U.S., Canada Face Biotech Wheat Showdown

By Tracy Sayler

The United States and Canada appear headed toward a showdown in the biotechnology arena. With global wheat markets at stake, the decision by one of these trade competitors to adopt biotech wheat will be critical to the decision of the other.

Both the U.S. and Canada produce spring wheat, and compete for the same markets. Biotech wheat won’t be commercially available in either country until around 2003 at the earliest, when Monsanto will have Roundup Ready wheat ready for release in both countries. The wheat will be genetically modified to be resistant to glyphosate, which kills both grass and broadleaf weeds.

More than likely, the U.S. will have the opportunity to decide before Canada whether to adopt biotech wheat. Whether that decision is the right one, however, will depend on what Canada will do.

Bill Wilson, professor agricultural economics at North Dakota State University in Fargo, has developed a model to evaluate the strategic moves of both countries in adopting biotech wheat. His conclusions:

•  If neither country adopts biotech wheat when it becomes commercially available, neither will have a payoff or net benefit.

•  If both countries adopt biotech wheat at the same time, both countries will likely gain by first-tier payoffs or benefits (such as higher grain yields, less herbicide use and better crop management) and through prospective second-tier benefits, such as better milling wheat or better quality bakery products.

•  If Canada adopts biotech wheat and the U.S. doesn’t, the U.S. would likely gain marketshare.

•  If the U.S. adopts biotech wheat and Canada does not, then Canada would likely benefit.

“I suspect there’s nothing that the Canadians would like more than for us to liberally adopt genetically-modified wheats without the ability to segregate them in the marketplace,” says Wilson. Immediately, he suspects the Canadians would raise the price of their non-biotech wheat to import countries wary of biotechnology.

Thus, if Canada chooses not to adopt biotech wheat, the best alternative for the U.S. is not to adopt it either. But if Canada does adopt biotech wheat, the U.S. is better off to follow suit.

“The decision is pretty simple on the export side: It all depends on what Canada does. There would be serious market implications if the U.S. adopts with the current state of buyer views toward GM wheats and without a system to reliably segregate wheats. Rival countries are now selling non-GM corn to Japan at fairly substantial premiums as a result of the problems in the U.S.,” says Wilson.

Mixed Market Signals
Biotech wheat faces different challenges than biotech corn or soybeans, says Wilson. For one, wheat is more dependent on exports. About half of the U.S. wheat crop is exported each year, compared to about 20% of the corn crop and about 35% of the soybean crop. Wheat is also used more widely for human consumption, and has more grain export competitors to contend with, including Canada.

The U.S. wheat industry is getting mixed messages about biotechnology, says Wilson, from a domestic industry that is generally more receptive or not as adverse (citing other recent surveys), and an export market that is mostly intolerant of it. The U.S. uses about half of the wheat it produces each year, and exports the rest.

Unlike consumers in Europe, U.S. consumers and food industry leaders are generally confident in the safety of biotechnology, and the government’s ability to regulate it. Wilson points out too that second-tier biotech products that benefit consumers may boost consumption of wheat-based products in the U.S., a market that on the whole has been flat in recent years.  “If a food company can differentiate its products, it can increase demand,” he says.

While biotech emphasis initially is concentrating on first-tier benefits to producers such as herbicide resistance, little attention has been paid to the tremendous advantages of second wave benefits of biotech wheat: stronger flour, enhanced nutrition, the ability to replace additives, improved product quality characteristics such as food taste and texture, production of industrial products, and increased storability.  Wilson says one study points out that a better shelf life for bread products that would stay fresh longer could reduce bakery costs by 12%.  “That’s a huge number,” he says.

A NDSU survey of U.S. millers and bakers indicated that domestic millers and bakers indifferent toward purchasing wheat that is genetically modified to enhance farm production. However, they would expect to pay discounts for biotech traits with only on-farm benefits, such as improved crop yields and herbicide resistance.  Conversely, most are willing to pay for attributes enhanced by biotechnology that would increase revenue or decrease their production costs, including functional traits, enhanced processing, and end-use factors.

While domestic wheat users are more accepting of biotechnology, overseas wheat users are not. Seven out of 10 of the leading U.S. hard red spring wheat importers in the 1998-99 marketing year are currently averse or opposed to genetically modified foods (See graphic on page 41).  In total, about 85% of the global customer base for U.S. hard red spring wheat now opposes the development of biotech wheat, compared to only 30% of Canada’s overseas customers who oppose the technology, says Wilson. 

China is a key reason for the disparity in the opposition among the customer bases of the U.S. and Canada, which compete aggressively for the world’s spring wheat export market.  China thus far has been neutral in its views toward biotech wheat, and while the Chinese have imported little to no hard red spring wheat from the U.S. in recent years, China is Canada’s largest customer for spring wheat.

Canada: Inherent Advantages
Canada has inherent quality control mechanisms to manage the adoption of biotechnology within its grain marketing system, through the Canadian Grain Commission and the Canadian Wheat Board, which has the sole authority to market grain in Canada. The CWB has the authority to regulate wheat varieties—and deny release of varieties for marketing reasons—while no such authority exists in the United States.  Also, there are fewer spring wheat varieties released and grown in Canada compared to the U.S., and varietal quality performance is more uniform across growing regions in Canada compared to the U.S.  Canadian varieties must also be visually distinguishable from varieties of a different class. Thus, Canadian wheat can be segregated more easily. “It allows their market system to easily distinguish wheats that should be placed in different classifications. We don’t have that.”

Wilson says that it is quite possible Canada could create a separate classification for biotech wheat.  “Of course they won’t call it genetically modified.  But when Prairie Spring and other wheat categories were developed, it was because of new production technologies.  We don’t do that and it’s a dilemma we have.”

A survey conducted by Wilson of spring wheat users last year estimated that the cost of segregating grain may vary between $0.25 and $0.50. Another survey of grain elevator managers earlier this year put the estimate at $0.15. It’s not surprising that the estimated costs of segregating grain vary by each survey and study. “It’s difficult to project, because you’re asking somebody the cost to do something they’ve never done before,” says Wilson.

Little is known yet on the potential cost savings of biotech wheat to producers, and the rate of adoption in North Dakota. However, Wilson guesses that the rate of adoption will be greater in the Red River Valley than in western ND, since producers in the Valley have traditionally been greater users of crop inputs, “and because we would expect that the Japanese and other Pacific Rim markets will specify no or nil GM wheat.”

It would not be surprising to see political officials from Canada, the U.S., and other wheat export countries to be passive promoters of biotech wheat, says Wilson. Otherwise, it could be damaging to market share in today’s political climate to acknowledge supporting the development of biotech products when countries such as Japan oppose them. Then, if and when acceptance occurs, they’ll move forward with the technology.