Chapter 6 Estimating the economic impact of the moratorium
To assist with its deliberations, the Review Panel has drawn on a cost–benefit analysis of the economic impacts of the regulation of genetically modified (GM) canola in Victoria, undertaken by ACIL Tasman (2007a). The model was designed to analyse the direct economic impacts of the current moratorium and the expected economic impacts of extending the moratorium. The model and its results are briefly described in the following sections, with additional detail provided in appendix 7 and ACIL Tasman (2007a).
6.1 Methodology of the cost–benefit analysis
The model's conceptual approach broadly followed standard cost–benefit procedures. It involved tasks such as identifying and quantifying various impacts, aggregating all past, present and future impacts through the application of appropriate discounting procedures to determine a net present value (NPV), and carrying out sensitivity analyses on the key assumptions. Fundamental to any cost–benefit analysis is the development of a 'base case' scenario to which other policy options can be compared — in this case, what would have happened had there never been a moratorium in Victoria (see scenario 1). To quantify the direct economic impacts (that is, the costs and benefits), ACIL Tasman (2007a) developed a partial canola industry model to explore the on-farm impacts of GM canola, likely GM adoption rates, production of GM canola and the impact of this quantity of GM canola on the supply chain.
An essential component of the model is a gross margins analysis of canola production based on six canola types, each with a unique set of on-farm costs and benefits, including impacts on herbicide types (and costs), yield, fertiliser requirements, labour productivity, oil content of seed, cost of seed, machinery requirements, rotational impacts and on-farm storage and transport costs. Three of the canola types modelled were the most widely grown non-GM canola in Victoria — namely, conventional, triazine tolerant (TT) and imidazolinone tolerant (IMI). The other three were the licensed GM canola (that is, Roundup Ready® open pollinated, Roundup Ready® hybrid, and InVigor®) that would be the first to be commercially grown if the moratorium were allowed to expire.
The gross margins analysis estimated the net benefits of growing a particular variety, in terms of dollars per hectare. However, to predict what would be most likely grown under particular policy scenarios and thus to estimate the economic impact of the current moratorium and of extending the moratorium (or, conversely, allowing the moratorium to expire), it was necessary to
- Scenario 1: no moratorium. This is the base case scenario, whereby a moratorium was never introduced, and GM canola was adopted.
- Scenario 2: a moratorium in place until 2008 and then removed. This is the scenario that will occur if the current moratorium expires and is not replaced or extended.
- Scenario 3: an ongoing moratorium, covering the whole projection
period (2004–2016). That is, the Victorian canola market develops without introduction of GM canola and adoption is zero.
The impact of the current moratorium is the difference in predicted outcomes - in net present value terms - between scenarios 1 and 2, and the impact of the continuation of the moratorium is the difference in predicted outcomes between scenarios 2 and 3. The overall impact of an ongoing moratorium for the whole of the projection period (2004–2016) is the difference in predicted outcomes between scenarios 1 and 3.
6.2 Results of the cost–benefit analysis
The ACIL Tasman (2007a) modelling demonstrated that the current moratorium has already imposed a small cost on the Victorian economy but the majority of the costs will be felt over the next few years. These future costs, resulting from the delay in adoption of GM canola imposed by the moratorium, will be incurred even if the moratorium is allowed to expire and is not replaced. This is because the adoption rate of GM canola is assumed to be low in initial years, and the adoption rates for scenario 1 and scenario 2 are not comparable until 2015 (see appendix 7). The magnitude of the cost imposed by the extension of the moratorium beyond 2008 is larger.
The total direct cost (that is, net present value) of a moratorium from 2004–2016 is modelled to be approximately $175 million, reaching
$29 million per year by 2015. This projection comprises:
- $63 million for the current 2004–2008 moratorium, with most of this impact ($55 million) to be realised after 2008.
- $112 million for an extension of the moratorium from 2008 to 2016.
The results are driven by the reduced yield - and hence farmer income - from the use of non-GM varieties, the increased costs imposed by the use of more herbicides and the related increase in cultivation costs. The benefits of the moratorium are largely found in the cost savings from not having to pay technology access fees, reduced fertiliser requirements and lower transport, storage and handling costs (both on-farm and off-farm). The majority of the economic impacts of the moratorium occur at the farm level. As discussed in section 5.3, in seasons with average rainfall, the farm gross margin for non-GM canola production (excluding any rotational benefits in subsequent years) is about $45 per hectare lower than the average gross margin for the three GM varieties over the projection period. For the average Victorian canola farmer producing 300–400 hectares of canola per year, this difference in gross margin is equivalent to a change in net income of approximately $13 500–18 000. These results are sensitive to the modelling assumptions discussed in section 6.3.
In addition to the direct costs and benefits of the moratorium that have been quantified, there are indirect impacts - both on-farm and off-farm - that have not been included. At the farm level, these include benefits from the use of GM canola, such as a substantial reduction in the use of chemicals that are generally of a more toxic nature; increased conservation farming practices; increased machinery and labour efficiency; increased simplicity and ease of farm management; greater choice in crop selection; and reduced weed burdens and associated farm hygiene costs.
A continuation of the moratorium would also deny Victorian farmers the potential use of a range of next generation GM canola traits, such as environmental stress tolerance, improved oil qualities and a wide range of high value new industrial and human health traits. The next generation of canola traits are likely to be considerably more valuable to Victorian farmers than are the current traits (see appendix 6). These benefits are speculative and were beyond the scope of the analysis.
Beyond the farm gate, there are the spillover effects on investment in cereals research and development and biotechnology more generally (discussed in chapter 7), and on communities and the environment from lower herbicide use. Further, economy-wide impacts flow from increased investment in research and from higher farm incomes. The cost–benefit analysis did not include these effects.
The Panel considers that the indirect negative impacts of the moratorium are likely to be significant and that the estimated costs of the moratorium should therefore be viewed as being conservative.
6.3 Key assumptions and sensitivity analysis
The results of the model are highly sensitive to some of the input assumptions (see appendix 7 and ACIL Tasman 2007a for a detailed discussion). The results were most sensitive to the adoption rate of GM canola. An increase in the timing of adoption of GM canola, such that a maximum adoption rate was achieved one year earlier, results in an increase in cost of an overall moratorium to 2016 of $18 million.
The results were also sensitive to climatic conditions. As ACIL Tasman (2007a) pointed out, many of the benefits of GM canola - particularly for the higher yielding varieties - are experienced only in average to good seasons. ACIL Tasman estimated that the impact of the drought in 2006, for example, more than halved the impact of the moratorium in that year. The impact of climatic conditions on the gross margin calculations is thus significant. The difference between gross margins for GM and non-GM canola was estimated to range from approximately $68 per hectare in a year of high yield and average prices to a negligible difference in a drought year.
The model assumed there is no premium for bulk non-GM canola - consistent with the Panel's finding 4.2 - and that the future price of canola would remain constant in real terms. The results were also sensitive to these assumptions regarding canola prices. If the real price of canola increased by 10 per cent in the projection period, the cost of an ongoing moratorium would increase by
$10 million. If the price of GM canola were 18 per cent below that of non-GM canola, then the cost of the moratorium would decline to zero. The Panel considers that such a price differential is unlikely.
By contrast, the results were less sensitive to the additional transport and segregation costs that may be imposed through the introduction of GM canola to the Victorian production system. ACIL Tasman (2007a) estimated that, assuming other variables remain unchanged, the current transport, storage and handling expenses would have to more than double for a net benefit to result from the current moratorium (that is, the benefits outweigh the costs). The Panel considers that this is unlikely to occur.
The proportion of the technology access fee that remains within the state is challenging to estimate. It depends upon unknown variables, such as:
- the state or country to which to attribute Monsanto or Bayer CropScience revenue from Victorian GM canola seed sales
- the extent to which the costs incurred in bringing the GM seed to market are already a 'sunk' cost
- the extent to which technology access revenue will ultimately be reinvested back into Victoria (for example, through research and development of locally adapted GM seed varieties).
For the model, ACIL Tasman assumed that 75 per cent of the technology access costs remain in Victoria. If this figure were 100 per cent, then the overall cost of the moratorium would be $17 million larger; if it were 0 per cent, then the cost of the moratorium would be $50 million less (that is, $125 million).
Because 75 per cent of the technology access costs is assumed to remain within the state (and thus largely represents a transfer rather than a loss), results are not particularly sensitive to changing the cost of introducing GM canola. Even doubling the technology access costs would reduce the cost of the moratorium by only $23 million. On the other hand, with no technology access costs, the cost of the moratorium would rise by only 17 per cent.
If the moratorium were allowed to expire in February 2008, it will have imposed a direct cost of approximately $60–65 million on the Victorian economy.
Extension of the moratorium beyond 2008 to 2016 would impose an additional direct cost of approximately $110–115 million on the Victorian economy.
The total direct cost of an on-going moratorium from 2004–2016 is estimated as being approximately $170–180 million, reaching $29 million per year by 2015. In addition to the direct costs, there are indirect on-farm and off-farm impacts that are likely to be significant. These include reduced investment in research and development and biotechnology more generally, and an increased impact on the environment.