12 October 2005

What our marketers say

Extracts:

Australian Wheat Board:

GM Wheat
At present there is a clear market signal from international and domestic customers that strong reservations exist concerning GM wheat. None of AWB’s National Pool customers are prepared at present to purchase GM wheat. Based on AWB Group’s experience in managing the National Pool we believe there is currently insufficient capability within the supply chain to ensure complete segregation of GM and non-GM grains. Due to this lack of capability, the introduction of GM wheat in Australia could jeopardise many of our existing export markets. AWB believes that GM wheat should not be released commercially in Australia until market preferences change and/or supply chain technologies and protocols are developed that will ensure that customer requirements can be met.

GM Canola
In relation to GM canola, the AWB Group has expressed some concerns about the impact the commercial release of GM canola varieties will have on the marketing of Australian grains, particularly wheat.  With approximately one-third of the AWB National Pool’s customers, Australia’s non-GM grain status is a distinct marketing advantage.  Therefore before GM canola can be released commercially in Australia, the AWB National Pool requires a supply chain system that can achieve segregation of GM and non-GM grains and guarantee product integrity. We will continue to work with industry and service providers towards achieving this goal.

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Grainpool:

AWB policy:

http://www.awb.com.au/AWBL/Launch/Site/AboutAWB/Content/FactsIndustryInformation/PublicPositionPapers/AgriculturalBiotechnology/

Agricultural Biotechnology and Genetically Modified (GM) Grain Varieties in Australia  

The AWB Group
As a market-focused company, the AWB Group is committed to capturing the greatest value for Australian grains from both international and domestic markets whilst at the same time balancing the need for Australian growers to utilise new technologies in production.  A key driver for the AWB Group’s position on the commercial release of GM grain are the preferences  in the final markets for Australian wheat and the efficient production of this commodity.  From this position we want to ensure that if GM grain varieties are released commercially in Australia it is done so in a manner that will satisfy AWB National Pool customer requirements, which in turn would protect grower returns.

Agricultural Biotechnology
The AWB Group recognises that agricultural biotechnology offers the potential to deliver agronomic, economic, consumer and/or environmental benefits, and supports ongoing research in this area.  We also acknowledge the need for the benefits of newly developed GM technologies to be demonstrated.  If required this could occur through commercial trials as long as the appropriate protocols to protect the National Pool were in place.  Also the AWB Group may explore the opportunities associated with biotechnology in our own research and development programs should market demand be evident.

GM Wheat
At present there is a clear market signal from international and domestic customers that strong reservations exist concerning GM wheat. None of AWB’s National Pool customers are prepared at present to purchase GM wheat. Based on AWB Group’s experience in managing the National Pool we believe there is currently insufficient capability within the supply chain to ensure complete segregation of GM and non-GM grains. Due to this lack of capability, the introduction of GM wheat in Australia could jeopardise many of our existing export markets. AWB believes that GM wheat should not be released commercially in Australia until market preferences change and/or supply chain technologies and protocols are developed that will ensure that customer requirements can be met.

GM Canola
In relation to GM canola, the AWB Group has expressed some concerns about the impact the commercial release of GM canola varieties will have on the marketing of Australian grains, particularly wheat.  With approximately one-third of the AWB National Pool’s customers, Australia’s non-GM grain status is a distinct marketing advantage.  Therefore before GM canola can be released commercially in Australia, the AWB National Pool requires a supply chain system that can achieve segregation of GM and non-GM grains and guarantee product integrity. We will continue to work with industry and service providers towards achieving this goal.

The Future
The AWB Group will continue to monitor market attitudes towards GM grain, including customer preferences and government regulations, and will position itself in response to market signals.  Our position will be driven by our constitutional mandate to maximise returns to growers who deliver wheat to the National Pool.

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West Australia's key canola marketer:

Grainpool Policy:

Marketing GM Crop

Marketing issues facing Australia as and if it moves into GM Crop.

Summary:
Surveys on consumer resistance to GM food indicate such resistance is strong in key export markets for Australia.

If consumers totally reject a tolerance level to GM contamination in non-GM food, Australia’s potential competitive advantage as a GM-free grain producer could be lost or seriously threatened by the commercial release of GM crop.
If GM food becomes accepted by consumers, withholding commercial release of GM crop could have serious impact on critical production and management choices and profitability.
The most feasible strategy for the grains industry, at this point, would appear to be to proceed cautiously and retain sufficient flexibility to handle both GM and non-GM in a least cost mode until the market signals are clearer.

Introduction
Consumer Attitudes Now v's Later
Poor v's Affluent
Real Consumer Resistance v's Lobby Group Resistance
Rational or Irrational and does it matter
Benefits for the Producer
For the Processor
For the Consumer
Risks
Food Safety
Accidents
Loss of Markets
Tolerance Levels - legislation v's market demands
Costs: Quality Assurance & Food Diversity
Three Possible Solutions
Passive Mode
Resistance Mode
Insurance Mode
Conclusion

Introduction

There is extensive debate, not only in the wider community but also the grains industry, about the introduction of genetically modified crops. While there are those within the grains industry who have concerns about the safety and wisdom of using this technology to improve the crops we grow, the majority of concern centres on the impact consumer resistance may have on the ability to sell grain products and profitably continue grain production, either with or without the use of GM varieties. To say that this is a complex issue is an understatement and this paper is unlikely to answer as many questions as it generates.

For the sake of conciseness, this paper assumes GM technology, properly managed and controlled, is safe technology.

Consumer attitudes and market signals - surveys vs. practice

The general impression presented in the media, and from surveys of consumer reaction to the introduction of GM crops into the food chain of the developed world, is that the majority of consumers are opposed.

For example, survey results presented at the Annual Canadian Canola Council Convention in 2000 indicate that in Europe 80-95% have at least some awareness of GM food issues with 60-80% expressing a negative attitude to GM food.

In the US 65% have at least some awareness with 50% expressing a negative attitude. Australia is similar to Europe in exposure but has a less negative attitude, being very similar to the US. Japan stands out as the country where nearly everyone (97%) has some awareness of the issue and over 80% have a negative attitude towards GM food.

In Europe the “mad-cow” has a lot for which to answer and that situation has done considerable harm towards the trust of science by the wider community, a contributing factor to GM resistance.

Recent moves to ensure labelling of food for GM content in Australia has gone some way towards softening the resistance, but it remains a topic of strong debate and continues to carry negative overtones in the media.

The real question is how much difference is there between what people say and what people will actually do? It is too early to know, beyond the general maxim that less people will boycott such products than say they will. Certainly there is anecdotal evidence that resistance in practice may not be as strong as in word.

One national survey conducted by the Washington DC based Grocery Manufacturers of America indicates that, over the period consumers have been informed about genetically modified crops, even with the knowledge of recent recall problems in corn, there has been no increase in the number of consumers moving to purchase non-GM products.

In fact, more than two thirds of those surveyed would be likely to buy genetically modified products which require the application of less pesticide. A study has been conducted in Ontario, by the University of Guelph, where both GM (Bt gene) and non-GM corn and potatoes were sold at a roadside stall at the farm where the crop was grown.

The stall advertised the origin and chemical applications applied to each crop. Two thirds of the shoppers purchased the GM product.

Now vs. later

In hindsight, it is easy to criticise the major proponents of GM technology for not better preparing for the consumer backlash. Much has been made of the bad choice of first release GM crop products, which are all about input reduction into crops and nought about consumer benefit.

Perhaps if the industry was prepared to make more of the reductions in pesticide application these GMs offer, we may see more consumer response reflecting the above road-side stall result.

What are the real market price signals for GM crops? At present in Canola, the first significant food crop in Australia likely to be impacted by GM technology, the market signals suggest no more than AUD10 per tonne premium for non-GM crop, but is that a real signal?

If GM Canola is released in Australia and taken up by growers, we may see a situation where non-GM Canola is in short supply for the markets that seriously desire it and the forces of supply and demand will reveal a stronger long-term price difference.

Poor vs. affluent

The most vocal resistance to GM crops is arising in the affluent developed world. In less developed countries the technology has the potential to significantly address nutritional issues and supply shortages.

There has been much prophetic comment by the GM proponents over the years, probably more so in earlier than recent times, about the capacity of this technology to address world hunger and health issues. While much of this is yet to be proven, there are immediate examples with good potential to have a significant impact.

Rice with vitamin A is one example. If the technology is priced within reach, crops that are more resistant to pests and diseases will be of particular interest in economies which are not currently able to afford the pest control technologies of the developed world.

It may be that the potential is just that, potential and not actual; vitamin A rich rice may, for example, fail if consumers consider it is the wrong colour or, vitamin A could just as easily be accommodated by introducing sweet potato into the diet.

At the very least, GM technology has the potential to be no less a contributing factor to solving food shortages than any previous technologies available to plant breeders. If the technology does impact to provide a more plentiful and reliable supply of food in such areas, the consumer benefit is simple; the opportunity to eat and live.

Even in the developed world there is considerable gulf between rich and poor. Despite evidence that the middle and upper classes are not price conscious in relation to food, the remainder are.

While it is not the same life and death issue, the pressure to have money to spend on luxuries other than food, which peer pressure says they must have, has and will continue to make price a consumer benefit when purchasing food. How much will depend on the difference in cost?

Real consumer resistance vs. lobby group resistance

Currently anti-GM lobby groups can claim to be fairly successful, particularly in Europe. How long they can sustain consumer support for their opposition, in the absence of any clearly proven increase in safety risk over the norm, is yet to be seen.

Provided the proponents of GM crops do not cause any serious threat to food safety, time could be expected to eventually work in their favour.

Even the recent Starlink episode, which has been portrayed in the media as a significant act of incompetence in the management of the introduction of GM technology, would appear to have had less impact on US consumers than on processors in the US or importers in other countries.

Rational or irrational and does it matter

For a marketer, in the end, it matters not whether the market reaction to GM crop can be proven to be either rational or irrational. Ultimately, if we are not delivering what the customer wants, and a competitor is, we and our suppliers eventually cease to be in business. Irrationality that may drive market preference is, for the marketer, a rational factor that must be faced.

As we face the advent of GM grain crops in Australia, it behoves us to at least have strategies in place with the flexibility to meet customer requirements, if that can be done profitably. In the early part of 2000, The Grain Pool of W.A. (Grain Pool) attracted considerable publicity and criticism when it called for a pause in the release of GM Canola varieties.

We did this because, from our perspective, proponents of the technology were not taking sufficient notice of customer requirements and the implications this could have for the industry in the longer term. We believed it was important that the industry took action to put in place the necessary strategies before it was too late. To the credit of the industry, that was heard and the GM Canola Technical Working Group, which includes members from the wider canola industry including the proponents of the technology, is now working on that issue in Western Australia. A similar working group has since been established in eastern Australia (including Tasmania) to address all broad acre grain crops.

Benefits for the producer

First generation GM crops are very clearly targeted at the producer. They are all about gains in productivity at the input level of the system. The last few years have seen Bt-cotton fairly readily accepted by growers. There has been a settling down period in the sharing of value between the owners of the technology and the producers, but producers probably see the benefits from the changes in production to be as important as the direct dollars; reduced time spent spraying the crops leading to greater flexibility in the use of their time, reduced exposure to chemicals for them, their employees and their families, who usually live in the same locality as the crops they grow.

For the processor

The scope for processors to use GM crop, which offers processing benefits, are significant. GM technology has the potential to offer solutions to processing problems and pathways to new products. In the absence of GM technology, this has been seen to some degree in a crop such as rapeseed as it became Canola and Monola etc.

The expansion of capability, with GM technology, raises the possibility of opportunities like pharmaculture (growing pharmaceuticals) and the production of industrial products, fuel and lubrication oils, plastics precursors, etc. While some of these concepts in themselves raise issues of risk for the food chain that need to be considered, the diversity of options has the potential to expand.

For the consumer

There are many commentators who, with the benefit of hindsight, indicate that the GM proponents made the basic mistake of not making sure there were consumer benefits in the technology they were asking consumers to accept. In other words failure to set up a demand situation akin to mobile phones where, though there is claim and counter claim about the safety of mobile phones, use has expanded rapidly to the point where, in Australia, the number of mobile connections now outnumber land-line connections.

Examples such as the vitamin A enriched rice are touted as being in that camp, but will have no impact in a developed economy where opposition to this technology is based and where there is an abundance of vitamin A in the diet. What is needed is something that tastes better and is more appealing.

For example, something that has all the appeal of fast or confectionary foods without any of the unfortunate side effects of getting fat and unhealthy. Just being good for you may not be enough, it needs to make you feel good.

Risks

Food safety

There is no question that it is possible to generate an unsafe food by the use of GM technology. This is nothing new; plant breeders have had that capacity for the last 10,000 years. In many of our important crops, the process of getting rid of the deleterious compounds is the biggest impact that plant breeding has had over time and, with a few notable exceptions, well before the time of Mendel. It is fairly simple, in the pursuit of another resistance gene from the wild progenitors, to drag the bad things back in.

The difference, it is argued, is that GM technology brings an unheralded dimension of power to the plant breeder. While that is true, it is also a fact that the technique may replace the reliance that plant breeders have had on techniques like wide species crossing and chemical or radiation induced mutation. In those situations large sections of a foreign genome can be transferred, or the random and unknown impact of a mutation can be engineered with little understanding of what has been changed in the resultant genome.

This contrasts with GM technology, where discrete and known genes are being introduced and can therefore be closely monitored for deleterious impact.

Certainly in the developed world, GM technology operates with uniquely high level safety requirements, in contrast to those imposed on varieties developed via traditional breeding methods, arguably providing safer outcomes than in the past.

The concern for those who oppose the introduction of the technology, is based on their doubt about the capacity or commitment of the proponents of the technology, or regulators, to undertake all the checks needed to test for expected and unexpected consequences.

Accidents

It will be impossible to provide GM-free grain products with the advent of GM crops. Crops such as Canola have particular outcrossing problems, but even in crops where out-crossing is not considered a risk, likely contamination within the handling systems automatically dictate that non-GM (GM contaminants at less than prescribed upper limits of tolerance) rather than GM-free must become the norm.

It is not difficult to envisage a number of scenarios where a grower delivering crop in error, or a bulk handler pushing the wrong button, or a road haulage operator getting instructions wrong could seriously challenge this tolerance limit. As you look at the grain chain from grower to market, there are multiple critical points where serious contamination could be effected. Levels of contamination of barley in wheat or vice versa, well in excess of the 1% agreed GM limit for Australia, are not unknown to marketers around Australia.

There are potentially major legal and financial liabilities associated with contamination problems. Distressed cargo on the water is every exporting grain trader’s worst nightmare and has the potential to destroy a business.

Add downstream processing liabilities in a non-GM value chain caused by late detection of a problem and the damage bill could be multiplied well past the value of the grain.

Loss of markets

The potential for loss of markets is one of the major imponderables at present. Most markets have a preference for non-GM and a number of markets are currently requiring certificates declaring that the product they are receiving is non-GM; easy to satisfy while no GM crop is being grown. Any discussion of premium however, is quickly dismissed by customers.

How serious will the markets be when we are growing GM crop? Will they be serious enough to pay the premium required to ensure supply of non-GM? This premium must not only cover the cost of segregation and Identity Preservation (IP) but also any differential in the production costs and value of GM vs. non-GM crop.

The signs are not promising. The difficulty is that we currently are not in a situation where there is a lack of supply of non-GM, it is all Australia currently has to offer. The real test will be when customers are finding non-GM crop difficult to purchase and have to pay for the privilege. When there is a shortage of supply of non-GM product, because and if it is more economic for growers to grow the GM crop, albeit at perhaps lower prices, will those consumers change their purchasing habits?

Will they purchase a different product, will they accept the GM product, or pay a higher price for non-GM? If we knew the answer to these questions, the strategic decisions we need to make now, for the future, would be much simpler.

Europe is one market where the preference for non-GM is very clear. This has certainly benefited Australia in terms of getting lupins more accepted into that market, with some signs that premiums may be possible. Particularly for the human food market, demand for lupins is growing, because of their non-GM status. This year, because of the non-GM advantage, over 30% of the Australian canola crop has been sold to Europe, replacing Canadian canola.

The European market however is opportunistic and only buys to supplement their own crop in times of short supply. If that happens one year in three, even if they are prepared to pay a premium that covers all the costs, who wears the risk in two years out of three when that product has to go into less discerning markets, which have perhaps learnt to live with GM crop? We are currently seeing premiums for non-GM corn and soybean, for which, it can be argued, there is a shortage of supply.

These are of the order of USD15-20, but in the case of canola that may not be enough to offset the benefit of growing GM crop, particularly in WA where it would be replacing TT canola, with its inherent yield and quality problems, and providing a strategic tool for herbicide resistance management in weeds.

Tolerance levels - legislation vs. market demands

Around the world we are starting to see legislated tolerance levels for GM in non-GM crops. Australia is moving to 1% accidental, Japan under the pressure of reliance on the US is moving to 5%, Europe is moving to 1%. Under tight IP procedures, 1% is likely to be generally achievable.

The difficulty of course is that these are only legislative levels; below which we will not be able to be prosecuted for mislabelling product claimed to be non-GM. They do not necessarily reflect market requirements.

It might be that markets will require zero tolerance or, given that such is difficult to prove, at least undetectable levels. If this turns out to be the case, Australia now enjoys a competitive advantage that will be eroded with commercial release of GM crop.

Costs quality assurance and identity preservation

Quality Assurance (QA), under a HACCP program to ensure food safety, is not yet a reality in Australian grain production. QA is a necessary precursor for being able to provide IP of product with any confidence and reliability. QA as such, once a farm enterprise has gone through the pain of restructuring itself to comply, is unlikely to be a major cost impediment, if you listen to the proponents of QA. Those resisting QA will say, “where’s the evidence?”

There is little argument that QA does help to establish best practice and that can only work in favour of developing a more pristine quality and therefore competitive product. In WA the Grain Pool has launched a project in which we expect to see some 300 grain growers undertaking QA accreditation in this coming year. Part of that project will be to evaluate the real costs and benefits of adopting QA across a range of widely differing farm enterprises. The primary motivation for QA is the capture of value from long-term access to safety conscious markets that deliver significant value to the industry, whether or not a premium per se is paid.

It is likely that the major cost of delivering non-GM grain will be in the area of segregation or IP. The simplest way to achieve that would be to have independent infra-structures to handle the two types of crop. However, running a duplication of receival, rolling stock and port facilities is economically unrealistic. At best it may be feasible to segregate receival points into GM and non-GM sites. Of course, that is to no avail when misclassification is made at delivery, or handling errors occur in transit to customers.

Who pays and for what benefit

In the era of first release GMs, most people agree there is not likely to be a premium for non-GM grain rather, if there is a price differential, it will be a discount on GM crops. Given this scenario, the non-GM growers have a case to suggest that they should not have to bear the cost of any segregation required to maintain access to the non-GM markets.

They are continuing to do what they always have; it is the adopters of GM crop who are causing the problem and therefore should pay. Presuming GM crop is being adopted by growers, because it is giving an economic return, there is the potential for these growers to cover segregation costs. The problem with this argument is that it is not the normal way business operates.

If a product is to be segregated, normal procedure would deem that the segregation is being undertaken for economic advantage and the cost of segregation should be included in the calculation of advantage. The decision to proceed should be on the merits of the advantage.

Of course, if consumers and therefore processors are prepared to pay the extra and do show a strong market bias towards the non-GM product and pay the premium that makes growing the GM crop worthwhile, the problem is solved. It is not likely to be that easy, particularly in the early stages of GM crop production, when market price signals are unlikely to be definitive.

Impact on small crops and food diversity

Proponents of GM are concentrating on globally large crops. Small crops, such as pulses, are going to find it difficult to attract GM investment. While that has some immediate benefits to us as marketers, if premiums for non-GM are realised, it has some serious long-term ramifications. If GM crop does become generally accepted by consumers and investment is all occurring in the large global crops and, because of the power of this technology, the relative yields of the GM vs. non-GM crops are steadily increasing, and quality benefits are starting to be built into the GM crops that provide added economic advantage in their favour; then what will happen to the alternative crops? Will they be priced out of existence? Will they become the province of the affluent?

Given that most of the legumes fall into this category, what will happen to the diets of those communities, which are primarily vegetarian?

If GM technology becomes so second nature that regulatory hurdles are lessened, the risks of litigation are greatly diminished and the technology becomes so cost effective that all crops are able to benefit, the problem is solved.

Three possible solutions

1. Passive mode

We could adopt the perspective of the classic trader and say it doesn’t really matter, let’s see what market forces sort out. GM crop will be saleable and as long as we get our margin as it passes through our hands, we will be OK. Of course that assumes there will still be producers in existence to supply product to us. It is an approach that only looks at one link in the chain. It also does not actually fit with the function of a marketer like Grain Pool, who sees its role to maximise value captured in the wider chain for both the immediate and longer terms.

There is significant risk that the industry, particularly producers, could seriously suffer if present consumer attitudes dominate long-term outcomes.

2. Resistance mode

We could oppose the release of GM crop until the market settles down and we know how consumers are ultimately going to respond and what the price signals are. That would also be risky. Firstly, while supply of non-GM product is greater than real demand, we may never get to discover what the market is prepared to pay. Secondly, such a strategy could result in denied access to the technology down the track, at least in the short term.

Thirdly, it could force producers to operate in an environment that is less economic than it needs to be. If this technology does become the essence of survival for growers, the opportunity of access may have been lost.

3. Insurance mode

While not resisting the release of GM crop, we could work to put strategies in place to manage the introduction of GM varieties to maximise future options.

Some likely necessary components of such a strategy would be:-

restrict release of GM crop to Quality Assured growers (at least in the first instance) to provide confidence in on-farm and delivery management of IP by growers and provide adequate control over GM grain;
rationalise receival points into GM and non-GM – initially most would be non-GM and could be reallocated over time to GM as dictated by market demand;
implement a strong IP system from receival point to port and/or customer;
implement pre-delivery GM testing of crop (PCR ex paddock or ELISA at delivery point);
implement the capacity for retrospective load by load checking of non-GM crop (PCR technology);
ensure a strong legal basis for penalising growers who misclassify grain on delivery; and
confirm agreement by markets of adoption of practical levels of tolerance to GM contamination in non-GM grain.

Under such a scenario, growers may have to travel further to deliver their crop, but provided that travel was towards port some freight trade-off should be possible. In the early seasons under such a scenario, the biggest impost would be on the producers of GM crop.

This again is a risky strategy. What happens if the system fails and the industry moves beyond the point of return to GM-free in a hostile consumer market?

Conclusion

The issue of how best to go about marketing GM crop is complex and will remain so, until both market signals provide clearer pictures of what consumers are prepared to pay for non-GM versus GM crop and the benefits and costs of the technology become apparent.

For Grain Pool’s part, we are working in “Insurance mode”. We have launched a project to move producers into QA on-farm as quickly as possible, not just for GM issues, but for wider food safety issues, of which GM is just a small part. We are working with the bulk handler, Cooperative Bulk Handling Ltd, to integrate this with their IP system, “Q-Track”, which is currently under development.

Canola is the first GM crop expected to impact on grain production in Australia. We are working closely with WA’s GM Canola Technical Working Group, to manage the introduction of GM crop. We believe this is the best way to ensure we retain the flexibility to both respond to market signals and allow growers choice. This should allow the new technologies to develop in response to market demand and induce markets to give the right price signals to ensure their access to non-GM product, if that is really what they want. 

Source: search for "marketing GM crop" http://www.grainpool.com.au/gpplindex.html