Specific cost of production example

The production of a new genetically engineered crop variety must, as illustrated in Fig. 15-1, begin with high quality genetic material. Because the highest quality new cultivars are increasingly being privately held, the successful production of a new genetically engineered cultivar for commercialization requires the ability to generate high quality germplasm. The Crop Development Centre (CDC) at the University of Saskatchewan is widely respected for its "traditional" crop breeding activities. Flax has been chosen as an example since the CDC has recently produced both traditional and genetically engineered varieties.

The production time for a traditional new cultivar at the CDC is between 10 and 15 years. In 1997-98 the flax-breeding program used the services of three secretaries, an internal administrator, external university administrators, a senior research scientist, one permanent technician, six other technicians, two technical assistants, three field managers, two professional research associates, four master of science students, three doctorate of philosophy students, and 11 summer students. Over the years, these resources have varied considerably. The annual expenditures are broken down as shown in Table 15-1.

Table 15-1. Annual cost of team to produce a new flax cultivar by traditional breeding

_Category of expenses_Expenses for 1997/98,_

Canadian dollars

Salaries and benefits 150,742

Supplies and services 12,443

Travel 2,121

Equipment/maintenance/rentals 5,922

Insurance/tax/license 1,000

Building space rental (estimate) 320,625

Land rental (estimate) 7,500

Total_500,353

Source: CDC Annual Report and personal communications.

The total cost of producing the required high quality germplasm, which takes 10-15 years, is, then, between $5,003,530 and $7,505,295. This is a conservative estimate for a number of reasons. First, equipment expenditures are underreported since significant investments using resources from other sources are made in purchasing expensive physical capital outright from time to time. Second, the CDC breeds many other crops and, thus, is able to exploit economies of scale to some degree. For example, the shop assistant, farm assistant, and administrative salaries are shared between breeding programs.5 Finally, as a public organization, the CDC may have communication networks open to it freely that would not be accessible privately or only at a significant cost. These communication networks also likely result in a shorter production period. It ought to be noted, however, that the cost per new variety would fall

5 The CDC has four major breeding programs: alternative and specialty crops, barley and oats, winter wheat, and spring wheat. Between 1995 and 1997 the CDC produced eight new varieties of peas, eight of barley, four of beans, four of wheat, two of flax, two of lentils, and two of oats.

rapidly in relation to the length the breeding program is expected to run. Nonetheless, for the purposes of genetic modification, a commercial entity must be willing and able to bear the cost of developing the initial germplasm as well as any resulting production risk.

In addition to the cost of germplasm development, the cost of developing a new cultivar through agricultural biotechnology was estimated in 1998 to be $1.5 - $15 million (Canadian) (McHughen, 1998) Most of this cost is incurred for navigating through different international regulatory regimes. McHughen (1998) offered a histogram that illustrates the challenges encountered in securing access for GE products in different countries. The regulatory testing and paperwork to register a conventionally bred variety named CDC Normandy added up to about 40 pages. The portfolio of reports required to gain approvals for the GE variety CDC Triffid added up to more than 2 feet. These transaction costs are likely to be much higher now in light of recent international events that have resulted in some jurisdictions placing a de facto moratorium on approvals for novel agricultural food products.

Further to the cost of germplasm development, the GE process requires securing the "freedom to operate" if it is for commercial purposes. Thus, licenses for relevant IPRs must be acquired. This can be a daunting task. For example, the number of U. S. patents related to Bt was 345 in October of 1999 (Phillips and Stovin, 1999). Further, as was noted above, key patents are often tightly held making negotiations difficult. The CDC, as a public research organization, was able to avoid some of the potentially larger sunk costs in licensing fees because of the research exemption. Nevertheless, to commercialize their research, the CDC needed to negotiate freedom to operate. By the time the GM flax was commercially viable, the CDC had received a U. S. patent for the biolistic GM process for flax, which offered the opportunity of cross-licensing. Licensing negotiations would be much more difficult and costly for other small organizations that do not enjoy a research exemption and do not yet have their own IPRs to trade for access.

The experience of the CDC at the University of Saskatchewan highlights the uncertainties involved in commercializing products of agricultural research. It provides support for the idea that, regardless of these uncertainties, agricultural research programs are generally not held up in Canada but that a significant barrier to entry may exist for small, private, niche market agricultural research organizations.

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