Can Conventional Crop Producers Also Benefit From Bt Technology?

Transgenic plants producing insecticidal protein derived from Bacillus thuringiensis (Bt) have been widely adopted since their commercial introduction in 1996. In 2009, 25 countries planted 134 million ha of transgenic crops. The widespread adoption of such plants has reduced use of conventional insecticides while attaining yield gains, thus providing economic, environmental and human health benefits. Because of Bt crops’ high pest control efficacy, there is concern that pests will develop resistance to Bt toxins so that Bt crops are less or no longer effective. To delay the evolution of resistance, the U.S. Environmental Protection Agency (EPA) currently requires Bt crop growers to also plant non-Bt (conventional) crops on a minimum percentage of their total Bt crop acreage as a refuge for susceptible (Bt toxin sensitive) pests. Refuge allows susceptible pests to survive and mate with resistant adults surviving on Bt crops and so slows the development of resistance in the pest population. The existing literature on the welfare analysis of Bt crops generally does not consider the fact that planting Bt crops not only increases the yields of Bt crops themselves but can also increase the yields of non-Bt (conventional/refuge) crops by reducing pests pressure. For example, based on annual population surveys of European corn borer (the most widespread insect pest throughout the U.S. Corn Belt) from the initial invasion of the pest into the Midwestern United States in the 1940s through the commercial adoption of Bt corn during the period 1996 to 2009, Hutchison et al. (2010) showed that ECB populations have declined relative to the pre-Bt era since commercialization of Bt corn, particularly since 2002. The existing literature typically claims that Bt crop producers are possibly winners if the yield increasing effect of the Bt crop beats the price reducing effect. However, conventional crop producers are sure to lose since the price reducing effect — the only effect comes to play for them — reduces their economic surplus. This outcome makes producers skeptical of the benefits for allowing pests to survive in non-Bt crop refuge and is at the root of the refuge compliance problem. Take Bt corn for example. Based on USDA data, Jaffe (2009) estimates that farmer compliance over all three categories of Bt corn, ECB (European corn borer), CRW(corn rootworm), and stacked hybrids, averaged 73% for distance and 74% for size. In other words, one out of four producers did not comply with the Bt corn refuge requirements. Failure to incorporate the positive externality of Bt crops on conventional crops in existing literature results in underestimation of consumer surplus and overestimation of Bt crops growers’ producer surplus. We model the positive externality of Bt crops on conventional crops as a kind of “technology spillover”. Therefore, planting Bt crops will shift the supply curve to the right, not only for Bt crops growers, but also for conventional crop growers, although the magnitudes should differ. Following Alston et al. (1995), we describe a framework to analyze distribution of gains from planting Bt crops in a large open economy context incorporating the technology spillover from Bt crops to conventional crops. We assume that the U.S. is a large open economy that exports crops to the rest of world. Rather than assuming specific functional forms for the supply and demand curves, we instead use a logarithmic differential approximation to solve the model. According to Alston and Wohlgenant (1990), the logarithmic differential (linear elasticity) approximation is good for small changes with constant elasticity supply and demand and is exact with linear supply and demand. We conclude that all world consumers always win due to the introduction of Bt crops since the Bt toxin is effective at increasing yield and reducing production costs. Bt crop producers might win depending on which effect (the yield increasing effect or the price reducing effect) is dominant. Conventional crop producers are no longer doomed to lose, as they might also win if the yield increasing effect of the “technology spillover” due to fewer pests outweighs the price reducing effect. This finding provides more evidence that Bt crop producers have incentives to comply with refuge policy. In the United States, corn has been the most abundant transgenic crop planted to resist insect pests and the most widespread insect pest throughout the U.S. Corn Belt has been the European corn borer which before the advent of Bt corn cost growers about $1 billion annually in losses and control costs. We apply the above model to analyze the distribution of gains from planting ECB Bt corn. The estimated of shift of conventional corn’s supply curve induced by planting ECB Bt corn is crucial to the economic surplus calculation. We combine information from farmer survey and USDA data to refine our estimates. We find that for year 2009, ignoring the positive externality of ECB Bt corn on conventional corn results in underestimation of world consumer surplus by 15.64% and overestimation of Bt corns growers’ producer surplus by 8.43%. The magnitude of these results indicates the importance of including the technology spillover from Bt crops to conventional crops when estimating the welfare effect of Bt crops. In addition, we find that conventional crop producers can also benefit when others use Bt technology. We see high potential for generating discussion as grower compliance with refuge policy for Bt crops continues to be a problem and has apparently gotten worse (Jaffe 2009). Our finding that both Bt and non-Bt acres can benefit from Bt crops will help encourage growers that the refuge/conventional crops that they plant can also benefit from Bt technology