Supposedly there is nothing new under the sun. But at the intersection of economics and law, new technology occasionally poses unique questions. That is the case with a recent lawsuit, brought by Kansas farmers against Syngenta, a Swiss-based agrotechnology company with its U.S. headquarters in Minnetonka. A similar lawsuit is pending in Minnesota.;
Splits and mergers in agrotechnology over the past decades are mindboggling, but some in the industry will recognize predecessor Swiss firms Ciba and Geigy that were important to U.S. farmers 50 years ago. Syngenta took over Minnetonka-based Golden Harvest, once an independent seed producer based on the old Funks Seed conglomerate famous for decades, but now only a brand.
Syngenta also bought some assets of Northrup-King, a producer of a wide range of seeds founded in Minneapolis in the 1890s. Interestingly, N-K was an early developer of corn genetically modified to resist insects — a key point in the recent and pending lawsuits.
The decision in the Kansas case, sure to be appealed, awarded $217.7 million to farmers who argued they had been hurt by Syngenta’s introduction of two new varieties of corn genetically modified to obviate the need for chemical insecticides. The harm to farmers derived from the fact that while the genetically modified organisms, or GMOs, had been approved for planting by U.S. and some other national regulators, the same had not happened in China. After the new gene showed up in some shipments, China reduced all corn imports from our country. The average price of corn received by U.S. farmers almost certainly was lowered somewhat by China’s reduced imports.
One crucial detail is that Syngenta acknowledged possible harm from Chinese import limits at the time it introduced the new GMOs, but predicted that country would approve its use very soon. That did not happen. Other countries that are major buyers of U.S. corn had approved the corn by the time Syngenta began to market seed here.
Some legal points are indisputable:
• Each country, including the United States, has the right to regulate agricultural chemicals and organisms such as GMOS.
• Having gotten U.S. government approval, Syngenta broke no law in selling it to farmers. No farmer broke the law by planting the new varieties.
• China, as with the U.S., has every right to not approve a new GMO seed and to ban imports of grain containing altered genes. (However, if done primarily to restrict trade rather than protecting health or safety, such action might be challenged under World Trade Organization dispute resolution procedures.)
Additionally, a few economic points seem true:
• A decrease in corn exports to China, all other things being equal, probably lowered U.S. corn producer prices.
• If the GMO is, in fact, beneficial to producers in lowering costs or increasing output, many will use it. There is no incentive for individual producers to hold back if they know others will not. This is a variation of the “prisoners’ dilemma” in game theory.
• Use of the GMO may well increase economic efficiency in production, resulting in greater output for the same use of inputs. But if its presence reduces a nation’s exports, it imposes an external cost on all farmers in that nation who are net corn sellers — even those who chose not to use the GMO.
While corn historically was a classic example of a “fungible commodity” for which one unit is no different than any other, once GMOs are introduced, that is no longer true. Yet these genes can only be detected with expensive testing, far outweighing any production efficiencies from the new technology. So there suddenly is an “information problem.” Participants all along the supply chain cannot be sure of what they are actually handling.
There are some other considerations that are more subtle:
• Not all farmers suffer from lower corn prices. Many livestock producers, including Minnesota dairy, hog and poultry farmers, are net buyers of feed grains. For any given level of prices for their products, higher corn prices mean lower profits. And the corn price dip alleged to have resulted from Syngenta’s GMO introduction happened after years of high feed prices that had scourged livestock producers.
• With competitive markets, higher input prices eventually cause higher output prices. So pricier corn means more expensive milk, eggs, chicken breasts and hamburgers for U.S. consumers. Economists note that non-restricted exports benefit producer incomes, overall employment, output, and general efficiency in resource use. But for an ag exporter like our country, greater exports do, taken alone, increase family food bills.
In the same vein, China’s import restrictions increased food costs for its consumers, at least marginally.
Note also that new technology that increases agricultural output has been lowering the inflation-adjusted prices of farm products for at least a century. This has been particularly true in the last 40 years. The difference is that this effect has been one of “supply shifts,” changes in the quantities that producers offer at each of a series of prices. The price drop alleged in the Syngenta suit was the result of a demand shift — fewer purchases of U.S. corn by Chinese importers.
Also note that the world economy as a whole probably benefited from Syngenta’s new genes. More total corn got produced from the same expenditure of productive resources. But given the regulatory decisions that occurred, U.S. corn producers were somewhat worse off and those in Brazil, Argentina, South Africa and elsewhere were somewhat better off.
There are still more complications in practical aspects of the real-world case. China did not impose a complete embargo on all corn imports from the United States. And China’s imports of U.S. corn have been erratic.
Many factors influence exports, especially when narrowed down to one importing country and one imported commodity rather than considering them as a whole. Weather in each country and relative exchange values of currencies are important. Political factors also enter. China still has central planning and de facto control of imports. Some observers see the refusal to accept some shiploads of corn as opportunistic exploitation of the situation to crack the whip over exporting nations and to score domestic political points with Chinese farmers who, as in Japan, get prices well above those in world markets.
The lawsuit in Kansas only involved that state. Groups have been certified in seven other states. Minnesota is one where a class has not yet been certified, but is likely. The decision in Kansas, based on a few hours deliberation by the jury, will be blood in the water for farmers and lawyers. But are there larger or longer-term implications?
Proving causation and quantifying the exact effects in a situation like this is difficult. Moreover, the fact that Syngenta represented that Chinese approval was imminent may make this a unique case legally.
We have faced similar situations before. Traces of growth-promoting hormones in U.S. beef exports to the European Union, chloramphenicol in Canadian pork and the initial kerfluffles over GMOs in any commodity starting two decades ago are familiar issues. In all cases some working arrangement was hammered out.
That said, one can conceive of a situation in which a seed company gets approval for an exotic gene that benefits only a few thousand domestic producers but that potentially taints the entire national corn crop, making it unacceptable to every importing nation. The company and the few thousand benefiting farmers would be better off, but hundreds of thousands of other producers would suffer as would grain handlers and input suppliers. Moreover, the entire world would be worse off because production would shift from a more efficient producer, the United States, to other countries that require more real resources to produce corn but that would have access to world markets exactly as our country was cut off. The outcome would be bad for the world. (In the short term at least, U.S. households would get cheaper groceries.)
Despite the Kansas jury’s decision, it isn’t clear that is what happened here. China eventually approved the GMO. Ironically, a state-owned Chinese enterprise is now negotiating to purchase Syngenta. (Conspiracy theorists see the corn turnbacks four years ago as the initial move in a diabolical Chinese plot to get a major ag technology company on the cheap.)
What could be done to avoid similar situations in the future? A move toward harmonized standards under the aegis of the WTO has been discussed for 30 years, but it is politically difficult for any nation to surrender its sovereignty over a health issue to any international body.
Economic theory suggests that as long as a globally-traded commodity is fungible as far as most importers are concerned, the interruption of sales to any single country, even China, will have limited effects on market prices, either globally or in the exporting country. The value of total U.S. export sales vary much less than sales to China. These totals are down slightly from a 2014 peaks, but much of that is accounted for by the strength of the U.S. dollar against other currencies of major importers.
I’ll venture that the Syngenta suits will be a fascinating footnote in agricultural and economic history, but won’t have large effects beyond that.