Kendell W. Keith
President, National Grain and Feed Association

I would like to discuss the status of biotechnology and its acceptance by consumers and the commodity sector of the grain and feed marketplace.

Not since the embargoes of the 1970s and the misguided government acreage idling programs of the 1980s, has U.S. agriculture been confronted with such disruption of markets as it faces today with biotechnology products. Market disruptions and shocks are harmful to economic growth. In 1983, 1988 and 1993, supply interruptions in the corn market, driven by the government's acreage idling program, reduced the demand for corn. It has taken years to recover. We are probably on a lower growth path today in corn utilization because of such policy mistakes. Any interruption in the supply of commodities and products available to a customer sends that customer in search of another source that will consistently supply the item desired. We do not need to have these interruptions in supply created by government policy or by the introduction of biotech products.

Now that a parallel has been drawn between biotech products and commodity embargoes and acreage idling, I want to make it clear that biotechnology holds great promise for mankind. Biotechnology providers are reluctant to tell about the benefits of their products for fear they will be thought to be condemning traditional crop varieties and cultural systems. They might even be viewed as targeting the chemistry-based crop protection system.
Less than a year ago the general rule in the commodity markets dealing with biotech products (with the exception of the corn wet milling industry) was "don't ask, don't tell." The grain handling and merchandising industry had no interest in trying to segregate crops on the basis of biotech and non-biotech products, except for a few small markets requiring non-biotech products.

We are involved with a very different market today. World consumers have been made aware of the StarLink corn problem. The open, transparent commodity marketing and regulatory system of the U.S. has been diminished, in the minds of some people, because of problems this biotech product created. A part of the U.S. food industry has been made to look like it is trying to hide something. This raises a question in the minds of others; "what else are they trying to hide?"

Why are markets and consumers suspicious? Is there in any justification for concern other than the StarLink matter? Some personal observations may shed some light on these questions.

Two years ago the National Grain and Feed Association (NGFA) was approached by biotech firms in midsummer, well after the corn crop had been planted. Their message was. "We have several hundred thousand acres of XYZ biotech hybrid planted. We thought it was going to get European Union and Japanese approval, but now we are not sure. Is there a way to keep it out of commercial channels in case it does not get approved before harvest?" It would appear that the biotech firms really did not want the market to know what was being grown and did not want the biotech hybrids treated different than conventional hybrids.

In the StarLink situation it was curious that a quick test that allows identification of the presence of the StarLink corn had been in development for a period of three years but never commercialized. Within three weeks after the discovery of StarLink corn in taco shells, the test had been commercialized and millions of test kits were in production. Moreover, the test was reliable. This suggested the test might have been withheld so that a specific biotech product could not be treated differently in the marketplace. In each of these instances the behavior of the biotech industry did not contribute to market transparency.

The NGFA has a mission statement proclaiming that the organization is pursuing
economic growth through efficient market mechanisms and that food abundance and safety are paramount. Given the immense potential of biotechnology, that industry should
be a partner in pursuit of the NGFA goals, but there are several hurdles left to be cleared.
The most fundamental tenet about efficient markets is that the better the information, the better markets perform. The beauty of the U.S. grain and oilseed commodity market has been that information has been about as full and complete as anyone could desire. Future markets quote prices around the globe on a 24-hour basis. Electronic services send out cash price quotes on more than 2,000 locations in the U.S. Crop conditions are monitored locally and internationally on a minute-by-minute basis. Grain buyers and merchandisers know exactly what to expect in terms of types and classes of wheat crops, corn, soybeans and every other product being grown in their market area.

The U.S. commodity market is really good at some things and not so good in others. It is very good at handling and merchandising grain inexpensively. Gross margins are in the 5 to 10 cent range even though daily price swings may be greater. The system is also geared to delivering certain types and grades of product. We are especially good at producing and delivering No. 2 and No. 3 corn.

A few years ago there was a debate in Congress about why the grain industry does not pay a premium price for No. 1 corn. For most markets there may be a one to two cent premium price for the No. 1 grade of product, but there is none in the case of corn. The explanation offered by a wet corn miller was that his company would gladly pay five or six cents more per bushel for No. 1 corn. The company had conducted tests and knew that if it could consistently obtain No. 1 corn for processing it could extract the added value in the form of a premium product. The miller subsequently found that the U.S. market could not efficiently and consistently deliver No. 1 corn.

No. 2 corn is acceptable for almost every purpose and the U.S. is probably the most efficient place in the world to produce it. The biotechnology industry has the ability to make this world-class corn production system even better. But it also has the potential to shrink markets and impede the efficiency with which corn is delivered to certain classes of customers.

The U.S., and probably each of the world's commodity markets will gradually move in the direction of acceptance, or rejection, of biotechnology commodity products within the next five years. I expect that the U.S. commodity market will consist largely of biotechnology products within this period and a "new" commodity market will have to be created. Scientists indicate that biotech grain products are the same as conventional grain products and can be used for the same purposes. It is less clear how foreign markets will react. Economic efficiency and growth of our customer base will continue to be goals of the U.S. commodity market. The acceptance of biotech products will require some important additional responsibilities for the biotechnology companies, seed producers and sellers.

Four years ago I had an opportunity to address a group of Polish business people in Warsaw, Poland about creation of a competitive market system out of the previously state-directed system. Poland had an inadequate infrastructure for business and little commercial law. I use this situation because there is some similarity between what Poland is doing and what is going on today in the U.S. commodity marketplace. Poland is trying to create a new economy. The U.S. is trying to re-invent a commodity market to accommodate biotech products. My advice to the Polish group was to create a self-regulatory system with a maximum of "sunshine" (i.e. make it as transparent as possible and give the industry and marketplace a chance to regulate itself). In the absence of strong commercial law and enforcement mechanisms the market can do an acceptable job of policing providing it has good information. I offered as an example the century-old arbitration system operated by the National Grain and Feed Association. The greatest strength of this system is its transparency. After arbitration cases are completed the decisions are published along with the companies, the arbitrators and all particulars. This process helps to educate grain traders and logistic people about acceptable business practices and reduces misbehavior that might otherwise occur. The Polish markets need more transparency. Similarly the U.S. market need more information about what biotech products are in the pipeline, in commercial production, what is being planted and what is acceptable in major markets.

Consumer labeling (i.e. labeling products by force of law as a biotech product or a non-biotech product) is not a good solution. Identifying and being able to name the source of grains contained in consumer products is totally incompatible with the development of a highly efficient commodity marketing system. What appears to be the best approach at the retail level does not necessarily apply throughout the complete food chain. If a percentage of the customers want non-biotech products (within reasonable tolerances) and are willing to pay a premium price several questions will need to be answered.

Is it the responsibility of the marketplace to figure out how to serve that customer group without accurate information about what biotech products are being planted in different regions? Is it the responsibility of grain elevators to keep on hand a dozen different quick tests to determine the nature of each truckload of grain that crosses their scales? How does the elevator operator know which biotech characteristic he is to look for with the quick test? The answer is that elevator operators must choose to take a risk that is difficult to measure or test every load of grain received with every quick test available. These options are not attractive in terms of cost or logistics.

Most elevators and grain buyers will not demand to know if the grain they handle is a biotech product because they are serving markets that are not sensitive to biotech issues. Is it not the responsibility of the biotech industry to provide the marketing system access to the kinds of information that will permit an efficient specialty market in biotech commodities to develop? If the grain marketing industry is forced to do all the gathering of planting data and perform all of the tests required by biotech customers the outcome is predictable. The very high costs incurred will have to be absorbed by the farmer, the elevator or the customer. More likely the customer that requires non-biotech products will simply buy from a country that does not permit such products to be planted. U.S. markets will be unable to compete effectively in this environment. Loss of this segment of the customer base is not a good strategy for long term growth of the industry.

I seriously doubt that we can achieve the market transparency required to permit the U.S. marketplace to serve customers of all types. In November 2000 NGFA wrote a letter to individual companies in the biotechnology industry requesting information on biotech events, seed varieties and approval status for the seed in major foreign markets. We wanted to get this information to the grain marketplace so elevators could have early discussions with farmers prior to planting the 2001 crop concerning types of grain that should or should not be planted in each area. In view of the time required to obtain responses we were forced to conclude the biotech seed industry does not have much understanding about where biotech products are marketed or they are reluctant to share this information with the grain marketplace. It is my assumption that this reluctance is driven by two factors operating in the biotech seed industry. One factor appears to be a corporate strategy designed to keep competitors from knowing the kinds of seeds they are selling. The second factor appears to be a desire to have their products treated no differently than the non-biotech component of the grain seed industry.

From my prospective it is time for the biotech seed industry to reassess its strategy. Are biotech interests best served by restricting information? Do competitive corporate strategies of the biotechnology industry have such a high priority that they outweigh the risks created from being less than transparent? The grain industry has no interest in treating any product differently unless there is a customer that asks for a special service. If the customer insists on a non-biotech product, everyone in the biotechnology industry and everyone throughout the market system should be interested in making it possible to obtain the product from the U.S. in the most cost-effective manner.

(Editor's comments:
Readers interested in details of the StarLink corn issue to which Dr. Keith alluded, are referred to an article that appeared in Fortune Magazine on February 19, 2001 entitled "Reaping a Biotech Blunder". The complete article may be seen at this location.
On June 14, 2001 the Centers for Disease Control and Prevention released a study in which it was concluded that StarLink corn did not cause the allergic reactions 58 people had reported. The CDC report added that an independent study of the data had confirmed these results. This report suggests that the issue raised about StarLink corn may have been unwarranted.)

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