Surplus distribution from GM maize adoption in Kenya:

A disaggregated ex-ante analysis

Anwar Naseem, Rutgers UniversityLatha Nagarajan, IFDC

Carl Pray, Rutgers University

Motivation

• No GM crops have been approved for cultivation in Kenya, in spite of ex ante evidence suggesting significant benefits

• Bt maize (De Groote et al., 2011) - 33% to producers and 67% to consumers

• Drought tolerant (Kostandini, Mills and Mykerezi, 2011) yield increase 68% to producers and 32% consumers

• Drought tolerant and WEMA (Dalton, Pray and Paarlberg 2011); gains to producers (depending on assumptions) yields have no impact on consumers

• Herbicide tolerant (Kalaitzandonakes, Kruse, and Gouse, 2012) Only report total surplus $41-146 million.

Motivation

• Yet welfare gains vary within groups– Consumers (rural vs uban; food vs feed)– Producers (smallholders vs farmers)– Seed and biotech firms (foreign vs domestic; small

vs large)– Others along the value chain• Wholesalers• Processors• Retailers

Objectives

• To estimate the distribution of benefits / losses among key agents along the Kenyan maize value chain

• To understand whether the distribution of these benefits / losses explains the position of key interest groups vis a vis GM crop policy and their lobbying efforts

5

Trends in maize area, production, yield and consumption (2000-2013)

1998 2000 2002 2004 2006 2008 2010 2012 20140.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.6

3.4

2.1

Area Mha

Production Mill tons

Yield T/ha

Consumption (Food) Mil tons

Source: FAO, 2014

ContextKenyan Maize Utilization

ContextMaize Marketing Channel

Source: Kirimi et al (2011)

ContextMaize Value Chain Simplified

Input suppliers Seeds Fertilizer Chemical

Farmers

Smallholders Large

Processors

Posho Millers Commercial

Consumption Food use Feed use

Node 1 Node 2 Node 3

Expected Impacts from GM Maize(Bt-, HT-, DT- Maize)

Stakeholders Expected Impact Magnitude

Input suppliers

Multinational seed & biotech Royalties, new / expanded markets for hybrids +++

Regional-African & domestic firms

Expand markets for hybrids, protect current market, R&D expansion

++

Pesticide firms

Insecticides Small decline in pesticide use -

Herbicides HT increases demand and use ++

Producers - Farmers

Small Improved yields, reduced input costs, reduce risk of loss, increase home consumption

+++

Medium-Large Improved yields, reduced input costs, reduce risk of loss, increase marketed surplus

++

Processors (Millers – feed /food) ?

“Posho” Millers Reduced prices; inferior processing technology; limited capacity to expand

++

Commercial Millers Reduced prices; better processing technology; excess capacity

+++

Consumers (Rural and Urban) Reduced prices +

Economic Surplus in Multistage Production

PR0 PR1

P SR0

SR1

DR0

QP0

PP0

PP1

DP0

SP0

DF

SF0

SF1

Processing Inputs

P

Farm Quantity

P

PF0

QF0

Retail Quantity

DP1

PF1

QF1

QR0 QR1

QP1

PR0

P SR0

DR0

QP0

PP0

DP0

SP0

DF

SF0

Processing Inputs

P

Farm Quantity

P

PF0

QF0

Retail Quantity QR0

PR0 PR1

P SR0

SR1

DR0

QP0

PP0

PP1

DP0

SP0

DF

SF0

SF1

Processing Inputs

P

Farm Quantity

P

PF0

QF0

Retail Quantity

DP1

PF1

QF1

QR0 QR1

QP1

Key Equations

0 0

0 0

0 0 0 0

Farmer Surplus Processor Surplus

(1 0.5 )

( )(1 0.5 )

( )( / )(1 0.5 ) ( )( / )(1 0.5 )F P

CS PR QR Z Z

PS PR QR K Z Z

PF QF K Z Z PPQP K Z Z

Where K is the vertical shift of supply function,Z is the relative price reduction ε is the demand elasticityη is the supply elasticity

Farmer surplus can be further disaggregated between small and large land ownersProcessor surplus can be further disaggregated between “posho” millers and commercial

Change in innovator profits are IS A L

Yield Assumptions

Yield Assumption – Farm size based

Acreage (million ha)

Production (million tonnes)

Yield (tonnes / ha)d

Small Large TOTAL Small Large TOTAL Small

Large Mean Yield

1.6336b 0.4084b 2.042a 2.2778 0.9762 3.254a 1.3943 2.390 1.5935

Adoption Assumptions (2016-2025)(Area shares are % of total hybrid area)

2016 2017 2018 2019 2020 2021 2022 2023 2024 20250%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Non GM

30%

BRDT; 0.4

HT

0.2IR+DT

IR

5%

Years

% sh

are

of h

ybrid

s are

a

GM pipeline:2016- Bt2018- BtDT2022-HT2025-BtHtDT

Source: Calculated by authors based on assumptions

Baseline Parameter Values Value Source and assumptionsDemand Elasticity

Demand elasticity of Posho Miller( )Demand elasticity of Commercial Miller ( )

-0.53-0.83

Nzuma (2008)

Supply Elasticity Supply elasticity of smallholder( )

Supply elasticity of Large landowners ( )

0.80.680.92

DeGroote et al (2011)Assumed

Average maize seed priceFarm level ( ) Retail level ( )

10542 KES/MT11314 KES/MT

Nzuma and Sarker (2010)

Domestic SupplyMarketed supply of maize by smallholder ( )

Marketed supply of maize by large landowners ( )

1.8824 MT0.9762 MT

Assumes 50% of the smallholder production is marketed, and 100% by large landowners

Domestic DemandDemand by Posho Miller ( )

Demand by Commercial Miller( )

0.4198 MT2.3788 MT

Assumes 85% of total marketed supply is processed by commercial millers

2p2c2s2l

Results

Trait

Farmers(Producer Surplus)

Millers(Consumer Surplus) Total

Producer

Surplus

Total Consum

er Surplus

Total Surplus

Small Large Total Posho Commercial Total

Bt 4.7 3.1 7.8 0.2 0.4 0.6 8.4 15.7 24.0BtDT 34.3 14.7 49.0 1.1 2.5 3.6 52.6 98.7 151.3HT 0.4 1.0 1.4 0.0 0.1 0.1 1.5 2.8 4.3BRDT 2.8 1.7 4.5 0.1 0.2 0.3 4.8 9.0 13.7TOTAL 42.2 20.5 62.7 1.4 3.2 4.6 67.2 126.1 193.3

Share in PS/CS 21.81% 10.60% 32.41% 0.74% 1.64% 2.37% 34.78% 65.22%Share in TS 67.3% 32.7% 31.0% 69.0%

Surplus in $ million for the period 2016-2026

17

Impacts on seed and biotech industry • The Kenyan maize hybrid market size currently US$ 69 Million

– Dominated by Kenya Seed Company – 70 % of the maize market share– Local, domestic firms – 20 %; MNCs – 10 %

• With GM introduction in 2016 the seed market is projected to double in sales – around US$ 118 million in 2025, with 90 % of sales from sale of GM seeds.

Trait Year

Total seed market

(US$ Mill)

GM seed market (% to total seed

market value)

Non GM 2012-13 69 0

Bt 2016 80 10

BtDT 2018 85 34

HT 2022 103 63

BRDT 2025 118 90

Impacts on seed and biotech industry -2

Assumptions: Area of hybrids & adoption from previous FIG., hybrid seed price $2.1/kg, seed rate 25kg/ha, Bt seed price 25% higher, Bt+DT price 30% higher, Bt+DT+HT 40% higher, and royalty is 40% of price increase.

Seed and biotech industry Margin: Major benefits to Kenyan seed companies (60 % of market sales). Bt and drought tolerance royalty free. HT requires royalties

19

Impact on pesticide industry profits, prices, and quantity used

• Bt introduction may have variable impacts – agro-ecologically– Insecticide Use – mostly in high intensity areas only – US$ 10

– 25 /ha – up to 8 % of CoP– 5 % reduction in use of insecticides for borers & incremental

yield benefits are expected.• HT introduction will increase the use of herbicides and

its demand– Weeding costs represent 45 – 75 % of total labor cost – Herbicides account for < 2 % of cost of cultivation expenses– 15% farmers use H/C currently

20

How do the potential winners and losers influence GM policy?

• Seed industry - STAK – KSC (Parastatal and market power)• Farmers

– Kenya farmers association – small – Kenya Cereal Growers Association – – KAON – organic…. – Export farmers (of other cash crops)

• Millers – – Cereal Millers Association – food and feed – big guys– United Grain Millers and Farmers Association (UGMFA) posho/hammer

millers • Pesticide industry –

– Kenya association – Crop life for fake inputs and currently on herbicide use/HT in Africa

campaign• Consumers --- Consumer international, NGOs

Conclusion

• Consumer gains as group but limited on a per capita basis; limited collective action

• Little gain for processors / millers• Gain for smallholders but limited political

power• Gain for seed industry