Department of Agricultural and Resource Economics, University of California, Davis, California, USA, and The Giannini Foundation
© CAB International 2002. Market Development for Genetically Modified Foods (eds V. Santaniello, R.E. Evenson and D. Zilberman)
1Lovell S. Jarvis is Associate Dean for Human Sciences, College of Agricultural and Environmental Sciences, and Professor, Department of Agricultural and Resource Economics, University of California, Davis. This chapter draws on and extends information contained in Jarvis (1996).
homeorhetic control that coordinates the metabo-lism of many tissues in dairy cattle. Among other effects, it triggers milk production in cows’ mam-mary glands. It is scientifically known as bovine somatotropin (bST) and as bovine growth hormone (bGH). Although bST was identified over a century ago, the high cost of its production restricted research and practical applications until recently.
rbST is a genetically engineered synthetic ana-logue of the natural hormone. Scientists identified the gene responsible for production of the natural bST and, using standard genetic-engineering tech-niques, duplicated the gene and spliced it into the DNA of Escherichia coli (E. coli) K-12 bacterium.
These bacteria can be grown in fermentation tanks, and rbST is produced with the organism. The E. coli bacteria are killed and ruptured and large amounts of rbST can then be inexpensively extracted for injection into cows (Bauman et al., 1985; Roush, 1991).
The injection of rbST produces a biological reaction that is essentially the same as that which occurs in dairy cows that naturally produce higher levels of bST. If appropriately managed and nour-ished, cows injected with rbST produce more milk.
As milk production rises, feed consumption also usually rises. Because the absolute nutrient require-ments for bodily maintenance do not change, a higher proportion of nutrient intake is channelled to milk synthesis. rbST also partitions calories to milk production at the expense of body fat. Since cows that are injected with rbST generally produce more milk, and more milk per unit of feed consumed, use of rbST reduces milk costs, provided that the cost of rbST is sufficiently low.
Four pharmaceutical firms applied to the Federal Drug Administration (FDA) for permission to market rbST in the USA. After lengthy delays to allow for a comprehensive review of rbST’s efficacy and animal and human safety, the FDA determined that rbST is safe and, in November 1993, approved the variety produced by Monsanto (recombinant methionyl bovine somatotropin, Sometribove, mar-keted as POSILAC) for on-farm use. rbST became
available for sale in the USA in February 1994.2 Monsanto is currently the only producer of rbST.
According to Monsanto, the health organizations of 53 countries have determined that dairy and meat products from dairy cows receiving rbST are safe for human consumption. However, only 17 countries have approved rbST use and, of these, only the USA is a developed country.3
Not surprisingly, rbST is most profitable when it produces a large absolute increment in milk pro-duction. The increment obtained correlates positive-ly with dairy farm characteristics found predomi-nantly in developed countries: cow genetic potential to produce milk, skilled management, adequate high quality feed and favourable production envi-ronment. Thus, the inability of Monsanto to market rbST in the European Union, Japan and Canada sharply restricts its broader use.
The Committee for Veterinary Medicinal Products of the European Economic Community concluded that rbST was safe for use (Commission of the European Communities, 1993). The Economic Community (EC) nonetheless imposed a moratorium on the commercial use of rbST, prima-rily out of concern that its adoption would exacer-bate EC milk surpluses. In late 1994, the Economic Commission extended the initial moratorium until the end of 1999. In March 1999, the European Union (EU) extended the moratorium again, citing concern regarding the tests previously used to deter-mine rbST safety, specifically regarding the dose–effect relationship between rbST, insulin-like growth factor-1 (IGF-1), and human health. rbST acts on lactating cells in the mammary gland through a messenger substance called IGF-1. Milk from rbST-treated animals contains higher-than-normal levels of IGF-1. Because IGF-1 acts as a messenger for human growth hormone in humans, if IGF-1 survives digestion and enters the human bloodstream, it could cause health problems.
Canada also imposed a moratorium on the use of rbST. Though Health Canada found rbST posed no threat to human safety, it expressed concern for ani-mal safety, principally a higher incidence of udder
2 Production of POSILAC began in 1989, at a time when it was illegal for a US firm to export a drug or chemical that had not been approved for use in the USA. Thus, Monsanto contracted with a chemical firm located in Austria to produce POSILAC. This is currently the only production site, though Monsanto is building a plant to manufacture POSILAC in Augusta, Georgia. POSILAC has been marketed in Brazil and Mexico since 1989.
3 These are: Brazil, Colombia, Costa Rica, Egypt, Honduras, Israel, Jordan, Korea, Mexico, Namibia, Panama, Peru, South Africa, Turkey, UAE, US and Zimbabwe. Outside the USA, POSILAC is marketed by Lilly under contract from Monsanto.
infections, a shorter productive-life (burnout) and worsening reproductive parameters. Canada extend-ed its moratorium in January 1999, referencing the human health issue raised by the EU and continued animal health concerns.
The FDA recently examined and scientifically refuted the new arguments of the EU and Canada, indicating that the tests used include standard haz-ard assessment procedures that have been applied to determine ‘the safety of vitamins, food additives and drugs, including hormones, for over twenty-five years’. The FDA asserts that the amount of IGF-1 and truncated forms excreted in milk following rbST treatment is ‘safe for all consumers, including infants’.4The FDA has also rejected the claim that rbST causes significant animal health problems.
Western Europe and Canada continue to oppose use of rbST on what appear to be mainly economic considerations,5though a general fear of biotechnology in Western Europe remains a major consideration as well. Although US farmers have been adopting rbST, many surveys indicate that a considerable number of farmers express unwilling-ness to use rbST. These farmers cite concerns similar to those expressed officially by the EU and Canada, that is, concern that their cows will be harmed and/or that consumers will be scared by rbST and that milk consumption will drop (e.g. rbST surveys of California dairy industry carried out by L.J.
(Bees) Butler, 1995). Some of these farmers are doubtlessly influenced by the popular and scientific debate, others by their perceptions following observed efforts to utilize rbST, and still others by a fear of what appears to be ‘unnatural’. Despite these concerns, longer-term studies have found that cows receiving rbST evidence no particular stress, lack of heat tolerance, health effects nor any significant gap in calving interval (e.g. Bauman, 1987; Chalupa et al., 1996; Bauman et al., 1999). Cows treated with rbST do evidence a higher level of udder infections, but no higher than untreated cows that yield equal amounts of milk, and all of these infections are cur-able with antibiotics. There is no evidence in the
USA that consumer demand has been affected by the presence of rbST.6
Microeconomics of rbST Use and its Adoption
Initial yield trials showed considerable variability of milk production response to rbST treatment. For example, at the 1989 meetings of the American Dairy Science Association and the American Society of Animal Science, Bauman et al. (1989) reported trials in which rbST-related production increases ranged from 2.5 to 30%, or about 1.3 lb to 15.4 lb of milk day–1of treatment. Herd management was a critical factor in determining response, but it was then believed that the absolute level of response was positively correlated with initial animal milk yields.
Surprisingly, subsequent analysis of on-farm rbST use suggests that the absolute magnitude of the potential response to rbST in the US herd is largely independent of the pre-rbST level of production.
That is, when properly managed, response is fairly constant at about 10–12 lb day–1of treatment (W.
Weiland, 1999, personal communication).7 Although genetic potential is a factor in rbST response, animals within the US dairy herd are suf-ficiently similar that their rbST response is poten-tially similar. Thus, most of the observed variation in rbST response in US herds can be attributed to differences in herd management. Poorly managed herds achieve a lower response than well-managed herds, with nutrition being the main limiting factor.
A recent study by Bauman et al. (1999) pro-vides further support for this view. The study utilizes panel data for 1990–1998 from several continuing surveys of dairy herd productivity in Pennsylvania and New England. Using a list of rbST users and non-users provided by Monsanto, the authors iden-tified 164 dairies that began using rbST between February and June 1994, continued using rbST through March 1998, had treated at least 50% of their cows, and used only Holstein cows. The
4FDA’s determination is supported by numerous scientific and regulatory bodies, including the Joint Food and Agricultural Organization/World Health Organization Expert Committee on Food Additives (JECFA).
5Canada’s primary concern is that use of rbST will increase Canadian milk production and thereby jeopardize Canada’s milk quota system.
6Currently it is impossible to distinguish between bST and rbST in milk. Thus, promises or assertions are the only means that brand-name products have to ensure consumers that their milk is rbST-free.
7Since the response to rbST is small during the early stages of lactation, it is not profitable to administer rbST until about the 90th day of lactation. Thus, rbST has a smaller proportional effect on total output per lactation than on daily output when rbST is being administered.
authors identified 170 control herds that also used only Holstein cows and that did not use rbST at any time. The 340 herds contained more than 27,000 cows in milk, generating over 2 million cow test day records. Control herds were slightly smaller than rbST herds and had lower total and per cow pro-duction both before and after rbST became avail-able. Adjusting for cow age, stage of pregnancy, stage of lactation, and months fresh, the authors deter-mined the annual average change in milk yields for rbST and control herds. Assuming that parameters other than rbST (e.g. weather, feed supply, farmer education, milk price) affect the two sets of herds in a similar way, the authors attribute changes in the difference in yields between rbST and control herd yields after 1994 to rbST. The data show that milk yields for rbST and control herds fell slightly in 1990 and 1991, were constant in 1992 and 1993, and rose in all years 1994–1998. However, yields for rbST-using herds rise sharply in 1994 relative to yields of control herds. The yield gap widens slight-ly thereafter and then remains roughslight-ly constant with both sets of herds manifesting continuing yield growth (presumably from management improve-ments and adoption of duplication technologies other than rbST). The data indicate that rbST use increased milk yields by about 6 lb per cow milked on test day. However, only about 65% of a herd’s cows are eligible for treatment with rbST at any point in time;8the data indicate that rbST increased the yields of treated cows by about 9.2 lb. Moreover, most farmers do not treat all their cattle.9Assuming that sampled farmers treated 80% of their cows, rbST treatment increased cow yields by 11.5 lb day–1of treatment.10
If these results are fairly representative of
dairies that effectively manage rbST, how profitable is rbST? And how does profitability vary as the response varies? Calculations can be made easily.
The change in the daily profit per cow from use of rbST equals:
(9.1) where p =daily profit per cow, PM=price of milk, M=milk output, Vi=the cost of input i (other than rbST) and Xi=the quantity of input i. For simplic-ity, let R=the quantity of rbST used and CR=its total cost. There is no assumption that inputs are chosen optimally as these are likely to vary across farms.
Rewriting, we get:
(9.2) Monsanto sells POSILAC in a standard 14-day prolonged-release dose for subcutaneous injection.
Experimental trials indicated that milk production responds strongly to rising amounts of rbST over a range and then plateaus, making it relatively easy to choose the profit-maximizing dose. However, some farmers, feeling that the response is stronger with a somewhat larger dose, inject all cows every 10 or 11 days. In general, farmers must provide a continuous high quality feed ration and other complementary inputs as needed. A farmer’s ability to manage nutri-tion and other inputs, maintaining cow health and comfort, strongly affects the milk increment achieved.
Monsanto currently sells POSILAC for US$5.80 per 14-day dose, or US$0.414 day–1.11 The price is increasingly discounted as a higher
8 Cows are treated for the last 215 days of their 305 day lactation, and a few cease treatment because of poor condi-tion or ill health.
9 Monsanto believes that the sample of effective rbST users in the Bauman et al. (1999) study treat about 80–85% of their cows. Though most rbST users decide not to treat some of their animals in the belief that they will not respond well to rbST, animal scientists recommend that farmers treat all cows. Everett (1999, personal communica-tion) believes that the lack of response of individual animals is likely to be a result of management and says that it is difficult to statistically separate management factors from genetic factors in the determination of milk yields for individual animals with the data available.
10 The distribution of average herd response in this sample is symmetrical and the SEis small (R. Everett, 1999, per-sonal communication). The distribution of milk response to rbST within herds is fairly uniform and appears to be uncorrelated with observable cow characteristics. The survey data show no significant change between rbST-treated and control herds in cow age, cow health, length of lactation or cow reproduction rates, and thus show no sign of health or reproductive problems (W. Weiland, personal communication).
11 Monsanto sells POSILAC at a price that appears broadly consistent with an assumption of profit-maximizing behav-iour. The price is substantially above the cost of production, which is estimated at US$0.05 or less (Marion and Wills, 1990). However, Monsanto markets POSILAC directly to farmers and provided considerable free technical assistance to adopting farmers during the first 3 years that POSILAC was marketed. It wanted to ensure that
Dp =PMddMR -
Â
ViddXMi ddMR -CRproportion of a farmer’s herd is treated; the lowest discounted price is US$5.25 per 14-day dose. Thus, depending on whether cows are treated every 10 or every 14 days, and on the discount obtained, the daily cost of rbST ranges between US$0.38 and 0.58. Marion and Wills (1990) estimated that mar-ginal feed costs are about US$0.0289 lb–1 of milk produced for Wisconsin dairy herds and that other costs like farm labour, power, veterinary services and milk transport increased at US$0.0087 lb–1 of milk produced. Adopting their estimates of variable costs assuming that the farm gate price of milk (which varies regionally) is US$11.50 per hundredweight (US$0.115 lb–1), each incremental lb of milk pro-duced yields the farmer US$0.0774, gross of the cost of rbST itself.12See Table 9.1. Since each cow is treated for about 215 days during each lactation, the increase in annual profit per cow rises rapidly.13 Although rbST appears to be a scale-neutral tech-nology in terms of its specific application, the absolute incentive for adoption varies proportion-ately with herd size, assuming that management is scale neutral. In fact, US dairy herds vary greatly in size both within and across regions. For example, while Wisconsin herds average about 50 cows, California herds average more than 500 cows (Reed, 1994). Similarly, within California, herds range from 50 cows to 10,000 cows.
Farms having only 50 cows that achieve an increment of about 11–12 lb per cow would appear to gain US$4000–5000 annually, a significant prof-it increment given the dairy’s size. However, if the
same farm achieves an increment of only 8 lb, and then treats only 60% of its cows, the benefit is about US$1000. Assuming rbST is sold at US$0.414 per daily dose, a dairy farmer must achieve an average increment of 5.34 lb to break even. It appears that most producers should at least achieve this incre-ment, making adoption of rbST relatively low risk.
Most farms must introduce changes in management to manage rbST effectively. Some farmers may lose money in the first several months following adop-tion. Subsequently, however, most adopters appear to achieve a significant economic benefit from adop-tion. When managed well, milk production increas-es in a predictable, consistent, significant manner.
The data are increasingly clear that treating cows with rbST creates no unusual animal health or reproductive problems. None the less, the likely gains to smaller dairies from adoption of rbST are relatively small and not likely to be a panacea. In contrast, a dairy with 2000 cows that treats 80% of its cows and achieves an average increase of 12.5 lb per cow gains an estimated annual profit increase of about US$190,000.
It was widely expected that rbST would have a differential effect on the profitability of different types of dairy farms within the US (Boehlje et al., 1987; Fallert et al., 1987; Butler and Carter, 1988;
Kaiser and Tauer, 1989). Considerable empirical evidence on the adoption and use of new technolo-gies suggests a positive correlation between farm size and farmer education on the one hand, and the rate and extent of adoption of (profitable) new
adopting farmers got good results and continued use, and Monsanto also wanted to better understand on-farm use and results. Monsanto still provides technical assistance, but at a lower level.
12 Marion and Wills (1990) first worked out a variant of this simple model.
13 As the response to rbST is not strong during the first 60 days of the lactation cycle, Monsanto recommends that dairy farmers treat essentially all cows after the 60th day of lactation.
Table 9.1. Profit effect of treating cows with rbST, assuming different milk increments.
Annual profit Daily profit Annual profit increment per herd Milk increment increment per cow increment per cow (assuming 100 lb day–1(dM/dR ) (Dp) (US$) (215 Dp) (US$) cows treated) (US$)
5 (0.03) (6.45) 645
7.5 0.17 36.55 3,655
10 0.36 77.40 7,740
12.5 0.55 118.25 11,825
15 0.75 160.13 16,013
Assumptions: PM=US$0.115 lb–1, CR=US$0.414, and ViXi=US$0.0376 lb–1(the sum of input cost other than rbST).
technologies on the other, and it seems likely that the same will hold for adoption of rbST. Indeed, Saha et al. (1994) found that, ex ante, the willing-ness of Texas dairy producers to adopt rbST is posi-tively related to herd size and education. Klotz et al.
(1995) found the same is true of dairy farmers in California. Given regional differences in farm size and farm productivity, rbST would seem likely to differentially affect regional milk production as well.
Monsanto does not report sales figures for any of its products. However, Monsanto reported in May 1999, that 13,000 US dairy producers were using rbST and that adopting farms have approximately 30% of the 9 million dairy cows in the US herd.
Although the data provided do not seem wholly internally consistent, Monsanto claims that the
Although the data provided do not seem wholly internally consistent, Monsanto claims that the