Senior Research Associate, National Center for Food and Agricultural Policy
before the United States House of Representatives
My name is Leonard Gianessi. I am a Senior Research Associate at the National Center for Food and Agricultural Policy, a private, non-profit, non-advocacy research organization located in Washington, DC. Over the past 10 years, I have worked closely with USEPA, USDA, commodity organizations and the agricultural chemical industry on studies to estimate the amounts of pesticides used in U.S. agriculture. We have also analyzed trends and changes in pesticide use and forecasted changes in pesticide use resulting from regulatory policy. Prices of pesticide products are one of the major explanatory variables regarding which pesticides are used and in explaining trends in pesticide usage. U.S. farmers face a wide variety of weeds, insects and disease pathogens that, if not controlled, would reduce crop yields dramatically. Farmers are interested in two questions: how well does the product work and how much does it cost? For products that work equally well, price is the determining factor in terms of which product is chosen.
The U.S. agricultural chemical market is extremely competitive . Products are not introduced unless they perform as well as the current industry standard. The U.S. market is made up of several hundred smaller segmented markets. Each crop represents a unique market. Every crop market can be broken down further by type of pesticides – herbicides, insecticides, fungicides. Thus, there is a U.S. market for wheat herbicides, tomato insecticides, potato fungicides, etc. In order to maintain market share, companies must price their products to be competitive in the individual segments. Each market segment has a market standard for price and performance. Each market segment generally is served with products from two or more major manufacturers and two or more generic producers. Thus, there is real competition, and companies that do not adjust to changes in prices often suffer financially.
A recent example of the impact of pesticide pricing is the introduction of Roundup Ready Soybeans, that have been transformed genetically to tolerate applications of the herbicide glyphosate. Research demonstrated that glyphosate applications would control most of the weeds that infest U.S. soybean acreage. The Roundup Ready weed control program was introduced at a cost equivalent to the current industry standards in 1996 and 1997, and then the price was dropped for 1998. This price drop forced competitors to lower their prices, as well. In a study funded by the Rockefeller Foundation, we estimated that U.S. soybean farmers are spending about $200 million a year less on their weed control expenses as a result of using fewer herbicides and as a result of a lowering of the prices of the major soybean herbicides by about 40%.
One major company waited until 1999 to lower its prices for soybean herbicides and suffered the consequences. There was $300 million in unsold product that had to be bought back. That company has been sold recently.
There are differential costs for different crop protection markets in the U.S. For example, the cost of a weed control program in a field crop generally is lower than the cost in a vegetable or tree crop. Costs are based on what the market will bear. An acre of tomatoes is more valuable than an acre of sugarcane. As a result, the overall weed control program for tomatoes costs more. Thus, there are situations in which a product is registered for both a field crop and a vegetable crop, but priced for the vegetable crop, which means that its price is too high to gain much use in the field crop.
Sometimes companies do not respond to changing price structures because they can’t; their product may be extremely expensive to manufacture and the opportunity for price reduction is not there. Chloramben was the major soybean herbicide in the 1960’s. It performed very well, but when lower cost alternatives were introduced into the market, it disappeared from use because of the inability of the manufacturer to produce chloramben in a less costly manner. Many times companies will introduce products that are more costly than the industry standard for a particular market segment because they believe that they will gain market share due to some product characteristic, such as its flexibility of timing or ease of use. If the higher price strategy does not work, to grab market share, after a few years the product generally is reduced in price.
There are new products in various markets that clearly are superior in performance to existing products. They usually are priced higher, and growers use them because the product solves an unmet pest control need. The price differential often lasts only a short period of time, however, once competitors introduce new products based on the same chemistry. Patents are scrutinized, and competitors often can develop a similar chemical, that can be introduced after a few years of additional development. And then, of course, when the patent expires, competitors are able to introduce their own products with the exact same chemical structure if they can manufacture it. The U.S. crop protection market increasingly is dominated by generics. About 45% of the pesticides that are sold in the U.S. are off patent, and 15 to 25% of those are sold by a company other than the original registrant. This figure is expected to grow to 65% in the next 10 years.
The introduction of generic products always forces a downward restructuring of the price in a crop protection market segment. Generic producers often do not carry the overhead or research and development expenses of large proprietary registrants.
Several factors account for a trend of rising prices for certain agricultural chemicals. The costs of regulation in the U.S. has increased in recent years with the passage of the Food Quality Protection Act (FQPA). One manufacturer of an organophosphate insecticide has announced price increases and reported to growers that it is a result of the tens of millions of dollars of extra costs of studies required by EPA under FQPA. EPA is fast tracking the registration of new products that are under patent and trying with its regulations to phase out older products. New products cost more than older products that have been off patent for many years. In most cases, when an older product is being phased out, growers don’t purchase the new product immediately but, instead, bid up the price of the product being phased out.
The length of time necessary to gain approval of a new product in the U.S. market has lengthened in recent years, meaning that companies have a shorter period of time to be in the marketplace with patent protection. As a result, prices often are set higher than they would if the product had been approved earlier.
Recently, there has been concern that prices for the same pesticide products are higher in the U.S. than in Canada. The particular market segment of most concern to farmers in the U.S. is the cereal herbicide market – specifically the market for grass control herbicides in such crops as wheat and barley. Certain new herbicides cost growers 30% more on a per acre basis in states such as North Dakota than they cost growers on the other side of the Canadian border. There are actually two distinct market segments: the Canadian market for grass weed control herbicides in cereals and the U.S. market for grass weed control herbicides in cereals. The reasons they are considered two separate market segments is that there are two separate regulatory agencies that regulate pesticide use, one in Canada and one in the U.S. The costs of meeting Canada’s regulatory requirements are to be covered by sales of the herbicides in Canada while the costs of maintaining registrations in the U.S. are covered by sales in the U.S. The costs of litigation in each country must be met and covered by the sales in that country. The costs of doing business in each country are to be covered by sales in the particular country.
The herbicides that have been registered for grass control in cereals, including wild oat control, generally are registered for cereals only. Thus, the income to cover their development and regulatory costs must be covered by sales to cereal growers in the U.S. or in Canada. The Canadian market for grass control herbicides in cereals is significantly larger than the U.S. market and has been significantly larger for the last 30 years. More acres of cereal grains in Canada are infested with wild oats than in the U.S. so the potential market has always been greater. About 70 million acres are infested with wild oats in Canada while 28 million acres are infested with wild oats in the U.S. In 1972, the government of Canada set up the Wild Oat Action Committee to tackle the wild oat problem. A major research and education effort in Canada led to widespread use of herbicides to control wild oats. In 1982, more than half of the acres of cereals in Manitoba, Alberta and Saskatchewan were treated with grass control herbicides (24 million acres), representing an annual purchase of $300 million. In the United States in 1982, only 6% of the nation’s cereal acres were treated with grass control herbicides (7 million acres). Currently, the U.S. market for grass herbicides in cereals is approximately 10 to 11 million acres – still less than 50% of the Canadian market.
The new grass control herbicides have been introduced into Canada one or two years before they have been introduced into the U.S. The grass weed control market in Canada is bigger and more of a priority for the agricultural chemical industry and the government. Registration of new grass weed control herbicides for cereals is not on the fast track at EPA. The fact that the market is bigger in Canada means that companies have expectations of more sales on more acres and, thus, can cover costs on a lower per acre price than in the U.S. where the expectation is that fewer acres will be treated. Therefore, with higher regulatory costs in the U.S. and the expectation that fewer acres will be treated, companies need to set a higher per acre price to cover their costs. In Canada the regulatory costs are lower, the acres that are treated are higher, thus, the per acre price can be lower.
These markets do change. The latest entry into the grass weed control cereal market in the U.S. is priced at $1 per acre less than the two competitive products. U.S. wheat growers have expanded their use of grass weed control herbicides in the last 10 years, making the market in the U.S. a growing one.
This concludes my testimony, and I hope that I’ve helped to further understanding of these complicated issues.