One per cent checkoff recommended for developing new varieties

The Standing Senate Committee on Agriculture and Forestry is currently holding hearings on agricultural research. These are excerpts from a presentation Oct. 18 by Richard S. Gray, professor, Bioresource Policy, Business and Economics at the University of Saskatchewan. He has visited Australia, France and the U.K. to study their system for funding research

My first point is that research has fundamentally changed agriculture. Western Canadian farmers produce roughly three times the amount of output per unit of input that they did in 1940, due to research.

Second, literally hundreds of studies have shown high rates of return for agricultural research. One study compiled 292 different studies, and those showed an internal rate of return of 65 per cent per year.

Third, in Canada intellectual property rights (IPRs) are very weak for non-genetically modified crops — open-pollinated crops — and need to be strengthened to attract private investment. Plant breeders do have the right to charge royalties on the sale of seed, but farmers have the right to replant saved seed. This means that breeders have a limited ability to collect royalties and very little monetary incentive for research in some important crops, like wheat.

In the U.K. farmers must pay a royalty on farm-saved seed equal to 53 per cent of the last year’s average royalty rate. While these intellectual property rights are an improvement over our system, the system in the U.K. has only generated enough revenue to support a small private-breeding industry.

The Australian system of end-point royalties is far stronger and has far greater long-run potential for revenue generation, but notably, even this system with strong IPRs took 15 years before they got to the point that they could support a private industry.

Fourth, end-point royalties, which are used in Australia and France, have several advantages over seed-based royalty collection systems. The advantages include reduced producer risk, accommodation of farm-saved seed and low administration costs. The application of uniform end-point royalties to all varieties can generate immediate cash flow for breeders.

Fifth, in the absence of strong intellectual property rights and non-refundable checkoffs, the funding for wheat in Western Canada is very low relative to the competition. The funding for wheat in Australia is at approximately $80 million a year and the funding for canola in Canada, at approximately $80 million a year, is four times the level of the funding for wheat research, about $20 million a year in Canada.

Sixth, strong IPRs are not the complete solution to fund agricultural research. While they do stimulate research, and private investment is very important, they are less than perfect for a number of reasons.

Industry concentration

First, given the fixed costs of research and that once you have invested in research it can be used over and over again, the industry cannot be fully competitive. Industry will be naturally concentrated, which can lead to very high seed prices. Corn and canola producers pay about 10 per cent of their gross income for seed, but only about 10 per cent of seed company revenue is reinvested in research.

Second, with strong intellectual property rights, knowledge sharing is often limited. This fragments research, and duplicates effort.

Third, just across the border, or in crops where patents prevail, there is a problem of a “patent thicket,” meaning that there are a lot of legal requirements to determine whether you have the right to use a particular technology, and this increases the cost of research because lawyers do not breed wheat. It is just part of the system.

Finally, many types of knowledge, such as agronomic research, will never fit intellectual property rights. It will be impossible to use intellectual property rights to protect some types of knowledge and, as a result, they will continue to be underfunded in a fully private system.

Recommendations

  •  Government should work with industry to pass legislation that would create a one per cent levy on the sale of all crops that would be paid to variety owners regardless of whether they are private producers or public organizations. This would immediately provide more adequate funding and create an incentive for all breeders to develop better varieties.
  •  The federal government should use its research mandate to create a non-refundable industry-controlled checkoff corporation similar to Australia’s. These corporations would give industry a means to undertake substantial research investments of specific value to the industry. Given the ability of governments to free ride on this industry initiative, both federal and provincial government matching would be desirable.
  •  Government should publicly support basic scientific research. This is a foundation for ongoing applied research, especially in this century of biology.

My final words of advice are that Canada needs to think big and bold. At a time when we are trying to find investments generally with any positive rate of return, agriculture investment has a proven high rate of return.

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