Can farmers make a profit from growing genetically modified (GM) food crops? Economic modelling can be used to weigh up different factors that influence the profits that can be gained from growing GM crops. The most important factor is consumer preference.

Are GM crops good or bad for farmers’ profits?

What are the possible financial impacts of growing genetically modified (GM) food crops on New Zealand agriculture producers, such as farmers?

The main GM crops grown in other parts of the world are herbicide-tolerant soybeans, insect-resistant maize and insect-resistant canola. No GM crops are currently grown commercially in New Zealand, and all new crops (including GM crops) need to be approved by the Environmental Protection Authority (EPA) prior to being grown in New Zealand.

How to answer an economics question

Economic modelling can be used to predict economic outcomes such as crop yield and farmer profit. What modelling does is try to represent the economy with mathematical equations. These equations express specific relationships. For example, the amount of milk that farmers provide can be expressed as a function of the price they can sell it for. It is like a word problem in algebra: Two cars are travelling towards each other. Where and when will they meet? The difference is that a ‘model’ solves hundreds of word problems simultaneously.

In 2004, a team from the Agribusiness and Economics Research Unit at Lincoln University made a model of international trade that related prices to quantities for farmers and consumers around the world. Once all the equations were written, they were entered into a computer program (Microsoft Excel). Then the computer found all the prices that balance supply and demand.

Factors to consider

There are many factors that affect whether or not farmers profit from growing a certain crop. For example:

  • Do the GM seeds cost more than non-GM seeds?
  • Does growing insect-resistant crops really mean that farmers can reduce amounts of pesticide they use, reducing costs?
  • Will using GM seeds produce an increase in crop yields?
  • Will increases in crop yields lead to increased profits?

All of these factors had to be put into the model.

Several scenarios were also considered, including:

  • different percentages of GM and non-GM crop production
  • positive and negative consumer attitudes toward buying GM foods - see the article GM food and New Zealand consumers
  • increases in crop production rates
  • the control of intellectual property associated with GM technology and crops.

The results of the model

The results were consistent with theory, experience and other studies.

First, consumer demand has the largest impact. New Zealand producers increase their profits most when they concentrate on products that consumers prefer. In markets that prefer non-GM foods, consumers will pay more money for non-GM than similar GM foods. Therefore, if consumers prefer non-GM products, New Zealand farmers gain by growing these crops. However, if the products are intended for export to countries where consumers prefer GM crops, New Zealand farmers gain more by growing those.

Second, an increase in productivity does not necessarily lead to increased profit. Gains will only be made if one or a few farmers increase their crop production. This has to do with supply and demand. If there is a lot of a crop available and consumer demand for it remains constant, farmers have to lower their prices to sell their whole crop. This can mean lower profits, even though the crop is larger.

Third, controlling access to the preferred products or to the technology is usually beneficial to New Zealand producers. In other words, if only New Zealand farmers are growing a specific GM crop, they will be more likely to see profits from selling that crop than if other countries are also selling that crop as well, because increased competition can reduce prices paid for the crop.

The research team

This research was carried out by Caroline Saunders, William Kaye-Blake, and Selim Cagatay at Lincoln University’s Agribusiness and Economics Research Unit (AERU).

    Published 16 November 2007