I Private Sector in Cotton Breeding

II Bt Cotton

In India, the first approvals to Bt cotton were given to three hybrids released by Mahyco Monsanto Biotech (MMB), the joint venture between Mahyco and Monsanto. These hybrids contained the Bt gene cry1Ac owned by the US firm Monsanto, which licensed the gene to MMB in India. Subsequently, MMB has sub-licensed the gene to 20 other firms in India (as of April 2005) to incorporate it into their cotton hybrids. As of 2006, 44 cotton hybrids (from 14 seed companies) using this gene construct had been approved for different cotton zones in India.

In 2006, the regulator – Genetic Engineering Approval Committee (GEAC) – also approved three other gene constructs: MMB’s Bollgard II which stacks cry 1 Ac and cry 2 Ab genes, a modified cry 1 Ac gene developed by the Indian Institute of Technology (IIT), Kharagpur in collaboration with JK Seeds, and a “fusion” cry 1Ac/cry 1Ab gene sourced by Nath seeds from the Chinese Academy of Agricultural Sciences. Fourteen cotton hybrids (from five different seed companies) incorporating these gene constructs were approved in 2006 for commercial release.

The first approval to the MMB varieties was preceded by the discovery of an unauthorised Bt cotton hybrid in farmers’ fields at the end of 2001 in Gujarat. The illegal variety was NB 151, a variety registered with the Gujarat government as a conventional hybrid. It belonged to Navbharat Seeds, a firm based in Ahmedabad. Later investigation confirmed that the Bt gene in NB 151 is the Cry 1 Ac gene developed by Monsanto and used in the legally approved varieties. As a result, Navbharat Seeds is barred from the cotton seed business and is being prosecuted for violating biosafety laws. Despite this, illegal seed continues to be planted, especially in Gujarat. In interviews, industry observers stated that the male parent (with the Bt gene) used in Navbharat 151 has been crossed with a variety of female lines to generate many different versions of illegal Bt, often well adapted to local environments. NB 151 is now a generic name for illegal seed.

III Size and Composition of Cotton Seed Market

The source of our information on market sales and volume comes from a proprietary survey of cotton growers (‘Cotton Crop Track’) by Francis Kanoi Agri-Inputs Marketing Research (2005). The first of these surveys was conducted in 1996-97. The survey is conducted every two years and the latest year for which we have information is 2004-05. The survey uses a stratified design where the strata are districts. The sample size per district is fixed according to the cotton growing area. The farmers are sampled by a clustering procedure. First, villages are randomly selected from a census listing. Within the selected village, 20 cotton growers are randomly picked. In 2004-05, the survey covered 13,256 cotton growers in 1,002 villages of 44 districts.

70

50

40

30

10

1996-97 1998-99 2000-01 2002-03 2004 -05

0 1996-97 1998-99 2000-01 2002-03 2004-05

Volume of public hybrids (per cent)

Volume of varieties (per cent)

Per cent area under public hybrids

Per cent area under varieties

IV Market Shares

80

70

60

Market share by volume

50 40 30

Value (per cent)

20

10

30

Figure 5: Five-Firm Herfindahl Index for Cotton Proprietary

Value of public hybrids (per cent) Hybrid Seed Market

5-Firm

Square of market shares

2000

1500

1000

500 Source: Computed from Francis Kanoi Marketing Research (2005).

million packets. At the lower end, a firm with sales of more than

0.1 million packets usually sells it as a branded product with

significant investments in sales promotion activities although

there are a few firms with branded products that fail to reach this

threshold. In 2004-05, the top five firms had an average volume

of 1.7 million packets while the corresponding figure for the

At the lowest end are small seed firms with sales between 15,000 and 30,000 packets with little or no brand visibility. According to the Francis Kanoi survey, such firms account for about 15 per cent of the market (by volume), which corresponds well with industry estimates of 15-20 per cent.5

In the earlier sections, we saw that higher priced proprietary hybrid seed have been displacing lower priced public hybrids. This has contributed to the growth in the value of the seed market. It has also meant that the countervailing power of the public sector has declined. This would reduce choices for growers and increase market power of the private firms if the proprietary seed market is concentrated.

Figure 4 displays the market shares (by volume) of the top five firms (the five-firm concentration ratio) in the proprietary hybrid seed market. Figure 5 displays the five-firm Herfindahl index of concentration, which is regarded as a better measure because it squares the market shares before adding it up and therefore gives a higher weight to the larger firms. Because of lack of suitable data, the market shares and Herfindahl index can be computed on the basis of firm shares of volume of seed sold rather than on the basis of value of seed sold. However, this is not misleading as long as there is not much variation in the prices of proprietary seed of different firms. The most serious violation of this condition occurs in 2004-05 when there is significant adoption of Bt seeds that are priced much higher than non-Bt hybrids. To correct for this, we normalise with respect to non-Bt hybrids. As a later table (Table 2) shows, legal Bt seed in 2005 was about 3.5 times more expensive than a non-Bt hybrid. The legal Bt component of a firm’s seed sales is multiplied by 3.5 to obtain the equivalent amount of non-Bt seeds that would generate the same revenue. The overall volume figures are similarly adjusted. Illegal Bt seeds are about 2.4 times more expensive than non-Bt proprietary hybrids.

0 1996-97 1998-99 2000-01 2002-03 2 0 0 4 -0 5

Year

5-Firm

Source: Computed from Francis Kanoi Marketing Research (2005).

Therefore, we also make an adjustment for the volume of illegal Bt seeds along the lines of legal Bt seeds.

In the proprietary seed market, the five-firm concentration ratio declines by 25 percentage points from 84 per cent to 59 per cent. The five-firm Herfindahl index declines quite sharply from 2,087 in 1996-97 to 870 in 2004-05. It should be remembered that the proprietary seed market was a small part of the hybrid seed market in 1996-97 and therefore the relatively high level of concentration in 1996-97 relates to a still young and incipient market. By 2004-05, when the proprietary market is several times larger and dominates the hybrid seed market, the Herfindahl index drops to below 1000 indicating a competitive market structure.

As the proprietary hybrid market expanded, it induced entry from several players, which reduced the market share of the leaders. To see this, consider the number of firms each year

that have sales greater than or equal to the sales of the firm ranked fifth in 1996-97. By definition, this number is five in 1996-97. It increases to six in 1998-99, seven in 2000-01, nine in 2002-03 and 12 in 2004-05.

For whatever reason, public hybrids have been unable to compete with proprietary hybrids. This is confirmed by an analysis of the price gap between public and private hybrid seed (excluding Bt cotton seed) shown in Table 2. These computations show that the price gap is increasing with time. To take account of the different seeding rates of proprietary hybrids (1.4 kg per ha) and public hybrids (3.2 kg per ha), we also work out the cost of using seed per hectare. The cost difference between proprietary non-Bt and public hybrids rises from Rs –9 per ha to Rs 473 per ha (Table 3). Despite this, proprietary hybrids have increased their market share at the expense of public hybrids. The power of proprietary hybrids to charge a mark-up over public hybrids could arise from a perception of quality difference or it could reflect a retreat of the public sector in terms of supply of its hybrids.

V Market Leaders: Variation over Time and Space

In 2004-05, there were nine firms across the four states that figured in the top five list. The same number was eight in 1996-97 when the hybrid market was much smaller. The 2004-05 list consists of Mahyco, Nuziveedu Seeds, Rasi Seeds, Ankur Seeds, Emergent Genetics, Navbharat Seeds, JK Seeds, Syngenta and Tulasi Seeds. Other firms, which are on the fringes of this list and strong in regional pockets (especially in Maharashtra and Andhra Pradesh) include Krishidhan, Pravardhan, Vibha Seeds, Nath Seeds, Ganga Kaveri and Prabhat.6 Thus, there seems to be a minimum of 15 firms with recognisable brands of proprietary seeds.

VI Mergers and Foreign Direct Investment

VII Entry Barriers

In understanding how seed markets may evolve in the future, it is useful to look at entry barriers and cost advantages that could favour large incumbents. Our analysis in this and the following sections is based on interviews with seed companies.

It is commonly agreed that conventional plant breeding does not require much capital investment. Breeders, a collection of germplasm, and land for an experiment station are the principal inputs. As mentioned earlier, the private sector has often hired breeders from public sector research institutions and agricultural universities. Germplasm was not mentioned as a constraint by any of the seed companies that we interviewed. The size of experiment stations varies between 25 hectares for a modest breeding programme and over 100 hectares for an experiment station spread over multiple sites. Marker assisted breeding is beginning to be important but as the cost of this technology is not prohibitive, it is unlikely to be a dominant source of technological advantage for larger firms.

Among the non-technological factors, the biggest issues in scaling up are the needs for working capital and ability to bear risk. Seed production is organised through contract growers and this needs to begin one year before sales commence. Growers receive an advance (about a sixth of the price of seed) and they are fully paid by April-May. Risk is an issue because seed production is based on one-year ahead forecasts of demand (for the firm’s proprietary hybrid). Cautious firms could therefore miss opportunities to become market leaders. However, it is clear from the earlier sections that these barriers have been only modest hurdles. The proprietary seed market has seen entry by a number of firms in the last decade.

There are two routes to Bt hybrids. Either a firm can license an already approved gene construct from a technology provider or it can undertake R&D on its own to develop its own Bt gene. Most seed firms in India have chosen the first option of obtaining a Bt gene on licence. As noted earlier in Section III, most cotton hybrids are based on genes supplied by MMB (Bollgard 1 and Bollgard 2). In this section, we consider the competition in the MMB Bt seeds segment.

If a firm opts for the first route, the principal investments (besides the licence fee) by the licensee consist of equipment that isolates DNA (through grinding and centrifugal force), tests for the presence of the Bt protein (Elisa test), tests for tracking plant transformation (homozygosity tests using polymerase chain reactions) and greenhouse for contained field trials. According to several respondents, such equipment together with related essentials (such as refrigeration) and infrastructure (temperature controlled buildings with backup power) cost about Rs 5 million. Many seed firms go beyond these essentials and also invest in plant pathology labs, machines for DNA sequencing and characterisation and multiple Elisa machines to be used for testing Bt presence in seeds produced by their growers. For this reason, many seed companies reported budgeting around Rs 1 crore for the biotech lab. In addition, MMB charged a licensing fee of Rs 50 lakh in 2005.

While Rs 1.5 crore is a quantum jump in R&D expenses for most seed firms, the economics of such investment was favourable in 2005 for even a small firm selling 1,00,000 packets annually. For a packet of seed (450 g), MMB had fixed a trait value of Rs 1,200 of which Rs 700 was paid to MMB as royalty (in addition to the lump sum licensing fee of Rs 50 lakh) and Rs 200 to the seed dealer. If the firm expected to sell the seed at Rs 1,600 (the prevailing Bt seed price in 2005), its share of the selling price would be Rs 700 and its expected revenues would be Rs 7 crore. As non-Bt hybrids sell for around Rs 400 per packet, the incremental revenues due to Bt would be of the order of Rs 3 crore annually. Thus, even for a small firm, the additional R&D cost due to Bt-related investments could be recouped quite rapidly provided the assumptions about expected sales and price hold. Thus, firms would not have considered the Bt-related investments as a barrier to entry and this is borne out by the large number of seed firms that have licensed the Bt gene from MMB.

Most firms have not bothered with the notification process and have relied on their own quality systems, demonstration plots and field days to build brands and push sales. In some cases, for the sake of public relations with the government and public sector agricultural research establishment, firms submit their flagship hybrid to the notification trials but almost never wait for the outcome to market their product.8 In the perception of seed firms, notification adds little or no commercial value. The dominance of non-notified proprietary hybrids in the cotton seed market demonstrates this amply.

The hybrids from MMB, the first firm to apply for commercialisation, spent four years in large-scale trials including two years of testing with Indian Council of Agricultural Research (ICAR) trials. By allowing concurrent ICAR and large-scale trials (organised by the applicant), the GEAC quickened the process to two years for Rasi, which was then reduced to one year for the approvals in 2005, which included hybrids from Nuziveedu Seeds. However, since then, the GEAC revised its protocol to specify that nonnotified Bt hybrids would have to spend up to two years in ICAR trials, thereby increasing the time before which new Bt hybrids can come to the market. In a more recent decision (June 30, 2006), the regulator has waived the requirement of agronomic trials for hybrids with cry 1 Ac gene and in the future for all genes that had been monitored for their performance for three years after their commercialisation.

While the entry of more MMB Bt hybrids offers growers more choices and lessens concentration, the impacts on price would be muted. Because of the revenue sharing agreement with MMB, it is only the share retained by the seed company that could be affected by competition.

In 2006, JK Seeds and Nath Seeds won regulatory approval for their Bt cotton hybrids which incorporated non-Monsanto genes. Nath Seeds obtained their Bt gene from the Chinese Academy of Sciences. JK Seeds developed their own Bt genes through collaboration with IIT, Kharagpur. This route is considerably more expensive than licensing it from a technology provider.9 In addition, the firm also incurs the costs of regulatory compliance. For a firm that licenses an already approved gene, biosafety regulation requires only field trials for agronomic tests. But for a new gene, food and environment safety must also be demonstrated (this requirement applied to hybrids from JK as well as Nath Seeds). In the case of MMB’s cry 1 Ac gene, the costs of regulatory compliance excluding field trials, amounted to about $ 1.5 million (or nearly Rs 7 crore) [Pray, Bengali and Ramaswami 2005]. This is probably an overestimate of what biosafety tests would cost today because many of the tests can now be done in India.

The competition from alternative genes could have had a more serious impact on the seed price than the competition between hybrids with the MMB gene. This is because the alternative gene providers could target a trait value lower than that fixed by MMB. Whether that would happen and to what extent depends on two factors: (a) The performance of these alternatives as compared to MMB’s genes especially Bollgard II, which promises protection not only against lepidopetran pests but also spodoptera – a rapidly emerging pest, and (b) MMB’s first mover advantage in sub-licensing the Monsanto genes to firms that have some of the best performing hybrids in the country. Even if the alternative gene constructs prove successful, they would not be able to combine with quality germplasm. Thus, the market for the new genes may well be limited by the contractual restrictions of the major seed firms with MMB.10

The decision of the Andhra Pradesh government (and then followed by other state governments) to impose a price ceiling of Rs 750 on Bt cotton hybrid seed meant that price competition based on market fundamentals never got to happen. If in the absence of the ceiling, prices would have been above it (as suggested by the fact that Bt cotton seeds are priced at the ceiling rather than below it), then the imposition of the ceiling would have been disadvantageous to the new entrants in 2006 – whether with MMB or other genes. Thus, although the price ceiling was supposedly directed at controlling MMB’s monopoly pricing, it probably disadvantaged the alternative gene providers (JK Seeds and Nath Seeds) even more.

VIII Illegal Bt and Seed Markets

IX Concluding Remarks

Markets with local monopolies have to contend with this set of potential entrants. Judged by commonly used concentration indices, the entry of new brands, fluctuation in market leaders and number of established brands, proprietary seed market has become more competitive over the last decade. These trends in market structure are consistent with the fact that capital requirements of conventional plant breeding are modest. Working capital requirements and risk bearing capacity are probably greater entry barriers. However, in the Indian context, they have not been formidable enough to preserve the advantages of the incumbents.

With Bt cotton, the seed industry encompasses a seed market as well as a technology market. As of now, the technology market is dominated by Mahyco Monsanto Biotech (MMB) that has licensed its Bt genes to almost all the leading cotton seed companies. For a seed company, developing a Bt product means a substantial hike in R&D expenses. However, the investment is rapidly recouped even for medium-sized firms. As a result, as many as 20 firms (as of April 2005) had licensed the Bt technology from MMB. These firms are, however, contractually bound to pay royalties to MMB, which sets a floor to Bt seed prices even with competition among these firms.

MMB’s position as the dominant gene supplier is not protected by intellectual property laws. Although India now provides for plant breeders’ rights, it has not been operationalised. Even if it were, the private seed industry is unlikely to use it because the rights as they exist are so weak as to provide few incentives for innovation [Srinivasan 2004]. As for patent laws, India’s compliance with Trade Related Intellectual Property Rights norms could mean that technology suppliers could patent genes. However, the patents office has not yet granted any claim. In our interviews with seed company officials, patenting was not regarded as an important element of the current business environment.

MMB has derived a measure of protection for its gene through biosafety laws. As biosafety approvals are obtained for the composite of the gene and germplasm, hybrids that incorporate MMB’s gene but do not go through the biosafety process are illegal. While this has not stopped the diffusion of illegal Bt seeds, it has led the seed companies that wish to work within the law (consisting of all the established firms with branded products) to either deal with MMB or consider an alternative Bt strategy. At this point, most of the firms have chosen to license the Bt technology from MMB.

For three years starting from 2002, MMB was able to use its monopoly of technology to set Bt seed prices to be four times that of non-Bt hybrids. Even at this price, several refereed studies have estimated that farmers, on an average, have gained substantially from Bt cotton. Using conservative estimates thrown up by this literature, Ramaswami and Pray (2007) conclude that on average, growers received about two-thirds of the gains from Bt cotton while the remainder went to the seed company. However, the relatively high price of Bt seeds has drawn adverse attention from NGOs and the government. The trade-off is that while competitive pricing would generate more gains for growers and also greater diffusion, it would also mean that MMB receives no rewards for its technology, which could jeopardise incentives for future product development from MMB and other potential technology suppliers.

MMB’s monopoly has however, been challenged by illegal seeds, by alternative gene providers and by state policy. Illegal seeds in Gujarat have, by and large, done well outclassing the MMB hybrids that were initially approved. The social gains from the diffusion of these seeds are likely to have been positive. However, they do undermine the intellectual property of MMB varieties which once again raises the dilemma of how does one preserve the incentives for innovators without restricting the spread of the innovation? Ramaswami, Lalitha and Pray (2007) argue that the appropriate policy response should be mechanisms such as technology buy-outs. Then it is possible for seed prices to be low, diffusion to be unconstrained and for innovators to receive rewards from such spread.

The competition from alternative technology providers is the only sustainable way to reduce the rents of incumbents. The costs of going this route are considerable and would be daunting to any seed firm. Yet, we have two instances of it. Unfortunately, the state policy of price regulation has not allowed the resulting competition to play out. In fact, price regulation has severely disadvantaged the new entrants into the technology market and has probably discouraged future entrants. Besides a stable regulatory environment, public policy must address the failure of public sector research institutions in staking out a presence in the technology market.

EPW

Email: milind.murugkar@gmail.com

[This research was supported by a grant from the International Food PolicyResearch Institute. We are indebted to Nana Chaudhuri, Nitin Chaudhuri and A Ravishankar for pointing us the way. While conducting this study, we benefited from conversations with government officials, scientists and seed companyrepresentatives. We are very grateful to them for their generosity and patiencein answering our questions; however none of our views should be attributedto them. We alone are responsible for all errors.]

1 Indeed, the leading cotton seed firms continue to market public bred hybridseven though they derive insignificant revenues from it.

2 The seeding rate for private hybrids fluctuates between 1.14 and 1.68 kg perha while that for public hybrids varies between 2.01 and 2.66 kg per ha.The seeding rate for varieties is in the range from 9 to 11 kg per ha.

3 For detailed tables on each of the states, the reader is referred to Murugkar,

Ramaswami and Shelar (2006).4 Public hybrids are sold in packets of 750 g.5 In the Francis Kanoi survey, such non-branded seeds are not separately

enumerated. Their market share is derived as the difference between the

total market size and the share of the branded seeds. 6 The list is indicative and not meant to be exhaustive. 7 According to press reports, Delta & Pineland, the cotton seed major from

the US is due to enter the Indian market.

8 A fairly typical example is that of Vikram 9 and Vikram 5 from VikramSeeds. They were released in 1993 and 1995 and were very successfulhybrids in Gujarat till 2003. Both hybrids were also tested in notification trials and were notified in 2000 and 2002 respectively.

9 Representatives of JK Seeds would not confirm the exact figure but agreedthat the direct costs were in excess of Rs 10 crore. By opting for thisroute, JK Seeds entered the market much later than its major competitorswho licensed Bt genes from MMB. As a result, the indirect costs in terms of the opportunities foregone by not licensing the technology from MMBare probably much larger than the direct costs.

10 Several firms indicated that the agreement with MMB disallowed the licenceof genes (with insect-resistant traits) from other companies. However, they cited confidentiality reasons in declining us access to this clause.

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