How Science-Based Regulations Can Improve Trade

Paul Spencer is Corteva Agriscience’s Global Grain Trade Leader. He provides strategic counsel to the company on a range of trade policy issues, including: biotechnology asynchronous approvals, low-level presence, plant breeding innovations, and pesticide maximum residue levels. He was previously a Senior Foreign Service officer with USDA’s Foreign Agricultural Service, serving at U.S. Embassies in Europe, Asia, and the Middle East.

What has plant breeding meant for the grain trade?

Plant breeding has dramatically increased grain harvests, productivity and sustainable farming practices. Productivity has been driven by the commercialization of technologies such as mutagenic breeding beginning in the 1920’s, hybrids in the 1930’s, marker assisted selection in the 1980’s and genetic engineering beginning in the 1990’s. For the future, plant breeding innovations, such as gene editing, show great promise. Just in the last 50 years, average U.S. yields for corn, the most valuable crop in the United States, have more than doubled. Other field crops share a similar success story.

Innovation-driven productivity has given rise to whole industries including feed, exports, biofuels, transportation and logistics. Innovation has enabled the United States, Brazil and other countries to become a bedrock of global food security. However, future growth in will be limited by the pace at which seed companies can commercialize new product innovations.

Why are grain handling policies and practices important to agricultural innovation?

The grain trade connects growers to global markets, which is important to support farmer income. For consumers, accessing a global grain supply is important to enhancing food security. But the grain trade should not act as a policy-making gatekeeper.

In the United States, grain merchandizers have profited from the concept of fungibility. A bushel of USDA graded #1 soybeans is legally identical to any other bushel of #1 soybeans anywhere in the country. The agricultural sector has invested in nation-wide infrastructure, logistic, marketing, and payment systems on the premise that consignments of commingled grain are commercially identical. Fungibility is also supported by century-old legislation which, among other things, authorize the government to establish grain grades and license grain elevators. While the fungibility-based system is efficient at moving large volumes of grain, it is increasingly out of synch with the modern demands of farmers and consumers, stifles adoption of needed new technologies and can magnify the effects of foreign non-tariff trade barriers.

How can one country’s regulatory system hurt another country’s ability to innovate?

Grain traders will seek to export to a country even if it has a politicized regulatory system. Governments in these markets put non-scientific barriers in place to discourage the use of technologies that farmers in exporting countries need to address challenges such as sustainability and climate change. In response, grain merchandisers place contractual restrictions on farmers preventing them from using certain biotech seeds, for example. These restrictions can have a strong commercial feedback effect. Farmers do not want to buy seeds or other technological inputs if that will make their grain unmarketable, even though many of these technologies are needed to protect their crops from yield-robbing pests, disease and weeds. This in turn limits technology availability until a certain foreign approval is achieved, even if that foreign regulatory system is politicized and non-functional.

The current system can lead to enormous distortions. For example, U.S. exports of corn products to the EU are consistently less than 1% of U.S. production and less than 5% for Brazil. Despite these low numbers, the grain trade has historically demanded the entire North and South American grain production system accommodate the EU’s politicized and non-functional import rules. A market that buys a small fraction of the crop can in effect impose its approach to technology on an entire hemisphere via the grain trade’s current business model, preventing farmers and consumers from accessing new technologies and discouraging innovation investments generally.

What changes are needed?

A better question is what is driving change. Over the past 25 years, differing approaches to regulating biotech crops created tension in the fungibility-based system but no significant alternatives emerged. Now, new societal and regulatory demands are emerging, including carbon budgeting requirements, unrealistic pesticide maximum residue limits and sustainability certification. There are also and new biotechnology-based value-added grain traits. These will further challenge fungibility-based systems.

To continue to access increasingly restrictive foreign markets, specific commodity streams that start on the farm will begin to form. While complex and long-term, this segmentation can provide additional strategic benefits by disconnecting farmers and consumers from dysfunctional foreign regulatory systems while still enabling trade. Key to this transition will be transmitting value through the grain handling system to farmers in ways that support and pay for grain segregation and higher production costs. In the future, markets will have to pay extra for grain produced to unique standards, rather than having the costs borne by others.

What is the Role of Governments?

All governments should strive for science and evidence-based regulations. Failing that, governments in exporting countries should support infrastructure and programs that speed the formation of commodity channels capable of serving politicized and restrictive foreign markets. Also, grain handling policies should not disadvantage new technologies by inappropriately characterizing products as different when there is no science-based reason to do so. In the United States, USDA clarifying that genomic changes are not ‘characteristics’ of grain under the Grain Standards Act would be an example of policy support for innovation consistent with USDA’s efforts to modernize its Part 340 regulations.