canada’s seed system...7.0 structure, conduct and performance of the seed system ..... 86 7.1...

Prepared for

Seed Synergy Collaboration Group

Prepared by

JRG Consulting Group a division of 1260977 Ontario Inc.

Guelph, Ontario (519) 836-1860

And

SJT Solutions Southey, Saskatchewan

(306) 726-4569

March 2018

JRG Consulting Group Collaborating for Success

in the Agri-Food Sector

Canada’s Seed System:

Economic Impact Assessment and Risk Analysis

Economic Impact Assessment and Risk Analysis – Final Report March 2018

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Table of Contents

Executive Summary ............................................................................................................... v

1.0 Introduction .................................................................................................................. 1

1.2 Project Scope and Objectives .................................................................................. 1

1.2 Organization of the Report ....................................................................................... 2

2.0 A Seed System Framework ......................................................................................... 3

2.1 Seed System Core ................................................................................................... 3

2.2 Seed System Influencers ......................................................................................... 4

2.3 Seed System Enablers ............................................................................................. 5

2.4 Options for Change - Influencers and Enablers ....................................................... 5

2.5 Chapter Summary .................................................................................................... 5

3.0 Profile of the Canadian Seed System .......................................................................... 6

3.1 Canadian Seed Supply Chain Overview .................................................................. 6

3.2 Seed Sector Organizations with Regulatory Authority .............................................. 9

3.3 Other Organizations in the Seed Supply Chain ...................................................... 11

3.4 Laws and Regulations Affecting the Canadian Seed System ................................. 12

3.5 Chapter Summary .................................................................................................. 15

4.0 Activities and Economics in the Seed System ........................................................... 16

4.1 Variety Development – Research & Development and Plant Breeding .................. 16

4.2 Time and Costs for Regulatory Approvals .............................................................. 19

4.3 Modern Plant Breeding and Plants with Novel Traits ............................................. 20

4.4 Economic Issues and Variety Development ........................................................... 21

4.5 Registration of Varieties ......................................................................................... 22

4.6 Economic Issues and Variety Registration ............................................................. 24

4.7 Seed Production ..................................................................................................... 24

4.8 Seed Certification ................................................................................................... 26

4.9 Economic Issues and Seed Certification ................................................................ 30

4.10 Use of Certified Seed by Canadian Farmers ....................................................... 31

4.11 Exports and Imports of Seed ............................................................................... 36

4.12 Chapter Summary ............................................................................................... 37

5.0 Seed Systems in Some Other Jurisdictions ............................................................... 39

5.1 Use of Certified Seed in Quebec ............................................................................ 39

5.2 The United States Seed Sector .............................................................................. 40

5.3 The Dutch Seed Sector .......................................................................................... 43

5.4 The Seed Sector in France .................................................................................... 51

5.5 Some Comparative Data from Europe and FSS Royalties ..................................... 56

5.6 EPR and FSS in Australia ...................................................................................... 60


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5.7 An Overview of Some South American Countries .................................................. 64

5.8 Chapter Summary .................................................................................................. 65

6.0 Assessment of the Current Seed System .................................................................. 68

6.1 Value Capture in Cereal Crops and Funding Plant Breeding ................................. 68

6.2 System Focus on Greater Use of Certified Seed or on FSS Royalties ................... 70

6.3 Regulatory Approach with PNTs ............................................................................ 70

6.4 Compliance Costs and Time .................................................................................. 73

6.5 Variety Registration ................................................................................................ 75

6.6 Quality Assurance to Buyers and Seed Certification .............................................. 76

6.7 Data Integration Through the Seed Supply Chain and Traceability ........................ 80

6.8 Organizations Supporting the Seed System ........................................................... 81

6.9 Benefits and Risks of the Current System .............................................................. 82

6.10 Chapter Summary ............................................................................................... 85

7.0 Structure, Conduct and Performance of the Seed System ........................................ 86

7.1 Basic Conditions – Technology for Product Development ...................................... 86

7.2 Barriers to Entry and Product Development ........................................................... 88

7.3 The Economics of Structure, Conduct, and Performance ...................................... 90

7.4 Structure of the Seed Industry in Western Canada ................................................ 93

7.6 Canola in Western Canada .................................................................................. 100

7.7 Estimated Revenues and Costs in the Canadian Seed Supply Chain.................. 101

7.8 Seed Suply Chain Structures and Associated Perfromance ................................ 105

7.9 The Global Seed Market ...................................................................................... 106

7.10 Concentration in the US Seed Market (Corn and Soybeans) ............................ 109

7.11 Chapter Summary ............................................................................................. 111

8.0 Options to Increase Certified Seed Sales in Cereals ............................................... 112

8.1 Options for Consideration ..................................................................................... 114

8.2 Moving Forward on Increasing Certified Seed Purchases by Farmers ................. 120

8.3 Chapter Summary ................................................................................................ 121

9.0 Options for Royalty Collection on FSS .................................................................... 123

9.1 Comparing System for Collecting Royalties on FSS ............................................ 123

9.2 Moving Forward on Collecting Royalties on FSS ................................................. 129

9.3 Traceability and FSS ............................................................................................ 130

9.4 A Comparison of Various Royalty Systems – Wheat in Western Canada ............ 131

9.5 Chapter Summary ................................................................................................ 132

10.0 Assessment of Some Options .............................................................................. 134

10.1 Value Capture by Product Developers .............................................................. 135

10.2 Traceability ........................................................................................................ 136


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10.3 The Single Window ........................................................................................... 138

10.4 Regulatory Flexibility - PNTs and Tiered Risk Assessment .............................. 140

10.5 Registration of Varieties .................................................................................... 143

10.6 Quality Assurance of Certified Seed ................................................................. 148

10.7 Product Profile .................................................................................................. 150

10.8 Seed Sector Governance and Coordination ...................................................... 152

10.9 Investing in Value Creation ............................................................................... 154

11.0 Comparing an EPR to a Royalty on FSS .............................................................. 159

11.1 Certified Seed Contract with Trailing FSS Royalties ......................................... 160

11.2 Using End Point Royalties (EPR) ...................................................................... 162

11.3 Some Sensitivity Analysis ................................................................................. 164

11.4 A Comparison of Systems ................................................................................. 167

11.5 Chapter Summary ............................................................................................. 170

Annex 1 - Summary of Royalty Collection in Wheat ...................................................... 171


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Executive Summary

Introduction

Seed Synergy was formed to initiate change in the overall Canadian seed system. Seed Synergy initiatives are guided by the following vision: “A reformed, industry-led, government-enabled seed system that effectively attracts investment, fosters innovation, and delivers new and tailored seed traits to customers efficiently”. The Canadian seed industry is large, with $3.2 billion in seed sales to Canadian farmers and to overseas customers. In addition to providing advanced genetics for commercial farm operations, this value of sales supports over $6.0 billion in annual economic activity, and employment in many value added sectors of the economy. These seed sales are an integral input into the $33 billion in annual crop production sold by farmers into markets, as well as the crops used as home-grown feed and forages on livestock operations. The seed sector is key to continued productivity improvements in the Canadian agriculture and food sectors. Commercialization of new varieties that improve yields, offer disease resistance, provide attributes required by buyers of grains and oilseeds, and which improve per acre profit margins are required to enable continued competitiveness of the agriculture sector in domestic and export markets. The Advisory Council on Economic Growth (i.e., the Barton Report) is calling for an increase in agriculture and food exports, signalling out oilseed exports to increase by 20% and for pulses to capture 50% of global exports. The seed sector can continue to create such value which benefits the Canadian economy. However, changes are required to enable such value creation by product developers in the seed sector. Seed Synergy requested the consulting team of JRG Consulting Group and SJT Solutions to provide a third party assessment of proposed changes in the Canadian seed system. The following is our perspective and suggestions to Seed Synergy on upcoming and proposed changes. Within Canada, there are two rather different seed supply chains; one is the canola, corn, and soybean seed supply chain where the private sector supplies most of the new varieties, and the other is the cereal and pulse crop seed supply chain where the public sector supplies most of the new seed products. These two seed supply chains are different due to the former being characterized by either hybrid crops and/or crops with patent protection and very effective intellectual property rights (IPR) and use of modern breeding technologies. In the cereals and pulse crops there relatively less effective IPR and the self-replicating nature of these crops have a significant effect on private sector investment since farmers can save part of the harvest for planting next year’s crop. As a result, this report has a much larger focus on cereals and pulse crops.

Investing in Seed Product Development – FSS Royalty or EPR The farm sector, the seed sector, and government have all recognized the need for additional investment in varietal development in cereals and pulses. There are currently two approaches being considered for this sector to incentivize more investment. One approach is an “end-point-royalty” (EPR) system where first receivers of grain collect an EPR royalty (such as $1.00/t) on delivered grain, which is then distributed back to the breeder/product developer. The second approach is a royalty paid on “farmer-saved-seed” (FSS) where farmers with their purchase of Certified seed enter into a contractual agreement with the product developer/breeder with the obligation to pay a FSS royalty (e.g., 1¢/lb. or $0.50 per 50-lb. unit) on any FSS used in subsequent crop years. Contracts of this nature are already used that have terms on FSS; however none currently require a payment on usage of FSS. Which of these approaches that is adopted will have a considerable consequence on the seed industry and the investment level in varietal development. Consequently, this is an important issue


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for Seed Synergy and for the overall seed system in Canada. We strongly suggest that Seed Synergy endorse the FSS royalty approach. Our suggestion is based on the following considerations:

For a given level of royalty revenues, per tonne costs are less with a FSS royalty (and only on FSS acres);

For a comparable royalty rate (between FSS and EPR), the FSS generates more royalty revenues for investment by product developers/plant breeders;

Comparable per output tonne FSS rate (to EPR) generates more overall royalty revenues; FSS approach improves plant breeding sector performance (in relation to an EPR approach)

due to higher available investment dollars; FSS approach involves fewer intermediaries; The FSS royalty approach is based on contracts already in place between product

developers and farmers with restrictions on use of FSS; FSS approach applies to all acreage planted in FSS, with no avoidance, while an EPR does

not capture royalties in certain market channels; Data required and system architecture for FSS approach can become a major component of

a traceability system Breeder has flexibility to set royalty rates on Certified seed and FSS; Faster build-up of royalties can provide greater incentives for entry into the breeding sector

by small and medium size breeding companies. The EPR has some weakness. One is that EPR revenues are not collected on grain used on farm or sold to entities not collecting an EPR. Another is that with an EPR being an extension of the current deduction system used by producer commissions, grain producers may request significantly reduced check-off rate or ask for more refunds. Non-compliance could be an issue; to avoid the EPR, farmers may mis-declare varieties at delivery. Moving forward with a FSS contract approach on UPOV 91 varieties (varieties released after February 2015) allows for product developers to capture some of the value in their newly released varieties, which enables further investment in varietal development. With such value capture mechanisms, opportunity is created for breeding companies to invest in variety development, whether these are multi-nationals, or medium size or small Canadian companies.

Increasing Use of Certified Seed A royalty on FSS or an EPR is primarily designed to collect royalties on FSS. At the same time, we strongly suggest that the seed industry through Seed Synergy focus on approaches that increase the use of Certified seed in cereal and pulse crops. Some of the Seed Synergy initiatives will result in higher Certified seed use. As well, with the higher investment funds available through FSS royalties this will result in increased varietal development which should offer more varieties offering higher per acre margins for farmers, which can increase Certified seed sales. Our analysis indicates that if Certified seed use increases by 60% in cereals and pulses, then Certified seed sales will increase from $302 million to $483 million, a $181 million gain that is shared between seed growers, seed distributors and product developers/plant breeders. If 60% of all cereal and pulse crops were planted with Certified seed, the value of sales increases by $467 million to $769 million, a 155% increase. It can be noted that Certified seed use in wheat is around 50% in Ontario and over 90% in Quebec.

The Traceability Initiative We strongly recommend that Seed Synergy support an electronic traceability system, which begins with breeder seed, continues through seed production and the sale of Certified seed, and the subsequent use of the planted crop, whether used as FSS in the following year, or as a commercial sale to a buyer or intermediary. Digital technologies are available and in use in agriculture in parts of the world that have the necessary functionality, confidentiality, and security features for necessary


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on-line traceability; the blockchain technology can become the underlying digital infrastructure. Elements of a traceability system are in place; however they are not well integrated. One of the advantages noted above for FSS royalties is that the FSS approach supports full traceability in the seed sector. The Certified seed contracts with the resulting obligation on reporting on FSS provides a critical link in tracking subsequent generations of Certified seed lots and as well tracing back to a seed lot based on a grain delivered to a first receiver of grain. These attributes are not realized with an EPR approach. The benefits are considerable and include;

Maintaining identify of a seed lot in the various segments of the seed supply chain; Locating a seed lot or variety within the seed supply chain; Tracing the flow of a seed lot through various stages in the seed supply chain; Facilitating identification of the cause of nonconformity of a seed lot; Allowing for withdrawal/recall of a seed lot, as required. Increased buyer confidence in the attributes of the seed lot purchased; Maintaining a description of seed lot attributes for access by each partner in the supply

chain; Improved business support functions such as necessary documentation and inventory

control; Improved communication between partners in the seed supply chain; Allowing for necessary coordination between partners in the seed supply chain; Improvement in the flow and reliability of information through the seed supply chain; Increase in accountability between supply chain partners; and Increase seed sector productivity;

Our quantification of benefits indicate that for one product recall, having traceability in place can save over $30 million in costs incurred by product developers, seed companies, grain companies, and government. As well, having one Panamax grain vessel not tied up for a week due to uncertainty over possible product contamination can save at least $850,000 in cost and lost revenues to a grain company. Traceability is a foundational piece and is inter-twined with a number of other Seed Synergy initiatives, such as (1) the single window, (2) product profile, and (3) variety registration. These initiatives support the traceability initiative and, in turn, the traceability feature allows for the cost efficient development of an initiative (e.g., the product profile). This highlights the synergies associated with big data. There are also inter-twined risks. There are potential risks to the overall on-line traceability system if it is not properly designed and implemented. These risks can include (1) incomplete integration between various databases, (2) maintaining data security, (3) ensuring that proprietary data provisions are not breached, (4) necessary cooperation between industry partners does not occur, and (5) the cost of system design and on-going operation. These risks can be minimized through the appropriate design and architecture of the overall data management system. Furthermore, with a seed sector traceability system, one organization in the seed sector needs to be responsible for its on-going operation, which also indicates a strong linkage between traceability and seed sector governance and coordination.

The Single Window The single window approach allows for product developers and seed companies to enter on-line product data, such as for data for registration, variety listing, PBR protection, and for the product profile. Any data once entered does not need to be re-entered as is the current case with manual paper-based systems for registration and PBR protection.


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A single window approach also allows for one point of contact to obtain necessary information on the Canadian seed industry. Information requests can include data requests that vary from (1) acreage planted to a variety, (2) acres planted with Certified seed by crop kind, (3) pedigreed seed production by variety or crop kind, (4) seed exports and imports, (5) varieties that can be sold in Canada, and (6) information on a variety as provided in the product profile, etc. The single window concept supports traceability and the traceability infrastructure lowers the cost of a single window approach. The single window approach improves overall efficiency from (1) reducing the time cost of product developers and seed companies entering necessary data for production registration and PBR protection, to (2) less time required for searching for information, and less staff time at supporting organizations responding to information requests. Our conservative assessment of benefit is at least $250,000 of annual savings in time costs.

The Product Profile The product profile is possible through the single window approach and interfaces with the traceability system and the listing of varieties (whether basic or enhanced tiers of registration), and provides necessary information for the seed lot listing system. A product profile would begin as part of the variety registration system, which would be enhanced as more information is compiled on a variety. The product profile can be considered an output of the integration of some data bases, which are currently separate, but would be integrated (in the near future). The product profile would be designed to contain information on each variety such as (1) required varietal identity, (2) intellectual property features, (3) product developer, (4) distributors, (5) other regulatory features, (5) agronomic characteristics, (6), geographic areas for production, (7) stewardship requirements, and (8) and relevant end-use and market information. While not suggested by Seed Synergy, the product profile should also include agronomic performance information on a variety, with this updated based on results from recognized performance trial data. Interested parties would be able to go on-line and access information on a variety. This includes breeders, seed companies, seed growers, and crop producers. The product profile is not designed to contain proprietary information. There can be linkages to other variety specific data bases with such confidential information, such as a data base used to administer FSS royalty collection. The product profile reduces search costs for farmers, seed growers, seed distributors, agronomists, and other participants in the seed sector. We estimate that this saving in time costs is at least $1.5 million per annum. Use of the product profile by farmers could reduce common seed sales and increase Certified seed sales, depending on how it is organized. A 2% decrease in common seed usage increases Certified seed sales by 6.6% in cereal and pulse crops, which increases Certified seed sales by $18.4 million. Product developers, seed growers and seed distributors become beneficiaries.

Seed Sector Governance and Coordination The above initiatives proposed by Seed Synergy requires visitation of how the seed sector is supported by organizations, necessary coordination and overall governance of the seed sector within Canada. There are some efficiency gains to be realized through a restructuring of the supporting organizations for the seed industry. Some organizations are focused on advocacy and representing the seed industry, such as CSTA and Crop Life, while others are focused on delivering necessary quality assurance and audit services, such as CSI, CSGA, and CSAAC. Some organizations are involved in both service delivery and advocacy. A streamlining of roles and responsibilities can result in efficiencies that should reduce overall costs incurred by the collective of these organizations


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and by seed sector companies that incur internal costs to ensure that the organizations are effective and efficient. A reconfiguration of organization structures such as (1) an overall seed industry organization that represents the industry and (2) another organization that ensures the requisite quality assurance required by the seed industry is a possibility. An organization that represents the overall seed industry could take ownership and be responsible for the on-line traceability system (from breeder seed through to the users of commercial crop production). The seed industry can look to the Netherlands and to France for models where there are fewer organizations that support the seed industry. In the Netherlands one organization (Plantum) represents and advocates for the seed industry (as well as collects FSS royalties on behalf of breeders), and one other organization (NAK) provides for quality assurance and oversees the quality assurance functions for the seed industry, which is a delegated authority. A similar situation exists in France with GNIS being the body that represents the seed sector, and a division of GNIS ensures that the necessary quality assurance occurs. Cost savings can occur in the area of (1) a reduction in senior management and associated costs with two (or fewer) organizations, and (2) less time incurred by industry representatives providing necessary oversight and direction to the supporting organizations, when only two organizations require Directors from within the seed industry. Efficiencies can also occur when each remaining organizations has more critical mass of experienced seed industry staff. We estimate that cost savings to the seed industry in the range of $0.6 to $1.5 million per annum. This is after accounting for the time savings of industry that provide direction and guidance to the current supporting organizations and for the overall lower staff costs in the remaining supporting organizations.

Tiered Risk Assessment The regulatory system for “plants with novel traits” (PNTs) has served the seed industry reasonably well and has enabled the introduction of genetics that has benefited the crop production sector in Canada. Notwithstanding these benefits, improvements can be made that provide efficiency gains. Each year product developers seek approval for approximately 5 PNTs, with overall regulatory compliance costs ranging from $500,000 to over $2.5 million, depending on the type of novel trait. The approval process has built in duplication and some redundancies, which if eliminated provide for considerable time savings. Efficiencies can be achieved by the three approval bodies jointly working on submissions, and the elimination of some duplicative reviews. Improvements could be made that reduce the time spent by CFIA and Health Canada seeking additional information and providing necessary approvals to product developers. By reducing the time required for a regulatory decision by one year, the potential benefit to product developers of earlier commercialization can approach $16 million. Similarly, farmer benefits can approach $38 million over a 5 year period for each new PNT commercialized one year earlier. Another efficiency occurs when the level of assessment is based on the risk of the event being approved and whether related trait assessments have already been conducted. A tiered risk assessment procedure would result in a full evaluation for higher risk events and a reduced evaluation protocol for lower risk events. Examples of low-risk events include those with traits very similar to previously-approved traits, or with traits that could have been introduced by natural spontaneous processes. The approach used in the U.S. accounts for risks and knowledge acquired, and should be considered as part of the Canadian system.


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A tiered risk assessment approach should result in efficiencies and costs savings for both the regulator and the product developer. One saving is the reduced time required for the assessment and associated costs incurred by the regulator and the product developer. Another benefit is to the overall product development system, where more products can be approved in the same time frame. It would also increase predictability of regulatory requirements, which will promote investment in innovation.

Registration of Varieties The variety registration system serves to maintain and improve grain quality standards; support seed certification and trade in seeds; and facilitate variety and grain identity and traceability. Changes are proposed to the system of variety registration which would streamline the process for some crop types. Crops subject to variety registration would go through either an Enhanced process (Part 1 in the current process) or a Basic process which would not require pre-registration and merit testing. There would be cost savings to the developer for having a crop enter and remain at the basic tier or be moved to the basic tier. We estimate that cost saving in the range of $26,000 to just under $1.0 million per annum.

Quality Assurance The current model of seed certification is for third party inspection of fields in pedigreed seed production and third party testing of seed for purity and germination, and third party oversight of seed grading and labeling. The approach to quality assurance can become more flexible by allowing interested and qualified seed companies and seed growers to replace external third-party inspections with internal quality management systems and an ex-post third party audit framework. This approach is used in other jurisdictions, such as the Netherlands for cereals. As with HACCP programs, self-inspection of seed can occur following a documented protocol, including overall system audits. This could be a more cost-effective model for those in high-cost remote areas. The current system would continue to operate for those for whom it is the right business choice. By adopting a more flexible approach, the cost of quality assurance can decrease without compromising the quality of Certified seed. We have estimated that the cost of quality assurance could decrease between $2.0 and $4.0 million a year by adopting a more flexible approach.

Seed Synergy Initiatives and Value Creation The above initiatives proposed by Seed Synergy will create at least $100 million in additional value each year, after a period of transition. We are supportive of these initiatives. The FSS royalty model can provide $24 million in overall royalties when UPOV 91 varieties have a 50% market share, which could occur within the next decade. The FSS royalty approach which is based on contracts with farmers at time of Certified seed purchases is an enabler of an on-line traceability system for the seed sector. Traceability is intertwined with the other initiatives, which include (1) the single window and (2) the product profile, These initiatives combined create at least $50 million in addition value each year. The cost saving with an on-line traceability system that can trace and track in seconds can result in overall savings well in excess of the amount incurred in the event of a recall. The initiative which provides for regulatory flexibility and tiered risk assessment can create over $50 million per year in value, with one-third realized by the product developer and two-thirds by farmers. We encourage Seed Synergy to continue their efforts to initiate change in the seed sector. Change should begin with the change that provides additional investment dollars in product development and plant breeding. This starts with the implementation of a FSS royalty program. Other countries have such royalty collection in place and their best practices can be leveraged into Canada’s cereals and pulse crop sector.


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1.0 Introduction The Seed Synergy Collaboration Project has six Canadian seed industry organizations that represent the certified seed system value chain beginning with research & development, marketing, production & processing, through to sales & distribution. Seed Synergy members are the following trade associations (in alphabetic listing):

Canadian Plant Technology Agency (CPTA), Canadian Seed Growers’ Association (CSGA), Canadian Seed Institute (CSI), Canadian Seed Trade Association (CSTA), Commercial Seed Analysts Association of Canada (CSAAC), and Crop Life Canada.

Members of these trade associations are businesses that operate within the Canadian seed system; with their livelihood and profitability dependent on how the system operates and can provide the necessary financial rewards to invest in the future of their space in the seed system. These members range from farm operations that specialize in the multiplication of pedigreed seed to multi-nationals that engage in discovery research and plant breeding to develop technologies that are part of the genetics being grown by Canadian farmers. These members have indicated that change is required as to how the seed system operates. Members of Seed Synergy have indicated that the current seed system is:

organizationally fragmented; limiting to innovation; difficult to navigate; costly to administer; not providing for the value creation necessary to sustain the innovation that fuels the sector.

Seed Synergy was formed to initiate change in the overall Canadian seed system, with the following vision1:

A reformed, industry-led, government-enabled seed system that effectively attracts investment, fosters innovation, and delivers new and tailored seed traits to customers efficiently.

1.2 Project Scope and Objectives Seed Synergy is developing options for change in the seed system, and requires a third party analysis and assessment of options being considered. To do so, Seed Synergy commissioned the consulting team of JRG Consulting Group and SJT Solutions2 to conduct economic impact and risk analysis assessment of the current seed system and some agreed upon change options. The analysis is designed to provide an independent assessment of the risks associated with maintaining the current system (i.e., inaction associated with the status quo) and an assessment of the costs and benefits associated with the specific options being considered. Analysis for this project is based on guidance provided by Seed Synergy, which is “The project will assess key risks and opportunities facing the seed industry and identify measures to mitigate risks and enhance opportunities, including:

Examination and assessment of the current regulatory system and the associated industry structure, conduct and performance characteristics underlying it;

1 Green Paper on the Next Generation Seed System, Seed Synergy Collaboration Project (October, 2017).

2 The consulting team is led by John Groenewegen, Ph.D., CMC of JRG Consulting Group and Shelley Thompson,

Ph. D. of SJT Solutions. Other team members include Catherine Brodeur of AGECO, and Ron Weik (retired).



Examination of relevant trends in regulatory modernization and innovation; Analysis of risks associated with the current system and bench marking of the current system; Evaluation of opportunities for increased seed system contribution to agriculture and growth; and Analysis of benefits/costs and contribution to the agriculture economy of a series of scenarios

(options) for system changes”.

1.2 Organization of the Report Our report is organized in the following manner. The next chapter provides a framework for viewing the seed system, including system influencers and enables. This is followed by an overview of the $3.0 billion seed supply chain in Canada in Chapter 3.0, including the role of the seed sector organizations. In Chapter 4.0 we provide more detail on activities that occur within the seed supply chain. Seed systems in other jurisdictions are examined in section 5.0, which provides some comparative information on how the seed system is organized and approaches used to capture value for plant breeders in self-replicating crops such as wheat. In Chapter 6.0, an assessment is provided on a number of features of the current seed supply chain in Canada such as value capture and plant breeding, regulatory compliance costs, variety registration, and seed certification. The structure of the seed supply chain for self-replicating crops such as cereal and pulse crops and the seed supply chain for crops such as canola, corn and soybeans is examined in Chapter 7.0 along with implications on seed supply conduct and performance. The use of farmer saved seed (FSS) is a feature of seed supply chains for self-replicating crops. The acreage shares of Certified seed for self-replicating crops (e.g., wheat) is much higher in some other jurisdictions than in western Canada, with approaches examined in Chapter 8.0 to increase the use of Certified seed. In some other jurisdictions royalties are paid on FSS and we examine approaches to capture royalties on FSS in Chapter 9.0 Chapter 10.0 provides an assessment of approaches being considered by Seed Synergy to create more value for the seed sector within Canada. This value can exceed $100 million per annum. In Chapter 11.0, the two approaches of an end-point-royalty (EPR) and a royalty on FSS being considered to capture value for plant breeders are examined and compared. The approach taken in Canada can have a fundamental impact on the future performance of the seed system for self-replicating crops (cereals and pulses).



2.0 A Seed System Framework A major purpose of the seed system is to provide quality seeds for commercial agricultural production, with the product offering allowing crop producers to increase output and profitability over time through productivity gains and/or supplying attributes required in certain market channels. There are a number of activities, system influencers, system enablers, and participants in the seed system; however the principal participants at the core of the seed system include: 1. crop producers, 2. suppliers of Certified seed (i.e., seed companies), 3. seed multiplication by seed growers, and 4. product developers (which include plant breeders) providing the Breeder seed. A framework for considering and assessing the seed system is illustrated in Figure 2.1. Figure 2.1 A Framework for Viewing the Seed System

2.1 Seed System Core The seed system core can be viewed as a demand-pull system. Crop producers want access to genetics that will perform and will maximize per acre margins based on market requirements. It can be argued that crop producers base their decisions on which varieties to plant based on past experience with specific varieties3, observations on neighbors’ experience with certain varieties, information supplied by a seed company representative, past performance of varieties supplied by a branded seed company, and review of available performance trial data. Producer knowledge and access to product information influences how the seed system operates. In all probability, a crop producer is not overly concerned with the protocols used in seed multiplication and relies on (and/or chooses) the seed supplier based on reputation. Seed companies have self-

3 This also includes saving some seed for replant as FSS.

Seed System Core

Crop

Producers

Seed

Companies

Seed

Growers

Product

Developers

System Influencers: o Market

Requirements; o Product Information

& Knowledge; o Product

Performance; o Product Safety; o Value Capture by

Developer; o Compliance costs; o Regulatory decision

timelines; o Government; o Cost of doing

business.

System Enablers: o Variety registration

and listing; o Quality Assurance

Programs; o Regulations; o PBRs and IPR; o Government; o System

Collaboration & Supporting Organizations;

o Supporting

Infrastructure.



interest to protect their brand and ensure that any Certified seed supplied by them meets “the prescribed standards of quality and has the characteristics attributed to the variety4.” To offer these attributes and a product that performs, a seed company is relying on (1) new varieties provided by plant breeders5 and (2) a seed multiplication system that maintains the attributes released in the Breeder seed. To deliver Certified seed that has all the characteristics of the Breeder seed, the seed multiplication process engaged in by seed growers relies on a Quality Assurance (QA) system; this is the seed certification process. Seed certification is the QA system that enables seed companies to have a product offering of Certified seed that replicates the Breeder seed released by the product developer. Seed has many elements of a credence good6 since seed has attributes that producers can’t readily verify, and which may take sophisticated tests to determine presence or absence; hence the use of seed certification for QA. Plant breeders supply new varieties that may or may not have market success with crop producers. Breeders typically focus on providing attributes required by growers (e.g., higher yields, disease resistance) or downstream users (e.g., oil composition, protein composition). New varieties released by public breeding institutions are based on the crop kind focus of their breeding programs, the amount of public, producer and private sector funding they can attract to support the breeding program, and traits desired by funders. Private sector release of new varieties is also based on financial considerations, which are primarily whether the operating environment is conducive to capturing sufficient value to provide a return on the investment in releasing a new variety to the market. Hybrids and non-hybrid varieties with technology use agreements (e.g., soybeans, Clearfield wheat) are examples of operating environments where product developers can capture value through the price of one-time use seed sales. In cases where the seed is self-replicating, there are challenges to capturing sufficient income to earn a return on the investment made. When there is a high use of FSS, without any associated royalty payment to the product developer, this challenges private sector investment. The availability of PBRs and the use of IPR enable product developers through mechanisms to capture some value and continue some investment level in varietal development. Without utilizing such value capture mechanisms the use of FSS with self-replicating crop kinds limits private sector interest in investing in their own plant breeding program. This is due to less effective IPR in self-replicating crops such as cereals and pulses.

2.2 Seed System Influencers

The left-hand portion of Figure 2.1 highlights seed system influencers. Product performance is a system influencer. Frequent introduction of higher yielding varieties will generally increase the use of Certified seed. As well, product safety influences the seed system through the need to develop assurances that newly introduced seed products are safe for producers, workers, consumers, and the environment. Government through policy and regulation has considerable influence over the seed system.

4 http://www.inspection.gc.ca/plants/variety-registration/registration-procedures/questions-and-

answers/eng/1360122407834/1360122517324 5 In an integrated seed company the plant breeder is typically employed by the seed company, and for seed

companies that focus on seed sales and distribution the plant breeder is a third party, such as a public breeder. 6 Another example of a credence good is organic food (or non-GM food), which cannot be distinguished from non-

organic food (or food with a GM ingredient); hence the use of labels and certifying bodies. A credence good is defined as good with qualities that cannot be observed by the consumer after purchase, making it difficult to assess its posited attributes.



How value can be captured is also a seed system influencer, as discussed above. The speed at which regulatory decisions are made (e.g., decisions required for PNT) also influences whether investments are made to introduce varieties with specific traits into the Canadian marketplace. The overall cost of doing business also affects the seed system core.

2.3 Seed System Enablers

The right-hand side of Figure 2.1 lists some key seed system enablers. QA enables seed companies to deliver the genetics promised to crop producers. Regulations are in place for; (1) product safety, (2) product performance for some crop kinds, and (3) consumer protection because of the need to correct for asymmetric information. Within Canada, plants with novel traits (PNT) are subject to product safety regulations. Product safety is typically considered a public good given potential worker safety, environmental safety, food safety and feed safety concerns. A key issue associated with these regulations is the choice of the tools that allow for regulatory flexibility, timeliness, and compliance costs incurred by product developers. Government through regulatory authority is also an enabler. Plant breeders rights (PBRs) enable seed companies and/or product developers to capture some value and obtain a return on investing in variety development. A number of organizations support the participants (e.g., CSGA, CSI, and CSTA) in the core seed system and enable the necessary collaboration that is required throughout the seed system. Another enabler is the supporting infrastructure, which can include networks and IT platforms used.

2.4 Options for Change - Influencers and Enablers

This framework in Figure 2.1 can be used to highlight where potential changes may occur in the seed system, whether the change is on the system influence level (e.g., product information, compliance costs, regulatory decision timelines, value capture mechanisms, etc.) or at the system enabler level (e.g., redesign of QA approach, some regulatory changes, different structure that supports seed system collaboration, etc.). For example, a change that allows seed companies to capture some value on self-replicating FSS influences the seed system core. In response, private sector product developers could introduce higher yielding varieties, which would cause more seed multiplication to occur. Furthermore, with higher yielding varieties available the average crop producers would reduce their use of FSS, which again increases the demand for certified seed and the associated volume of seed multiplication. An example of change of a system enabler could be that organizations move to a different organizational structure to support the core seed system. The associated impact could be lower direct costs on supporting organization and freeing up internal resources (of seed system core participants) to focus on other matters.

2.5 Chapter Summary

This chapter provided a framework for the seed system in terms of the system core and its influencers and enablers. The core of the system is crop producers, seed companies, seed growers, and product developers. The core is influenced by market requirements, product information and knowledge, product performance, value capture by developer, compliance costs, regulatory decision timelines, and the cost of doing business. System enablers which are variety registration, quality assurance programs, regulations, plant breeders’ rights and intellectual property rights, supporting infrastructure, and system collaboration and supporting organizations will also cause the system’s core to change. Government is both a seed system influencer as well as an enabler of the seed system and its performance. The Canadian seed system is explored in greater detail in the next chapter.



3.0 Profile of the Canadian Seed System The Canadian seed system is profiled in this Chapter, starting with a brief overview of the overall seed supply chain, which is then followed by a profiling of the organizations that provide support to this supply chain.

3.1 Canadian Seed Supply Chain Overview The Canadian seed supply chain begins with discovery research and development, where new traits and technologies can be developed that become part of the genetics that are eventually encompassed in a seed that is planted by a farmer, whether in Canada or in a seed export market. The supply chain ends with the production of crops by commercial farmers within Canada and the use of the crops in market channels ranging from food, feed, fibre, exports and fuels (energy). Figure 3.1 (on the following page) illustrates the various segments of the seed supply chain as well as associated values (e.g., sales of seed, R&D expenditures on variety development in Canada that includes the cost of plant breeding, costs associated with seed multiplication, costs associated with seed processing, and the value captured by the product developer). On the right-hand side of Figure 3.1, Seed Synergy member organizations (e.g., CSGA) that represent and/or provide services to a supply chain segments are noted. On the left-hand side, the CFIA (Canadian Food Inspection Agency) is shown where they have regulatory responsibility7. Each year, approximately $180 million is expended on variety development, which includes basic discovery research and development that supports plant breeding, as well as the plant breeding activity, and costs associated with obtaining necessary regulatory approvals (check with CSTA). Private sector research and development is estimated to be $100 million8 per year (in 2017) and expenditures on plant breeding by public support and by producer contributions is estimated to be just under $80 million per annum (2016)9. Crop Life, a Seed Synergy member, represents companies (e.g., Syngenta) that develop modern technologies for plant breeding. To ensure compliance with environmental, feed and food safety considerations, regulatory approval by CFIA and Health Canada is required for products where traits introduced by modern plant breeding technologies or other methods are considered novel. Each year plant breeders, product developers and/or supporting organizations register varieties for sale and production within Canada. The variety registration process varies by crop kind, with certain crops such as wheat being subject to evaluation by recommending committees, while other crops are listed. The CFIA maintains a registry/listing of varieties that can be grown in Canada. Seed growers are in the business of seed multiplication, where starting with Breeder seed various generations of seed are grown as part of the multiplication process. After Breeder seed, the next generation is Select seed, followed by Foundation seed, which when replanted becomes Registered seed, and the final generation is Certified seed, which is then grow by commercial farmers. More than 3,500 seed growers are involved in seed multiplication using just over 1.3 million acres across Canada. The Canadian Seed Growers Association (CSGA) provides oversight on seed production.

7 The role of each of these organizations is discussed in a following section in this Chapter.

8 Canadian Seed Trade Association (R&D Expenditure survey).

9 JRG Consulting Group, “Exploring Options for Producer Involvement in Wheat and Barley Variety Development”,

prepared for Wheat and Barley Variety Development Working Group, October 2015.



Figure 3.1 Seed Supply Chain

Feed Energy Fibre Food Exports

Crop Production + Home Grown Feed

$33.8 billion

Commercial Seed Purchases

$2.5 billion (STC)

Seed Imports

$0.5 billion

Farmer Saved Seed and Common Seed

$0.5 billion

Seed Exports

$0.6 billion Domestic Certified Seed Sales

$2.0 billion

Sales of Canadian Produced Certified Seed

$2.6 billion

Seed Conditioning, Grading, Testing, Certification and Labelling at RSE (AC/BSF) ($0.5 billion)

billion)

Registration of Varieties by Product Developer

Crop Life

CSGA

CSTA

CPTA

CSI

CSAAC

Multiplication of Pedigreed Seed (Breeder, Select, Foundation, Registered & Certified) by Seed Growers

(1.3 million acres & $0.6 billion in cost) ASCIS &

LSCI

CFIA

CFIA

CFIA

Value Captured by Seed Developers & Residual

$1.0 billion

Plant Breeding/Variety Development $0.10 billion private (includes R&D)

$0.08 billion public and producer

CFIA

Crop Life Approval of Novel Traits Health

Canada

Seed Sales and Distribution

$0.3 billion



The cost of seed production is estimated to be $0.7 billion each year, with this cost including a profit margin for seed growers and the costs associated with field inspections. Inspections are carried out by Authorized Seed Crop Inspection Service (ASCIS) providers, by individuals who are Licensed Seed Crop Inspectors (LSCI). CFIA has regulatory authority over seed production, with most inspections now conducted by LSCI’s – in the past seed cop inspections were conducted by CFIA employees. Once the seed crop is harvested, the goes to a seed processing facility, which are referred to as Registered Seed Establishments (RSEs), where the seed is conditioned, graded, tested, certified and labeled. Approximately 1.7 to 2.0 million tonnes of seed is processed by seed conditioners each year, with 575 RSEs that are seed conditioners, which are approved by the CFIA. Seed analysts at seed laboratories provide testing services required for maintenance of the integrity of pedigreed seeds. The Commercial Seed Analysts Association of Canada (CSAAC) represents the suppliers to testing services. The Canadian Seed Institute (CSI) is recognized by the CFIA as being responsible for monitoring and accreditation, and is the single point of contact for all seed establishments, seed laboratories, operators and graders seeking registration, licensing or accreditation. An estimated $500 million occurs in this segment of the seed supply chain10, which excludes the value of seed being processed and includes the cost of services provided at RSEs (and excludes a normal profit margin)11. These RSE’s (seed companies) sell Certified seed into domestic and export market channels. There are marketing and distribution costs associated with commercial seed sales, which are estimated at $0.2 billion (less than 10% of sales value). Statistics Canada estimated $2.5 billion in farmer seed purchases12 (in 2016). Crop Life estimates the value of seed sales based on modern plant breeding technologies to be $2.0 billion in 2015 and $2.125 billion in 2016. The $2.125 billion includes $1,152 million of sales by developers (e.g., Monsanto, Bayer, Dow) and integrators13 (e.g., SeCan), and $973 million in sales by distributors. This sales value accounts for imported seed, as well, as exported seed. This segment of sales based on modern breeding technologies is mostly seed sales involving canola, soybeans and corn. Seed sales are made by seed companies, which can be either developers, integrators or distributors. Product developers can also have seed growing operations. Integrators and can sell seed based on licensing agreements with technology developers. The Canadian Seed Trade Association (CSTA) is an advocacy group for companies in the business of selling seed into domestic and export market channels. Statistics Canada reports that crop and livestock farmers in Canada purchased $2.5 billion in seed in 2016, with $0.5 billion of these purchases based on seed that was imported (e.g., corn seed accounted for around $200 million), which suggests approximately $2.0 billion of domestically produced seed was purchased by farmers. In a following Chapter, we estimate that purchased of Certified seed is in the neighbourhood of $2.4 billion, which includes imported seed, with more than 80% of the $2.4 billion accounted for by canola, corn and soybeans. Our estimate of common seed purchases is $0.5 billion, with the majority of this being FSS14 15. The seed industry supplied an estimated $2.4 billion of Certified seed in domestic markets and exported $0.6 billion of seed (assumed to be mostly Certified seed).

10

Based on a mark-up by seed companies of just over 50% on the cost of seed purchases based on the George Morris Centre report “Economic Profile of the Canadian Seed Sector: Seed Processor Summary” (2014). This would result in a cost structure of $350 million, which may not account for all costs incurred in seed processing and treatment. 11

Including normal profit margins in each segment will be considered (e.g., 5% of sales value). 12

This sales value is based on $2.5 billion in purchases of seed by farmers (CANSIM 002-005), with the $0.5 billion in seed imports deducted, and the $0.6 billion in exports added. 13

Integrators are defined as seed companies with sales of seed containing novel traits where the novel trait was not developed by the reporting company, but was integrated into the seed by the reporting company. 14

Common seed is defined in this report to include “Commercial” common and FSS, to capture all seed sales that are not Certified seed. 15

Common seed is a recognized grade in Canadian Seeds Regulations, with mechanical purity and germination requirements that must be met, including grading and labelling with a proper tag. Most of the standards for Common seed, such as purity limits



The largest portion of common seed is farmer saved seed (FSS), with FSS being a portion of the grain crop that is retained for replanting (in a subsequent year)16. Figure 3.1 also highlights that value of the seed that is captured by the breeder/product developer. This value is the difference between the sale of seed into commercial channels (export and domestic users) and the costs in the supply chain to provide the seed, which is the cost of seed multiplication and seed processing. The estimated value captured by product developers and by seed companies is $1.0 billion, which includes license fees when a third party multiplies and distributes the seed. This $1.0 billion of value capture is the revenue flow that defrays the annual R&D expenditure within Canada (estimated at $0.2 billion), the global R&D costs that are incurred to develop a trait that is part of a variety registered in Canada, as well as in other parts of the globe, plus profit margins by seed companies that are not product developers, and provide a return to investments in variety development activities. The $2.4 billion of Certified seed purchases plus the $0.7 billion of common seed is approximately 12% of the value of crops sold into commercial channels by crop producers (of $33.8 billion17). As will be shown in a following section, seed cost as a share of revenues varies from over 20% for corn, around 15% for canola and around 6% for wheat.

3.2 Seed Sector Organizations with Regulatory Authority The integrity of the seed system is supported by standards, with such standards encompassed in regulation. The following is a brief overview of the organizations with regulatory authority in the seed supply chain. Canadian Food Inspection Agency (CFIA) The CFIA has the responsibility and authority for many parts of the seed system through the Seeds Act and Seeds Regulations. The CFIA is ultimately responsible for the enforcement of the Seeds Regulations and for the regulation of seed in Canada. In this regard, the CFIA:

is the official seed certification body for pedigreed seed; is recognized by the CSGA as the official agency for pedigreed seed crop inspection; establishes seed purity and germination standards; registers varieties of the major crop kinds in Canada.

The CFIA is involved in many activities in the seed system, including authorization for environmental release and feed use of plants with novel traits, crop inspection, laboratory analysis such as for variety verification, and overall monitoring and surveillance and audit of the overall program. Government involvement in the economy usually occurs when the market does not provide a specific good or service (e.g., public goods) or when the private sector outcome may not match society’s objectives. In the case of Seed Certification, a rationale offered for government involvement through regulation is to ensure that buyers can have the confidence that the product purchased is not mis-represented, and to provide the necessary infrastructure to fulfill seed export requirements. Labelling laws and truth in advertising requires government oversight in the Canadian economy. Seed is regulated in Canada in order to protect consumers, protect the plant resource base, protect the environment and human and animal health and safety, and promote economic growth. CFIA monitors the overall seed certification program through random inspections, sampling and testing, and an overall audit of the seed certification system. This includes an audit of the CSI as Conformity

for weeds and other crop kinds, are less than those for Certified seed. Common seed has no third-party or official certification records to verify varietal purity and identity and cannot legally be sold by variety name. 16

FSS is also referred to as bin-run seed, which is commercial grain cleaned for replanting. 17

Source: CANSIM 002-0001



Verification Body. This level of oversight is designed to ensure that the seed program meets the requirements of a quality management system, and that the pedigreed seed is sold in Canada meets the minimum standards. The CFIA’s responsibility for the administration of the seed certification system is based on the authority provided in the Seeds Act and Seeds Regulations. The CFIA has responsibility for other pieces of legislation including the Plant Breeders’ Rights Act, the Feeds Act, the Fertilizers Act, and the Plant Protection Act. Canadian Seed Growers Association (CSGA) Seed growers must be recognized by the CSGA to multiply pedigreed seed based on standards developed by the CSGA. The CSGA has been designated within the Seeds Act (4.(1a.1)) as the regulatory authority for grades requiring varietal purity, for the determination of varietal purity of seeds, and for establishing any necessary standards regarding seed crop production. The CSGA also has the authority within the Seeds Regulations (5(1)) to approve seed as Breeder or Select status seed. The CSGA is also responsible for the following:

receiving applications and fees for pedigreed seed crop inspection; receiving and assessing completed Reports of Seed Crop Inspection and other inspection

reports; issuing crop certificates for crops meeting the requirements of the Canadian Regulations and

Procedures for Pedigreed Seed Crop Production (Circular 6 and its amendments); consulting with CFIA operations staff on specific reports as appropriate; reporting to CFIA; facilitating CFIA communication with growers; and submitting pedigreed seed crop inspection fees to CFIA.

Canadian Seed Institute (CSI) The CSI is a conformity verification body, recognized by the CFIA. CSI is a not-for-profit organization founded in 1997 by CSTA, CSGA, and CSAAC. CSI activities begin once pedigreed seed enters a RSE. The CSI is responsible for auditing each RSE at minimum once every three years to ensure compliance with the registration requirements described in the Seeds Regulations and conformance with the quality management system of the RSE. Based on these audits, CFIA involvement may be required on corrective actions, and with noted non-conformities the audit frequency increases (e.g., annual). The mandate of CSI is to be the single point of contact for all seed establishments, seed laboratories, operators and graders seeking registration, licensing or accreditation. The CSI develops and maintains quality system standards for the accreditation of RSE facilities; issues technical manuals to provide industry guidance; and develops audit protocols and procedures to assess facilities for compliance with the CSI quality system standards as well as the Seeds Regulations. In general, the CFIA reviews reports and recommendations from CSI and, is responsible for subsequent:

accreditation of laboratories, analysts, and graders, licensing of operators and samplers, registration of approved conditioners, bulk storage facilities and authorized importers, authorization of Authorized Exporters, auditing of the CSI, ongoing monitoring of RSEs and accredited laboratories, and audit of the overall seed certification system.



Collaboration Between the Parties The seed system in Canada is based on collaboration between various parties, including the CFIA, the CSGA, and the CSI. Other organizations in the seed sector, such as CSTA and CSAAC, provide input to improve overall service delivery. Over time, service delivery has evolved; the CFIA has taken a less direct role, and instead ensures compliance with standards and regulations through third party verifications, monitoring programs, and overall system audits.

3.3 Other Organizations in the Seed Supply Chain Registered Seed Establishments (RSE) When a crop is certified by the CSGA a crop certificate is issued and the seed may then be delivered to a Registered Seed Establishments (RSE) for conditioning, sampling, testing, grading and labeling. The RSE provides the following services:

Conditioning (by the grower or an RSE that is an approved conditioner); Sampling (by a sampler approved by the CFIA); Analysis (by an accredited seed analyst for purity and germination); Grading (by an accredited grader based on the results of the analysis); Sealing and labelling (according to the Seed Regulations)

The four main types of RSEs in Canada are described in Table 3.1. Most bulk storage facilities are also approved conditioners and are denoted as denoted as AC/BSF Table 3.1 Types of Registered Seed Establishment

RSE Type Description

Approved Conditioners (AC) Facilities that clean, treat, mix, blend or bag pedigreed seed (Approximately 575 across Canada)

Bulk Storage Facilities (BSF) Facilities that store graded pedigreed seed in bulk (Approximately 887 across Canada)

Authorized Importers (AI) Facilities that may import seed with minimum documentation (Approximately 40 across Canada)

Authorized Exporters (AE) Facilities with current status as an Approved Conditioner (AC) who are authorized to sample, seal and label seed lots for export according to the Organization for Economic Co-operation and Development (OECD) Seed Schemes

In total there are 1,007 RSE’s today (Table 3.2). Many AC’s are also involved in bulk storage, with 494 operations in 2017, (this includes the 34 that are also AI’s). There are 392 businesses that only store product (BSF). Table 3.2 Count of RSE’s by Scope of Operations

Scope Number AC 63

AC,AI 18

AC,BSF 460

AC,BSF,AI 34

BSF,AI 1

AI 39

BSF 392

TOTAL: 1,007

Source: CSI



Authorized Seed Crop Inspection Services (ASCIS) and Licensed Seed Crop Inspectors (LSCI) In 2013, the CFIA began to formally license entities that provided seed crop inspection services as ASCIS and individuals as LSCI in anticipation of the privatization of seed crop inspection in 2014. In 2016, there were 27 ASCIS and approximately 300 LSCI operating in Canada. The Commercial Seed Analysts Association of Canada (CSAAC) The CSAAC is a private, non-for-profit organization with more than 100 members in Canada and the US. Seed analysts test seed according to recognized standard methods to ensure that seed lots meet the minimum requirements set out in the Seeds Regulations. Seed analysts may also provide additional seed testing services for non-regulated quality parameters such as certain diseases or variety identification. Accredited Seed Testing Laboratories In 1976, the government of Canada began to accredit private seed laboratories for seed import conformity assessment purposes. In 1980, there were four private accredited labs and 18 accredited seed analysts. In 1985, Canada began accepting foreign lab results for import purposes and allowed private labs to test pedigreed seed for certification purposes. Today, the CFIA accredits seed laboratories pursuant to its Seed Laboratory Accreditation and Audit Protocol. CFIA also trains, evaluates and accredits seed analysts. The initial quality system audit of a seed laboratory is conducted by the CFIA; subsequent audits are performed by CSI auditors. The Canadian Plant Technology Agency (CPTA) The CPTA was established to protect intellectual property rights pertaining to crop variety development. It seeks to promote an environment within Canada where a robust and globally competitive framework for intellectual property protection is valued and respected. The CPTA monitors and enforces seed intellectual property issues and has a significant communications and education mandate. Canadian Seed Trade Association (CSTA) The CSTA is a private, not-for-profit organization with more than 130 members ranging from small and medium sized enterprises to large integrated multi-national life science companies. CSTA members engage in seed variety research and development, production, marketing and trade both domestically and internationally. Crop Life Canada Crop Life Canada is the trade association representing the manufacturers, developers and distributors of plant science technologies, including pest control products and plant biotechnology, for use in agriculture, urban and public health settings.

3.4 Laws and Regulations Affecting the Canadian Seed System The seed system is governed by a number of regulations, with the Seeds Act the most prominent and guides many of the activities within the seed system today. The CFIA is responsible for the administration and enforcement of the Seeds Act and the Seeds Regulations.

Seeds Act and Seeds Regulations The Seeds Act sets out the broad parameters of Canada’s seed regulatory framework while the Seeds Regulations describe in detail the requirements for compliance. The Seeds Act focuses on three principal “prohibitions”:

1. No seed shall be imported into or sold in Canada unless it meets minimum requirements set out in the Regulations with respect to quality (e.g., relative freedom from weed and other crop seeds; minimum germination levels; disease) and is packaged and labelled as required;

2. No seed of a variety of a crop kind listed in Schedule III to the Regulations shall be imported into or sold in Canada unless the variety has been registered as prescribed by the Regulations

3. No seed shall be sold, imported or exported that presents a risk of harm to human, animal or plant health or the environment.



The main emphasis of the Seeds Regulations is on agricultural seed; however, all seed, including vegetables, herbs, flowers, turf and other miscellaneous seeds, are subject to standards for weed seeds. Seeds that are sold, imported, or exported, as well as seeds released into the environment, must meet established standards for quality and be labelled so that they are properly represented in the marketplace. The Regulations do provide for some exemptions to the above noted prohibitions for specified purposes such as seed production of unregistered varieties in anticipation of variety registration or for export. The layout of the Seeds Regulations is as follows:

1. Section 2, Interpretation - Over 45 words, terms and expressions are defined in s. 2, from “biotechnology” to “variety name”.

2. Part I, Seeds other than Seed Potatoes - deals with seed standards, sampling, testing, grading, packaging and labelling as well as the use of variety names. There are also sections on advertising, seed crop inspection and seed importations.

3. Part II, Seed Potatoes – sets out the requirements for certification of seed potatoes, including standards, testing and labelling requirements. The CFIA is wholly responsible for seed potato certification including field production standards/inspection as well as tuber standards/inspection, although some tuber inspections are conducted by authorized producers under official supervision.

4. Part III, Variety Registration - the requirements for the Minister to approve recommending committees is set out in s. 65.1. Applications for registration, eligibility requirements of varieties and other requirements are set out in Part III.

5. Part IV, Registration of Establishments that Prepare Seed and the Licensing of Operators - there are three types of registered seed establishments: i) approved conditioners that prepare (clean, process, pack, treat, etc.) seed of pedigreed status; ii) bulk storage facilities that store seed graded with a Canada pedigreed grade name in bulk (i.e., not in sealed containers) and iii) authorized importers that are able to import seed on minimum documentation and ensure that an import conformity assessment has been completed before further distribution or planting.

6. Part V, Release of Seed – deals with seeds with novel traits and the requirements for notification, information, decision of the Minister, confined releases and unconfined releases.

The Weed Seeds Order is a ministerial order made pursuant to subsection 4(2) of the Seeds Act, and plays a critical role in preventing the introduction of new weed species into Canada by regulating the presence of weed species in seed sold in, or imported into, Canada. The WSO groups weed seeds into six classes according to their level of risk. The assessment of risk includes considerations such as economic reasons, such as crop yield and market access, and environmental impacts. The most restrictive class, Class 1 prohibited noxious weed seeds, is prohibited in seed18. The level of weed species listed in Classes 2 to 6 and that are permitted in a seed sample are specified in Schedule I of the Seeds Regulations.

Plant Protection Act The purpose of the Plant Protection Act is to protect plant life and the agricultural and forestry sectors of the Canadian economy by preventing the importation, exportation and spread of pests and by controlling or eradicating pests in Canada. The Plant Protection Division in the Plant Health and Biosecurity Directorate of the CFIA has various sections that deal with grains and oilseeds, horticulture, forestry and international standards. The CFIA is Canada’s National Plant Protection Organization (NPPO) and represents Canada at meetings of the International Plant Protection Convention (IPPC). Plant Breeders’ Rights Act The Canadian Plant Breeders' Rights Act (the Act) came into force on August 1, 1990. Revisions to this legislation came into force on February 27, 2015 aligning it with the 1991 Convention of the International Union for the Protection of New Varieties of Plants (UPOV). The intent of the legislation is to stimulate

18

(http://www.inspection.gc.ca/about-the-cfia/acts-and-regulations/faq-amendments-to-the-weed-seeds-

order/eng/1463457256836/1463457257335)

http://www.inspection.gc.ca/about-the-cfia/acts-and-regulations/faq-amendments-to-the-weed-seeds-order/eng/1463457256836/1463457257335

http://www.inspection.gc.ca/about-the-cfia/acts-and-regulations/faq-amendments-to-the-weed-seeds-order/eng/1463457256836/1463457257335



plant breeding in Canada, to provide Canadian producers with better access to foreign varieties and to facilitate the protection of Canadian varieties in other countries. Plant Breeders' Rights (PBR) are a form of intellectual property rights by which plant breeders can protect their new varieties in the same way an inventor protects a new invention with a patent. With the grant of a PBR for a new plant variety, the holder of PBR obtains exclusive rights in relation to the propagating material of their variety. The holder is then able to protect the variety from exploitation by others and can take legal action against individuals or companies that are conducting acts, without permission, that are the exclusive rights of the holder. The holder of PBR may also take action to prevent another individual or company from using the approved denomination (name) of their protected variety when that individual or company is selling propagating material of another variety of the same genus or species19.

Patent Act The Patent Act grants patents that cover the gene in the plant or the process used to incorporate the gene, but does not provide a patent on the plant itself. This was affirmed in two Supreme Court of Canada decisions: Harvard College vs Canada in 2002 and Monsanto Canada Inc. vs Schmeiser in 2004. Intellectual property protection of the plant is covered by the Plant Breeders’ Rights Act. The Patent Act and the Plant Breeders’ Rights Act both afford breeders or owners of new varieties the ability to collect technology fees or royalties on their products.

Feeds Act The Feeds Act is administered and enforced by the CFIA and regulates feed for livestock which means horses, cattle, sheep, goats, swine, foxes, fish, mink, rabbits and poultry and includes “such other creatures as may be designated by regulation as livestock” for the purposes of the Act. New varieties of crop kinds that can be fed to livestock, such as most grains and oilseeds, are subject to Feeds Act provisions.

Food and Drugs Act The Food and Drugs Act is an Act respecting food, drugs, cosmetics and therapeutic devices. Many crops kinds produced in Canada become ingredients into food products and are subject to food safety provisions within the Act. In Canada, manufacturers or importers of novel food must notify Food Directorate of Health Canada prior to advertising or selling the novel food and cannot advertise or sell said food until it receives a letter of no objection. Health Canada classifies a novel food as one without a history of safe consumption in Canada; or a food that has been processed using a new technique or which results in major changes; or foods from GMO’s. Plants with Novel Traits (PNT) - The Seeds Regulations regulate seed with novel traits (PNTs), the Feeds Act regulates novel feeds and the Food and Drugs Act regulates novel food. Canada has a “no split approvals” policy in respect of novel products, which means that approvals are required under each legislative framework (seed, feed and food). This may result in duplication of effort and delays for approval of innovative plant products. It may also protect the Canadian marketplace from damage suffered through the presence of unauthorized events in certain channels (i.e. StarLink).

Pest Control Products Act The purpose of the Pest Control Products Act is to protect human health and safety and the environment by regulating products used for the control of pests, and prevent the importation, exportation and spread of pests injurious to plants and provides for their control and eradication and for the certification of plants and other things. It is administered and enforced by Health Canada’s Pest Management Regulatory Agency (PMRA). A pest control product is defined as “a product … that is manufactured, represented, distributed or used as a means for directly or indirectly controlling, destroying, attracting or repelling a pest or for mitigating or preventing its injurious, noxious or troublesome effects”.

19

http://www.inspection.gc.ca/plants/plant-breeders- rights/overview/guide/eng/1409074255127/ 1409074255924)

http://www.inspection.gc.ca/plants/plant-breeders-%20rights/overview/guide/eng/1409074255127/%201409074255924



Fertilizers Act The Fertilizers Act is administered and enforced by the CFIA and regulates both fertilizers and supplements. A fertilizer is defined as any substance or mixture of substances, containing nitrogen, phosphorus, potassium or other plant food, manufactured, sold or represented for use as a plant nutrient; a supplement means any substance or mixture of substances, other than a fertilizer, that is manufactured, sold or represented for use in the improvement of the physical condition of soils or to aid plant growth or crop yields. Agricultural Biologicals - Interest in and development of innovative agricultural biologicals are expanding rapidly. Some products may fall under the regulatory authority of both the Fertilizers Act and the Pest Control Products Act, which can complicate the approval process and result in delays.

3.5 Chapter Summary This chapter presented a supply chain view of the seed system, discussing the organizations involved in regulatory or other roles. The supply chain begins at product development/plant breeding. Investment at this level of $100 million by the private sector and $80 million by the public and producer is the foundation of a system which eventually results in $33 billion of sales of crops into commercial channels by farmers. The Canadian seed sector provides $2.6 billion of Certified seed each year into the domestic and export market, with an estimated $2.0 billion of sales to commercial agriculture within Canada. Organizations involved throughout the supply chain include CSGA, CSTA, CPTA, CSAAC, CSI and Crop Life. CFIA has regulatory authority over variety registration, seed production and certification of certified seed, and seed imports and exports. The CFIA and Health Canada both are involved with the approval of plants with novel traits. Activities performed in the supply chain are discussed in greater detail in the next chapter.



4.0 Activities and Economics in the Seed System The last Chapter provided an overview of the seed supply chain. In this Chapter certain activities in the seed supply chain are discussed in more detail, with some analysis in certain segments of the seed supply chain. Our assessment of the seed sector as it is structured in 2017 is covered in a following Chapter. We begin by looking a variety development, the beginning of the supply side of the seed sector supply chain.

4.1 Variety Development – Research & Development and Plant Breeding The seed system begins with basic discovery research and plant breeders that develop new varieties for use in Canadian crop production or for sale into export markets. The various stages of variety development are shown in Figure 4.1, which, include:

Discovery R&D and pre-breeding, which includes discovery, germplasm development, genomics, development of breeding tools, development of evaluation, etc.;

Breeding, which is the breeding of a number generations (e.g., F1 to F6) of a crop kind such as wheat; and

Variety finishing, includes finishing, replication, and registration. Figure 4.1 Stages in Variety Development

Source: The major portion of Figure 1.1 is from “AAFC and the Future of Cereal Breeding”, presentation by Drs. Stephen Morgan Jones and George Clayton, Science and Technology Branch, AAFC.

R&D/Pre-Breeding

Breeding

Finishing

Seed Multiplication and Sale



Discovery R&D and associated pre-breeding activities typically generates “knowledge” and “know how” that can be used in breeding programs, and these outcomes are typically public goods. Pre-breeding has been defined in Australia20 as “R&D intended to contribute to genetic improvement for a trait or traits of economic value. It is often undertaken outside a commercial breeding program, but with the intent of providing improved germplasm, screening technology or breeding methods. Pre-breeding may include gene discovery, trait identification, developing markers, phenotypic screens and information generation”. Breeding begins with the crossing of two in-bred parental lines (the F1 generation) to create the F2 generation, from which breeders select and replicate through successive generations as highlighted in the above schematic. The Breeder seed is then multiplied as part of the seed production activity in the seed supply chain. The CSGA recognizes plant breeders as competent to conduct field crop inspections of their own plots of Breeder seed and to apply breeder seed tags to the pedigreed seed harvested from Breeder seed plots. To ensure a high quality beginning seed stock, breeders use a quality management system, which is ISO or equivalent and is subject to third party audits. There are an estimated 219 plant breeders across Canada, with 84 (38% of total) considered to be public breeders located in either universities or government (Table 4.1). AAFC is the largest public share, followed by the University of Guelph and the University of Saskatchewan (mostly in their Crop Development Centre). The CSTA, based on a survey of its members, indicates that there are 135 scientists involved in plant breeding21, which are supported by a further 227 technicians, 117 support staff and 100 summer staff22. Table 4.1 Estimated Number of Plant Breeders Across Canada

Institution Breeders Public Share Total Share

AAFC 54 64% 25%

U of A 2 2% 1%

U of S/CDC 10 12% 5%

U of M 3 4% 1%

U of Guelph 11 13% 5%

McGill 1 1% 0%

Alberta Ag & Forestry 3 4% 1%

Total University 27 32% 12%

Total Public 84 100% 38%

Private 135

62%

All Breeders 219 100% Source: CSTA for private sector breeders/scientists and consultants review of public sector and university materials and websites for public institutions.

Information supplied by the CSGA indicates that in 2017, there were 48 breeders from the private sector with breeder plots, which ranged between 48 and 60 unique breeders with breeder plots since 2010, with a total of 85 unique breeders with breeder plots. Over the same time frame, government sector breeders had between 9 and 15 breeder plots in a year, and between 7 and 14 university breeders had breeder

20

“Grains Industry, National Research, Development and Extension Strategy”, Australia 2011, Primary Industries Standing Committee – R&D Subcommittee, April 2011. 21

For this purpose we are assuming that these 135 scientist are primarily involved in either plant breeding or basic R&D that supports plant breeding. 22

As reported by the Seed Sector Value Chain Round Table, “Canadian Seed Sector Profile”, July 2014.



plots in any year. This suggests that of the 27 university breeders, in any year up to half of these breeders have breeder seed plots. The focus of public sector plant breeding by crop kind is provided in Table 4.2, which shows that across Canada 20 are identified as wheat breeders, followed by 10 focused on pulse crops, and 9 on barley. For crop kinds that have some form of IPP there are 7 developing soybean varieties, 3 on canola and 2 on corn. Table 4.2 Public Sector Crop Kind Breeding Focus

Crop Kind Breeders Public Share Wheat 20 24% Pulses 10 12% Barley 9 11% Soybeans 7 8% Forages 7 8% Potatoes 5 6% Oats 3 4% Canola 3 4% Tree fruits 3 4% Corn 2 2% Flax 2 2% Triticale 2 2% Other horticulture 7 8% Other cereals 4 5% Total Above 84 100%

Source: Consultants review of public sector and university materials and websites for public institutions

A CSTA survey of its members indicates that private sector investment in plant breeding and related research was $45.3 million in 2001, which increased to $57 million in 2007, and stood at $101.3 million in 2012. The distribution of these 2012 investment dollars by crop kind is provided in table 4.3, with canola capturing the largest share at 64%. This is followed by corn with $16.5 million and then by soybeans with $9.6 million in investments23. Table 4.3 Private Sector Investment in Plant Breeding and Research 2012

Crop Kind Expenditures Expenditure Share

Share of 2015-16 Farm Cash Receipts

$ million % %

Canola $64.8 64% 0.8% Corn $16.5 16% 0.8% Soybeans $9.6 9.4% 0.4% Other oilseeds $1.3 1.2% Wheat $6.2 6.1% 0.1% Barley $1.7 1.7% 0.2% Other Cereals $0.5 0.5% 0.1% Forages $0.2 0.2% Pulse Crops $0.2 0.2% 0.0% Special Crops $0.0 0.0% Other $0.4 0.4% Total $101.3 100%

Source: CSTA and Consultants calculations

23

CSTA will have the results of their 2017 survey of members in the near future.



The last column shows the private sector investment in variety development as a percent of farm cash receipts. For corn and canola this was 0.8% of the value of the crop (average for 2015 and 2016) and 0.4% for soybeans. For crops with FSS, such as wheat, private sector investment was much lower at 0.1% to 0.2% of farm value. Across Canada approximately $180 million is spent each year on R&D and plant breeding activities, which is the $101 million of private sector investments, and an estimated $80 million in the public sector24. As an example, in western Canada for wheat and barley, public sector investment was approximately $48 million in the 2015/16 period (Table 4.4). This is prior to at universities in eastern Canada on plant breeding.

Table 4.4 Spending on Variety Development by Crop Kind (circa 2015/16)

Source: JRG Consulting Group report for Wheat and Barley Variety Development Working Group

A new cereal variety can take 12 to 15 years to reach the market. Research and development and breeding of the variety take six or seven years (see Figure 4.1 above). Pre-registration testing typically requires another three years25. Seed multiplication also requires times, especially in cereals which have low seed multiplication rates, which requires 4 generations from Breeder Seed to Certified seed. The following year commercial crop producers can plant the Certified seed.

4.2 Time and Costs for Regulatory Approvals International studies indicate that bringing a new trait based on modern breeding technologies into a newly registered variety has a cost of approximately $136 million26 (in US funds, or $170 million in Canadian dollars) per trait. As well, the time interval is in the range of 11 to 16 years. This cost per trait includes cost of complying with the regulatory systems. A 2007 study indicated that compliance costs for an herbicide resistance trait in corn ranged from $6.2 million to $14.5 million27. The $136 million of introducing a new trait is not a country specific cost to a product developer; rather this cost is spread across all of the markets and countries in which the trait will be introduced as seed, feed or food.

24

This estimate is based on approximately $1 million (on average) per plant breeder for their plant breeding program. 25

http://www.agr.gc.ca/eng/about-us/public-opinion-and-consultations/crop-variety-registration-modernization/crop-variety-registration-in-canada-issues-and-options/?id=1374783569676#a3 26

Phillips McDougall, “The cost and time involved in the discovery, development and authorization of a new biotechnology derived trait” a consultancy study for Crop Life International, Sept. 2011. 27

Kalaitzandonakes, A, J Alston, and K. Bradford, “Compliance Costs of Regulatory Approval of New Biotech Crops”, Nature Biotechnology, Vol. 25 #3, May 2007

Item Units Wheat Barley Canola Corn Soybeans

Expenditures on Variety Development $ million $46.1 $10.0 $64.8 $16.5 $9.6

Private (Via CSTA) $ million $6.2 $1.7 $64.8 $16.5 $9.6

Producer $ million $6.2 $1.4

Public (Government and Universities) $ million $33.7 $6.9

Farm cash receipts (2013 & 2014 average) $ million $5,628 $684 $7,635 $2,231 $2,337

Expenditures per 1$ of cash receipts % 0.8% 1.5% 0.8% 0.7% 0.4%

Acreage (2013 to 2015 average) million acres 22.6 6.4 20.3 3.4 4.5

Expenditures/acre $/acre $2.04 $1.57 $3.19 $4.89 $2.10

Production (2011 to 2014 average) million tonnes 27.5 7.8 15.5 12.5 5.2

Expenditure/tonne of output $/tonne $1.67 $1.27 $4.18 $1.32 $1.83

Seed purchases (sales by seed companies) $ million $181 $51 $1,219 $371 $364

Expenditures per $1 of Seed Sales (purchases) % 25.5% 19.6% 5.3% 4.4% 2.6%

Seed purchases as a % of cash receipts % 3.2% 7.4% 16.0% 16.6% 15.6%



Costs of complying with the regulatory system are typically country specific costs. The Canadian R&D costs reported in Table 4.3 include regulatory compliance costs. A product developer will introduce a variety into Canada if the anticipated rewards from the market place will exceed the costs of registering a product in Canada, which includes compliance costs. Time to reach a regulatory decision is a cost to product developers; for example an extra year until market introduction has a carrying cost of at least $ 7.0 million/year28. Within Canada there are three regulatory paths required for traits that require approval – through Seeds Act, Food and Drugs Act and Feeds Act requirements.

4.3 Modern Plant Breeding and Plants with Novel Traits A plant with novel traits (PNT) is defined as “plants into which one or more traits have been intentionally introduced, and where the introduced trait is both new to cultivated populations of the species in Canada and has a potential to affect the specific use and safety of the plant with respect to the environment and human health29”. The environmental safety review by the CFIA, under the Seeds Act, looks at the PNT and its (1) potential to become a weed or be invasive, (2) for gene flow to the wild to occur, (3) to become a plant pest, (4) to impact non-target species, and/or (5) to impact biodiversity. All plants exhibiting novel traits (e.g. new herbicide tolerances) are treated as a PNT regardless of the method of trait introduction, (e.g. by GE, mutagenesis or conventional breeding) 30 . The PNT’s incremental impact on the environment is assessed to answer the following questions: “Does the addition of novel traits change the plant’s impact on the environment in comparison to the same crop being grown in an agricultural setting?” The environmental assessment has three potential outcomes. The CFIA can (1) authorize the unconfined environmental release without any conditions; or (2) add conditions to the authorization (such as herbicide tolerance stewardship or insect resistance management requirements); or (3) could refuse to authorize the PNT on the basis that it poses an unacceptable risk to the environment. If the PNT passes the environmental impact assessment and it could be used for food and feed, it must receive authorizations from CFIA (for feed) and/or Health Canada (for food) before it is authorized for unconfined release. The developer submits data to Health Canada to demonstrate its safety as a food31. Under the Feeds Act and Regulations, “only feed ingredients that have been approved and evaluated by the Animal Feed Division may be used in livestock feeds; approved ingredients are listed in Schedules IV and V of the Feeds Regulations. Any feed ingredient that is new (i.e. not listed in the Schedules), or has been modified such that it differs from conventional parameters, is required to undergo a pre-market assessment. This concept applies to all novel feeds, including those developed through biotechnology.”32 The CFIA’s livestock feed safety assessment considers: (1) whether the plant is safe for animal consumption; (2) whether the plant is as nutritious as its conventional alternatives; and (3)

28

Based on a 5% cost of capital. 29

CFIA, “Regulatory Framework for Biotechnology-Derived Crops with Specific Focus on New Plant Breeding Techniques in Canada”, Presentation 30

ibid 31 ibid 32

Ibid



whether exposure to the plant or its products could pose a hazard to those working with it33. If the CFIA has no concerns about the feed’s safety, it will authorize it. Under Health Canada’s Food and Drug Act, “A novel food is “a food that is derived from a plant, animal or micro-organism that has been genetically modified such that the plant, animal or microorganism exhibits characteristics that were not previously observed in that plant, animal or micro-organism; the plant, animal or microorganism no longer exhibits that characteristics that were previously observed in that plant, animal or microorganism; or one or more characteristics of the plant, animal or microorganism no longer fall within the anticipated range for that plant, animal or microorganism.”34 The food safety assessment takes into account: (1) composition of the novel food compared to non-modified counterpart foods; (2) nutritional information compared to non-modified counterparts; (3) potential for introducing new toxins; and (4) potential for causing allergic reactions35. If the novel food is judged to be safe, Health Canada will notify that it has no objection to the novel food. When new lines (varieties) are developed with the same novel trait already authorized with a similar intended use, the CFIA does not require a data review before unconditional release36. Stacked events are the “result of using traditional cross-breeding techniques to combine two or more previously authorized PNT”. After a PNT is authorized, the plant can be traditionally bred to develop new varieties. Developers of new varieties with stacked traits are required to notify CFIA prior to intentionally releasing the variety to the environment. The CFIA will determine if the conditions of authorization are compatible or if more information is needed and notify the developer within 60 days.37

4.4 Economic Issues and Variety Development There are a number of economic issues associated with variety development. These include:

1. the ability of product developers to capture sufficient value through the market, on non-hybrid crops and varieties without a technology use agreement, to invest in variety development, unless subsidized by producer contributions or government funding;

2. the costs associated with time required for regulatory decisions and resulting impact on investments in plant breeding with modern technology;

3. lack of coordination among three distinct but closely related regulatory pathways for PNT (environmental, feed and food authorizations), resulting induplication of some regulatory requirements and unnecessary associated costs to product developers; and

4. unduly onerous regulatory requirements and associated costs to product developers for certain low-risk categories of PNTs

The associated impact is addressed in a subsequent Chapter that provides our assessment of the current seed system.

33

http://www.inspection.gc.ca/plants/plants-with-novel-traits/general-public/assessment-

process/eng/1338189630096/1338189929476 34

CFIA, “Regulatory Framework for Biotechnology-Derived Crops with Specific Focus on New Plant Breeding Techniques in

Canada”, Presentation 35

http://www.inspection.gc.ca/plants/plants-with-novel-traits/general-public/assessment-

process/eng/1338189630096/1338189929476 36


Canada”, Presentation 37

Id bid



4.5 Registration of Varieties Under the Seeds Act, it is illegal to sell, advertise for sale, or import unregistered varieties. Variety

registration is designed to38

:

1. maintain and improve quality standards; 2. facilitate and support the certification of seed and imports and exports of seed; 3. enable fair and accurate variety representation in markets; and 4. facilitate trait identity and traceability as well as variety identity which support trade and ensure

standards are met. There are a number of purposes of the variety registration system in Canada, such as to ensure39: (1) that agronomically inferior or non-adapted varieties are excluded from the Canadian marketplace, (2) that new varieties meet current requirements for resistance to economically important diseases, and (3) that processors and consumers have access to high quality agricultural commodities. Plant breeders apply to the Variety Registration Office (VRO) of the CFIA for registration of varieties. New varieties that are distinguishable are registered by the CFIA, and for some crop kinds registration requires that the variety meet specific standards for agronomic performance, and/or disease resistance, and merit. Varieties must meet certain criteria such as purity (and distinguishable) to be eligible for registration. PNT varieties must have been approved for unconfined release and have the appropriate approvals. The CSGA has the authority to register, with a Form 300, varieties of corn and other crop kinds not subject to variety registration in Canada. Corn, food grade soybeans, chick peas, fruits and vegetables, ornamentals and turf grass are exempt from variety registration. The variety registration system was modified in 2009 (See Table 4.5). Prior to the revisions, all crops subject to variety registration had to be tested and assessed for merit. Basic information and a fee must accompany applications for variety registration. Crops in Parts 1 and 2 must also be evaluated by a recommending committee using data from testing and will only be put forth for registration by the committee if the review is positive. In the case of Part 1 crops, the recommending committee compares the performance of the applicant variety to the attributes of a reference variety (merit assessment). The recommending committees, of which there are 18 covering forages, cereals and oilseeds, and beans and special crops, have clear roles and responsibilities. Crops in Part 3 do not undergo pre-registration testing and must supply only the basic information and fee40. Varieties derived from plants with novel traits (PNT) will not be registered until the regulatory requirements for the novelty have been met and approved by the CFIA and Health Canada. The registered variety is either unrestricted (meaning the variety can be grown legally anywhere in Canada) or restricted. There are three types of restricted registrations: interim (to handle an emergency situation such as a disease or to produce grain for market acceptance testing); regional (the variety may only be grown in certain regions of Canada); and contract (used when unrestricted registration could result in adverse effects)41.

38

http://www.agr.gc.ca/eng/about-us/public-opinion-and-consultations/crop-variety-registration-modernization/crop-variety-registration-in-canada-issues-and-options/?id=1374783569676#a3 39

As noted in a December 1, 2000 version of “Procedures for the Registration of Crop Varieties In Canada”, a document

produced by the Variety Registration Office of the CFIA. 40

http://www.inspection.gc.ca/plants/variety-registration/registration-procedures/guidance-document/eng/1411564219182/1411564268800 41

http://www.inspection.gc.ca/plants/variety-registration/registration-procedures/guidance-document/eng/1411564219182/1411564268800



Table 4.5 Current Variety Registration System

Source: http://www.inspection.gc.ca/plants/variety-registration/registration-procedures/guidance-document/eng/1411564219182/1411564268800

The US has identified Canada’s variety registration system as a non-tariff barrier, since imported product cannot be introduced into Canada unless it has been registered by the VRO, or it is exempt (e.g., corn). The USTR has recently indicated that “For many major field crops, Canada’s Seeds Act generally prohibits the sale or advertising for sale in Canada, or import into Canada, of seeds of a variety that is not registered. The purpose of variety registration is to provide government oversight to ensure that health and safety requirements are met and that information related to the identity of the variety is available to regulators in order to prevent fraud. However, there are concerns that the variety registration system is slow and cumbersome. The United States is consulting with Canada on steps to modernize and streamline Canada’s variety registration system.”42 For some crop kinds the registration requirement can limit supply and provide a guaranteed market for Certified seed produced in Canada. This barrier to entry (of imported seed) can be an opportunity costs to Canada agriculture and its impacts on yields realized by commercial growers, and resulting profitability.

42

Office of the United States Trade Representative, “2017 National Trade Estimate Report on Foreign Trade Barriers”.

Tier Requirements Crops Part 1 Basic + Pre-

Registration Testing + Merit Assessment by Recommending Committee

Barley, six-row, two-row, Bean, faba (small-seeded) Bean, field, Buckwheat, Canola, oilseed rape, rapeseed, Flax (oilseed), Lentil (grain type), Mustard, brown, oriental, Indian, Mustard, white (= yellow), Oat (grain type), Pea, field (commodity type), Rye (grain type), Tobacco (flue-cured), Triticale (grain type), Wheat, common, Wheat, durum, and Wheat, spelt

Part 2 Basic + Pre-Registration Testing

Safflower

Part 3 Basic Alfalfa (forage type), Bird's foot trefoil, Bromegrass, meadow, Bromegrass, smooth, Canarygrass, annual, Canary grass, reed, Clover, alsike, Clover, red, Clover, sweet (white blossom), Clover, sweet (yellow blossom), Clover, white, Fescue, meadow (forage type), Fescue, red (forage type), Fescue, tall (forage type), Lupin, lupine (grain and forage types), Orchardgrass, Potato (commercial production), Ryegrass, annual (forage type), Ryegrass, perennial (forage type), Soybean (oilseed), Sunflower (non-ornamental), Timothy, common (forage type), Wheatgrass, beardless, Wheatgrass, crested, Wheatgrass, intermediate, Wheatgrass, northern, Wheatgrass, pubescent, Wheatgrass, Siberian, Wheatgrass, slender, Wheatgrass, streambank, Wheatgrass, tall, Wheatgrass, western, Wildrye, Altai, Wildrye, Dahurian, and Wildrye, Russian

Basic requirements are generally informational requirements regarding the variety such as proposed name; scientific name/common name of species; pedigree, origin, history, development method, experimental test number and breeding organization; detailed description of variety (CGC must provide a statement of eligibility for wheat and triticale); indication if sold in other countries; seed stock maintenance provisions; contact information for Canadian representative; signed statement from breeder authorizing application if applicant is not the breeder; representative sample (requirements vary by crop type); further information/descriptions for hybrid/composite canola, hybrid alfalfa, hybrid tobacco, and potatoes; and identification if want optional inclusion in OECD list. Fees must also be submitted.

Pre-registration testing refers to the “results of valid experimental trials comparing the agronomic and/or quality characteristics of the variety to the performance of the appropriate reference varieties designated by the recommending committees.”

Merit: “Equal or superior to appropriate reference varieties with regard to any single characteristic or combination of characteristics that renders the variety beneficial for a particular use in a specific area of Canada.”



4.6 Economic Issues and Variety Registration The economic issues associated with variety registration include:

1. the system can limit the varieties that can be grown by crop producers; 2. the system can be considered a trade barrier and limit access to varieties grown in other

jurisdictions; The associated impact is addressed in a subsequent Chapter that provides our assessment of the current seed system.

4.7 Seed Production To provide sufficient volume of Certified seed for use by crop producers, Breeder seed (of registered varieties) needs to be multiplied by seed growers over successive generations (Select, Foundation, and Registered). In 2016, 67% of the seed acreage was used to produce certified seed, with 26% of the acreage producing Registered seed, 6.5% of acreage for Foundation seed, 0.3% of acreage produced Select seed, and less than 0.1% producing Breeder seed43. With each generation of pedigreed seed the RSEs condition the pedigreed seed and label the seed based on sampling, testing, and grading of each seed lot. Self-pollinating crops (such as wheat and soybeans) can be multiplied though each of these generations (Breeder-Select-Foundation-Registered-Certified) since they can maintain varietal purity over a number of generations. Open pollinated crop kinds (such as corn and canola) do not go through Select or Registered status, but instead go from Breeder status to Foundation and then Certified in three generations. The shortened cycle for open-pollinated crops reduces the risk of losing varietal purity and identity over subsequent generations as a result of cross-pollination. Crop kinds with high multiplication rates, where one seed can produce many hundreds and up to a thousand of next generation seeds (as with corn, canola, forage legumes and grasses) generally do not have a Select generation, while crop kinds with low multiplication rates (e.g., wheat and soybeans) do have a Select generation. Breeder seed may be repeatedly multiplied to produce additional crops of Breeder seed as long as it maintains the required varietal purity and identity. In 2016, there were 1,326,064 acres in seed production across Canada with the approximately 70% of the area in western Canada. Acreage in seed production over the last 20 years is illustrated in Figure 4.2, with acreage increasing over the last five years from a low of just over 1.0 million acres in 2011.

43

As reported by the CSGA on the 2016 crop.



Figure 4.2 Acres in Seed Production, 1997 to 2016

The CSGA reports that seed production occurred for 27 named crop kinds with 5,672 acres in a number of minor crops. The crop kind with the most acreage in seed production is wheat, with 365,045 acres in production in 201644. This is followed by soybeans, which accounts for 24% of seed production acres across Canada (see Table 4.6). Table 4.6 Acres in Pedigreed Seed Production in 2016, by Crop Kind (top 13 in acreage)

Source: CSGA

Across Canada, in 2016 there were 3,537 seed growers, with 58% (2,056 growers) in western Canada and 1,481 growers in eastern Canada. The average acreage in seed production was 500 acres in western Canada and 194 acres in eastern Canada. The number of growers has been relatively stable over the last five years. The volume of seed production is estimated to be approximately 1.6 million tonnes (see last column in Table 4.7). This volume is an average of 2015 and 2016 acreage using average yields by region as reported by Statistics Canada, with seed corn yields estimated to be 35% of commercial corn yields.

44

With 365,045 acres in wheat seed production and assuming 50% of these acres are sold as Certified seed, and with a yield of

3,000 lb./acre this results in 547.5 million lbs. of Certified seed. After accounting for exports of 50 million lbs., and with a seeding rate of 110 lbs./acre, this suggest that 4.5 million acres are planted using Certified seed, which is around 20% of commercial acreage across the country. In a following section we estimate that 22% of wheat acreage is planted with Certified seed.

Province Wheat Soybeans Barley Peas Alfalfa Canola Oats Lentils Timothy Ryegrass Flax Fescue Corn

P.E.I. 557 778 447 82 174

Nova Scotia 63 62

New Brunswick 295 286 1,396 2,075

Québec 17,771 51,332 8,714 294 14,318 50 21

Ontario 26,939 125,533 3,516 40 107 3,027 18,487

Manitoba 105,551 131,955 12,168 9,713 15,753 12,870 22,877 22,201 5,368 6,641

Saskatchewan 128,440 4,420 41,241 42,032 18,877 11,882 39,503 4,438 2,485 11,103 626

Alberta 84,789 167 50,378 39,840 46,630 50,306 7,352 3,763 12,854 550 4,589 11,631

British Columbia 640 347 667 240 2,027 150 500

International 8,388

Total 365,045 314,533 118,207 92,668 81,260 58,801 51,938 43,266 42,246 25,386 21,081 19,398 18,487



Table 4.7 Estimated Volume of Seed Production, 2015 and 2016

Crop Kind 2015 Seed Acres

2016 Seed Acres

2015 Seed Production

2016 Seed Production

Average Seed Production

acres acres tonnes tonnes tonnes

Alfalfa 69,967 81,259 84,414 133,896 109,155 Barley 111,473 118,207 158,098 188,437 173,268 Beans 3,846 3,348 3,526 2,746 3,136 Birdsfoot Trefoil 2,606 2,107 3,144 3,472 3,308 Bromegrass 6,685 9,872 8,065 16,267 12,166 Buckwheat 1,105 1,437 1,309 2,162 1,736 Canarygrass 195 550 235 906 571 Chickpea 956 2,814 697 2,119 1,408 Clover 5,870 6,106 7,082 10,061 8,572 Corn 13,692 18,484 20,911 28,230 24,571 Faba Bean 13,421 8,414 13,584 7,154 10,369 Fescue 14,501 19,398 17,495 31,964 24,729 Flax 40,017 21,081 24,302 14,509 19,406 Hemp 8,243 6,945 5,006 4,780 4,893 Hybrid Canola 44,788 50,306 31,914 39,104 39,104 Lentil 29,454 43,266 18,603 24,523 21,563 Mustard 3,126 4,122 1,177 1,953 1,953 Oats 59,965 51,938 75,693 69,263 72,478 Peas 71,144 92,252 63,367 108,312 85,840 Rapeseed 346 2,814 247 2,187 1,217 Rye 5,884 7,373 5,517 9,802 7,660 Ryegrass 24,851 25,386 29,982 41,830 35,906 Soybeans 338,769 314,533 387,524 374,405 380,965 Timothy 43,713 42,196 52,739 69,529 61,134 Triticale 3,388 3,996 4,088 6,585 5,336 Wheat 399,471 365,044 497,190 546,419 521,804 Wheatgrass 5,044 6,375 6,085 10,505 8,295 Minor Crops 3,223 5,338

Total 1,325,743 1,314,961 1,521,995 1,751,121 1,636,558

Source: CSGA acreage and consultants’ calculations

This volume of seed is for all seed, whether Select or Certified seed. Using the 67% of acreage being Certified seed, the volume of Certified seed produced can be around 1.1 million tonnes. In a following section we will compare Certified seed production with estimated usage of Certified seed. In some crop kinds, it appears that a significant volume of Certified seed may be sold, not as Certified seed, but rather as grain for use in downstream markets.

4.8 Seed Certification The seed certification system is focused on maintaining the quality of the Breeder seed stock as it is multiplied through sequential generations of seed – starting with Breeder status seed and ending with Certified seed that is sold to crop producers45. The seed certification system is designed to provide credible and authoritative information to buyers of pedigreed seed. The seed tag is a mechanism that provides quality assurance of the seed stock to a buyer. The seed certification system is a quality management system for the seed industry46.

45

There are five levels of pedigreed seed crop status, which are Breeder, Select, Foundation, Registered, and Certified. 46

The seed certification system reviewed applies to specific crop kinds, which are field crops (grains, oilseeds, pulse crops, grasses, etc.) and does not include horticultural crops.



The official tag contains the following information: the plant species and variety name, the pedigree status (Foundation, Registered, Certified) of the seed lot, the quality grade (No. 1, No. 2) reflecting the mechanical purity and percentage germination of the

seed lot, the crop certificate number of the seed lot and the lot number.

From a seed sector and CFIA perspective, the seed certification system is designed to: Provide quality assurance to seed growers, RSEs, and seed buyers; Ensure varietal identity and purity of seed as seed is multiplied through a specific, limited number

of generations; Ensure that standards for germination, seed health, and mechanical purity are part of the seed

certification system. There are many activities that are part of the seed certification system, which range from land use inspections, crop inspections, issuing of a crop certificate, sampling and testing seed, labelling seed, issuing of a seed tag, and verification of variety purity, random inspections, and an overall audit of the program. There are two main components of the seed certification system – the issuance of a crop certificate to the seed grower and the issuance of a seed tag after seed processing. Field Inspections by Licensed Seed Crop Inspectors and Issuance of a Crop Certificate Approximately 3,500 Canadian seed growers follow specific protocols established by the CSGA for the estimated 14,700 separate fields and 2,699 plots producing pedigreed seed. The first activity in the process is for growers to receive approval that a particular field is eligible for production of pedigreed seed of a given crop kind. This inspection takes into consideration standards developed by the CSGA, and includes factors such as isolation distances and previous cropping history. Seed growers then purchase pedigreed seed for multiplication, or seed companies provide them seed when the seed is grown under assignment. Hybrid seed production (e.g., corn, canola) is typically under assignment. Across Canada, in 2007 approximately 30% of the seed crop acres are assigned (under contract) to a seed company. In Ontario the percentage of assigned crop acres is higher due to hybrid seed production and the production of pedigreed seed with proprietary genetics. The seed grower, a member of CSGA, plants the pedigreed seed and follows specific production protocols as specified by the CSGA in the “Canadian Regulations and Procedures for Pedigreed Seed Crop Production: Circular 6”. The grower makes an application to the CSGA (the grower must be a CSGA member) requesting a crop inspection47 during a growth stage when varietal purity is best determined48. An authorized party (the LSCI) conducts the crop inspection and completes a “Report of Seed Crop Inspection”. Authorized parties can include second party inspections by seed company representatives on assigned seed crop production, as in the case of seed corn production49. Authorized third parties provide crop inspection services for some hybrid canola seed production. The Report of Seed Crop Inspection includes the data necessary to verify conformance with the CSGA production protocols (prior land use, isolation distances, general condition and uniformity of the crop), the seed grower’s number, the crop code, the estimated yield, the crop location and plot area, information from parent seed tags, inspection date, and name of the inspector. This data provides a necessary level of quality control for the overall quality management system.

47

Breeder and Select status seed is inspected and certified by the breeder of the variety according to standards established by the CSGA and are not subject to the same procedures as the lower generations of seed, Foundation, Registered and Certified. 48

Ideally during the flowering period or immediately before dehiscence of the anthers. 49

Approximately 97% of seed corn is inspected by the seed company.



A growing seed crop can be inspected up to three times depending on the crop kind and any issues identified in the first crop inspection. All crop inspections occur over a 6 to 8 week period during the growing season. In the 2016 crop year, 18,249 distinct seed crop inspections (this excludes seed crop inspections provided by authorized parties as in the case of corn) were provided by 323 crop inspectors

(includes LSCI and CFIA, the CFIA inspecting less than 5% of plots and less than 2.5% of acreage).

Approximately 10% of seed crops are “check inspected” by CFIA to monitor the competency of LSCI’s, and ASCIS’s are subject to annual audits (with a fouls on the quality management system). The CSGA receives a copy of the seed crop inspection report and reviews the report to determine if the crop is eligible for certification and issues a crop certificate confirming the pedigreed status of the seed crop. It is the grower’s responsibility to: Advise the local crop inspectors of crop inspection requirements; Ensure that the crop has been inspected prior to harvest; Prior to inspection, ensure that the crop meets the standards established by the CSGA; Provide the cropping history for the field for the previous five years; Carefully review the completed Report of Seed Crop Inspection for accuracy and compliance with

CSGA’s requirements; and Contact the CSGA as soon as possible, and/or call to arrange a re-inspection if necessary.

Based on crop inspections conducted by the Licensed Seed Crop Inspectors (LSCI), the grower is issued a crop certificate by the CSGA for the pedigreed name of the crop. The crop certificate is a key component of the seed certification system. Upon receipt of a crop certificate, the grower may harvest the crop following required protocols issued by the CSGA. Growers may store the crop, condition the seed crop on-site and then ship it to an RSE for packaging and labelling, or the crop may be shipped to a RSE for conditioning by the RSE prior to bagging and labelling. A seed crop entering an RSE marks the last activity in the first major component of the seed certification system, which is the issuance of a crop certificate, and is the beginning of the second major component of the seed certification system – seed conditioning, sampling testing and labelling of seed with a seed tag. Testing and Certification at Registered Seed Establishments and Issuance of a Seed Tag The second component of seed certification is seed conditioning, grading, testing, and labelling, which occurs at the 575 Approved Conditioners that are generally located in seed production areas. The seed is conditioned, sampled, tested, graded and a pedigreed grade name is applied to the lot. Labelling and sealing the seed lot with an official tag with the pedigreed grade name is the final certification step. Seed labelled as Certified seed will be sold into commercial channels and planted by farmers to produce a commodity product, and seed of Foundation or Registered status is typically planted for production of another generation of pedigreed seed. In this component of seed certification, the CSI is an important body. In 1997 the CSI was accredited as a Conformity Verification Body by the CFIA50 for:

assessment, recommendation for registration, and audit of RSEs; recommendation to the CFIA for accreditation of graders and licensing of operators; recommendation to the CFIA for annual renewal of seed laboratory accreditation.

The CSI has been given the mandate to be the single point contact for all seed establishments, seed laboratories, operators and graders seeking registration, licensing or accreditation. The CSI administers the accreditation of individuals, and the quality management and assurance systems of RSEs and seed testing labs to ensure that the activities required for seed certification and the application of an official seed tag are conducted according to approved procedures and comply with the Seed Regulations. The

50

Prior to 1997, the CFIA conducted all the activities required for the seed certification system.



CSI also conducts the on-going compliance auditing programs for the renewal of registrations of RSEs. RSE audits occur once every four years, unless non-conformance findings require more frequent audits. At the RSE, an approved sampler samples the seed crop by distinct seed lot. The sample is tested for purity and germination and the grade is determined based on the results of the testing. The sampler may be the Licensed Operator, an accredited Grader or an employee of the RSE acting under the supervision of these individuals. The activities of the Licensed Operator and accredited Grader are subject to oversight by the CSI. The seed lot is graded by an accredited grader who determines the grade based on the results of the purity and germination testing. The RSE may conduct an on-site a preliminary test for purity and germination so that the seed tags can be prepared. The results of the purity and germination testing conducted at the accredited lab are confirmation of the grade of the seed. The activities of the seed testing laboratories in Canada are subject to oversight by the CSI. The labs, once accredited, are audited by CSI at minimum once every three years or more frequently if significant non-conformities are noted. After conditioning, the seed lot is packaged, sealed, labelled and tagged with an official seed tag by an accredited grader. The seed tag provides assurance of:

the crop kind and variety, the pedigreed status of the seed (Foundation Registered, Certified); the grade which refers to a minimum standard (the Grade Tables, Schedule I to the Regulations)

mechanical purity (freedom from seeds of weeds and other crop kinds and disease propagules) and percent germination of the seed lot.

The crop certificate number and the lot number. Additional information included on the label attached to or printed on the bag may include the names of the weed and other crop species in the seed, the net weight, origin, percentages of species in a mixture and other information depending on the type of seed and the crop kind. The results of the official seed germination test are usually made available after the seed lot is sealed. Thus, if a seed lot was mis-tagged as to grade (due to germination), the seed tags must be removed and destroyed and new seed tags affixed to the packages. The seed tag is the CFIA’s official certification that the seed meets the prescribed standards. The CFIA supplies these tags to the RSEs on request at cost, either lot by lot or in larger quantities sufficient for multiple lots. The end point of this component of the seed certification system is the transfer of seed from the owner of the pedigreed seed, which has been certified, to the buyer of the seed. The official tag provides the quality assurance that the product meets the minimum standards ascribed on the tag. Seed Certification - Exports and Imports The seed certification system also includes the incremental activity associated with seed exports. All exported seed must be sampled, tested and tagged according to the standards of the importing country. Until 2008, the CFIA was solely responsible for drawing and testing the samples from export seed lots. The Authorized Exporter Program (AEP) has been recently developed, to provide options to industry for the sampling, sealing, tagging and testing of seed lots for export. Seed imported into Canada is subject to inspection by the CFIA to ensure the integrity of the Canadian agriculture industry and protect the Canadian environment. The CFIA SSTS lab in Saskatoon as well as accredited laboratories and graders inspect, test and grade imported seed to ensure that it meets minimum requirements.

Crop kinds such as tomatoes are not registered in the VRO, but must meet the standards as established in the Grade Tables of the Seed Regulations. Imported seed is subject to inspection to be in conformance with established standards.



Seed Certification and the CFIA The CFIA has the ultimate responsibility for the seed program and the seed certification system. To ensure overall integrity of the system after certification is provided at an RSE, the CFIA will randomly sample seed in the marketplace and at RSEs to monitor compliance levels over the whole seed distribution system. This includes the CFIA conducting variety verification tests (VV) on high generation seed (e.g., Foundation seed) and a specified percentage of lower generation seed (e.g., Certified seed) in the marketplace, and conducting purity and germination tests of sampled seed lots. These monitoring activities ensure that the seed certification system delivers seed that meets minimum quality standards for varietal identity, variety purity and percentage germination. A summary of the results of Variety verification testing and marketplace monitoring are provided to CFIA’s international counterparts as part of CFIA’s obligations as the designated authority for seed certification in Canada. The CFIA may conduct inspections at an RSE at any time; however in the following cases an inspection by CFIA is required:

The CSI issues a corrective action request pertaining to a critical non-conformance; A review of the CSI annual report triggers an inspection as part of the annual directed inspection

plan; A complaint or other evidence of non-compliance is received; or A RSE’s registration is suspended or cancelled.

The CFIA maintains records of all RSEs in Canada and their accredited personnel. During an RSE inspection, the CFIA inspector may take samples, verify that product meets the required standards, verify labels and records, and conduct other activities to verify compliance with the Seeds Act and Regulations. Graders are accredited by the CFIA to apply a grade to a pedigreed seed lot based on the analysis conducted by the accredited laboratory. For labs, the CFIA reviews reports and recommendations from CSI and, if appropriate, the CFIA is responsible for the subsequent:

accreditation of laboratories, analysts, and graders, licensing of operators and samplers, registration of approved conditioners, bulk storage facilities and authorized importers, authorization of Authorized Exporters, auditing of the CSI, ongoing monitoring of RSEs and accredited laboratories, and audit of the overall seed certification system.

4.9 Economic Issues and Seed Certification The economic issues associated with seed certification include:

1. the system may be too costly; 2. can alternative QA systems be used for seed certification; 3. is there need for government oversight of a QA system;

The associated impact is addressed in a subsequent Chapter that provides our assessment of the current seed system.



4.10 Use of Certified Seed by Canadian Farmers The production of Certified seed is used by Canadian farmers and sold into export markets. In some crop kinds, only a portion of commercial crop production uses Certified seed, with the remainder of the commercial acreage using common seed, with the latter being predominately FSS. For self-pollinating crop kinds with considerable acreage and where FSS is commonly used, Table 4.8 provides an estimate of the percentage of commercial acres that are planted with Certified seed. The highest usage occurs in Eastern Canada, with over 50% of wheat acreage planted with Certified seed. In western Canada, use of Certified seed can be as low as 13% as is the case with durum wheat. In a following section we will discuss the economics and impact on investment in crops with a high use of FSS. Table 4.8 Share of Acreage Using Certified Seed, by Crop Kind

Crop Kind 2012 2013 2014

Western Canada Spring wheat 19% 20% 21%

Winter Wheat 25% 37% 50% Durum 10% 16% 13% Barley 29% 29% 27% Oats 12% 17% 15% Flax 23% 31% 39% Ontario

Winter wheat 49% 48% 54% Spring wheat 89% 69% 64%

Source: CSTA (based on member survey and Statistics Canada)

Use of Certified seed in Quebec is much higher due to the requirement that any crop insured acreage must be sown with Certified seed. For estimation purposes, we have assumed that 90% of seeded acres in Quebec are planted with Certified seed. In other crop kinds, such as corn 100% of acreage is planted using Certified seed, which occurs due to hybridization of corn. For soybeans and canola, acreage seeded with Certified seed can range between 95% and 100% across Canada due to technology use agreements. The estimated value of Certified seed purchases is $2.6 billion51, with just over 50% of this occurring with the purchase of canola seed, as shown in the second column in Table 4.9. Total use of common seed is estimated at $527 million (see fourth column in Table 4.9), with the majority of this assumed to be FSS. The total value of seed used (Certified purchases, purchases of common seed and opportunity cost of FSS) is estimated to be $3.1 billion.

51

The estimate is based on the share of certified acres using CSTA data in above Table 4.8, and Certified seed acreage share ranging between 100%, and 10% based on consultant’s knowledge and/or input from industry contacts. Seeding rates are based on data supplied in OMAFRA crop budgets and Saskatchewan’s Crop Planning Guide, with Certified seed prices based on these two data sources. Common seed prices are based on a mark-up over commercial crop prices.



Table 4.9 Estimated Value of Certified Seed Use and Common Seed Use, by Crop Kind

Crop Kind Acreage (2015-2017 average)

Purchases of Certified

Seed

Distribution of Certified

Sales

Value of Common

Seed Used

Value of Seed Used by Crop

Farmers

million acres $ million % $ million $ million

Barley 6.2 $37.8 1.4% $44.5 $82.3 Beans, all dry 0.3 $6.3 0.2% $16.6 $22.9 Canary seed 0.3 $0.8 0.0% $2.5 $3.3 Canola 21.3 $1,358.5 52% $23.5 $1,382.0 Chick peas 0.1 $0.8 0.0% $2.4 $3.2 Corn for grain 3.4 $424.6 16% $0.0 $424.6 Fababeans 0.1 $2.9 0.1% $0.8 $3.7 Flaxseed 1.2 $7.9 0.3% $7.8 $15.7 Lentils 4.8 $21.6 0.8% $66.8 $88.4 Mixed grains 0.3 $2.4 0.1% $2.8 $5.1 Mustard seed 0.4 $1.9 0.1% $9.6 $11.5 Oats 3.1 $30.5 1.2% $18.2 $48.6 Peas, dry 4.0 $21.1 0.8% $64.5 $85.6 Rye 0.4 $5.6 0.2% $4.1 $9.7 Soybeans 6.1 $463.2 18% $24.0 $487.2 Sunflower seed 0.1 $2.7 0.1% $0.3 $3.0 Wheat, durum 5.7 $25.0 1.0% $74.6 $99.6 Wheat, spring 16.1 $95.2 3.6% $154.1 $249.3 Wheat, winter 1.4 $42.2 1.6% $9.9 $52.0 Tame hay 16.6 $62.1 2.4% $0.0 $62.1

Total above 91.8 $2,613.0 100% $526.9 $3,139.9 Source: Calculation using certified seed sales by region estimates, acreage by region (Using CANSIM 001-0010), seeding rates based on OMAFRA crop budgets and Crop Planning Guide 2016 and 2017 (Government of Saskatchewan), certified seed prices based on Crop planning Guide and OMAFRA crop budgets

Seed costs as a share of farm cash receipts average out at 12.4% of farm cash receipts, with this value ranging from a low of 3.5% to 4.2% (e.g., lentils and chickpeas) with corn at 21.8%.



Table 4.10 Seed Cost as a Percent of Farm Cash Receipts

Commodity FCR (2015-2016 ave)

Seed cost Seed cost as a % of FCR

$ million $ million %

Wheat, excluding durum $4,752.3 $301.3 6.3% Durum wheat $1,257.9 $99.6 7.9% Oats $482.5 $48.6 10.1% Barley $753.9 $82.3 10.9% Rye $38.2 $9.7 25.5% Flaxseed $282.1 $15.7 5.6% Canola (rapeseed) $8,630.7 $1,382.0 16.0% Soybeans $2,636.8 $487.2 18.5% Corn $1,951.0 $424.6 21.8% Mustard seed $116.4 $11.5 9.8% Sunflower seed $17.8 $3.0 16.7% Lentils $2,129.9 $88.4 4.2% Canary seed $66.2 $3.3 5.0% Dry beans $181.7 $22.9 12.6% Dry peas $1,163.8 $85.6 7.4% Chickpeas $92.8 $3.2 3.5% Forage and grass seed $105.1 $0.0 0.0% Hay and clover $497.9 $62.1 12.5% Total above $25,157.1 $3,131.1 12.4%

Source: Statistics Canada CANSIM -002-0001 and calculations

Seed costs per acre (after considering use of, and opportunity cost of, common seed) are shown in Table 4.11, with corn the highest at $125/acre and oats the lowest at $8.86/acre using common seed. Table 4.11 Estimated Per Acre Seed Cost

Crop Kind Certified Seed cost/acre

Common Seed cost/acre

$ acre $ acre Barley $20.99 $10.05 Beans, all dry $105.00 $70.00 Canary seed $19.25 $10.50 Canola $65.08 $55.11 Chick peas $40.00 $22.00 Corn for grain $125.23 Fababeans $50.00 $25.00 Flaxseed $16.80 $10.60 Lentils $30.25 $16.50 Mixed grains $41.93 $12.38 Mustard seed $45.00 $25.00 Oats $28.20 $8.86 Peas, dry $26.35 $20.15 Rye $45.25 $18.11 Soybeans $79.77 Sunflower seed $38.00 $38.00 Wheat, durum $33.47 $14.95 Wheat, spring $26.78 $12.32 Wheat, winter $55.52 $14.81 Tame hay $3.75

Source: Calculations.



The resulting acreage planted with Certified seed and with common seed is provided in Table 4.12, with 57.0 million acres planted with Certified seed and 34.8 million acres using common seed. An estimate of the volume of Certified seed and common seed used based on seeding rates is also provided, with the volume of Certified seed required being 858,863 tonnes, while common seed requirement is higher at 1,593,036 tonnes. The higher volume of common seed sown is due to higher seeding rates for cereals (e.g., 100 lbs. per acre or more) compared to crops such as canola (5 lbs./acre or corn 29 lbs./acre). Table 4.12 Estimated Volume of Certified and Common Seed Used, (2015 & 2016 average)

Crop Kind Seeding Rate

Certified Acres

Certified Seed Use

Common Acres

Common Seed Use

lbs./acre million acres tonnes million acres tonnes

Barley 120 1.8 98,010 4.4 240,913 Beans, all dry 70 0.1 1,903 0.2 7,523 Canary seed 35 0.0 666 0.2 3,775 Canola 5 20.9 47,344 0.4 966 Chick peas 100 0.0 890 0.1 5,044 Corn for grain 29 3.4 44,853 0.0 0 Fababeans 70 0.1 1,855 0.0 999 Flaxseed 40 0.5 8,559 0.7 13,387 Lentils 55 0.7 17,829 4.0 101,033 Mixed grains 100 0.1 2,547 0.2 10,076 Mustard seed 100 0.0 1,926 0.4 17,336 Oats 85 1.1 41,657 2.1 79,118 Peas, dry 155 0.8 56,270 3.2 225,080 Rye 130 0.1 7,309 0.2 13,484 Soybeans 65 5.8 171,175 0.3 8,884 Sunflower seed 4 0.1 128 0.0 14 Wheat, durum 115 0.7 38,895 5.0 260,294 Wheat, spring 100 3.6 161,259 12.5 567,298 Wheat, winter 125 0.8 43,048 0.7 37,812 Tame hay 15 16.6 112,740 0.0 0

Total above 57.0 858,863 34.8 1,593,036 Source: Consultants’ Calculations



Table 4.13 is used to compare the volume of Certified seed produced with the estimated volume planted by commercial growers. This calculation begins with the estimate of all seed produced (Table 4.7) and then uses a factor by crop kind to reflect the portion of seed produced that is Certified seed (recall than on average this is 67% across all seed acreage. Table 4.13 Comparing Estimated Certified Seed Supply to Estimated Use (2015-16 Ave.)

Crop Kind Certified Seed Use

Estimated Seed

Produced

Certified as % of all

Seed Acres

Certified Seed

Supply

Supply to Use

Surplus (Deficit)

tonnes tonnes % % tonnes

Barley 98,010 173,268 65% 112,624 115% 14,613 Beans, all dry 1,903 3,136 65% 2,038 107% 135 Canola 47,344 39,104 80% 31,283 66% (16,060) Chick peas 890 1,408 65% 915 103% 25 Corn for grain 44,853 24,571 80% 19,657 44% (25,196) Fababeans 1,855 10,369 65% 6,740 363% 4,884 Flaxseed 8,559 19,406 65% 12,614 147% 4,055 Lentils 17,829 21,563 65% 14,016 79% (3,813) Mustard seed 1,926 1,953 65% 1,269 66% (657) Oats 41,657 72,478 65% 47,111 113% 5,454 Peas, dry 56,270 85,840 65% 55,796 99% (474) Rye 7,309 7,660 65% 4,979 68% (2,330) Soybeans 171,175 380,965 65% 247,627 145% 76,452 Wheat, all 243,201 521,804 65% 339,173 139% 95,972 Tame hay 112,740 199,893 80% 159,914 142% 47,174

Total above 855,522 1,563,416 1,055,755

Source: Consultants’ Calculations (sunflower is not included) Some of the deficits can be attributed to a crop kind relying on imported seed. For example, in the case of seed corn approximately 35,000 tonnes were imported over the 2012/13 to 2015/16 period each year with exports of around 26,000 tonnes. Some canola seed is imported based on contracted seed production in South America. Some of the extra volume is overage sold into commercial grain channels by seed companies (risk of stock outs etc.)



4.11 Exports and Imports of Seed The volume and value of seed exports and imports has been increasing over the last 5 years52, with the value of exports increasing from $450 million to $700 million and the value of imports from $427 million to $637 million. Pulses had the largest value of seed exports in 2016/17 at $176.8 million (Table 4.14) which was followed by the forages and grasses segment. Corn, hemp and soybeans were the other three crop kinds in the top five exports of seed. Table 4.14 Value of Seed Exports and Imports, 2015/16 and 2016/17

Crop Kind Exports Imports Net Exports 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17

$ million $ million $ million $ million $ million $ million

Pulses $167.5 $176.8 $46.5 $38.9 $121.1 $137.9 Forages and grasses $179.9 $162.9 $85.7 $82.1 $94.2 $80.8 Corn $46.0 $103.8 $170.5 $212.2 ($124.5) ($108.4) Hemp $89.2 $101.5 $0.0 $0.0 $89.1 $101.5 Soybeans $20.6 $69.6 $9.2 $30.3 $11.3 $39.3 Rye $21.4 $20.5 $0.1 $0.2 $21.4 $20.3 Canola and rapeseed $19.8 $19.9 $72.9 $57.8 ($53.1) ($37.9) Linseed $19.5 $19.6 $13.2 $14.2 $6.3 $5.4 Oats $7.8 $8.1 $0.1 $0.1 $7.7 $7.9 Buckwheat $5.9 $6.4 $0.4 $0.0 $5.6 $6.4 Wheat and Durum $15.8 $3.5 $3.0 $3.1 $12.8 $0.4 Vegetable $2.2 $3.2 $150.5 $152.3 ($148.3) ($149.1) Barley $4.5 $2.7 $12.7 $0.2 ($8.3) $2.6 Sorghum and millet $1.1 $1.2 $0.8 $0.9 $0.3 $0.3 Sunflower $0.6 $0.8 $4.6 $6.1 ($4.0) ($5.3) Sugar beets $0.1 $0.0 $10.2 $10.5 ($10.2) ($10.4) Cotton $0.0 $0.0 $1.7 $1.4 ($1.7) ($1.4) Sweet corn $0.0 $0.0 $8.1 $8.0 ($8.1) ($8.0) Ground nuts $0.0 $0.0 $0.0 $0.0 ($0.0) ($0.0) Flower seed $0.0 $0.0 $18.3 $19.0 ($18.3) ($19.0)

Total $601.7 $700.5 $608.3 $637.3 ($6.6) $63.2 Source: Statistics Canada, CATSNET Analytics (July to June time frame) The largest value of imports was corn (at $212 million), followed by vegetables ($152 million), forages and grasses, canola, and pulses. From a net export (exports minus imports) perspective, pulses have the largest net export position ($138 million), followed by hemp ($101 million), forages and grasses ($81 million), soybeans $39 million) and rye ($20 million). The largest net import position occurred in vegetable seed (-$149 million), followed by seed corn (-$108 million), and then canola seed ($38 million). In the case of canola, seed companies use the counter season in Chile to produce seed for use in Canada. Across all crop kinds there was a $63.2 million trade surplus in 2016/17 with a small trade deficit in the prior year (at -$6.6 million) The associated volume of seed is reported in Table 4.15. In 2016/16 time frame, the largest volume of imports occurred in seed corn ((245,265 tonnes), followed by pulses (202,969 tonnes) and soybeans (103,707 tonnes). The largest volume of imports occurred with corn (59,307 tonnes), followed by soybeans and then forages and grasses.

52

Using the July to June period between 2012/13 to 2016/17.



Table 4.15 Volume of Seed Exports and Imports, 2015/16 and 2016/17

Crop Kind Exports Imports Net Exports

2015/16 2016/17 2015/16 2016/17 2015/16 2016/17

tonnes tonnes tonnes tonnes tonnes tonnes

Corn 49,957 245,265 27,115 59,307 22,842 185,958

Pulses 209,525 202,969 26,355 17,366 183,170 185,603

Soybeans 23,011 103,707 5,835 34,307 17,176 69,400

Rye 50,334 64,373 132 384 50,202 63,989

Forages and grasses 50,296 51,402 28,973 26,592 21,322 24,809

Linseed 32,483 35,091 13,092 17,090 19,391 18,001

Hemp 22,036 20,408 9 6 22,026 20,402

Oats 18,254 17,604 15 17 18,239 17,587

Buckwheat 6,389 7,017 735 17 5,654 7,000

Canola and rapeseed 4,030 6,370 11,018 10,474 (6,987) (4,103)

Barley 9,754 6,158 65,504 472 (55,750) 5,686

Wheat and Durum 42,010 4,842 3,524 3,680 38,486 1,162

Sorghum and millet 1,680 1,428 1,693 2,072 (13) (644)

Sunflower 584 761 808 4,391 (224) (3,629)

vegetable 131 96 4,624 5,328 (4,493) (5,233)

Sugar beets 48 17 150 154 (103) (137)

Cotton 0 15 3,685 3,297 (3,685) (3,281)

Sweet corn 0 0 1,616 1,713 (1,616) (1,713)

ground nuts 0 0 13 12 (13) (12)

flower seed 0 0 201 178 (201) (178)

Total 520,521 767,524 195,098 186,855 325,424 580,668

Source: Statistics Canada, CATSNET Analytics (July to June time frame)

In 2016/7, corn and pulse had similar net export volumes of just over 185,000 tonnes, followed by soybeans and rye.

4.12 Chapter Summary This chapter looked in seed system in more detail. Starting with variety development, there are approximately 219 plant breeders in Canada, with 38% in AAFC and universities and the remainder in the private sector. Canola received the largest share (36%) of total investment dollars of $180 M and this was entirely from the private sector. Wheat received the second largest share, 26%. The public sector contributed 80% of the investment in wheat plant breeding. Regulatory approval of a new trait developed by modern technology is expensive and can take 11 to 16 years. Cereal varieties can take 12 to 15 years to reach market. Plants with novel traits are assessed in terms of environmental safety (by CFIA); feed safety (by CFIA); and food safety (by Health Canada). Economic issues associated with the development of varieties are (1) limited ability to capture value on non-hybrid crops and the resulting impact on investment; (2) costs associated with the time required for regulatory approval of plants with novel traits and the impact on investment; and (3) the costs associated with separate regulatory pathways for plants with novel traits. Variety registration seeks to exclude varieties from the Canadian market with inferior agronomics; ensure that new varieties provide resistance to important diseases; and that processors and consumers have access to high quality commodities. Economic issues with the variety registration system include that it limits the varieties that can be grown and access to varieties grown in other jurisdictions; and that it has been viewed as a trade barrier by the US.



In 2016, the production of pedigreed seed occurred on 1.3 M acres with wheat accounting for 27% of these acres, followed by soybean at 24%. The seed certification system provides credible and authoritative information to buyers of pedigreed seed. Many activities are necessary to produce Certified seed, ranging from land use inspections, crop inspections, issuing of a crop certificate, sampling and testing seed, labelling seed, issuing of a seed tag, and verification of variety purity, random inspections, and an overall audit of the program. The CFIA has the ultimate responsibility for seed certification. Economic issues in the seed certification system include its cost; oversight by the government; and the potential to use alternated quality assurance systems. The Certified seed produced is used by Canadian farmers and sold into export markets, with an estimated value of $2.6 billion. In some crop kinds, such as self-replicating cereals and pulses, only a portion of commercial crop production uses Certified seed, with the remainder of the commercial acreage using common seed, with the latter being predominately FSS. The highest usage of certified seed for self-pollinating crops occurs in Eastern Canada, with over 50% of wheat acreage planted with Certified seed. In western Canada, use of Certified seed can be as low as 13% as is the case with durum wheat. In other crop kinds, such as corn 100% of acreage is planted using Certified seed, which occurs due to hybridization of corn. For soybeans corn, and canola, acreage seeded with Certified seed can range between 95% and 100% across Canada due to technology use agreements. These differences result in canola, soybean and corn combined certified seed sales accounting for 86% of total Certified seed sales of $2.6 billion. The seed supply chain for canola, corn and soybeans is rather different than the seed supply chain for cereals and pulse crops. In terms of volume of seed used each year, Certified seed accounts for 35% of the 2.45 million tonnes of seed sown each year across Canada. Canada was a net exporter of seed in 2016/17, with seed imports and exports in 2016/17 were $701 million and $637 million, respectively (which includes horticulture and floriculture), with pulse seeds having the largest net export position. This information on the seed system allows for comparison to seed system in other jurisdictions, the subject of the next Chapter, and provides the basic data on the seed system in Canada to assess the impact of possible changes to the seed system.



5.0 Seed Systems in Some Other Jurisdictions An overview on some of the seed systems elements in other jurisdictions is provided in this Chapter to allow for some comparison to Canada’s seed system. While the comparison is primarily on other countries, the Chapter begins with some information on Quebec where only acreage planted with Certified seed is eligible for government payment programs.

5.1 Use of Certified Seed in Quebec The policy framework in Quebec has the grain and oilseed market regulated through a plan managed by the Producteurs de Grains du Quebec (PGQ) under the Quebec Agricultural, food and fishing products marketing Act, with oversight of the Regie des marchés agricoles et agroalimentaires du Québec (RMAAQ), which is also referred to as the Regie. The policy framework in Quebec has an eligibility criterion, which is that insured acres must be planted using Certified seed. The eligibility requirement also applies to their income stabilization program (referred to as ASRA). The resulting market share of Certified seed acreage for wheat oats and barley is much higher in Quebec that in the rest of Canada. Over the 2007 to 2015 period, Certified seed usage occurred on 87% of oats and barley acreage, and at 93% for wheat acreage53 (see also Figure 5.1). This calculation is based on comparing acreage as reported through ASRA with planted acres as reported by Statistics Canada. The Certified seed acreage share can be higher than the values shown in Table 5.1 when either some Certified seeded acreage is not enrolled in ASRA or Statistics Canada estimates may overstate actual planted acreage. Figure 5.1 Percent of Quebec Cereal Acreage Planted Using Certified Seed

Source: Calculation by Groupe AGÉCO based on Statistics Canada and FADQ Quebec’s pedigreed seed production for soybeans is estimated to be 192% of Certified seed requirements. After accounting for production of earlier generations (e.g., Registered seed), Quebec is likely a net exporter of Certified soybean seed. On the international trade front, Quebec exports approximately 6,000 tonnes of soybean seed per annum (over the last 4 years).

53

Over this same time period, the value for corn acreage was 92% and 88% for soybeans. This methodology does not imply that some corn was seeded using FSS, rather than (1) some corn acreage is not enrolled in ASRA and/or the Statistics Canada estimate overstates actual planted corn acres.

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015Wheat Oat Barley



Quebec has 35 AC (approved conditioners) and a total of 47 RSE’s. The Quebec industry is served by a number of seed companies, with the larger seed companies including RDR Grains et Semences Inc., La Coop Fédérée and affiliated coops, Les Grains Semtech Inc., Semences Prograin Inc., SG Ceresco inc54, Synagri sec, William Houde Ltee., Réseau Agrocentre, Agrocentre Belcan, and Semican.

5.2 The United States Seed Sector In the US, seed certification is the responsibility of individual states and is handled by either (1) a Land

Grant university, (2) a department of the state, or (3) a grower association.55 At the national level, the

Federal Seed Act (FSA) is concerned about labelling, purity and prohibits the movement or importation of

misbranded or adulterated seeds. USDA’s authority is limited to seed imports that could contain noxious

weed seeds. Intellectual property protection (IPP) in provided by the Plant Variety Protection Act (PVP).

Under the PVP, a breeder can choose to prohibit sales of seed of a variety unless the seed is certified

(breeder’s choice). Applicable federal legislation applicable to the seed industry is provided below in

Table 5.1.

Table 5.1 Applicable US Seed Laws

US Seed Laws

Federal Seed Act (1939) “Requires accurate labeling and purity standards for seeds in commerce, and prohibits the importation and movement of adulterated or misbranded seeds.”

Plant Protection Act (2000)

Allows USDA “to regulate the importation of field crop, pasture and forage, or vegetable seed that may contain noxious weed seeds.”

Plant Variety Protection Act 1970 (1994 amended to include potatoes and other tubers)

“voluntary program that provides patent-like rights to breeders, developers and owners of plant varieties. The PVP gives breeders up to 25 years of exclusive control over new, distinct, uniform, and stable sexually reproduced or tuber propagated plant varieties.” “Under one option the developer of the variety or his agent protects his rights through contractual agreements and may sell either certified or uncertified seed of the variety. The other option utilizes the provision of Title V of the Federal Seed Act (FSA) often called the certification option. A variety protected under this option may be legally sold by variety name only as a class of certified seed.”56

State Laws Regulate certified seed and quality assured seed

Source: http://www.betterseed.org/resources/key-seed-legislation/ State certifying agencies are members of the Association of Official Seed Certifying Agencies, (AOSCA). “The Federal Seed Act (FSA) Regulations prescribe the requirements for seed certification in the United States. Because the FSA is a federal law, it supersedes any AOSCA certification requirements or standards. AOSCA and its member agencies may adopt more restrictive standards if warranted. State certification agencies must enforce standards and procedures that meet or exceed the standards and procedures specified in the FSA Regulations.”57 In the US, state agencies can allow the sale of quality assured seed which is different from certified seed, but which has met purity and identity standards. Some varieties protected under PVP may only have

54

In Sept 2017, the main shareholder of Semences Prograin Inc. acquired 50% of SG Ceresco Inc. 55

http://seedcert.oregonstate.edu/sites/default/files/potato/earlygenpotatoprodcert.pdf 56

https://datcp.wi.gov/Documents/BrownBagSeed.pdf 57

http://www.nd.gov/seed/field/eligibility.aspx



certified seed available for seed. “The quality assurance process includes field inspections, laboratory testing, audits of production records, and on-site evaluations of conditioning and treatment facilities. Seed that meets all requirements is eligible to be labeled with the AOSCA QA logo. Seed producers of all crop types may utilize a QA program to access a complete service for seed sold as varieties, hybrids, brands or blends. QA programs can be customized to support an existing quality management system or as part of an AOSCA program. Seed that meets the QA standards may bear a Quality Assurance label or be marked with a QA logo. Buyers of bulk quality assured seed may be provided with a QA Bulk Sales Certificate.” 58 In Minnesota, for example, quality assured oats and soybeans are available.

Certified Seed Use In the US three types of seed are sold: (1) certified seed, (2) QA seed, and (3) common/bin run seed. If the variety is unprotected, bin run seed can be sold by farmers, otherwise the sale is illegal. The International Seed Foundation’s study on royalties on wheat, placed quality assured seeds with certified seed in the US. Certified (and QA) seed use (for wheat) varies in the US with the overall average of 33%. In the Pacific Northwest, certified seed represents 85% of seed use, primarily because of the use of contracts which forbids FSS. In the Great Plains states, overall certified seed use in wheat is about 25% with states such as Colorado at 35% and Oklahoma and Texas at about 15%. In the Mississippi/Missouri river system and eastern seaboard states, certified seed use is between 50% to 60%.59 In the US, value capture for wheat is inefficient, with a capture rate of 33%. In wheat, Quality Assured (QA) seed is found primarily in the Mid-West where wheat seed is sold by brand and not by variety. For example, CPS’s wheat seed brand is Dyna-Gro and Land O’ Lakes brand is CROPLAN. There is no variety registration in the U.S. and some seed companies find that QA seed protects the confidentiality of seed more than the AOSCA’s certification process which requires information on origin and breeding process.60 In essence, these companies are relying on trade secrets. In soybeans, utility patents, patents on traits, and PVP are used to protect varietal IP. Soybean seeds protected only by PVP are small in magnitude. Most soybean seed sold is not certified but do have royalties attached. There are a very small number of varieties that are PVP but without patent protection that can be used as FSS. Protected seed represents 95% of sales. Purchased seed provides a consistent yield advantage relative to FSS. This benefit plus strong protection on seed (such as technology-use agreements) have resulted in a very low usage of FSS (5%). Royalty collection is very efficient.61 In the Midwest, the average royalty rate on Certified wheat seed is in the range of $0.30 to $0.70/bu., for publicly released varieties and can be as high as $1.50/bu. for private sector varieties. Syngenta has the three highest selling varieties in North Dakota with a royalty rate in the $1.50/bu. range. The average royalty rate on wheat in North Dakota and Minnesota is around $0.30 to/bushel for public varieties, with the royalty rate twice as high in South Dakota. North Dakota’s royalty rate on public varieties will be increasing to between $0.50 and $0.70/bushel. In the Great Plains, seed companies/seed growers raise their own seed. In the Pacific North West, cooperatives have contracts with seed growers. In the Midwest, there are specialized producers of QA seed. These producers are very large and will produce for multiple companies.

58

MCIA, “Quality Assured Seed” 59

International Seed Federation, “Collection Systems for Royalties in Wheat: An International Study”, 2012. 60

https://www.aosca.org/wp-

content/uploads/Documents//VarietyReviewBoards/Small%20Grains//2018SmallGrainVRB_WheatApplication_PartB_SAMPLE.pdf 61

International Seed Federation, “Generating Value in the Soybean Chain Through Royalty Collection: An International Study”,

2016.



North Dakota Seed Department – Seed Certification by a State Agency The North Dakota Seed Department, a state department, was established in 1931 as North Dakota’s seed certification and regulatory agency. It is a self-funded agency ($3.0 M budget) within the state government with a staff of 30 full time employees plus part-time and seasonal employees. The agency is governed by a nine-member board with agricultural organization representatives. It also has a quality assurance program for seeds not typically marketed as certified. QA programs offered are for varieties, hybrids, brands, or blends not typically sold as certified62. The agency has diagnostic and seed quality laboratories. Services for field crops (not potatoes) include:

“Establish minimum standards for genetic purity and identity. Field inspection in support of seed certification and custom programs. Evaluate, document, and verify that seed or plant products meet state certification standards. Inspection of seed conditioning plants and bulk retail facilities. Develop specialized programs related to field inspection of unique varietal traits and identity

preservation. Assist plant breeders with identification and quantification of variants useful in certification. Assist with purification of seed stock. Facilitate interstate or international transfer of seed. Develop and disseminate educational information and programs on certified seed standards. Promote certified seed industry throughout the state and region. Collect research fees on behalf of variety owners.” 63

The North Dakota Seed Department has regulatory responsibility to enforce state and federal seed laws. The regulatory component is “funded by a seed permit system that collects fees on seed sold, and by licensing non-resident seed dealers. Field staff inspects seed lots offered for sale to ensure proper labeling and compliance to state standards for purity and other quality factors.” The Identity Preserved program complies with Association of Seed Certifying Agencies (AOSCA). It also has a QA program. In North Dakota, 40% of spring wheat acres are seeded using Certified seed. The relatively high share for certified seed is because pre-treated seed saves farmers time and effort. There are 300 to 400 seed growers for cereal crops. For all field crops (cereal and oil), there are typically between 280,000 and 340,000 acres of certified seed production. Spring wheat would account for 50% of this volume.

South Dakota Seed Certification Service – Seed Certification by a University South Dakota State University is responsible for certifying all seed and propagation materials except for potatoes. The South Dakota Seed Certification Service (SCDSC) is managed by a university employee and has three full time staff supplemented by part time field inspectors. The Board of Directors is elected. Certification and production is under AOSCA procedures. The SCDSC has a quality assurance program for seeds not eligible for certification. It also has an Identity Preserved program.64

62

"The purpose of the Quality Assurance (QA) program is to provide complete service for seed merchandised as varieties, hybrids, brands or blends that are generally not marketed as certified seed. Program guidelines are very similar to certification guidelines and enable the seed producer to market seed with the assurance to each customer that the seed is of known purity and quality as verified by an unbiased third-party agency." http://www.nd.gov/seed/field/qualityassurance.aspx 63

http://www.nd.gov/seed/ 64

https://www.sdstate.edu/agronomy-horticulture-plant-science/south-dakota-seed-certification-service

http://www.nd.gov/seed/field/qualityassurance.aspx

http://www.nd.gov/seed/

https://www.sdstate.edu/agronomy-horticulture-plant-science/south-dakota-seed-certification-service



Montana – Seed Certification Delegated by a University to a Grower Association Certification of seed (excluding potatoes and mint) is the responsibility of the Montana Seed Growers Association (MSGA), a non-profit organization governed by a board of elected seed growers. Seed legislation in Montana dates from 1951. The legislation delegated responsibility for seed certification to Montana State University which in turn delegated responsibility to the MSGA. It is a member of the Association of Official Seed Certifying Agencies (AOSCA). In 2016, 98,000 acres applied for certification with 92,000 acres passing inspection.65

Minnesota – Seed Certification by a Grower Association The Minnesota Crop Improvement Association (MCIA), founded in 1903, is recognized by Minnesota Agriculture and Minnesota Agricultural Experimental Station as the official seed certification agency. As of 1997, MCIA also certifies noxious weed-free forage and mulch, and as of 2001 in an organic certifier. The not-for-profit organization which is funded by fees, has 14 full time staff and 40 part-time employees. Its 11-member board is elected from the membership (seed producers, conditioners, handlers, etc.). The MCIA provides access to varieties developed by the University of Minnesota. There are quality assurance programs for Identity Preserved grain and it will conduct third party monitoring. It is a member of AOSCA which sets minimum standards for certified seed. MCIA can also certify seed to OECD standards.66

5.3 The Dutch Seed Sector The Dutch Seed Sector Received the Highest Ranking A number of parties have indicated that the seed sector in the Netherlands does a few things right. The World Bank, in its report67 “Enabling the Business of Agriculture 2017” reviewed the seed sector across a number of countries. This review included the Netherlands, which was given the highest ranks after scoring across a number of criteria68. Scores by area were; plant breeding69 (9 out of 10), variety registration70 (7 out of 8), seed quality index71 (12 out of 12), years to register a new variety (1.5), and cost to register a new variety (13.7% of average per capita income72). The World Bank report indicated that the Netherlands, along with Uruguay, had the strongest and least burdensome regulations for plant variety protection and registries in the seed sector. The report also noted that Denmark, Italy and Spain accredited seed companies to perform their own field inspections, sampling and lab test, and labelling of seed. In the area of variety release committees (akin to recommending committees), there are more non-governmental representatives than government representatives on the committee. This report also indicated that certification processes, which are designed for seed quality, have a negative effect and impede development of the seed supply chain due to government performance, which is why there are third parties providing such services, with

65

https://mtseedgrowers.org/ 66

http://www.mncia.org/ 67

World Bank. 2017. Enabling the Business of Agriculture 2017. Washington, DC: World Bank. doi:10.1596/978-1-4648-1021-3. License:Creative Commons Attribution CC BY 3.0 IGO 68

Other countries included Spain (ranked 2nd

), Denmark (ranked 3rd

), Italy (ranked 4th

), Poland (ranked 5th

), with Uruguay (at 9th

) and Chile (at 29

th). Many of the countries were lower income countries.

69 Based on measure for (1) existence, duration and terms of plant variety protection, (2) right to license protected varieties and

availability of information on protected varieties, and (3) access to germplasm, breeder and foundation seed. 70

Based on measures for (1) legal requirements to register a new seed variety and information accessibility, including time and cost, (2) acceptance of testing data from foreign authorities, and (3) variety release committee and availability of online variety catalogue listing registered varieties. 71

Based on measures for (1) breeders’ requirement to ensure the traceability of breeding materials, (2) publicly available fee schedule for certification, (3) third-party accreditation or self-accreditation for certification activities, and (4) labeling requirements and penalties for mislabeled seed containers. 72

If per capita income is $50,000, the inference is that the cost of variety registration is $6,850 per variety.

https://mtseedgrowers.org/

http://www.mncia.org/



accreditation mechanisms. Some countries also require the national authority (for seeds) to test a minimum percentage of certified seed, with the Netherlands being an example. The Netherlands’ prominent position is the result of extensive consultation and coordination between the business community, inspection bodies, the research and education sector and policymakers73. The Netherlands is keen to share its expertise in order to support the development of strong seed sectors that can contribute to global food and nutrition security.

Position in Seed Trade The Netherlands is also a leading exporter of seed, which was valued at $1.5 billion (in US funds) in 2015, with only France and the US slightly exceeding this value, each with exports valued at $1.6 billion74. The value of exports and imports for the Dutch seed industry is shown in Table 5.2, which indicates that most of the exports (in value terms) are in vegetables, with the country being a net importer of seed for field crop production. The volume of seed imported into the Netherlands exceeds the export volume, which is in part due to the prominence of the Netherlands in importing seed for re-export. The per unit value of exports was $14.70/kg, with a $1.92/kg import value in 2015.

Table 5.2 Netherlands Trade in Seeds, 2015

Item Units Vegetable Flower Field Total

Exports $(US) million $1,221 $60 $224 $1,505 Imports $(US) million $420 $39 $311 $770 Net Exports $(US) million $801.0 $21.0 ($87.0) $735

Exports tonnes 12,364 962 89,051 102,377 Imports tonnes 13,590 1,232 386,052 400,874

Net Exports tonnes (1,226) (270) (297,001) (298,497) Source: International Seed Federation.

Dutch companies are the world’s number-one supplier of vegetable seed (40% of the world trade) and seed potatoes (60% of the world trade). Eight out of ten of the world’s largest vegetable seed companies have their main offices and/or important branches in the Netherlands75.

Seed Production and Certified Seed Usage in Field Crops The Dutch plant reproductive materials sector consists of around 300 specialised breeding and propagation companies. The sector develops new varieties, produces and trades in seeds, bulbs, tubers, cuttings and young plants for agriculture, vegetable horticulture and ornamental horticulture. Around 10,000 people work in this sector in the Netherlands. The annual turnover in the Dutch seed industry has been estimated at € 2.2 billion ($3.3 billion in Canadian funds). For cereals and potatoes seed the sales value was € 0.362 billion ($543 million) in 200976. The sector of plant reproductive materials is one of the most profitable sectors of the Dutch agricultural chain77. The area in seed production for field crops inspected is reported in Table 5.3.

73

AgroNews “The Dutch Seed Sector – An Overview”, Aug. 16, 2017. 74

International Seed Federation. 75

Kamphuis, B.M. (2005), The seed sector in the Netherlands. An overview of production, trade and related institutions. Report 5.05.09. Agricultural Economics Research Institute (LEI), The Hague. pp. 19-21. 76

Plantum, “Presentation on “Farmer Saved Seed; Dutch Implementation”, (2016) by Daniel Ende 77

The Netherlands, an international leader the economic value of the sector, Plantum factsheet.



Table 5.3 Area in Seed Production in the Netherlands (for field crops)

Cop Kind 2005 2015 2016 hectares

Potatoes 35,645 38,960 40,180

Grasses and forages 27,639 13,511 13,321

Cereals 4,951 4,293 4,024

Flax 3,790 1,799 1,805

Pulses 94 138 90

Oilseeds 38 805 494

Above total 72,157 59,506 59,914 Source: European Seed Certification Agencies Association

Potato seed production has the largest acreage at 99,245 acres (40,180 ha.) in 2016, followed by grasses and forages and then cereals. In the cereals complex, soft wheat has the largest production base with 2,642 ha of soft winter wheat and 478 ha of soft spring wheat. As in the EU, in the Netherlands seed certification is based on first and second party inspection, with third party oversight (such as government or a body with delegated authority). In the case of cereals in the Netherlands, a decade ago FSS ranged between 26% and 33% of acres for winter wheat, and between 40% and 68% for winter barley (over the 2004 to 2007 period)78. Recently FSS use has decreased with cereal crops acreage planted with Certified seed being just above 80%.

Policy Framework for the Seed Sector The Dutch government is proactive in providing a supportive policy framework. Overall regulation of the seed sector is through79:

Netherlands Food and Consumer Product Safety Authority (NVWA), which partly operates under the Ministry of Health, Welfare and Sport (with regard to food and product safety issues) and the Ministry of Economic Affairs and the Directorate-General for Agriculture and Rural Development (with regard to phytosanitary issues, veterinary inspections and certification, and also partly food safety issues);

Plant Protection Service section of the NVWA. Board for the Authorisation of Pesticides and Biocides;

Seed Sector Representation Through Plantum NL Plantum is the Dutch association for the seed sector and more generally for the larger plant reproduction material sector. The 350 members of Plantum are active in breeding, propagation, production and trade of seeds, bulbs, tubers, cuttings and young plants80. The association was founded in 2001 as a successor of different organisations: the Dutch Association of Plant Breeders (NVP), the Dutch Association for Seed and Plant Material (NVZP), the department of propagating material of the Association of Wholesalers of Floriculture Products (VGB) and CIOPORA Netherlands (a branch of the International Community of Breeders of Asexually Reproduced Ornamental and Fruit-Tree Varieties). Plantum is an association with members and a secretariat. Plantum represents and promotes the interests of its members and, on behalf of the sector, acts as a discussion partner with government bodies and interest groups. Plantum’s focus is on consolidating the competitive position of the sector and

78

Community Plant Variety Office, Angers, France “Study on Farm Saved seed in the European Union, (December 2008 and updated

27/05/2009) prepared by Hans Walter Rutz 79

Agricultural law in The Netherlands: overview, by Jan Holthuis and Marc van der Velden Buren N.V. 80

Information compiled from the Plantum representatives and the Plantum website.



of the groups of affiliated members on an international level. Plantum also initiates new developments and serves as a source of information for companies. Plantum enjoys broad national and international recognition as an authority and expert proponent of the interests of the plant reproduction material sector in the Netherlands. The not-for-profit trade association is comprised of a governing board, standing committees and departments for seeds for agricultural field crops, vegetable seeds, vegetable plants, and ornamentals. The Agriculture department, which covers field crops (e.g., cereals and seed potatoes) has approximately 130 companies active in breeding, propagation and trade in agricultural seeds and seed potatoes. The Agriculture department covers the following crop groups: (1) potatoes, (2) grains, seeds and pulses, (3) corn (maize), (4) sugar beets, and (5) forages (fodder plants). Many member seed companies are active internationally, with breeding and production occurring in various global locations. The Agriculture department also collects royalties on FSS (discussed in a following sub-section). This department is also responsible for agreeing with inspection regulations (as carried out by NAK, the certifying body), and actively participates in various boards and committees (e.g., NAK). Many of the members also play an active role in crop groups and technical committees.

Variety Development and Introduction of New Varieties In cereals, most varieties grown in the Netherlands have been developed by private sector seed companies, with most of these product developers headquartered outside of the country. New varieties must be Distinct, Uniform, and Stable (DUS). The DUS comparison trials are performed by NAK81 for agricultural crops. In addition, new varieties are tested with regard to agricultural performance and whether they are an improvement over existing varieties, through a Value for Cultivation and Use (VCU) test that investigates the agricultural value of a new variety. The VCU trials are conducted by authorized (and independent) research institutes82 - for cereals this is Wageningen Plant Research. A variety must be traded under the correct variety name, with the identity of a variety well described. After DUS and VCU requirements are met, the variety is included on the national list, the Dutch List of Varieties of the Board for Plant Varieties. This is followed by automatic listing in the European Common Catalogue. Vegetables and agricultural crops may only be marketed if they have been listed in the European Common Catalogue. Once a variety is on the national list, it can be considered for admission to the Recommended List (this last does not apply to potatoes), after a recommendation test. The Recommended List is published by CSAR (the Dutch commission which decides on admitting varieties to the recommended list). Upon acceptance, plant breeders rights are obtained (for up to 25 years) on the new variety. The conditions that apply to the marketing and trading of seeds are anchored in the European trade directives. These directives are provided for in the Netherlands by the Dutch seeds and planting materials act 2005. The act places conditions at variety and production levels.

Plant Breeders Rights in the Netherlands Plant Breeders' Rights can be obtained for each variety of plant that is Distinct, Uniform and Stable (DUS), based on DUS testing. The application for inclusion in the Dutch national list can be combined with an application for national Plant Breeders' Rights. A variety must also be new and have an approved name. Dutch Plant Breeders' Rights is regulated in the Dutch Seeds and Planting Materials Act. Rights are granted by the Board for Plant Varieties, which are listed on the Board’s website.

81

NAK is a certifying body, which is covered in a following sub-section. 82

Kamphuis, B.M. (2005), The seed sector in the Netherlands. An overview of production, trade and related institutions. Report

5.05.09. Agricultural Economics Research Institute (LEI), The Hague



EU Community Plant Variety Rights has been in force since 1994, which allows a Plant Breeders' Right holder to obtain the rights in all the member states of the EU with a single application. Applications for European Plant Breeders' Rights can be submitted to the Community Plant Variety Office (CPVO). The website of the CPVO lists all the varieties which are protected by European Plant Breeders' Rights. A variety can either be protected by national or by European Plant Breeders' Right. Plant Breeders' Rights grant the Plant Breeders' Rights holder the exclusive right to matters including the production and reproduction of the plant variety. There are a few exceptions to this right, such as breeders' exemption and farmers' privilege. The breeders' exemption allows plant breeders to freely use protected varieties for the development and exploitation of new varieties and is important for continuing innovation in plant breeding. Farmer's privilege (the right of a grower to plant FSS within their operation) applies. This privilege only applies to crops in sectors in which the use of own seeds and seed materials is allowed and is restricted to potatoes and cereals in the Netherlands. In the Netherlands, the grower must (1) inform the PVR holder of the details of his company and the use of the seeds and seed materials, and (2) pay a reasonable licence fee for the use of the harvested materials (in general, 60% of the licence fee that is due in trade for use of that variety is considered reasonable)83. In the EU a trademark can be used to indicate the origin of the product, which can be a company name or a commercial name used to market a variety or series of varieties. The actual variety name cannot be used; variety names are used to indicate the plant material. However, variety names and brand names can be used together. A trademark can be applied for covering the Benelux countries, for the EU (Community Trade Mark) or for many different countries by submitting an international application. The trademark right is valid for 10 years and can be renewed repeatedly. In Europe, patents cannot be obtained for individual plant varieties or organic methods. However, a patent can be obtained for traits or methods, and the claim can extend to varieties of plants.

NAK – the Dutch General Inspection Service for Agricultural Seed and Seed Potatoes Given the diversity of agriculture and horticulture in the Netherlands, there are three distinct bodies responsible for seed (plant reproduction material) inspection and certification:

for agricultural crops it is the General Inspection Service for Agricultural Seed and Seed Potatoes (NAK84);

for the horticulture it is the Netherlands Inspection Service for Horticulture (Naktuinbouw); and, for flower bulbs it is the Flower Bulb Inspection Service (BKD).

NAK was founded in 1932, is an independent non-profit organisation, and is the only seed certifying body for grains and oilseeds (and sugar beets, potatoes) – essentially field crops. The NAK board has representatives of the sector and includes breeders, growers, traders and users of seed potatoes and seed. NAK has been appointed by the Minister of Economic Affairs, Agriculture and Innovation to perform the official seed inspection and seed certification in the Netherlands. NAK also carries out phytosanitary inspections and issues the plant passport as well as phytosanitary certificates on behalf of the Netherlands Food and Consumer Product Safety Authority (NVWA). The NAK has an advanced laboratory, a research department, and a testing and an inspection company. NAK has over 220 employees and around 150 seasonal employees (in the June-October period)85. Every year around 21,000 hectares of grass seed, grains and other crops are inspected.

83

Ibid 84

NAK stands for 'Nederlandse Algemene Kwaliteitsdienst', the Netherlands General Inspection Service for Agricultural Seeds

and Seed Potatoes.



NAK ensures that the propagating material meets the set requirements. During the field inspection, the crops are assessed for varietal identity, varietal purity, weeds, and mixing. The seed analysis provides information about the germination power, the purity, the moisture content and the health of the seed. Some seed companies carry out the quality assessment of the seed itself (recognized companies). NAK provides necessary oversight of these recognized companies by means of control samples, check tests and expertise assessments. The main aim of the inspection service is to guarantee the quality of the seed material for the farmers in the Netherlands and abroad, with Dutch seed and seed potatoes eligible for a NAK label only after thorough inspection. The inspection requirements are among the most stringent in the world. The arable crop sector imposes these stringent requirements, higher than the minimum statutory requirements, on itself in order to strengthen its position on domestic and foreign markets. The inspection process includes field and laboratory inspections. All multiplication fields are inspected. Part of the crops, especially basic seed potatoes, are submitted to extra inspection on possible viral infections in the laboratory, the so-called 'post-harvest control'. After that, lot inspections are carried out for diseases and external defects. If the lot is approved, certification follows. Only certified seed is allowed to be marketed. The inspection of seed is also subdivided into field inspection and lot inspection. In the field, the inspector assesses the crop on identity, variety purity and admixtures. This is followed by an analysis of germination capacity, purity and health in the NAK laboratory. If the seed meets the requirements, it is eligible for the NAK label and can be marketed under that label. The Dutch Plant Health Directive requires the varieties to have a "plant passport", in order to sell the crop seeds in the EU. A plant passport for agricultural (field) crops is provided by the NAK. A plant passport proves that the plant varieties comply with all relevant phytosanitary requirements applicable in the EU, and will be issued if the plant varieties:

Are free of the harmful organisms referred to in Annex I, Part A of the Plant Health Directive. Are free of the organisms referred to in Annex II, Part A of the Plant Health Directive. Comply with all the special requirements in Annex IV, Part A, Section II of the Plant Health

Directive. NAK has extensive facilities at its disposal to carry out the inspection of seed and seed potatoes in an efficient and reliable way, including laboratories and a trial and control farm. A substantial part of the inspections of NAK is carried out by its subsidiary NAK AGRO. NAK AGRO inspects crops in the field and the accompanying production monitoring system. It also inspects for product quality, processing and chain agreements. NAK AGRO follows an efficient approach; it only requires one visit of one inspector to carry out checks for the various labels/crops (potatoes, sugar beet, vegetables, grain). NAK AGRO inspects for EUREGAP, food safety and the environmental quality label. In addition, it carries out soil and crop analyses, for example, on nematodes, brown and ring rot and Erwinia, a bacterial disease in potatoes. The laboratory also carries out purity analyses of arable seed and VCU tests for potatoes. Parties that meet all the required standards are certified by NAK. Each packaging unit is provided with a NAK certificate. It is also possible to have an analysis of (seed) seeds carried out by the NAK on a voluntary basis. The NAK carries out this work according to the specifications of the client or according to internationally recognized regulations, such as those of the ISTA.

85

The following information was assembled based on the NAK website (www.nak.nl)

http://www.nak.nl/



NAK is also responsible for drafting the inspection and certification regulations. Standing committees of NAK have a role in establishing regulations for inspection and testing. These committees have representation of growers, breeders, propagators and traders. These regulations are published in the 'Keuringsreglement' and 'Aanwijzingen' (also posted on the NAK website). The cost of NAK’s inspection and certification services are paid for by industry, with inspections supported by the sector. NAK’s quality standards can meet the strictest requirements demanded by any country. This system, in which the agricultural sector formulates its own standards in compliance with the relevant national and international rules and regulations, results in a market responsive Netherlands seed sector that is industry led and government enabled. One can argue that this situation is supportive of its competitive position in the global seed sector.

Dutch Plant Protection Service and Protection at the Boarder

Given the importance of international trade to the Dutch seed sector, considerable emphasis is placed on preventing the introduction of unwanted plant pests and diseases in the Netherlands86. The Dutch Plant Protection Service (PD) - Plantenziektenkundige Dienst in Dutch) is an executive agency of the Dutch Ministry of Agriculture, Nature and Food Quality. The main objective of the Plant Protection Service is to safeguard and promote plant health from an international perspective. Principle elements of this policy are preventing the introduction and spread of quarantine pests and diseases of plants and plant products, and assisting in managing and controlling such organisms order to be conducive to plant health. Living plants and plant products originating from countries outside the European Union are submitted to import inspection(s) by the PD in order to prevent introduction of unwanted organisms as stipulated in national and EU regulations. In co-operation and under supervision of PD, phytosanitary inspections are conducted by entities such as NAK, which are required for plant passport. A phytosanitary certificate is required for trading propagating material in the EU. Consignments of living plants and plant products destined for countries outside the EU are submitted to export inspection(s) by the PD. These inspections are carried out on the basis of worldwide accepted principles which have been laid down in the International Plant Protection Convention, with products needing to also meet the phytosanitary requirements of importing countries.

Royalty Collection on Farmer Saved Seed in the Netherlands87

Use of certified seed in cereal crops is high in the Netherlands, which is likely over 80% today; with this measure based on FSS being estimated to be 18% in 201688 which compares to a 2008 estimate of 28%.89 The reduction in FSS over time is in part due to improved yields with newly introduced varieties. Royalties are collected on the FSS, with royalty rates at 65%. Dutch PBR legislation has the minimum FSS royalty rate set at 60% of the normal license90 for the certified variety; however an agreement was reached with the Dutch Farmers Union for the FSS royalty rate to be established at 65% for cereals (60% for seed potatoes). For cereals, these FSS rates range between € 4.75 per 100 kg to € 6.00/100 kg, which translates to $1.60 to $2.00 per 50 lb. unit in Canada (using a currency factor of $1.50/€1.00).

86

Parts of the section are based on Kamphuis, B.M. (2005), The seed sector in the Netherlands. An overview of production, trade and related institutions. Report 5.05.09. Agricultural Economics Research Institute (LEI), The Hague 87

This section is based on a Plantum presentation on “Farmer Saved Seed; Dutch Implementation”, (2016) by Daniel Ende, and an interview with Plantum staff. 88

Plantum, “Presentation on “Farmer Saved Seed; Dutch Implementation”, (2016) by Daniel Ende 89

Community Plant Variety Office, Angers, France “Study on Farm Saved seed in the European Union, (December 2008 and updated 27/05/2009) prepared by Hans Walter Rutz 90

Unless established by agreement in a member country, the EU PBR regulation has a FSS royalty rate of 50%



An observation can be made that the royalty differential between FSS and Certified seed can be under $1.50 per bag of seed, which is much narrower than the price differential in Canada between FSS and Certified seed. In general, the wider the price differential between FSS and Certified seed, the higher the use of FSS (lower Certified use). In the Netherlands, with an apparent rather narrow price differential, this lessens any incentive a farmer may have to use FSS. The EU PBR Regulation 2100/94 indicates that the breeder has the right to ask the farmer for information on FSS. In the Netherlands, PBR Law 2005 indicates that a farmer may use his harvested seed on his own holding (farm operation), under the condition that the plant breeder is informed of such use prior to May 15th of the year of harvest. This feature of placing an obligation on farmers to declare use of FSS assists in royalty collection – in contrast German regulation requires the plant breeder to determine whether a farmer is using FSS. Plantum NL has the responsibility for royalty collection on FSS. A total of 28 breeders, representing more than 400 varieties of cereals and potatoes) have authorized Plantum NL to collect their FSS royalties. Each year Plantum sends all farmers a declaration form and the farmer declares the following (either on-line using a personalized security code or paper based):

name and address of the farm holding; variety names of the FSS; amount of FSS planted (in kgs); area (hectares) planted with FSS; total farm land base.

Farmers who have used FSS are obligated to provide the information, and farmers who did not use FSS are requested to provide their information, which indicates they did not use FSS and their farm size. In 2015, just under 11,000 farmers received a declaration form from Plantum, with just under 8,000 responding, and just under 1,500 farmers declared use of FSS (which is 18% of respondents). The non-respondents can be farmers that did not use FSS (since they are only requested to provide the information), or by users of FSS that decided to not declare. Plantum invoices the farmers based on their declarations, with the exception when a grower has a direct contract with a breeder. The total land base is captured on the declaration since farms that have a total land area of less than 15 hectares are not invoiced for the FSS royalty91. In the event that a farmer does not provide a declaration by May 15th, the breeder has the right to take legal (civil) action against the farmer; there are not many cases sought by the breeder. However, if it is known that a farmer is using FSS over a number of years and has not paid the royalty legal action has been taken. For farmers that have not declared by May 15th, they have the option in following months to declare and provide the appropriate royalty payment as part of the declaration. Administration of the system is information technology based. Some administrative issues include; (1) some farmers not reporting FSS, (2) data entry errors at the farm level; and (3) some farmers not providing the correct information on FSS volumes. One administrative issue is the definition of “own holding” and whether that applies to the home farm, or to all plots of land under the control of a farm operation. This becomes an issue in the event that a separate plot of land is operating by a subsidiary and whether this violates the spirit of FSS “for own” use and is a way to create a market in FSS transactions. Breeders are relatively satisfied with how the FSS royalty system operates within the Netherlands; however, a more harmonized approach with other EU countries would help Dutch breeders capture

91

In Dutch law there is no small farmer exemption.



royalties on their FSS varieties in other countries (e.g., Germany). Dutch farmers are accepting of the system, particularly with the low compliance costs associated with the declarations and invoicing.

Elements for Consideration by the Canadian Seed Sector This overview of the Dutch seed sector suggested that there are some system features which could be considered by the Canadian sector. These can include:

an industry lead sector, which is enabled by government; one organization that represents all members of the seed sector, such as Plantum; one organization that focuses on its area of responsibility of seed certification, such as NAK; having the commodity supply chain provide input on necessary standards and regulations; royalty collection on FSS based on mandatory declaration by the farmer; royalty rates on FSS that are at least 60% of the license fee on the Certified variety;

5.4 The Seed Sector in France France is a leading exporter of seed, with $(US) 1.6 billion in seed exports in 2015, with $(US) 1.2 billion of this volume in field crop seed exports92. More than half of this export volume is associated with corn (maize) and sunflowers. Within field crops the second largest seed exporter is the U.S., with $(US) 901 million in exports, followed by Germany with $(US) 577 million. Canada was the fifth largest exporter of seeds for field crops) with a value of $(US) 280 million in 2015. While corn is the largest seed export for France, there are more seed acres in wheat production than in corn. Table 5.4 indicates that in 2016, 25% of seed production area was devoted to wheat (excluding durum) with 218,986 acres. Corn’s acreage share was 19% followed by barley at 10%. The eight crop kinds reported in Table 5.4 accounted for 77% of France’s seed acreage. With much of our focus on cereals and pulses, versus hybrid crops, the following discussion of the seed system in France will focus on cereals, with wheat in particular93. Table 5.4 Seed Acreage in France, Top Crop Kinds, 2016

Cop Kind 2016 acres Share

Wheat 218,986 25%

Corn (maize) 162,877 19%

Barley 85,974 10%

Potatoes 46,838 5%

Lucerne/Alfalfa 46,424 5%

Flax 43,363 5%

Sunflower 33,529 4%

Durum 31,775 4%

Total seed acres 867,870 Source: European Seed Certification Agencies Association

92

Source: International Seed Federation 93

The information sources for the following sections are from the JRG Consulting Group report for Wheat and Barley Variety Development Working Group and Giovanoli, S, “Farm Saved Seed (FSS) and Royalty Generation for Wheat in France, United Kingdom, and Australia – Policy Implications for Canada”, Master’s Thesis, University of Saskatchewan, (2014).



Wheat Breeding in France The wheat breeding industry in France is characterized by mixture of public, private and producer organizations, operating in a well-financed, well-coordinated research system. Wheat breeding is largely a private activity, while pre-breeding is a public activity with some private and producer participation. The Institute National de la Recherché Agronomique (INRA94), and Universities undertake basic research and some applied research. INRA does much of the pre-breeding in variety development in France. As well, the Breedwheat consortium and the Cereal Valley cluster95 also participate in pre-breeding activities. The private sector, through these consortiums, recognizes the importance of pre-breeding activities. Producers have limited involvement in wheat breeding in Europe, with the important exception of Limagrain headquartered in France, a very large successful producer owned cooperative. INRA does much of the pre-breeding in variety development in France. As well, the Breedwheat consortium and the Cereal Valley cluster also participate in pre-breeding activities. The private sector, through these consortiums, recognizes the importance of pre-breeding activities. INRA was established in 1946 with the goal of “feeding France” focusing on farm production methods, crop and animal breeding. Over time, the research scope broadened to include food processing, biotechnology, environmental sustainability and the science has shifted to upstream research to support private breeding and applied research sector. In the last decade INRA has developed a wheat genomics program with the goal of supporting wheat breeding. It is now a very large agricultural research institution. At the end of 2012 INRA employed nearly 8,500 permanent staff in 18 regional centres, 13 scientific divisions and 6 metaprogrammes and had a budget of € 881 million. INRA also ranks second in the world (behind USDA) in citations for publications in agricultural science96. INRA has approximately 200 permanent staff involved in wheat related research. This is made up of about 20 scientists and 180 technicians and an overall personnel and overhead cost of 20 million Euro per year (Feuillet, 2013). These resources make INRA France’s dominant institution in pre-breeding research and put it in a lead position to collaborate with the private sector and international partners in wheat research projects. France also has a public institution called Agri-Obtentions that is responsible for commercializing crop varieties produced by INRA. INRA undertakes applied breeding in crops where the private sector does not operate, which includes wheat varieties suitable for organic production. Agri-Obtentions is a crown corporation with a specific role of commercializing new varieties which includes variety testing, variety registration, and working with the seed industry for commercialization. Limagrain is the dominant seed company in France and has grown to be the fourth largest firm (by seed sales) in the world and now operates in 39 countries. Limagrain’s wheat variety Apache has been a dominant wheat variety in France for almost a decade reaching a peak market share of nearly 60 percent. Limagrain has an important international presence in vegetable seeds. In wheat, Limagrain operates breeding enterprises in many other countries, such as Brazil, Australia and the United States, and within a number of other European countries. In 2015 Limagrain entered into a research and breeding partnership between Canterra Seeds for wheat variety development in western Canada. Despite is very large size, Limagrain is a producer owned cooperative, with 2,000 farmer97 members from the Auvergne region of France electing the 18 farmer board members. The organization, which operates for the long run profitability of its members, has made many strategic investments and acquisitions since

94

Or National Institute for Agricultural Research 95

Céréales Vallée began in 2005 when IRNA, Limagrain, and the Agence Nationale Researche (ANR), answered a call for proposal by Les pôles de Compétitivité and proposed a cluster to enhance the competiveness of the cereal sector in France. 96

(http://institut.inra.fr/en/Overview/Figures2). 97

Only active farmers in the Auvergne region are eligible to be members of Limagrain. When farmer members retire or sell their land, their Limagrain shares are returned to the cooperative.

http://institut.inra.fr/en/Overview/Figures2



it began in 1964. Limagrain profited from a hybrid corn variety that had 40% of the French market for many years. The farmer board members also typically serve on the board of directors in the many joint ventures of Limagrain. Limagrain has always been quick to build partnerships when it can see value in doing so. This openness allowed Limagrain to have a very close partnership with INRA and ARVALIS98 over time. As the largest firm in the industry, Limagrain has been influential in developing a broad industry approach to development. As a founding member of Cereals Valley, Limagrain was proactive in expanding what had largely been its own public partnerships to create the research cluster and the multiyear BreedWheat genomics project.

Organizations in the France’s Seed Sector There are a number of organizations that are part of France’s seed system, which is illustrated in Figure 5.2. A short description is provided on each of these organizations and their role in the seed system is outline din following sections. SICASOV refers to the Société Coopérative d’Intérêt Agricole des Sélectionneurs Obtenteurs de Variétés Végétales, which is a cooperative owned by plant breeders that enforces IPRs and collects Certified seed royalties from seed growers. Figure 5.2 Organization of France’s Seed Sector

Source: European Seed Certification Agencies Association

GNIS refers Groupement National Interprofessionnel des Semences et plants, a national association representing plant breeders created in 1999 that has the responsibility of seed certification, verification, licensing growers and inspecting seed production in France. GNIS also has responsibility for collection of FSS royalties and distribution of the 85% of FSS royalties (along with SICASOV) back to breeders based on varieties grown. GNIS has representatives that include plant breeding, seed production, seed

98

ARVALIS is a technical institute that serves farmers.



distribution, farming and other interested parties. Changes to the system proposed by GNIS are submitted to the Ministry of Agriculture for official approval. SOC is the Service Officiel de Contrôle et de Certification (Official Service for Seed Control and Certification) and is the official regulatory body within GNIS that has responsibility for official seed certification in France. ONPV now referred to as the National Plant Protection Organization (NPPO) is the national plant protection authority within the Ministry of Agriculture, and has responsibility to: monitor plant production health; combat health dangers affecting plants, particularly regulated or emerging pests; guide plant selection according to expectations and guarantee of seed health quality; authorize and inspect material inputs, phytopharmaceuticals, fertilizers, crop supports and genetically modified plants, and monitor their environmental impact; inspect plant imports and certify exports; monitor forest health and support health managers; and guarantee health at the primary plant production stage. CTPS refers to the Technical Standing Committee for Breeding that provides recommendation to the Agriculture ministry for listing of a variety in France. GEVES refers to the group for the study of varieties and seed testing which provides the results for DUS and/or VCU on varieties proposed for listing. CPOV is the Office for plant variety protection in France. CPVO is the EU’s Community Plant Variety Office

Variety listing Seeds of agricultural and vegetable species can be marketed only if they are listed on an official catalogue from a Member State of EU. In France, a variety can be listed after a decision from the ministry in charge of Agriculture (published in the Official Journal). The ministry relies on the recommendation from the CTPS (Technical Standing Committee for Breeding) and the results of DUS and/or VCU tests realised by GEVES (Group for the study of varieties and seed testing).

Seed Certification The Agriculture ministry has delegated responsibility over the control and certification of seeds of agricultural and vegetables species to SOC (Official Service for Seed Control and Certification), which is the technical service division of GNIS (a national association that represents the sector in France). Seed certification in France complies with the OECD Seed Scheme. Each bag of seed has a blue label which contains the seed's pedigree and history. This label is issued to the seed producer under the authority of the SOC.

Royalties on Pedigreed Seed Collected From Seed Growers SICASOV the cooperative owned by plant breeders, enforces IPRs and collects Certified seed royalties from seed growers. SICASOV operates on a “declarative system” based on forms sent to seed growers. Each year seed growers apply to SICASOV for license agreements to grow certified seed indicating the variety and area of seed crops they wish to produce. Based on this information, SICASOV sends invoices to seed growers who declare the quantity of seed produced and remit royalties to SICASOV. SICASOV collects these seed royalties on behalf of breeders (ISF, 2012) and pays for this expense. Seed growers have the incentive to accurately declare their seed production because GNIS is in charge of seed inspection and shares seed certification data with SICASOV, which makes it easy for SICASOV to detect any miss-declaration.

SICASOV also sets the certified seed royalty rate. In the case of wheat, the above information indicates that farmers who bought Certified seed pay a common royalty rate in the Certified seed price of €78.40/



tonne ($0.1176/kg) a common royalty rate across all wheat varieties. The royalty rate is established by the plant breeder organization SICASOV. This royalty is collected by SICASOV directly from seed growers. Farmers that purchased Certified seed can apply and receive a refund of € 28.00 per tonne ($0.042/kg) of purchased seed to offset some of the EPR applicable on wheat sales.

Royalties on Farmer Output Collected Through an EPR Currently, approximately 61% of wheat acreage is planted using Certified seed99, which has increased from the estimated 55% share100 in 2012. The EPR system used in France was established in July 2001 after an extended course of discussion among farmers, breeders and the government. The royalties are collected via an EPR known as Contribution Volontaire Obligatoire, (CVO), with a value 0.70€, (approximately $1.05) per tonne of output. This EPR rate is a uniform rate applied across all varieties. The CVO is charged on the sale of all bread wheat at the time of delivery to a marketer. Once CVO is collected, “small farmers” who produce less than 92 tonnes (estimated to be less than 10% of all farms) can apply for a full rebate of the royalty. The EPR (or CVO) was originally only applicable to bread wheat, and in 2012 the royalty on FSS was extended to other cereals (e.g., barley and oats), potatoes and forages. After these rebates are paid, 85% of the money raised by the levy is submitted to a property rights management organization for plant breeders ‘Groupement National Interprofessionnel des Semences et des plants’ (GNIS). This organization works with SICASOV to allocate the royalties to breeders in proportion to each variety’s individual share of certified seed sales. The remaining 15% of the money raised by the CVO is used to support public wheat research101. These funds are directed to FSOV (Fonds de Soutien a l’Obtention Végétale en blé tender) the French research support fund for wheat. The cost of administration is 2% for FSS.

Royalties on Wheat Table 5.5 summarizes the royalty structure on wheat, where the first column has the values for Certified seed royalties, the refund amount and the EPR rate in euros. The second column shows values in $/kg, followed by $/acre (based on seed rates of 60 kgs/acre. The last column shows the rate based on output, with the EPR rate at $1.05/tonne and the net royalty rate when using Certified seed at $2.70/tonne (based on a yield of 2.75 t/acre).

Table 5.5 Royalties Paid on Certified Seed and FSS in France

Item Value in Euros

Value in Dollars

Per Acre

Per Tonne of Output

€ /tonne $/kg $/acre $/t output

Royalty on Certified seed 78.40 0.1176 $7.06 $2.57

Refund on Certified seed 28.00 0.0420 $2.52 $0.92

Royalty rate of Certified seed prior to EPR 50.40 0.0756 $4.54 $1.65

EPR rate on FSS 0.70

$1.05

Royalty paid in year of Certified purchase

$2.70 Source: Consultants’ calculations using seeding rate of 60 kgs/acre, 2.75 t/acre (101 bu.) and $1.5 per €

99

Source: Uciechowski P, “Obtaining Income form the Plant Breeder’s Right in Poland”, JARD, Vol 43, 2017. 100

As reported in the International Seed Federation’s “Collection Systems for Royalties in Wheat: An International Study” (2012). 101

GNIS, “Plant Variety Protection and Farmer’s Rights in France”, presentation by Francois Burgaud, Director for public affairs and international relations, GNIS, at a seminar on IPR (2017).



Elements for Consideration by the Canadian Seed Sector This overview of France’s seed sector suggested that there are some system features which could be considered by the Canadian sector. These can include:

one organization that represents all members of the seed sector, such as GNIS; one organization that focuses on its area of responsibility of seed certification, such as SOC; one organization (GNIS) that provides input to government on proposed seed system changes; royalty collection on FSS using a uniform EPR system (the COV); directing a portion of the EPR (15%) for pre-breeding R&D at various research institutions; the royalty rates on Certified seed, the refund rate, and the EPR rate is negotiated every three

years between the seed industry and the farm leaders.

5.5 Some Comparative Data from Europe and FSS Royalties The 2015 European Seed Association (ESA) survey results of farmer saved seed and black-market seed are shown in Table 5.6. In 2015, FSS was lowest in durum wheat and highest in triticale. The share of illegally sold (black-market) seed was highest in oats (32%). Certified seed, which makes up the remainder, varies from 70% for durum to 32% for oats. Table 5.6 Farmer Saved Seed and Black-Market Seed in the EU, 2015

Crop FSS % 2015 Black Seed % 2015 Total % 2015 FSS% 2005

Wheat Soft 41 11 52 49

Durum 15 15 30 49

Barley Winter 34 17 51 42

Spring 34 6 40 56

Rye 36 19 55 77

Oats 36 32 68 71

Triticale 45 18 63 59

Total 37 15 52 52 Source: ESA, “Certified Seed, Farm Saved Seed or Black Seed”, November 2015

Table 5.7 shows the extent of certified seed use in various EU countries in 2015. According to the Polish Seed Chamber, total use of certified seed in Poland is about 17% (15.7% for cereals and 8.4% for potatoes) while the EU average is 50%. Use of certified seed is highest in Sweden (at 90%), followed by Denmark (at 80%) Table 5.7 Certified Seed Use in the EU, 2015

Country % Certified Seed Country % Certified Seed

Sweden 90% Germany 53%

Denmark 80% Hungary 39%

Czech Republic 65% Spain 32%

France 61% Latvia 26%

UK 55% Lithuania 19%

Slovakia 54% Poland 17% Source: Uciechowski P, “Obtaining Income form the Plant Breeder’s Right in Poland”, JARD, Vol 43, 2017



In the EU, only certified seed may be marketed. Prevailing laws are: 102 UPOV91 – optional exemption to breeder’s rights EU law – Article 14 of CPVR Regulation: “Agricultural Exemption” Implementing Rules in

Regulation (EC) No 1768/95. National Plant Breeder’s Rights Laws

The agricultural exemption is in place to safeguard agricultural production. Under it, farmers are obligated to provide information and pay an equitable remuneration. Small farms do not have to pay. The definition of small farmer: for cereals <92 tonnes, for potatoes, < 185 tonnes. In 2010, 88% of farms had < 20 ha and these farms accounted for 22% of land. The share of farms with more than 20 ha by country is as follows: 103

Germany 45% Estonia 29% France 56% Italy 7% Hungary 4% Poland 5% Sweden 47% UK 40%

Under EU law, member states can provide de minimis aid to agriculture under certain criterion and restrictions. Poland provides assistance (a subsidy) to producers using certified seed which provides an incentive to use certified seed104. The EU does have some cross-compliance requirements in its Common Agricultural Policy. It does not appear that these requirements relate to certified seed use. In the EU, royalties due to plant breeders are collected through license fees on certified seed and on royalty payments on FSS. The royalty payments due plant breeders on FSS vary by country. For example, in Poland the share is 50% of the license fee for certified seed. In Sweden, it is 70%. 105 The following section provides an overview of royalty collection, including FSS royalties for most EU countries106. A summary table is provided in Annex 1 Czech Republic For cereals, 55% of seed is certified; 25% is FSS; 14% is brown bag (illegal); and 11% is by small farmers who are exempt. Royalties are to be paid on Certified seed and FSS. 100% of the royalties are collected on certified seed. 90% of the royalties due on FSS are collected. No fees are collected on the brown bag and exempt seeds. Overall efficiency is 77.5% (payment share of available royalty). There was no information on the value capture system. There are varieties protected by EU laws and varieties protected by Czech laws. The differences in legislation at the EU and at the national level make it difficult to collect FSS royalties. The use of mobile cleaners allows farmers to conceal the actual use of FSS.

102 ESA, “Certified Seed, Farm Saved Seed or Black Seed”, November 2015 103

ESA, “Certified Seed, Farm Saved Seed or Black Seed”, November 2015 104

https://ec.europa.eu/agriculture/stateaid_en and USDA FAS GAIN, “Planting Seed Market in Poland – Outlook 2015”, 2015. 105

Uciechowski P, “Obtaining Income form the Plant Breeder’s Right in Poland”, JARD, Vol 43, 2017 and ESA, “Certified Seed,

Farm Saved Seed or Black Seed”, November 2015 106

Unless otherwise specified, the material in the following sub-sections is from International Seed Federation, “Collection Systems for Royalties in Wheat: An International Study”, 2012.

https://ec.europa.eu/agriculture/stateaid_en



Germany In wheat, 45% of seed is certified while 55% is FSS. The extent of brown bag seed sales is unknown. Plant breeder right to royalties is through EU law and German plant variety protection and other laws. STV works on behalf of 51 plant breeders (cereal, potato, oil, and protein) to enforce control agreements with seed growers and collect FSS royalties. 100% of the royalty on certified seed is collected. The STV sends out declaration forms for FSS to 85,000 farms. However, legally STV must have evidence that the farmer may have used FSS of a protected variety and without evidence, the farmers doesn’t have to provide any information. Between 30% to 40% of the royalties on FSS can’t be collected because of lack of evidence The STV can also ask processors for information, but again must have evidence before any information will be provided. Royalties are distributed by STV. About one-third of Germany’s 120,000 farms qualify for the small farm exemption. Legal requirements for evidence on FSS use reduce the ability to collect royalties. Italy Certified seed use in soft wheat and durum is 55% which is down from 90% in the early 1990’s. FSS represents 15% while brown bag accounts for 30%. Royalties are collected on certified seed (at 100%). No royalties are collected on FSS as Italy does not have a system in place to collect FSS royalties and Italy has no national regulation requiring farmers to pay royalties on FSS. Furthermore, royalties on FSS on Italian-only protected varieties cannot be legally collected. Royalties could be (but are not) collected only on EU protected varieties, which is about 50% of all varieties. Therefore, 55% of total potential royalties are collected, since there is no royalty collection on FSS. IF FSS royalties were collected, 85% of the farms qualify for the small farm exemption. Poland In wheat, 15% of seed is certified, 55% is FSS and 30% is brown bag. Cereal and potato breeders have an organization, AGNAS, which collects royalties on FSS and supplies labels for certified seed. AGNAS also communicates to farmers about the benefits of certified seed. Farmers are required to pay a royalty on FSS 30 days after seeding. AGNAS sends forms out to farmers. Processors are also to provide information. AGNAS invoices farmers, visit farms to verify FSS, and distributes the royalties. Royalties on FSS are 50% of the license fee on certified seed107. Royalties payable on FSS are low because 96% of farms are exempt because of their small size and because AGNAS doesn’t have all the address of farmers. Collection costs are high. Less than 100% of royalties on certified seed are collected. Uchiechowski suggests that 70% to 80% of certified seed royalties are collected and 3% of FSS seed royalties. 108 The overall efficiency is 21.6% (cost of collecting is included). The cost of collecting FSS is 30% of the total FSS royalties collected. Spain In cereals, 20% is certified seed (durum is higher at 72% (used to be subsidized) while soft wheat and oats are lower at 18% and 9%, respectively. FSS, brown bag, and block farming account for the remaining 80%. Block farming refers to farmers informally farming together and sharing seed. Under Spanish law, plant breeder rights infringement is a crime subject to up to two years in prison. New regulations for FSS came into being in 2011. A plant breeder’s association, GESLIVE, administers the royalty collection on FSS. The regulations apply to varieties protected either at EU or national level. Collection rests on agreements between plant breeders and agricultural cooperatives and between seed producers and processors. Cooperatives and processors collect the FSS royalties.

107

Uciechowski P, “Obtaining Income form the Plant Breeder’s Right in Poland”, JARD, Vol 43, 2017 108 Uciechowski P, “Obtaining Income form the Plant Breeder’s Right in Poland”, JARD, Vol 43, 2017



The royalty on FSS is 50% of the certified fee for EU protected varieties and 40% for Spanish protected varieties. The royalties collected by GESLIVE are distributed as follows: 50% to breeders; 20% collection fees to cooperatives and processors; 15% to local R&D; and 15% for campaigns to increase certified seed use. Most of certified seed royalties are collected and some of FSS royalty is collected. Efficiency is hurt by the large share of brown bag seed. Overall, 22% of royalties are collected. Cost of collection is 20% and is paid to cooperatives and processors. Sweden In cereals, 65% to 85% of seed planted is certified. FSS is the remainder. IP protection is through UPOV91. Royalty on certified seed is included in the price. The plant breeder or representative collects the royalty on certified seed from seed sellers. 100% of the certified seed royalty is collected. 90% of the royalty due on FSS is collected. Overall efficiency is 94.4%. Both producers and seed processors have the legal obligation to provide information on FSS. The Swedish Seed Trade Association (SSTA) collects FSS information on royalties. Plant breeders provide SSTA a list of protected varieties for which royalties are required. FSS royalties are a % of the certified seed royalty fee (this varies). Addresses of farmers required to pay FSS royalties are given by the Swedish Board of Agriculture109 to SSTA which in turn sends out questionnaires to farmers twice a year regarding FSS use. Farmers can submit the information by mail or electronically to SSTA which then collects the royalties. Seed processors are also legally required to provide information about their customers. Success is due to (1) support for plant breeding is high among farmers who also have their own plant breeding company; (2) Federation of Swedish Farmers supports FSS royalty collection; (3) low number of farmers; (4) Board of Agriculture provides address of farmers legally obligated to supply information; and (5) varieties have a short life-span. There are some weaknesses in the Swedish system including (1) Board of Agriculture is responsible for compliance but lacks expertise in this area; (2) farmers sometimes provide incorrect variety information because fees on FSS vary by variety; and (3) farmers share FSS between themselves in block farming and block farming is increasing. United Kingdom In wheat, 58% of seed is certified and 42% is FSS. According to the UK’s Intellectual Property Office, in 2015 FSS shares were as follows: wheat 42%, peas and beans 47%, barley 40%, oats 35%, and oilseed rape 41%.110 For FSS, it is the law that farmers must compensate breeders for the use of protected varieties. The small farm exemption applies to FSS. The British Society of Plant Breeders, BSPB, is an organization of plant breeders. It issues licenses to seed processors and collects FSS royalties. It has several different methods to calculate the royalties on FSS. With certified seed, first processor and/or seller pay the royalty to BSPB each year. For FSS, the most used collection method is through mobile seed cleaners which have an agreement with BSPB to collect the royalties. The BSPB will audit mobile seed cleaners. Other processors are also obligated to provide names and information on FSS.

109

“The Swedish Board of Agriculture is the administrative authority in the agricultural policy area and is responsible for matters

of agriculture, stock farming, horticulture, reindeer husbandry and rural development. The Swedish Board of Agriculture is also the authority in charge of the country’s district veterinary officers.” (http://www.government.se/government-agencies/swedish-board-of-agriculture/) 110

UK, Intellectual Property Office, “The UK Plant Breeding Sector and Innovation”, 2016.



All farmers are required to submit a declaration form. The farmer can pay either the cleaner ($/tonne) or the BSPB ($/hectare). If a farmer has her/his own cleaning plant, information on FSS is also required to be submitted. 100% of the seed royalty is collected on certified seed and 90% of the FSS royalty is collected. Overall, 92.8% of royalties/fees are collected. It costs 1% to 2% to collect royalties from certified seed producers. The cost associated with the collection of FSS is 6.2% of the FSS royalty According to GHK Consultancy, while the farmer FSS declaration is mandatory and non-return of declaration forms is a criminal offence, the BSPB may lack the legal power to enforce. The BSPB has a campaign to raise awareness of the need for new plant varieties and the importance of royalties111.

5.6 EPR and FSS in Australia

Plant Breeders Rights Australia first introduced Plant Variety Rights in 1987. This was replaced by the Plant Breeder’s Rights Act of 1994. This act is compliant with UPOV91. IP Australia is the government agency responsible for intellectual property rights and is the location of the Plant Breeder’s Rights Office. Varieties which are distinct, uniform and stable; have a breeder or are new or recently exploited are eligible for PBR. In crops the rights last for 20 years. Specifics are shown below including the farm saved seed exemption.

“A valid PBR gives the owner (initially, the breeder) a number of rights. For example, holders of PBR

have exclusive rights in relation to the propagating material to:

produce or reproduce the material

sell or offer for sale

import or export the variety

While these rights are primarily in relation to the commercialization of propagating material, they may

also apply to harvested material, products obtained from harvested material, and to derivative

varieties in certain circumstances.

An important feature of the PBR system is the way in which the interests of breeders, growers, and

researchers have been accommodated through the use of exceptions or limitations to the scope of

the breeder’s right. Some exemptions include:

private or non-commercial purpose

experimental purposes

plant breeding

farm saved seed” 112

Currently in Australia, wheat and barley breeding is 100% funded through end-point-royalties. Canola

breeding is funded through royalties on seed or EPR. Breeding in oats, pulses, and other minor crops is

through EPRs and public investment.113 Some canola varieties have an EPR.

Variety Registration A merit-based variety registration system is not used by Australia. A wheat variety that is distinct, uniform and stable can be registered and then sold as a general-purpose wheat. Wheat Quality

111 GHK Consultancy, “Evaluation of the Community Plant Variety Right Acquis – Final Report”, 2011 112

Australian Centre for Intellectual Property in Agriculture, “Plant Breeder’s Rights” 113 http://www.agtbreeding.com.au/sourcing-seed/pbr-and-epr



Australia, an independent and not-for-profit company, will test the variety and then classify the wheat based on the needs of the market.114 “Wheat Quality Australia is responsible for maintaining and growing the reputation of Australian wheat as a high quality product, by using its accountable, transparent and sustainable wheat classification system. The Wheat Quality Australia Wheat Variety Classification Panel assesses new wheat varieties to determine their processing and end product suitability (for qualities such as milling extraction, dough balance, baking performance and noodle colour and texture), to meet key market requirements. The Wheat Quality Australia Classification Council represents the entire value chain of wheat production in Australia, and uses this engagement to constantly improve the classification system in response to the needs of the market. The Wheat Variety Master List is the primary output of the classification system and is the foundation for wheat quality management in Australia”.115

Royalty Collection on Wheat Farmer Saved Seed Australia uses an EPR to collect royalties on FSS – thus the royalty is paid on the commodity crop and not the seed. The EPR is payable on all grain produced, not just what is delivered to an elevator. This system is preferred in Australia because of (1) the high percentage share of FSS; (2) farmers have experience with declaring varieties when delivering grain; and (3) when the EPR was established, the then existing Australian Wheat Board and Australia Barley Board were supportive. The EPR rate varies by variety.116 The first EPR variety was released in 1996. There are now approximately 140 wheat varieties subject to EPR. These varieties account for the majority of the wheat crop. A contract between the PBR owner or the licensed commercialization agent and the grower lays out the terms and conditions of use of a new variety. Most commercialization agents use an industry standard Variety License Agreement.117 Each year farmers complete and submit a “EPR Harvest Declaration” which requires information on the following quantities: seed sown; harvest grain sold (and buyer’s identity); used on farm; in storage; and retained for planting. This information is submitted to a central body (Seedvise) which compiles necessary information, such as farmer-specific grain deliveries by variety.

Australia’s EPR is collected using two systems as shown below in Figure 5.3, which is linked to growers’ harvest declarations. The first method is automatic deduction of the EPR when the grain is delivered to a grain buyer118. The producer must declare the variety and miss-declarations can be subject to a large fine119. The collection agent sends the EPR to the royalty manager (i.e., owner of a variety) for that variety. The associated report to each royalty manager provides information on the grower, varieties and deliveries and this information helps the royalty manager reconcile EPR payments from the grower. Seedvise is being used by some grain companies and royalty managers to simplify the administration and collection of EPRs.

114

JRG Consulting Group, “Exploring Options for Producer Involvement in Wheat and Barley Variety Development – Annexes”, November 2015. 115

http://wheatquality.com.au/about/ 116

ISF, “Collection Systems for Royalties in Wheat: An International Study”, 2012 117

http://varietycentral.com.au/licensing/seed-licensing/ 118

Grain buyers deduct $0.40/tonne to $0.50/tonne from the EPR to cover their costs of collecting the EPR. 119

$55,000 for an individual and $275,000 for a company.

http://varietycentral.com.au/licensing/seed-licensing/



Figure 5.3 EPR Collection System in Australia

Source: Grains Research & Development Corporation, “End Point Royalties (EPR) Fact Sheet”, 2011

The second method applies to grain used on their farm or delivered to a buyer that doesn’t automatically deduct the EPR. In this case, the information supplied on the grower’s “EPR Harvest Declaration” provides the necessary information for invoicing (the applicable EPR) by the royalty manager. Over time, the Australian industry has streamlined the processes required to collect information and EPR royalties.120 According to Jefferies, 85% of Australian farmers provide correct information on the Harvest Declaration.121

Variety Central is an information source supported by the seed industry, which provides information on the varieties subject to EPR, variety owner, royalty manager, the rate, seed distribution and if growers can sell to other growers. Table 5.8 is an excerpt for wheat that is subject to EPR. Seed sharing is permissible for 55% of the 141 wheat varieties listed

Table 5.8 Wheat Varieties (Subject to EPR) Seed Distribution Arrangements 2018-19

Common Variety

Name (all wheat types)

Registered PBR

Name (all wheat types)

Variety Owner

Royalty Manager

Charged with EPR

Collection

EPR Rate $/tonne

(GST Exclusive)

Seed Distribution

Arrangements 2017

Grower to Grower Sales

Permitted

Axe Axe AGT AGT $2.50 Seed Sharing Yes

Darwin DS Darwin DOW Seeds SeedNet $4.25 SeedNet Yes

Faraday DS Faraday DOW Seeds SeedNet $4.25 SeedNet No

QAL2000 QAL2000 Allied Mills Austgrains $2.00 Austgrains No

Kennedy Kennedy DEEDI Heritage Seeds $1.45 Heritage Seeds No

Source: http://varietycentral.com.au/varieties-and-rates/2018-19-harvest/wheat/

120

Grains Research & Development Corporation, “End Point Royalties (EPR) Fact Sheet”, 2011 121

Jefferies S, “Cereal Breeding and End Point Royalties in Australia”, 2012.

http://varietycentral.com.au/varieties-and-rates/2018-19-harvest/wheat/



Seed Sharing The variety license agreement spells out whether the grower can sell to other growers. Of the 141 wheat varieties with EPR’s in 2018-19, 77 varieties allow grower to grower sales while 64 do not. The seed sharing provision varies by company. For example, AGT has 43 wheat varieties that are subject to an EPR and of these, grower to grower sales are permitted for 40. Intergrain allows grower to grower sales on 40 of its 43 varieties. Some variety owners do not permit seed sharing, such as Ausgrainz, Allied Mills and Deedi. AGT, which is the largest breeding company in Australia, provides the following chart in Figure 5.4 explaining its seed sharing program.

Certified Seed Certified seed use is low in Australia, as low as 5% in wheat. Farmers will typically only purchase

certified seed when a new variety is released. The low use of certified seed is in part due to the PBR

owners allowing grower to grower seed sales (seed sharing) on many varieties of wheat. The EPR is

collected on all grain grown which also reduces the incentive for seed companies to invest in the

production of certified seed.

Figure 5.4 Seed Sharing Program Example

Source: http://www.agtbreeding.com.au/sourcing-seed/seed-sharing

http://www.agtbreeding.com.au/sourcing-seed/seed-sharing



Further information is provided in the following box122.

5.7 An Overview of Some South American Countries The information in this section is from International Seed Federation’s “Collection Systems for Royalties in Wheat: An International Study” (2012) and information supplied by seed officials in Argentina, Chile, and Uruguay. Argentina Argentina has a variety registration system that gives plant breeders the ability to commercialize the variety and can provide property rights to breeder. The National Seed Institute is responsible for seed certification. However, many acres do not complete the process. In wheat, certified seed represents 21% of acreage while FSS accounts for 30% of acreage. The remainder is brown bag seed or varieties not included in the FSS royalty system. A royalty is collected on FSS through the Extended Royalty System (ERS). In this system, farmers and breeders execute a binding license agreement regarding IP and royalty fees. The farmer is to pay royalty on FSS and agreement renews each time farmer uses the seed. A non-profit organization, ARPOV, is responsible for administering and implementing an ERS for self-pollinating varieties. The royalty on certified seed is included in the price. The royalty is about $1.00 USD to $3.50 USD per 40 kgs. The royalty on FSS is about 45% to 50% of the royalty on the certified seed. Almost all royalties/fees on certified seed are collected. However, collection on FSS is low, about 30%, because there is no national law requiring the payment of royalties on FSS. ARPOV does not have the legal capacity to enforce the payment of FSS. Royalty collection on FSS depends on farmer honesty. Overall success is 50%. ARPOV charges 15% to collect FSS royalties. ARPOV and its members are increasing the payment of FSS royalties through communication to farmers about IP and its benefits.

122

http://www.agtbreeding.com.au/sourcing-seed/seed-sharing

“Growers who purchased seed of an eligible AGT wheat variety from a recognized seed retailer, are offered the legal right, under the terms of a License Agreement, to sell or trade grain derived from these varieties to another grower for use as seed under AGT's unique Seed Sharing™ model. AGT offers the grower who originally purchased seed from a recognized retailer (the "Seller") the legal right to sell or trade seed of these varieties to another grower referred to in the attached License Agreement as the "Purchaser" at a price or arrangement agreed to between the "Seller" and the "Purchaser". AGT requires a signed "AGT Seed Sharing™ License Agreement" to be completed by the "Seller" and the person/business to whom they wish to sell or trade the seed (the "Purchaser"). If the purchaser is a registered NGR card

user, providing the NGR number will assist in ensuring the records relating to the specific business purchasing seed of the variety are accurate, but this is not essential to the transaction. The AGT Seed Sharing™ License Agreement should be completed and returned to AGT as soon as possible following the transaction between the "Seller" and the "Purchaser". It is important to note that no seed can be legally traded without the return of a completed AGT Seed Sharing™ License Agreement. The sale or trade of seed without a

completed and returned License Agreement is an infringement of Australian Law under the Plant Breeders Rights ACT of 1994, and the "Seller" would be liable. The contract/license agreement also provides a range of indemnities, disclaimers and releases for both the "Seller" and the breeder. (refer section 3 of the License Agreement). “



Chile Chile plays a major role in the production of canola seeds for Canada. Its high sun radiation, expertise, and ability to export quickly after harvest are factors behind Chile’s success. Chile has three variety registration systems: RVP for protected varieties; RVAC for certified varieties; and LVOD for varieties that are commercialized but not protected or certified. The plant breeder rights law (Law 19.342) is based on UPOV78. From 15% to 20% of wheat acres are planted with certified seed, with FSS for wheat ranging from 70% to 80%. The royalty on certified seed is included in the seed price and accounts for 10% to 15% of the price. There is no royalty on FSS because UPOV78 does not demand it.

Uruguay In Uruguay, there is a Technology Value System (TVS) or Extended Royalty System (ERS) that has been in place since 2003 for wheat, barley, peas, and soybeans. It is a contract-based system. The farmer and breeder sign an agreement when certified seed is purchased. The agreement sets out the use conditions and royalties for FSS and the conditions renew with every planting. URUPOV, which is an association of Uruguayan plant breeders, collects the information from breeders. Auditors from URUPOV visit each farm twice annually, processes the information and puts it online for breeders, with the breeder then invoicing farmers. INASE (National Seed Institute) and URPOV are responsible for enforcement and will use DNA fingerprinting in its efforts. Satellite capabilities are also being developed. URUPOV assists on enforcement tools and activities. There is a tax incentive for certified seed (1.5 times amount spent on certified seed) that has been in place since 2007. The tax incentive is a key feature of the value capture system. In wheat, 48% of planted acreage uses certified seed while 44% is FSS. The remainder (5% to 8%) is brown bag. The royalty on certified wheat seed, which is included in the price, is approximately $50/tonne ($.05/kg) and the royalty on FSS is about the same. All the royalties on certified seed are collected and 90% of FSS royalties are collected. Brown bag (5% to 8%) escape royalty payment. Overall efficiency of royalty collection is 89%. The ERS costs 7% to 15% (of the revenue collected) to administer depending on the variety. The ERS is successful in Uruguay because 1) farmers recognize the benefits of new varieties and of paying royalties to develop new varieties; 2) breeders develop new varieties; 2) government has put in place a legal framework which allows the enforcement of royalty collection; 4) multipliers and distributors communicate about plant breeder’s rights and collect information; and 5) URUPOV is an efficient collector of royalties and a strong enforcer.

5.8 Chapter Summary This Chapter provided an overview of the seed system in other jurisdictions, using wheat as the example in most regions. The use of Certified seed versus FSS varies significantly across the regions, with high usage of Certified seed for wheat in Quebec, Sweden, the Netherlands, the U.K., and France for example, with very low use of Certified seed in Australia (estimated at 5%). In western Canada approximately 21% of spring wheat acreage is sown with Certified seed.



Quebec’s has a 93% Certified wheat seed acreage share, with this high level resulting from cross-compliance, where Certified seed must be used for crop insurance and income stabilization programs. In the Netherlands and Sweden, Certified seed usage is over 80% for wheat, which can be attributed to (1) yield gain on newly released varieties, and (2) a royalty is collected on FSS, with the FSS royalty set at 70% of the Certified seed rate in Sweden and at 65% in the Netherlands. These conditions also apply in the UK, where the Certified seed share is over 50%. The higher the FSS royalty, in relation to the royalty on Certified seed, the greater the incentive a farmer has to use Certified seed. In Uruguay, a tax incentive at 150% of the seed price is used to encourage use of Certified seed, which contributes to the 48% Certified seed share. The share of wheat acreage in France that uses Certified seed in any year is 61%, which can be attributed to the introduction of higher yielding varieties and the use of an EPR on all wheat sold (with a partial rebate on the Certified seed royalty). Royalty rates on Certified seed, the refund rate, and the EPR rate is negotiated every three years between the seed industry and the farm leaders. Australia uses an EPR, with the royalty rate being variety specific, and no royalty embedded in the purchase price of Certified seed. For small grains, only 5% of the seed used is certified in Australia while 95% is FSS. For some varieties, farmers are allowed to sell seed to other growers (seed sharing), which tends to favour greater use of FSS. As in Canada, the US does not use an EPR system or collect royalties on FSS. In the US 100% of royalties on certified seed are collected. In the Pacific North West, certified seed use is very high, 85% because of the use of contracts forbidding the use of FSS. Quality assured seed for wheat is found primarily in the Mid-West where it is sold by brand and not variety. There is no variety registration in the U.S. and some seed companies find that quality assured seed protects the confidentiality of seed more than the AOSCA’s certification process which requires information on origin and breeding process. There are some design elements in seed systems in Europe and in Australia that could be considered in Canada to support a royalty system on FSS. For example, in Australia the EPR is payable on all grain produced, not just what is delivered to an elevator. A contract between the PBR owner or the licensed commercialization agent and the grower lays out the terms and conditions of use of a new variety. The variety license agreement spells out whether the grower can sell to other growers (seed sharing). Each year farmers complete and submit a “EPR Harvest Declaration” which requires information on the following quantities: seed sown; harvest grain sold (and buyer’s identity); used on farm; in storage; and retained for planting. This information is submitted to a central body (Seedvise) which compiles necessary information, such as farmer-specific grain deliveries by variety. The EPR is collected using two systems: the automatic deduction of the EPR when the grain is delivered to a grain buyer and through invoices based on the Harvest Declaration. Seedvise is being used by some grain companies and royalty managers to simplify the administration and collection of EPRs. Grain elevators receive a fee to collect the EPR. A Netherlands law specifies that a farmer may use his harvested seed on his own holding (farm operation) under the condition that the plant breeder is informed of such use prior to May 15th of the year of harvest. This feature of placing an obligation on farmers to declare use of FSS assists in royalty collection. Plantum NL collects royalties on FSS. Royalty collection is supported by an information system that has an interface with data supplied by plant breeders/seed companies and the obligatory data supplied by farmers. The Netherlands and France offers some insight on organizations that support the overall seed system. There are two key organizations in the Dutch seed system for cereals: Plantum and NAK. Plantum is the Dutch association for the seed sector and more generally for the larger plant reproduction material sector with 350 members which are active in breeding, propagation, production and trade of seeds, bulbs,



tubers, cuttings and young plants. Plantum represents and promotes the interests of its members and, on behalf of the sector, acts as a discussion partner with government bodies and interest groups. NAK is the body responsible for seed inspection and certification of field crops with such authority delegated by the government. The Netherlands is a leading exporter of seed, primarily vegetable seed, and a net importer of seed for field crop production. There are 300 specialized breeding and propagation companies, with annual seed industry sales around $3.3 B. France is a leading exporter of seed, primarily of field crops. In 2016, 25% of the total seed production acres of 867,870 were in wheat. A mix of public, private, and producer organizations are active in the wheat breeding sector. Pre-breeding is primarily a public sector activity while breeding is primarily a private sector activity. Limagrain, a producer cooperative, breeds wheat. Seed certification has been delegated to SOC (Official Service for Seed Control and Certification), which is the technical service division of GNIS, a national association that represents the seed sector in France. SICASOV is a cooperative owned by plant breeders that enforces IPRs and collects Certified seed royalties from seed growers. SICASOV operates on a “declarative system” based on forms sent to seed growers and it also sets the royalty rate on certified seed. The EPR (or CVO) was originally only applicable to bread wheat, and in 2012 the royalty on FSS was extended to other cereals (e.g., barley and oats), potatoes and forages. After the rebates on Certified seed are paid, 85% of the money raised by the levy is submitted to a property rights management organization for plant breeders ‘Groupement National Interprofessionnel des Semences et des plants’ (GNIS). This organization works with SICASOV to allocate the royalties to breeders in proportion to each variety’s individual share of certified seed sales. The remaining 15% of the money raised by the CVO is used to support public wheat research123. These funds are directed to FSOV (Fonds de Soutien a l’Obtention Végétale en blé tender) the French research support fund for wheat. The cost of administration is 2% for FSS. Based on the examination of the system in Netherlands, Canada could consider: an industry lead sector, which is enabled by government; one organization that represents all members of the seed sector, such as Plantum; one organization that focuses on its area of responsibility of seed certification, such as NAK; having the commodity supply chain provide input on necessary standards and regulations; royalty collection on FSS based on mandatory declaration by the farmer; royalty rates on FSS that are at least 60% of the license fee on the Certified variety; and a division of the organization representing plant breeders (such as Plantum or SICASOV in France) that collects FSS royalties . This material provides a lens to view Canada’s seed system which is the subject of Chapter 6.0. The information on system design and performance will also be used in Chapter 8.0 on increasing use of Certified seed and in Chapter 9.0 when options for collecting royalties on FSS are assessed.

123

GNIS, “Plant Variety Protection and Farmer’s Rights in France”, presentation by Francois Burgaud, Director for public affairs and international relations, GNIS, at a seminar on IPR (2017).



6.0 Assessment of the Current Seed System In prior Chapters the seed system was characterized. In this Chapter we focus on some key elements of the seed system and provide a third-party perspective and assessment. The elements that are assessed include:

value capture in cereal crops and investing in plant breeding; system focus on use of Certified seed or on royalties on FSS; regulatory approach with PNTs; compliance Costs and Time; variety registration; quality assurance to seed buyers and seed certification; data integration throughout the seed system and traceability; organizations supporting the seed system.

6.1 Value Capture in Cereal Crops and Funding Plant Breeding Private sector product developers have a challenge with self-replicating crops such as wheat and barley, where FSS for replanting can occur. The high rate of FSS (see Table 4.8) limits the amount of private sector investment in variety development. This is evident where 90% of private sector investments (of $101 million in 2012) in variety development are in canola, corn and soybeans (see Table 4.3) and the remaining 10% of private sector investment occurs in cereals, forages and pulse. FSS does not occur in corn and is very low in soybeans and canola. With these crops, product developers with successful varieties and/or traits capture value to fund further breeding programs through seed sales and/or license agreements with integrators. This low level of private sector investment is directly related to whether the seed is considered a “private good” or an “industry good”. Table 6.1 illustrates the major difference between private goods and industry goods124. Table 6.1 Public, Industry and Private Goods in Variety Development and Crop Production

Source: Gray (2014)

125

124

Table 6.1 also refers to public goods, where all of society benefits, whereas with industry goods benefits are more limited to the industry, such as the wheat and barley industries. 125

Gray, Richard. "Solutions to the Agricultural Research Funding Conundrum" Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie 62.1 (2014): 7-22.



Private goods are excludable, when use by others can be excluded, which is the case with hybrids and varieties with IPR and traits. Industry goods are non-excludable, which mean that use by others and/or use by a producer in subsequent years cannot be prevented. With self-pollinating crops, such as cereals, planting harvested seed (FSS) cannot be prevented by a product developer unless the variety has some form of IPR protection. In this context, a self-replicating variety can be considered an industry good, where continued use is difficult to exclude by the product developer. This is in contrast to a private good where sufficient value can be captured each year by a developer requiring repurchase by producers each year, such as with hybrid seed. In the near future, it is possible that based on applying modern plant breeding technology to cereals that the resulting varieties have the characteristics of private goods, due to excludability. Introduction of commercial wheat and barley hybrids is occurring on a small scale in the EU. With high rates of FSS in cereals, the private sector is not assured of a revenue stream to offset variety development costs, unless a mechanism such as a technology use agreement (e.g., which covers conditions of use of the seed, such as one time use or paying a use fee in subsequent years) is in place (e.g., Clearfield). A contract between a farmer and a seed company on re-use of the seed would result in the affected varieties being private goods. Presently, government and producer funding of cereal plant breeding provides the production sector with new varieties. A weakness of public and producer funding is that their financial contributions do not always respond to market requirements or provide revenues back to successful plant breeding operations. Uses of FSS will likely decline once higher yielding varieties of cereals are introduced by product developers. Modern breeding technologies such as gene editing could result in plant breeders introducing higher yielding genetics in the near future. In such a scenario, crop producers would gravitate to these varieties, which presumably would have technology use agreements in place (as with canola and soybeans), which would provide a revenue stream for product developers that have successful varieties, and by extension reduce use of FSS. With FSS a producer right, aside from when (1) hybrids, and (2) technology use agreements prevent the use of FSS, there are a few options for funding variety development. These include: (1) a combination of government funding and producer funding based on (voluntary) producer check-offs on grain sales, where a portion is used to fund plant breeding programs; (2) implementation of a royalty collection system on grains sales, such as an end-point royalty system where fund are distributed back to product developers in proportion to their market share (where varieties are declared upon delivery); (3) royalty collection on FSS where farmers declare the volume of FSS, the varieties being replanted, and are invoiced for necessary royalty payment; and (4) seed companies enter into contracts with growers which indicates royalty payment obligations with subsequent FSS. Funding of variety development for cereals may be lower in Canada than in other countries, which can have an impact on the varieties supplied to the marketplace and overall farm sector productivity. In a prior study126, we found that in the case of wheat, in Canada expenditures on variety development were $2.00/acre, compared to $3.00/acre in France and Australia, and $7.30/acre in the United Kingdom. On a per tonne of commercial production, the spending was $1.67/tonne in Canada, compared to $4.55/tonne in Australia. The above is highly suggestive that in certain crop kinds, such as cereals and other self-replicating crops, the overall level of investment in variety development is lower than in other countries. Based on the proposition that higher investment levels result in more varieties with higher yield potential and/or higher per acre profit margins, then efforts are required to increase total investment. An issue is whether this should be through FSS royalties or greater use of Certified seed.

126

Source: JRG Consulting Group, “Exploring Options for Producer Involvement in Wheat and Barley Variety Development – Annexes” (November 2015), prepared for Wheat and Barley Variety Development Working Group.



6.2 System Focus on Greater Use of Certified Seed or on FSS Royalties This assumed need for more investment dollars and an incentive system for private sector investments in variety development in cereal crops can be addressed through some royalty capture mechanism for self-replicating crop kinds. Doing so should provide an incentive for private sector breeders to invest in variety development and introduce new varieties into the market. The larger issue may well be (1) whether effort and resources are expended to increase the use of Certified seed rather than (2) expending efforts and resources on collecting royalties on FSS. In other words, is the larger objective to have a much higher usage of Certified seed with cereal crops or a royalty collection system on FSS? Higher usage of Certified seed can be obtained through (1) incentive systems such as lower crop insurance premiums, with growers supplying administrators with varieties planted, (2) incentive systems127 such as lower check-off fees (funds collected for Producer Commissions) based on proof that the delivered crop was planted with Certified seed, and (3) cross compliance mechanisms such as eligibility for participation in government programs dependent on planting using Certified seeds. Collecting royalties on FSS will provide revenues for plant breeders; however, there are a number of practical issues. For some royalty collection systems on FSS these issues can include:

1. for some systems implementing new administrative systems; 2. the need for verifying which variety was planted; 3. whether all of the collected funds are used for plant breeding versus other purposes; 4. the formula used to direct collected funds to seed companies and product developers; 5. whether royalties should be collected on older varieties developed with public and producer

funds; 6. the costs of collecting the funds and administering the system compared to the net benefits.

Another issue is whether collecting royalties on FSS sends a message to many cash crop producers that FSS is as good as Certified seed, which may work against the goal of greater usage of Certified seed. At the same time FSS trades between some farmers. Common seed trade between farmers is regulated, however, there is minimal enforcement. A perspective is that the seed system has a critical choice to make, which is to focus on approaches to increase the use of Certified seed, which is a win-win for all Seed Synergy members, or to focus on approaches to collect royalties on cereals that do not have technology use agreements (or contract type equivalents) in place.

6.3 Regulatory Approach with PNTs In Canada, a plant with novel traits (PNT) is defined as “plants into which one of more traits have been intentionally introduced, and where the introduced trait is both new to cultivated populations of the species in Canada and has a potential to affect the specific use and safety of the plant with respect to the environment and human health128. Canada regulates the product, not the process, with the regulating agencies associated with PNT noted in Table 6.2 (on the following page).

127

In the past a proposal was developed where users of Certified seed would receive a tax credit. 128


Canada”, Presentation



Table 6.2 Regulators of Plants with Novel Traits in Canada

Agency Act Review Area Specifics

CFIA Seeds Act

Environmental safety review

Looks at the PNT and its (1) potential to become a weed or be invasive; (2) for gene flow to wild relative to occur; (3) to become a plant pest; (4) to impact non-target species; and (5) to impact biodiversity. All plants exhibiting novel traits (e.g. new herbicide tolerances) are treated as a PNT regardless of method of trait introduction (e.g. GE, mutagenesis, or conventional breeding).129

CFIA Feeds Act

Feed safety review

Assessment considers:130

“whether the plant is safe for animal consumption;

whether the plant is as nutritious as its conventional alternatives; and

whether exposure to the plant or its products could pose a hazard to those working with it.”

Health Canada

Food and Drug Act

Human food safety evaluation

Takes into account: 131 “composition of the novel food compared to non-

modified counterpart foods; nutritional information compared to non-modified

counterparts; potential for introducing new toxins; and potential for causing allergic reactions.”

The regulatory pathway for a PNT includes many steps, which is outlined in Figure 6.1 (on the following page). At first, the proponent (product developer) must characterize their plant and inform CFIA that they have a regulated product. The CFIA’s authority over the characterization is absolute. It may require that the proponent provide scientific evidence that the product is not a PNT 132. Since there is no recourse to CFIA’s decision, product developers will sometimes declare varieties to have novel traits to minimize their risk. The risk is that the CFIA declares a variety being a PNT at the end of the registration process when the there is no novelty. Such a decision would set back product registration and incur additional costs to the developer. Some other steps include (1) authorization for importation, when required, (2) risk/safety assessment when under contained use (i.e., in the lab or greenhouse), (3) confined release trials, and (4) environmental assessment prior to unconfined use. The environmental assessment has three potential outcomes. The CFIA can authorize the unconfined environmental release without any conditions; or it could add conditions to the authorization (such as herbicide tolerance stewardship or insect resistance management requirements); or it could refuse to authorize the PNT on the basis that it poses an unacceptable risk to the environment. Product developers have indicated that after 20 years of experience, the CFIA treats all PNT in the same manner (re risk).

129

ibid 130

http://www.inspection.gc.ca/plants/plants-with-novel-traits/general-public/assessment-process/eng/1338189630096/1338189929476 131

ibid 132

CFIA, “Regulatory Framework for Biotechnology-Derived Crops with Specific Focus on New Plant Breeding Techniques in Canada”, Presentation



If the PNT passes the environmental impact assessment and it could be used for food and feed, it must receive authorizations from CFIA (feed) and/or Health Canada (food) before it is authorized for unconfined release. The time to make a decision and the opportunity cost to the product developer can be reduced with the feed and food assessment conducted concurrently with the environmental assessment. Figure 6.1 Pre-Market Regulatory Process for PNTs

Source: CFIA “Canadian Pre-Market Regulatory Process for Plants with Novel Traits and Novel Foods and Feeds Derived from Plant Sources” , 2009 Industry is concerned with duplication of effort by CFIA and Health Canada. Two suggestions have been offered. One is to have the three assessments under one regulator which would reduce redundancy. The other is the concern that both Health Canada and the CFIA review the core molecular, nutritional/compositional, and allergenicity data. Instead, the approach could be to have CFIA review field performance/agronomic data and Health Canada only review the core molecular, nutritional/compositional, and allergenicity data. This would increase CFIA’s efficiency and reduce the cost of regulatory delays (should reduce regulatory time by six months (from 24 months)). After receiving full authorization for unconfined release by the CFIA, the VRO (within the CFIA) is involved, based on the crop kind. A data review by the CFIA is not required before unconditional release of new lines developed with the same novel trait already authorized if the intended use is similar; the plant does not display any additional



novel traits; and the novel genes are expressed at similar levels” 133. However, industry also has some concerns about the regulation of stacked traits in Canada. Stacked events are the “result of using traditional cross-breeding techniques to combine two or more previously authorized PNT”. After a PNT is authorized, the plant can be traditionally bred to develop new varieties. Developers of new varieties with stacked traits are required to notify CFIA prior to intentionally releasing the variety to the environment. The CFIA will determine if the conditions of authorization are compatible or if more information is needed and notify the develop within 60 days.134 This approach is much more burdensome than used in the US. In the US, “Once an event is deregulated, subsequent events using the same gene construct to transform the same species may be granted a ‘fast track’ deregulation called an extension.” 135 A deregulated event in a crop can be stacked with other deregulated events if previously approved without further regulatory oversight by USDA. 136 The above suggests that the regulatory approach used in Canada can be more flexible and coordinated, with less time required for necessary regulatory approval. This will benefit the entire seed sector, as well as commercial farmers with earlier access to new technologies that provide more profit margin per acre.

6.4 Compliance Costs and Time Cost and time associated with regulation of biotechnology has been studied by Phillips McDougal 137. A 2011 study, prepared for Crop Life International, surveyed six global plant biotechnology companies (BASF, Bayer CropScience, Dow AgroSciences, DuPont/Pioneer Hi-Bred, Monsanto, and Syngenta) about the cost and time involved with the R&D process for a plant with a new trait that was approved for cultivation (in at least two countries) and for importation (in at least five countries). The results are shown below in Table 6.3. Table 6.3 Time and Money Costs Associated with New Traits

Stage Time for Event Sold Before 2002

(Months)

Time for Event Introduced from

2008-12 (Months)

Cost 2008-12 ($(US) million

Early Discovery 38.0 33.9 $17.6

Late Discovery 17.3 20.0 $13.4

Construct Optimization 18.0 27.0 $28.3

Commercial Event Production & Selection 24.0 30.0 $13.6

Introgression Breeding & Wide Area Testing 40.0 37.2 $28.0

Regulatory Science 50.5 37.2 $17.9

Registration & Regulatory Affairs 44.5 48.8 $17.2

Total 232.3 234.1 $136.0

Source: Phillips McDougal, “The Cost and Time Involved in the Discovery, Development and Authorization of a New Plant Biotechnology Derived Trait”, For Crop Life International, September 2011.

133

CFIA, “Regulatory Framework for Biotechnology-Derived Crops with Specific Focus on New Plant Breeding Techniques in Canada”, Presentation 134

ibid 135

McHughen A and Smyth S, “Regulation of Modified Crops in USA and Canada: American Overview”, C.A. Wozniak and A.

McHughen (eds.), Regulation of Agricultural Biotechnology: The United States and Canada, DOI 10.1007/978-94-007-2156-2_3, © Springer Science+Business Media Dordrecht 2012. 136

National Academy of Sciences, “Genetically Engineered Crops: Experience and Prospects”, 20??; 137

Phillips McDougal, “The Cost and Time Involved in the Discovery, Development and Authorization of a New Plant

Biotechnology Derived Trait”, For Crop Life International, September 2011.



The time spent in each stage can overlap. The costs for breeding stacks with multiple events are not included.138 The regulatory requirements (regulatory science stage and registration and regulatory affairs stages) represented 25.8% of the total cost and 36.7% of the total time. The average length of the R&D process for plant biotechnology is 13.1 years. As shown below, the process is shorter than average for canola, corn, and cotton. Figure 6.2 Duration (in Years) of Plant Biotechnology R&D Process

Source: Phillips McDougal, “The Cost and Time Involved in the Discovery, Development and Authorization of a New Plant Biotechnology Derived Trait”, For Crop Life International, September 2011.

The European Association for Bioindustries (Europa Bio) examined GMO approvals in the EU, and compared the time required for regulatory approval in Canada, Brazil, and the US. As shown in Figure 6.3, it takes an average of 30 months to obtain regulatory approval for a GM product in Canada, while it takes 45 months in the EU139. Figure 6.3 Time (in months) Required for Regulatory Approval

Source: Europa Bio, "Approvals of GMOs in the European Union", October 2011

138

According to Phillips McDougall these costs are higher because it typically takes another 2 to 3 years to commercialize. 139

Europa Bio, "Approvals of GMOs in the European Union", October 2011

11.7 12 12.7

16.3

13.1

0

2

4

6

8

10

12

14

16

18

Canola Corn Cotton Soybean All Crops

Years

30

25 27

45

0

5

10

15

20

25

30

35

40

45

50

Canada US Brazil EU

Month

s



The longer approval time in the EU occurs largely because all member states can have input into a regulatory decision. An industry expert indicated that In Canada, it takes between 18 months and 30 months to get necessary approval. The time will depend on the complexity and the work load. The data in Figure 6.3 is based on 2011 information. Since then, the time for approval is approximately 1-year in Brazil, and much longer in the US with approval of about 3.5 years (40 months) due to the court’s decision affecting deregulation of a trait. In the US, deregulation of GE plants is the final step in the commercialization process. Monsanto filed a petition with USDA’s Animal and Plant Health Inspection Service (APHIS) for deregulation of its GE alfalfa in 2004, and for GE sugar beets in 2005 (both are herbicide tolerant). As part of the deregulation process, APHIS conducts an environmental review under the National Environmental Policy Act (NEPA) to determine whether any significant environmental impacts would result from deregulation. APHIS conducted a limited review, known as an environmental assessment (EA), of the GE plants to assess the impacts of growing them on a commercial scale. APHIS issued a “finding of no significant impact” (FONSI) for GE alfalfa and GE sugar beets. Some lawsuits subsequently challenged the adequacy of the EAs for the two crops (as separate actions). Both courts held that APHIS should have prepared a more analytically thorough environmental impact statement (EIS) for the deregulation decisions. Separately, the courts directed APHIS to complete an EIS on the effects of deregulating GE alfalfa and GE sugar beets140. These decisions have lengthened the time required for regulatory approval of a trait in the US. There is a significant cost to regulatory delays. In the case of canola in Canada, a 1-year delay can be to $15 M to $20 M (for a company) and much larger for the industry ($40 M to $60 M). Herbicide tolerance in canola has provided over $1 billion in benefits to producers. For corn or soybeans in the US, the cost of 1-year delay is about $100 M in NPV (for a company)141.

6.5 Variety Registration The CFIA on their website indicates that “the purpose of variety registration is to provide government oversight to ensure that health and safety requirements are met and that information related to the identity of the variety is available to regulators to prevent fraud. It also facilitates seed certification, the international trade of seed and the tracking and tracing of varieties in commercial channels”. A key requirement of variety registration is that the variety must be distinguishable, uniform, and stable. Approximately 50 different crop kinds are subject to variety registration, which are listed in Schedule III of the Seeds Regulations. As shown in Table 4.5, these crop kinds are tiered in Part 1, Part 2 or Part 3, with different registration requirement. Exceptions to variety registration include field corn, food-type soybeans, chickpeas and hemp. These crop kinds are listed. Seeds of most crop kinds (~ 70) can only be sold by variety name if the seed is Certified/pedigreed status, with these crop kinds listed in Schedule II of the Seeds Regulations. Grain corn, food-type soybeans, chickpeas and hemp are included in this list and can only be sold by variety name. Common seed is derived from pedigreed seed of the variety; it is the seed of a registered variety (of Certified seed) that cannot be sold by a variety name. This provision applies to all crop kinds listed in Schedule III (e.g., wheat and barley). Prior to 1974 this restriction on the use of variety names applied

140

from Congressional Research Service, "Deregulating Genetically Engineered Alfalfa and Sugar Beets: Legal and

Administrative Responses", 2013 141

Conversation with an industry expert in 2013.



only to cross-pollinating species where the identity and integrity of the variety can break down if care is not taken to protect the seed crop from contaminating pollen sources. This restriction on the use of variety names was extended to self-pollinating crop kinds (e.g., wheat) in 1974 in part to increase use of Certified seed. Acres in seed production essentially doubled between 1974 and 1982, following this prohibition on the use of variety name on common seed.

For most crop kinds, imported seed that is to be sold in Canada must be registered with the VRO, and meet the requirements for the specific crop kind. In the case of wheat and barley this includes the Part 1 requirements of the basic requirements, plus pre-registration testing and merit assessment by a recommending committee. This requirement can limit opportunity for commercial crop producers with Part 1 crop kinds (e.g., oats, barley) as product developers in other countries may choose not to invest extra funds for the Part 1 pre-registration testing requirements and be subject to the merit assessment by a recommending committee142. The USTR may be considering the Part 1 requirement as a non-tariff barrier. The larger consequence is potential lost opportunity for the commercial grower and multiplication of the variety by Canadian seed growers. As noted some crop kinds are not subject to variety registration (e.g., corn, food grade soybeans); rather they are listed. These varieties can be imported into Canada as long as they meet basic requirements of distinguishable, uniform, and stable, and any traits have received regulatory approval in Canada. Another impact of Part 1 requirements is that varieties being considered for registration must have merit. This again can limit opportunity for certain crop producers since the variety may not yield as well in test plots; the variety may be well suited for certain growing areas in the country – and the variety could be registered in a specific region. Registration of Part 1 crop kind varieties has a higher overall system cost, with the cost incurred by the variety recommending committee on such cost. The net effect of variety registration is likely fewer varieties available to growers, potentially lost opportunity of higher yields or supplying higher valued niche markets, and for seed growers fewer varieties that require seed multiplication.

6.6 Quality Assurance to Buyers and Seed Certification Seed certification is a quality assurance system to provide confidence to the seed buyer that the seed being purchased is as advertised and promoted by the seller. Certification is a process whereby an unobservable quality level of some product is made known to the consumer through some labeling system, usually issued by a third independent party. Both products and processes can be certified. The seed tag is a mechanism that provides quality assurance of the seed stock to a buyer. Products such as seed can have one of the following three attributes: search, experience or credence. Search attributes are those which can be assessed prior to purchase, such as KVD. Experience attributes are those which cannot be assessed until the product has been purchased and used, such as performance of a variety. Only through use can the attribute (e.g., yield, standability, disease resistance) be assessed. Credence attributes are those which cannot be assessed before or after purchase and use; with seed uniformity and purity as examples. A quality assurance system and associated certification provide necessary information and can result in a credence attribute becoming an experience attribute.

142

It should be noted that a Canadian based product developer can import germplasm outside of this registration system for use in their breeding program.



In general, a quality assurance program improves market efficiency and lowers transaction costs since the QA program (such as seed certification) removes the asymmetric information. The latter occurs when the seller (the supplier of seed) has more information than the buyer. The seed certification system is designed to provide credible and authoritative information to buyers of pedigreed seed. However, at issue is whether the seed certification, as a QA program, requires all the current features. Seed companies have self-interest to protect their brand and reputation, and in this respect, they will invest in a QA program and a certification program that is viewed as credible by buyers. In this context, what is an appropriate role of government in the certification process? Is it to provide oversight, provide accreditation to third party certifying bodies, or? Figure 6.3 illustrates the different approaches that can be taken with certification, whether use of government standards or private standards. This illustration was used for food labelling and is applicable to seed certification where the labelling is the CFIA’s blue tag. The first branch (on the left had side of Figure 6.4) is completely private. A private third-party sets private standards, private testing, private certification and testing, and enforcement/compliance with standards. The second branch is a mixed model. The third party sets private standards, private certification and enforcement/compliance. Government provides testing or accreditation of testing. This approach is beneficial when the standards are difficult to test for. Figure 6.4 Approaches to Certification and Labelling

Source: Golan E, F Kuchler, and L Mitchell, “Economics of Food Labeling”, USDA, ERS, 2000

The third branch based on government standards is also a mixed model. The approach uses private testers and certifiers to ensure standards are met. Enforcement could be provided by the government or private entities.



The fourth branch is completely public. The government sets standards, test, certifies, and enforces. Examples of this model include (in the US) state organic standards143. In the past seed certification was primarily this model. The current approach to quality assurance in Canada would be a fifth branch in the above chart. Standards are set by government with some collaboration with industry. Testing and certification is handled by the private sector with the government accrediting the testing and certification. In Canada, government is also providing meta control when CFIA rechecks work by licensed seed crop inspectors. Are government standards necessary? Could private standards be used in seed quality assurance? A standard is “a measurable threshold that a commodity has to meet in order to qualify as a specified food product (identity standard) of grade of product (grade standard).” A grade is “a designation that places a product in a qualitative category”. In grain, grades can facilitate long distance trade, or/and they can be used to differentiate products144. Grades and standards provide standardization of goods; assist with product differentiation; and reduces the risk to buyers and sellers. Public standards rely on a performance standard; reduce transaction costs; can serve as a non-tariff barrier; and can have low and slow enforcement. Private standards, on the other hand, rely on a process standard (such as HACCP). Performance standards are used to meet needs of differentiated products. Enforcement is by third parties (generally) and is typically fast. Private standards are used when the buyer needs consistent quality and reliable quality; there are differentiated products; heavy investment in the brand has occurred and the product is important in the portfolio; and to provide a signal to suppliers. The use of private standards can result in economics of scale and scope; bargaining power with suppliers; trust along and the supply chain; and reinforcement of the demand driven chain. With private standards, suppliers must investment in equipment which can be a barrier to entry or result in increased concentration or increased cooperation among suppliers. For policy makers, private standards result in less control. The government must still set minimum grades and standards and over time, private standards will tend to tighten public standards.145 Standards for export markets may be different than for domestic markets and there could be continuum of quality provided by standards. The need to protect the reputation of a firm selling differentiated products results in an incentive to maintain quality. If reputation is not sufficient then private sector quality certification, private contracting, civil litigation and public prosecution of fraud can be used.146 Public versus private certification Certification bodies arise because the cost of setting up and maintaining a certification system for an individual firm is prohibitive and because some certification also requires R&D. There are at least three types of certification schemes used in the organic sector: third party certification, group certification, and participatory guarantee schemes. The basics of each type are shown in Table 6.4. The latter two schemes cost less, increase the role of growers, and are very flexible (sensitive to local conditions).147

143

Golan E, F Kuchler, and L Mitchell, “Economics of Food Labeling”, USDA, ERS, 2000. 144

Gardner B, “US Food Quality Standards: Fix for Market Failure or Costly Anachronism?”, American Journal of Agricultural Economics”, Volume 85, August 2003. 145

Kinsey J, “Private and Public Standards for Food Quality: A Symbiotic Relationship?”, ERS Conference on Policy and Competitiveness in a Changing Global Food Industry, April 2005. 146

Gardner B, “US Food Quality Standards: Fix for Market Failure or Costly Anachronism?”, American Journal of Agricultural Economics”, Volume 85, August 2003. 147

Herberg L, “Organic Certification Systems and Farmers’ Livelihoods in New Zealand”, January 2007.



Table 6.4 Certification Schemes used in the Global Organic Sector

Item Third Party Certification Group Certification Participatory Guarantee Scheme

Who Audits

Professional certification body

Internal group audits growers, External control checks internal control and audits a few growers

Peer review/audit by other growers

Who Markets

Individual grower Group Individual grower

Which Markets

Export and domestic Export (for LDC) and domestic Local

Who is certified

Individual growers Group is certified Individual growers

Separation Advice/consultation separate from audit/certification

Can combine advice and audit Can combine advice and certification

Other External certification body regulates control structure

Group is homogeneous and in same location Lacks formal recognition

Lacks formal recognition

Source: Herberg L, “Organic Certification Systems and Farmers’ Livelihoods in New Zealand”, January 2007

Participatory guarantee schemes in the organic sector typically occur in less developed countries. There are exceptions. In Canada, participatory guarantee schemes have been proposed as an option for organic producers in BC. “BC producers would submit plans for crops, methods and inputs on the Certified Organic Associations of BC (COABC) web site. These would be open for review by other producers, as well as a designated certifying body, which would then arrange a site visit.” 148 If there are high fixed R&D costs, certification or promotional costs are high, then a public entity may achieve economies of scale. However, if there are no huge technical or knowledge needs, then private sector certification emerges. With credence goods, if competition is possible then private certification will work. Public oversight may still be needed to enhance the credibility of private certification.149 Canada’s fruit and vegetable sector employs third party certification and group certification in the CanadaGAP Program. This program was developed to promote good agricultural practices (GAP) and as of 2012 it is run by CanAgPlus, a non-profit organization. In Canada, three companies are licensed to provide certification services for the program.150 There are six certification options in CanadaGap which respond to cost considerations and market requirements (some markets require Global Food Safety Institute (GFSI) certification and some don’t). The options which include group certification are shown in Table 6.5 below, with the left-hand column showing options not eligible for GFSI, which are generally weaker than those options on the right side of Table 6.5.

148

http://www.organiccouncil.ca/news/supporting-small-scale-organic-producers-in-ontario 149

Crespi J and S Marette, “Some Economic Implications of Public Labeling”, Journal of Food Distribution Research, November 2004. 150

Gale H, “Canada Gap Program Overview”, 2017



Table 6.5 Canada Gap Certification Options

Not Eligible for GFSI Certification Eligible for GFSI Certification

Option A1: “Four year audit cycle • Fixed, scheduled audit every four years • Mandatory surveillance (random audits and self-assessments) in the intervening years • Self-assessments are reviewed by the CB • Meets Canadian Government Recognition Requirements”

Option C

Annual on-site audit

Option A2: “Variable four year audit cycle • Same as A1, except – if selected for a random audit under the surveillance program, the next scheduled audit would be four years after the random audit.”

Option B: Group Certification •” Group Management System effectively functions as a surrogate certification body for the Group’s members • Group internally audits all of its members annually

Certification body audits Group Management System annually

• Certification body audits a sampling of farms and central facilities • Cost savings are achievable usually for larger groups, based on economies of scale and making use of existing staff, resources and management systems already in place”

Option A3: Group Certification • “ Combines elements of Option B and the four-year audit cycle • Group Management System effectively functions as a surrogate certification body for the Group’s members • The Group’s internal audit program achieves 100% coverage of all member production, packing and storage facilities over 4 years •System and a sampling Certification body audits the Group Management of farms and central facilities every 3 years”

Option D: Wholesale and Brokerage •” Repacking and wholesaling requirements are GFSI-benchmarked. Brokerage is not. • Individual certification • Annual on-site audit”

Source: Gale H, “Canada Gap Program Overview”, 2017

6.7 Data Integration Through the Seed Supply Chain and Traceability The seed system relies on data in each segment of the seed supply chain, beginning with variety registration through to seed certification. Each segment is required to supply data to support their activities. A few issues have been highlighted that can be addressed. One issue is that some parts of the seed system still rely on paper-based systems (e.g., variety registration, application for PBR) versus electronic filing. This adds to system costs and the extra efforts for transmission of some of the same that is required by other organizations (in the same agency). An electronic system can save time and costs for proponents and for agencies receiving data. As well the scoring or rating systems used by agencies can vary for the same phenomenon, which can create complexity and can add to costs as necessary data is being supplied to agencies for variety



registration, PBR, or other necessary approvals. Standardization and the associated simplicity lead to efficient gains in necessary administrative activities. The seed system would benefit from an initiative that uses an integrated information technology data system. This can allow for breeders to use the same system to seek registration of a variety and to support the quality assurance program for registered varieties. The system can be automatically linked to the variety listing system and can provide information back to breeders on how their varieties perform through the seed multiplication process. An integrated data system that supports the seed system will provide more transparency; however, the system should be developed to as well respect necessary privacy and confidentiality of proprietary information. Information technology packages are available which provide necessary security of data and access privileges to specific data sets. A scope issue that should be addressed is whether the data system is only for the seed sector, or whether users of Certified seed (e.g., farmers) can access certain data points, such as the performance of each generation of pedigreed seed during the seed multiplication process? Furthermore, should the scope of the system have linkage to performance trial data for listed varieties? These scope issues can be addressed when the seed sector determines the primary purpose of an integrated data system that supports the seed business.

6.8 Organizations Supporting the Seed System There are a number of organizations that support the overall seed system in Canada. Some organizations have a functional role. For example, (1) the CSI audits seed processing plants, (2) the CSGA provides necessary oversight of seed production in support of seed certification, (3) the CPTA is designed to monitor compliance with PBRs such as when technology use agreements are in effect, and (4) government agencies such as the CFIA and Health Canada. Some organizations within the seed system are primarily advocates for their members, such as Crop Life and CSTA. Other organizations provide support for members that provide services necessary for supply Certified seed to farmers such as the CSAAC for seed analysts. In addition, there are designations provided by CFIA for other service suppliers, such as RSE (seed processing plants), ASCIS (entities that provide seed crop inspection services), LCSI (seed crop inspectors), and accredited seed testing laboratories. With a focus on only non-governmental organizations that have a functional role or an advocacy role (i.e., CSGA, CPTA, CSI, CSTA, Crop Life) the issue is whether there can be organizational stream lining. For example, in the Netherlands Plantum is a body which represents the interests of the seed sector and NAK is the not-for-profit body that is involved with seed certification. In France GNIS is the overall seed system organization, with its division SOC responsible for seed certification151. These examples suggest that within Canada, some of the current organizations could consolidate and have one organization focused on service delivery and another on representing the overall seed sector as in the Netherlands, or one organization such as in France.

151

In addition, France’s SICASOV represents plant breeders and enforces PBRs and collected royalties from seed growers.



Doing so can result in cost saving within the seed supply chain. These cost savings include (1) seed company time and expenses associated with being involved with fewer supporting organizations, and (2) a potential reduction in senior management time required to operate an organization. Assuming the seed industry chooses consolidation of supporting organizations, one area of decision is whether to have two separate organizations – one to support the seed certification process and one for overall seed industry representation – or one organization with the functional activities (of quality assurance) being a division of the industry body. The role of government in the seed industry has evolved over time. Currently in some EU countries authority for seed certification has been delegated to an industry body, with obvious accountability to government to ensure compliance with necessary standards. This has been occurring in Canada with government’s role focused on product safety and registration/listing of varieties. Within Canada, government resources supporting the sector are in decline, implying that over time industry will need to deliver services that were provided by government, with government oversight, as required, such as when authority is delegated to an industry body. With an industry body, as in some EU countries, the seed industry can be industry led and government enabled. This includes the industry body working with government authorities on necessary changes to regulations, standards and certain practices.

6.9 Benefits and Risks of the Current System In Chapter 2.0 we introduced a framework for considering and assessing the seed system, which is reproduced below (as Figure 6.5). The seed system core is affected by seed system enablers (e.g., PBR’s and resulting impact on approaches used to capture value and resulting investment decisions) and associated seed system influencers (e.g., cost of doing business and impact on investment decisions). Figure 6.5 A Framework for Viewing the Seed System

Seed System Core

Crop

Producers

Seed

Companies

Seed

Growers

Product

Developers

System Influencers: o Market

Requirements; o Product Information

& Knowledge; o Product

Performance; o Product Safety; o Value Capture by

Developer; o Compliance costs; o Regulatory decision

timelines; o Government; o Cost of doing

business.

System Enablers: o Variety registration

and listing; o Quality Assurance

Programs; o Regulations; o PBRs and IPR; o Government; o System

Collaboration & Supporting

Organizations; o Supporting

Infrastructure.



For each enabler, benefits and risks of the current system are provided (in summary form in Table 6.6). As well, system influencers are noted for each of the enablers. Based on our assessment of benefits and risks for each enabler, the last column highlights resulting implications for Seed Synergy. With some enablers, the focus may pertain to only cereals and pulse crops. For example, in the area of PBR’s and IP protection, the current system has appropriate enabling legislation (see the third row in Table 6.6). However, the current approach used to capture value by product developers of cereal and pulse crops does not generate very high royalty payments for product developers, aside from the royalty embedded in the Certified seed price. The implication is that changes are required on how some royalty value can be captured on FSS. Elsewhere in this report we note that a contract system that begins with the Certified seed sale is one way to capture a royalty payment on FSS. Another enabler is system collaboration and the supporting organizations which apply across all crop kinds (fifth row in Table 6.6). While the system currently benefits from a high level of collaboration on initiatives, the structure of the system can result in too many supporting organizations which results in some duplication of effort, and an overall seed sector that is not as cost effective as it could be. The cost of doing business does influence organizational design. Approaches are used in the EU where there is one overall organization representing the seed system and a division focused on only assuring seed quality (i.e., seed certification).



Table 6.6 Benefits, Risks and Implications for Seed System Enablers (focus on Cereals and Pulse Crops)

Enablers Benefits/Advantages Risks/Disadvantages Influencers Implication for Seed Synergy Variety registration

Varieties are registered or listed in CFIA's VRO based on a tiered approach, with industry input

Variety registration may be too onerous for some crop kinds, System may be restrictive and high cost for some crop kinds

Market requirements; Product performance, Product information, Product safety

Should this be more of an industry led process?

Quality Assurance programs

Canada's seed certification system is well regarded around the world, and facilitates seed exports

A number of organizations have responsibility for the overall seed certification system, which can result in higher costs and overall efficiency

Product performance, Product information

A single industry organization be responsible for all aspects of the quality assurance system (seed certification), which is enabled by government (EU has examples for consideration)

Regulations Regulations are supportive of an effective seed system

Regulations from various agencies can be duplicative, adding costs to the seed system and reducing overall efficiency Some regulations may be unduly onerous.

Product safety, Compliance costs, Regulatory decision time-lines

Industry and government collaboration could be used to amend and develop regulations as conditions and technologies change

PBRs and IPR Current legislation enables PBR and farmer's privilege

Current approach does not incentivize private sector product developers to invest in variety development for cereals and pulses. IPR is not as effective on cereals and pulses, aside from royalties on Certified seed sale Inter-farm common seed sales are regulated, but not enforced

Value capture mechanism used by developers

Changes required to have plant breeders (via PBR) capture value on seeds (FSS) used by farmers across a number of crop kinds

System Collaboration & Supporting Organizations

Organizations in the seed supply chain collaborate on initiatives

The many organizations used to operate the seed system results in some duplicative effort and adds to a higher cost and less efficient overall seed sector Government resources are constrained, which impacts on a system dependent on government funds for service delivery

Cost of doing business

Seed industry could consolidate with one organization responsible for quality assurance (overall seed certification) and another that represents the overall seed system (e.g., Plantum (GNIS) represents the seed industry and NAK (SOC) responsible for seed certification in the Netherlands (France)). SOC is a division of GNIS

Supporting infrastructure

Some integration of data currently occurs

A higher cost seed system due to lack of data integration between various organizations, some parts are paper based, and not using an appropriate IT system for the seed supply chain

Product information, Market requirements

Collective action required to develop and implement an IT system for the requirements of the seed supply chain; Some EU countries have a prototype that could be emulated


Prepared by JRG Consulting Group and SJT Solutions 85 for Seed Synergy

6.10 Chapter Summary Value capture, regulation of PNT, variety registration, quality assurance, data integration, and organizational structure in Canada’s current seed system was assessed to identify benefits and risks associated with them as well as what factors influence them, and what the implications were for Seed Synergy. There are a few significant implications of the assessment. First, change is required to enable plant breeders to capture value on FSS in some crops. Private sector product developers have a challenge with self-replicating crops such as wheat and barley, where FSS for replanting can occur. The high rate of FSS limits the amount of private sector investment in variety development. Only 10% of private sector investment occurs in cereals, forages and pulses. Funding of variety development for cereals may be lower in Canada than in other countries, which can have an impact on the varieties supplied to the marketplace and overall farm sector productivity. In the case of wheat, in Canada expenditures on variety development at $2.00/acre is much lower than in Europe, and on a per tonne of output basis the investment is more than double in Australia. Higher investment levels result in more varieties with higher yield potential and/or higher per acre profit margins. Efforts are required to increase total investment through FSS royalties or greater use of Certified seed. The approach used to regulate PNT’s could become more flexible, which can save significant resources and provides benefits to the seed sector as well as to commercial farmers. The assessment also suggests that way quality assurance is delivered could change somewhat as part of the seed certification process. Integration of data and traceability can provide significant benefits to the seed system. These issues are further assessed in Chapter 10.0. Another significant implication is in the area of system collaboration and supporting organizations. Currently, some organizations such as CSI, CSGA, CPTA, CFIA, and Health Canada have a functional role. Some organizations within the seed system are primarily advocates for their members, such as Crop Life and CSTA. Other organizations provide support for members that provide services necessary for supplying Certified seed to farmers such as the CSAAC for seed analysts. With a focus on only non-governmental organizations that have a functional role or an advocacy role (i.e., CSGA, CPTA, CSI, CSTA, Crop Life) the issue is whether there can be organizational stream lining. For example, in the Netherlands Plantum is a body which represents the interests of the seed sector and NAK is the not-for-profit body that is involved with seed certification. In France GNIS is the overall seed system organization, with its division SOC responsible for seed certification. These examples suggest that within Canada, one organization could focus on service delivery and another focus on representing the overall seed sector as in the Netherlands. Following this assessment provided in this Chapter, the next Chapter focuses on the structure conduct and performance of the seed system in Canada.



7.0 Structure, Conduct and Performance of the Seed System This Chapter provides an assessment of the structure, conduct and performance of the current seed system. In general, there are basic conditions (e.g., technology, demand conditions, public policy, regulations) that influence industry structure (e.g., number and size of firms, barriers to entry, industry concentration, etc.). The resulting structure affects the behaviour or conduct of industry players (e.g., pricing, investment levels, mergers, R&D activity, cooperation, rivalry, etc.)152, which ultimately leads to performance (e.g., efficiency, profitability, cost structures, growth, contribution to the economy, etc.)153. In its simplest form, structure and conduct can impact sector performance. Figure 7.1 is a simple schematic of the structure- conduct- performance model. Figure 7.1 Schematic of the Structure- Conduct- Performance Model

7.1 Basic Conditions – Technology for Product Development This section is focused on product development technology154. Conventional plant breeding exploits national variation, and this process which can be enhanced by exposing seed to chemicals or radiation. Marker assisted selection, a recent advance, “links the genes associated with desirable traits to specific markers on the genome” and improves the accuracy and rapidity of trait selection. Genetic modification/engineering uses transgenesis to “add desirable traits to crops by inserting genes from other species into random locations in the plant’s genome.” Herbicide tolerance and insect resistance have been the most widely commercialized traits using genetic modification. Other new breeding techniques (NBT) allow for greater precision when increasing variation. “Collectively NBTs allow researchers to insert or remove whole genes, make small changes to the DNA, or change the activity of genes without modifying their sequence.” A standard classification system for new breeding technologies does not exist. Table 7.1 (on the following two pages) provides an overview of some of the techniques and the products that were developed using them.

152

Conduct can also be influenced by basic conditions such as regulations affecting businesses and economic activity in various segments of the seed sector. 153

In turn, performance can affect structure, such as more profitable firms can consolidate operations which lead to an altering structure. 154

Regulations that impact each portion of the seed supply chain have been discussed previously.

Basic Conditions

(e.g., technology, regulations)

Structure (e.g.,

number of firms, size of firms, entry barriers,

product differentiation)

Conduct (e.g.,

pricing, rivalry, investments, R&D)

Performance (e.g., profitability, cost

structures, varieties developed, efficiency of approvals, equity,

growth, exports)



Table 7.1 New Breeding Techniques

Technique Example/Comment

Genome Editing “Genome editing to modify DNA at one or more specific sites selected by the researcher. The three main techniques (CRISPR-Cas9, Zinc Finger Nucleases and TALENs) each use an enzyme (a nuclease) to cut the DNA at a specific location. Researchers are able to exploit the mechanisms that repair these cuts to make edits to the DNA.” (a)

“Waxy Corn: The first genome edited crop produced using CRISPR-cas9 is a corn variety developed by US company DuPont Pioneer. Genome editing was used to inactivate a gene leading to corn with a high amylopectin starch content. This is milled for a number of everyday consumer food and non-food uses, including processed foods and adhesives. In April 2016, the US Department of Agriculture decided not to regulate this variety because it does not contain any introduced foreign material.” (a)

Oligonucleotide- directed mutagenesis (ODM) “A specialised form of genome editing called Oligonucleotide - directed mutagenesis (ODM). ODM allows the introduction of targeted changes (mutations) to one or just a few bases of DNA” (a)

“Herbicide-Tolerant Oilseed Rape (Canola): The first commercial product resulting from an NBT was developed by Cibus, a US-based company. It used a technique called oligonucleotide directed mutagenesis (ODM) to generate a variety of canola that is tolerant to sulfonylurea herbicides. Using ODM, Cibus was able to introduce a single base mutation, which occurs naturally in related species. In 2014, this crop became the first NBT-derived product to gain market approval in the US and has been cultivated in the US since 2015”. (a)

Intragenesis “Genes derived from cross-compatible species are inserted into a plant genome” (d) “Cisgenesis (transferring a gene from the same or a closely related species) and intragenesis (inserting a reorganised regulatory coding region of a gene from the same species).” (a)

“Late Blight Resistant Potatoes: A UK research programme from The Sainsbury Laboratory has developed potatoes that are resistant to the disease late blight. Researchers inserted genes for blight resistance from a wild relative of the potato into commercial potato varieties using cisgenesis, an NBT using similar transformation techniques to transgenesis and thus currently regulated under EU GMO legislation.” (a) “Cisgenesis can speed up the breeding process significantly, particularly in self-incompatible, vegetative crops such as potato and apple. In these crops, a new variety could be developed in approximately 5 years using cisgenics (if the gene(s) of interest have been isolated) whereas this might take 25 years or more using conventional breeding” (b)

Using epigenetic processes to change the activity of genes without changing the DNA sequence (a)

“The United States Department of Agriculture (USDA) and Food and Drug Administration (FDA) have approved a potato variant developed by the company Simplot that contains no foreign DNA (elements were transferred from sexually compatible wild potato) and uses RNA interference to reduce the level of several enzymes including polyphenol oxidase responsible for bruising and browning. This variant, by lowering the level of the amino acid asparagine and of reducing sugars, also has reduced ability to generate the potentially carcinogenic metabolite acrylamide at high temperatures.” (c)

Reverse Breeding “Homozygous parental plant is generated from selected heterozygous plant by the suppression of meiotic recombination by RNA interference.”

“As a plant breeding tool, reverse breeding may be regarded as more versatile than alternative techniques as its controlled deconstruction of complex genotypes into homozygous parental lines allows the further improvement of these lines by classic breeding methods.” (b)

(a): Houses of Parliament, Parliamentary Office of Science and Technology, “New Plant Breeding Techniques”, PostNote #548, February 2017 (b) Advisory Committee on Releases to the Environment (ACRE), “New Techniques Used in Plant Breeding”, 2014

(c): European Academies Science Advisory Council, “New Breeding Techniques”



The new breeding techniques may create regulatory uncertainty in some jurisdictions. The UK’s Advisory Committee on Releases to the Environment (ACRE) examined the NBT in terms of: (1) does it involve a GM technique; (2) does it produce an intermediate product that is a GMO; and (3) are the offspring GMO. The results of the examination, shown in Table 7.2, indicate that there is ambiguity/uncertainty in the answers.155 Nevertheless, some countries have determined that some products of genome editing will not be regulated (e.g. https://www.usda.gov/media/press-releases/2018/03/28/secretary-perdue-issues-usda-statement-plant-breeding-innovation). Table 7.2 Results of an Examination of GM Status based on Breeding Technique

Source: International Grain Trade Coalition, “New Patent Breeding Techniques”, March 2015 The Canadian regulatory system is a product-based approach and designed to handle products developed using NBT similarly to those developed by any other method. In practise, however, the current case-by-case application of the novelty regulatory trigger leads to much uncertainty. It is not yet clear under what conditions products of NBTs may not be required to go through the standard PNT regulatory process.

7.2 Barriers to Entry and Product Development Historically, plant breeding has been considered to have high barriers to entry because of large start-up costs, economies of scale in production; length of time for investment pay-off; IPR; and access to distribution channels. The Intellectual Property Office in the UK argues that its plant breeding sector is, in general, characterized by high barriers to entry.

“Plant breeding covers a range of techniques, but at the commercial end the practice of plant breeding is highly research intensive, requiring both staff and facilities to manage numerous lines of genetic material to produce marketable varieties. Accordingly, barriers to entry are high and breeding programmes are usually purchased as part of acquisitions within the seed breeding sector, rather than established. Nevertheless, some markets are served by smaller

155

Advisory Committee on Releases to the Environment (ACRE), “New Techniques Used in Plant Breeding”, 2014



UK plant breeders. This may indicate that management of only a few lines and specialisation into a particular crop may offer entry into the market”156

It may not be possible for new entrants to access patented technology or genetic material. The cost of obtaining permission to use patented technology or genetic material often prevents smaller firms from participating in innovative research and creates significant barriers to entry157. Intellectual property lawsuits among agrochemical–seed companies are common. This combination of circumstances creates “patent thickets,” in which broad claims overlap, and it is difficult to bring a new product to market without potentially infringing on a patent. This is a significant barrier to entry for small firms. Even though the original purpose of patents was to encourage innovation, increased concentration and intellectual property congestion may have had an opposite effect. Multinational agrochemical companies have control over many essential proprietary technologies that creates a barrier to entry for new start-ups. Figure 2 (see insert on the right) shows cross-licensing agreements involving pharmaceutical and chemical companies for transgenic seed traits. These arrangements among the big six agrochemical-seed companies are sometimes referred to as “non-merger mergers”, as there is no change in ownership, but they nonetheless raise important questions regarding cartel behavior and market dominance. This arrangement is similar to formation of a cartel that excluded other competitors and potential entrants, implying that many remaining small firms either must merge with the big six, license from the big six, or go out of business. Even though the big six may license to competitors or new entrants, they have no incentive to grant such licenses at attractive rates. This suggests a substantial barrier to new entry in the markets for transgenic seed. Rommens argues that GM crops are difficult to bring to market and that this acts as a barrier to entry.

“Each year, billions of dollars are invested in efforts to improve crops through genetic engineering (GE). These activities have resulted in a surge of publications and patents on technologies and genes: a momentum in basic research that, unfortunately, is not sustained throughout the subsequent phases of product development. After more than two decades of intensive research, the market for transgenic crops is still dominated by applications of just a handful of methods and genes. This discrepancy between research and development reflects difficulties in understanding and overcoming seven main barriers-to-entry: (1) trait efficacy in the field, (2) critical product concepts, (3) freedom-to-operate, (4) industry support, (5) identity preservation and stewardship, (6) regulatory approval and (7) retail and consumer acceptance.”158

156

UK, Intellectual Property Office, “The UK Plant Breeding Sector and Innovation”, 2016. 157

This paragraph captures information provided by Maisashvili A, H Bryant, M Raulston, G Knapek, J Outlaw and J Richard, “Seed Prices, Proposed Mergers and Acquisitions Among Biotech Firms”, Choices Q4, 2016 158

Rommens C, “Barriers and Paths to Markets for Genetically Engineered Crops”, Plant Biotechnology Journal, Volume 8, 2010



However, technical, economic, and society factors appear to be reducing the barriers to entry and this will likely accelerate over time. The National Academy of Sciences argues that the following technical factors have reduced development costs and increased the access to biotechnology tools:

Technological change in DNA sequencing and synthesis: As the following chart (see insert) indicates substantial reductions in the cost have occurred beyond the rate at which Moore’s law would have predicted. Genome engineering allowing for targeted DNA sequence modifications and advances in silencing gene expression enable the development of new products.

Synthetic biology159

promotes standardized biological parts which will improve design efficiency; provides access to advanced biotechnology to a greater number of developers/potential developers; and improve regulatory analysis by enabling higher safety standards.

The design-build-test-learn cycle in synthetic biology is decreasing and can reduce product development time lines.

Public and private biorefineries (“centralized facilities that leverage software and automation to dramatically increase the number of organisms that can be engineered in parallel”) will allow the development of more biotechnology products.

Public and private investments are well known economic contributors to the development of new biotech products. There is a new source, however. Crowdsourcing is now being used in the US to fund start-ups and small companies to raise funds for the development of biotechnology products. New sources of capital help to level the playing field between small and large developers. A societal change which is reducing entry barriers is the entry of non-traditional players. Do it yourself community biotechnology labs teach basic methods to non-scientists. Canada currently has seven do it yourself biotechnology groups/organizations.160

7.3 The Economics of Structure, Conduct, and Performance Table 7.3 summarizes how economists perceive firm/industry behavior (conduct) based on characteristics. In a perfectly competitive industry, there are many small firms producing a homogeneous/standard product and there are no barriers to entering the industry. Each firm is a price taker, meaning that they have no control over price and just charge the going price.

159 “In synthetic biology, engineering principles are applied to reduce genetics into DNA “parts” so that those parts can be

understood in isolation and reassembled into new biological parts, devices, and whole systems to build desired functions in living cells. Through this process, it is possible to assemble new organisms from parts of DNA from more than one source organism or to build synthetic DNA from molecules.” (National Academy of Sciences, “Preparing for Future Products of Biotechnology”, 2017) 160

https://diybio.org/local/



Table 7.3 Industry Structure and Conduct

Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Structure

Number of Firms Many Many Few One

Size of Firms Small Small to Medium Large Very Large

Extent of Product Differentiation

None – Standardized Product

Differentiated Product

Standardized or Differentiated Product

Standardized

Barriers to Entry Low Low High Very High

Conduct

Pricing Price Taker – No Power over Price

Price Setter – Some Power over Price

Price Setter – Some Power over Price

Price Setter –Significant Power over Price

Non-Price Competition

None Advertising and Product Differentiation

Advertising and Product Differentiation

Advertising

Interdependence None None High None

Monopolistic competition is characterized by many firms of small to medium size that produce differentiated products and low barriers to entry. These firms do have some power over price and engage in non-price competition through advertising and product differentiation. An oligopoly is characterized by a few, large sized firms producing standard or differentiated products. The key characteristic is that firms in an oligopoly are very interdependent. For example, in quantity leadership, the leader sets the output taking into account how followers will respond, and followers do respond that way. There are also barriers to entry and firms will engage in non-price competition. The final market structure is a monopoly with one very large firm producing a standardized product. Barriers to entry are very high. The type of market structures produces different levels of performance. Economists typically view performance through an efficiency lens. Allocative, productive, and full efficiency can be defined as follows:

“Allocative efficiency means that resources are used for producing the combination of goods and services most wanted by society.

Productive efficiency means that least costly production techniques are used to produce wanted goods and services.

Full efficiency means producing the "right" (Allocative efficiency) amount in the "right "way (productive efficiency).”

In economics, allocative efficiency occurs when price and marginal cost are equal, while productive efficiency occurs when output is at the minimum point of the average total cost curve. These conditions are met under perfect competition (see the first row in Table 7.4). Full efficiency requires both allocative and productive efficiency. Only perfect competition delivers full efficiency. The other market structures do not. This is why from a societal viewpoint; perfect competition is the gold standard.



Table 7.4 Market Structure and Industry Performance

Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Allocative Efficiency

Yes, Price = Marginal Cost

No, Price > Marginal Cost



Productive Efficiency

Yes, in Long Run, Firm’s Output is where Average Total Cost is Minimized

No, in Long Run, Firm’s Output is less than where Average Total Cost is Minimized



Full Efficiency Yes No No No

Profit Potential Normal Normal in Long Run

Moderate to High High

Investment in New Product Development

None Yes Yes None

The potential for profit varies by market structure. Monopolies have a high potential for profit (no competition). Firms in an oligopoly have more ability to profit than firms in monopolistic competition. Perfectly competitive firms earn only normal profits. The amount that firms will invest in new products is related to profits. Firms in a perfectly competitive industry or a monopolist have no incentive to invest in new products. Producers of differentiated products (monopolistic competition and sometime oligopoly) do have an incentive to invest in the development of new products.

Structure and Performance in the Seed Supply Chain Often farmers are used as the textbook definition of perfectly competitive firms. This also applies to seed growers. Both player types are price takers, produce a standardized product, have low barriers to entry, and there are a large number of small firms. These firms earn normal/zero profits (in economic terms). Seed companies fall under monopolistic competition with the primary attribute being the production of differentiated products. These firms are likely more profitable than perfectly competitive firms. The product developer segment has some nuances. Product developers in crop kinds such as corn, canola, and soybean fall into the oligopoly category because there are only a few firms, they are large, barriers to entry are high, and their behavior is very interdependent. Companies in this segment clearly produce and price their products taking into account competitor actions. They have the potential to make significant profits. Developers of pulses and cereals are also oligopolies. However, because of the dominance of the public/producer sector in pulse and cereal R&D funding, output and pricing of new varieties will be closer to competitive ideals. Cereal and pulse product developer firm performance will also differ from other product developer firms because of the differences in IPR. Investment by product developer firms in crop kinds such as corn, canola and soybeans will be high because plant varieties have strong intellectual property rights which allows the developer to capture the value of the innovation. Because IPR are weak in cereal and pulses, private firms find little incentive to invest in R&D and thus the public sector dominates in cereal and pulse development.

Industry Concentration and Market Power Market concentration (or the share of the market held by a few firms) may allow firms to exercise market power and price above competitive levels. However, if the market is contestable, higher prices may not result from market concentration. “A market is said to be contestable if there is freedom of entry and exit into the market and there are little to no sunk costs. Sunk costs are costs



that cannot be recovered once they have been incurred. In the seed industry, examples of sunk costs include regulatory approval, expenditures on advertising, and expenditures on research and development. Because of the threat of new entrants, existing companies in a contestable market are constrained in the extent to which they are able to act anti-competitively, even if they are few in number”161. Fulton and Giannakas argued in 2001 that the seed and chemical industry might not be contestable because of high sunk costs and pricing behavior (prices greater than marginal cost).162 There are two standard ways to measure market concentration: four-firm concentration ratio and the Herfindahl Index (HHI). The HHI takes into account differences in the size of firms and is preferable to the four-firm ratio if data availability is not an issue. The four-firm concentration ratio for a given industry is the sum of the market share percentages of that industry’s four largest firms. In general, a concentration ratio measures the total output, in terms of market share, for a given number of firms at the top of a given industry. The concentration ratio can vary from 0 to 100 percent. A ratio of 100 percent indicates total concentration, or an extreme oligopoly, which is total industry domination by a small number of firms. A ratio between 0 and 50 percent indicates low concentration. Industries at the lower end of this range enjoy perfect competition, while those at the high end may represent an oligopoly. Concentration ratios above 50 percent are usually indicative of this to some degree.163 “The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated”164.

7.4 Structure of the Seed Industry in Western Canada This section provides information on market shares and market concentration in the development of varieties by plant breeders, the production and distribution of certified seed by seed growers, and the sales by seed companies in western Canada165.

Cereals, Pulses, and Special Crops Firms in the Western Canadian seed market for cereals, pulses, and specialty crops are listed below: Plant Breeding:

Cereals: AAFC, CDC, NDSU, Westbred; SW Lantmannen, Syngenta; Plantomar; FDC; BARI; KWS; U of A; Nickerson; Danko; WFGDC

161

Maisashvili A, H Bryant, M Raulston, G Knapek, J Outlaw and J Richard, “Seed Prices, Proposed Mergers and Acquisitions Among Biotech Firms”, Choices Q4, 2016 162 Fulton, M., and K. Giannakas. 2001. Agricultural Biotechnology and Industry Structure.” AgBioForum 4(2): 137-151. 163

https://www.reference.com/business-finance/calculate-four-firm-concentration-ratio-17d2be8faa01dd06 164

https://www.justice.gov/atr/herfindahl-hirschman-index 165

Western Canada is used given its size in the cereals and pulse crops and availability of data by variety



Lentils and Peas: CDC; Limagrain Flax, Canary, and Mustard: AAFC; CDC; NDSU; CPS; Joordans; Coleman’s

Cereal, Pulse and Specialty Crop Certified Seed Production and Plant Breeding:

AAFC CDC U of A Western Feed Development Corporation Coop: farmer directed breeding program Syngenta

Cereal, Pulse and Specialty Crop Certified Seed Production:166

SeCan: over 700 seed growers across Canada; likely 400 seed growers in western Canada Canterra: approximately 200 seed growers in western Canada and the northern great plains FP Genetics: approximately 160 seed growers in western Canada Seed Depot: family owned seed grower company Alliance Seed: partners with seed growers CPS: works with seed growers to produce certified seed; owned by Nutrien (formed by

merger of Agrium and PCS) SeedNet: 13 seed growers in Alberta Mastin: seed grower, distributor and retailer in Alberta Hansen Seeds: Canadian Mustard Association: Corbo Agro: Saskatoon company T&L Seeds: Western Ag: Saskatchewan company producing certified winter wheat seed

Sales:

All the seed grower companies listed CPS Independent farm input dealers and grain companies

Structure and Concentration in Western Cereals In Table 7.5 estimated shares for wheat varieties in western Canada by plant breeder is provided. The acreage data is from the Canadian Grain Commissions’ Crop Insurance data.167 AAFC and CDC developed varieties dominate wheat varieties grown under crop insurance and together represent 94% of the market. The four-firm concentration ratio is 99% while the Herfindahl-Hirschman Index (HHI) is 5,650 which indicates a highly concentrated market. Also shown are the companies that produce the certified seed. Acres do not represent certified seed production and are only present because acres are used to calculate certified seed production shares. The largest producer of certified wheat seed is SeCan with 47% of the market, followed by FP Genetics with 21%. The four-firm concentration ratio is 85%. The HHI is 2,890 which indicates a highly concentrated market. The four-firm concentration ratios and the HHI indicate the potential for the use of market power. However, the dominance of public sector plant breeders and of seed grower organizations, rather than typical private sector firms, significantly lessens any incentives to exercise market power.168

166

Note that a large portion of seed growers will be members of several organizations (i.e. belong to SeCan, Canterra, and FP Genetics). 167

Varieties with less than 1,000 acres were ignored. 168

In Western Canada, seed grower will typically be shareholders of SeCan, FP Genetics, and Canterra. Because of the multiple involvement, there is no incentive to engage in a pricing war.



Table 7.5 Structure and Concentration in Western Wheat Breeding and Seed Production

Source: Consultants’ calculations

Product developer and certified seed and distribution shares for barley are shown below169 in Table 7.6. CDC is the largest developer of barley with 51% of the market, followed by AAFC at 28%. The four-firm concentration ratio is 95% and the HHI is 3,574. The top producer of certified barley seed is SeCan with 71% of the market followed by CPS. The four-firm concentration ratio is 94% and the HHI is 5,217. In barley, based on the HHI, product development is less concentrated than production and distribution. The public sector dominates plant breeding which lessens any incentive to exercise market power. The large market share of SeCan in production and distribution likely reduces any incentive to exercise market power.

169

Note that as with the other tables in this section, the acres are only used to estimate shares and have no other meaning.

CWRS CWAD CPSR CWRW CWSWS CNHR CWSP Total Market

Share

Cumulative

Share

Breeder Acres

AAFC 6,554,944 2,566,781 507,460 205,406 256,326 173 0 10,091,090 72%

CDC 2,710,726 319,574 0 59,997 0 0 22,266 3,112,563 22% 94%

NDSU 224,962 0 0 0 0 247,078 0 472,040 3% 97%

Syngenta 151,929 0 102,348 0 0 0 0 254,277 2% 99%

Plantomar 0 0 0 0 0 0 99,576 99,576 1% 100%

U of Alberta 17,928 0 0 0 0 0 0 17,928 0.10% 100%

FCDC 0 0 0 0 0 0 11,380 11,380 0.10% 100%

Nickerson 0 0 7,431 0 0 0 0 7,431 0.10% 100%

WFGDC 0 0 0 0 0 0 1,491 1,491 0.00% 100%

Total 9,660,489 2,886,355 617,239 265,403 256,326 247,251 134,713 14,067,776

HHI 5,650

Production & Distribution Acres

SeCan 4,907,282 801,924 491,308 68,692 238,833 0 112,068 6,620,107 47%

FP Genetics 1,727,810 1,253,734 0 0 0 17,735 0 2,999,279 21% 68%

CPS 826,901 569,425 85,031 0 0 0 0 1,481,357 11% 79%

Alliance 668,732 210,645 24,748 0 0 0 0 904,125 6% 85%

Seed Depot 589,281 0 0 60,089 0 229,343 0 878,713 6% 92%

CANTERRA 364,211 47,495 16,152 136,622 0 173 3,821 568,474 4% 96%

U of S 509,472 0 0 0 0 0 0 509,472 4% 99%

Syngenta 42,629 3,132 0 0 0 0 0 45,761 0.30% 100%

Mastin 7,144 0 0 0 0 0 11,380 18,524 0.10% 100%

SeedNet 0 0 0 0 17,493 0 0 17,493 0.10% 100%

U of Alberta 10,784 0 0 0 0 0 0 10,784 0.10% 100%

AAFC 6,243 0 0 0 0 0 0 6,243 0.04% 100%

Western AG 0 0 0 0 0 0 5,953 5,953 0.04% 100%

WFGDC 0 0 0 0 0 0 1,491 1,491 0.01% 100%

Total 9,660,489 2,886,355 617,239 265,403 256,326 247,251 134,713 14,067,776

HHI 2,890



Table 7.6 Structure and Concentration in Western Barley Breeding and Seed Production

Designated Non-Designated

Total Market Share

Cumulative Share

Breeder Acres CDC 986,203 516,153 1,502,356 51%

AAFC 831,771 0 831,771 28% 79% Westbred 0 369,520 369,520 13% 92% BARI 96,859 0 96,859 3% 95% FCDC 37,611 49,451 87,062 3% 98% NDSU 0 60,622 60,622 2% 100% Total 1,952,444 995,746 2,948,190

HHI 3,574 Production & Distribution Acres

SeCan 1,616,965 463,899 2,080,864 71% CPS 0 369,520 369,520 13% 83%

CANTERRA 59,372 101,705 161,077 5% 89% Syngenta 151,831 0 151,831 5% 94% FP Genetics 124,276 0 124,276 4% 98% Seed Depot 0 60,622 60,622 2% 100% Total 1,952,444 995,746 2,948,190

HHI 5,217 Source: Consultants’ calculations

Estimated shares are provided in Table 7.7 for oats and rye. AAFC has almost 50% of the oat variety market while FP Genetics has 31% of seed production and distribution. The four-firm concentration ratio for product development of oats is 100% while it is 95% for production and distribution. The HHI for product development of oats is 3,433 and for production and distribution of oats it is 2,577. Table 7.7 Structure and Concentration in Western Oats and Rye Breeding and Seed

Production

Oats Market Share

Cumulative Share

Rye Market Share

Cumulative Share

Breeder Acres

Breeder Acres

AAFC 581,664 48%

AAFC 54,381 62%

SW Lantmannen 357,264 29% 78% KWS 26,464 30% 93% CDC 155,483 13% 90% Danko 6,272 7% 100% NDSU 117,074 10% 100%

Total 1,211,485

Total 87,117

HHI 3,433 4,871

Production & Distribution Acres

Production & Distribution Acres FP Genetics 372,229 31%

SeCan 54,381 62%

CANTERRA 364,964 30% 61% FP Genetics 29,202 34% 96% SeCan 301,027 25% 86% Seed Depot 3,534 4% 100% Seed Depot 117,074 10% 95%

Mastin 45,419 4% 99%

T & L Seeds 10,772 1% 100%

Total 1,211,485

Total 87,117

HHI 2,577 5,037


AAFC has 62% of the product development market for rye while SeCan has 62% of production and distribution. The HHI for rye product development is 4,871 and 5,037 for production and distribution. The top firms in oat product development are AAFC and SW Lantmannen (owned by



Swedish farmers) while the top firms in production and distribution are seed grower organizations. The players in this market are not likely to exercise market power. In rye, seed grower companies dominate production and distribution and are not likely to exert market power. In product development, AAFC has over half of the market which may prevent KWS, a publicly traded German company with 30% of the market from exerting market power. For wheat, barley, oats, and rye combined, AAFC has the largest product development share at 63%, following by the CDC at 26%., as reported below in Table 7.8. The four-firm concentration ratio is 95% and the HHI is 4,685. In terms of production and distribution, SeCan has just under 50% of the market following by FP Genetics and CPS. The four-firm concentration ratio is 85% and the HHI is 3,020. The dominance of public sector plant breeders and seed grower organizations prevent, or control, any significant market pricing power. Table 7.8 Structure and Concentration in Western Cereals Breeding and Seed

Production

Acres Market Share

Cumulative Share

Breeder

AAFC 11,558,906 63.10% CDC 4,770,402 26.00% 89% NDSU 649,736 3.50% 93% Westbred 369,520 2.00% 95% SW Lantmannen 357,264 2.00% 97% Syngenta 254,277 1.40% 98% Plantomar 99,576 0.50% 99% FCDC 98,442 0.50% 99% BARI 96,859 0.50% 100% KWS 26,464 0.10% 100% U of Alberta 17,928 0.10% 100% Nickerson 7,431 0.04% 100% Danko 6,272 0.03% 100% WFGDC 1,491 0.01% 100% Total 18,314,568 100.00%

HHI 4,685

Production & Distribution

SeCan 9,056,379 49.40% FP Genetics 3,524,986 19.20% 69% CPS 1,850,877 10.10% 79% CANTERRA 1,094,515 6.00% 85% Seed Depot 1,059,943 5.80% 91% Alliance 904,125 4.90% 96% U of S 509,472 2.80% 98% Syngenta 197,592 1.10% 99% Mastin 63,943 0.30% 100% SeedNet 17,493 0.10% 100% U of Alberta 10,784 0.10% 100% T & L Seeds 10,772 0.10% 100% AAFC 6,243 0.03% 100% Western AG 5,953 0.03% 100% WFGDC 1,491 0.01% 100% Total 18,314,568 100.00%

HHI 3,020




Structure and Concentration in Western Pulse Crops The CDC has 95% of the product development market for peas and 100% for lentils (see Table 7.9). SPG (SK Pulse Growers) has 95% of the production and distribution of certified pea seed and 100% of lentil seed. The CDC produces the breeder seed on its own land. The SPG is responsible for distributing the breeder seed to seed growers (through an application process). The product development and production and distribution markets in lentils are monopolies (10,000 HHI indicates a monopoly) and a near monopoly in peas. While the potential for the use of market power in pricing is very significant, the public sector and producer organization participation should eliminate or mitigate the use of this power. Table 7.9 Structure and Concentration in Western Pulse Breeding and Seed Production


Certified Seed Sales of Cereals and Pulses In 2017, estimated certified seed sales of cereals and pulses in Western Canada were $235.3 million. Producers and distributors of certified seeds sold 90% or $212 M. The remainder, $24 M, was sold through wholesalers such as Cargill. Figure 7.2 Sales of Certified Cereals and Pulses in Western Canada, 2017

Peas

Acres Market

Share

Cumulative

Share

Acres Market

Share

Cumulative

Share

Acres Market

Share

Cumulative

Share

Breeder

CDC 2,231,119 95% CDC 2,367,353 100% 100% CDC 4,598,472 98%

AAFC 75,245 3% 98% AAFC 75,245 2% 99%

Limagrain 38,711 2% 100% Limagrain 38,711 1% 100%

Total 2,345,075 100% Total 2,367,353 Total 4,712,428

HHI 9,065 10,000 9,525

Production and Distribution

SPG 2,231,119 95% SPG 2,367,353 100% 100% SPG 4,598,472 98%

SeedNet 75,245 3% 98% SeedNet 75,245 2% 99%

FP Genetics 38,711 2% 100% FP Genetics 38,711 1% 100%

Total 2,345,075 Total 2,367,353 Total 4,712,428

HHI 9,065 10,000 9,525

Lentils Peas & Lentils

$212

$24

$0

$50

$100

$150

$200

$250

Sales by Producers and Distributors Sales by Wholesalers

M o

f $



Structure and Concentration in Western Special Crops In 2017, the CDC has 78% of the product development market for flax, followed by AAFC at 9%. The four-firm concentration ratio was 100% while the HHI was 6,217, as reported in Table 7.10. Table 7.10 Structure and Concentration in Western Flax Breeding and Seed Production

Acres Market Share

Cumulative Share

Breeder

CDC 421,100 78% AAFC 50,757 9% 87% CPS 45,405 8% 95% NDSU 24,662 5% 100% Total 541,924

HHI 6,217

Production and Distribution SeCan 413,495 76% CPS 45,405 8% 85% FP Genetics 34,182 6% 91% Corbo Agro 24,662 5% 96% Alliance 16,575 3% 99% CANTERRA 7,605 1% 100% Total 541,924

HHI 5,964


SeCan accounted for 76% of certified flax seed production and distribution followed by CPS at 8%. The four-firm concentration ratio for certified flax seed production and distribution was 96% while the HHI was 5,964. The HHI scores indicate that flax product development and production and distribution are very concentrated markets. However, because of the dominance of public sector breeders and seed grower organizations, little market power is expected to be exercised. AAFC is responsible for 92% of the mustard varieties in Western Canada while Coleman’s is responsible for 8%. Production and distribution of certified mustard seed is primarily done by the Canadian Mustard Association (92%). The mustard seed market in Western Canada is very concentrated, approaching a monopoly. Market power will be tempered by public sector and industry organization participation. Table 7.11 Structure and Concentration in Mustard Breeding and Seed Production

Acres Market Share Cumulative Share

Breeder

AAFC 173,552 92% Coleman's 14,947 8% 100% Total 188,499 100%

HHI 8,540

Production and Distribution Canadian Mustard Association 173,552 92% CPS 14,947 8% 100% Total 188,499

HHI 8,540

Source: Consultants’ calculations Two breeders are responsible for all the canary seed varieties: AAFC with 73% and Joordans with 27%. The HHI for product development was 6,025 indicating a very concentrated market. CDC is responsible for 44% of the certified canary seed production and distribution. Three firms account



for 100% of production and distribution. The HHI was 3,513. Because of the dominance of the public sector in plant breeding and of seed grower organizations in production and distribution, pricing is unlikely to be impacted by market power. Table 7.12 Structure and Concentration in Canary Seed Breeding and Seed Production

Acres Market Share Cumulative Share

Breeder

CDC 111,187 73% Joordans 41,872 27% 100% Total 153,059

HHI 6,025

Production and Distribution

CDC 67,736 44% CANTERRA 43,451 28% 73% Hansen Seeds 41,872 27% 100% Total 153,059

HHI 3,513


The above indicates that for cereals, pulse crops, and special crops, there is concentration in product development and seed production; however due to the presence of public institutions and grower organizations this structure has not resulted in the use of market power to influence pricing.170

7.6 Canola in Western Canada The major developers171 of canola varieties are Bayer CropScience, Monsanto, Pioneer Hi-Bred, Dow AgroSciences, DL Seeds, and CPS. The latter two, DL Seeds and CPS do their own seed production. Bayer, Monsanto, Pioneer Hi-Bred, Dow, DL Seeds and CPS coordinate their own production of certified seed to seed growers. Canola certified seed is primarily produced in the Lethbridge/Taber Alberta area because of the need for irrigation and isolation. Winter production occurs in Chile. Distribution and marketing are handled by the product developers themselves or through associated companies or other relationships as shown in Table 7.13. Table 7.13 Distribution of Canola Seed

Canola Developer Distribution

Bayer CropScience InVigor

Monsanto DeKalb

Pioneer Hi-Bred Pioneer Hi-Bred

Dow AgroSciences Dow AgroSciences

DL Seeds Brett-Young and Canterra

CPS Brett-Young

170

Crop insurance acres by variety are not published in Eastern Canada. Consequently, the approach used for Western Canada could not be used. According to industry sources, in the eastern Canadian market for corn and soybeans the top four seed companies have 80% or more of the market in each crop. 171

The crop insurance data showed 250 varieties of canola. Data on acres, product developer and production and distribution were assembled for the top 25 varieties (in terms of acreage). This means that market shares will be biased upwards slightly. Cargill, which has developed some specialty canola, did not have product in the top 25 varieties.



Table 7.14 shows the estimated market shares in canola product development and production and distribution. Bayer CropScience’s share of canola is most likely less than the 67% shown because only the top canola varieties were included in the analysis; its share is most likely 55%. The four-firm concentration ratio is 95% in both product development and production/distribution while the HHI is 4,777. The market is very concentrated. Table 7.14 Structure and Concentration in Canola Breeding and Seed Production

Breeder Acres Market Share Cumulative Share

Bayer CropScience 9,256,342 67.0% Monsanto 1,682,804 12.2% 79.1% Pioneer Hi-Bred 1,266,647 9.2% 88.3% Dow AgroSciences 916,445 6.6% 94.9% DL Seeds 506,292 3.7% 98.6% CPS 192,969 1.4% 100.0% Total 13,821,499 100.0%

HHI 4,777

Production & Distribution

InVigor (Bayer) 9,256,344 67.0% DEKALB 1,682,805 12.2% 79.1% Pioneer Hi-Bred 1,266,648 9.2% 88.3% Dow AgroSciences 916,447 6.6% 94.9% Brett-Young 467,926 3.4% 98.3% CANTERRA 231,339 1.7% 100.0% Total 13,821,509 100.0%

HHI 4,776


The accompanying chemicals must be taken into account. Round Up Ready is owned by Monsanto but the trait is also licensed by other product developers. The Liberty Link tolerance is owned by Bayer and is used exclusively by Bayer. The Clearfield system has a very small market share. Looking at the canola seed sector, it is fair to say that the companies do have market power. Bayer CropScience appears to be the market leader. All the companies exhibit a lot of price discipline. The distribution companies primarily sell the canola seed through their dealer networks (at least 95% of sales are made this way). Canterra and Brett-Young may sell some seed directly to farmers (5% at the most). If we assume that all canola certified seed is sold in Western Canada, then the dealer networks sell $1,054 M of the total $1109.9 sold.

7.7 Estimated Revenues and Costs in the Canadian Seed Supply Chain Estimated costs and revenues in the seed supply chain are provided in Table 7.15, with these values segmented into (1) variety development, (2) variety registration, (3) seed production, (4) seed processing, and (5) seed sales and distribution. These estimates are based on a variety of sources, including data from (a) Seed Synergy organizations, (b) published studies, (c) consolidation of data provided by seed growers and seed companies, and (d) consultant estimates. The top portion provides estimates of costs associated with product development, with the cumulative cost being $232 million. Variety registration costs add another $2 million in estimated costs.



Seed production costs are estimated at $283 million for cereals and pulse cops, and another $354 million for other crop kinds (mostly corn, canola and soybeans). Total seed production costs are estimated to account for $646 million per annum. Seed processing costs are estimated using a shrink factor of 10% for cereals and pulses and 15% for other crop kinds. With total seed processing costs of $517 million, which results in cumulative costs at $1.4 billion, with seed packaged and ready for sale. Of interest, seed production and processing costs (at $1.16 billion) are 42% of estimated revenues (of $2.75 billion, which excludes import), which compares to the 39% cost of goods reported by Monsanto172. Seed sales and distribution costs are estimated to be $249 million, which is just under 10% of domestic sales revenues. The sales value of Certified seeds of $2.99 billion is composed of cereals and pulse crops at $305 million, forages and grasses as $62 million, and other crop kinds (corn, soybeans, canola and sunflower) at $2,022 million, the latter which is 68% of all Certified seed sales. This $3.2 billion in Certified seed sales includes $600 million in seed exports. The domestic sales value of $2,6 billion is composed of:

$1,648 million in supply chain costs (51% of total), $37 million in royalties on cereals and pulses; $950 million in royalties on the other crop kinds (corn, canola, soybeans) (30% of total); $84 million in contributions by government and producers, $450 million in imported seed, and $45 million, which is a residual (and is value captured by one of the above).

The above costs and revenues can change as the seed sector embarks on changes, such as capturing a royalty on FSS, increasing usage of Certified seed by Canada cereal and pulse growers, and initiatives that reduce costs associated with seed production and processing. Membership fees for the supporting organizations of seed companies and seed growers are estimated to be in the neighbourhood of $3.6 million, which are used to cover some or all of the costs associated with delivering the services provided by the organizations. On the page following Table 7.15, Table 7.16 provides a summary of some descriptive statistics of the Canada seed sector.

172

See Table 7.18 at the end of this section.



Table 7.15 Estimated Revenues and Costs in the Seed Supply Chain (2016-2017 averages)

Segment Activity cost/revenue drivers Quantity Units Per Unit

Value

Units Revenues Costs Cumulative

Revenues

Cumulative

Costs

Dist. of

costs

Dist. Of

revenu

esProduct Development

Public/university plant breeders number, $/breeder 84 breeders $1,000,000 $/breeder $84.0 $84.0

Producer funding and government funding number of projects funded $84.0 $84.0 $84.0

Private company breeders (scientists) number, $/scientist 135 scientists $1,000,000 $/scientist $135.0 $84.0 $219.0

Compliance costs with PNTs no. of traits, cost/trait, working capital 5 traits/year $2,500,000 $/trait $12.5 $84.0 $231.5

Crop Life members, fees/member 35 members $10,000 $/member $0.35 $84.0 $231.9 7%

Variety Registration

2 years of test plots no. of plots, cost/plot, varieties registered 250 varieties $4,000 $/variety $1.0 $84.0 $232.9

variety registration fee fee amount, varieties registered 250 varieties $875 $/variety $0.2 $84.0 $233.1

PBR application fee amount, varieties applied 200 varieties $2,000 $/variety $0.4 $84.0 $233.5

Filing for VRO and PBR application time required, no of filings 450 applications $1,000 $/application $0.5 $84.0 $233.9 7%

Seed Production

Cost of seed production (cereals and pulses) acres, cost/acre, crop kind 745,146 acres $380 $/acre $282.9 $84.0 $516.8

Cost of seed production (other crop kinds) acres, cost/acre, crop kind 575,207 acres $616 $/acre $354.2 $84.0 $871.0

Seed grower return acres, cost/acre, crop kind 1,320,352 acres $483 $/acre $637.1 $721.1 $871.0

Grower acreage fee acres, rate/acre 1,320,352 acres $1.35 $/acre $1.8 $721.1 $872.8

CSGA Grower membership fee members, rates 3,537 members $200 $/member $0.7 $721.1 $873.5

Plot fees plots, rate 2,699 plots $30 $/plot $0.1 $721.1 $873.6 27%

Field inspections

Fields pre-production inspections fields, rates 14,700 fields $25 $/field $0.4 $721.1 $873.9

Plots pre-production inspections plots, rates 2,699 plots $200 $/plot $0.5 $721.1 $874.4

Crop Inspections acres, cost/acre, inspection/acre 1,639,123 inspection $3.50 $/acre $5.7 $721.1 $880.2

Authorized Seed Crop Inspection Services (ASCIS).acres, rate/acre 858,863 acres $0.12 $/acre $0.1 $721.1 $880.3 27%

Seed Processing

Processing costs (cereals and pulses) volume, $/bag 955,190 tonnes $110 $/tonne $105.3 $721.1 $985.5

Shrink (cereals and pulses) % of volume, feed value 10% % $25.42 $721.1 $1,010.9

Processing costs (other crop kinds) volume, $/bag 681,368 tonnes $132 $/tonne $90.1 $721.1 $1,101.0

Shrink (other crop kinds) % of volume, feed value 15% % $39.19 $721.1 $1,140.2

Seed bag, seed tag, etc. volume, $/bag 1,438,834 tonnes $44 $/tonne $63.4 $721.1 $1,203.7

Seed treat volume, $/bag 1,438,834 tonnes $132 $/tonne $190.3 $721.1 $1,393.9

Lab fees lots, $/lot 25,000 lots $100 $/test $2.5 $721.1 $1,396.4

CSI fees no. of RSE, annual fee 968 no. $825 $/RSE $0.8 $721.1 $1,397.2

Audit costs no. of RSE, audit fee, frequency 968 no. $250 $/RSE $0.2 $721.1 $1,397.5 43%

Seed Sales and Distribution

Sales and distribution costs (on all domestic sales)volume of certified seed, $/bag 858,863 tonnes $290 $/tonne $249.1 $721.1 $1,646.5

CSTA membership fee members, fee rate 133 members $7,000 $/member $0.9 $721.1 $1,647.5

CPTA members, fees/member 25 members $6,360 $/member $0.16 $721.1 $1,647.6

Certified seed sales - cereals and pulse acreage, seeding rate, $/bag 10.4 million acres $29 $/acre $304.6 $304.6 $1,647.6 9%

Certified seed sales - corn, canola and soybean acreage, seeding rate, $/bag 30.1 million acres $75 $/acre $2,246.3 $2,550.8 $1,647.6 70%

Certified seed sales - forages and grasses acreage, seeding rate, $/bag 16.6 million acres $4 $/acre $62.1 $2,613.0 $1,647.6 2%

Value of seed export sales volume, $/tonne 750,000 tonnes $800 $/tonne $600.0 $3,213.0 $1,647.6 51% 19%

Revenue from the market $3,213.0

Seed company supply chain incurred costs $1,647.6 51%

Royalties on cereals and pulses Certified seed $/bag, certified seed sales 482,624 tonnes $1.75 $/50 lb bag $37.2 $37.2 1%

FSS royalties on cereals and pulses $/bag, common seed use 1,583,172 tonnes $0.00 $/50 lb bag $0.0 $0.0 0%

EPR on cereals and pulses $/tonne, tonnage sold 49.0 million tonnes $0.00 $/tonne $0.0 $0.0 0%

Royalties on corn and oilseeds and forages $/bag, certified seed sales 376,239 tonnes $55.00 $/50 lb bag $912.4 $949.6 30%

Government and producer funds for breeding $84.0 3%

Imports of seed (exclude horticulture) $450.0 14%

Residual/ profit margins in the seed supply chain $44.5 1%

Domestic sales check $2,613.0

Supporting organizations

CPTA members, fees/member 25 members $6,360 $/member $0.16 $0.16

CSGA members, fees/member 3,537 members $200 $/member $0.71 $0.87

CSTA members, fees/member 133 members $7,000 $/member $0.93 $1.80

CSI fees no. of RSE, annual fee 968 no. $1,500 $/RSE $1.45 $3.25

Crop Life members, fees/member 35 members $10,000 $/member $0.35 $3.60

Total $3.60



Table 7.16 Some Descriptive Statistics of the Canadian Seed System

Item Value Units Source

Variety Development

University plant breeders 27 number web-search

Government plant breeders 57 number web-search

Private company breeders (scientists) 135 number Seed Sector Profile

Seed companies with a breeding program ~ 22 number CSTA & web

Private R&D expenditures $100 $ million CSTA

Public and producer R&D expenditures $80 $ million JRG Consulting Group

Variety Registration

Varieties registered

CFIA

New varieties registered in a year ~ 800 varieties CFIA

Seed Multiplication

Area in pedigreed seed production 1,326,064 acres CSGA

Share of acres in Certified seed production 67% % CSGA

Number of seed growers (2016) 3,537 number CSGA

Fields of seed 14,700 number CSGA

Plots of seed 2,699 number CSGA

Acres assigned by seed companies 46.8% % CSGA

Authorized Seed Crop Inspection Service (ASCIS) 26 number CSGA

Inspectors of growing crop (LSCI & CFIA) 323 number CSGA

Number of inspections (excluding corn) 18,249 number CSGA

CFIA share of inspections (fields/plots) 4.7% number CSGA

CFIA inspection fee $4.00 $/acre CSGA

Crop certificates issued 9,685 number CSGA

number

Seed Processing

number

Registered Seed Establishments (RSE) 1,007 number CSI

RSE as Bulk Storage Facility (BSF) 886 number CSI

RSE as Approved Conditioner (AC) 575 number CSI

RSE as part of seed growers operation 650 number estimate

RSE operated by a seed company/non-grower 200 number estimate

Seed analysts (CSAAC active members) 55 number CSAAC

Private seed labs 32 number CSI

CFIA seed laboratories supporting seed certification 2 number confirm

Seed Distribution and Sales

Seed companies selling seed ~ 86 number CSTA & web

Integrated seed companies ~ 65 number CSTA & web

Value of seed sales by seed companies $3,200 $ million Estimated

Value of seed sales with novel traits (modern breeding) $2,125 $ million Crop Life

Seed exports (2016/17) $700 $ million Statistics Canada

Seed imports (2016/17) $637 $ million Statistics Canada

Purchases of seed by crop producers $2,470 $ million Statistics Canada

Value of Certified seed planted by crop producers $2,613 $ million Estimated

Value of common seed planted by producers $527 $ million Estimated



7.8 Seed Suply Chain Structures and Associated Perfromance The above description of seed supply chains indicates that there is a distinct difference between the seed supply chain for cereals and pulse crops compared to canola. The latter is also rather representative of the corn and soybean seed supply chains in Canada. Using the structure, conduct and performance paradigm (as used in above section), some major differences are highlighted in Table 7.17. For example, under basic conditions corn soybeans and canola make greater use of modern breeding technologies compared to cereals and pulse crops, and the latter have a much lower use of IPR on varieties released, due to the nature of the crops. At the product developer level, both sectors are concentrated; however, the major difference is the cereals and pulses are dominated by public sector breeders, while corn, canola and soybeans are dominated by private sector breeders. The latter are also integrated in seed distribution. This different structure and basic conditions enables product developers to capture value through prices charged for Certified seed. There is much less value captured in the cereals and pulses supply chain (e.g., $37 million) by product developers compared to canola corn and soybeans (e.g., $950 million) as indicated above in Table 7.15. Basic conditions, such as use of PBR, can enable collection of royalties on FSS and increase overall value capture by product developers. Table 7.17 Summary Structure and Performance View of Two Major Seed Supply Chains

Item/Sector Cereals and Pulses Canola, Corn & Soybeans Basic conditions

o Self-replicating crops with farmers exemption – product substitution (FSS);

o Low incentive to use of modern breeding technologies;

o low share of market with PBR (UPOV 91); o Ineffective IPR

o Hybrid crops and/or patent protection; o High use of modern breeding

technologies; o High level of IPR

Product developer

o Concentrated with public sector (gov't and universities) having major share;

o Most developers not integrated into downstream activities

o Concentrated with private sector having major share;

o Developers are vertically integrated with (downstream) seed distribution

Value capture by product developer

o Minimal value capture on products commercialized;

o Product substitution possible (via FSS); o $37 million associated with Certified seed

sales of $305 million (~12%)

o Basic conditions and oligopolistic behaviours enable value capture through pricing;

o $950 million on Certified seed sales of $2.2 billion (~40%)

Seed distributor o Monopolistic competition o Concentrated, however owned mostly by

seed growers; o Limited pricing power due to competition

with direct sales by seed growers

o Monopolistic competition o Concentrated; o Seed distributors are owned

by/affiliated by product developers

Seed grower o Perfect competition; o Price takers on seed production activities;

many growers are vertically integrated (upstream) into seed distribution

o Perfect competition; o Price takers on seed production

activities

Commercial farmer

o Perfect competition; o Price taker

o Perfect competition; o Price taker

End-use o Primarily commodity markets o Primarily commodity markets aside from food-grade soybeans and specialty oilseeds



7.9 The Global Seed Market Estimates of the size of the global seed market vary widely, as the following inserted table indicates173. Bonny suggests that in 2015, the value of the global seed market was approximately $(US) 48.5 billion174. Growth estimates range from 6.8% to 13.2% per year, which indicates a growth sector at the global stage.

The following chart by Bonny ranks the top 12 seed companies by the value of sales in 2016. Red indicates that the company’s roots are in the chemical sector while green indicates that its roots are in the agriculture and seed sector. Monsanto, DuPont and Syngenta were in the top spots. Limagrain with $(US) 1.75 billion in global sales with its primary focus on genetics was in fourth spot.

173

Unless otherwise indicated, the charts and tables in this section are inserts from Bonny S, “Corporate Concentration and Technological Change in the Global Seed Industry”, Sustainability, 2017. 174

With Canadian domestic sales in the $2.3 billion range, this represents 5% of the global seed market.



Monsanto, DuPont, Syngenta, Dow, Bayer and BASF are commonly called the Big Six. The focus of these firms varies. For example, while seed accounts for most of total sales for Monsanto, the importance of seed revenue is much less for Dupont, Syngenta, Dow, and Bayer, and is of zero importance for BASF. As shown in the insert (Figure 5), in the seed and crop protection complex, seed is more important for Monsnato and DuPont (Pioner). Bayer and Syngenta have more crop protection slaes, with BASF having a crop protection focus. When overall sales are considered, the relative share of seeds is small for Syngenta, Dow and Bayer (as shown in the inserted figure 6). Corn and soybeans are important in the global seed market with corn representing 30% of total sales and soybean representing 17%. Vegetable and sugar beet seeds are also valuable. Market concentration in the global market for GM seed has risen from 9% in 2001 to reach 33% in 2016 (pre-mergers). Concentration has resulted from mergers and acquisitions. Triggers for mergers and acquisitions include to gain economies of scale and scope; pursuit of comparative advantage; need for better financial performance; quest for market dominance; enhance R&D capacity; and to spread the costs of technology development and regulation. Recently, most of the Big Six have experienced another wave of mergers and acquisitions:

December 2015: Dow merges with DuPont Pioneer to create Dow Dupont. February 2016: ChemChina acquires Syngenta. September 2016: Bayer acquires Monsanto.



Factors driving the changes during 2015-2016 included 1) fall in seed and pesticide sales because of the fall in commodity prices and weather conditions; 2) low interest rates; 3) need to reduce the weight of R&D costs in seed in order to improve return on investment; and 4) to take advantage of opportunities from the digitization of farming, population growth, and climate change. The following chart created by Bonny shows the impact of the mergers and acquisitions on revenue (prior to any mandatory sales).

In the global seed and pesticide market, concentration has increased.

In 1985, the top four firms had 8% of the market. In 1996, the top four firms and 12% of the market. In 2016, Bayer and Monsanto, Dow and Dupont Pioneer, ChemChina and Syngenta, and

Bayer had 51% of total sales. Potential impacts of the growing concentration, as suggested by Bonny, include the following:

Impacts on seed prices Impacts on farmers’ choices Impacts on other seed companies Reduction in employment in the seed and pesticide sector Greater capacity and efficiency to develop seeds arising from bringing together

complementary companies

Financial Performance and Investments in R&D by Product Developers Table 7.18 summarizes form 10-K filings by Monsanto for their seeds and genomics segment with sales of $10.0 billion in FY 2016. Cost of goods sold of $3.9 billion represent field growing (seed multiplication), seed processing, and distribution costs, which were 39% of sales value. Research and development costs assigned to the seed segment were $1.2 billion representing 12% of sales



value175. Earnings before tax (EBT) are estimated to have been 19% of sales value for FY 2016 for the seeds and genomics segment. Table 7.18 Financial Performance of a Large Seed Company

Item 2016 Distribution

$(US) million %

Seed Sales $9,988 100% Cost of Goods $3,914 39% Gross Profit $6,074 61%

SG&A176 $2,308 23% R&D $1,232 12% Restructuring $242 2%

EBIT $2,292 23% EBT $1,921 19%

Source: Calculations based on Monsanto filing (2016 form 10-K)

The distribution column in Table 7.18 can be used to suggest that for some crop kinds, that seed multiplication, processing and distribution costs can account for 39% of final seed sale value. The gross profit of 61% is the value captured by the seed company, which is then used to cover operating costs, including the 12% on the requisite R&D for product development. One view of this data indicates that on investments of $1.2 billion in product development and release of varieties into the marketplace, the seed company was able to pay for these investments and earn (pre-tax) an additional $1.9 billion. For Monsanto, EBIT as a percent of sales was 23%, which compares to 11.0% reported by KWS177, with corn at 8.0% and cereals at 7.6%. KWS indicated their R&D intensity at 17.6% of sales. Syngenta indicated that its R&D was 10% of sales, with the majority of their sales in crop protection and seed accounting for 21% of revenues178. Operating income (a variant of EBIT) stood at 13% of sales.

7.10 Concentration in the US Seed Market (Corn and Soybeans) Below (as an insert on the following page) are market shares in the US seed market in 2015 for corn, soybeans, and cotton179. The four-firm concentration ratios for corn, soybeans, and cotton are 81.7, 76.2, and 91.4 respectively. The Herfindahl-Hirschman Indexes (HHI) are 2,696 for corn; 2,360 for soybeans; and 2,804 for cotton. A market with a HHI between 1,500 and 2,500 is considered to be moderately concentrated while a market with a HHI above 2,500 is said to be highly concentrated. The US corn seed and cotton seed markets are highly concentrated while the soybean seed market is moderately concentrated.

175

The distribution of SGA, R&D, and restructuring costs operating for the consolidated business (of $4,642 million) was used to distribute the operating expenses (of $3.782 million) of the seed and genomics segment. 176

SGA refers to sales, general and administration. 177

KWS Group, Annual Report 2015/2016 (in Opportunity and Risk Report). 178

Syngenta, Financial Report, 2016. 179

Source: Maisashvili A, H Bryant, M Raulson, G Knapek, J Outlaw and J Richard, “Seed Prices, Proposed Mergers and Acquisitions among Biotech Firms”, Choices, Q4 2016



The recent Monsanto-Bayer merger would give the combined entity a market share of 35.5% in corn (no change), 28.0% in soybeans (no change), and a 69.7% in cotton. The Dupont Pioneer-Dow merger would give the combined entity a 40.5% market share in corn, a 38.4% share in soybeans, and a 15.3% share in cotton (no change). The HHI increases to 3,110 in corn; 2,705 in soybeans; and 5,205 in cotton. The US Justice Department believes that in a highly concentrated market, an increase of 200 of more is “likely to enhance market power.” Maisashvili estimated the optimal prices that a firm would charge after subsuming a competitor.180 As shown in the chart below, the analysis indicates modest price increases for corn (between 1.57% and 6.28%) and soybeans (1.29% to 5.82%) but very significant increases in the seed price for cotton (between 17.41% and 19.23%). Kalaitzandonakes et al viewed market power in the US seed market in a different fashion by comparing R&D expenditure outlays and price markup and premium revenue streams. “Seed companies incur large fixed costs in the form of R&D expenditures, costs for improvements in quality control systems, regulatory expenses, marketing costs, and legal expenses. The revenue streams from mark-ups and premiums on traits must be large enough to pay for these fixed costs year after year, even though innovations and other efficiencies from such fixed expenditures may be realized many years later.” As shown in the insert (on the right), for most of the period 1997 to 2008, revenues fell short of R&D investments in corn and soybeans181.

180

The analysis assumes that the mergers do not result in a reduction in the marginal cost of producing a seed crop, a reasonable assumption. 181

Kalaitzandonakes N, A Magnier, and D Miller, “A Worrisome Crop” Is There Market Power in the US Seed Industry”, Regulation, Winter 2010-2011.



7.11 Chapter Summary Basic conditions such as technology and regulation influence the structure of an industry which is the number and size of firms, concentration, product differentiation, and barriers to entry. Structure, in turn, influences conduct which refers primarily to pricing. Conduct then influences performance which refers to various types of efficiency and to investment. We conducted an examination of the plant breeding and sales and distribution sectors for cereals, pulse, specialty crops and canola in Western Canada and found high levels of concentration/dominance by a few large organizations. In terms of basic conditions, cereals, pulses and specialty crops are self-replicating, have high use of FSS and have relatively ineffective IPR. In the cereal and pulse sector, the public sector dominates with financial contributions by producers and taxpayers. These product developers don’t exercise any potential market power. This behavior and the basic conditions result in minimal value capture characterized by low investment and little private sector involvement. In the case of cereals and pulses, seed production and distribution is dominated by grower owned and directed organizations, which has not resulted in the exercise of market power. Due to these conditions investment in plant breeding is rather low and unattractive to the private sector. This implication will be of use in the following chapters on capturing the value of FSS. Canola, on the other hand, is a hybrid crop and/or patent protected with very effective IPR and minimal use of FSS. In canola and in corn and soybeans, for example, the product developer segment has a few large firms and there are high barriers to entry. There are public breeders offering non-GM food grade soybean varieties. In contrast to cereals and pulse crops, canola product developers do exercise market power and because of this and the basic condition capture value which results in high levels of investment in plant breeding. The seed production and distribution sectors in both canola and other crops are characterized by companies selling differentiated products. A key difference between the canola (and corn and soybeans) is that canola seed production and distribution is controlled by the plant breeders/product developers through forward integration. This further enables the use of their market position to capture value through pricing of seed products. Given the two rather distinct seed supply chains – of (1) cereal and pulse crops, and (2) canola, corn and soybeans as an example of the other seed supply chain – and the issues facing the cereal and pulse crop sector much of the analysis in subsequent Chapters focus on the seed supply chain for cereals and pulses. Building on findings in this and previous Chapters, the next Chapter considers ways to increase the use of Certified seed sales in cereals and pulses.



8.0 Options to Increase Certified Seed Sales in Cereals The overall seed system would benefit from a larger usage of Certified seed in self-replicating crops such as cereals and pulses. Most common seed (mostly FSS) use occurs with cereal and pulse crops, with an estimated 1,583 million kgs (see first row in Table 7.1). Certified seed use is estimated to be 483 million kgs with a value of $302 million. The associated seed price (in $/kg) cost/acre and seeding rate are also provided in the top portion of Table 8.1. The lower portion is for all crop kinds (and is a summary of Tables provided in Chapter 4.0). Table 8.1 Estimated use of Certified Seed and Common Seed in Cereals and Pulse Crops

Crop Kind Units Certified Seed

Common Seed

All Seed

Cereals & pulses

Volume of seed million kgs 482.6 1,583.2 2,065.8

Value of seed $ million $301.9 $479.1 $781.0

Acres planted million acres 10.3 34.1 44.4

Seed price $/kg $0.63 $0.30 $0.38

Cost/acre $/acre $29.22 $14.06 $17.59

Seeding rate kg/acre 46.7 46.5 46.5

All Crop Kinds


Value of seed $ million $2,613.0 $526.9 $3,139.9


Seed price $/kg $3.04 $0.33 $1.28

Cost/acre $/acre $45.81 $15.13 $34.18

Seeding rate kg/acre 15.1 45.8 26.7 Source: Consultants’ calculations Comparison of Certified Seed Market Shares in Wheat Across Selected Jurisdictions Table 8.2 reports on the market share for Certified seed in wheat across a few jurisdictions and offers a perspective on reasons for varying market shares. Higher certified seed share is the result of the following factors:

Cross compliance: In Quebec, producers must use certified seed to participate in crop insurance and income stabilization programs.

High FSS royalties relative to certified seed royalties: A narrower differential between the certified seed royalty and the FSS royalty makes the use of certified seed more attractive to producers. Sweden's FSS royalty is 70% of the certified rate while the Netherlands is 65% of the certified rate.

Rapid release of new varieties: Frequent releases of new and improved varieties, such as in Sweden, provide an incentive for farmers to use certified seed.

Yield gain on newly released varieties: New higher yielding varieties benefit producers' profitability, and this provides an incentive to use certified seed.



Table 8.2 Comparing Certified Seed Acreage Share for Wheat Across Selected Jurisdictions

Country Certified Seed Share

Contributing Factor Contributing factor - Relation to FSS Royalty

Royalty Collection Other Features

Quebec 93% Certified seed required for crop insurance & support program

None Included in seed price

Sweden 85% New varieties shorten life span of existing varieties

FSS royalty is 70% of value on Certified seed

Included in seed price

Central body has full information

Netherlands 80% Yield gain on newly introduced varieties

FSS royalty is 65% of value on Certified seed


Certified seed sale results in a contract between breeder and farmer, Central body has full information

United Kingdom

58% Higher yielding varieties as sector recovers from institutional change that reduced genetic yield gain

Royalties on FSS are a % of royalty on Certified seed

Royalty paid by seed processor, included in seed price

France 61% Yield gain on newly introduced varieties (estimated at 1.8%/year)

FSS royalty (EPR) is 36% of net Certified seed royalty

Breeder cooperative collects royalty from seed growers

EPR rate negotiated between farm leaders and seed industry

Uruguay 48% Tax incentive is 150% of seed price

Royalty on FSS Included in seed price

Certified seed sale results in a contract between breeder and farmer

Germany 45% Yield gain on newly introduced varieties

Seed royalty collected from seed growers

Breeder organization enforces seed grower agreement

Argentina 37% Yield gain on newly introduced varieties

Have extended royalty on FSS, however, low capture rate


Certified seed sale results in a contract between breeder and farmer

Australia 5% Companies only release certified seed first year variety introduced

Royalty on FSS same as on purchased Certified seed

EPR paid on delivered grain by commercial farmer

Producers also pay a 0.5% levy, which is matched by government



8.1 Options for Consideration In this section, options are discussed that can lead to higher acreage share of Certified seed for cereals and pulses. In addition to seed companies introducing new varieties that increase yields and/or reduce overall operating costs, there are a few options that can be pursued to increase the acreage share of Certified seed, these include:

Downstream users require use of Certified seed for access to specific markets; Seed companies promote the yield advantage/cost reduction with newly introduced varieties; Seed companies employ use agreements (contracts) with Certified seed sales; Crop insurance agencies require use of Certified seed on insured acres; Business risk management programs offer higher coverage or lower premiums for

operations that use Certified seed; Narrow the price spread between Certified seed and FSS; and Tax incentives for Certified seed purchases.

Requirement by Downstream Users Downstream users can require use of Certified seed to ensure varietal purity; verification of Certified seed usage provides a level of assurance that the desired attributes of a variety are delivered to a user. End-users can include millers, malsters, and other processors wanting certain attributes (e.g., starch for ethanol, protein composition for certain products, fatty acid profile for certain markets). Some malsters have a Certified seed use requirement and this can extend to other markets. Certified seed is a requirement in many of the the Canadian Identity Preserved Recognition System (CIPRS) programs used by downstream users. CIPRS is administered by the CGC, with CIPRS certifying that a company’s identity preservation (IP) system for the production, handling and transportation of specialty grains, oilseeds or pulses is effective. With such requirements, segregation is required through the supply chain, which adds extra cost in a bulk handling system. Such segregation and associated identity preservation (IP) protocols are required from the farm through the transportation and handling system through to the end user. Depending on market size, bulk shipments can occur, and with smaller market volumes, containerized shipments can be used to preserve identity. In local markets, the bulk handling system can be by-passed. With this approach, downstream users must be willing to pay a premium over non-Certified crops, since there are extra costs incurred in the handling of IP products, before considering the net position at the farm level. While this approach has merit, and should be pursued, by itself it is not expected to result in large increases in Certified seed acreage share. Over time as downstream users specify certain attributes and varieties for specific end uses, the requirement to use Certified seed through these channels will grow. The relative ranking of this approach in relation to the others is offered at the end of this section.

Promotion of New Varieties by Seed Companies Seed companies do promote their product offering; however more could be done to show performance of a variety in relation to reference varieties in certain agri-climatic regions. Investments in performance trials and demonstration plots can be used to highlight the attributes of certain varieties in certain geographic regions.



With this option the cost is borne by the seed company, which can result in a higher sales and distribution cost to seed companies, and by extension slightly higher Certified seed costs. This option can be used by individual seed companies to expand their market share, based on the expected causal link between effective promotion and subsequent sales of Certified seed. As with the prior option, sale of Certified seed should increase with more expenditures on promoting specific varieties; however, it is not expected to be by a large increment, unless the new varieties are shown to be clearly superior to existing varieties.

Seed Companies Employ Use Agreements With PBR, seed companies have the ability to employ use agreements associated with Certified seed sales, where the agreement has conditions of use. These conditions can include a prohibition of FSS (agreement to suspend farmers’ privilege) or the condition that with re-use by the farmer, a royalty payment is made to the seed company on the FSS. Such an approach likely requires that all seed companies agree to employ use agreements; since without such inter-company agreement there may be an incentive for some companies to either not employ such agreements, or to have conditions of use that enable FSS without a royalty collection system. If this were to occur, some farmers will switch to seed companies with less restrictive use agreements, which can result in a shifting in market share between seed companies. A seed company will need to decide whether the loss in market share is offset by the revenues associated with the FSS royalty income flow182. With an assumption that 60% of cereal and pulse crops will be planted with Certified seed, the Canada wide impact183 is illustrated in Table 8.3. Table 8.3 Potential Impact of Seed Companies Employing Certified Seed Use Contracts,

with 60% of Acreage in Cereals and Pulse Crops Planted with Certified Seed

Item Units Current With End Use Contracts

Change

Planted acres (cereals & pulses) Million acres 44.4 44.4 0.0

Certified seeded acres Million acres 10.3 26.6 16.3

Common seed acres Million acres 34.1 17.8 -16.3

Purchases of Certified seed $ million $301.9 $768.9 $467.0

Realized opportunity on FSS/avoided cost $ million

$233.0 $233.0

Aggregate farmer cost (prior to yield gain) $ million $234.0

Purchases of Certified seed $/acre $29.22 $28.87 $28.65

Realized opportunity on FSS/avoided cost $/acre

$14.29

Certified seed cost (prior to yield gain) $/acre $14.36 Source: Consultants’ calculations

Across Canada our estimate of 10.3 million acres of Certified seed plantings and associated value of $302 million is shown in the first column in Table 8.3 for cereals and pulses. With use contracts in place, and 60% of cereal and pulse crop acreage planted with Certified seed, the total Certified seeded acreage increases to 26.6 million acres, a 16.3 million acre increase. The fourth row in

182

The royalty collection system on FSS is discussed in the following section of this Chapter. 183

The impact excludes Certified seed use for corn, canola, soybeans, sunflowers, hay and forages.



Table 8.3 shows that Certified seed purchases increase by $467 million increase over the current Certified seed value of $302 million for cereals and pulses. This $467 million is not the net impact in the crop production sector. The freed-up FSS on these higher Certified acres can now be sold into commercial channels. The value of this former FSS is $233 million, which is the commercial value of the FSS plus costs associated with FSS such as seed cleaning, working capital costs, logistics costs, seed treatment costs, etc. The opportunity of the FSS being marketed must be valued. For example, approximately 1.7 bushels of wheat of FSS used per acre planted and 2.0 bushels for barley, the value of this volume sold into commercial channels must be considered. This value plus avoided FSS costs is estimated at $14.29/acre (see the last column in Table 8.3). After considering the $233 million of additional revenues/lower costs, the aggregate impact is $234 million (see the sixth row in Table 8.3). On a per acre basis, this is $14.36, before considering higher revenues, lower costs and less yield variability associated with Certified seed. The $14.36/acre on the additional Certified seeded acres is comprised of $28.65 Certified seed cost184 minus the $14.29 additional revenues/lower costs due to elimination of FSS on these acres. The net impact throughout the economy can be estimated by using the appropriate economic impact multipliers for three streams of economic activity. One is the higher Certified seed sale volume of $467 million – an increase over the $302 million as reported in Table 8.3. The second is the lower use of common seed of $233 million, which includes activities at seed cleaning facilities, and shipping FSS grain into commercial channels. The third is the possible higher volume of grain shipped into commercial channels due to higher output associated with Certified seed usage. The net of these three streams is the associated impact on jobs, overall economic activity, GPD, and taxes collected by governments. Table 8.4 provides the same analysis as Table 8.2, with a different assumption, which is that Certified seed acreage increases by 60% from current levels. In this case, the increase in Certified seeded acreage is less at 6.2 million acres of cereals and pulses. The net result is a $181 million increase in Certified seed sales, with a comparable net impact on the farm (of $15.7/acre). Table 8.4 Potential Impact of Seed Companies Employing Certified Seed Use Contracts,

with 60% Increase in Cereals and Pulse Crop Acreage Using Certified Seed

Item Units Current With End Use

Contracts

Change






$83.4 $83.4




$13.46


184

The per acre Certified seed cost on the expanded acres is slightly lower than in column one (at $29.22/acre) due to the composition of crop kinds.



The key to success with this approach to increase Certified seed sales is the discipline by all seed companies to employ use agreements with their Certified seed sales, and to have comparable FSS royalty structures if re-use of seed is permitted. With such discipline, the opportunity is for a material increase in Certified seed sales

Crop Insurance Based on Acres Planted with Certified Seed The province of Quebec has demonstrated that Certified seed acreage share can exceed 80% when enrollment in crop insurance has a requirement that crops are planted with Certified seed. In Quebec, this requirement extends to their BRM program ASRA. This cross-compliance feature can be extended to all provinces, which should result in a rather large increase in Certified seed sales. With this approach premiums paid by farmers do not change, with the additional crop insurance requirement that farmers demonstrate proof that the insured crop was planted using Certified seed. Using western Canada as an example, in 2017 there were 40.4 million acres of cereal and pulse crops planted, with 69% of these acres enrolled in crop insurance (27.8 million acres) – this acreage excludes hay, forages, canola, corn, soybeans and sunflowers. Our estimate is that 9.0 million of these seeded acres were planted with Certified seed (22.2% of acreage). With this option and assuming all of the crop insured acres will be planted with Certified seed should result in an additional 18.8 million acres using Certified seed (see third row in Table 8.5) Table 8.5 Potential Impact of Crop Insured Acres Planted with Certified Seed, Western

Canada, 2017 for cereals and pulses (excl. canola, corn, soybeans and sunflower)

Item Units Current Crop Insurance Acres with

Certified Seed

Change


Crop insured acres Million acres 27.8 27.8 0.0





$271.0 $271.0




$14.38

Certified seed cost (prior to yield gain) $/acre $14.16


The value of Certified seed sales to farmers in the west for these crops would increase from $235 million to $773 million. This increase of $538 million would be additional annual revenues to the seed supply chain, with this value dispersed upstream to seed processors, seed growers, seed companies and to product developers/breeders. The additional $538 million is not all an additional cost to farmers; rather the incremental cost to farmers is the difference between the certified seed price and the cost of using common seed. The latter includes the opportunity cost of not selling the grain into commercial channels plus the additional costs associated with FSS. The sixth row indicates that $271 million is the value of the former FSS now being merchandized into commercial channels plus the costs no longer incurred with FSS such as seed cleaning and treatment costs, working capital costs, and any logistics costs.



The difference between $538 million and $271 million is $267 million, which is the aggregate farm sector cost of requiring Certified seed for crop insurance enrollment. This is equivalent to $14.16/acre of expanded Certified seed acreage (see last row of Table 8.5). The last column shows that on a per acre basis, the additional Certified seed acreage has an average Certified seed cost of $28.54/acre, with farmers realizing an additional $14.35/acre associated with the sale of the former FFS and avoided costs associated with FSS, which results in $14.16/acre, prior to evaluating the higher yields, lower input costs or lower yield variability associated with the Certified seed usage. A possible issue is that the farm community may react negatively to the mandatory use of Certified seed to be eligible for crop insurance, which may result in some governments across Canada not supporting this type of approach. In Quebec, there was a consensus among industry stakeholders (through industry roundtables) for the cross-compliance feature. The primary purpose was to improve the quality of the crops and underlying seeds, and it was also seen as a way to provide some return on investment for public and private R&D, making crop quality improvement more sustainable. The following option uses program incentives versus a mandatory provision

Higher Coverage/Lower Premiums with BRM Programs An alternative to the mandatory use of Certified seed for crop insurance eligibility is that business risk management (BRM) programs use the incentive of lower premiums and/or higher coverage options when crops are planted with Certified seed. The incentive (of higher coverage or lower premium for a given coverage) can apply to crop insurance and margin guarantee programs, with the incentive structure proportional to a calculated higher seeding cost associated with Certified seed. The impact of the use of certified seed on productivity and then on premiums would have to be estimated in order for crop insurance to remain actuarially sound. With such an incentive structure, Certified seed acreage should increase substantially and could result in a Certified seed acreage share comparable to that experienced in Quebec. An issue with this approach is whether governments are willing to absorb the cost of lower premium dollars (or higher coverage liability). In this fiscal environment, such an initiative may be a rather low government priority. Farmers will pay through adjustments to premiums by type of coverage.

Narrow the Price Spread Between Certified Seed and FSS The wider the price spread between FSS and Certified seed, the greater the incentive for farmers to use FSS. The difference can be $10 to $30 per acre based on crop kind (refer back to Table 4.11). For example, with a price of $0.291/lb. for Certified durum wheat and $0.151/lb. for common durum seed185 with 105 lbs./acre seeding rate, the per acre cost differential is $14.70/acre. Tables 8.2 to 8.4 above indicate a price spread of around $13.00 to $14.00/acre across a number of cereals and pulse crops. With a yield of 50 bushels per acre, the cost differential is 26 to 28 cents per bushel of output. An approach is to decrease the price spread between FSS and Certified seed. The prior option (higher coverage/lower premiums with some BRM programs) has the effect of lowering the price spread between the cost of using FSS and Certified seed. Reducing the price spread by 50% should result in a per acre cost difference in the range of $0.15/bu. of output, before considering

185

The Saskatchewan Crop Planning Guide 207 has Certified seed prices and the 2016 version has common seed prices (or non-Certified seed prices).



yield gain associated with Certified seed. (A 1.5 bushel per acre yield increase with Certified seed can equal the cost differential – based on the lowered price spread being $7.50/acre, with the crop price at $5.00/bu.). This differential can be narrowed by (1) increasing the cost of FSS and/or (2) decreasing the price of Certified seed. A royalty on FSS is one way to increase the cost of FSS, which narrows the price gap. In the Netherlands the price differential is rather narrow with the FSS royalty set at 65% of the license fee on Certified seed, which resulted in a FSS royalty rate of $1.60 to $2.00 per 50 lb. unit. In Sweden the FSS royalty rate is set at 70% of the rate on certified seed sales. Lowering the cost of Certified seed can be through cost reductions in the seed supply chain, and increases in volume to lower fixed costs associated with varietal development and seed multiplication/certification. Table 8.6 provides an example where a FSS royalty rate of $2.00/bag (4¢/lb.) is applied across all cereals and pulse crops, using the same amount of Certified seed acres as in Table 8.3 (which is 60% acreage share for all cereals and pulse crops). This acreage share of Certified seed is used to illustrate a potential increase in Certified seed acreage. Table 8.6 Potential Impact of a $2.00 per unit (bag) FSS Royalty

Item Units Current Additional Acres of Certified Seed

Change






$233.0 $233.0

Aggregate farmer cost (prior to yield gain) $ million

$234.0

FSS royalty paid on FSS $ million $72.8 $72.8



$14.29

FSS royalty paid on FSS $/acre

$4.47

Net cost of FSS $/acre

$18.76


The aggregate royalty collection on FSS acres is $73 million, which is a cost to farmers using FSS (row 7 in Table 8.6). On a per acre basis this is $4.47/acre (see third last row). This $4.47/acre corresponds to an average seeding rate of 112 lbs. per acre (50 kgs/acre). With the 4¢/lb. FSS royalty rate on FSS the per acre cost difference is only reduced from $14.36 (see Table 8.3) to $9.89/acre, a 31% decrease. A larger FSS royalty rate does not seem to be practical, suggesting a reduction in the Certified seed price is required to achieve a narrower price spread. The latter is possible with a much larger volume of annual Certified seed sales. The increase is sales volume of Certified seed is $467 million per annum, which is 753 million kilograms of additional Certified seed sales based on $0.62/kg ($0.28/lb.) average seed price. This volume compares with our estimate of Certified seed volume usage in Canada for cereals and pulses account for 483 million kgs, with common seed sales today of 1,583 million kgs. Such an expansion in Certified seed acreage in cereals and pulses would reduce common seed sales volumes to around 830 million kgs (1,583 – 753).



The above analysis suggests that in addition to a FSS royalty rate, a reduction in the Certified seed price will enable the transition from FSS to Certified seed purchases when using price to achieve the objective of more Certified seed acreage for cereals and pulses. A narrower cost differential is expected to result in a higher Certified acreage share than that associated with promotion or downstream user requirement.

Tax Incentives with Certified Seed Purchases Tax credits/incentives applicable to Certified seed purchases have been advanced in the past186 with minimal support from governments. A tax credit will lower the cost differential between Certified seed and FSS; however, these is no guarantee that this feature will only be used to reduce the cost of Certified seed when a farmer decides to invest in a new variety. As well, existing users of Certified seed, as well as corn, canola, and soybean growers that have most if not all of their acreage planted with Certified seed will receive a net benefit from this provision, which reduces the efficacy of government expenditures (using taxation) for a desired end of higher Certified seed usage. The larger issue is that central agencies and finance departments would need to see the business case for these tax credits, which, based on past experience, will likely be low.

8.2 Moving Forward on Increasing Certified Seed Purchases by Farmers Table 8.7 provides a ranking of these options based on their (1) apparent effectiveness in increasing the use of Certified seed, (2) the ease of implementation, and (3) who pays. Table 8.7 Summary Assessment of Approaches to Increase Certified Seed Use

Approach Ranking on Effectiveness to

Increase Certified Seed Use

Ease of Implementation

Who Pays

Requirement of Downstream Users ∆ ∆ ∆ Farmer &

User Promotion of New Varieties by Seed Companies

∆ ∆ ∆ ∆ Seed Co &

Farmer

Seed Companies Employ Use Agreements

∆ ∆ ∆ ∆ ∆ ∆ Farmer

Crop Insurance Based on Planting Certified Seed

∆ ∆ ∆ ∆ Farmer

Higher Coverage/Lower Premiums with BRM Programs

∆ ∆ ∆ ∆ Farmer

Narrow Price Spread Between FSS and Certified Seed

∆ ∆ ∆ ∆ Farmer & Seed Co

Tax Incentives with Certified Seed Purchases

∆ ∆ Taxpayer

186

An example is the report prepared for the CSTA, “A Tax Incentive for Certified Seed: A Broader Assessment”, prepared by George Morris Centre (2007).



The government response to a tax credit to lower the cost of Certified seed was not supported by government in the recent past. It seems hard to justify government subsidization of Certified seed usage since it does not appear to align with a major government initiative or policy objective. For this reason, the two options that require government funding, or loss of tax revenues (i.e., Higher Coverage/Lower Premiums with BRM Programs and Tax Incentives with Certified Seed Purchases) will likely be difficult to implement. The leaves the remaining approaches for further consideration. The number of diamonds (in the second and third columns of Table 8.7) implies more effectiveness or greater ease. The approaches that appear to have merit based on these criteria, and where the taxpayer does not subsidize increases in Certified seed acreage, are (listed in potential priority):

Seed Companies Employ Use Agreements, which could increase annual Certified seed sales by $181 to $467 million;

Narrow Price Spread Between FSS and Certified Seed, which could provide additional royalty revenues of $73 million, in addition to the higher Certified seed sales;

Crop Insurance Based on Planting Certified Seed, which could increase sales by $537 million if all current insured acres remain in the program;

Promotion of New Varieties by Seed Companies; and And Requirement of Downstream Users.

A combination of these approaches can be considered to achieve the end of a much larger Certified seed acreage share in self-replicating crop kinds. Two of these options are interrelated with capturing royalties on FSS (i.e., Seed Companies Employ Use Agreements, and Narrow Price Spread Between FSS and Certified Seed).

8.3 Chapter Summary Building on features identified in other jurisdictions, options to increase the use of Certified seed are examined. The review of other jurisdictions in Chapter 5.0 identified that higher certified seed share use is the result of the following:

1. cross compliance: In Quebec, producers must use certified seed to participate in crop insurance and income stabilization programs;

2. high FSS royalties relative to certified seed royalties: A narrower differential between the certified seed royalty and the FSS royalty makes the use of certified seed more attractive to producers. Sweden's FSS royalty is 70% of the certified rate while the Netherlands is 65% of the certified rate.;

3. rapid release of new varieties: Frequent releases of new and improved varieties, such as in Sweden, provide an incentive for farmers to use certified seed; and

4. yield gain on newly released varieties: New higher yielding varieties benefit producers' profitability, and this provides an incentive to use certified seed.

Options to increase the use of certified seed were examined with the following results:

A requirement by downstream users to require the use of certified seed was found to have merit but was not expected to result in a large increase in certified seed use.

Promotion of new varieties by seed companies was also judged to have merit, but this option was not expected to increase sales by a large amount unless the new varieties are clearly superior.

With PBR, seed companies have the ability to employ use agreements associated with Certified seed sales, where the agreement has conditions of use. These conditions can include a prohibition of FSS (agreement to suspend farmers’ privilege) or the condition that with re-use by the farmer, a royalty payment is made to the seed company on the FSS. If use contracts were in place and 60% of cereal and pulse acreage in Canada was planted



with certified seed, certified seed sales would increase by $467 M. If use contracts were in place and certified seed acreage for pulses and cereals rose by 60%, certified seed sales would increase by $181.1 million.

Crop insurance could require the use of certified seed. In Western Canada, this would increase the number of acres with certified seed by 18.8 million acres and sales by $537.9 million.

Business risk management programs could incentivize the use of certified seed through lower premiums or higher coverage. While this could increase certified seed use, government would be unlikely to absorb the cost associated with the design changes, resulting in farmers paying the cost through adjustments to premiums.

The differential in price between certified and FSS could be reduced by either increasing the cost of FSS or decreasing the price of certified seed. With a FSS royalty rate of $2/bag on all cereals and pulse crops and a 60% certified acreage share, certified seed sales would increase by $467 million (the same amount as a contract on FSS and 60% certified share option).

A tax credit on certified seed purchases would reduce the price differential between certified seed and FSS. However, tax credits have been proposed by the Canadian industry in the past with minimal support by the government.

The option of increasing Certified seed use via use agreements, which could limit the use of FSS or require payments on FSS, was judged to be the most effective in increasing Certified seed sales as well as the easiest to implement.



9.0 Options for Royalty Collection on FSS

Farmers’ privilege does exist, enabling farmers to replant harvested seed. With such FSS, plant breeders through PBR do have the right to collect royalties; with an end-point-royalty (EPR) system being one such approach. Including EPRs there are approaches that can be used to collect royalties on FSS including:

Trailing contracts with seed company based on initial purchase of Certified seed; EPR system with rebates to users of Certified seed; Uniform EPR system with no royalty collection on Certified seed sales; A portion of producer check-off fees directed to plant breeding programs.

A summary of some approaches used to collect royalties on FSS is provided in Table 9.1. Canada is absent from this table since, to date, royalties have not been collected on FSS. However, Canada does collect check-off fees, where a portion of those funds are directed by producer organizations to fund varietal development. There are two approaches used to collect royalties on FSS, with one being a royalty on non-Certified seed planted (e.g., Netherlands) and the other an EPR system (e.g., Australia) that begins with a royalty on output.

9.1 Comparing System for Collecting Royalties on FSS

Contracts with Seed Companies Associated with Certified Seed Purchases One option to collect royalties on FSS is to have seed companies enter into contracts with farmers that purchase Certified seed. These contracts would be comparable to technology use agreements, with differing conditions on farmer’s rights on FSS. The contract would have a trailing feature, which would indicate the obligation of the buyer to pay a royalty rate on seed saved for replanting. This option is an extension of the approach used for increasing use of Certified seed – the option of “Seed Companies Employ Use Agreements” (see also Table 8.3). This approach is used in several EU countries (e.g., the Netherlands), where seed companies use contracts with farmers and have specified FSS royalty rates that are 65% of the license associated with the Certified seed purchase. A central body187 would send out to each farmer a declaration form indicating the amount of FSS being used with varietal information by crop kind, as well as the seed company and supplier for Certified seed purchases. The system would be IT based and have appropriate security and access privileges. As in the Netherlands, the farmer would be obliged to submit his/her declaration of whether or not FSS was being used. This declaration would be followed up by an invoice for funds to be directed to the central body. The collection process is aided by the contract between the seed company/breeder and the farmer, which has a trailing feature; this implies that the farmer’s obligation and the supplier’s rights extend past the use of Certified seed and includes the collection of a royalty on FSS. The use of distributed and network information technology would allow seed companies/seed suppliers to access the data base to review the farmers that indicated they used their Certified seed and compare this to internal seed company/seed supplier records. In the case where use of Certified seed was mis-represented, the system would send an invoice and/or capture more information on payment due. Since farmers with their purchase entered into a contractual agreement with a seed company, the seed company has the right to use collection agencies and the court system to capture the necessary royalty payment on FSS.

187

Possibly CSGA or CSTA.



Table 9.1 Comparing Farmer Saved Seed (FSS) Acreage Share for Wheat Across Selected Jurisdictions

Country FSS Share

Contributing Factor Approach Used to Collect Royalties on

FSS

Royalty Collection Mechanism

Collection Costs

Other Features

Sweden 15% FSS royalty is 70% of Certified seed royalty, yield gain on newly introduced varieties

Royalty on FSS SSTA invoices farmers based on semi-annual questionnaires sent to farmers

Not available

Central body has full information

Netherlands 20% FSS royalty is 65% of Certified seed royalty, yield gain on newly introduced varieties

Royalty on FSS based on Certified seed purchase contract with obligation to pay FSS royalty

Invoiced by central body (Plantum)

Not available

FSS royalty rate ranges between $1.60 to $2.00 per 50 lb. seed bag

France 39% FSS royalty is < 40% of Certified seed royalty, yield gain on newly introduced varieties

Uniform EPR, with small farmer exception

EPR paid on delivered grain by commercial farmer

2% of FSS royalty revenues

EPR rate of ~$1.05/t negotiated between farm leaders and seed industry

United Kingdom

42% Higher yielding varieties as sector recovers from institutional change that reduced genetic yield gain

Royalty on FSS Royalty paid by farmer at seed cleaner or payment to breeder organization (BSPB)

6% of FSS royalty revenues

Uruguay 44% Tax incentive to use Certified seed

Royalty on FSS (Extended Royalty System) based on Certified seed purchase contract with obligation to pay FSS royalty

Farmer invoiced for FSS royalty

7% of royalties collected

Plant breeder association (URUPOV) visits farms semi-annually

Germany 55% Yield gain on newly introduced varieties, low royalty collection rate on FSS

Royalty on FSS STV (breeder organization) sends out declarations

Not available

Onus is on breeder to capture FSS royalty, resulting in low collection rate (30%) on FSS

Australia 95% Farmers have the right to sell saved seed (applicable on eligible varieties)

Variable Rate EPR EPR paid on all grain produced (at delivery or used on farm); farmer completes Harvest Declaration

Grain company receives 40¢ to 50¢ per tonne

No royalty on Certified seed sales, EPR varies for $1.00 to $4.25/tonne



Using a royalty rate of $2.00 per unit (a 50 lb. bag @ 4¢ a lb., or 8.8¢/kg) of FSS has the potential to generate $139 million per annum on the estimated 1,583 million kgs of FSS currently used each year across Canada for cereals and pulse crops. Table 9.2 illustrates the range in FSS royalties that could be realized each year based on royalty rates ranging from 2¢/kg to 10¢/kg (0.9¢ to 4.5¢ /lb.). For example, with a royalty rate that averaged out at 7¢ /kg, with 1,600 million kgs of FSS the annual royalty revenues would be $112 million. Current usage of FSS for cereals and pulses is estimated to at 1,583 million kg (see Table 8.1 above). Table 9.2 Annual FSS Royalty Revenues with Various Royalty Rates and FSS Volumes

FSS Royalty Rate FSS Volumes

million kgs of common seed

1,400 1,600

¢/kg $/acre $/tonne of output $ million $ million

2 $0.90 $0.60 $28.0 $32.0

3 $1.35 $0.90 $42.0 $48.0

4 $1.80 $1.20 $56.0 $64.0

5 $2.25 $1.50 $70.0 $80.0

6 $2.70 $1.80 $84.0 $96.0

7 $3.15 $2.10 $98.0 $112.0

8 $3.60 $2.40 $112.0 $128.0

9 $4.05 $2.70 $126.0 $144.0

10 $4.50 $3.00 $140.0 $160.0 Source: Consultants’ calculations

The second column shows the resulting royalty rate per acre based on a seeding rate of 45 kg/acre (100 lbs./acre) and the third column shows the royalty rate based on output, assuming 1.5 tonnes of grain production per acre. At 7¢ per kg of FSS, the comparable value per tonne of output is $2.10/tonne. If the desired FSS royalty rate is comparable to $1.20/tonne of output, the royalty rate on FSS could be 4¢/kg (1.82¢/lb.). This would generate $63.3 million per annum for just under 1,600 million kgs of common seed use associated with cereals and pulses188. Assuming the Certified seed royalty is 4¢ a lb., (or 8.8¢/kg), this royalty stream on 482.6 million kgs of Certified seed is $42.5 million. See also the FSS Royalty via Contract section in Table 9.3 below. The effectiveness of this option assumes that all seed companies use these types of contracts. If only a subset of seed companies/breeders use these contracts and/or enforce the contracts, then collection of FSS royalties will be at a lower value than suggest above. The column labelled 1,400 million kgs of FSS (in Table 9.2) indicates the FSS royalty collection on the volume of common seed if it is below the current volume of just under 1,600 million kgs. Plant breeders and product developers should be aligned on the use and usefulness of using these contracts impacting on FSS when growers purchase Certified seed.

188

With 76% of acreage using common seed, 76% of 49 million tonnes of output suggests a FSS royalty revenue of $45 million based on output. The difference is based on assumptions of yield and seeding rates.



Table 9.3 Estimates of Royalties Collected on Farmer Saved Seed

Crop Kind Units Certified Seed

Common Seed

Totals

Cereals & pulses


Value of seed $ million $301.9 $479.1 $781.0


Seed price $/kg $0.63 $0.30 $0.38

Volume of output million tonnes

49.0

FSS Royalty via Contract

Royalty on FSS - 4¢/kg $ million

$63.3 $63.3

Royalty of Certified seed - 8.8¢/kg $ million $42.5 $42.5

EPR with refund on Certified seed purchase

EPR on output at $1.20/tonne $ million $13.7 $45.0 $58.8

Refund of 4¢/kg for Certified seed use $ million $19.3

$19.3

Net Certified seed royalty revenue $ million $36.9

$36.9

Net royalties with EPR and refund $ million

$81.9

Net FSS $ million

$45.0 $45.0

EPR with no refund

EPR of $1.20/t and no Certified seed royalty $ million $13.7 $45.0 $58.8 Source: Consultants’ calculations

EPR with Rebates for Certified Seed Purchases An alternative to a contract system is an EPR system. As in Australia, the EPR applies to all grain harvested minus seed retained for replanting (i.e., FSS). An EPR is collected by the first receiver of grain (e.g., grain company or grain processor) or is invoiced based on a farmer’s declaration. A portion of the collection system used for producer check-offs can be used for EPR. Since the EPR applies to all production a collection system is required for grain that is used on farm or sold to other farmers, for example. With an EPR system there can be a uniform EPR across all varieties which have PBR. This system is used in France with a royalty rate of $1.05/tonne of output (€ 0.70 /t). A uniform rate (when applied to all varieties) minimizes miss-declaration of varieties that can occur when EPR rates vary by variety. Australia uses a variable EPR, which is established by the product developer. While this can result in some growers indicating a variety with a lower EPR rate to save on check-off costs, information from contracts between producers and plant breeders/seed companies and Harvest Declarations minimize this. In France, growers that used Certified seed also pay the EPR. However, they receive a rebate of €28/tonne ($0.042/kg) of seed purchased. The royalty rate of Certified seed is established by SICASOV189 at € 78.40/tonne of seed ($0.1176/kg). The refund rate is only 36% of the royalty on Certified seed. Assuming 60 kgs/acre seeding rate in France, and 101 bushels/acre (2.75 tonne/acre) yield, the net per acre royalty rate is $4.54/acre, which translates into $1.65/tonne of output (Table 9.4 third row).

189

SICASOV is the acronym for Société Coopérative d’Intérêt Agricole des Sélectionneurs Obtenteurs de Variétés Végétales, a cooperative owned by plant breeders which enforces IPRs and collects royalties on seed.



Table 9.4 Royalties Paid on Certified Seed and FSS in France

Item Value in Euros

Value in Dollars

Per Acre

Per Tonne of Output

€ /tonne $/kg $/acre $/t output

Royalty on Certified seed 78.40 0.1176 $7.06 $2.57

Refund on Certified seed 28.00 0.0420 $2.52 $0.92

Net Royalty rate of Certified seed prior to EPR 50.40 0.0756 $4.54 $1.65

EPR rate on FSS 0.70

$1.05

Royalty paid in year of Certified purchase

$2.70 Source: Consultants’ calculations using seeding rate of 60 kgs/acre, 2.75 t/acre (101 bu.) and $1.5 per €

The purchaser of Certified seed also pays the EPR, which results in a net cost of $2.70/tonne of output, which decreases the following year to the $1.05/tonne EPR rate assuming planting with FSS. As a result, a farmer using FSS has a royalty cost of $1.05 per tonne of output, compared to a producer using Certified seed each year, with a cost structure of $2.70/tonne, a $1.65/tonne difference. This difference can incentivize FSS since the royalty rate is much lower, unless yield gains each year with Certified seed offset this cost difference. The royalty rate on FSS, using the data in Table 7.9, is 39% of the net royalty rate paid on Certified seed, which is much less than in the Netherlands (65%) and Sweden (70%). It can be noted that Certified seed acreage share is 55% for wheat in France and is much higher in the Netherlands and Sweden (over 80%). The EPR would be collected by the first receiver (e.g., grain companies and grain processors) and distributed to breeders by a central body (as noted above in the contract system). This same central body would administer Certified seed refunds to growers that had documentation supporting Certified seed use. In France, collecting on deliveries of bread wheat works because none of the wheat is used on farm. An average EPR rate of $1.20/tonne across all Canadian cereals and pulses results in $58.8 million of annual EPR revenues based on 49 million tonnes of output (as shown in Table 9.3 on the prior page). In addition, a royalty on Certified seed sales of 482.6 million kgs would also apply, such as $42.5 million based on a Certified seed royalty of 8.8¢/kg of seed. If a refund rate was offered at 4¢/kg (equivalent to $1.20/tonne of output), the value of the refund would be $19.3 million. The net proceeds on Certified seed sales would be $23.2 million, prior to EPR collections on this volume. After considering the EPR of $13.7 million on this volume, the value attributable to Certified seed is $36.9 million190. This level of royalties assumes that the EPR is also collected on grain that is used on farm (excluding FSS), as well as grain in storage, and grain sold to third parties that do not collect the EPR on deliveries. Annual royalty revenues for distribution back to product developers would be in the neighbourhood of $81.9 million191 per annum, with net FSS royalty collection being $45.0 million, after adjusting for the 76.6% FSS share on all EPR collected. It can be noted that the Certified seed royalty in France is collected by SICASOV directly from seed growers. On the EPR portion 85% is distributed back to product developers and a portion (15%) to research institutes supporting varietal development.

190

This is $42.5 million of Certified seed sales, plus the EPR on the Certified seed volume (of $13.7 million based on Certified seed share) minus the refund of $19.3 million. 191

Based on $45.0 million (net on FSS) and $36.9 million (net on Certified seed).



EPR with No Royalty on Certified Seed Sales Another type of EPR system only collects royalties on output, with no explicit royalty structure embedded in the Certified seed price. The same EPR applies to a crop planted with Certified seed or with FSS. Such a system is used in Australia. EPR collection can be as noted above, with proceeds distributed back to plant breeders. As noted previously Australia uses a variable EPR rate, with each product developer establishing the applicable EPR rate for each variety. This type of EPR system can proceed with a uniform EPR rate by crop kind, or a variable EPR rate. With 49 million tonnes of output across all cereals and pulse crops in Canada, and an EPR rate of $1.20/tonne generates $58.8 million in EPR royalties per annum. With 76.6% of volume estimated to be based on FSS, $45 million can is based on FSS and $13.7 million can be attributed as royalty income on Certified seed use (see the section in Table 9.3 above based on the volume of Certified seed used). An assumption is made that seed companies receive royalty income in proportion to their Certified seed sales on at least their annual Certified seed sales.

A Portion of Producer Check-off Fees Directed to Plant Breeding Programs Currently, in western Canada producer Commissions have the authority to collect check-off fees which are deducted by first receivers of grain, such as at a country elevator or grain processor. These check-off dollars are then used to fund specific initiatives established by each of the Commissions, with plant breeding, basic R&D in support of plant breeding, agronomic research, marketing programs and other activities examples of these initiatives. With this competing use of funds, not all of the check-off funds are directed to varietal development. In the case of wheat, the Commissions use a collaborative approach where resources are pooled to fund plant breeding initiatives of importance to producers, such as disease resistance traits. A potential weakness of the current system is that check-off funds are voluntary, which means producers can apply for refunds. A feature of the current system is that producers and the plant breeding community are not fully aware of what amount of the check-off will be used for varietal development192. Notwithstanding the above, the current check-off system can be amended to have a specific amount of the check-off be dedicated for plant breeding, such as $1.20/tonne, with this amount mandatory on all grain sold into commercial channels. The collection method used by producer Commissions is comparable to, or identical to, the collection system used for an EPR system. There are a number of options for the distribution of these funds, which can range from:

funds forwarded to product developers based on varietal market share as determined by declarations or by annual Certified seed sales;

funds forwarded to producer Commissions for their direction to specific plant breeding initiatives; or

a combination of the above two approaches. Since some varieties were developed by governments and by universities, the flow of funds on these varieties could go to producer Commissions, for their funding of plant breeding programs. The rationale for this flow of funds is simply to avoid royalties going to consolidated revenue funds in government or to central administration in universities, which appears to be standard practice on royalty income in the government sector, rather than directly to the plant breeding program at these institutions. Having a portion of these funds flow to producer Commissions enables the producer community to have some influence over the type of investments they want to support.

192

This may not apply to pulse crops in some provinces.



With this approach a common check-off rate by crop kind is suggested. This avoids any mis-declaration of varieties by farmers (to avoid higher rates on some varieties) and allows for rather immediate program implementation. With a $1.20/tonne this is equivalent to $58.8 million per annum across all cereals and pulses. The same allocation can occur between FSS and Certified seed as above with an EPR and no royalty on Certified seed at time of seed sale.

9.2 Moving Forward on Collecting Royalties on FSS A summary assessment of the four approaches that could be used to collect royalties on FSS for cereals and pulses is provided in Table 9.5 using the criteria of (1) efficacy of collection, (2) ease of implementation, and (3) the annual value of the FSS royalty. Table 9.5 Summary Assessment of Approaches to Collect FSS Royalties (Annual Values)

Option Efficacy Collecting

FSS Royalty

Ease of Implementation

Value of FSS

Royalty

Value of Certified

Seed Royalty

Royalty Total

Contracts with Seed Companies on Certified Seed Purchases ∆ ∆ ∆ ∆ ∆ $63.3 M. $42.5 M. $105.8 M.

EPR with Rebates for Certified Seed Purchases ∆ ∆ ∆ $45.0 M. $36.9 M. $81.0 M.

EPR with No Royalty on Certified Seed Sales ∆ ∆ ∆ $45.0 M. $13.7 M. $58.8 M.

Portion of Check-off Fees Directed to Breeding Programs ∆ ∆ ∆ ∆ ∆ $45.0 M. $13.7 M. $58.8 M.

The annual value of FSS royalty is shown in the third column of Table 9.5 for each of the four approaches, with the royalty rate based on 4¢/kg (1.82¢/lb.) for the contract option and $1.20 per tonne of output for the other three options (EPR and check-off). These values are as reported above in Table 9.3. The royalty value on FSS across all cereals and pulse crops ranges from $45 million to $63 million. The difference on FSS royalty collection between the contract approach and the other three arises since the former is based on the volume of FSS used, while the other three approaches is based on the volume of output sold into commercial channels attributable to the plantings with FSS. The latter could be lower due to (1) not all output enters into commercial channels, (2) actual yield of the crop, and (3) the technical relationship between the FSS royalty rate and the EPR rate193. The second last column shows the royalty collected on Certified seed for cereals and pulses using $2.00 per 50 lb. bag (8.8¢/kg) for the first two options. The value for the last two options is based on the $1.20/tonne of output attributed back to Certified seed use. The total of royalties collected range between $59 million and $106 million, as reported in the last column of Table 9.5. The contract system results in the highest value of royalty collection, based on the assumptions used. There can be an impact on the market with a FSS royalty based on output. For example, with a uniform EPR or check-off based on output, breeders may have an incentive to release higher yielding varieties versus varieties with disease resistance or market required attributes. In this case, the impact on the market is not neutral. The contract system does not have this effect, with the FSS

193

This is based on seeding rates, crop yields and the FSS royalty rate and the EPR rate.



royalty based on the volume of seed used, which is determined by seeding rates. A variable levy EPR system may be able to correct for the incentive to release yield increasing varieties relative to other types and thus may be more market neutral. Also, product developers supporting crop kinds with relatively more on farm use could be penalized by an EPR system that is only based on deliveries – a declaration system such as used in Australia minimizes this potential issue of not capturing all applicable volumes. The contract system between farmers and seed companies is ranked slightly higher than the other systems for efficacy of collection. The reason is that this system has more information based on required obligatory declarations by farmers, supported by the contract, which supports the efficacy of FSS royalty collection. Implementing the system requires an investment in the enabling IT platform as well as staff in a central body to administer the collection system. Our review of FSS royalty collection in other countries concluded that the jurisdictions with the highest efficacy had (1) a supporting information system that was enabled by either a contract between farmers and seed companies/breeders or a database maintained by government (or a central body). Another noteworthy feature is that most had (2) a contract system between farmers and seed companies, which provided information and created an obligation for farmers to pay a FSS royalty.

9.3 Traceability and FSS Traceability is an important feature in many crop-based supply chains. An issue with FSS is whether varietal identity can be preserved over a few seed generations. Within Canada, FSS can only be used on the farm where it was produced, and in Australia with the ability for seed sharing (e.g., for at least 50% of wheat varieties) FSS can be sold to another farmer. In both situations, a concern is whether variety identity, and possibly more important whether Certified seed lot identity can be maintained. Maintaining identity can be achieved with a contract system, such as used in the Dutch seed sector. A Certified seed purchase contract obliges the farmer to declare the use of the planted crop and whether some of the crop produced is planted using retained FSS. When a crop is planted with FSS, the variety is known, as well as necessary characteristics of the original seed lot of Certified seed. The associated central data warehouse can be used for any necessary traceability issues based on seed planted. The Australian EPR system, which starts with a contract between the farmer and seed company/plant breeder, also has a grower (harvest) declaration system, where the flow of grain by variety is recorded by market channel (e.g., sold to grain company, used on farm, sold to a neighbours, retained as FSS), for all generations of a Certified seed purchase. The associated data by variety is either part of a large database maintained by Seedvise (on behalf of some variety owners) or maintained by the owner of a variety. While this system is designed to ensure that all EPR royalties are collected, the system can also provide necessary traceability by variety. Accordingly, an EPR system that is designed to collect royalties on all grain produced (excluding an EPR on FSS194) enables traceability by variety (and seed lot). To achieve this end, a farmer declaration system is required along with an IT enabled database that supports royalty collection by variety, which therefore can support necessary traceability actions.

194

It can be noted that some variety owners in Australia collect an EPR on FSS.



9.4 A Comparison of Various Royalty Systems – Wheat in Western Canada A summary view of alternative royalty collection systems that includes FSS royalties and royalties on Certified seed using non-durum wheat in western Canada can provide additional perspective. Table 9.6 explores the impact based on the collection systems used in Quebec, Sweden, the Netherlands, France and Australia based on 22.2 million tonnes of wheat production. The first row in Table 9.6 indicates the type of system used to collect royalties on FSS, such as based on declaration or use of EPR or no system. The second row summarizes high level features of the Certified seed system such as royalties in the seed price, or a cross compliance requirement (as in Quebec with crop insurance), a contract system with growers, or use of the EPR. Table 9.6 Comparing Impact of Various Seed Royalty Systems for Prairie Wheat

Item Units Prairies Quebec Sweden Netherlands France Australia

FSS System

none none Declaration Declaration EPR EPR

Certified Seed System

in seed price

Cross-compliance

in seed price

Contract in seed price

EPR

Certified Share % 22% 74% 83% 80% 61% 5%

FSS Share % 78% 26% 17% 20% 39% 95%

Net Certified Royalty $ million $14.2 $47.8 $53.6 $51.6 $25.2 none

Royalty on FSS $ million none none $7.7 $8.4 none none

EPR on Output $ million none none none none $26.3 $25.8

Total Royalties $ million $14.2 $47.8 $61.3 $60.0 $51.5 $25.8

Certified Seed Sales $ million $81.7 $274.7 $308.1 $296.9 $226.4 $18.6

Royalty/Certified Sales

% 17% 17% 20% 20% 23% 139%

Source: Consultants’ calculations using 16.3 million acres of wheat, a yield of 1.36 t/acre (50 bushels), a holdback of 3.3% of harvest on FSS plantings, a seeding rate of 45 kilograms/acre (100 lbs.), a Certified seed cost of $0.506/kg ($0.23/lb.) a Certified seed royalty rate of 8.8¢ per kg (4.0¢/lb.), an EPR rate of $1.20/tonne of delivered grain, and a 36% Certified seed royalty rate refund (for France).

The third row indicates the Certified seed market share for wheat in each of the jurisdiction, with the exception being Quebec where the 74% reflects the share of insured wheat acres in western Canada (for 2017). The net Certified seed royalty is based on a royalty rate of $2.00/bag (8.8¢/kg) of seed, which results in an estimate of current royalty revenues being $14.2 million (first data column in Table 9.6) to a maximum of $53.6 million based on an 83% market share as reported for Sweden. The Certified seed royalty in France accounts for the farmer refund rate being 36% of the royalty rate on Certified seed. The royalty on FSS for the Dutch and Swedish approach is in the neighbourhood of $8.0 million. The EPR revenue on all output is in the range of $26 million for the French and Australian approaches. Total royalty revenues are shown in the third last row, which ranges from a low of $14 million for the current system in the west to a high of $60 to $61 million for the Swedish and Dutch approaches. Certified seed sales are the highest in the Swedish approach (at $308 million) and lowest in the Australian model ($19 million), which is directly related to Certified seed market share (of 5%). Of interest, royalties as percent of Certified seed value is lowest in Canada at 17%, which increases to 20% with the Swedish and Dutch approaches, increases to 24% in France (due to the combination of EPR and Certified seed royalties) and to 139% in Australia, which is due to low use of Certified seed and an EPR on output. The Australian results show that royalties in a year can exceed the



value of Certified seed sales (at 139%), while in Canada the current system with higher Certified seed sales has much royalty revenues (only 17% of Certified seed purchases). Further insight of seed royalty collection systems is offered when the same Certified seed market share is used. Table 9.7 is constructed using a Certified seed share of 50%. The results indicate that with the same parameters (seeding rates, royalty rates, etc.) used as in Table 9.6, then the highest royalty collection is through the approach used in the Netherlands (comparable to Swedish model), and lowest in Australia with a $1.20/tonne EPR rate. The combination of royalties on Certified seed, a partial grower refund on Certified seed use, and an EPR (and their values) as in France result in total royalty revenues (of $47 million), which is lower than in the Dutch system. Table 9.7 Comparing Royalty Systems for Prairie Wheat with 50% Certified Seed Share

Item Units Prairies Netherlands France Australia

FSS System

none Declaration EPR EPR

Certified Share % 50% 50% 50% 50%

FSS Share % 50% 50% 50% 50%

Net Royalty on Certified $ million $32.3 $32.3 $20.7 none

Royalty on FSS $ million none $21.0 none none

EPR $ million none none $26.2 $26.2

Total Royalties $ million $32.3 $53.3 $46.8 $26.2

Value of Certified Seed Sales $ million $185.6 $185.6 $185.6 $185.6

Royalty/Certified Seed Value % 17% 29% 25% 14%

The best practice appears to be a good information system administered by a central body, with such an information system generated through a contract system on Certified seed purchases by growers. Our view is that a contract system is an approach that should be considered.

9.5 Chapter Summary This chapter examined options to collect royalties on FSS. Based on the examination of other jurisdictions, there are three basic ways to collect royalties on FSS:

1. EPR, 2. declarations, and 3. contracts with trailing royalties, which can also include declarations.

Declarations are used in Sweden, the UK, and Germany. This method is most successful in Sweden because of information provided by the government. In the Netherlands, success is linked to the legal requirement by farmers to declare their FSS use and by the contract on the certified seed purchase. In the UK, 90% of FSS royalties are collected and mostly by mobile seed cleaners. Only 30% of FSS royalties are collected in Germany because of the legal requirement that plant breeders must show that the farmer used FSS. This contrasts with the Netherlands where declarations are mandatory. EPR’s are used in France and Australia. In France, the royalty is the same for all varieties and is collected when the grain is delivered. A portion of the certified seed royalty is rebated. In Australia, the variable rate EPR is paid on all grain produced except for that used for FSS. A harvest declaration provides details on use by variety. The EPR is collected either at the elevator or through an invoice based on the harvest declaration. Contracts are used to collect FSS royalties in Uruguay and the Netherlands.



Contracts between the plant breeder and farmers specify the use restrictions and royalty rates. The Netherlands system for collecting FSS also uses a farmer declaration. The examination of different countries identified that information is key to collecting FSS royalties. Contracts between breeders and farmers and harvest declarations can both provide the necessary information to collect royalties. Options to collect royalties modelled after systems in place in Netherlands (contract); France (uniform EPR with rebates on certified seed); Australia (EPR with no royalties on certified seed); and Western Canada (producer levies to support R&D paid on delivered grain) were analyzed. Using all cereal and pulse crop acreage in Canada, total royalties collected under the systems were as follows:

contract system $105.8 million; EPR with rebates $81 million; EPR with no royalty $58.8 million; and check-off fees $58.8 million.

If a 50% FSS share is imposed on all the options, the Netherlands model collected $53.3 million in total royalties while the French EPR collected $46.8 million and the Australia EPR collected $26.2 million. The contract system was judged to be the most effective at collecting royalties on FSS. It also provides a base of information for traceability. Initiatives being considered by Seed Synergy to improve performance of the seed system are assessed in the following Chapter. This assessment builds on the information and insights noted in this Chapter and in previous Chapters.



10.0 Assessment of Some Options In this section a number of changes being considered by Seed Synergy are summarized and assessed, with a view of providing our third-party perspective on benefits and potential risks. The topics covered in this Chapter are highlighted in Figure 10.1, along with their inter-relationships. The key areas are shown in the middle portion of Figure 10.1, which are (1) value capture by product developers, (2) traceability and (3) value creation. The single widow concept, variety registration, quality assurance, the product profile, value capture and value creation is linked in some manner to traceability. Aside from value capture by product developers, all of the topics/concepts support value creation. Figure 10.1 Actions that Enhance Value in the Seed Sector Our assessment begins with (1) value capture, (2) traceability and (3) the single window concept since they involve most segments of the seed system and are elements of the areas of the seed system used by Seed Synergy. These areas are (1) Research & Development, (2) Market Entry and Commercialization, (3) Production and Processing, (4) Sales and Distribution, (5) Value Creation and (6) Seed sector Governance and Coordination. Our assessment of change in each these six (6) areas occur if following sections. The impact of moving forward with an EPR versus a royalty on FSS as part of a Certified seed sale contract between growers and a seed company is covered in the next Chapter.

Value Capture by Product

Developers

Traceability

Value Creation

Product

Profile

Single

Window Variety

Registration

Tiered Risk

Assessment

Seed Sector

Governance

Supporting Seed Sector Activities The Seed Product

Quality

Assurance



10.1 Value Capture by Product Developers Value creation and value capture are different but related concepts. Value creation is about creating a benefit, such as a variety that creates more profit margins for the farm community. Value capture is about what organizations or segments of the supply chain capture the benefits of the value that was created. In the case of a new variety, the product developer created the value and through the pricing system, use of PBR and contracts with farmers using the seed, the product developer captures some of the value created. The farm community also retains (captures) some of the value, otherwise there is no incentive to use a newly released variety. In the two prior Chapters we outlined how product developers can capture value when farmers’ exemption exists and FSS is used. Our suggestion was that a contract be entered into between the seed company (or product developer) and the farmer on Certified seed purchases, which outlines the rights and obligations of the farmers with respect to saving seed for next year’s crop. This contract would outline the obligation of the farmer to declare the volume of the crop retained as FSS and the associated royalty rate of the FSS. The ability to capture this value also relies on a data management system that has a few attributes, including (1) seed companies supply Certified seed sales by variety by famer into a central data base, (2) the data base manager cross checks each farmer’s purchases of Certified seed alongside declarations of FSS use, (3) each seed company (product developer) can review volumes of FSS by variety used by farmer, and (4) the data base manager invoices farmers for FSS royalties. More value capture also occurs when acres planted with Certified seed increases which benefits both product developers and seed companies/growers. In our assessment we assume that with Certified seed contracts overall cereal and pulse crop acreage planted with Certified seed increases by 40 percent.

Benefits The major beneficiaries are product developers when using a contract system on Certified seed sales, which allows for collection of a royalty on FSS. Our estimate is that seed companies would collect $30.6 million each year (see 8th row in Table 10.1), based on a $0.50/unit FSS royalty (1¢/lb.) across all cereals and pulses195. As well, with assumed higher Certified seed sales, the value of Certified seed sales increase by $120 million from our estimate of the $302 million in current annual Certified seed purchases by Canadian cereal and pulse growers. This value is shared with seed companies/growers and product developers, where the Certified seed royalty (at $1.50/unit) increases by $12.6 million (see the 5th row in Table 10.1). This value capture approach creates opportunity for small and medium size breeding companies to invest in variety development. This benefit comes at a small cost to growers. Across the 30 million acres using FSS this is an average cost of $1.02/acre, which is less than $1/tonne on an output basis. This suggests that the cost to farmers with a small FSS royalty should not have a material impact on their operation. For a cash crop producer with 1,000 acres in cereals and pulse crops that are planted with FSS, the annual cost is $1,020. However, the longer-term benefit to farmers is the resulting innovation and release of new varieties, with higher yields or higher per acre profit margins, which is enabled by a higher royalty stream back to product developers. The increase in Certified seed usage on 4.1 million acres is the source of the $120 million increase in Certified seed sales. Before accounting for yield gain (or margin improvement per acre) resulting from Certified seed usage, the net per acre cost is $14.61/acre, ($60 million in total on the additional 4.1 million acres, which is $64.2 million minus the FSS royalty at $1.02/acre on 4.1 million acres).

195

This rate is ~50% of the rate on Certified seed which ranges from 1.7¢ to 2.7¢ per lb., or $0.85 to $1.35 per unit in western Canada for cereals.



Table 10.1 Estimate of Value Capture with a FSS Royalty ($0.50/unit) and a 40% Increase in Certified Seed Acreage in Cereals and Pulse (with Certified Seed Contracts)

Item Units Current Additional Acres of Certified

Seed

Change

Planted acres (cereals & pulses) Million acres 44.4 44.4 0.0 Certified seeded acres Million acres 10.3 14.4 4.1 Common seed acres Million acres 34.1 30.0 -4.1 Purchases of Certified seed $ million $301.9 $421.5 $119.6

Certified seed royalty $ million $31.9 $44.5 $12.6

Realized opportunity on FSS/avoided cost $ million $0.0 $55.4 $55.4 Aggregate farmer cost (prior to yield gain) $ million $0.0 $0.0 $64.2

FSS royalty paid on FSS $ million $0.0 $30.6 $30.6

Purchases of Certified seed $/acre $29.22 $28.87 $29.10 Realized opportunity on FSS/avoided cost $/acre

$13.47

FSS royalty paid on all FSS $/acre

$1.02

Net cost of FSS $/acre

$14.50

Certified seed cost (prior to yield gain) $/acre $14.61

Risks A risk is that some seed companies decide not to have a FSS royalty rate or decide to have a low rate compared to others as a means to capture market share. To overcome this risk, the collective industry body as represented by CSTA (or its equivalent in the future that represents the seed industry) would need to ensure that all seed companies had a FSS royalty rate that was a fixed percentage of the associated fee on Certified seed sales (as in the EU countries such the Netherlands and France).

10.2 Traceability Traceability is defined as the: “ability to follow the movement of a feed or food through specified stage(s) of production, processing and distribution” by the International Organization for Standardization (ISO)196. In the seed sector, a traceability system allows for:

Maintaining identify of a seed lot in the various segments of the seed supply chain; Locating a seed lot or variety within the seed supply chain; Tracing the flow of a seed lot through various stages in the seed supply chain; Facilitating identification of the cause of nonconformity of a seed lot; Allowing for withdrawal/recall of a seed lot, as required.

In addition to these capabilities, other benefits of a traceability system can include:

Increased buyer confidence in the attributes of the seed lot purchased; Maintaining a description of seed lot attributes for access by each partner in the supply

chain; Improved business support functions such as necessary documentation and inventory

control; Improved communication between partners in the seed supply chain;

196

ISO 22005:2007, 3.6, Traceability in the feed and food chain – General principles and basic Requirements for system design and implementation.



Allowing for necessary coordination between partners in the seed supply chain; Improvement in the flow and reliability of information through the seed supply chain, and Increase in accountability between supply chain partners; and Increase seed sector productivity;

The seed sector can benefit from have a sector wide traceability system, from breeder seed through seed multiplication to shipments of seed by distinct seed lots through to the locations of where the Certified seed (and any associated FSS) is planted. This traceability system can be extended, as required, to customers that require information on the history of the product they are processing. The traceability system can be based on interfaces/linkages with a few data systems. For example, in the seed multiplication sector, (1) plant breeders may require information on the performance of their variety in different locations, (2) seed companies can assess agronomic performance of each generation and by geographic location, and (3) seed companies can quickly determine the location of a variety by pedigree seed status. The system can begin with the necessary data submitted for variety registration, PBR filing, and product listing. As well, a seed company can quickly assess the location of each seed lot and quickly withdraw any seed lot that has been shown to not conform to expected standards. Furthermore, the variety specific contracts are part of the overall traceability system, with appropriate linkages to the above data bases. With the contract system, and supported data base, a seed company will know the location of each seed lot (by variety) across the country side and will be aware of any common seed (based on FSS) of their variety is on a farm based on the royalty collection system. Such a traceability system is based on the appropriate architecture of each data base and the necessary interfaces required exchanging data, as well as providing the necessary security and privacy of proprietary and confidential company specific data. Currently, the databases that support traceability are not fully integrated. Benefits The benefits are significant, as noted above in the above list of benefits. They range from cost savings for seed sector participants, to the ability to collect royalties on FSS, to knowing where each seed lot is located in the case of recall. The Triffid flax example is a case in point which demonstrates the benefits of a trace and track system and the ability to recall and destroy all non-conforming or unwanted seed material. Triffid, a GM flax was developed at the Crop Development Centre (CDC) at the University of Saskatchewan and received complete regulatory approval in 1998. At this point in time, Triffid entered the seed multiplication program. In 1999, Canadian flax exports to the EU (50% of total Canadian exports) were threatened because of the EU position on GMO's. It was decided that it would be better for Canada to remove the GM flax from the system, and not harm flax exports into certain markets, such as the EU. In 2001, the variety was de-registered and all seed was supposedly disposed of. Seed was crushed, the oil sent to the industrial market and the meal used in livestock feed. Breeder seed was burned. However, in 2009 Triffid was found in flax shipments to the EU. The source of the contamination was identified as being from the seed varieties CDC Normandy and CDC Mons. Some seed growers allegedly did not dispose of all the Triffid seed believing that the EU would change its mind. The contamination could also have come from seed-mediated gene flow (volunteer flax and equipment contamination). The Triffid flax situation resulted in estimated costs of $29.1 million, consisting of demurrage/quarantine costs of $12 million; testing costs of $3.9 million; and cost of segregation and



other costs borne by breeders, certified seed suppliers, producers, grain companies, AAFC and Sask Flax of $13.2 million197. A large benefit of an effective traceability system is minimization of costs associated with recall and isolating non-conforming product and possible liability actions. The $29 million cost associated with Triffid would in all probability have been much lower had a traceability system been in place. Eliminating the cost of delay associated with product recall is another benefit. For example, a grain shipment on a 70,000 tonne Panamax can be delayed in voyage or unloading if the shipment may be part of a potential recall. Paper based and incomplete traceability systems can result in 5 to 7 days of time required to determine if the cargo is part of a recall, while an integrated traceability system (for example using block chain technology) can determine the location of all seed lots in a matter of seconds. With a 7 day delay several costs are incurred. The first is the demurrage cost of $(US) 15,000/day, or $105,000. The second is the working capital cost since payment will be delayed by at least 7 days, which is valued at $20,000 for the 7-day period (based on a value of $300/tonne). The third is possible price discounts requested by the buyer due to shipment delay; a $10/tonne discount is valued at $700,000. Overall this one shipment can incur a cost of $825,000 due to delay, which is essentially avoided with all of the information in the product profile. These two examples are just a small measure of the overall benefit of complete traceability. The future of the seed sector is based on having complete traceability – from breeder seed through seed multiplication, through to use on the farm, and shipment of the grain (and oilseed) product to users. Risks The risk is a financial risk, where significant funds are expended, and the overall traceability system supported by large data bases does not provide the required trace and tracking function. A recent example is the Phoenix pay system used by the federal government where the system was not able to deliver on what it was designed to do. This risk can be minimized by appropriate design of the system and linkages between the various data bases that will comprise the overall traceability system, starting with the breeder through to the use of the seed, at a seed lot level, by commercial farmers. Another risk is breach of proprietary data that feeds into the overall traceability system. This risk can be minimized through appropriate data base designs and allowable interfaces for traceability.

10.3 The Single Window The single window approach allows for product developers and seed companies to enter on-line product data, such as for data for registration, listing, PBR protection, and for the product profile. Any data once entered does not need to be re-entered as is the current case with manual paper-based systems for registration and PBR protection. A single window approach allows for one point of contact to obtain necessary information on the Canadian seed industry. Information requests can include data requests that vary from (1) acreage planted to a variety, (2) acres planted with Certified seed by crop kind, (3) pedigreed seed production by variety or crop kind, (4) seed exports and imports, (5) varieties that can be sold in Canada, and (6) information on a variety as provided in the product profile, etc.

197

The source for this section is Ryan C and S Smyth, "Economic Implications of Low-Level Presence in a Zero-Tolerance European Import Market: The Case of Canadian Triffid Flax", AgBioForum 2012.



Information requests can also come from international bodies, such as the OECD, seeking general information on the Canadian seed sector. As well, a government agency that requires input on issues that may affect the seed industry should have one point of contact from which to obtain a seed industry perspective. A single window has linkage to seed industry governance as shown above in Figure 10.1. Having only one organization responsible for supplying information to other interested parties ensures that the industry has only one voice. The single window concept also has linkage to traceability within the seed supply chain, product profiles, and other sources of seed sector data. The single window concept requires the necessary supporting architecture of a data management system for the overall seed industry. The single window concept also raises the issue of what organization has overall responsibility for traceability in the seed sector.

Benefits The benefits of a single window occur on a few dimensions. Users of the system incur significant benefits as their search costs are reduced and all of the necessary information is in one place. Furthermore, the single window concept, with its linkage to traceability provides significant benefits to the overall seed sector. Another benefit is the cost savings of only having one organization responsible for supplying seed sector data, information, and seed industry perspectives on topics. These cost savings are in terms of time, staff resources, and opportunity cost of staff time when contrasted with the current system where data and information requests are made to more than one organization, or where one organization needs to confer with another on a data/information request. A conservative estimate is at least $50,000 in saved staff cost time each year, thus freeing up staff time to be involved in other necessary tasks in the seed system. Another benefit is the efficiency gain and cost savings to product developers and seed companies only needing to enter in product information once and not in a duplicative manner as today. With approximately 240 varieties registered in one year, and assuming that most of these varieties are seeking PBR protection, then the cost saving is significant. With at least 240 days hours of effort at seed companies/product developers, then the cost saving is over $100,000 per annum. Product developers may need to provide more data on varieties after they have been in production, an on-line single window approach can dramatically save time associated with updating variety information. This can add another $100,000 in annual savings to product developers

Risks On the data front, a risk is that the data management system used by the organization does not provide the required data integration and/or provides the necessary data, but at a high cost. This risk is minimized through the appropriate design and architecture of the overall data management system required, and the linkage to the traceability system used for the seed industry. The cost of the information technology system is another risk that needs to be managed as the system is built. Security of information and maintenance of proprietary information is another risk with the single window approach. This risk can be minimized through the use of blockchain technology, where the information supplied into the system remains secure and cannot be changed, aside from those who provided such information (or with permission granted to a specific third party). The risk that the necessary coordination with industry partners does not occur, or with government partners in the seed sector, cannot be over-looked.



10.4 Regulatory Flexibility - PNTs and Tiered Risk Assessment The regulatory system for PNTs has served the seed industry reasonably well and has enabled the introduction of genetics that has benefited the crop production sector in Canada. Notwithstanding these benefits, concerns have been raised regarding unduly lengthy and costly processes for obtaining regulatory approvals, as well as negative impacts of the current delivery of Canada’s novelty-based regulatory system on innovation in the sector. Canada regulates plants with novel traits, novel feeds and novel foods on the basis of the novelty of the product rather than the process by which they were developed, unlike many other jurisdictions that regulate according to the use of recombinant DNA (or transgenic, modern biotechnology or genetic modification) techniques. This system is intended to capture all products with a broad potential for risk, acknowledging that techniques such as recombinant DNA are not in and of themselves risky. Three federal authorities undertake three separate reviews for assessing environmental, feed and food safety of novel products. Over the last 20 years at least 5 submissions are made per annum by product developers for regulatory approval of PNTs and associated novel feeds and novel foods. Once laboratory and greenhouse product development is completed, obtaining regulatory approval is at least $2.5 million for a PNT on average (ranging from $500,000 to over $4 million depending on the trait). These costs are associated with undertaking confined research field trials, in-house and third-party studies, and preparation of submissions to the regulatory agencies. Generating data and material from confined field trials and other studies and preparing submissions takes at least two years, with another minimum two years required for CFIA and Health Canada to review the submissions, seek additional information from the developer when needed, and issue approvals. As noted in a prior Chapter (see Figure 6.1), the approval process is in three areas and includes some duplicative efforts among environment, feed and food assessments. Improvements can be made that provide efficiency gains through a reduction in time and/or resources required for novel product approvals. For example, this can occur through joint regulatory reviews of molecular, nutritional or toxicology data submitted by a developer for a given novel product where currently environment, feed and/or food authorities undertake very similar reviews independently. A joint review allows for a reduction of government resources on a novel product and may also reduce the time to approval. With a joint review there is also one set of follow-up questions submitted by the regulators to the proponent, which saves time and resources for regulators and proponents. A pilot project was recently initiated where the CFIA environment and feed regulators jointly reviewed the molecular characterization of a novel product, which demonstrated that government resources can be used more efficiently and time to approval could be shortened. Other improvements such as adherence to service standards, increased transparency and consistency in data requirements could also enhance the efficiency of regulatory assessments. A more efficient system in Canada has additional beneficial impacts in addition to supporting innovation and farmer access to new tools. Quicker approval supports the product developer in obtaining regulatory approvals in an importing country much quicker. That is, one key importing country (China) will not begin their review and approval process for a novel trait until after “authorization” has been provided by a cultivating country (i.e., an exporter). China typically takes 4 or more years to complete their approval process. That process can begin one year earlier if a Canadian approval has been completed efficiently in 12 months rather than 24 months. This results in the exporting country and the product developer having the ability to begin cultivation of this product one year earlier without any risk to export trade. This is of great importance when the approval is unique to Canada (i.e., the trait is only in a Canadian registered variety, with recent examples in potatoes and apples).



In addition to streamlining and enhancing efficiency of assessment procedures under the current system, improvements could also be made through changes to the regulatory pathways themselves. Novelty-based regulation as currently interpreted is believed to be hindering innovation among Canadian plant breeders relative to their counterparts in other jurisdictions. A broad application of novelty as a regulatory trigger means that some products which are arguably low-risk may be subject to full regulation in Canada and not regulated elsewhere in the world, if they meet the novelty definition. The case-by-case application of the novelty trigger also creates uncertainty which makes investment difficult to secure. Implementation of a more truly risk-based approach to regulation could eliminate unnecessary regulatory burden on certain product types and increase predictability for product developers. A tiered assessment approach has been proposed198 in which regulatory requirements would be met through notification or reduced assessments for well-defined low risk categories of products such as those that are very similar to previously-approved traits or that exhibit traits that could be obtained through conventional breeding or otherwise acknowledged as safe. Such an approach for regulatory flexibility would reduce uncertainty, increase investment and reduce regulatory costs for developers of such products, thereby promoting innovation. Where such products are not regulated in other jurisdictions, this approach would put Canadian plant breeders on a more even playing field with their competitors elsewhere and would facilitate trade by strengthening the perception of safety of Canadian exports. In any case, a significant reduction in the time to market of such products would be expected. Some minor crops are not the subject of R&D. These orphan crops could become more attractive in terms of R&D if the regulatory burden was reduced and the regulatory process became more predictable. Benefits to Growers When commercialization can occur one year earlier due to either increased efficiency of assessments or modification of regulatory pathways through a tiered assessment approach, there are benefits to product developers and to farmers. The benefit to growers is the ability to benefit from the advantage of a higher per acre profit margin one year earlier (Table 10.2). Table 10.2 Grower Benefits When a PNT Can Be Introduced 1-Year Earlier

Item Units Value Corn, soybean and canola FCR $ million $13,218 Market share in year of introduction % 5% Crop output associated with new PNT $ million $660.9 Yield increase/cost saving with new PNT % 1% Benefit to growers using new PNT in first year $ million $6.6 Market share in year 5 after new PNT introduction % 15% Benefit to growers until full adoption (in Year 5) $ million $38.1

Note: The benefit after 5 years is based on the market share assumption of 5% in year 1, 7% in year 2, 10% in year 3, 12% in year 4 and 15% in year 5, with future values discounted using a 5% discount rate. The benefit is based on one new PNT event introduced each year in the corn, soybean and canola complex.

The illustration in Table 10.2 is based on the assumption of one new PNT event introduced each year in the crop kinds of canola, corn and soybeans. With the new variety (with the PNT) capturing 5% market share in the first year of introduction, the benefit to farmers is $6.6 million, when the yield increase (or cost savings) is 1% associated with the new variety (see the fourth row).

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Assuming full adoption of the new variety by growers in a 5-year time span results in a 15% market share, the cumulative effect over the 5 years is $38.1 million of grower benefit. This benefit is calculated using the difference in market share that occurred in each year over the 5-year period and after accounting for the time value of money using a 5% discount rate. Benefits to Product Developers The benefit to the product developer is minimally the savings in working capital interest when approval times are shortened. With incurred costs of $2.5 million for the PNT, the annual working capital interest cost is $150,000 (at a 6% internal cost of capital). This $150,000 of foregone interest charge is the minimal benefit to a product developer when a variety with a PNT can be commercialized one year earlier. The assumption underlying this estimate is that the new PNT is replacing a former PNT for the same desired attribute (e.g., resistance to a specific herbicide) and the new variety is priced the same to farmers as the variety being replaced. In this case a grower is substituting one variety with another at planting time, and the selling price of each variety is comparable. The benefit to product developers is much larger when the approved PNT has new attributes for the market such as disease resistance or stacked traits (i.e., combining herbicide tolerance and disease resistance). As well, the first introduction of a PNT in a crop kind where a trait has not existed before (e.g., herbicide resistance or altered oil composition) also provides significant benefits to product developers with release one year earlier. The benefit arises from the higher selling price and the royalty revenues that flow to the product developer one year earlier. Table 10.3 illustrates a potential developer benefit when a new PNT in a new corn variety can be introduced one year earlier (e.g., a variety with a trait that is resistant to a new herbicide). With a 5% introductory year market share, the trait would be included in 74,165 bags of seed corn. Assuming $80 in trait royalties, the product developer would capture $5.9 million one year earlier (see third last row). Assuming full adoption of the variety by year five, the one-year delay is valued at $16.4 million in current dollars. This value significantly exceeds the working capital interest cost associated obtaining regulatory approval in Canada. Table 10.3 Developer Benefits When a Corn PNT Can Be Introduced 1-Year Earlier

Item Units Value Corn acreage million acres 3.39 Seeding rate acres/bag 2.29 Units of seed required million units 1.48 Market share in year of introduction % 5% Units of seed associated with new PNT units (bags) 74,165 Value of trait (PNT) $/bag $80 Royalty revenues of new trait in year of introduction $ million $5.9 Market share in year 5 after new PNT introduction % 15% Benefit to developers until full adoption (in Year 5) $ million $16.4

Note: The benefit after 5 years is based on the market share assumption of 5% in year 1, 7% in year 2, 10% in year 3, 12% in year 4 and 15% in year 5, with future values discounted using a 5% discount rate. The benefit is based on one new PNT event introduced in corn.

A similar example is shown in Table 10.4, where we assume that a PNT is available for spring wheat and the developer can market the new variety with a $3.00/bag royalty fee for the trait. This example assumes that due to the PNT and its benefit, that 5% of spring wheat acreage would adopt the new variety in year one. After 5 years the value to the developer is estimated at $15 million, in present day values.



Table 10.4 Developer Benefits When a Wheat PNT Can Be Introduced 1-Year Earlier

Item Units Value Spring wheat acreage million 16.06 Seeding rate acres/bag 0.50 Units of seed required million units 32.12 Market share in year of introduction % 5% Units of seed associated with new PNT units (bags) 1,606,249 Value of trait (PNT) $/bag $3.00 Royalty revenues of new trait in year of introduction $ million $4.8 Market share in year 5 after new PNT introduction % 15% Benefit to developers until full adoption (in Year 5) $ million $15.3

Note: The benefit after 5 years is based on the market share assumption of 5% in year 1, 7% in year 2, 10% in year 3, 12% in year 4 and 15% in year 5, with future values discounted using a 5% discount rate. The benefit is based on one new PNT event introduced in spring wheat.

Additional benefits are cost savings to a product developer when a tiered risk assessment requires less fieldwork for the studies and tests associated with a full assessment. Savings can start at $300,000 per application for a low risk event, with larger savings possible on some applications.

Risks There are minimal risks in the domestic seed sector or in the domestic commercial crop sector with the regulatory bodies addressing PNT using a more flexible and risk-based approach. A risk is that by implementing a truly risk-based approach in Canada this could result in more instances of products with minimal regulatory oversight in Canada being fully regulated in our export markets. For example, the EU or China could take a stricter approach on Canadian products, which can have trade and export opportunity implications. This risk can be minimized by Canada having a modern and well recognized regulatory structure and with the assistance of regulators, advocate for similar approaches in our export markets.

10.5 Registration of Varieties The last significant re-design of the variety registration system occurred in 2009. Prior to the

revisions, crops subject to variety registration had to be tested and assessed for merit. Basic

information and the fee must accompany applications for variety registration. Crops in Parts 1 and 2

must also be evaluated by a committee using data from testing and will only be put forth for

registration by the committee if the review is positive. In the case of Part 1 crops, the committees

compare the performance of the applicant variety to the attributes of a reference variety (merit

assessment). There currently are 12 recommending committees. Crops in Part 3 do not undergo

pre-registration testing and must supply only the basic information and fee. 199

“Crop kinds in Part I require pre-registration testing (field trials and sometimes laboratory

testing) and merit assessment by a recommending committee to assess that the candidate

seed varieties meet minimum standards. A recommending committee, which is approved by

the Minister under the Regulations, is comprised of public and private sector crop experts.

Its role is to establish protocols for pre-registration testing (subject to review by the CFIA)

and to assess the merit of the seed variety. A seed variety is determined to have merit if it

199

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performs as well as or better than appropriate commercial reference varieties for one or

more criteria as established for that crop kind. If the recommending committee determines

that the variety has merit, it will recommend that the CFIA register that seed variety.

Crop kinds in Part II require pre-registration testing with oversight by a recommending

committee but do not require merit assessment. This part is intended to address crop kinds

where oversight to confirm the validity of pre-registration testing data is useful, but where

merit assessment does not effectively predict the utility and value of varieties in the

marketplace. In this case, the recommending committee will review the results of the pre-

registration tests to verify compliance with the test protocols but will not assess a variety’s

merit. If the recommending committee finds that the variety has complied with the pre-

registration test requirement(s), it will recommend that the CFIA register that variety.

Crop kinds in Part III do not require pre-registration testing or merit assessment. Crop kinds

are included in this part where pre-registration testing and merit assessment are deemed to

be excessively burdensome or ineffective. There is no recommending committee involved

for Part III crops, and application for registration is made directly to the CFIA.”200

In 2014, soybeans (not food grade) and forages were moved from Part I to Part III. The change

eliminated the need for pre-registration testing and merit assessment. At the same time the

distinction between a suspension and a cancellation of a registration was eliminated. According to

the Regulatory Impact Assessment Statement (RIAS), 1) costs for variety registration would be

reduced; 2) competitiveness would improve because breeding program costs would be recouped

earlier; 3) the cost reduction would increase the number of varieties tested; and 4) provide farmers

with faster access to new varieties. The changes were expected to benefit small and local breeding

companies relatively more than large MNE breeding companies. In the RIAS the following was

noted:201

For soybeans, 1 to 2 years of pre-registration testing costs $750/variety

For forages, pre-registration costs $1,500 per variety (perennials require 3 to 5 years of

testing)

Costs for the government were not expected to change because while the cost of merit

assessment would fall, new variety applications would increase and offset the cost

reduction.

The estimated impacts on administration costs were as follows:

o The total saving would be $109,515. With 56 stakeholders, average savings were

$1,956/year.

o The removal of the need for pre-registration testing would save 16 hours per variety

for a total cost saving of $73,636.

o The removal of the merit assessment would reduce administration costs of attending

committee meetings by $45,804 per year (or $22,902 per crop kind).

In 2015, the government initiated the modernization of the variety registration system. Rationale for

the modernization was as follows:

Provide support for innovation

Improve competitiveness

Encourage the development of new and enhanced varieties

Remove barriers to the development of new varieties

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Increase investment in plant breeding

Enhance system transparency and predictability

Provide faster access for farmers to new varieties

The proposed changes are as follows:202

“Streamlining procedures for crop-specific Recommending Committees Model Operating Procedures will streamline Recommending Committees. This will give

Canadian farmers faster access to the newest cutting-edge varieties.

The Canadian Food Inspection Agency (CFIA) is currently leading stakeholder engagement

on the creation of "Model Operating Procedures" (MOPs) for crop-specific Recommending

Committees.

The MOPs enable value chain leadership of the Recommending Committee merit evaluation

process. These changes include more transparent merit requirements and greater

acceptance of private sector and foreign-generated testing data.

Streamlining the variety registration system to two tiers: Basic and Enhanced Crops that are currently placed in Part I will be moved to the new Enhanced Part of the

Variety Registration system. Crops in the Enhanced Part will retain their Recommending

Committees, merit criteria and performance testing requirements. Crops currently in Parts II

and III will be placed in the Basic Part.

New crops entering the system will be placed in the Basic Part, requiring only a minimum

degree of federal government oversight. To be moved to Enhanced, value chains must

provide a clear rationale and demonstrate value chain consensus.

Amendments to the Seeds Regulations will be required to reduce the number of categories

from three (Parts I, II and III of Schedule III to the Seeds Regulations) to two (Enhanced and

Basic).

Removing the requirement for regulatory changes to move crops between categories Incorporation by reference will allow value chain consensus to speed up administrative

changes by 24 months.

The Agricultural Growth Act amends the Seeds Act, and provides new authority allowing for

the incorporation by reference of documents in the regulations. The change enables the

CFIA to identify crop kinds in the VR system that could be updated without a full regulatory

change, making it easier to add and remove crop kinds from the list and move crop kinds

from one category to another.”

Streamlining of the procedures of the Recommending Committees has already occurred.

Some of the benefits and costs of these proposals are noted below.

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Current Cost of Pre-Registration Testing The cost of pre-registration testing for Part I crops varies by region, crop kind and for some crop

kinds such as wheat and barley, by the type of variety (i.e. western bread wheats or malting

barleys). Cost also depends on whether it is done by the public or private sector.

Pre-registration costs for wheat across Canada are shown below. In Ontario, spring wheat requires

two years of testing for agronomy, fusarium resistance, and quality203. The cost per year, excluding

quality and fusarium testing, is $1,600. With quality and fusarium testing, the total cost rises to

$2,230/year. With two years of testing the cost is $4,460 per candidate (see Table 10.5). In

Quebec, the cost of two years of testing is $2,740 per candidate wheat variety while in Atlantic

Canada, the total cost of testing is $1,420.

Table 10.5 Pre-Registration Testing Costs for Wheat

Region Item Units Value Ontario, Internal Costs - Agronomy $/year $1,600 - Fusarium testing $/year $360 - Quality $/year $270 Total $/year $2,230 2 Years of Testing $ $4,460

Quebec: - Agronomy $/year $890 - Fusarium testing $/year $250 - Quality $/year $230 Total $/year $1,370 2 Years of Testing $ $2,740

Maritimes: Agronomy and disease $/year $480 Quality $/year $230 Total $/year $710 2 Years of Testing $ $1,420

Western trials (Internal Costs) - Agronomy and Disease $/year $2,000 - Quality $/year $2,200 Total $/year $4,200 3 Years of Testing $ $12,600

Western Trials (External Costs) - Agronomy and Disease $/year $6,000 - Quality $/year $4,000 Total $/year $10,000 3 Years of Testing $ $30,000

In Western Canada, pre-registration testing by a hired company for hard red spring costs between

$30,000 and $40,000 per candidate. (see lower panel in Table 10.5)204 The field trials for disease

and agronomic traits will cost approximately $6,000 per entry per year. Milling quality must also be

evaluated and this will cost approximately $4,000 per candidate per year. For wheat, 24 site years

of data must be collected over 3 or more years (which implies 8 sites/year). In 2017, 52 lines of hard

red spring wheat were tested (27 lines in central region, 25 lines in the western region, and 25 lines

in the parkland region). The total cost If the testing is conducted by a company with candidates, the

internal costs is approximately $4,200/year per candidate: cost over three years would be $12,600.

203

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Sponsors can use the private registration path rather than the co-operative testing path to generate the required data. (Beres B, “Overview of Prairie Recommending Committee for Wheat, Rye and Triticale”, April 2012.



In western Canada, field peas require two years (minimum) of participation in the Field Pea Co-

operative Registration Test. The cost for two years of testing (2018 and 2019) would be $4,307 per

candidate.

Table 10.6 Fees for 2017 to 2019 for Field Peas, $/entry/year

Component 2016 2017 2018 2019

Test coordination $415 $435 $457 $480

Agronomic $1,103 $1,158 $1,216 $1,277

Pathology $110 $116 $122 $128

Quality $168 $176 $185 $194

Cooking (optional) $110 $116 $122 $128

Total $1,906 $2,001 $2,101 $2,206 Source: Procedures for Evaluation and Recommendation for Registration of Cultivars of Field Pea for Western Canada, 2017

Benefit of a Crop Kind in the Basic Tier Rather Than Being in the Enhanced Tier Under the proposal, new crop kinds would enter at the basic tier and would move to the enhanced

tier only with value chain approval. Crop kinds would also be able to move from the enhanced tier to

the basic tier faster (according to the proposal, 2 years faster).

Based on the methodology used in the RIAS for soybeans, cost savings to the developer for having

a crop enter and remain at the basic tier or be moved to the basic tier would be as follows:

reduce costs associated with pre-registration testing

reduce administration costs associated

The reduction in costs associated with pre-registration testing would depend on the specifics of the

crop kind and the number of candidate varieties. Shown below in Table 10.7 are estimated cost

savings for candidates requiring high, medium, lower, and low-cost pre-registration testing for 1 to

25 candidates. Estimated savings range between $26,000 to $813,000, based on the number of

candidates.

Table 10.7 Some Cost Saving with Basic Tier Registration

Cost Area Cost per Candidate

Cost Savings by Number of Candidates

5 10 15 20 25 Pre-Registration

High Cost $30,000 $150,000 $300,000 $450,000 $600,000 $750,000 Medium Cost $12,600 $63,000 $126,000 $189,000 $252,000 $315,000 Lower Cost $4,307 $21,535 $43,070 $64,605 $86,140 $107,675 Lowest Cost $1,420 $7,100 $14,200 $21,300 $28,400 $35,500

Administration $1,600 $8,000 $16,000 $24,000 $32,000 $40,000 Committee $22,902 $22,902 $22,902 $22,902 $22,902 $22,902

Total Cost

High $54,502 $180,902 $338,902 $496,902 $654,902 $812,902 Medium $37,102 $93,902 $164,902 $235,902 $306,902 $377,902 Lower $28,809 $52,437 $81,972 $111,507 $141,042 $170,577 Lowest $25,922 $38,002 $53,102 $68,202 $83,302 $98,402



The estimates are for pre-variety registration. However, even if the pre-registration tests are

removed, companies are extremely likely to test their candidate varieties privately/internally in order

to have sound disease and agronomic data for marketing and decision purposes.205 Consequently,

the estimates are upper-bounds. The analysis also does not address the feasibility of the proposal

(i.e., are the benefits greater than the costs/risks).

The introduction of varieties for a crop kind at the basic tier instead of the enhanced Tier (Part I)

would also benefit product developers and farmers by reducing the time to market.

Risks

There are some risks by moving some crop kinds into the basic tier. These include:

Possible unintended negative impact on export grain quality and loss of sales;

There may be a need to remove an unwanted variety from the system, and with a good

traceability system the costs should be less than associated with Triffid;

In addition to a traceability system, these risks can be mitigated through an identity

preserved (IP) program when a variety needs to be removed from certain markets.

The costs associated with the potential negative impact on export grain quality and loss of sales

may outweigh the estimated benefits for some crop kinds.

10.6 Quality Assurance of Certified Seed Funds provided by seed companies and seed growers to third party service providers is estimated to be in the range of $10 million per annum, with $6 million associated with inspection costs in the seed production stage and $4 million in the seed processing stage. These payments to third parties allow for having a blue tag showing that the seed supplied by a seed company is a Certified seed. The current model of seed certification is for third-party inspection of fields in pedigreed seed production and third-party testing of seed for purity and germination, and third-party oversight of seed grading and labeling. During field inspection, a field may be rejected for a variety of reasons such as not being able to ensure necessary purity, and when rejected, the potentially high valued seed crop losses its value and is sold at the much lower commercial crop value. Such rejection is lost value to the seed growing sector. This model has been used for years and provides a quality assured product – Certified seed that meet a set of minimal standards. New seed cleaning and processing technology is available that can detect foreign material and provide the necessary purity at the seed processing plant. This technology can remove some critical control points in the field, with the critical control now in the seed processing plant when the operation has invested in this new sorting technology. As well, the current model has every field inspected by a third-party (aside from corn) with an acreage fee per inspection, which is around $6 million per annum. Greater flexibility could be provided by allowing interested and qualified seed companies and seed growers to replace external third-party inspections with internal quality management systems and an ex-post third party audit framework. As with HACCP programs, self-inspection of seed inspection can occur in some cases that follow a documented protocol. This could be a more cost-effective model for those in high-cost remote areas. The current system would continue to operate for those for whom it is the right business choice.

205

Canola streamlined its operating procedures, but companies still privately test candidates.



This approach is used in other jurisdictions, such as the Netherlands for cereals. More generally, the EU model is to rely on first and second party inspection, with third party oversight. Such an approach should be cost saving without compromising on the quality of Certified seed.

Benefits to Seed Growers and Seed Companies There are two general areas of benefit to seed growers and seed companies. The first is the lower cost of quality assurance and being able to have a blue Certified seed tag on the seed supplied to commercial farmers. This cost is estimated to be $10 million per annum. A conservative assumption can be that the QA cost association with seed production decreases by 50% (to $3.0 million) based on fewer field inspections (many of them being random) and after considering the cost of auditing. This is a benefit to seed growers and/or seed companies, which is a cost saving of 0.2% of accumulated supply chain costs (see Table 7.15) of $1.6 billion. For seed growers this $3.0 million is a 0.5% reduction in a cost base of $646 million. This cost savings can be passed on through lower Certified seed prices. The second benefit is the lower cost of the Certified seed going into a seed bag arising from fewer rejected acres (for operations having access to new seed cleaning and processing technologies). With the newer seed cleaning technology being able to sort based on colour and other dimensions of purity, and then the seed company can accept seed production that formerly may have been rejected in the field through the inspection process. Table 10.8 illustrates the potential benefit in terms of lower costs in the seed supply chain for cereals and pulses, with the current Certified seed acreage rejection rate decreasing from 1% to 0.5% and processing shrink in the seed processing plant decreasing from 10% to 9%. Table 10.8 Impact of Fewer Rejected Certified Seed Acres – Cereals and Pulses

Item Units Current Potential Acres in seed production acres 745,146 745,146 Yield t/acre 1.30 1.30 Production tonnes 968,689 968,689 Acreage rejection rate % 1.0% 0.5% Pedigreed seed production tonnes 959,002 963,846 Certified seed share % 67% 67% Certified seed volume tonnes 642,532 645,777 Processing shrink % 10% 9% Certified seed available for sale tonnes 578,278 587,657 Costs of seed production and processing $ million $581.5 $581.5 Costs of seed production and processing $/tonne $1,006 $990 Costs of seed production and processing $/bag $22.81 $22.44

Cost saving $/bag $0.36 Cost saving % 1.6%

These efficiency gains result in Certified seed available for sale increasing from 578,278 tonnes to 587,657 tonnes, a 1.6% increase in volume. With seed supply chain costs for seed production and seed processing of cereals and pulses remaining at $582 million, the cost of seed decreases from $22.81/bag to $22.44/bag (see third last row in Table 10.6), a 1.6% cost saving for these crop kinds. This becomes an aggregate cost saving of $3.5 million based on the current volume of certified seed use in cereals and pulses. In addition, the number of downgraded acres (from Select to Certified) should decrease for the seed companies that have access to the newer seed processing technology.



Benefits to Farmers Buying Certified Seed A portion of the above cost savings to seed companies and seed growers (at $6.5 million in total) can translate into a lower Certified seed price across a number of crop kinds. If half of this cost savings is passed on through lower Certified seed prices, then the farm sector should have a reduction in Certified seed cost in cereals and pulses of $3.7 million.

Risks The risk is that the QA system compromises the quality of Certified seed sales, which can affect Certified seed sales into certain market segments. This risk should be minimal due to seed companies wanting to protect their brand of supplying quality seed and will ensure that their QA program does not compromise on seed quality.

10.7 Product Profile The product profile is linked to the traceability system, the single window and listing of seed products (whether basic or enhanced tiers of registration). The product profile can be considered an output of the integration of some data bases, which are currently separate, but would be integrated (in the near future). The product profile would be designed to contain information on each variety such as (1) required varietal identity, (2) intellectual property features, (3) product developer, (4) distributors, (5) other regulatory features, (5) agronomic characteristics, (6), geographic areas for production, (7) stewardship requirements, and (8) and relevant end-use and market information. While not suggested by Seed Synergy, the product profile should also include agronomic performance information on a variety, with this updated based on results from recognized performance trial data. A product profile would begin as part of the variety registration system, which would be enhanced as more information is compiled on a variety. Interested parties would be able to go on-line and access information on a variety. This includes breeders, seed companies, seed growers, and crop producers. The product profile is not designed to contain proprietary information. There can be linkages to other variety specific data bases with such confidential information, such as a data base used to administer FSS royalty collection.

Benefits One benefit is that a product profile reduces search costs when all of the information for a variety is in one place. As well, everyone in the seed sector can have on-line access to the same basic, non-proprietary, information that reduces any asymmetry in information across stakeholders. This is a benefit to farmers, seed growers, seed distributors, and other participants in the seed sector. The cost of search is reduced, which can include less time required by (an assumed) 10,000 farmers, 3,000 seed growers, and 2,000 consulting agronomists. If the product profile saves the equivalent of $100 per individual, then the benefit is worth at least $1.5 million per annum. Another benefit is the increase in information available to farmers on varieties for their enterprise. Table 10.9 analyzes the impact of a 2% reduction in common seed usage in cereals and pulses. A 2% reduction in the volume of common seed would be 30 M kgs (from 1.58 million kgs to 1.55 million kgs (see common seed column in Table 10.9). Assuming a comparable 2% decrease acreage planted with common seed, the acreage planted with Certified seed increases from 10.3 million acres to 11.0 million acres, a 6.6% increase in Certified seed acreage.



Table 10.9 Impact of a Product Profile Reducing Common Seed Use by 2%

Crop Kind Units Certified

Seed Common

Seed All Seed

Cereals & pulses



Seed price $/kg $0.63 $0.30

Value of Sales $ million $301.9 $479.1 $781.0

Seeding rate kg/acre 46.5 46.5 46.5

Acreage change million acres 11.0 33.4 44.4

Change in acreage % 6.6% -2.0% 0%

New volume of seed million acres 512.1 1,553.1 2,065.2

New seed sales $ million $320.3 $470.0 $790.3

Change in seed sales value $ million $18.4 ($9.1) $9.3

Certified seed sales would increase by the 30 million kgs, which increases the value of Certified seed sales from $301.9 million to $320.3 million, an $18.4 million gain in Certified seed sales (see last row in Table 10.9). At the same time, the value of implied common seed sales (mostly on-farm use of FSS) decreases by $9.1 million using a value of $0.30/kg. In this illustration, product developers seed growers and companies benefit by $18.4 million, with 12% of this value ($2.2 million) attributed to product developers based on royalties/license fees. Growers incur a cost of $9.1 million (before taking into account yield increases associated with certified seed). The overall sector benefit would be $9.3 million. The benefit to crop farmers includes improved information on seed availability, more information on attributes of a certain seed lot, access to a larger supply source, and lower search costs. This reduction in asymmetric information is beneficial to farmers, which can include lower seed purchase costs and improved returns through use of varieties that provide a higher per acre profit margin. The product profile is an integral part of the overall traceability system for the seed sector. Many of the benefits attributed to the single window and the traceability system requires a product profile being an integral part of the overall system design.

Risks There are minimal risks with a product profile given that the information is designed for use by a broad array of users including farmers. A possible risk is when the security interface with other linked data bases are breached and proprietary information is accessed. This risk can be minimized with appropriate system design.



10.8 Seed Sector Governance and Coordination The seed industry through Seed Synergy recognizes that there are some efficiency gains to be realized through a restructuring of the supporting organizations for the seed industry. Some organizations are focused on advocacy, such as CSTA and Crop Life, while others are focused on delivering necessary quality assurance and audit services, such as CSI, CSGA, and CSAAC. Some organizations are involved in both service delivery and advocacy. A streamlining of roles and responsibilities can result in efficiencies that should reduce overall costs incurred by the collective of these organizations and by seed sector companies that incur internal costs to ensure that the organizations are effective and efficient. A reconfiguration of organization structures such as one overall seed industry organization that represents the industry and another organization that ensures the requisite quality assurance required by the seed industry. An organization that represents the overall seed industry could take ownership and be responsible for the on-line traceability system (from breeder seed through to the users of commercial crop production). The seed industry can look to the Netherlands and to France for models where there are fewer organizations that support the seed industry. In the Netherlands one organization (Plantum) represents and advocates for the seed industry (as well as collects FSS royalties on behalf of breeders), and one other organization (NAK) provides for quality assurance and oversees the quality assurance functions for the seed industry, which is a delegated authority. A similar situation exists in France with GNIS being the body that represents the seed sector, and a division of GNIS ensures that the necessary quality assurance occurs. Cost savings can occur in the area of (1) a reduction in senior management and associated costs with two (or fewer) organizations; (2) lower overall overhead costs with two organizations providing the support functions of this seed industry; and (3) less time incurred by industry representatives providing necessary oversight and direction to the supporting organizations, when only two organizations require Directors from within the seed industry. Efficiencies can also occur when each remaining organization has more critical mass of experienced seed industry staff.

Benefits Transitioning to a supporting structure with an advocacy organization and a separate quality assurance/audit body allows the industry to have only one recognized voice by government, by other agencies and by international organizations; in addition to the cost savings. With one organization, the opportunity exists for the seed industry to seize on seed sector opportunities without having to seek government approval, particularly when the industry organizations are more involved with service delivery and government’s role focuses on required regulatory oversight. Time estimates for a number of activities are provided in Table 10.10. For example, Director involvement totals $683,813 per annum (see the first column in Table 10.10), with $470,606 associated with providing guidance and direction to each organization206. With only two organizations, we conservatively estimate that these Director costs (for providing direction) could be decreased by 50%, for a savings of $235,000 per annum (see the first column in Table 10.11). This is an industry cost saving, based on senior management time dedicated to supporting the organizations. Similarly, less staff time is required with fewer organizations, which should decrease by at least 50% to $94,000 per annum versus the $188,644 noted in Table 10.10. The $2.17 million for other member is an estimate of the time spent at annual meetings or providing support to their

206

This is the value of Director’s time and not necessarily a cost internal to the supporting organization.



organization. These industry costs will also decrease, with an estimate of at least 25% less time, or a savings to members of $542,000 per annum (see second row in Table 10.11). Combined savings associated with activities providing direction can exceed $871,000 per annum (see last column in Table 10.11). These savings include lower costs within seed industry companies as staff resources are freed up for internal company matters and can include reduced membership fees. Table 10.10 Estimated Time Costs for Supporting Organization Selected Activities

Item Directors Attending

Other Members Attending

Staff Members Attending

Totals

Activities providing direction

Annual meetings $140,625 $1,503,563 $52,875 $1,697,063

Director and Executive Committee meetings $242,438 $7,313 $60,469 $310,219

Meetings with other seed industry groups $87,544 $657,366 $75,300 $820,209

Subtotal $470,606 $2,168,241 $188,644 $2,827,491

Activities for service delivery

Internal meetings $14,475 $68,461 $17,798 $100,733

Meeting with government $129,094 $73,688 $74,250 $277,031

Meetings with other groups - domestic $9,300 $47,831 $26,513 $83,644

Meetings with international organizations $60,338 $185,588 $43,294 $289,219

Subtotal $213,206 $375,567 $161,854 $750,627

Totals $683,813 $2,543,808 $350,498 $3,578,118 Source: Consultants’ calculations based on survey information provided by the six Seed Synergy organizations, with time valued at $75/hour. These estimates exclude any associated expenses.

Under the heading of activities for service delivery, these costs add up to $750,000 per annum. These service delivery activities we assume will continue to occur with a more streamlined supporting industry structure. There are potential savings in the meeting with government when there is one voice on behalf of the seed sector. In this area we assume a cost savings of $20,000 based on less industry time required to support these activities. Table 10.11 Estimated Savings for Supporting Organization Selected Activities

Item Directors Attending

Other Members Attending

Staff Members Attending

Totals

Activities providing direction Current estimate $470,606 $2,168,241 $188,644 $2,827,491

Savings $235,000 $542,000 $94,000 $871,000

Activities for service delivery

Current estimate $213,206 $375,567 $161,854 $750,627

Savings $13,000 $7,000 $0 $20,000

Total Savings $248,000 $549,000 $94,000 $891,000

Staff costs savings may well be a conservative estimate. For example, with 2 organizations versus six today, at least one senior management individual in the average organization is no longer required in at least 4 organizations. Assuming total employee costs (salary plus benefits) of $150,000, this suggests that staff costs can be reduced by at least $600,000 per annum. This $600,000 can substitute for the estimated reduction in staff time of $113,000 in savings (the last row



in Table 10.11). This would result in minimal cost savings of $1.4 million. Some of these cost savings could be directed into programs and services delivery activities valued by the seed industry. A significant benefit also occurs when there is only one voice that speaks on behalf of the Canadian seed sector, whether the issue involves product approval, product registration, quality assurance, or value capture to ensure adequate levels of investment occurs in variety development. When more than one organization provides a perspective on behalf of the seed industry a fragmented view can emerge which can constrain overall value creation by the seed.

Risks In terms of a single voice, a risk is that the perspective of one segment of the supply chain may not be addressed/communicated as desired by that segment. This risk can be minimized by ensuring adequate representation in the body responsible for outward communication and stakeholder relations. This risk is addressed through overall seed sector governance. With a smooth transition from the current structure to a supported alterative structure there are minimal risks to the overall performance of the seed industry. If one organization emerges, which is both an advocacy body and a quality assurance body, potential conflicts can emerge. The advocacy body may desire change, while the quality assurance division is operating under delegated government authority and can be in a conflict situation. The quality assurance body should only be accountable to one master, which is to the government body which has provided it with the authority to deliver on the required quality assurance. This does not suggest that representatives of the industry body cannot provide necessary direction to the quality assurance organization, as occurs elsewhere.

10.9 Investing in Value Creation Action on the above initiatives will create value for the overall seed system and for the Canadian agricultural sector in general207. The value is estimated to range between $43 million (a very conservative estimate) to well over $100 million per annum, as reported in Table 10.12 (when excluding the value capture associated with FSS royalties). Table 10.12 Value Creation - Estimate of Potential Benefits and Cost Savings

Item Product Developer

Seed Company & Grower

Farmer Seed Sector

Total

$ million $ million $ million $ million $ million Traceability

$20 to $60+ $20 to $60+

Single Window $0.3 to $1.0

$0.3 to $1.0 Tiered Risk Assessment $5 to $16

$7 to $38

$12 to $55

Variety Registration $0.03 to $1.0

$0.03 to $1.0 Quality Assurance

$2 to $4 $2 to $4

$4 to $8

Product Profile $1 to $7 $10 to $20 -$5 to -$10 $0.5 to $2 $6 to $19 Sector Governance & Coordination $0.2 to $0.5 $0.2 to $0.5

$0.2 to $0.5 $0.6 to $1.5

Total $7 to $24 $12 to $25 $4 to $32 $20 to $62+ $43 to $142+

This annual value will take a few years to materialize as systems and approaches are implemented. The table summarizes our quantified benefits and does not provide a value for the number of qualitative benefits that have been discussed above. The four columns in Table 10.12 highlighting

207

The exception is in section 10.1 (Value Capture by Product Developers) where the focus is on how product developers can capture more of the value they created with new seed products.



system participants provide an indication of the distribution of the benefit as summarized in the last column. This value creation can finance necessary investments in supporting infrastructure.

This value (cost savings and/or higher revenues) will be realized by seed sector participants. For example, seed companies will spend fewer internal resources as they support only two organizations that support the overall seed system, each with a particular focus. Another example is the lower level of effort (time and money) that seed companies will need to dedicate to registering varieties and applying for PBR protection when applications are made on-line and applications are linked. Farmers are expected to be beneficiaries of the value creation activities with significant benefits through a tiered risk assessment ($7 to $38 million by having higher per acre varieties available sooner) and through lower cost certified seed due a change in the quality assurance model for seed certification (of $2 to $ 4 million). The -$5.0 to -$10 million associated with a product profile is an assumed voluntary choice by farmers as they increase their use of Certified seed.

Distribution of Benefits and Costs Within the Seed Supply Chain The overall value proposition should include the additional value capture by product developers and the seed industry through the FSS royalty and any increase in Certified seed sales based on the Certified seed contract program. These impacts are shown in Table 10.13, along with the consequence on the farm sector. The top portion of Table 10.13 excludes any impact of changes in Certified seed (e.g., higher Certified seed use with the product profile and our assumption of higher Certified seed acreage in the future). The value creation total ranges between $26 and $123 million. This value is lower than the in Table 10.12 due to the exclusion of the benefits attributed to the product profile. As well, the value capture by product developers due to FSS is offset by the cost to the farmer. Table 10.13 Estimated Value Creation and Value Capture and Supply Chain Impact

Item Product Developer

Seed Company & Grower

Farmer Seed Sector

Total

No Increase in Certified Seed Use $ million $ million $ million $ million $ million

Value Capture by Developers - FSS $20 to $50

-$20 to -$50

$0.0

Total of Value Capture $20 to $50 $0.0 -$20 to -$50 $0.0 $0.0

Value Creation ( Table 10.12) $5 to $14 $2 to $5 $9 to $42 $20 to $62+ $26 to $123+

Total Value $27 to $74 $12 to $25 -$40 to $22 $20 to $62+ $7 to $85+

Increase in Certified Seed Use

Value Capture by Developers - FSS $20 to $50 $0.0 -$20 to -$50

$0.0

Value Capture- Additional Certified Seed $11 to $22 $90 to $120 -$50 to -$100

$0.0

Total of Value Capture $31 to $72 $90 to $120 -$70 to -$150 $0.0 $51 to $80

Value Creation (Table 10.12) $5 to $14 $2 to $5 $9 to $42 $20 to $62+ $26 to $123+

Total Value $35 to $86 $92 to $125 -$61 to -$108 $20 to $62+ $86 to $165

The FSS royalty results in a $20 to $50 million increase in value captured by the product developer (see the first column), prior to the higher value created of $5 to $14 million through primarily a tiered risk assessment approach and earlier approvals of novel traits. Total value is estimated to range between $27 and $74 million for product developers (see the 5th row). The cost on FSS is required to incent product developers to introduce new varieties that increase farm profit margins – in the past the public paid for the release of new varieties in cereals and pulse crops. This farmer cost will not occur in the first year of FSS royalty collection – the value depends



on the purchases by farmers of Certified seed with PBR protection, likely following Canada’s adoption of UOPV 91, with annual FSS royalties less than $10 million/year for a number of years. The primary source of value creation for seed companies and seed growers is the reduced costs of a quality assurance program. The lower portion of Table 10.13 includes the value captured through higher Certified seed sales. Seed companies and seed growers primarily benefit from higher Certified seed acreage (with the $90 to $120 million based on the higher Certified seed sales (see Table 10.1) plus higher acreage due to the product profile initiative. While the farm sector is a beneficiary of value creating activities by $9 to $42 million, the farm sector incurs a $20 to $50 million cost based on the FSS royalty (of approximately $1/acre) and incurs another $50 to $100 million net cost increase, when Certified seed acreage (for cereal and pulses) increases. Higher Certified seed sales is a voluntary choice by farmers where he/she calculates the benefit of using Certified seed (for cereals and pulses) relative to the incremental cost. Overall the seed supply chain is better off by between $86 and $165 million with changes advocated by Seed Synergy. Initiatives that can further reduce the cost of Certified seed will create more value for the farm sector.

Investments Investments are required to create the value identified above. The largest investment is in information technology systems that have the necessary interfaces. For example, the product profile as part of the registration system, the traceability system that begins with breeder seed through to sales of Certified seed by seed lot, the information system the supports collection of FSS royalties based on grower breeder Certified seed contracts. Elements are already in place, such as (1) seed company data bases on variety sales by grower, (2) CSGA data bases on pedigreed seed production. These systems can be modified to interface with the overall information technology system that can be used by the seed sector. While this study has not investigated the investment cost, there undoubtedly will be a payback based on the value created. One issue is to ensure that costs incurred by system participants are commensurate with the value they are able to capture from the investment.

10.10 Chapter Summary

Approaches considered by Seed Synergy to capture or create value in Canada’s seed system are examined in terms of their benefits and risks. Value capture from FSS using contracts produces a benefit to product developers that can approach $50 million per annum. A risk is that some seed companies decide not to have a FSS royalty rate or decide to have a low rate compared to others as a means to capture market share. To overcome this risk, the collective industry body would need to ensure that all seed companies had a FSS royalty rate that was a fixed percentage of the associated fee on Certified seed sales. Traceability from breeder seed to locations where certified seed (and FSS) is planted would create value. The Triffid flax example demonstrates the benefits of a trace and track system and the ability to recall and destroy all non-conforming or unwanted seed material. With traceability, the costs associated with Triffid ($29.1 M) would have been lower. The contract system supports traceability. Traceability also reduces the cost of delay associated with product recall. A week’s delay was estimated to have a cost of $825,000. Annual benefits to the overall seed sector range from $20



million to $60 million per annum. Risks associated with this option are 1) underperformance of large data bases; and 2) breach of proprietary data. The single window approach allows for product developers and seed companies to enter on-line product data, such as for data for registration, listing, PBR protection, and for the product profile. Any data once entered does not need to be re-entered as is the current case with manual paper-based systems for registration and PBR protection. This approach also allows for one point of contact to obtain necessary information on the Canadian seed industry. The estimated benefits include (1) entering information only once, (2) minimizing the need to provide annual variety updates and (3) lower costs associated with providing information, with annual cost saving ranging between $300,000 and $1.0 million. Risks associated with this option are (1) underperformance of large data bases; (2) breach of proprietary data and (3) that the required industry and/or government coordination does not occur. The product profile would be designed to contain non-proprietary information on each variety such as (1) required varietal identity, (2) intellectual property features, (3) product developer, (4) distributors, (5) other regulatory features, (5) agronomic characteristics, (6), geographic areas for production, (7) stewardship requirements, and (8) and relevant end-use and market information. Interested parties such as breeders, seed companies, seed growers, and crop producers would be able to go on-line and access information on a variety. The improved availability of information would reduce search costs by an estimated $1.5 million. The improved information would also reduce the use of common seed. If common seed use in cereals and pulses fell by 2%, certified seed use would increase by 6.6%. The net change in sales would be $9.3 million. Overall, the range in net benefits ranges between $6 and $19 million per year. The risk of the product profile would be a database failure that resulted in the release of proprietary data. The regulatory process for PNT could be improved. Product developers are seeking approval for up to five PNT’s each year. An increase in efficiency of assessment could occur through joint review. This would quicken the time for approval by an importing country. A tiered risk assessment would decrease uncertainly; increase investment; reduce regulatory costs; and result in greater innovation. Such improvements in the regulatory system could benefit producers through faster access to new varieties and product developers through a reduction in the time to market. The value of this benefit to farmers over five years for a new corn variety was estimated to be $38.1 M. The value of this benefit to product developers over five years for a new corn variety was estimated to be $16.4 M. Annual benefits can be as high as $55 million, and in some cases as low as $12 million. The current cost of variety registration for a crop in Part 1, requiring pre-registration and merit testing, varies from a low of $1,420 per candidate to a high of $30,000 per candidate. The three-part variety registration system could be narrowed into an Enhanced tier (Part 1 crops) and a Basic tier (Parts 2 and 3 crops). The basic tier would not require pre-registration and merit testing. With the agreement of the value chain, new crop kinds could enter at the basic tier and or move to this tier. Cost savings would occur because of the reduction in testing and from lower administration costs. Estimated annual cost savings for candidates requiring high, medium, lower, and low-cost pre-registration testing for 1 to 25 candidates range from $26,000 to just under $1 million. Risks for this option include the possibility of an intended negative impact on export grain quality resulting in a loss of sales and these losses could outweigh the benefits. In the current quality assurance system, funds provided by seed companies and seed growers to third party service providers is estimated to be in the range of $10 million per annum, with $6 million associated with inspection costs in the seed production stage and $4 million in the seed processing stage. It is possible to allow interested and qualified seed growers and companies to replace external third-party inspections with internal quality assurance and a third-party audit framework. A conservative assumption can be that the quality assurance cost associated with seed production



decreases by 50% (to $2.7 million) based on fewer field inspections (many of them being random) and after considering the cost of auditing. The use of new seed cleaning and processing technologies could result in fewer rejected acres which would lower the cost of Certified seed going into a seed bag. Overall benefits are estimated to range between $4 and $8 million per year for the combination of seed growers and seed companies and farmers benefits are in the same magnitude. There are some efficiency gains to be realized through a restructuring of the supporting organizations for the seed industry. A streamlining of roles and responsibilities can result in efficiencies that should reduce overall costs incurred by the collective of these organizations and by seed sector companies that incur internal costs to ensure that the organizations are effective and efficient. One overall seed industry organization that represents the industry and another organization that ensures the requisite quality assurance required by the seed industry could be created. The seed industry can look to the Netherlands and to France for models where there are fewer organizations that directly support the seed industry. Estimated annual cost reduction ranges between $0.6 to $1.5 million, with a large portion being cost saving incurred by seed growers, seed companies, and product developers (and plant breeders) providing overall guidance and direction to their supporting organizations. Non-quantitative benefits are that one voice provides a stronger message and that the seed system would be able to seize opportunities without obtaining government approval. A risk associated with this option is that the single voice may silence some parts of the supply chain. Another is that the advocacy body may interfere in the quality assurance body (which is only accountable to government). The potential value creation initiatives produce an estimated annual benefit that can exceed $100 million. The largest source of value creation was in regulatory flexibility (tiered risk assessment in PNT) followed by traceability. The combination of value creation and capture initiatives can provide a net benefit of at least $86 million per annum, with $165 million a realistic possibility, with the largest beneficiaries being a combination of seed companies and seed growers, and then product developers. Value capture is examined once more in the next Chapter.



11.0 Comparing an EPR to a Royalty on FSS A comparison of collecting a royalty on FSS based on Certified seed contract with an EPR will allow Seed Synergy to provide a perspective to other interested seed sector stakeholders on the merits of each approach and which approach could be supported by the seed industry. In this Chapter we provide our analysis of these two approaches using cereals (wheat, durum, oats and barley) in western Canada208. The analysis is based on varieties where PBR protection was applied for after February 27, 2015, when legislation was changed for compliance with the provisions of UPOV 1991. The analysis includes varieties that were previously released but have applied for UPOV91 protection. Varieties that are protected under PBR legislation that complies with UPOV 1991 have the following certification symbol.

A CSTA data base was used to identify varieties protected under UPOV 1991 209. Shown below in Table 11.1 are varieties protected under UPOV (or with protection pending) that had insured acres in 2015, 2016, or 2017.

Table 11.1 UPOV 1991 Varieties with Insured Acreage

Spring Wheat Spring Wheat AAC CAMERON SY SOVITE

AAC CHIFFON SY479 VB

AAC CONCORD THORSBY

AAC CONNERY Winter Wheat AAC CROSSFIELD AAC ELEVATE

AAC ENTICE AAC WILDFIRE

AAC FORAY Durum AAC ICEBERG AAC MARCHWELL

AAC INDUS AAC SPITFIRE

AAC JATHARIA CDC ALLOY

AAC PARAMOUNT CDC CARBIDE

AAC PENHOLD CDC DESIRE

AAC PREVAIL CDC FORTITUDE

AAC PROCLAIM CDC PRECISION

AAC REDWATER CDC VIVID

AAC TENACIOUS Oats AAC VIEWFIELD AAC JUSTICE

AAC W1876 CAMDEN CS

CDC ADAMANT ORE3541M

CDC BRADWELL Barley CDC HUGHES AAC CONNECT

CDC LANDMARK AMISK

CDC TERRAIN CANMORE

CDC TITANIUM CDC BOW

ELGIN ND CDC MARLINA

GO EARLY CLAYMORE

PROSPER OREANA

SY ROWYN SY SIRISH

SY SLATE Source: Consultants’ analysis using data from CSTA and CGC

208

Seed Synergy suggested that the analysis be focused on cereals. The analysis is limited to western Canada since

crop insurance data in western Canada identifies crop insured acres by variety planted. This same data is not available for eastern Canada. 209

UPOV 91 varieties are from the CSTA database (http://cdnseed.org/library/crop-kinds-database/)

http://cdnseed.org/library/crop-kinds-database/



11.1 Certified Seed Contract with Trailing FSS Royalties An analysis of Certified seed contracts with royalties applicable on associated FSS is provided in this section. The analysis is based on the following data sources and assumptions210:

Provincial crop insurance data is used to estimate the share of crop insured acres for

varieties protected under UPOV 1991. UPOV91 came into effect February 27, 2015. Crop

insurance data for 2015, 2016, and 2017 which shows insured acreage by variety was used.

For the UPOV 91 varieties listed in Table 11.1, the associated crop insurance acreage in

2015, 2016 and 2017 is used to compute a UPOV 91 acreage share;

The assumption is used that the uninsured acres have the same proportion of the UPOV

1991 varieties as the insured acreage;

Seeding rates of 100 lbs./acre for wheat, durum and barley, with 80 lbs./acre for oats;

With Certified seed acreage ranging between 30% to 32% for wheat, oats and barley, the

assumption is made that, on average across the prairies, after planting a crop with Certified

seed, this is followed by 2 years of FSS, which is then followed by a year of Certified seed

use, etc. For durum wheat, the Certified seed acreage ranges between 10% and 15% in

any year suggesting after planting with Certified seed, this is followed by 4 years of FSS;

A FSS royalty rate of 1¢ per lb., or $0.50/unit (50 lb. bag), is applied on all FSS, with the

implied royalty rate on Certified seed sales being ($1.50/unit (3¢/lb.);

To explore the impact of increases in future plantings of only UPOV 91 varieties, the UPOV

91 acreage share is increased from current levels to 25% 50%, 75% and 100%, as shown in

Table 11.2. In 2017, the UPOV 91 share is 19.2% for oats, 1.5% for barley, 7.2% for durum,

and 8.9% for non-durum wheat;

Breeders and seed companies collectively agree to use Certified seed contracts with farmer

obligation to pay FSS royalties.

This approach is used in the Netherlands, where the contract between the seed company and the farmer has a farmer obligation to pay royalties on any FSS.

Potential FSS Royalties Based on the above assumptions and methodology, in 2017 FSS royalties would have been $1.6 million, based on varieties protected under UPOV91. This is shown in the 3rd last row of Table 11.2. For oats the FSS royalty value for 2017 is estimated at $301,282, for barley at $53,081, for durum at $298,368, and for all other wheat at $941,341. When UPOV 91 varieties have a 50% market share, the overall FSS royalty value increases from $1.6 million to $10.3 million, with wheat (excluding durum) accounting for $5.3 million. Using oats as an example, the first row in Table 11.2 shows the reported insured acreage for the UPOV 91 varieties, with 266,664 acres in 2017, which is 19.2% of the 1.4 million insured oat acres. In 2017, Statistics Canada reported 2.9 million acres of oats, which indicates that 47.2% of oats acreage was insured. Adjusting for uninsured acres, the estimated total UPOV 91 acres increases to 0.56 million acres (based on 0.267 million divided by 47.2%).

210

Gray et al’s 2017 paper “Intellectual Property Rights and Canadian Wheat Breeding for the 21st Century”

published in the CJAE) examined different options then this analysis does. Specifically, the uniform EPR (French Model) was on all tonnes of wheat, not just those covered under UPOV91 while the competitive EPR (Australian model) did not include a royalty rebate on certified seed. The FSS option (UK model) also did not examine only varieties covered by UPOV91. Given the different assumptions, a direct comparison with our assessment cannot be made.



With a seeding rate of 80 lbs. per acre, this results in 903,846 units (50 lb bags) of seed required to plant the UPOV 91 varieties. With FSS being used every 2nd and 3rd year (after planting with Certified seed), the volume of FSS seed is estimated to be 602,564 units. Table 11.2 Estimate of FSS Royalties, Cereals in Western Canada

With a FSS royalty of 50¢ per 50 lb unit, the FSS royalty collection on oats is estimated at $301,282 for 2017. When the UPOV 91 variety acreage share increases to 75%, the FSS royalty value increases to $1.2 million for oats (based on 3.0 million acres or total planting (see second last row in Table 11.2). The same approach was used for the other cereals, except for higher seeding rates and Certified seed planted every 5th year for durum. With 100% of acres in UPOV 91 varieties, the annual FSS royalties approaches $20 million.

Item Units 2015 2016 2017 Future UPOV 91 share

25% 50% 75% 100%

Oats

UPOV 91 CI acres acres 19,306 79,587 266,664

CI insured acres million acres 1.6 1.2 1.4

All acreage million acres 2.9 2.6 2.9 3.0 3.0 3.0 3.0

UPOV 91 share % 1.2% 6.6% 19.2% 25% 50% 75% 100%

CI acreage share % 55.2% 46.7% 47.2%

UPOV 91 acres million acres 0.03 0.17 0.56 0.75 1.50 2.25 3.00

Seed requirement (@80lb/acre) units 55,917 272,741 903,846 1,200,000 2,400,000 3,600,000 4,800,000

Volume of FSS used (2 years of FSS) units 37,278 181,827 602,564 800,000 1,600,000 2,400,000 3,200,000

FSS royalty (@ 1¢ / lb or 50¢/unit) $ $18,639 $90,914 $301,282 $400,000 $800,000 $1,200,000 $1,600,000

Barley




UPOV 91 share % 0.1% 0.7% 1.5% 25% 50% 75% 100%

CI acreage share % 67.4% 69.3% 60.1%



Volume of FSS used (2 years of FSS) units 8,312 54,206 106,162 2,000,000 4,000,000 6,000,000 8,000,000

FSS royalty (@ 1¢ / lb or 50¢/unit) $ $4,156 $27,103 $53,081 $1,000,000 $2,000,000 $3,000,000 $4,000,000

Durum




UPOV 91 share % 1.3% 4.8% 7.2% 25% 50% 75% 100%

CI acreage share % 71.1% 69.9% 67.6% 0% 0% 0%



Volume of FSS used (4 years of FSS) units 121,075 471,481 596,736 2,200,000 4,400,000 6,600,000 8,800,000


Wheat, excluding durum

UPOV 91 CI acres acres 44,430 592,250 1,055,201



UPOV 91 share % 0.3% 4.8% 8.9% 25% 50% 75% 100%

CI acreage share % 78.5% 78.8% 74.7%


Seed requirement (@100lb/acre) units 113,141 1,502,230 2,824,022 8,000,000 16,000,000 24,000,000 32,000,000

Volume of FSS used (2 years of FSS) units 75,428 1,001,487 1,882,682 5,333,333 10,666,667 16,000,000 21,333,333


Combined FSS Royalty $ million $0.12 $0.85 $1.6 $5.2 $10.3 $15.5 $20.7

Certified seed royalty ((@ 3¢/lb) $ million $0.14 $1.1 $2.2 $6.9 $13.9 $20.8 $27.7

Total royalties $ million $0.26 $2.0 $3.8 $12.1 $24.2 $36.3 $48.4



For completeness, the second last row shows the Certified seed royalty (based on 3¢/lb). In 2017, this is estimated to be $2.2 million based on the UPOV 91 market share, which increases to $13.9 million with a 50% UPOV 91 share. Total royalties on UPOV 91 varieties is estimated to have been $3.8 million in 2017, and with a 50% market share this increases to $24.2 million.

Strengths Associated with Certified Seed Contracts with Trailing FSS Royalties There are some advantage to collecting FSS royalties through Certified seed contracts. These include:

The FSS royalties approach is simply an extension of contracts that seed companies have in

place for Certified seed sales, including use agreement contracts;

The approach supports the complete traceability for the seed sector;

Avoidance of FSS royalty payment will be minimal – high effectiveness of collections – with

the integration of data bases by an independent third party, such a system is in place for

crop protection through AgCollect;

Compared to an EPR system, a grower is ensured of not paying twice in year of Certified

seed purchase;

Likely encourages greater use of Certified seed compared to an EPR;

Plant breeders and seed companies are able to establish their unique royalty on Certified

seed sales, and the FSS royalty (subject to a minimum);

Efficiency of royalty collection is likely higher due to less dilution (e.g., collection fees paid to

grain companies and compliance by producers).

The FSS approach does not bias product developers to concentrate on yield at the expense

of quality or other traits, and vice versa.

Weaknesses Associated with Certified Seed Contracts with Trailing FSS Royalties There are some weaknesses/disadvantages associated with collecting FSS royalties, and can include:

Some seed companies may decide to buy market share with a low FSS royalty rate – this

weakness can be minimized by the seed sector agreeing to minimum FSS royalty rates by

crop kind;

A disadvantage is that some infrastructure investment is required to integrate data bases

and information held by seed companies; however, this integration is required for the full

traceability being sought by the seed sector.

11.2 Using End Point Royalties (EPR) In contrast to collecting FSS royalties on UPOV 91 varieties, an alternative approach is through the use of end-point-royalties (EPR). Analysis of EPR is based on the following assumptions and data sources:

UPOV 91 acreage shares are calculated using the same approach as in the above section;

Grain companies and processors deduct the EPR on eligible grain sales (UPOV 91

varieties) upon grain delivery;

Producers make a declaration on varieties delivered to a primary elevator and to grain

processors (grain used on farm or in stocks is not included);

Grain deliveries is based on data collected by the Canadian Grain Commission on producer

deliveries;

Producer commissions collect the EPR from grain companies/processors and distribute the

royalty to breeders/seed companies based on Certified seed sales (for analysis we use the

crop insurance data).

Grain companies will be paid a fee to collect the EPR (assumed a 20¢ per tonne fee);



The EPR rate is $1:00 per tonne of UPOV 91 grain delivered;

If the Certified seed has a royalty/license fee (of 3¢/lb.), the Certified seed rebate is $1.00

per 50 lb. bag, or 2¢/lb.

This approach is used in France, with Certified seed rebates, and in Australia where there are no rebates on Certified seed purchases and no explicit royalty in the Certified seed price.

Potential EPR Values In 2017, the EPR approach would have collected $2.4 million in EPR for oats, barley, durum, and wheat excluding durum (see the 7th last row in Table 11.3). Using oats as an example, this 2017 estimate is based on using producer deliveries (to elevators and processors) of 1.7 million tonnes211 for oats and multiplying it by the UPOV 91 acreage share of 19.2%, which results in 325,800 tonnes of UPOV 91 oats subject to EPR. With a $1.00/t EPR rate, the value collected in 2017 on oats would be $0.33 million. Table 11.3 Estimate of EPR Revenues, Cereals in Western Canada

As with FSS royalties, the value of the EPR is proportional to the UPOV 91 acreage share. This results in a low value for barley of $41,200 (in 2017), $345,700 for durum, and $1.66 million for all other wheat. With a 50% UPOV 91 market share across the four cereals, the associated volume of deliveries is 14.0 million tonnes and an EPR value of $14 million (see 7th last row).

211

Delivery volume for 2017 is estimated based on an average for the two prior crop years.

Item Units 2015 2016 2017 Future UPOV 91 share

25% 50% 75% 100%

Oats

UPOV 91 share % 1.2% 6.6% 19.2% 25% 50% 75% 100%

Producer Deliveries 1,000 t 1,627.2 1,762.3 1,694.8 1,694.8 1,694.8 1,694.8 1,694.8

EPR volume 1,000 t 19.5 116.8 325.8 423.7 847.4 1,271.1 1,694.8

Barley

UPOV 91 share % 0.1% 0.7% 1.5% 25% 50% 75% 100%


EPR volume 1,000 t 2.6 20.6 41.2 708.4 1,416.7 2,125.1 2,833.5

Durum

UPOV 91 share % 1.3% 4.8% 7.2% 25% 50% 75% 100%


EPR volume 1,000 t 58.7 244.5 345.7 1,205.6 2,411.3 3,616.9 4,822.5


UPOV 91 share % 0.3% 4.8% 8.9% 25% 50% 75% 100%


EPR volume 1,000 t 60.6 898.7 1,657.6 4,659.7 9,319.4 13,979.0 18,638.7

Total EPR Volume 1,000 t 141.3 1,280.6 2,370.2 6,997.4 13,994.7 20,992.1 27,989.4

EPR dollars (@ $1/t) $ million $0.14 $1.3 $2.4 $7.0 $14.0 $21.0 $28.0

Collection fee (20¢/t) $ million $0.03 $0.26 $0.47 $1.40 $2.80 $4.20 $5.60

Net EPR $million $0.11 $1.0 $1.9 $5.6 $11.2 $16.8 $22.4

Certified seed volume units 90,778 736,630 1,444,888 4,616,667 9,233,333 13,850,000 18,466,667

Certified seed royalty $ million $0.14 $1.1 $2.2 $6.9 $13.9 $20.8 $27.7

Certified seed rebate $ million $0.09 $0.7 $1.4 $4.6 $9.2 $13.9 $18.5

Net Royalties $ million $0.16 $1.4 $2.6 $7.9 $15.8 $23.7 $31.6



With a 20¢ per tonne collection fee, in 2017, the grain companies would deduct $0.47 million from the collected royalties with a net EPR of $1.9 million (see the 4th last row in Table 11.3). With a 50% UPOV 91 market share, the collection fee amounts to $2.8 million, which is 20% of royalties collected. If the EPR model retained royalties on Certified seed, and a Certified seed rebate was in place, then the royalties on Certified seed sales would have been $2.2 million (based on 3¢/lb.) and the value of the rebate would have been $1.4 million in 2017. The latter is based on a $1.00/bag (2¢/lb.). The net EPR and Certified seed sale royalties are estimated at $2.6 million for 2017, which increases to $15.8 million with a 50% UPOV 91 market share (as noted in the last row of Table 11.3).

Strengths Associated with Using an EPR System A major strength/advantage of using an EPR system is that the collection process is already in place with grain companies and processors deducting check-off fees and submitting them to producer commissions.

Weaknesses Associated with Using an EPR System There are a few weaknesses associated with using an EPR which include:

Farmers may make a false declaration on grain variety to avoid the EPR deduction. This is

a $40 saving on each truck load of grain delivered;

Monitoring and enforcement mechanisms may be required to minimize the amount of false

declarations, given the volume of UPOV 91 varieties in relation to overall crop size;

Farmers may decide to purchase non-UPOV 91 varieties to avoid the EPR rate, which has

negative effects on royalties and benefit of new varieties;

The collection fee provided to grain companies dilutes the amount of royalty that can be

distributed back to breeders/seed companies (this does not occur with FSS royalties)212;

With a uniform EPR rate, breeders are not able to set a royalty rate commensurate with the

value being offered in a variety;

If Certified seed sales still have a royalty rate, the user of Certified seed can argue that they

are paying twice – once on the seed purchase and again on delivered grain;

With a rebate on Certified seed purchases, depending on the rebate level, the EPR rate, and

the Certified seed acreage share, the net proceeds may be small. When the Certified seed

market share is low, as in Australia, the net royalties increase.

The EPR approach could bias product developers to concentrate on yield at the expense of

quality or other traits, and vice versa.

11.3 Some Sensitivity Analysis The above analysis of a FSS royalty approach and an EPR approach to capture value on UPOV 91 varieties assumed certain royalty and rebate rates. A sensitivity analysis with various royalty rates plus the associated farmer cost is provided to illustrate some features of each approach. In the case of a FSS royalty approach, the first column Table 11.4 shows the same data as in Table 11.2 where the assumed UPOV 91 acreage share is 50% with a 1¢/lb FSS royalty rate and a 3¢/lb rate on Certified seed sales. Using wheat as an example, the resulting FSS royalty payment rate is $1.00/acre, which becomes $0.77/tonne on all output. In the case of barley, this per acre rate is $0.68/tonne213.

212

Both the FSS royalty and the EPR system require an IT system on farmer use of Certified and FSS seed. 213

The conversion from per acre rates to per tonne rates is based on using 2015 to 2017 average yields for western Canada.



Table 11.4 Impact on Royalties and Per Tonne FSS Costs with Varying Royalty Rates

Item Units 1¢/lb FSS 1.5¢/lb FSS 2¢/lb FSS

3¢/lb Certified 3¢/lb Certified 2¢/lb Certified

Oats

All acreage million acres 3.0 3.0 3.0 UPOV 91 acres million acres 1.50 2.25 3.00 Seed requirement (@80 lb/acre) units 2,400,000 2,400,000 2,400,000 Volume of FSS used (2 years of FSS) units 1,600,000 1,600,000 1,600,000 FSS Royalty $ $800,000 $1,200,000 $1,600,000

Per acre FSS Royalty $/acre $0.80 $1.20 $1.60 Per tonne FSS royalty $/tonne $0.56 $0.85 $1.13

Certified seed royalty $ $1,200,000 $1,200,000 $800,000

Total oats royalties $ $2,000,000 $2,400,000 $2,400,000

Barley

All acreage million acres 6.0 6.0 6.0 UPOV 91 acres million acres 3.00 3.00 3.00 Seed requirement (@100 lb/acre) units 6,000,000 6,000,000 6,000,000 Volume of FSS used (2 years of FSS) units 4,000,000 4,000,000 4,000,000 FSS Royalty $ $2,000,000 $3,000,000 $4,000,000


Certified seed royalty $ $3,000,000 $3,000,000 $2,000,000

Total barley royalties $ $5,000,000 $6,000,000 $6,000,000

Durum




Total durum royalties $ $3,850,000 $4,950,000 $5,500,000





Total wheat royalties $ $13,333,333 $16,000,000 $16,000,000

Combined FSS Royalty $ million $10.3 $15.5 $20.7

Certified seed royalty $ million $13.9 $13.9 $9.2

Total royalties $ million $24.2 $29.4 $29.9 Note: The first data column is the same as Table 11.2 where UPOV 91 varieties achieved a 50% market share

An increase in a FSS royalty rate to 1.5¢/lb., or $0.75 per 50 lb. unit results in a per acre royalty rate of $1.20 for oats (see second column in Table 11.4) to $1.50/acre for the other cereals. After accounting for yield, the per tonne rate become $1.15 for wheat and $1.44/tonne for durum. Overall royalties increase by $5.2 million to $29.4 million per annum. Having the same royalty rate on FSS as on Certified seed (at 2¢/lb) results in comparable overall revenues of $29.9 million, as reported in the last column in Table 11.4.



Table 11.5 provides some sensitivity analysis for the EPR approach. The first column is comparable to the 50% UPOV 91 acreage share in Table 11.3. The second column increases the EPR rate to $1.50/tonne on delivered grain. The third column decreases the royalty rate on Certified seed to 2¢/lb. ($1.00/ unit) and does not provide a rebate on Certified seed purchases. This increases total royalties to $27.4 million as the $9.2 million rebate value is larger than the reduction in royalties of $4.7 million. Table 11.5 Impact on Royalties and Per Tonne EPR Costs with Varying Royalty Rates

Item Units $1/t EPR rate $1.50/t EPR rate $1.50/t EPR rate

3¢/lb Certified 3¢/lb Certified 2¢/lb Certified

Oats

UPOV 91 acres million acres 1.50 2.25 3.00 UPOV 91 tonnage 1,000 t 2,126 2,126 2,126 EPR deliveries 1,000 t 847.4 847.4 847.4 EPR rate $/t $1.00 $1.50 $1.50

EPR revenues $ $847,375 $1,271,063 $1,271,063

Certified seed used (@80 lb/acre) units 800,000 800,000 800,000

Certified seed royalty $ $1,200,000 $1,200,000 $800,000

Total oats royalties $ $2,047,375 $2,471,063 $2,071,063

Barley

UPOV 91 acres million acres 3.00 3.00 3.00 UPOV 91 tonnage 1,000 t 4,413 4,413 4,413 EPR deliveries 1,000 t 1,416.7 1,416.7 1,416.7 EPR rate $/t $1.00 $1.50 $1.50

EPR revenues $ $1,416,725 $2,125,088 $2,125,088

Certified seed used (@100 lb/acre) units 2,000,000 2,000,000 2,000,000


Total barley royalties $ $4,416,725 $5,125,088 $4,125,088

Durum


EPR revenues $ $2,411,250 $3,616,875 $3,616,875



Total durum royalties $ $4,061,250 $5,266,875 $4,716,875



EPR revenues $ $9,319,350 $13,979,025 $13,979,025



Total wheat royalties $ $17,319,350 $21,979,025 $19,312,358

Total EPR revenues $ million $14.0 $21.0 $21.0

EPR Collection fee $ million $2.8 $2.8 $2.8

Net EPR revenues $ million $11.2 $18.2 $18.2

Certified seed royalties $ million $13.9 $13.9 $9.2

Certified seed rebate $ million $9.2 $9.2 $0.0

Total net royalties $ million $15.8 $22.8 $27.4

Note: The first data column is the same as Table 11.3 where UPOV 91 varieties achieved a 50% market share. The Certified seed rebate is 2¢/lb. ($1.00 per unit)



With an EPR of $1.00/tonne the total EPR revenues for barley is $1.42 million, which compares to the FSS royalty for barley (at $1.02/tonne in the second column in Table 11.4) which generates $3 million (using on FSS acreage at two-thirds of the UPOV 91 acreage). Total royalty revenues are lower with an EPR approach (at $1.00/t) (Table 11.5) provides $1.4 million in revenues across all acreage, which is delivered where EPRs are collected. As shown in Table 11.5, the barley production volume on the UPOV acreage is 4.4 million tonnes, while actual deliveries are less than 35% at 1.4 million tonnes. With a FSS royalty the issue of how the grain is used and whether an EPR is collected (based on end-use channel) becomes non-existent. This same effect does not occur with wheat due to most production being delivered into the country elevator system. For example, with a $1.00 EPR rate $9.3 million in revenues are collected as shown in the first column in Table 11.5 (before considering the collection fee), while a much higher FSS rate is required (see Table 11.4). However, after considering collection fees and rebates on Certified seed purchases a different outcome emerges. Continuing with wheat as an illustration, at $1.00 EPR rate, the net ERP revenues become $7.4 million, after deducting $1.8 million in collection fees214. After a certified seed rebate of $5.3 million, the net Certified seed royalty is $2.7 million, which results in total royalties of $10.1 million for wheat. An implied $1.00/tonne FSS rate is the same as a $0.65/per unit (1.3¢/lb.) and $1.00/tonne FSS royalty rate which generates $6.9 million in FSS royalties and $8 million in Certified seed royalties for a combined royalty value of $14.9 million. The latter compares to the $10.1 million (net) with an EPR approach, suggesting that with comparable per acre rates on FSS on FSS acres and an EPR on all acres, the FSS approach is preferable. The above indicates that a FSS royalty system can offer more revenue to product developers while having a comparable or lower implied per tonne royalty rate. A $1.00/tonne EPR rate collects less revenue than a FSS royalty rate that is comparable to $1.00/tonne, with this rate applying only on production associated with FSS. As noted above, this allows for a lower implied FSS royalty rate with the same overall revenue target for royalties. This result arises for a number of reasons including not all acres are included in an EPR system, EPR collection fees, and rebates on Certified seed sales.

11.4 A Comparison of Systems A summary comparison between the two approaches is provides in Table 11.6. Our preference is for Seed Synergy to move forward with a FSS royalty approach. This preference is based on a number of factors, which are included in the following table (and in bold italics)

214

This is the same as using an EPR rate of $0.80/tonne and no collection fees.



Table 11.6 Summary Comparison Between FSS Royalties and an EPR System

Item FSS Royalties End Point Royalties

Amount collected at 50% UPOV 91 market share

$10.3 million on FSS and $13.9 million on Certified seed, for a total of $24.2 million; Comparable per output tonne FSS rate (to EPR) generates more overall royalty revue; Amount depends on FSS royalty rate; Higher Certified seed market share lowers FSS royalty

$14.0 million in EPR, which decreases to $11.2 million after collection costs; With retention of Certified seed royalties and a rebate, total royalties increase to $15.8 million; EPR revenues and total royalties can increase with lower Certified seed volumes; Net EPR revenues lower than contract approach

Collection Efficacy

FSS approach involves fewer intermediaries; FSS approach applies to all acreage planted in FSS; The same (implied) per acre rate results in higher overall royalties due to no slippage on collected acres

Dilution through grain company collection fee; Lower EPR revenues due to EPR not collected on grain used on farm or sold to entities not collecting an EPR

Avoidance of royalty

System design minimizes avoidance and increases compliance

Avoidance potential through false declarations

Breeder flexibility Breeder has flexibility to set royalty rates on Certified seed and FSS

System may negate Certified seed royalty, and breeder may not be able to establish unique EPR rate

Interface with Certified seed royalties/license fees

No conflict, since FSS applies after Certified seed sale

System may negate ability to collect a Certified seed royalty/license fee, resulting in lower overall royalties to product developers

Saleability to seed companies

Saleable, an extension of how business is conducted Seed companies have a data base

Less saleable due to less control

Saleability to farmers

Keeps separate producer commission deductions from royalty payments to incent variety development; Familiarity with use provisions on some crop types

Extension of current deduction system, may request significantly reduced check-off rate or increase in refunds

Per acre cost to farmers

For a given level of royalty revenues, per tonne costs are less (on only FSS acres)

Per tonne EPR rate is higher than implied FSS per tonne rate for the same royalty revenues

Linkage to traceability

Data required and system architecture can be a major component of a traceability system

Resulting data capture is less conducive to a trace and track system since all plantings are not captured

Impact on varieties

Neutral on UPOV 91 varieties; Could lead to use of some non-UPOV 91 varieties;

Can have bias towards yield rather than quality or other attributes; Could lead to use of some non-UPOV 91 varieties; Underfunded crops remain underfunded

Structure-Conduct-Performance

Reduces plant breeding sector performance limitation by higher available investment dollars

Smaller reduction of breeding performance limitation due to lower available investment dollars



Our perspective on comparing FSS and EPR approaches is that a FSS generates a larger amount of royalty dollars for investment into varietal development. Figure 11.1 illustrates the difference in royalty revenues using the net results in Tables 11.2 and 11.3. For example, with UPOV varieties having a 50% market share, then the FSS royalty approach generates $8.4 million in additional net royalties for investing in product development. Figure 11.1 FSS Royalties and EPR Over Time, Net Royalties

By providing more royalties, the FSS royalty approach should result in higher investment in plant breeding in cereals and pulses. This will benefit producers. Economic studies of investment in plant breeding have shown that for each dollar invested in plant breeding, producers benefit by more than $1.215 At the point in time when UPOV91 varieties represent 50% of total acreage, the contract system would result in a total of $24.2 million in royalties ($10.3 million from FSS royalties and $13.9 M in certified seed royalties) compared to net royalties of $15.8 million from an EPR. The FSS royalties of $10.3 million can generate future producer benefits of at least $70 million per year216 and an economy wide impact of $140 million per year217. The combined $24.2 million in FSS and certified seed royalties from the contract system can generate future producer benefits of $170 million and economy wide impacts of $340 million each year. The comparisons between the FSS and EPR approach in Table 11.6 suggest that Seed Synergy should support the FSS royalty approach. Much of this is a result of the improved investment performance that arises with a FSS approach, and its more efficacious manner in which royalties are collected.

215

For example, a 2016 study by Groenewegen and Thompson found that for every $1 million invested in plant breeding in cereals, pulses, and special crops by the Crop Development Sector, producers benefited by $7.1 million to $11.5 million. (Groenewegen JR and SJ Thompson, “Economic Impact of Plant Breeding at the Crop Development Centre”, November 2016). 216

This is based on a benefit to cost ratio of 7:1. 217

Based on $8.4 million differential multiplied by 7.

3.8

12.1

24.2

36.3

48.4

2.6

7.9

15.8

23.7

31.6

1.2 4.2

8.4 12.6

16.8

0

10

20

30

40

50

60

2017 25% 50% 75% 100%

M o

f $

FSS EPR Difference



11.5 Chapter Summary The use of contracts and EPR to collect royalties on FSS in cereals in Western Canada were compared using varieties covered by UPOV91. At the point in time when UPOV91 varieties represent 50% of total acreage, the contract system would result in a total of $24.2 million in royalties ($10.3 million from FSS royalties and $13.9 M in certified seed royalties) compared to net royalties of $15.8 million from an EPR. The FSS royalties of $10.3 million can generate future producer benefits of at least $70 million per year and an economy wide impact of $140 million per year. The combined $24.2 million in FSS and certified seed royalties from the contract system can generate future producer benefits of $170 million and economy wide impacts of $340 million each year. Besides providing more money for plant breeding through higher royalties the contract system (compared to an EPR system) was also judged to:

1. provide more money for plant breeding through higher royalties; 2. be more efficient in collecting the royalties; 3. be more saleable to producers and seed companies; 4. have a lower per acre cost to producers; and 5. provide a better linkage to traceability.



Annex 1 - Summary of Royalty Collection in Wheat

Country Seed Usage

System Collection Success Cost Comments

Czech Republic

Certified 55% FSS 25% Brown Bag 14% Small Farmer 14%

No information No information Certified 100% FSS 90% Overall 77.5%

No information

Differences in EU and national laws complicate collection Use of mobile cleaners can hide FSS use

France Soft Wheat Certified 55% FSS 45%

Breeder cooperative (SICASOV) collects royalties on certified and FSS FSS royalty is 25% of certified rate

Seed producers declare amount of certified seed FSS royalty collected when delivered to mill, coop etc.

Certified seed 100% FSS 90% 10% of FSS has small farm exemption or is used on farm Overall 92%

2% of FSS royalty collected

Only for soft wheat SJT – perhaps on durum – still checking

Germany Wheat 45% certified 55% FSS Brown Bag unknown

Organization servicing breeders (STV) enforces agreements with seed growers and collects royalties on FSS

STV sends out declaration forms to 85,000 farmers Must provide evidence that farmer may have used FSS Can try to collect from processors but must have evidence

Certified 100% FSS 30% Overall 56.7%

No information

Legal requirement for evidence on FSS use reduces ability to collect

Italy Soft Wheat and Durum Certified 55% FSS 15% Brown Bag 30%

Italy has no national regulation requiring farmers to pay royalties on FSS

Royalties collected on EU protected varieties (50% of varieties)

Certified 100% FSS 55%

Borne by breeder

85% of farms are exempt (small size)

Poland Wheat Certified 15% FSS 55% 30% Brown Bag

AGNAS (cereal and potato breeder organization) collects royalties on FSS and supplies labels for certified seed AGNAS visits farms to verify FSS

AGNAS sends out form Farmers to pay royalties on FSS within 30 days

Certified < 100% (70% to 80%) FSS 3% Overall 21.6%

30% of FSS royalties

96% of farms are exempt (small size) AGNAS does not have all the addresses

Spain Cereals Certified 20% FSS, Brown Bag and Block Farming 80%

GESLIVE, a plant breeder organization, administers FSS royalties FSS royalty is 50% of certified

By agreement, cooperatives and processors collect FSS and send to GESLIVE which distributes to breeders, certified seed campaign, local R&D, and collection fee to cooperatives and processors

Certified <100% FSS some Overall 22%

20% of FSS royalties

Brown bag and block farm are large users of seed

Sweden Cereals Certified 65 to 85% FSS 15% to 45%

Swedish Seed Trade Association (SSTA)administers and collects FSS royalties Swedish Board of Agriculture provides

Royalties on certified seed included in price Producers and seed processors legally required to provide information on FSS SSTA sends out questionnaires twice a


No information provided

Addresses of farmers provided by government a key success factor Lack of



address of farmers required to pay FSS royalties and it is responsible for compliance FSS royalties are % of certified seed royalty

year and then SSTA collects royalty and distributes .

enforcement ability by government on FSS Incentive to provide incorrect variety information because of royalty differentials

UK Wheat Certified 58% FSS 42%

An organization of plant breeders, BSPB, issues licenses to seed processors and collects FSS royalties Royalties are a % of certified seed royalty BPBS will audit

In certified seed, royalty paid by first processor and seller Most FSS royalties collected by mobile seed cleaners All farmers are required to declare FSS use and can pay BSPB or mobile seed cleaner


6% to 7% of FSS royalty

Are small farmer exemptions

Argentina Wheat Certified 21% FSS 30% Brown Bag and varieties outside the ERS are 49%

ARPOV, a non-profit organization, collects and administers royalties for FSS on self-pollinating varieties

Certified seed royalty included in the price Extended Royalty System (ERS) in which farmers and breeders have a contract regarding FSS which renews annually

Certified most FSS 30% Overall 50%

ARPOV charges 15% to collect FSS royalties

Brown bag is a large part of market ARPOV lacks legal ability to enforce FSS royalty payment

Australia Small Grains Certified 5% FSS 95%

An End Point Royalty (EPR) is used to collect royalty on FSS. Fees vary by variety

EPR paid on commodity crop when producer delivers

No information

No information

Provides incentive for breeders to select for yield rather than quality or other attributes Farmers have incentive to declare low royalty variety – still checking

Chile Wheat Certified 15% to 20% FSS 70% to 80%

No royalty on FSS Certified seed royalty is included in the price

Certified 100% FSS 0%

Not collected

No royalty on FSS because UPOV78 does not demand it

Mexico Wheat Certified 89% FSS 11%

SNICS, organization responsible for plant variety protection, collects royalties on certified seed.

No attempt to collect royalties on FSS (because is so low)

Certified high Overall 40% (on certified)

Cost to collect certified seed royalties is 10% of the royalty collected

Only 50% of varieties are covered by plant variety protection

Uruguay Wheat Certified 48% FSS 44% Brown Bag 8%

URUPOV, a plant breeder association, responsible for royalties URUPOV and INASE (seed

Contract based system (Extended Royalty System) anchored by breeder and farmers agreement when certified seed is purchased

Certified 100% FSS 90% Overall 89%

Cost of ERS is 7% to 15% depending on variety

Brown bag seed reduces efficiency Strong legal framework



institute) responsible for enforcement

URUPOV visits each farm twice annually Tax incentive of 150% to use certified seed

US Wheat National Certified and QA 33% Certified: PNW: 85% ND: 40% OK & TX: 15%

Plant Variety Protection Act does not support royalty collection on FSS

No formal system for FSS royalties Some breeders have producers sign contracts with rules regarding FSS

Certified or QA 100% FSS 0% Overall 33%

Borne by owners of IP for certified and QA

Low level of value capture

Canada Wheat National Certified at 22%

Legislation does allow for royalty collection on FSS

No formal system for FSS royalties

Certified at 100% FSS 0%

Borne by owners of IP for certified and QA

Low level of value capture