Strategic Investment and Entry Decisions for Soybean Breeding in western Canada

Abstract

With the increase in soybean adoption in western Canada, accompanied by the lack of private soybean breeding, begs the question whether the levy funded Saskatchewan Pulse Growers (SPG) should invest in a producer-controlled breeding program at the Crop Development Center (CDC). SPG has very successful breeding programs with other pulse crops, but with soybeans, the decision to invest has unidentified economic impacts due to the potential private involvement. This thesis examines the crowding effects and welfare effects from the SPG investing in a soybean breeding program in western Canada. The thesis presents three models of strategic investment and entry to analyze private incentives to invest in soybean breeding and the effects of breeding investment on welfare. Players for each game include the Saskatchewan Pulse Growers (SPG) and private soybean seed companies located in western Canada. The first model is an extensive form game where SPG’s decision to investment is followed by the private firm. This model examines the potential holdup problem in soybean breeding in western Canada, which can exist if a private firm expects ex post entry by SPG. The extensive form game shows that the private firm has an incentive to invest when the threat of SPG entry is low, and/or their payoff increases because of SPG entry. SPG does not deter private entry when they credibly select traits that do not compete with the private firm, or traits that result in large research spillovers from SPG to the private firm. The second model is a two-stage game for investment in soybean breeding. This model examines how the degree of substitutability and the difference in the level of existing seed technology impact private profits, farmer welfare, and social welfare. In the first stage of the game, SPG and the private firm set their level of investment. The second stage of the game each player sets their level of quantity. Results of the two-stage game show that the private firm is crowded out when SPG invests in biotech traits and has a competitive level of existing seed technology. SPG can reduce crowding effects by either investing less prior to entry, which lowers their level of existing seed technology, or by selecting food edible traits that are less substitutable with private firm soybean varieties. The third model is a simulation model. The simulation model estimates the impact investment in soybean breeding has on economic surplus in western Canada for 20 years. The simulation model quantifies these effects using a new production function, data on yield, acres, costs, and acreage elasticities. The simulation model also quantifies how the degree of substitutability impacts the net present value of private profits, farmer welfare, and social welfare. The results of the simulation model are consistent with the two-stage game in that increased substitutability lowers a private firm’s incentive to invest in soybean breeding. However, SPG can reduce crowding effects by either selecting traits that are less substitutable with private soybeans, increasing their price of seed, and/or lowering their level of investment. SPG’s decision to invest in a soybean breeding program has the potential to provide farmers in western Canada with a maximum net present value benefit of 9 billion dollars over twenty years. However, outcomes that benefit farmers the most are likely to crowd out any significant private investment. The consensus of the three models is that SPG has breeding and pricing options that will limit the detrimental effect on private investment in soybean breeding while still increasing farmer welfare in western Canada. However, any option to reduce crowding effects of SPG comes at a cost of farmer welfare.