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Inorganic, synthetic fertilizer is a critical ingredient in the global food economy. In 2008, global consumption of the three main agricultural fertilizer nutrients—nitrogen (N), phosphate (P2O5), and potash (KCl, or potassium)— totaled 162 million metric tons (FAO). Nitrogen accounts for about 63 percent of the total tonnage of fertilizers applied, phosphate another 21 percent, and potassium 15 percent. At world trading prices for major fertilizers, the size of the global fertilizer market was about $68 billion in 2005 but soared to over $200 billion by 2008 due to a rapid rise in fertilizer prices. Demand for fertilizers has risen in recent years, mostly in developing countries. In high-income countries, where application rates are generally higher, fertilizer use has been stable or declining. In agricultural areas with high fertilization rates, environmental concerns stem from fertilizer runoff and leaching, which can affect surface and groundwater quality (USDA/ERS, 2006). Nitrogen fertilizer can also vaporize into the atmosphere in the form of nitrous oxide (N2O), which has been identified as a greenhouse gas and a contributor to global climate change (IPCC, 2007).
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CHAPTER 4
Private Research and Development
for Synthetic Fertilizers
David Schimmelpfennig, Keith Fuglie, and Paul Heisey
Inorganic, synthetic fertilizer is a critical ingredient in the global food
economy. In 2008, global consumption of the three main agricultural fertil-
izer nutrients—nitrogen (N), phosphate (P2O5), and potash (KCl, or potas-
sium)—totaled 162 million metric tons (FAO).1 Nitrogen accounts for about
63 percent of the total tonnage of fertilizers applied, phosphate another 21
percent, and potassium 15 percent. At world trading prices for major fertil-
izers, the size of the global fertilizer market was about $68 billion in 2005
but soared to over $200 billion by 2008 due to a rapid rise in fertilizer
prices.2 Demand for fertilizers has risen in recent years, mostly in developing
countries. In high-income countries, where application rates are generally
higher, fertilizer use has been stable or declining. In agricultural areas with
high fertilization rates, environmental concerns stem from fertilizer runoff
and leaching, which can affect surface and groundwater quality (USDA/ERS,
2006). Nitrogen fertilizer can also vaporize into the atmosphere in the form
of nitrous oxide (N2O), which has been identifi ed as a greenhouse gas and a
contributor to global climate change (IPCC, 2007).
The Global Agricultural Fertilizer Market
and Industry Structure
The fertilizer industry has undergone signifi cant changes over the past half
century. Park (2001) provides a comprehensive overview of the evolution of
the global fertilizer industry during the 20th century and the structure of
the industry as it stood in the late 1990s. Following World War II, produc-
tion of chemical fertilizers increased rapidly, partly due to the conversion of
munitions factories to fertilizer production. Many countries viewed fertilizer
as a strategic industry, which led to signifi cant government intervention in
fertilizer markets, both in terms of direct ownership of factories and control
of trade and prices. Since the 1980s, many fertilizer markets have been
liberalized or privatized, although some governments continue to maintain
a controlling interest in the industry. In the 1990s, fertilizer manufacturing
and use in the countries of the former Soviet Union declined sharply, as did
industry consolidation and company mergers in Europe and North America.
By 2008, government-owned and government-controlled production
accounted for 57 percent of global nitrogen fertilizer, 47 percent of phosphate
fertilizer, and 19 percent of potassium fertilizer (PotashCorp, 2008).
The market structure that emerged from this period of liberalization
and consolidation is markedly different for the three primary nutrients.
The market structure for N fertilizers is the least concentrated globally.
Manufacture and pricing of N is closely associated with availability and
cost of natural gas, which is a main ingredient used to synthesize ammonia
(the main feedstock for N fertilizer). Due to the high cost of transporting
ammonia, most N fertilizer is consumed in or close to its country of manu-
facture, and more than 60 countries have manufacturing facilities for N fertil-
izers (PotashCorp, 2008). The United States is a net importer of ammonia,
primarily from Trinidad, which has low-cost sources of natural gas.
1Nitrogen, phosphate, and potassium
are classifi ed as primary macronutrients
for agriculture. Other “secondary” mac-
ronutrients are calcium, magnesium,
and sulfur, which are often supplied
through liming or manuring. Many mi-
cronutrients (trace elements) are also re-
quired for plant growth. These may also
be applied as chemical fertilizers but
are usually naturally available in soil in
suffi cient quantities. In this chapter, we
only consider synthetic (manufactured)
fertilizer and not organic fertilizer, such
as animal manure.
2Values of the global fertilizer
market are derived by multiplying
Food and Agriculture Orgacalculated
on a dollar per metric ton of nutri-
ent basis. The reference prices are
for Nitrogen Ukraine Urea (44-46%
N), for Phosphate U.S. Gulf Port
Superphosphate (45 percent P2O5), and
for potassium Canadian Potash (60
percent K2O).
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The production of phosphate and potassium fertilizers is more concentrated
due to the limited geographic availability of raw materials—phosphate rock
and potash. These fertilizers are mined primarily from underground deposits.
Phosphate rock is mined by both surface and underground methods, but
surface mining is the predominant method used to mine phosphate deposits.
Most potash mines are deep shaft mines, although a small share of the
worlds production also comes from salt lakes and seas. While about 40 coun-
tries produce phosphate fertilizers, just 5 account for 80 percent of global
phosphate rock production (PotashCorp, 2008). Phosphate fertilizer manu-
facturing requires signifi cant amounts of sulfuric acid, and production costs
are sensitive not only to global prices of phosphate rock but also to prices
of sulfur. Farm demand for phosphate fertilizer also faces competition from
animal feed and industrial uses of phosphates.
Mineral resources of potash (used to produce potassium fertilizer) are even
more concentrated than phosphate, with only three countries (Canada,
Belarus, and Russia) accounting for 80 percent of the world’s reserves
(PotashCorp, 2008). Markets for phosphate and potassium fertilizers are
more integrated globally than the market for N fertilizer. About 80 percent
of global potash production is traded across international borders. World
prices for fertilizers were fairly stable over 1995-2007 but rose signifi cantly in
2007-08 (fi g. 4.1). Factors contributing to the spike in fertilizer prices include
a signifi cant increase in world nutrient demand (as farmers responded to
rising crop prices in this period), a sharp rise in the cost of energy and mate-
rials used in fertilizer manufacture (especially natural gas, sulfur, and phos-
phate rock), increased transportation costs, and the falling value of the U.S.
dollar (Huang et al., 2009).
The Canadian company PotashCorp is the world’s largest fertilizer manufac-
turer and produces signifi cant amounts of all three primary macronutrients
(table 4.1). In 2007, PotashCorp alone had about 22 percent of the total world
production capacity in potash fertilizers. Moreover, PotashCorp, together with
another Canadian fi rm Agrium and the U.S. fi rm Mosaic3 (which sources
most of its potash from mines in Canada), conducts its offshore marketing of
3Mosaic was formed in 2004 when
IMC Global and Cargill agreed to com-
bine their fertilizer businesses. Mosaic
is the largest fertilizer company in the
United States and also produces potash
in Michigan and New Mexico.
Figure 4.1
World fertilizer prices
Constant 2006 U.S. dollars per metric ton
Source: USDA, Economic Research Service using monthly fertilizer prices from Haver Analytics and adjusted for inflation by the monthly U.S.
Producer Price Index for Finished Goods, seasonally adjusted (Federal Reserve Bank of St. Louis).
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
0
200
400
600
800
1,000
Urea, Ukraine, US$/metric ton
Superphosphate, US Gulf Ports, US$/metric ton
Potash, Canadian, US$/metric ton
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potash through a common trading company Canpotex. This trading consor-
tium controls more than one-third of global potash production. Another trading
consortium, the Belarus Potash Company, handles the exports of Uralkali and
Belaruskali, two major potash manufacturers in Eastern Europe. This small
number of producers has historically been an important feature of the global
fertilizer export market (Park, 2001) and enables it to exercise considerable
market power, particularly in the potash fertilizer market. Even though the
market structure for N fertilizers is the least concentrated globally, the market
for urea fertilizer, an important type of N fertilizer, is more concentrated and
this is refl ected in regional price (Hernandez and Torero, 2011).
Eight fi rms account for just over half of global production capacity in
phosphate fertilizers. The government-owned Moroccan company Offi ce
Cherifi en des Phosphates (OCP) is by far the largest global producer of
phosphates and is the source of about half of global exports of phosphate
rock (PotashCorp, 2008). Production of ammonia, the feedstock for nitrogen
fertilizers, is the least concentrated globally. The top seven producers account
for only about 15 percent of global production. Looking forward, the global
nitrogen industry is expected to remain relatively unconcentrated because
recent technological advances in extracting natural gas from shale rock have
caused estimates of economically recoverable gas reserves to increase and
become more geographically diverse (Nature, 2009).
R&D and Technical Change in the
Fertilizer Industry
Over the course of the 20th century, a series of technical innovations led to
a steady lowering of real fertilizer prices (Tomich et al., 1995). During 1909-
13, German chemists Fritz Haber and Carl Bosch developed the Haber-Bosch
Table 4.1
Fertilizer production capacities of largest companies in 2007
Capacity in million tons of primary product
Ammonia (NH3) Phosphate (P205) Potash (KCl)
Company Capacity Company Capacity Company Capacity
Yara (Norway) 6.0 OCP (Morocco) 7.0 PotashCorp (Canada) 13.2
Terra Industries (U.S.) 4.5 Mosaic (U.S.) 4.6 Belaruskali (Belarus) 8.5
PotashCorp (Canada) 3.9 Agrium (Canada) 3.0 Mosaic (U.S.) 8.1
Agrium (Canada) 3.0 PotashCorp (Canada) 2.4 ICL (Israel) 6.0
CFI (U.S) 3.0 CFI (U.S.) 2.0 Silvinit (Russia) 5.4
IFFCO (India) 2.7 IFFCO (India) 1.7 Uralkali (Russia) 4.5
Mosaic (U.S.) 0.5 ICL (Israel) 1.0 Kali & Salz (Germany) 4.0
GCT-CPG (Tunisia) 1.0 Sinofert (China) 3.0
APC (Jordan) 2.0
Agrium (Canada) 1.7
Capacity of listed companies 23.6 22.7 56.4
Total global capacity 154.3 43.0 67.0
Listed companies share of total 15% 53% 84%
Government-owned or subsidy-
controlled production 47% 57% 19%
Source: USDA, Economic Research Service using PotashCorp (2007) and Heffer and Prud'homme (2008).
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process to synthesize ammonia from air and a carbon feedstock and then
convert ammonia to N fertilizer. In 1963, a centrifugal compressor replaced
the complex reciprocating compressor, reducing the capital costs of ammonia
synthesis by half (Tomich et al., 1995). New fertilizer formulations have also
been developed that have increased nutrient density, such as urea (44-46
percent N) and triple superphosphate (45 percent P2O5), which effectively
lowered the farm cost of fertilizer applications.
The sources of these innovations include university and government research
laboratories and the research departments of private fi rms within and
outside the fertilizer industry. A review of research spending by the fertilizer
industry, however, reveals that these fi rms spend relatively little on R&D rela-
tive to company sales. Data compiled in a 1975 survey of private-sector agri-
cultural R&D in the United States show that fertilizer manufacturers spent an
average of only 0.21 percent of net sales on R&D (Wilcke and Williamson,
1977). Of the 42 fertilizer manufacturers in the dataset, only one, Yara
International,4 reported any R&D expenditures in its annual fi nancial state-
ment (Yara International, 2007). The R&D-to-sales ratio for Yara in 2006
was 0.25 percent, similar to the fi nding of the 1975 U.S. survey. It appears
that most of the innovations in fertilizer manufacture are spillins from either
the public sector or private fi rms in other chemical and energy industries or a
result of “learning-by-doing” within the fertilizer industry.
Several factors may account for the low R&D spending by the fertilizer
industry. First, fertilizer is a large-volume and low-value commodity with
few opportunities to develop differentiated products. The industry is capital
intensive with major costs tied up in Greenfi eld development or raw material
procurement. For example, the development of 2 million tons in new potash
capacity is estimated to take 5-7 years and cost $2.8 billion (PotashCorp,
2008). For ammonia manufacture, up to 90 percent of the production cost
is for natural gas. Under this cost structure, opportunities to reduce costs by
developing more effi cient manufacturing processes are limited. Second, the
industry may lack incentives to develop more effi cient fertilizers or fertilizer
application methods (i.e., with less environmental escape). It may be diffi -
cult to claim intellectual property over this type of technology and therefore
recoup returns to research investment. Further, the oligopoly structure of the
fertilizer industry may reduce the competitive pressure on fi rms to innovate.
More effi cient fertilizers that capture a greater share of applied nutrients for
plant growth could result in increased crop yields and agricultural produc-
tion without a corresponding increase in nutrient use or even reduced farm
demand (and industry revenue) for fertilizers. Such improvements in fertil-
izer formulations and application methods could have signifi cant economic
benefi ts to farmers as well as provide environmental benefi ts.
The fertilizer industry supports research on improving fertilizer use by
jointly funding the International Plant Nutrition Institute (IPNI). The IPNI
is a nonprofi t, science-based organization that supports research and agro-
nomic education about fertilizer utilization. It encourages adoption of best
management practices to raise farm productivity as well as address envi-
ronmental concerns associated with fertilizer use (IPNI, 2009). However,
new innovations to improve agricultural nutrient management, such as soil
testing and precision agriculture, have thus far come mainly from public and
private sources outside of the fertilizer industry. The International Fertilizer
4Yara International, a Norwegian
rm, was formed in 2003 when Norsk
Hydro decided to spin off its fertilizer
business as a separate company. In
2007, it acquired the Finnish fertilizer
manufacturer Kemira GrowHow Oyj.
Yara is the largest manufacturer of
nitrogen fertilizer in the world.
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Development Center (IFDC) is a public nonprofi t R&D center that focuses
on developing and transferring fertilizer technology to developing countries.
The IFDC was established in 1974 as an outgrowth of the Tennessee Valley
Authority’s National Fertilizer Development Center (NFDC). The IFDC and
its predecessor, NFDC, developed the majority of fertilizer products currently
in use (International Fertilizer Development Center, 2010). In 2010, the
IFDC launched a “Virtual Fertilizer Research Center,” a global initiative to
link researchers across universities and research laboratories to create a new
generation of more effi cient fertilizers and soil fertilizer management technol-
ogies. The IFDC is fi nancially supported primarily by the (U.S. and foreign)
public sector.
Given the lack of data on R&D spending by fertilizer companies, we esti-
mate R&D spending by the industry as simply a fraction of sales. For
fertilizers manufactured by fi rms in high-income countries, we assume an
R&D-to-sales ratio of 0.25 percent. This is close to the average ratio for the
U.S. fertilizer industry reported by Wilcke and Williamson (1977) and that
reported by Yara International in 2006. For developing countries, we assume
the fertilizer industry’s R&D-to-sales ratio is half this rate, or 0.125 percent.
Evenson and Westphal (1995, table 37.1, p 2242-3) fi nd that average R&D
intensities of industries in developing countries are half or less the average
level in high-income countries. Production quantities of synthetic fertilizer
nutrients (nitrogen, phosphate, and potassium) by country are from FAO.
Value of production is estimated by multiplying production quantities by
representative global fertilizer prices for urea, superphosphate, and potash,
adjusted for nutrient content, as reported in the commodity price database
of Haver Analytics. To estimate R&D in 2006-08, we use average fertilizer
prices from 2002-05 instead of the infl ated actual market prices.5 Firms,
particularly in an industry that does not conduct much research, are unlikely
to change their R&D investment behavior in response to short-term price
uctuations. With these assumptions, we derive estimates of fertilizer R&D
for each manufacturing country.
Among all countries, China has by far the largest fertilizer industry in the
world and accounted for about one-fi fth ($22.5 billion) of total global R&D
in 2006 (table 4.2). North America (the United States and Canada) accounted
for about 28 percent of global fertilizer R&D. In several countries, govern-
ments still play a controlling role in domestic fertilizer markets, either by
maintaining direct ownership stakes in fertilizer companies or controlling
pricing, distribution, and trade in fertilizers. Among the fi ve largest fertilizer-
producing countries, government intervention predominates in two, China
and India. In China, however, privately held share ownership in fertilizer
companies is growing.
Our estimate of R&D spending by the U.S. fertilizer industry, $19.1 million
in 2006, is within the range of estimates provided by previous studies (table
4.3). Three studies conducted in the late 1970s estimated that fertilizer
industry R&D in the United States was $6 million to $10 million annually,
while a 1984 survey estimated the amount for that year at $35.3 million
(constant U.S. 2006 dollars). While the considerable range of these estimates
suggests uncertainty in the actual amount, all these studies fi nd that R&D by
the U.S. fertilizer industry is relatively small and represents a small share of
industry revenue.
5In nutrient-equivalent units, average
fertilizer prices over 2000-2005 (in
constant 2006 dollars) were $328 per
metric ton of N, $383 per ton of P2O5,
and $231 per ton of K20. These prices
are based on the market prices reported
by IMF (2009) for Urea (Ukraine),
Superphosphate (U.S. Gulf Ports) and
Potash (Canadian) by Haver Analytics.
Prices are adjusted for infl ation using
the U.S. Producer Price Index for
Finished Goods (Federal Reserve Bank
of St. Louis).
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References
Crosby, Edwin A. 1987. “Private Sector Agricultural Research in the United
States,” in V.W. Ruttan and C.E. Pray, (eds.), Policy for Agricultural
Research, Boulder, CO: Westview, pp. 395-409.
Economic Report of the President. 2009. U.S. Government Printing Offi ce.
Evenson, Robert E., and Larry E. Westphal. 1995. “Technological Change
and Technology Strategy,” in J. Behrman and T.N. Srinivasan (eds.),
Handbook of Development Economics, Vol. III, Amsterdam: Elsevier
Science, pp. 2209-2299.
Table 4.2
Research and development (R&D) by the global fertilizer industry
in 2006
Country or region
Dominant
sector R&D
Production
value Production
—— Mil. U.S. dollars —— Mil. tons
N,P,K nutrients
Leading countries
China State 22.0 21,525 45.9
U.S. Private 19.1 9,152 20.0
Canada Private 8.9 4,626 13.6
Russian Federation Private 6.5 6,492 16.2
India State 6.4 6,285 13.1
By region
North America 28.1 13,778 33.5
Europe-ME 32.9 26,166 62.1
Asia-Pacifi c 35.2 33,188 70.3
Latin America 3.0 2,929 6.5
Global total 99.1 76,060 172.5
Source: USDA, Economic Research Service. Production of nitrogen (N), phosphorus (P2O5),
and potassium (KCl) fertilizers are from Food and Agriculture Organization of the United Nations
(FAO). Value of production is estimated by multiplying FAO production quantities by global
fertilizer trade prices (nutrient basis) from Haver Analytics. R&D is estimated as 0.25 percent of
production value in Organisation for Economic Co-operation and Development and former Soviet
Union countries and 0.125 percent of production value in developing countries using average
global prices over 2002-05.
Table 4.3
Research and development (R&D) by the fertilizer industry
in the United States
Year Source Industry R&D expenditures
Million nominal
U.S. dollars
Million constant
U.S. dollars
1975 Wilcke & Williamson (1977) 3.4 10.5
1978 Malstead, reported in Ruttan (1982) 3.0 7.7
1979 Malstead, reported in Ruttan (1982) 3.0 7.1
1984 Crosby (1987) 22.2 38.3
2006 Present study 19.1 19.1
Current expenditures adjusted for infl ation by the U.S. Gross Domestic Product implicit price
defl ator (Economic Report of the President, 2009).
Source: USDA, Economic Research Service using studies listed in table.
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Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
Economic Research Service/USDA
Food and Agriculture Organization of the United Nations (FAO). FAOSTAT
database, Rome, Italy, available at: http://faostat.fao.org/ (accessed
October 2010).
Federal Reserve Bank of St. Louis. Producer Price Indexes, FRED Economic
Data, available at: http://research.stlouisfed.org/fred2/categories/31
(accessed September 2009).
Haver Analytics. Commodity Prices, International Financial Statistics. DLX
Databases, Haver Analytics, Inc., available at: www.haver.com/ (subscrip-
tion required).
Heffer, Patrick, and Michel Prud’homme. 2008. World Fertilizer and
Fertilizer Demand, Global Fertilizer Supply and Trade, 2008-2009,
International Fertilizer Industry Association, Paris.
Hernandez, Manuel A., and Maximo Torero. 2011. Fertilizer Market
Situation: Market Structure, Consumption and Trade Patterns, and
Pricing Behavior, IFPRI Discussion Paper 01058, International Food
Policy Research Institute, January.
Huang, Wen-Yuan, William McBride, and Utpal Vasavada. 2009. “Recent
Volatility in U.S. Fertilizer Prices,” Amber Waves, Vol. 7 Issue 1, U.S.
Department of Agriculture, Economic Research Service, available at:
www.ers.usda.gov/amberwaves/march09/meatures/mertilizerprices.htm.
Intergovernmental Panel on Climate Change (IPCC). 2007. Climate Change
2007: Mitigation of Climate Change, Contribution of Working Group
III to the Fourth Assessment Report of the Intergovernmental Panel on
Climate Change, B. Metz, O.R. Davidson, P.R. Bosch, R. Dave and L.A.
Meyer (eds.), Cambridge, UK: Cambridge University Press, available at
www.ipcc-wg3.de/activity/assessment-reports/ar4.
International Fertilizer Industry Association (IFA). 2010. IFA Fertilizer
Database, available at: www.fertilizer.org/ifa/ifadata/search (accessed
April 2011).
International Fertilizer Development Center (IFDC). 2010. Virtual Fertilizer
Research Center, IFDC, available at: www.ifdc.org/Alliances/VFRC.
International Plant Nutrition Institute (IPNI). IPNI Website, available at:
www.ipni.net/ (accessed November 2009).
Nature. 2009. “The Shale Revolution: The Vast Reserves of US Natural
Gas Must Be Used Judiciously To Ease the Transition to Clean Energy,”
Editorial, Vol. 460 (7255) July 30.
Park, Murray. 2001. The Fertilizer Industry, Cambridge, UK: Woodhead
Publishing.
PotashCorp. 2007. Overview of PotashCorp and Its Industry 2007,
PotashCorp, Saskatoon, Canada, available at: www.potashcorp.com.
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Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
Economic Research Service/USDA
PotashCorp. 2008. Overview of PotashCorp and Its Industry 2008,
PotashCorp, Saskatoon, Canada, available at: www.potashcorp.com.
Ruttan, Vernon W. 1982. Agricultural Research Policy, Minneapolis:
University of Minnesota Press.
Tomich, Thomas P., Peter Kilby, and Bruce Johnston. 1995. Tra nsforming
Agrarian Economies: Opportunities Seized, Opportunities Missed, Ithaca,
NY: Cornell University Press.
U.S. Department of Agriculture, Economic Research Service (USDA/ERS).
2006. Agricultural Resources and Environmental Indicators, Economic
Information Bulletin 16, available at: www.ers.usda.gov/publications/arei/
eib16/
Wilcke, H.G., and J.L. Williamson. 1977. A Survey of U.S. Agricultural
Research by Private Industry, Agricultural Research Institute.
Yara International. 2007. Financial Review 2007, Oslo, Norway, available at:
www.yara.com.
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Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
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CHAPTER 5
Farm Machinery Research and Development
by Private Industry
David Schimmelpfennig and Keith O. Fuglie
Since the 19th century, private-sector fi rms and entrepreneurs have led
the development of new farm machinery, with public institutions investing
relatively little in this area. Private-sector makers of machinery capture
the gains from their innovations through sales of their products, and the
patent system protects and enforces their rights as innovators. As in other
agricultural input sectors, large multinational corporations are engaged in
developing and marketing farm machinery in global markets. While small-
and medium-sized fi rms (as well as individual inventors and farmers) have
historically been a source of innovation in farm machinery, their share
of the global market appears to have signifi cantly declined over the past
decade. Consolidations and mergers have led to fewer and larger companies
producing for global markets. The U.S.-based company John Deere is the
worlds largest manufacturer of farm machinery, with sales of over $16.5
billion in 2008. About 40 percent of these sales were to markets outside the
United States and Canada. In the U.S. market, European and Asian fi rms are
also major suppliers of farm machinery. Between 1994 and 2009, the market
share of the four largest farm machinery manufacturers rose from 28 to 50
percent of total global sales (see table 1.7).
Global Farm Machinery Markets and Factors
Affecting Farm Mechanization
Industry sources estimate that the global market for farm machinery exceeded
$70 billion per year by 2005 (Freedonia, 2006). In real terms, sales of farm
machinery are estimated to have grown by about 3 percent per year since 2000,
with growth strongest in the Asia-Pacifi c region (table 5.1). Farm tractors make
up the largest share, accounting for nearly 30 percent of global sales of new
farm equipment. Harvesting and haying machinery make up another 22 percent
of the global market. Equipment for such uses as planting, fertilizing, plowing,
cultivating, irrigating, and spare parts accounted for the remainder.
The pattern and speed of farm mechanization is heavily infl uenced by rela-
tive scarcities of farm land and labor, the demand for labor from the nonfarm
Table 5.1
The global market for agricultural machinery
Year
Total global
farm machinery
sales
By type By region
Far m
tractors
Harvesting
& haying
equipment Other
North
America
Europe,
Africa &
Middle East Asia-Pacifi c
Latin
America
Million constant 2006 U.S. dollars
1995 62,091 18,344 13,901 29,846 18,426 21,307 19,642 2,716
2000 61,397 18,713 12,778 29,907 16,855 22,824 18,719 2,999
2005 72,486 20,941 16,325 35,221 22,025 22,722 24,668 3,072
2010 82,858 24,307 18,018 40,533 22,450 23,994 32,658 3,756
Source: USDA, Economic Research Service using Freedonia (2006). Annual expenditures adjusted for infl ation using the U.S. Gross Domestic
Product implicit price defl ator (Economic Report of the President, 2009).
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sector, and the aggregate demand for agricultural products (Hayami and
Ruttan, 1985). Although mechanization may not directly lead to crop yield
increases, it can contribute signifi cantly to raising total factor productivity in
agriculture by saving labor costs as well as reducing the resources required
for maintaining draft animals. In developing countries, power-intensive
operations like plowing, water pumping, grain milling, and transporting crops
to markets tend to be mechanized fi rst, with control-intensive operations like
harvesting and crop husbandry shifting to mechanized techniques only when
wages are high or rapidly rising (Binswanger, 1986). Mechanization also
facilitates growth in farm size, and larger farms tend to adopt new forms of
machinery much faster than small farms.
Farm Machinery Market Structure, Innovation,
and R&D Spending
The global farm machinery industry underwent signifi cant structural
changes during the latter half of the 20th century, with the largest fi rms
growing their market share, primarily through mergers and acquisitions.
The four largest fi rms increased their share of the global farm machinery
market from about 28 percent in 1994 to 50 percent by 2009 (see table
1.7). By 2009, at least 10 companies worldwide had annual sales of farm
machinery valued at over $1 billion; together, these companies accounted
for about one-third of the global market.
While large fi rms account for most of the formal R&D by the farm
machinery industry, small- and medium-sized fi rms play an outsized role
in innovation. Evenson (1982), basing his analysis on the patterns of patent
ownership for farm machinery innovations in the United States, characterized
the farm machinery industry as one in which large fi rms have concentrated
on making refi nements and achieving economies of scale in the manufacture
of innovations originating from small-sized entrepreneurs. Case studies from
other countries have also demonstrated the important role of small, local
entrepreneurs in developing adaptive innovations of farm machinery, such as
in the emergence of the power tiller industry in Thailand (Wattanutchariya,
1983) and water pump set manufacturing in China (Huang et al., 2007).
Inventive work on a particular operation may precede its widespread use by
decades, and invention often reaches a peak during the initial adoption cycle
when many small fi rms enter with alternative designs (Evenson, 1982). The
most successful of these fi rms either grow or are bought up by larger fi rms
that can offer scale economies in manufacturing and distribution. Recently,
this pattern has been seen in the rapidly expanding demand for drip- and
micro-irrigation technologies in response to growing water scarcity in some
regions of the world. During 2006-08, both John Deere and an Indian fi rm,
Jain Irrigation Systems, acquired a number of U.S. and foreign fi rms special-
izing in irrigation technology. By utilizing their global manufacturing and
distribution networks, the two fi rms established themselves as global leaders
in agricultural irrigation technology.
Fifteen companies worldwide had over $500 million in farm machinery sales
in 2006 (table 5.2). The four leading farm machinery companies develop and
produce multiline products, including tractors, harvesting equipment, and
implements, whereas second-tier companies are more likely to specialize
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in certain types of machinery. Three of the four leading manufacturers also
produce nonfarm machinery, such as earth-moving and construction equip-
ment or machines for home-gardening and lawn care. These companies
report research intensities ranging between 2.1 and 3.7 percent of total farm
and nonfarm machinery sales. For the purpose of estimating farm machinery
R&D, we apply this ratio to the companies’ reported sales of farm machinery.
Second-tier companies are characterized by a wider range of research intensi-
ties as well as less complete data available on R&D spending. But none of the
rms on which we have data exceeded 4 percent as an R&D-to-sales ratio,
and some had less than 1 percent. For 11 fi rms from high-income countries
for which we have data on farm machinery sales and R&D expenditures, the
average research intensity was 2.40 percent. For six developing-country fi rms,
the average research intensity was 0.82 percent. To derive an estimate of
R&D spending by second-tier fi rms on which we lacked data, we multiplied
their sales by the average R&D intensity ratio for this group of fi rms (2.40
percent of sales for fi rms from high-income countries and 0.82 percent of
sales for fi rms from developing countries) to derive industry-level estimates
of R&D spending.
Farm machinery sales and R&D expenditure estimates in 2006 are reported
for different market segments in table 5.3. The top part of the table shows
sales and R&D by size of fi rm: the totals for the four leading manufacturers
and second-tier companies with at least $100 million in farm machinery
sales. “Other manufacturers” include all nonlisted companies, and their
total sales is simply the difference between the estimate of total global sales
Table 5.2
Companies with over $500 million in farm machinery sales in 2006
Company
Country of
incorporation
Far m
machinery
sales
Total
equipment
sales R&D / sales
Ag machinery
product lines
—— Mil. U.S. dollars —— Percent
Leading multiline farm machinery manufacturers
Deere U.S. 10,232 19,884 3.65 Multiline
CNH Netherlands 7,809 12,115 3.03 Multiline
AGCO U.S. 5,435 5,435 2.35 Multiline
Kubota Japan 5,103 5,796 2.13 Multiline
Second-tier farm machinery manufacturers
CLAAS Germany 2,954 2,954 4.27 Harvesters, balers
Yanmar Co. Japan 1,440 1,440 n.a. Tractors
Iseki Japan 1,391 1,391 2.60 Multiline
SAME Deutz-Fahr Italy 1,303 1,303 2.50 Tractors, combines
Kuhn Group Switzerland 976 2,622 3.13 Implements
ARGO Group Spa Italy n.a. n.a. n.a. Multiline
Minsk Tractor Works Belarus 937 937 n.a. Tractors
First Tractor Co., Ltd. China 630 769 1.01 Multiline
Kverneland ASA1Norway 569 569 3.77 Multiline
Mahindra & Mahindra India 575 2,086 1.22 Tractors, implements
TAFE India 568 n.a. n.a. Tractors
Total for listed companies 39,921 57,300 70.3
Global market total 73,579 6.5
n.a. = not available.
1Kverneland ASA was acquired by Kuhn Group in 2009.
Source: USDA, Economic Research Service using corporate websites and annual fi nancial reports.
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and the reported sales for fi rst and second-tier companies in table 5.2. This
category includes virtually hundreds of small and medium-sized companies,
many with no formal R&D departments but which nevertheless are sources
of innovation for the farm machinery industry. To get an estimate of R&D
spending for this group, we assume an R&D-to-sales ratio of 0.82 percent
(the average for second-tier fi rms from developing countries). Taken together,
our estimate of total R&D by the global farm machinery industry in 2006
is $1.48 billion, with 57 percent of this attributed to the four leading farm
machinery manufacturers.
Geographically, fi rms based in the United States, the EU, and Japan are the
global leaders in farm machinery sales and R&D spending. As in the case of
other agricultural input industries, many of these fi rms produce machinery
for the global market and locate manufacturing and R&D facilities in several
countries. Among developing countries, India is an important manufac-
turer, especially of small four-wheel tractors, with several large (second-tier)
companies that produce machinery for both the Indian and global market.
China is also a leading manufacturer of farm machinery, although the
Chinese farm machinery industry appears to be dominated more by small-
and medium-sized fi rms.
Farm Machinery R&D in the United States
Estimates of expenditures by U.S. manufacturing companies on farm
machinery R&D were reported periodically by the National Science
Foundation from the 1960s through 1997.1 In addition, data from at least two
independent surveys of private agricultural research in the 1970s included
estimates of farm machinery R&D. Based on these sources and fi ndings
from this ERS study, private farm machinery R&D rose between the 1960s
and 1970s, peaking at about $627 million (in 2006 U.S. dollars) in the mid-
1The National Science Foundation’s
(NSF) survey of industry R&D in-
cluded a question on R&D by “product
eld,” in which equipment manufactur-
ers would indicate their expenditures
on farm machinery R&D, if any. The
NSF discontinued the “product fi eld
question after 1997.
Table 5.3
Farm machinery research and development (R&D) by the private sector
in 2006
Market segment Companies
Far m
machinery
R&D
Far m
machinery
sales
Average
R&D / sales
Number — Mil. U.S. dollars — Percent
By company classifi cation
Leading multiline farm machinery
companies 4 847 28,479 3.0
Second-tier farm machinery
manufacturers 30 407 16,841 2.4
Other manufacturers (not listed) n.a. 9 375 2.4
By region
North America n.a. 575 23,054 2.5
Europe-ME n.a. 581 22,357 2.6
Asia-Pacifi c n.a. 311 25,040 1.2
Latin America n.a. 9 3,129 0.0
Global total, all manufacturers n.a. 1,470 73,579 2.0
n.a. = not available.
Sources: USDA, Economic Research Service estimates using data from Freedonia (2006), com-
pany annual reports, interviews with company representatives.
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1970s, then fell below $400 million in the 1990s before recovering to over
$500 million again by 2006 (table 5.4). Part of the renewed growth in farm
machinery R&D by U.S. fi rms may be due to several factors: growing global
demand for labor-saving equipment; the development of precision agriculture
with global positioning systems (GPS), yield monitors, and auto-steer guid-
ance systems; and the need to meet stricter regulatory standards, such the
U.S. Environmental Protection Agencys air pollution Tier 4 standards for
off-road diesel equipment.
References
Binswanger, Hans P.1986. “Agricultural Mechanization: A Comparative
Historical Perspective,The World Bank Research Observer 1 (January):
27-56.
Economic Report of the President. 2009. U.S. Government Printing Offi ce.
Evenson, Robert E. 1982. “Government Policy and Technological Progress
in U.S. Agriculture,” in Richard Nelson (ed.), Government Support
of Technological Progress: A Cross Industry Analysis, New York:
Pergamon Press.
Freedonia, 2006. World Agricultural Equipment to 2010, Report Number
2089, Freedonia Group, Cleveland, OH.
Huang, Qiuqiong, Scott Rozelle, and Dinghuan Hu. 2007. “Pump-Set
Clusters in China: Explaining the Organization of the Industry That
Revolutionized Asian Agriculture,” Asia-Pacifi c Development Journal 14
(December): 75-105.
Table 5.4
Farm machinery research and development (R&D) by U.S. companies
Year Source1Industry R&D expenditures
Mil. U.S.
dollars
Mil. constant
2006 U.S.
dollars
1960-64 National Science Foundation 73.0 395.4
1965-69 National Science Foundation 98.6 478.7
1970-74 National Science Foundation 104.6 396.9
1975-79 National Science Foundation 205.5 553.5
1975 Wilcke & Williamson (1977) 203.8 627.1
1978 Malstead, reported in Ruttan (1982) 225.0 575.1
1979 Malstead, reported in Ruttan (1982) 225.0 530.9
1981, 1983 National Science Foundation 284.0 534.7
1985, 1987,1989 National Science Foundation 377.2 601.3
1991, 1993 National Science Foundation 291.7 397.6
1995, 1997 National Science Foundation 280.0 347.6
2006 Present study 513.2 513.2
1The National Science Foundation stopped reported R&D for the U.S. farm machinery industry
after 1997.
Current expenditures adjusted for infl ation by the U.S. Gross Domestic Product implicit price
defl ator (Economic Report of the President, 2009).
Source: USDA, Economic Research Service using studies listed in the table.
79
Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
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Hayami, Y., and Ruttan, V.W. (1985). Agricultural Development: An
International Perspective, Baltimore: Johns Hopkins University Press.
National Science Foundation, Division of Science Resource Studies (various
issues). Research and Development in Industry.
Ruttan, Vernon W. 1982. Agricultural Research Policy, Minneapolis:
University of Minnesota Press.
Wattanutchariya, S. 1983. “Economic Analysis of the Farm Machinery
Industry and Tractor Contractor Business in Thailand,” in Consequences
of Small-Farm Mechanization, Los Banos, Philippines: International Rice
Research Institute, pp. 39-50.
Wilcke, H.G., and J.L. Williamson. 1977. A Survey of U.S. Agricultural
Research by Private Industry, Agricultural Research Institute.
80
Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
Economic Research Service/USDA
CHAPTER 6
Private Research and Development
for Animal Health
Paul Heisey and Keith O. Fuglie
Signifi cant productivity gains in agriculture have been achieved through
improvements in animal husbandry and health. The animal health industry
has contributed in this area by developing and supplying new vaccines, medi-
cated feeds, anti-infectives, paracitides, and other pharmaceuticals that have
reduced animal mortality and morbidity and raised growth and reproductive
rates. The animal health industry is research intensive—globally, it invests
more than 8 percent of its net sales in R&D, with leading fi rms investing at
even higher levels. The industry is a component of one of the world’s largest
and most research-intensive industries, the pharmaceutical industry, and
several leading companies invest in both human and animal health. In recent
years, animal health product sales have ranged from 2.5 to 3.0 percent of
global pharmaceutical sales.
Researchers estimating private R&D for agricultural animal health face
two major challenges: many of the leading pharmaceutical companies do
not report animal R&D expenditures separately from total R&D spending
(which, in most cases, is dominated by human health R&D); and second,
even when reasonable estimates can be derived of company R&D spending
for animal health, it may be impossible to distinguish between R&D
for food animals versus nonfarm (companion and equine) animals. The
approach in this study is to rely on company and industry information to
estimate total animal health R&D expenditures and then apportion this
R&D among food and nonfood animals according to species market shares
of product sales.
In recent years, structural changes in the global pharmaceutical industry,
including mergers, have affected the animal health industry. In 2009, the
animal health industry underwent major structural realignment, with the
number of fi rst-tier companies (those with at least $1 billion in annual
sales of animal health products) falling from eight to six. To assess the
effects of recent mergers on concentration and R&D spending in the
animal health industry, we have extended our data period to the end of
2009. We also report on some other mergers and acquisitions that took
place in 2010 and 2011, but these involved second- and third-tier compa-
nies and are unlikely to signifi cantly alter the level of concentration in the
global animal health industry.
We fi nd that globally, private-sector growth in animal health R&D over
the past decade was mostly for nonfood animals. Spending on food-
animal health R&D (in constant 2006 U.S. dollars) declined from over
$900 million per year in the mid-1990s to under $800 million annually
during 1999 to 2007 before recovering somewhat to $890 million/year
over 2008-10. This trend refl ects the stagnant market for food-animal
health products. Mergers and acquisitions among major pharmaceutical
companies have led to a relatively high degree of concentration in the
global animal health market, with the four largest fi rms accounting for
more than 50 percent of global sales in 2009.
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Global Market for Animal Health Products
Global sales of animal health products
Various sources place the global market for animal health products between
$16 billion and $18.5 billion in 2006.1 While the overall market for animal
health products rose from just $10.8 billion in 1991 to nearly $17.5 billion by
2009 (constant 2006 U.S. dollars), most of this growth was in the nonfood-
animal market ( g. 6.1). The food-animal share of the global market for
animal health products declined from 80 percent in the early 1990s to about
58 percent by 2009. Sales of animal health products for food-animal species
have fl uctuated somewhat over time but in constant dollars have ranged
between $8 billion and $10 billion since the early 1990s.
Breakdown by product types and species
The three principal product types that we include in the market for animal
health products are pharmaceuticals (including anti-infectives and paracit-
ides), biologicals (primarily vaccines but also including diagnostic products),
and medicated animal feeds (primarily antibiotics).2 Pharmaceuticals are by
far the largest component of this market, with sales of about $11.7 billion in
2009, although sales of biologicals rose more rapidly between 2001 and 2009
(table 6.1). Medicated animal feed is the smallest segment of this market
(sales of $2.2 billion in 2009) and has shown the slowest rate of growth
over the past decade. The use of antibiotics in animal feed has come under
increased scrutiny due to concerns about microbial resistance, and in the EU,
its use in feed for growth promotion has been phased out.
As previously mentioned, food animals account for just under 60 percent
(about 44 percent in the United States) of the total market for animal health
products. In 2009, animal health product sales for cattle (dairy and beef)
made up about 25 percent of the total market, pigs nearly 18 percent, and
poultry about 11 percent (table 6.1).
1In this report, we use estimates
of global market sales of animal
health products from Vetnosis (an
industry consulting fi rm; formerly,
Wood Mackenzie) as reported in the
International Federation for Animal
Health annual reports. Vetnosis
reported global market sales of $16.1
billion in 2006. PhillipsMcDougall,
another industry source, estimated this
global market to be $17.5 billion, while
Animal Pharm placed this estimate at
$18.6 billion in 2006. While industry
sources vary somewhat in their esti-
mates of total global sales for animal
health products, the estimates all show
similar trends in sales over time and
similar market shares for different
product types and animal species.
2We include medicinal feed additives
but do not include nutritional feed ad-
ditives, such as vitamins, in our animal
health total. Nutritional feed additives
are covered in the chapter on animal
nutrition. We estimate the value of the
global market for nutritional feed addi-
tives to be $4.4 billion in 2006.
Figure 6.1
Global sales of animal health products
Million constant 2006 U.S.$
Source: USDA, Economic Research Service. Animal health product sales from Vetnosis, as
reported in International Federation for Animal Health (various annual reports) and adjusted for
inflation by the U.S. Gross Domestic Product implicit price deflator (Economic Report of the
President, 2009).
1991 93 95 97 99 2001 03 05 07 09
0
2
4
6
8
10
12
Food animals
Companion & equine animals
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Animal Health Industry Structure
The structure of the animal health industry can be described various ways,
including by size of fi rm. In this chapter, fi rst-tier animal health companies
are those with at least $1 billion in animal health product sales in 2009,
second-tier fi rms are those with between $300 million and $999 million
in sales in 2009, and third-tier fi rms as those with less than $300 million
in animal health product sales in 2009. A fourth category, “biotechnology
companies with animal health applications,” comprises companies that
mainly provide technology services to other fi rms in the industry. Industry
structure may also distinguish between “discovery” fi rms and “generics”
rms (the latter includes fi rms that do not develop their own products but
produce off-patent products or products under license from developers).
Discovery fi rms tend to be much more research intensive than generics fi rms.
All fi rst-tier fi rms and most second-tier fi rms fall into the discovery fi rm cate-
gory. A few fi rms specialize in products for food- or nonfood-animal species,
although most of the larger fi rms produce products for both groups of species.
Finally, industry structure may include a ranking of fi rms by their overall
presence in the pharmaceutical industry.
First-tier animal health companies
Table 6.2 captures signifi cant restructuring that occurred in the global animal
health industry in 2009, when two fi rst-tier companies acquired two other
rst-tier companies, further increasing concentration in the industry. Animal
health is not the primary business of any of the fi rst-tier companies listed in
the table and, at most, contributes 10 percent of each fi rm’s total pharmaceu-
tical sales.
Over the past two decades, the largest fi rms set the pace in merger and acqui-
sition activity in the animal health industry (fi g. 6.2). In the 1990s, a number
of other large pharmaceutical companies, among them Rhone-Poulenc,
Table 6.1
Global market for animal health products
By product type
Value of sales Growth in
sales over
2001-092001 2006 2009
———— Mil. U.S. dollars ———— Percent
per year
Pharmaceuticals 7,018 10,410 11,700 6.4
Biologicals 2,389 3,660 4,700 8.5
Medicated feeds 1,635 1,995 2,200 3.7
Total 11,050 16,065 18,600 6.5
By species Market share
Percent
Food Animals 64.0 58.9 58.1
Cattle 28.2 27.2 25.3
Sheep 5.1 4.8 4.3
Pigs 17.9 16.1 17.7
Poultry 12.8 10.8 11.3
Nonfood animals & other 36.0 41.1 41.9
Source: USDA, Economic Research Service using Vetnosis, as reported in International
Federation for Animal Health (various annual reports).
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AkzoNobel, and Mallinckrodt, had substantial animal health sales. Rhone-
Poulenc, a French chemical-pharmaceutical company, was a predecessor
of Sanofi -Aventis. In 1997, this company and Merck formed a joint venture
for their animal health segments, Merial. In 2009, Merck sold its interest in
Merial to Sanofi -Aventis, which then became the sole owner of Merial, and
in 2009, Schering-Plough, another leading fi rm in the animal health industry,
merged with Merck. In 2007, Schering-Plough acquired another leading
animal health company, Intervet. With the 2009 merger of Schering-Plough
and Merck, Merck became the new parent company of the Intervet/Schering-
Plough Animal Health subsidiary. In 2010, Sanofi -Aventis and Merck consid-
ered merging their animal health companies but later abandoned the idea.
Table 6.2
Major animal health companies
Company1
Animal health
sales in 2006
Animal health
sales in 2009
Animal health
share of total
pharmaceutical
sales
Rank of parent
rm in global
pharmaceutical
sales in 2010
—— Million U.S. dollars —— Percent Rank
1st tier companies (> $1 billion in animal health sales)
Pfi zer 2,311 2,764 5.5 1
Intervet/Schering-Plough (parent: Merck)31,413 2,741 10.0 --2
Merial (parent: Sanofi -Aventis)42,195 2,554 6.3 6
Bayer 1,137 1,357 9.3 14
Elanco (parent: Eli Lilly) 876 1,207 5.5 11
Novartis 940 1,101 2.5 4
Fort Dodge (acquired by Pfi zer from Wyeth in 2010) 936 --2--2--2
Schering-Plough (acquired by Merck in 2009) 910 --2--2--2
2nd tier companies ($300 -$999 million in animal health sales)
Virbac 505 649 100.0
Boehringer Ingelheim Vetmedica (BIV) 470 847 4.8 12
Ceva Sante Animale 301 413 100.0
Alpharma Animal Health (acquired by Pfi zer in 2010) 347 359 20.2
Vetoquinol 266 350 100.0
Lohmann Animal Health (parent: PH Wesjohann Group) n.a. n.a. 100.0
Industry aggregate data for 2009 Companies
Animal health
R&D
Animal health
sales R&D/Sales
Number —— Million U.S. dollars —— Percent
Total for 1st tier companies 6 1,149 11,724 9.8
Total for 2nd tier companies 5 206 2,490 8.3
Total for all others n.a. 132 4,386 3.0
Global total - all animal health 1,487 18,600 8.0
Global total - food animal health 863 10,800 8.0
n.a. = not available.
1The fi rst- and second- tier companies listed above are all classifi ed as “discovery” companies except for Alpharma Animal Health, which is classi-
ed as a “generics” company.
2These companies had merged or been acquired by other fi rms by 2010.
3Intervet only in 2006 when it was a subsidiary of AkzoNobel. Schering-Plough acquired Intervet in 2007 to form Intervet/Schering-Plough. Merck
acquired Intervet/Schering-Plough in 2009.
4Merial was a 50-50 joint venture between Merck and Sanofi -Aventis until 2009, when Merck sold its interest in Merial to Sanofi -Aventis.
Source: USDA, Economic Research Service. Animal health sales and R&D fi gures compiled from company fi nancial reports and Animal Pharm
Reports (2007); global ranking of pharmaceutical fi rms compiled from Fortune (2010).
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Another major merger occurred in 2009 when Pfi zer acquired Wyeth
and merged its animal health business with Wyeths Fort Dodge Animal
Health subsidiary. In 2010, Pfi zer acquired another second-tier animal
health company, Alpharma. By 2010, Pfi zer’s annual sales of animal health
products exceeded $3.5 billion, making it by far the worlds largest animal
health company.
Second-tier companies
Unlike all of the fi rst-tier animal health companies that are subsidiaries of
large pharmaceutical companies, many second-tier companies specialize
in animal health. Virbac, Ceva Sante Animale, and Vetoquinol are three
independent animal health discovery companies with annual sales between
$300 million and $1 billion. Lohmann Animal Health, which develops and
sells poultry vaccines, may also be a second-tier company: in 2010, its parent
company, the PH Wesjohann Group, reported $775 million (585 million
Figure 6.2
Evolution of major animal health companies
Source: USDA, Economic Research Service using company websites.
Major companies in 2011
Pfizer (USA)
Fort Dodge (2009)
(parent company: Wyeth)
Pharmacia & Upjohn (2000)
Alpharma (2010)
(parent company: King Pharmaceuticals)
Intervet/Schering-Plough (Neth.)
(parent company: Merck, USA)* Schering-Plough (2009)
Rhone-Poulenc (1997)
Merck (1997): formed Merial, a 50-50 joint venture with Sanofi-Aventis
until fully acquired by Sanofi-Aventis in 2009
Janssen Animal Health (2011)
(parent company: Johnson & Johnson)
Mallinckrodt (1997)
Hoescht (1999)
Intervet (2007)
(parent company: Azko Nobel)
Elanco (USA)
(parent company: Eli Lilly, USA)
Merial (France)
(parent company: Sanofii-Aventis,
France)*
Novartis (Switzerland)
Bayer (Germany)
Ciba-Geigy (1996)
Sandoz (1996)
Key legacy companies
(year of merger or acquisition in parentheses)
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euros) in animal health and nutrition sales, which includes nutritional feed
products along with vaccines and other animal health products. We estimate
that second-tier companies spent at least $218 million on animal health R&D
in 2009 (about 14 percent of the private-sector total) and had a research inten-
sity of 8.3 percent of sales, compared with 9.8 percent for fi rst-tier companies
(table 6.2).
Third-tier companies
Data are considerably more diffi cult to obtain for third-tier animal health
companies, defi ned here as fi rms with annual global sales of less than $300
million. Using information from industry sources, we identifi ed over 100 third-
tier manufacturers of animal health care products and estimate their combined
market sales to be $4.3 billion in 2006.3 Of these companies, at least 30 are
believed to invest in animal health R&D, although on average they spend less
on R&D (as a percentage of sales) than either fi rst- or second-tier fi rms. Based
on observations from a limited number of fi rms in this category, we assume
that third-tier fi rms spend an average of 3 percent of sales on R&D. Applying
this research intensity to the total sales of these fi rms we derive an estimate of
animal health research expenditures for this group of fi rms.
Biotechnology companies with animal health applications
In this study, we identifi ed over 20 biotechnology companies that had animal
health applications in 2006. Only four reported animal health as their main
business. Most of these companies were relatively small, privately held,
and appeared to be mainly technology service providers to other fi rms.
Insuffi cient data made it diffi cult to estimate animal health R&D expendi-
tures for these companies, so we omit these in our total R&D estimate for the
animal health industry.
Concentration in the global animal health industry
The global pharmaceutical industry has been characterized by considerable
merger and acquisition activity for at least the past two decades (CBO, 2006).
Of the top 10 global pharmaceutical companies in 2008, only 2 have not been
involved in signifi cant horizontal merger activity.4 Pharmaceutical company
mergers or acquisitions have also affected the structure of the animal health
industry, as all fi rst-tier and several second- and third-tier companies are
subsidiaries of large pharmaceutical companies. Thus, the principal reasons
for the growing consolidation in the animal health industry are the factors
driving consolidation in the larger pharmaceutical industry.5
The data collected for this study show that concentration in the animal
health industry has increased since 1994, with the global Herfi ndahl index
rising from 510 to 827 between 1994 and 2009 (see table 1.7). With the
recent mergers and acquisitions that occurred among the fi rst-tier rms
between 2006 and 2010, this ratio rose from 44 percent to just over 51
percent. This growth would place the animal health industry second to only
the animal genetics industry in terms of four-fi rm concentration among
the agricultural input industries considered in this report (see chapter 1 for
more discussion).
3We have been able to put together
time series estimates for sales fi gures
for both fi rst- and second-tier animal
health companies and their legacy
companies. Combining these data with
estimates of total global sales, we can
derive an estimate of total sales fi gures
for third-tier companies by subtracting
rst- and second-tier company sales
from the global total.
4Horizontal mergers take place
between fi rms producing similar goods
or services. They may be contrasted
with vertical mergers, which take place
between fi rms at different points in a
production process, for example when
a large fi rm buys out fi rms that were
formerly its suppliers.
5Danzon et al. (2007) examine
a number of hypotheses regarding
merger and acquisition activity in the
pharmaceutical industry. They fi nd that
among larger fi rms, mergers are a re-
sponse to excess capacity arising from
patent expirations and gaps in a fi rm’s
product pipeline. For small fi rms,
mergers are primarily an exit strategy
in response to fi nancial trouble. The
study does not fi nd economies of scale
in R&D to be a signi cant factor in
explaining mergers.
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Industry Investment in Animal Health R&D
To distinguish between the food and nonfood animal segments, we estimate
R&D spending on food-animal health by apportioning total R&D according
to the share of food animals in total product sales. This approach could over-
or understate actual spending on agriculturally related R&D by the industry.
Given the time lag between R&D spending and new product introductions,
we would expect fi rms to allocate their R&D resources according to antici-
pated future market demand for new products. Since the market share of
nonfood animal products has been rising over the last two decades, fi rms may
be allocating a larger share of their current R&D to nonfarm-animal markets
in response to this rising demand. On the other hand, many of the new prod-
ucts being introduced into nonfood-animal health markets are direct applica-
tions of human health care drugs that may not be relevant for food animals,
such as treating the health conditions of aging companion animals. With a
higher degree of “spillover” from human health R&D to the nonfood market
segment, more of the animal-specifi c discovery R&D may in fact be directed
to the unique problems faced by food animals. At present, we have insuffi -
cient information to determine which of these biases, if either, are signifi cant,
and so rely on this simple apportioning.
Globally, private spending on animal health R&D increased from $806
million in 1994 to $1,449 million in 2010 (table 6.3). Spending on food animal
health R&D grew at a substantially slower rate, rising from $645 million
(or 80 percent of the total) in 1994 to $855 million (59 percent of the total)
Table 6.3
Research and development (R&D) spending and research intensity by the global animal health industry
Year
Total private R&D
spending for animal
health
Private R&D
spending for food
animal health
Private R&D
spending for food
animal health
Animal health
research
intensity
Animal health
research intensity
by discovery fi rms
—— Million nominal U.S. dollars ——
Million constant 2006
U.S. dollars —— R&D/Sales (%) ——
1994 829 664 858 8.6 11.8
1995 973 778 986 9.2 11.1
1996 985 767 953 9.1 9.6
1997 989 749 915 8.9 9.7
1998 977 720 870 8.7 9.8
1999 934 670 798 8.3 9.4
2000 937 655 763 8.5 9.7
2001 925 592 674 8.4 9.7
2002 933 590 662 8.2 10.2
2003 1,078 663 727 8.6 11.5
2004 1,190 712 760 8.7 11.0
2005 1,267 757 781 8.5 10.7
2006 1,349 794 794 8.4 10.4
2007 1,401 816 793 7.8 9.9
2008 1,638 960 913 8.5 11.6
2009 1,602 930 876 8.6 9.4
2010 1,595 941 878 8.6 9.8
Source: USDA, Economic Research Service. R&D spending estimated from company fi nancial reports and as reported in Animal Pharm Reports
(2003, 2005, 2006a, 2007). R&D spending for food animal health estimated by multiplying total R&D spending by the market share of food animals
in total sales of animal health products. Market sales of animal health products from Vetnosis, as reported in International Federation for Animal
Health (various annual reports). Annual expenditures converted into constant 2006 U.S. dollars using the U.S. Gross Domestic Product implicit
price defl ator (Economic Report of the President, 2009).
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in 2010. In infl ation-adjusted dollars, however, private R&D on food animal
health appears to have declined since the mid-1990s, from over $900 million
annually in 1995-96 to only $640 million per year by 2002, before recovering
to around $800 million per year since 2006 (constant 2006 U.S. dollars).
This lack of long-term growth in private-sector animal health R&D spending
directly refl ects the stagnant market for food-animal health products.
The United States is the worlds largest market for animal health products
for both food and nonfood animals (with nonfood-animal health products
accounting for about 56 percent of U.S. market sales). Companies based in
the United States conduct about 42 percent of the R&D by the global animal
health industry (table 6.4). EU countries (the UK, Germany, the Netherlands,
France, and Switzerland especially) account for 55 percent of global animal
health R&D. Outside of these regions, companies based in China, Japan,
India, Brazil, and Israel are also making signifi cant investments in animal
health R&D, but their combined share of global private animal health R&D is
probably under 5 percent. U.S. and EU-based companies are also performing
R&D for animal health markets in other regions of the world. Several of these
companies have located research laboratories and have substantial product
sales in these countries.
Our estimate of animal health R&D spending by U.S. companies, $546
million in 2006, compares favorably with industry estimates. From its annual
survey of member companies, PhRMA reports that R&D expenditures for
veterinary pharmaceuticals were $496.3 million in 2006 (Pharmaceutical
Research and Manufacturers of America, 2008). Of this total, $356.4 million
was spent in the United States and $139.9 million was spent by these fi rms
abroad. Another U.S. industry group, the Animal Health Institute, reports
that its member companies spent $663 million in animal health R&D in 2006
(Animal Health Institute, 2007). The samples of companies included in these
surveys are not identical and may vary from year to year, so these estimates
are not directly comparable with ours. Nonetheless, all three estimates show
a similar trend in animal health R&D since 1994, with our estimate tracking
somewhat closer to PhRMAs ( g. 6.3). We conjecture that most of the
growth in animal health R&D spending in the United States since 2000 has
been directed at nonfood-animal species.
Table 6.4
Private animal health research and development (R&D) by region in 2006
Sales and R&D by
companies with HQ in:
Companies
with sales
> $50 million
R&D
spending for ani-
mal health
Sales of animal
health products by
these companies R&D/sales
Industry
R&D share
Industry
market share
Number ——— Million U.S. dollars ——— ——————— Percent ———————
North America 8 562 6,145 9.1 42 38
Europe-Middle East 18 746 5,417 13.8 55 34
Asia-Pacifi c 19 39 2,676 3.0 3 17
Latin America 2 3 1,827 3.0 0 11
Global total 47 1,349 16,065 8.4 100 100
Notes: Sales and R&D fi gures include animal health for food and nonfood animals.
Source: USDA, Economic Research Service using company fi nancial reports and Animal Pharm Reports (2007). Market sales of animal health
products from Animal Pharm Reports (2006c) and Vetnosis as reported in International Federation for Animal Health (various annual reports).
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References
Animal Health Institute, 2007. Animal Health Institute News Release,
Washington, DC, Oct. 3.
Animal Pharm Reports. 2003. R&D in the Animal Health and Nutrition
Industry, London: Informa UK Ltd., February.
Animal Pharm Reports. 2005. Animal Pharms’ Top 20: 2005 Edition,
London: Informa UK Ltd., October.
Animal Pharm Reports. 2006a. Animal Pharms’ Top 20: 2006 Edition,
London: Informa UK Ltd., October.
Animal Pharm Reports. 2006b. Generics in the Animal Health Industry,
London: Informa UK Ltd., May.
Animal Pharm Reports. 2006c. World Animal Health Markets: 2006 Edition,
London: Informa UK Ltd., August.
Animal Pharm Reports. 2007. Animal Pharms’ Top Tier Companies: 2007
Edition, London: Informa UK Ltd., September.
Congressional Budget Offi ce. 2006. Research and Development in the
Pharmaceutical Industry, Congress of the United States, October.
Danzon, Patricia M., Andrew Epstein, and Sean Nicholson. 2007. “Mergers
and Acquisitions in the Pharmaceutical and Biotech Industries,”
Managerial and Decision Economics 28, 4-5 (June-August): 307-328.
Economic Report of the President. 2009. U.S. Government Printing Offi ce.
Figure 6.3
Estimates of research and development spending by the U.S.
animal health industry
Million nominal U.S.$
Source: USDA, Economic Research Service. AHI members estimate is from the Animal Health
Institute annual survey of members. Phrma members estimate is from the Phrma annual
survey of members. ERS estimate is derived from company financial reports for U.S.-based
companies identified in our survey with investments in animal health R&D (see text).
1994 96 98 2000 02 04 06 08
0
200
400
600
800
1,000
Our estimate
Phrma members
AHI members
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Fortune. 2010. “Global 500: Our Annual Ranking of the World’s Largest
Corporations,” CNNMoney.com.
International Federation for Animal Health. (various years). IFAH Annual
Report 2003 through IFAH Annual Report 2010, Brussels, Belgium.
Pharmaceutical Research and Manufacturers of America. 2008.
Pharmaceutical Industry Profi le 2008, PhRMA, Washington, DC, March.
PhillipsMcDougall. Key Data, Animal Health, AgreWorld, data accessible
from www.agreworld.com/ (subscription required).
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CHAPTER 7
Animal Genetic Improvement by the
Private Sector
Keith O. Fuglie and Paul Heisey
Selecting superior animals for breeding stock emerged as a specialized
industry in the 1920s and 1930s for poultry, in the 1930s and 1940s for cattle,
and in the 1950s and 1960s for hogs (Bogus, 1992; Willham, 1982; and
Schneider, 2004). More recently, the private sector has also begun investing
in aquaculture breeding, especially for salmonoids (salmon and trout species),
shrimp (Pannaeus spp), and tilapia (tilapia spp). The genetic improvements
and reproductive technologies developed by these fi rms have made signifi cant
contributions to raising the productivity of animal farming around the globe.
As is the case with crops, animal breeders (with the exception of dairy
cattle) have been able to capitalize on the benefi ts from hybridization, or
cross-breeding. The typical model that emerged in the poultry and swine
genetics industries was one in which a company would invest in improving
purebred lines (inbreds) and then sell hybrids (crosses between different
purebred lines) to producers who would use these animals as production
stock on their farms. The hybrids are often complex crosses involving four
to six purebred lines. Companies would supply genetic material to farmers
through “pyramid programs” (nucleus herds to multiplier herds to producer
stock). The animal genetics fi rms could maintain control over their intel-
lectual property by guarding access to their purebred “nucleus” herds. Since
the offspring from the hybrids produced on the farm would themselves breed
inferior stock, farmers would return to the animal genetics companies to
replace their production stock. This model served species with high fecundity
rates, such as poultry and pigs, but was less suitable for cattle because of the
greater expense and diffi culty in maintaining viable inbred lines (Narrod and
Fuglie, 2000). The reproductive technology of artifi cial insemination (A.I.),
combined with expanded performance testing of progeny, was the basis of
investment in dairy cattle breeding by both producer cooperatives and private
companies. Beef cattle breeding has exploited cross-breeding for heterosis
since the 1970s, but the dominance of uncontrolled mating under pasture and
rangeland conditions across widely diverse production environments in many
beef cow-calf operations, combined with relatively long generation intervals,
has meant that, to date, large-scale private investment in beef breeding has
been relatively limited.
More recently, new reproductive technologies, such as embryo transfer, and
the tools of molecular biology have opened up new possibilities in the animal
genetics industry. In dairy cattle, genomic evaluations using single nucleo-
tide polymorphism (SNP) markers have been developed that increase the
accuracy of genetic selection programs, lower the cost, and reduce the time
necessary to evaluate A.I. sires (Strauss, 2010). Similar genomic evaluations
are evolving for both the beef and swine industries, and specifi c SNP tests for
various traits of economic importance, including genetic diseases and meat
quality, have been widely available for several years. A.I. has been widely
used in the cattle industry for many decades, but its use in swine breeding has
been more limited because boar semen, unlike that of bulls, does not remain
viable if frozen. Over the last decade, however, technologies that extend the
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life of fresh boar semen have succeeded in signifi cantly increasing the use of
A.I. in swine breeding.
It is diffi cult to obtain reliable information on the animal genetics industry.
Nearly all fi rms in the industry are privately held and do not publish informa-
tion on company revenues or R&D expenditures. To examine R&D spending
and market structure in this sector, we contacted all of the major animal
genetics companies in the poultry, swine, and cattle breeding sectors and a
sample of aquaculture breeders and requested the relevant information. Most
companies we contacted complied with our request, at least in part. This
chapter is based on the information provided by these companies, informa-
tion from company and industry websites, and interviews with knowledge-
able persons from public- and private-sector animal breeding programs. To
maintain confi dentiality, we report R&D and market sales fi gures only for the
animal breeding sectors as a whole and not for individual companies.
Structure of the Animal Genetics Industry
Poultry
The poultry industry is composed of at least three distinct subsectors: the
broiler and turkey industries for poultry meat and the layer industry for
eggs.1 Over the past two decades, the poultry breeding industry has under-
gone considerable consolidation, with a few companies dominating genetic
supply in each subsector. Currently, broiler breeding is dominated by three
rms and layer breeding and turkey breeding are each dominated by only
two fi rms ( g. 7.1). The EW Group, Hendrix Genetics, and Groupe Grimaud,
all European-based, have established themselves as global “multi-species”
animal genetics companies. Their divisions may include broilers, layers,
turkeys, other avian species, pigs, and aquaculture species. One U.S.-based
rm, Cobb-Vantress (a subsidiary of Tyson Foods), specializes in broiler
breeding. Cobb-Vantress, Aviagen Broilers (EW Group), and Hubbard
(Groupe Grimaud) together supply at least 95 percent of the global commer-
cial breeding stock for broilers.2 Two companies, the EW Group3 and
Hendrix Genetics, supply nearly all the global breeding stock for turkeys and
layers. In 2008, Groupe Grimaud established a new layer breeding subsidiary,
Novogen, but its market share is not signifi cant. In total, our survey identi-
ed 18 companies worldwide that appeared to be engaged in some poultry
breeding. In addition to the four shown in fi gure 7.1 and Heritage Farms,
six other companies were engaged in breeding specialty chickens for niche
markets (e.g., free-range chickens, colored birds, ducks, geese, and other
avian species), and seven served regional markets for broiler or layer breeding
stock. These regional breeding fi rms, like India’s VH Group and Thailand’s
CP Group, usually worked through joint ventures or licensing agreements
with one or more of the major multinational companies to adapt breeding
material for local markets.
A driving force behind consolidation in the poultry genetics industry has
been economies of scale and scope in conducting research and marketing
genetic products. The advent of molecular biology (marker-selected breeding,
primarily) in poultry breeding has driven up the fi xed costs of a breeding
program while expanding the possibilities for genetic improvement. With
1A small component of the poul-
try genetics industry breeds ducks
and specialty birds, such as colored
chickens, which we do not discuss here
although fi gures from this sector are
included in our estimates.
2One other broiler breeding compa-
ny, Heritage Farms (owned by Perdue),
has a signifi cant presence in the United
States but does not sell breeding stock
in other countries.
3The EW Group operates its layer
breeding program as two distinct com-
panies, Lohmann Tierzucht, based in
Germany, and Hy-Line International,
based in the United States.
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larger fi xed costs, higher returns can be achieved through larger scale. Firms
have also achieved economies of scope by investing in multispecies breeding.
These come about by sharing biotechnology research capacity as well as
market distribution networks across species.
Swine
Until the emergence of dedicated swine breeding companies in the 1950s and
1960s, genetic improvement in pigs was conducted primarily through national
breed registries. Organization of the breed registries was something of a
cooperative venture and would often receive technical support from public
research institutions. Individual breeders would register their prize purebred
breeding stock through a registry and provide data to track performance of
progenies. Breeding material might be exchanged or sold among members
Figure 7.1
Evolution of the global poultry and multi-species genetics industry
Name of company is followed by parent company, year of acquisition, and country of incorporation.
EW Group (Germany)
Hendrix Genetics (Netherlands)
Cobb-Vantress (Tyson Foods,
1986, USA)
Aviagen Broilers (2005, Netherlands)
Aviagen Turkeys (2005, Netherlands)
Lohmann Tierzucht (1998, Germany)
ISA (2005 from Merial, USA-France)
Dekalb (2000, USA)
Hybrid (2007 from Nutreco, Neth.)
Groupe Grimaud (France)
Broilers
Layers
Turkeys
Hy-Line International (1978, USA)
H&N International (1987, USA)
LIR (1999, USA)
Arbor Acres (1998, USA)
Ross (1999, UK)
Nicholas Turkeys (1999, USA)
B.U.T. (2005 from Merial
, USA-Fr an ce)
Layers
Turkeys
Bovans (1991, Neth.)
Shaver (1988, USA)
Hypor (2007 from Nutreco, Neth.)
Pigs
Hubbard (2005 from Merial, USA-France)
Novogen (newly established by Groupe Grimaud in 2008)
Broilers
Layers
Grimaud Frères-breeds ducks, geese and other avian species
Avian
Acquired Hybro from Hendrix Genetics (Netherlands) in 2007
Broilers
Newshams Choice Genetics (2010, USA)-see figure 7.2.
Pigs
AquaGen (2008, Norway)
Aquaculture
Babcock (1981, USA)
Landcatch and LNS (2011, Scotland)
Aquaculture
Hisex (1998, Neth.)
Hendrix Poultry Breeders (2005, Neth.)
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to improve the genetic performance of pedigree lines. Purebred offspring
from superior sires and dams would be sold to farmers who would crossbreed
these within their own breeding herd. In the 1950s, the fi rst dedicated swine
breeding companies began offering superior crossbreds to farm producers
(Schneider, 2004). As with poultry breeding, these companies maintained
their own purebred nucleus herds and developed hybrid crosses with supe-
rior performance. Initially, these efforts focused on hybrid boars but later
expanded their scope to include hybrid sows and gilts and, more recently, to
boar semen administered through A.I.
Over the last 15 years, the swine genetics industry has undergone signifi -
cant consolidation although it remains considerably less concentrated than
the poultry genetics industry (fi g. 7.2). The leading global swine genetics
company is PIC, which is owned by Genus, a publicly traded UK fi rm (Genus
also invests in cattle breeding through its U.S.-based subsidiary, ABS Global).
Another major swine breeding company is Smithfi eld Premium Genetics, a
subsidiary of the vertically integrated pork producer and processor Smithfi eld
Foods. This fi rm only supplies swine breeding stock internally to producers
in the Smithfi eld system. Hypor (a subsidiary of Hendrix Genetics) and
Newshams (a subsidiary of Groupe Grimaud) also have signifi cant swine
breeding R&D and international sales. Other important swine genetics
suppliers include two farmer-owned cooperatives, Danbred (Danish-based)
and TOPIGS (Netherlands-based). Farmer cooperatives in several countries
supply swine breeding stock to their members, but Danbred and TOPIGS
are unique in that they also export swine genetic material to other countries.
A number of smaller fi rms, nearly all based in North America or Western
Europe, invest in swine breeding.
The driving force behind consolidation in the swine genetics industry, much
like in the poultry genetics industry, has been economies of scale in breeding
and genetics. Unlike in poultry, however, independent pureline breeders
working through national breed registers continue to play a role in animal
genetic improvement and maintaining genetic diversity in commercial herds
(Mabry, 2004).4 Producer-owned farmer cooperative breeding programs are
also active in some countries and in international markets.
Cattle
Genetic improvement in cattle continues to involve complex interactions
between individual breeders, organized through breed associations; artifi cial
insemination and embryo transfer companies; and public-sector research.
Figure 7.3 depicts some of these relationships with a particular focus on
artifi cial insemination companies and producer cooperatives. In the United
States, for example, nearly all live breeding cattle in both dairy and beef
production originate with breeders or seedstock producers whose revenues
from sale of breeding stock are relatively small.5 Out of nearly 800,000 beef
cow-calf operations in the United States (USDA/NASS, 2009), between
70,000 and 75,000 operators, or around 10 percent, are associated with breed
registries. Only about a quarter of these operators earn signifi cant revenues
from such sales, however, and a much smaller share earn annual revenues of
up to $10 million per year from sales of live breeding animals, semen, and
embryos (Marshall, 2010; Brester 2002). Similarly, out of some 70,000 dairy
farmers in the United States, about 10,000 sometimes breed animals for sale
4The National Swine Registry was
formed in 1994 as a consolidation of
breed registries for four major breeds.
5The terms “breeder” and “seedstock
producer” are more or less interchange-
able, although the former tends to be
used more in the dairy industry and the
latter in the beef industry.
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as breeding stock, but only about 1,000 operators consider this activity as a
signi cant source of revenue (Lawlor, 2010).
Opportunities for cross-breeding and hybridization as a form of intellec-
tual property protection have been more limited for cattle producers than
for poultry and swine producers. In beef cattle, the relatively long gestation
period (Narrod and Fuglie, 2000) combined with uncontrolled mating under
rangeland conditions have limited the use of more complex cross-breeding
schemes, although cross-breeding has made a signifi cant impact in the beef
industry. Today, 75-80 percent of U.S. beef cows are crossbred (Cundiff,
2007), and the supply of crossbred bulls or semen from crossbred bulls is
the fastest growing sector of beef seedstock production (Marshall, 2010).
The greater use of crossbred bulls and the development of new protocols for
synchronizing heat in beef cattle may provide greater opportunities for more
complex hybrid breeding schemes in beef cattle in the future.
Figure 7.2
Evolution of the global swine genetics industry
Producer-owned breeding organizations with significant
international sales: TOPIGS (Netherlands), Danbred (Denmark)
PIC (Genus, 2005, UK)
Smithfield Premium Genetics
(Smithfield Foods, 2000, USA)
Newshams Choice Genetics
(Groupe Grimaud, France)
Hypor
(Hendrix Genetics, 2007, Netherlands)
Other current swine genetics companies: Babcock (USA), Genesus
(Canada), Fast Genetics (Canada), JSR Genetics (UK), ACMC (UK),
Hermitage (Ireland), Gene+ (France), Rattlerow-Seghers (Belgium),
Selección Batallé (Spain), UPB (Spain)
Cotswold (2003, USA)
NPD (2000, UK part)
Kleen Leen (1980s, USA)
NPD (2000, USA part)
Newsham Hybrid (est. 1990, USA; to Grimaud 2002)
Monsanto Choice Genetics (2007, USA) Dekalb Swine (1998, USA)
Seghers (2002, USA)
Designed Genetics (2010, Canada)
France Hybrids (2008, France)
Euribrid (Nutreco, 2007, Netherlands)
Farmers Hybrid was owned by Monsanto
1969-1983, spun off as an independent
company, and went bankrupt in 1998
Name of company is followed by parent company, year of acquisition, and country of incorporation. PIC, Hypor, Newshams,
Génétiporc, TOPIGS and Danbred appear to be the major multinational swine genetics companies. The other listed companies
appear to serve primarily domestic markets.
Génétiporc
(Aliment Breton Foods, 1988, Canada)
Ausgene (2006, USA)
Newsham UK (est. 1976)
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Dairy production, on the other hand, has been marked by the selection of
superior animals from within the same breed, particularly in North America,
where historically, the separation of dairy from beef production took place
earlier than it did elsewhere in the world. Holsteins, deriving from a breed
that originated in the Netherlands, now account for over 90 percent of U.S.
dairy cows.6 Artifi cial insemination, combined with large-scale performance
recording schemes, has been the basis for investment in cattle genetics by
producer cooperatives and companies since the 1940s. In the 1960s and
1970s, North American holstein semen was exported to Europe on a rela-
tively small scale, but by the 1980s and early 1990s, bovine A.I. exports had
developed into a large commercial market. In 1983, the International Bull
Evaluation Service (Interbull) was founded with headquarters in Sweden,
which helped to foster international genetic comparisons and the development
of A.I. companies outside of North America. By the late 1990s, some of these
companies were signifi cant competitors in the global market (Funk, 2006).
As with the poultry and swine industries, technological factors have strongly
infl uenced cattle industry concentration; but unlike with poultry and swine,
6In recent years, there has been re-
newed interest in dairy cross-breeding,
both for the potential of hybrid vigor
and for the incorporation of traits that
may contribute to total lifetime profi t-
ability, complementing the productivity
traits of dairy animals in current inten-
sive dairy systems. Cross-breeding has
also been a relatively more important
part of dairy improvement in develop-
ing countries, particularly in tropical or
subtropical environments where pure
European breeds might not be suited to
the production environment.
Figure 7.3
Private companies, producer cooperatives, and individual breeders in the global cattle genetics industry
Livestock (beef and dairy) producers
Individual breeders/seedstock
producers and breeder associations
Producers of
bull semen for AI Producers of
embryos for transfer
Commercial
(companies & some
cooperatives)
Commercial
Non-commercial
(cooperatives, state
breeding schemes, etc.) Sales & transfers of
Live breeding cattle
Bull semen
Embryos
AI = artificial insemination
Individual breeders/seedstock producers are a subset of livestock producers who sell superior stock to the breeding industry as well as
directly to other livestock producers. Commercial and non-commercial breeding companies and cooperatives work with individual breeders
to improve their stock. They evaluate the genetic performance of large numbers of animals bred by individual breeders, recommend
crosses, and market genetic material of superior stock to producers.
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breeding programs for cattle have been generally unable to distinguish
product lines. Each new technology is usually adopted by most major A.I.
companies within a few years of being introduced, making price competi-
tion a major factor driving industry consolidation and globalization. A single
bull can, theoretically, produce 50,000 offspring in 1 year through A.I.,
and techniques for freezing and storing semen, fi rst developed in the early
1950s, facilitate the distribution of these progeny over a wide area.7 Embryo
transfer can allow more rapid dispersion of genes from elite females, although
at nowhere near the rate A.I. allows for bulls. Embryo transfer technology,
which was fi rst established commercially in the 1970s, was adopted by A.I.
companies in the 1980s.8 Other technologies that have been adopted in the
industry include genetic marker technology (1990s) and sexed semen (2000s)
(Funk, 2006; Hassler, 2003; De Vries et al., 2008). More recently, single
nucleotide polymorphism chips were introduced after having been developed
through a collaboration involving a genetics-sequencing company whose
primary focus is human health (Illumina), USDA, U.S. and Canadian univer-
sities, and the major North American A.I. companies. These chips potentially
permit genetic evaluation of young sires much more quickly and cheaply than
traditional progeny testing (Van Raden et al., 2009; Strauss, 2010).9
As a result of these patterns of technology diffusion, consolidation to achieve
economies of scale and globalization have also occurred in cattle breeding,
although not to the degree observed in poultry or swine breeding. The
number of A.I. cooperatives and companies in the United States fell from
about 200 in 1950 to approximately 20 in the 1980s (Narrod and Fuglie,
2000). In fact, by 1981, 11 companies provided 90 percent of the bovine
semen processed in the United States; by the early 2000s, only 5 companies
accounted for the same share. This group included three large cooperatives or
cooperative alliances (Select Sires, Accelerated Genetics, and Genex/CRI),
one privately held company (Alta Genetics, with headquarters in Canada and
owned by a Netherlands-based holding company),10 and one publicly traded
company (ABS Global, which since 1999 has been part of Genus plc, based
in the UK). Together with the Canadian cooperative alliance Semex (which
has perhaps two-thirds to three-quarters market share in Canada), these
companies constitute the six major A.I. organizations in North America. In
Europe, cattle breeding organizations, whether cooperatives, companies, or
government schemes, often hold market shares of 75-100 percent in their
home countries, but no company has a European market share of over 25
percent (van Arendonk and Liinamo, 2003; Joint Research Council, 2007).
Another notable European-based company marketing bovine semen glob-
ally, in addition to Genus, is CRV (Netherlands based, owned by Dutch and
Flemish cooperatives), formerly known as Holland Genetics. Scandinavian-
based Viking Genetics was founded in 2008 to consolidate the activities of
cooperative-owned breeding programs in Denmark, Sweden, and Finland.
In addition to these companies, members of the French association of A.I.
cooperatives (UNCEIA) and alliances of German cooperatives and breeding
associations (notably the Holstein breeding association DHV and coopera-
tive unions TopQ and NOG) export signifi cant amounts of bovine semen.11 In
2009, UNCEIA, CRV, DHV along with VIT (German computing center for
cattle data), and Viking Genetics announced they were forming a research
consortium named EuroGenomics to aggregate the reference populations of
Holstein bulls (with breeding values from progeny tests and known DNA
profi les) used in their breeding programs. Finally, New Zealand-based LIC
7The potential number of progeny
each year from a single bull through
A.I. is much greater than the potential
number of progeny from a boar using
the same technique (Estienne, 1993).
8Embryo transfer technology can
allow the production of a larger num-
ber of potential A.I. sires from elite
females or “bull dams,” which make it
particularly useful to the A.I. compa-
nies. It can also allow greater selection
intensity in females within dairy herds,
although it is only profi table if the very
top cows are used. With the exception
of Alta Genetics, few North American
A.I. companies purchased and main-
tained females for multiple ovulation
embryo transfer (MOET) programs,
working instead with cooperator breed-
ers. More European companies (e.g.,
CRV, formerly Holland Genetics) did
maintain their own females. Embryo
transfers are available from many A.I.
companies, from specialized embryo
transfer businesses, and from veteri-
nary practitioners; as with breeders
of live breeding stock, these embryo
transfer businesses are usually quite
small scale in terms of revenues and
numbers of employees (Funk, 2006;
Joint Research Council, 2007).
9Other biotechnology companies
and research institutions have been
working on similar technology using
genomic information, but at present,
the Illumina chip provides more infor-
mation at lower cost (Strauss, 2010).
10Alta Genetics was publicly traded
from 1993 through 1999, when it was
purchased by Koepon Holdings.
11In addition, they illustrate within-
country consolidation. Although
France has around 40 A.I. coopera-
tives and around 20 cattle-breeding
institutions, recent consolidation has
left the top 5 cooperative unions with
over 60 percent market share (based
on UNCEIA data on semen doses).
Similarly, cooperatives in Germany
have consolidated, especially after
the reuni cation of East and West
Germany.
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(cooperatively owned but with some shares publicly traded) has branches or
agencies on several continents, in addition to its major position in the New
Zealand market. In China, the recent expansion of the dairy industry has
spurred the rapid growth of China Milk Products Limited (publicly traded on
the Singapore Exchange). Although it operates only in the Chinese domestic
market, by 2007, it had revenues from sales of semen and embryos, as well as
physical quantities marketed, at a level comparable with those of some of the
other companies mentioned in this chapter.
Aquaculture
The cultured fi sh industry has grown from only 11.3 million tons produced
in 1985 to over 68 million tons by 2008 (FAO). A number of companies have
emerged to supply superior genetic broodstock to aquaculture producers.
Technological advances have enabled researchers to breed and multiply
superior broodstock for a number of fi sh species, especially salmonoids like
Atlantic salmon and rainbow trout and Penaeus species like whiteleg shrimp
(P. va nna mei). Although the fi sh-breeding industry is still in its infancy
and most of the breeders are small, there may be signifi cant opportunities
for companies to enhance productivity through breeding and genetics and
respond to the growing demands from aquaculture producers for superior,
disease-free broodstock.
The emergence of a private aquaculture breeding industry is due in large part
to earlier government-sponsored research that acquired, characterized, and
improved fi sh genetic resources and established basic fi sh-breeding technolo-
gies. This has been especially apparent in Norway, which leads the world
in breeding improved salmonoid (salmon and trout) species, and the United
States, which has had notable successes in breeding shrimp. The modern
Norwegian aquaculture industry dates to 1971, when the government estab-
lished Akvaforsk (Institute for Aquaculture Research), with a mission to
develop and transfer fi sh-breeding technology to the private sector. Breeding
programs for Atlantic salmon and rainbow trout were established around this
time. A number of salmonoid breeding companies emerged from this under-
taking. One of the most successful is AquaGen, which was fi rst established
in 1992 as Norwegian Salmon Breeding AS (Norsk Lakseavl AS). In 2008,
AquaGen was acquired by the German-based EW Group (see fi g. 7.1).12
Similarly, the shrimp (Penaeus spp.) breeding industry got its start from
government-sponsored research in the United States. With fi nancial support
from USDA, the Oceanic Institute at Hawaii Pacifi c University successfully
domesticated whiteleg shrimp (P. vanna mei), which led to the development
of genetically superior, specifi c-pathogen-free (SPF) broodstock. This tech-
nology was commercialized by such companies as Hi Health Aquaculture,
Sygen, and Shrimp Improvement Systems (the latter, established in 1998, was
acquired in 2007 by the CP Group, a Thai conglomerate).
Animal genetics biotechnology
A fi nal component of the animal genetics industry is a group of biotech-
nology fi rms that either provide technology services to breeding companies
or develop GM animals and fi sh. Most of these operations are small- or
medium-sized fi rms that offer genomic services to companies in agriculture,
health, and other life sciences sectors. A primary source of revenue for these
12Genus, the global leader in cattle
and swine breeding, also acquired an
aquaculture breeding interest when it
purchased SyGen in 2005, but it quick-
ly sold off this enterprise to focus on its
core bovine and porcine businesses.
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companies is contract research with the larger animal-breeding companies.
One company, AquaBounty, has developed a GM salmon that reportedly
grows to harvest size in half the time it takes for conventional fi sh, and the
company is currently seeking regulatory approval for this product. A number
of other biotechnology companies are working on animal health technologies
(see chapter 6 of this report).
Regarding the use of biotechnology in the animal-breeding industry, our
survey found wide-scale use of marker-selected breeding but little investment
in transgenic animals or animal cloning. Concern about consumer acceptance
of transgenic and cloned animals for food uses was cited by several compa-
nies as a reason for their lack of interest in pursuing applications of these
technologies. For marker-selected breeding, however, companies perceive that
this tool will speed up the rate of genetic progress in productivity and quality
traits in animals and fi sh, and several companies have incorporated marker-
selected breeding into their R&D programs.13
Table 7.1 lists the major breeding companies in each animal and fi sh sector of
the industry. In addition to the companies listed here, our survey identifi ed 72
companies worldwide that appear to have some R&D investment in animal
and fi sh breeding. However, the companies listed in table 7.1 account for most
of the private R&D investments in this sector, especially for poultry, swine,
and cattle. The aquaculture and animal biotechnology sectors, on the other
hand, are composed mainly of small companies, including several others
not identifi ed in this study. But the aggregate R&D spending by these small
companies is thought to be small.
The Market for Animal Genetics
As in the case of crop seed, farmers obtain their animal-breeding stock from
diverse sources, including self-supply and other farmers, so determining
the size of the commercial market for animal genetic material can be diffi -
cult. Moreover, the market may change over time. In developing countries,
commercial companies may supply only a small share of total farm demand
for breeding animals, but this share may increase over time as a country’s
livestock sector becomes more sophisticated and commercially oriented.
In high-income countries, the increased use of A.I. in bovine and swine
has reduced the number of live bulls and boars required to meet market
demand for sire services as A.I. allows each animal to fertilize many more
females. In hog production, the wider use of the “closed herd” system—in
which a farm establishes its own nucleus herd of purebred parent lines to
supply hybrid replacement gilts—has reduced the demand for replacement
gilts from commercial seed stock companies. But use of this system may
increase farm reliance on A.I. as a means of introducing improved genetics
into their nucleus herd. In cattle production, even though the markets for
live breeding animals—bulls and some replacement females—have a much
higher monetary value than the markets for semen and embryos, practically
all of the demand is met through individual breeders or small-scale breeding
schemes.14 In the tables below, we have compiled information from several
sources—estimates from companies and industry analysts as well as public
statistics on animal production—to construct our own estimates of the size
of commercial markets for animal genetics in the United States and for the
world. These estimates only cover the portion of the animal genetics market
13To date, the use of genetic markers
in dairy cattle breeding has been more
effective in reducing or eliminating
deleterious qualitative traits than in in-
creasing quantitative production traits
(Funk, 2006).
14Data are available for the mon-
etary value of international trade for
bovine semen and live bovine breeding
animals from the UN’s COMTRADE
database. In recent years, the value
of live breeding animals traded has
been two to three times the value of
semen traded. However, most of the
trade in breeding animals is among
geographically proximate countries.
For example, a number of European
countries report relatively high exports
of live bovine breeding animals, but
most of this trade takes place within
Europe (Gollin et al., 2009; D. Gollin,
personal communication).
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supplied by commercial breeding companies and thus only cover a portion of
total farm demand for animal breeding material. Moreover, given the lack of
public data on these markets, these estimates are not defi nitive and subject to
some margin of error.
We estimate that sales of animal genetic material from commercial compa-
nies in 2006-07 were $4.06 billion globally and $1.35 billion in the United
States (table 7-2). The largest component of this was parent breeding stock
Table 7.1
Major research and development (R&D) fi rms in the animal genetics industry
Sector Major R&D fi rms and producer organizations1Main R&D locations
Poultry – boilers Cobb-Vantress (Tyson's Food, U.S.) U.S.
Aviagen (EW Group, Germany) UK, U.S.
Hubbard (Groupe Grimaud, France) U.S., France, Brazil
Poultry – layers Lohmann Tierzucht (EW Group, Germany) Germany
Hy-Line International (EW Group, Germany) U.S.
ISA (Hendrix Genetics, Netherlands) Netherlands
Poultry – turkeys Aviagen (EW Group, Germany) U.S.
Hybrid (Hendrix Genetics, Netherlands) Canada
Swine PIC (Genus, UK) U.S., Canada
Smithfi eld Premium Genetics (Smithfi eld Foods, U.S.) U.S.
Newshams Choice Genetics (Groupe Grimaud, France) U.S.
Hypor (Hendrix Genetics, Netherlands) Netherlands, Canada
TOPIGS (producer cooperative, Netherlands) Netherlands
Danbred (producer cooperative, Denmark) Denmark, U.S.
Cattle
(beef and dairy) ABS Global (Genus, UK) U.S
Select Sires (producer cooperative, U.S.) U.S.
Accelerated Genetics (producer cooperative, U.S.) U.S.
CRI/Genex (producer cooperative, U.S.) U.S.
Alta Genetics (Koepon Holding, Netherlands) Canada
Semex Alliance (producer cooperative, Canada) Canada
CRV (producer cooperative, Netherlands) Netherlands
Viking Genetics (producer cooperative, Scandinavian countries) Denmark, Sweden,
Finland
LIC (producer cooperative, New Zealand) New Zealand
Aquaculture AquaGen (EW Group, Germany) Norway – salmonoids
Salmobreed (Norway) Norway – salmonoids
Landcatch Natural Selection (Hendrix Genetics, Netherlands) Scotland – salmonoids
Troutlodge (U.S.) U.S. – salmonoids
Genomar (Norway) SE Asia – tilapia
Hi Health Aquaculture (U.S.) U.S.Penaeus spp.2
Shrimp Improvement Systems (CP Group, Thailand) U.S.Penaeus spp.2
Animal genetics biotechnology Metamorphix (U.S.) U.S.
AquaBounty (U.S.) U.S.
Illumina (U.S.) U.S.
1Company names are followed by corporate owner and country of incorporation in parentheses.
2The main Penaeus breeding species are P. vannamei (whiteleg shrimp) and P. monodon (tiger prawn).
Source: USDA, Economic Research Service survey.
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for poultry hatcheries (broilers, layers, turkeys, and other fowl combined),
at $1.74 billion for the world market and $362 million for the United
States. Commercial penetration into the animal genetics market is highest
for poultry, at nearly 100 percent in high-income countries and lower but
increasing in developing countries.
For swine genetic material, we estimate commercial sales in 2006-07 to
be $1.3 billion globally and $675 million in the United States. The largest
component of this market is replacement gilts, and the fastest growing is A.I.
According to the National Animal Health Monitoring Survey (NAHMS)
conducted by USDAs APHIS,15 the share of sows on farms with 100 or more
head of hogs that were fertilized with A.I. rose from 1.1 percent in 1990 to
82.6 percent in 2006 (USDA/APHIS, 2005, 2008).
Market penetration by commercial breeding companies is relatively low for
cattle, and farmers tend to rely on self-supply or purchases of breeding stock
from independent breeders or breeder associations. As a result, we do not
include sales of live breeding animals for cattle and instead focus on sales
of A.I. doses and embryos. We estimate global market sales of semen and
embryos by commercial breeding companies to be $931 million per year in
2006-07. The total global market for these products was about $1.5 billion (the
difference is made up by semen or embryos provided by producer coopera-
tives that do not market outside of their membership, government A.I. schemes,
etc.). In fi gure 7.3., total global demand for bovine semen and embryos corre-
15NAHMS is conducted periodically
on nationally representative samples
of U.S. farms producing hogs, cattle,
poultry, fi sh, and other species.
Table 7.2
U.S. and global markets for animal genetics in 2006/07
Commercial sales
of breeding
materials1
Sector Types of breeding materials
United
States World
Million U.S. dollars
Poultry Female parent lines 362 1,742
(broilers, layers,
turkeys, and other fowl) Male parent lines
Swine Replacement sows & gilts
675 1,303Live boars
Semen doses for A.I.
Cattle Semen doses for A.I. 297 931
Embryos
Aquaculture Fish eggs and fry 12 87
Prawn/shrimp larvae (broodstock)
Global total 1,346 4,062
n.a. = data not available.
A.I. = artifi cial insemination.
1Commercial sales include the sale of animal genetic material supplied by genetics companies
and producer organizations. In many countries, a share of breeding stock may be supplied by
farmers themselves or through breeding associations. Thus, the sales estimates are generally
below the total farm demand for animal genetic material.
Source: USDA, Economic Research Service.
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sponds to the area of the two overlapping circles, while the portion supplied by
commercial companies corresponds to the areas labeled “commercial.
For the United States, commercial sales for bovine semen and embryos
amounted to about $300 million in 2006-07. The use of A.I. was widespread
in dairy cattle but was much less prevalent in beef cattle.16 However, the
number of embryo transfers for beef cows was roughly double the number for
dairy cows.17
During the last decade, embryo transfer grew rapidly in Latin America
and Asia, grew more slowly in North America, and was relatively stable in
Europe. As noted, however, one major impact of embryo transfer in dairy
breeding has been the use of elite females in MOET herds to produce more
bulls for progeny testing by the A.I. industry.
For aquaculture, we do not have suffi cient information to estimate the size of
the market for commercial breeding material, much of which has not been
genetically improved. Some aquaculture producers continue to rely on wild
seedstock and broodstock18 rather than supplies from hatcheries, but the use
of wild broodstock to restock fi sheries is declining.
Research Spending in the Animal
Genetics Industry
In total, the global animal genetics industry spent $295 million on R&D in
2006-07, or about 7.3 percent of sales (table 7.3). Nearly half of this amount
is attributed to poultry breeding companies, where both sales and research
intensity were relatively high (at least 8 percent of sales). Research intensity
was lowest for the cattle sector, at less than 5 percent of sales.
While our survey identifi ed 72 companies with at least some investments
in animal genetic improvement, research spending tends to be concen-
trated among a few fi rms. In the poultry sector, four fi rms accounted for 97
percent of poultry R&D worldwide. For swine and cattle, the top four fi rms
accounted for two-thirds of total industry R&D in both sectors. As previ-
ously mentioned, most of the companies in the animal genetics industry are
16According to USDAs Agricultural
Resource Management Survey
(ARMS), which selects different com-
modities each year for intensive study,
A.I. was used on 85.9 percent of dairy
cows in 2005 and 14.5 of beef cows
in 2008 (based on calculations by the
authors from raw ARMS data). ARMS
focuses on farms in major producing
States. USDA’s NAHMS survey for
cattle suggests somewhat lower rates
for A.I. According to NAHMS, 72.5
percent of all dairy cow pregnancies
in 2007 resulted from A.I. Also, only
1.4 percent of beef cow females were
inseminated artifi cially and 5.0 percent
were both inseminated artifi cially and
exposed to bulls. Over 90 percent of all
beef cow females were exposed only to
bulls, according to this study. A.I. was
somewhat more prevalent for beef heif-
ers than for beef cows (USDA, 2009a;
2009b). Differences in estimates may
stem not only from differences in
sampling frameworks but also from
differences in defi nitions, especially
for da ir y.
17Embryo transfer quantity data are
available from such sources as the
International Embryo Transfer Society
(www.iets.org) and the American
Embryo Transfer Association (www.
aeta.org).
18The term “seedstock” refers
to young juvenile animals that are
grown out in aquaculture facilities.
“Broodstock” refers to sexually mature
sh that are kept separate for breeding
and seedstock multiplication purposes.
Table 7.3
Research and development (R&D) spending and research intensity by
the global animal health industry
Sector Companies1
R&D
expenditures
Breeding
sales R&D / sales
Number Million U.S. dollars Percent
Poultry 18 141 1,742 8.1
Swine 16 96 1,303 7.4
Cattle (beef and dairy) 20 43 931 4.6
Aquaculture 17 6 87 6.5
Animal genetics biotechnology 5 10 n.a. n.a.
Global total 72 295 4,062 7.3
n.a. = data not available.
1Companies that work on multiple species are counted only once in the total.
Source: USDA, Economic Research Service survey.
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privately owned fi rms. Our compilation also includes a number of producer-
owned cooperatives that sell animal genetic material on a commercial basis
to nonmembers. Table 7.4 shows total R&D spending, sales, and research
intensity (R&D/sales) for publicly traded, privately owned, government-
owned, and cooperatively owned companies. The research intensity of coop-
eratives was only about half the level of other fi rms, but this fi nding largely
refl ects the concentration of these fi rms in the cattle sector, where research
intensity is lower than in other animal sectors. There may be a dichotomy of
research intensities for privately owned companies. Research intensities of
the larger privately held companies may be similar to those of publicly traded
companies, but relatively small privately held companies may have lower
research intensities.
In 2006, companies based in the United States and Canada had about 40
percent of the global market for animal genetic material and accounted for
50 percent of global R&D spending by this industry (table 7.5). European
companies (Germany and the Netherlands are the leading countries)
accounted for most of the rest of the R&D spending and about 57 percent of
the global market. A number of foreign companies operate research stations
in the United States. For example, UK-based Genus plc, the world’s leading
private cattle and swine breeding fi rm, locates its principal breeding stations
Table 7.4
Animal genetics fi rms and research and development (R&D) by type
of company ownership in 2006/07
Type of ownership Companies1
R&D
expenditures
Breeding
sales R&D / sales
Number Million U.S. dollars Percent
Publicly traded 6 62 642 9.7
Privately owned 54 195 2,518 7.7
Cooperatives 12 38 902 4.2
Global total 72 295 4,062 7.3
1Companies that work on multiple species are counted only once in the total.
Source: USDA, Economic Research Service survey.
Table 7.5
The global animal genetics industry by region in 2006/07
Country Companies1
R&D
expenditures Breeding sales R&D/sales
Global R&D
share
Global market
share
Number —— Million U.S. dollars —— —————— Percent ——————
North America 36 147 1,615 9.1 50 40
Europe-ME 31 144 2,330 6.2 49 57
Asia-Pacifi c 5 5 117 4.1 2 3
Latin America20
Global total 72 295 4,062 7.3 100 100
Note: Sales and research and development (R&D) expenditures are the totals for the companies incorporated in a particular country, including
their sales and R&D in other countries.
1Companies that work on multiple species are counted only once in the total.
2Several multinational animal breeding companies operate research stations in Latin America, but we could fi nd no major local breeding compa-
nies in this region.
Source: USDA, Economic Research Service survey.
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for both commodities in the United States. In our survey, we asked compa-
nies to break down their R&D spending by the share spent in the United
States and in other countries. When based on the location of R&D facilities,
the U.S. share of total industry spending on animal breeding and genetics
research increased from 45 to 51 percent of the global total.
Although our data do not show trends in animal genetics R&D spending over
time, we can compare our fi ndings with those of a study that used a similar
methodology to estimate private-sector animal breeding research in 1996.
Narrod and Fuglie (2000) fi nd that animal breeding companies (including
foreign fi rms doing research in the United States) spent $144.5 million on
R&D (in 2006 dollars) in the United States in 1996; our survey data showed
expenditures of $155.8 million in 2006. From 1996 to 2006, spending
declined in U.S.-based poultry R&D but increased in swine and cattle R&D.
Globally, total global breeding research on chickens (broilers and layers)
increased by about 7 percent in real terms between 1996 and 2006 (from
$122.9 million to $131.4 million), while swine breeding research more than
doubled (from $37.9 million to $95.8 million). For all animal genetics R&D,
we estimate that global private R&D increased by 43 percent in real terms
between 1996 and 2006.
Implications of Market Structure on
Animal Breeding Research
The growing concentration in the market for animal genetics has raised
concerns that these fi rms may hold excessive market power and reduce biodi-
versity (Gura, 2007). In a study of genetic diversity in commercial poultry
ocks, Muir et al. (2008) found that commercial chicken breeds contained
only about half the genetic diversity native to the species. The authors
concluded that “these fi ndings indicate that the poultry industry, across both
the egg and meat pure-line stocks, has a narrowed genetic resource and
possibly a reduced capacity to respond to future industry needs” (p. 17316).
While the authors note that this reduction of diversity does not preclude
future genetic progress, it does raise a concern that some traits, such as those
conferring resistance to certain infectious diseases, may be lost through selec-
tive breeding in commercial poultry. It is not clear, however, that increased
concentration in the industry has contributed to reduced biodiversity. Bugos
(1992) reported that U.S. poultry breeding companies relied on a fairly
narrow genetic pool as far back as the 1950s, when there was a larger number
of companies engaged in commercial breeding. Similar concerns regarding
loss of genetic diversity have been raised for the dairy industry (Young and
Seykora, 1996; Hansen, 2000).
Among all sectors, levels of concentration in the animal genetics market
are highest for poultry, lower for swine, lowest for cattle, and unknown
for aquaculture. Given the absence of reliable information on the size of
genetics markets and the prices of genetic materials, it is diffi cult to assess
whether market concentration confers much market power to breeding
companies. Moreover, compared with other agricultural input sectors, the
size of the largest animal genetics companies are relatively small, certainly
smaller in terms of total revenue than the largest crop seed companies.
Genus (the one animal breeding company for which fi nancial information
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is publicly available and the global leader in swine and cattle genetics) had
total net sales of $468 million in 2006, signifi cantly below those of the
largest six crop seed companies.
The share of sales devoted to R&D (research intensity) shows a similar
pattern to the level of market concentration, with poultry at 8.1 percent of
genetic sales, swine at 7.4 percent, and cattle at 4.6 percent. But market
concentration is only one factor determining research intensity; others include
projected market growth, technological opportunities (i.e., the ease at making
genetic progress), the cost of research inputs, and the ability to appropriate
gains from research (Pray and Fuglie, 2000). Several of these factors favor
commercial poultry breeding, especially in broilers, and likely contribute to
the higher research intensity of this sector (Narrod and Fuglie, 2000).
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Marshall, Troy. 2010. Contributing Editor, BEEF Cow/ Calf Weekly, personal
communication.
Muir, W.M., G. Wong, Y. Zhang, J. Wang, M. Groenen, R. Crooijmans, H.
Megens, H. Zhang, R. Okimoto, A. Vereijken, A. Jungerius, G. Albers, C.
Taylor Lawley, M.E. Delany, S.A. Maceachern, and H.H. Cheng. 2008.
“Genome-Wide Assessment of Worldwide Chicken SNP Genetic Diversity
Indicates Signifi cant Absence of Rare Alleles in Commercial Breeds,
Proceedings of the National Academy of Sciences 105 (45):17312-17317.
Narrod, Clare A., and Keith O. Fuglie. 2000. “Private Investments in
Livestock Breeding With Implications for Public Research Policy,”
Agribusiness 16: 457-470.
Pray, Carl I., and Keith O. Fuglie. 2000. “The Private Sector and
International Technology Transfer in Agriculture,” in K.O. Fuglie and D.E.
Schimmelpfennig (eds.), Public-Private Collaboration in Agricultural
Research: New Institutional Arrangements and Economic Implications,
Ames: Iowa State University Press, pp. 245-68.
Schneider, James F. 2004. “The Evolution of Breeding Companies as
Seedstock Suppliers in the USA,” Proceedings of the 29th Annual
National Swine Improvement Federation Conference and Meeting,
December 9-10.
Strauss, Stephen. 2010. “Biotech Breeding Goes Bovine,Nature
Biotechnology 28(6): 540-543.
U.S. Department of Agriculture, Animal and Plant Health Inspection Service
(USDA/APHIS). 2005. Part IV: Changes in the U.S. Pork Industry, 1990-
2000, USDA:APHIS:VS,CEAH, National Animal Health Monitoring
System, #N428.0405
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U.S. Department of Agriculture, Animal and Plant Health Inspection Service
(USDA/APHIS). 2008. Part IV: Changes in the U.S. Pork Industry, 1990-
2006, USDA-APHIS-VS, CEAH, #N520.1108
U.S. Department of Agriculture, Animal and Plant Health Inspection Service
(USDA/APHIS). 2009a. Part IV: Reference of Dairy Cattle Health and
Management Practices in the United States, 2007, USDA: APHIS:VS,
CEAH, #N494.0209
U.S. Department of Agriculture, Animal and Plant Health Inspection
Service (USDA/APHIS). 2009b. Beef 2007-08, Part II: Reference of Beef
Cow-Calf Management Practices in the United States, 2007-08. USDA:
APHIS:VS, CEAH, #N512.0209.
U.S. Department of Agriculture, National Agricultural Statistics Service
(USDA/NASS). 2009. 2007 Census of Agriculture, available at: www.
agcensus.usda.gov/publications/2007/index.asp.
Van Arendonk, Johan A.M., and Anna-Elisa Liinamo. 2003. “Dairy Cattle
Production in Europe,” Theriogenology 59: 563-569.
Van Raden, Paul M., George R. Wiggans, Curtis P. Van Tassell, Tad S.
Sonstegaard, and Flavio S. Schenkel. 2009. “Benefi ts From Cooperation
in Genomics,” Interbull Annual Meeting Proceedings, Uppsala, Sweden,
January 28-29.
Willham, R.L. 1982. “Genetic Improvement of Beef Cattle in the United
States: Cattle, People and Their Interaction,Journal of Animal Science
54: 659-666.
Young, C.W., and A.J. Seykora. 1996. “Estimates of Inbreeding and
Relationship Among Registered Holstein Females in the United States,”
Journal of Dairy Science 79: 502-505.
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C HAPTER 8
Private Research and Development
for Animal Nutrition
Sun Ling Wang and Keith O. Fuglie
Processed or manufactured animal feed constitutes a major component of
purchased farm inputs. In 2005, purchased feed accounted for 20 percent of
total purchased inputs by U.S. farms and was equivalent to 22 percent of total
livestock sales (USDA/ERS). Globally, the feed industry supplied 700 million
tons of animal feed in 2008 (Best, 2009a). Like fertilizers, animal feeds
are for the most part bulk products with few R&D inputs by manufacturing
rms. However, specialty feeds and feed additives are high-value components
of the feed market and are more technology intensive. Firms that supply these
feeds have signifi cantly higher R&D-to-sales ratios than manufacturers of
bulk feeds.
Types of Manufactured Animal Feed
For optimal growth, farm animals require regular amounts of macro-
ingredients (energy, primarily supplied by grains and grasses, and protein,
mostly supplied by legumes) and micro-ingredients (vitamins and minerals)
in their feed rations. In some cases, pharmaceuticals such as vaccines or anti-
biotics may be added to feed mixtures as well. Complete feed is industrial-
compounded (blended) feed that fully matches the nutritional requirements
of an animal and consists of both macro- and micro-ingredients. Premixes
are ingredients used in the making of complete feeds and consist of protein-
rich concentrates like soybean meal and/or micro-ingredients. Premixes may
be sold to manufacturers of complete feeds or directly to farmers, who do
their own blending with farm-grown or purchased grains to form complete
feeds. In terms of total volume, complete feeds constitute 85-95 percent of
total global feed sales while concentrates account for another 5-15 percent
(Nutreco, 2008). Complete feeds and concentrates are high-volume bulk
feeds. Specialty feeds and premixes of micro-ingredients, on the other hand,
are low-volume (0.1 to 0.5 percent of total feed volume) but high-value
products that may require signifi cant investments in R&D to develop. We
can distinguish between three main market segments for animal feed: (1)
compound feed consisting primarily of complete feed and concentrates; (2)
nutritional feed additives consisting of micro-ingredient premixes, such as
vitamins and minerals, including enzymes, carotenoids, and amino acids;
and (3) medicated feeds, which contain animal health pharmaceuticals. This
chapter focuses on the fi rst and second markets—compound feed and nutri-
tional feed additives. Medicated feeds, which are manufactured primarily by
pharmaceutical companies, were discussed in chapter 6.
Global Market for Manufactured Feed
According to industry sources (Best, 2009a), worldwide industrial produc-
tion of manufactured animal feeds increased from just under 600 million
tons in 1995 to 700 million tons in 2008 (fi g. 8.1). Nearly all of this growth
took place in developing countries. While the crop commodities used as raw
ingredients by the feed industry are traded internationally, feed is manu-
factured primarily within the country in which it is consumed, due to the
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specifi c requirements of local markets and transportation costs. The largest
manufacturer of animal feed is the United States, with about 25 percent of
the global total, followed by the EU, China, and Brazil. The composition of
manufactured feeds varies regionally. In the United States, a high proportion
of manufactured feeds are concentrates due to the prevalence of onfarm feed
mills in which premixes are blended with farm-grown grains; in the EU and
developing countries, a higher proportion of the market is for complete feeds
(Nutreco, 2008).
The size of the global animal feed market is diffi cult to determine because
product quantity and price data are not readily available. However, due to
the competitive nature of the market, compound feeds generally track move-
ments in feed commodity prices, especially corn and soybean meal, the
principal raw materials used in their manufacture. To assess the size of the
global market for manufactured animal feed, we consider the compound feed
and nutritional additive market segments separately. For compound feed, we
estimate a global average price based on international trade prices for corn
and soybean meal plus a markup for milling and distribution costs.1 For nutri-
tional feed additives, we rely on industry sources for the size of this market.
In constant 2006 dollars, we estimate that global sales of compound feeds
averaged around $100-120 billion between the mid-1990s and 2005 but then
increased to over $220 billion by 2008 due to the sharp rises in commodity
prices (see fi g. 8.1).
Nutritional feed additives are a relatively small but critical component of the
animal feed market. This market consists of several unique segments, such as
specifi c vitamins, amino acids, feed enzymes, and carotenoids, which provide
animals with micro-nutrients as well as enhance digestion. Certain market
segments may be dominated by a few companies, and with limited competi-
tion, there may be more scope for monopolistic behavior on the part of these
rms. For example, in 1996, the U.S. company Archer Daniels Midland
(ADM) and four Asian companies were found guilty of price-fi xing behavior
1Our estimate of the average global
wholesale price of compound feed is a
weighted average of the price for corn
(U.S. No 2 Yellow, FOB Gulf Ports)
and soybean meal (Chicago soybean
meal futures, fi rst contract forward,
minimum 48 percent protein). The
weights are 90 percent for corn and 10
percent for soymeal. We then assume a
30-percent markup over the cost of raw
ingredients to cover manufacturing and
distribution costs. Corn and soybean
meal commodity price data are from
the International Monetary Fund.
Figure 8.1
Global market for manufactured animal feed
Million tons
Source: USDA, Economic Research Service. Quantity of manufactured feed from Best (2009a).
The average price of manufactured feed was derived by ERS based on a composite of
international trade prices for corn and soymeal (IMF) plus a markup for processing and
marketing costs. Nominal prices are adjusted for inflation using the U.S. Gross Domestic
Product implicit price deflator (Economic Report of the President, 2009).
Billion constant 2006 U.S. dollars
1994 96 98 2000 02 04 06 08 10
0
100
200
300
400
500
600
700
800
0
50
100
150
200
250
Gobal feed quantity (left axis)
Gobal feed sales (right axis)
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in lysine, an essential amino acid used in animal feed, in violation of U.S.
anti-trust laws (Connor, 1997).
Generally, the level of market concentration in the manufacturing of bulk
animal feeds is low, with the top 10 companies accounting for only 17 percent
and the top 40 companies only 30 percent of global production in 2008 (Best,
2009b). However, in national or regional markets, and for specialty feed prod-
ucts, concentration ratios may be signifi cantly higher.
R&D Spending by Animal Feed Companies
The U.S. agribusiness fi rm Cargill is the largest manufacturer of animal feed,
followed by the Thai conglomerate Charoen Pokphrand (table 8.1). Four
large European fi rms specialize in the production of nutritional feed addi-
tives, although some of the major producers of compound feeds, like Nutreco
and ADM, manufacture both kinds of feed. R&D investments are made to
develop new products, to reduce manufacturing costs through process innova-
tions, and to determine optimal feed use in animal husbandry. The four fi rms
listed in the table that specialize in nutritional feed additives have relatively
high research intensities, at about 5 percent of sales. Of the largest producers
Table 8.1
Major manufacturers of animal feed in 2006
Figures for animal feed business segment in 2006
Company Country Production R&D Sales R&D/sales
Million tons —— Million U.S. dollars —— Percent
Major producers of bulk feeds (compound and premix concentrates)1
Cargill/Agribrands U.S. 17.5
Charoen Pokphrand Thailand 15.2
Land o' Lakes Purina U.S. 11.5 11.9 2,711 0.44
Tyson Foods U.S. 10.0
Zen-Noh Cooperative Japan 7.8
Nutreco Netherlands 6.1 19.1 3,808 0.50
Ucaab Cooperative France 4.0
AG Abri UK 3.8
Smithfi eld U.S. 3.6
Sadia2Brazil 3.5
Provimi Netherlands 3.3
Hope Group3China 3.2
Archer Daniels Midland (ADM) U.S. 3.2
Ridley Australia 3.2
Perdigao2Brazil 3.0
Major fi rms specializing in nutritional feed additives
DSM Netherlands 77.9 1,371 5.68
BASF Germany 29.2 858 3.40
Degussa4Germany 31.4 651 4.83
Adisseo5France 25.1 632 3.98
1Some of these fi rms may also produce specialty feeds and nutritional feed additives.
2Sadia and Perdigao merged to form Brasil Foods in 2009.
3Hope Group includes New Hope Group and East Hope Group.
4Degussa was acquired by Evonik Industries, also a German fi rm, in 2007.
5Adisseo was acquired by CNCC, a Chinese fi rm, in 2006.
Sources: USDA, Economic Research Service using feed production estimates from Best (2006) and estimates of feed sales and research and
development (R&D) from company annual reports.
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of bulk feeds (some of which also produce specialty feeds and nutritional
feed additives), we were only able to fi nd sales and R&D fi gures for two.
The average R&D-to-sales ratio for these fi rms was only 0.47 percent, which
is similar to the fi ndings of a 1975 survey of 31 animal feed companies in
the United States that reported an R&D-to-sales ratio by these fi rms of 0.70
percent (Wilcke and Williamson, 1977).
With such limited information, we can only make a rough estimate of R&D
spending by this sector. However, like synthetic fertilizer, manufactured
animal feed is largely a bulk agricultural input with relatively little R&D,
so even an approximate estimate is not likely to distort the overall estimate
of agriculturally related private-sector research. To estimate R&D spending
by the animal nutrition industry, we use company R&D data when available
and for other fi rms we apply representative R&D-to-sales ratios to fi rms in
different segments of the industry. Moreover, we assume that only the 60
largest feed manufacturers worldwide conduct R&D. These fi rms accounted
for about 30 percent of global production in 2006. For fi rms in high-income
countries, we assume an R&D-to-sales ratio of 4.7 percent for manufacturers
of nutritional feed additives and 0.50 percent for producers of bulk feeds.
These are average R&D intensity ratios observed from eight feed manufac-
turers for which we have data, and the ratios are close to those reported by
Wilcke and Williamson (1977) in their 1975 survey of U.S. agricultural input
producers. For fi rms in developing countries, all of which produce primarily
bulk feed products, we assume half this level, or 0.25 percent of sales.
Evenson and Westphal (1995, table 37.1, p 2242-3) show that average R&D
intensities of manufacturing industries in developing countries are typically
half or less the average level for high-income countries. To estimate sales for
the top 60 producers in the industry, we apply our estimate of the average
global wholesale price of manufactured feed over 2000-2005 (in constant
2006 U.S. dollars) to the production volumes for 2006 reported by Best
(2009b). We use the 2000-2005 average price ($199/ton) rather than the 2006
price of feed to avoid distortions caused by the infl ated feed prices during
2006-08. Firms are unlikely to change their R&D expenditures quickly in
response to price fl uctuations.
Total R&D spending on animal feed by the largest 60 feed manufacturers
was $375 million in 2006 according to our estimates (table 8.2). Companies
located in the Europe-Middle East region made up 62 percent of the total,
with Dutch and German fi rms both ahead of U.S. fi rms. Relatively high
expenditures on animal feed R&D by European fi rms may be attributed
to stricter EU regulations on the use of antibiotics, hormones, and animal
parts in animal feed products. Such regulations increase farm demand for
alternative feed ingredients and husbandry methods to provide for animal
health and growth.
It is likely that at least half of the total R&D by the animal feed industry is
conducted for the nutritional feed additive segment of the market. The four
companies listed in table 8.1 that specialize in these feeds alone spent $163
million on R&D, or 43 percent of our estimate of total R&D by the feed
industry. Applying our method for estimating R&D for other fi rms in this
market segment raised the total for R&D spending on nutritional feed addi-
tives to $215 million, or 57 percent of the feed industry total.
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A comparison of our estimate for 2006 with estimates from fi ve other studies
from 1975-96 reveals a declining trend in R&D spending by the U.S. animal
feed industry (table 8.3). The 1975 survey by Wilcke and Williamson (1977)
found $85 million (in 2006 dollars) in animal feed R&D in the United States
that year. Our estimate for 2006 was $64.5 million. Based on these study
ndings, real R&D spending on feed in the United States declined by an esti-
mated 25 percent over the past three decades.
References
Animal Pharm Reports. 2006. Animal Pharm’s Top 20: 2006 Edition,
Informa UK Ltd., London.
Ash, Mark, William Lin, and Mae Dean Johnson. 1984. The U.S. Feed
Manufacturing Industry, Statistical Bulletin Number 768, U.S.
Department of Agriculture, Economic Research Service.
Table 8.2
Research and development (R&D) spending by the animal nutrition
industry in 2006
Sales and R&D by
companies with their
headquarters in: Companies
Animal
nutrition R&D
Animal
nutrition sales R&D/sales
Number Million U.S. dollars Percent
North America 21 66 11,803 0.56
Europe-ME 32 232 17,036 1.36
Asia-Pacifi c 25 71 11,931 0.59
Latin America 6 7 3,101 0.22
Global total 84 375 141,770 0.26
Source: USDA, Economic Research Service estimates: Animal nutrition R&D from company
nancial reports where available or estimated by applying representative R&D/Sales ratios to
rms in developed and developing countries; animal nutrition sales estimated from company
nancial reports where available or estimated by multiplying a representative feed price to feed
production statistics for major fi rms given in Best (2009b).
Table 8.3
Private animal nutrition research and development (R&D)
in the United States
Year Source Industry R&D expenditures
Million U.S.
dollars
Million constant
2006 U.S. dollars
1975 Wilcke and Williamson (1977) 27.6 85.0
1978 Malstead, reported in Ruttan (1982) 30.0 76.7
1979 Malstead, reported in Ruttan (1982) 33.0 77.9
1984 Crosby (1987) 42.5 73.4
1996 Fuglie et al. (2000) 48.5 60.3
2006 Present study 64.5 64.5
Current expenditures adjusted for infl ation by the U.S. Gross Domestic Product implicit price
defl ator (Economic Report of the President, 2009).
Source: USDA, Economic Research Service using data from studies in table.
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Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130
Economic Research Service/USDA
Best, Peter. 2009a. “World Feed Panorama, Feed International, January,
pp.12-15.
Best, Peter. 2009b. “Top Companies,” Feed International, October, pp. 12-14
Connor, John M. 1997. “The Global Lysine Price-Fixing Conspiracy of 1992-
1995,” Review of Agricultural Economics 19 (2):412-427.
Crosby, Edwin A. 1987. “Private Sector Agricultural Research in the United
States,” in V.W. Ruttan and C.E. Pray (eds.), Policy for Agricultural
Research, Boulder, CO: Westview, pp. 395-409.
Economic Report of the President. 2009. U.S. Government Printing Offi ce.
Evenson, Robert E., and L.E. Westphal. 1995. “Technological Change and
Technology Strategy,” in J. Behrman and T.N. Srinivasan (eds.), Handbook
of Development Economics, Volume III, Amsterdam: Elsevier Science.
Fuglie, Keith O., Clare A. Narrod, and Catherine Neumeyer. 2000. “Public
and Private Investments in Animal Research,” in Keith O. Fuglie and
David E. Schimmelpfennig (eds.), Public-Private Collaboration In
Agricultural Research, Ames: Iowa State University Press, pp. 117-151.
Gill, Clayton. 2006. “Top 25 Companies,Feed International, October/
November, p. 10.
International Monetary Fund (IMF). Primary Commodity Prices, available
at: www.imf.org/external/np/res/commod/index.asp (accessed November,
2009).
Nutreco. 2008. Annual Report 2007, Amsterdam.
Ruttan, Vernon W. 1982. Agricultural Research Policy, Minneapolis:
University of Minnesota Press.
U.S. Department of Agriculture, Economic Research Service (USDA/ERS).
Data Sets, Farm Income, available at: www.ers.usda.gov/data/farmin-
come/ (accessed January, 2009).
Wilcke, H.G., and J.L. Williamson. 1977. A Survey of U.S. Agricultural
Research by Private Industry, Agricultural Research Institute.
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CHAPTER 9
Research and Development in the
Food Manufacturing Industry
Kelly Day-Rubenstein and Keith O. Fuglie
Food manufacturing and processing companies produce intermediate food-
stuffs or edible products for human and animal consumption.1 The process
of turning raw agricultural outputs into food, beverage, and tobacco products
adds signifi cant value to agricultural raw commodities (Gopinath and Roe,
1996); in 2009, it accounted for 13.5 percent of total U.S. manufacturing in
terms of shipments (Bureau of the Census, 2010). Among all components of
U.S. food and beverage manufacturing, meat processing is the largest (about a
quarter of total shipments in 2009), followed by beverages, dairy, other food
products, grains and oilseeds, and fruits and vegetables.
The food manufacturing industry differs signifi cantly from the input
industries reviewed in this report. Its work generally lies in post-harvest
processing. While some fi rms in this sector do invest in raising farm produc-
tivity—plantation companies and animal feed manufacturers, for example—
we have tried to include those investments within the respective farm input
industries described elsewhere in this report. While most of the investments
in R&D and innovation described in this chapter do not directly affect farm
productivity, we assess them to make our estimates comparable with those
of other studies. Klotz et al. (1995) report separate estimates of private-
sector R&D spending in the United States by agricultural input industries
and food manufacturing, and Alston et al. (2010) report combined estimates
for private-sector food and agricultural R&D. Previous global estimates of
private R&D spending have also lumped the food and agricultural input
industries together (James, 1997; Pardey et al., 2006). By including food
manufacturing R&D in our survey, we can compare our estimates with those
of other studies (including USDA/ERS, 2010b) and at the same time provide
richer detail about the share of the total directed at raising agricultural
productivity or post-harvest processing.
R&D Spending by the Food Manufacturing Industry
The food manufacturing industry encompasses operations ranging from
small processing fi rms to large multinational corporations. Large compa-
nies (de ned here as those with annual revenue or turnover2 in excess of $1
billion) account for a signifi cant portion of this industry. Unfortunately, many
of these companies do not make their R&D investments public (see table
9.1). Cargill, the largest company in this sector, is privately held and does not
release R&D data. Others, such as Coca-Cola, consider R&D investment to
be confi dential business information.
The leading companies in this sector—Cargill, Nestlé, ADM, and Unilever—
all have annual turnover or revenues in excess of $50 billion. R&D expendi-
tures as a percentage of sales vary signifi cantly among the largest companies
that make this information available. Nestlé and Unilever invested more than
$1 billion in companywide R&D in 2008, and Unilever’s ratio of R&D to
sales was over 2 percent. Sysco conducted no R&D at all.
1The food and beverage manufactur-
ing sector transforms raw agricultural
materials into intermediate foodstuffs,
animal feed, or edible products. It does
not include the food wholesale, retail-
ing, or service sectors. The term “man-
ufacture” is used in the International
Standard Industrial Classifi cation
(ISIC) and North American Industry
Classifi cation System (NAICS) codes.
Several ERS publications refer to “pro-
cessing” industries, as do Gopinath
and Vasavada (1999). See also ERS
briefi ng room “Food Marketing
System in the U.S.: Food and Beverage
Manufacturing,” www.ers.usda.gov/
briefi ng/foodmarketingsystem/process-
ing.htm.
2The term “turnover” is used by
some companies, particularly those
in the EU. It refers to net external rev-
enue, which may be from product sales
but which also may include additional
sources of income (e.g., interest or
royalties).
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Many food manufacturing companies often operate in other sectors, which
further limits the usefulness of company data. For example, a considerable
portion of Unilever’s sales come from home and personal care products, and
the fi rm’s R&D spending includes investments in these areas as well as in
food manufacturing. Nestlé produces pharmaceutical products. Few of these
companies parse out their research spending by division or sector. Some
companies conduct research that is directly related to agriculture, such as
poultry breeding by Tyson Food (through its subsidiary, Cobb-Vantress) and
tomato and pepper breeding by Campbell, as well as research related to new
product development and process innovation.
OECD data on R&D in the food manufacturing sector
The Organisation for Economic Co-Operation and Development produces
the Business Expenditure on R&D (BERD) database (part of the Structural
Analysis Statistics, or STAN database). The database provides the most
comprehensive assessment available of R&D by the food manufacturing
industry in high-income countries as well as in a few other countries.3 All
data are at an industry level. The BERD data generally use an enterprise-
based approach: the R&D of a given enterprise will be classifi ed by its
primary industry only. This, combined with missing information, may lead
to understating (or overstating) the R&D investment by a particular industry.
Changes in classifi cation schemes can also affect R&D data, though this has
3OECD draws upon national offi cial
sources to compile its statistics. For the
United States, industry R&D spending
comes from surveys conducted by the
National Science Foundation and the
U.S. Census Bureau.
Table 9.1
Sales and research and development (R&D) for leading food manufacturing companies in 2008
Signifi cant
agricultural R&DCompany Country Net sales R&D R&D/sales
—— Million U.S. dollars —— Percent
Cargill U.S. 120,400 n.a.
Nestlé Switzerland 91,896 1,653 1.80 Cocoa, coffee
Archer Daniel Midlands U.S. 69,816 49 0.07
Unilever Netherlands 56,941 1,277 2.24 Tea
Pepsi U.S. 43,251 282 0.65
Kraft Foods U.S. 42,201 499 1.18
Sysco U.S. 37,552 0 0.00
Coca-Cola U.S. 31,944 n.a.
Wilmar International Singapore 29,145 n.a. Palm oil
Tyson Foods U.S. 28,130 n.a. Poultry
Smithfi eld U.S. 14,264 91 0.64 Swine
Conagra U.S. 13,809 69 0.50
General Mills U.S. 13,652 205 1.50
Sara Lee U.S. 13,450 n.a.
Kellogg U.S. 12,822 181 1.41
Dean Foods U.S. 12,455 8 0.06
Land O Lakes U.S. 12,039 40 0.33 Forage, dairy
Sime Darby Malaysia 10,894 n.a. Palm oil, rubber
Heinz U.S. 10,071 n.a. Tomato
Bunge U.S. 10,028 34 0.34
Cadbury UK 9,960 128 1.28
Campbell U.S. 8,391 115 1.37 Tomato, pepper
Dole U.S. 7,732 n.a. Fruit
n.a. = not available.
Source: USDA, Economic Research Service using company annual reports and Fortune, May 8, 2008.
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been less of an issue with food manufacturing industries.4 The OECD data
combine the food, beverage, and tobacco industries (International Standard
Industrial Classifi cation codes 15 and 16).
Data are not available for every year for every country, so we report them
here as an annual average within 5-year intervals that cover 1990-94, 1995-
99, 2000-04, and 2005-07 (see table 9.2). According to the OECD, R&D
spending by the U.S. food, beverage, and tobacco manufacturing industry
averaged $2.37 billion per year during 2005-07 (constant 2006 U.S. dollars),
which was the highest amount globally, closely followed by Japan at $1.99
billion per year. Globally, R&D expenditures in food manufacturing have
increased over time. From 1990-94 to 2005-07, global food industry R&D
increased from $7.4 billion to $8.2 billion annually (in constant 2006 U.S.
dollars). R&D expenditures also grew as a percentage of food industry value
added (GDP), from 0.9 percent of GDP in 1990-94 to 1.6 percent of GDP in
2005-07 (table 9.2).
Research intensity varies considerably across countries (fi g. 9.1). For the
United States, research intensity was 1.53 percent during 2000-2007, about
the average for all OECD countries. Among OECD countries, Switzerland,
Denmark, Norway, and the Netherlands have the highest research intensity
in food manufacturing. This partly refl ects the presence of large, multina-
tional, and R&D-intensive food companies in these countries, such as Nestlé
(Switzerland) and Unilever (Netherlands) (see table 9.1). These companies
likely dominate national totals for these countries, even though some of the
R&D by these companies may be conducted outside their home country.
Generally, research intensity in the food industry is considerably less than
that in manufacturing industries as a whole. For the 2000-2007 period,
research intensity in all manufacturing industries among OECD countries
was 7.6 percent, compared with 1.6 percent in the food manufacturing
industry (OECD, 2010).
4See ISIC revision 3 and revision 4.
Figure 9.1
Research intensity in food manufacturing in OECD countries
R&D as a percent of food industry GDP
The figures show the average research and development (R&D)/Gross Domestic Product (GDP) percentage over 2000-2007.
Source: USDA, Economic Research Service using data from Organisation for Economic Co-operation and Development (OECD).
Switzerland
Denmark
Norway
Netherlands
Finland
Japan
Korea
France
Belgium
Australia
Iceland
USA
UK
Taiwan
Sweden
New Zealand
Ireland
Spain
Germany
Canada
Greece
Austria
Italy
Hungary
Portugal
Poland
Mexico
Czech Rep.
0
1
2
3
4
5
6
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Factors Affecting R&D Investment by
Food Manufacturing Firms
Private fi rms may invest in R&D to develop new products or to reduce manu-
facturing costs (i.e., raise productivity of labor, capital, and materials). Such
product and process innovations enable companies to maintain or expand
market share, develop new markets, lower costs, and earn higher profi ts.
While we have not found data that reveal how fi rms in the food manufac-
turing industry allocate R&D investments, we conjecture that most expendi-
Table 9.2
Food Industry research and development (R&D) expenditures by country and region
Average annual food R&D expenditure Food industry R&D/GDP
Company 1990-94 1995-99 2000-04 2005-07 1990-94 1995-99 2000-04 2005-07
—— Million constant 2006 U.S. dollars —— ——————— Percent ———————
By region:
North America 1,956 2,191 2,481 2,471 0.82 1.18 1.23 1.74
Europe-ME 2,506 2,520 2,902 2,843 0.74 1.01 1.23 1.31
Asia-Pacifi c 2,945 3,272 3,205 2,826 1.25 1.82 1.93 2.57
Latin America 6 25 59 92 0.02 0.10 0.15 0.28
Global total 7,413 8,007 8,647 8,232 0.88 1.25 1.35 1.64
By country:
U.S. 1,868 2,094 2,381 2,371 0.87 1.24 1.30 1.91
Canada 88 96 100 100 0.35 0.58 0.56 0.55
UK 467 413 470 397 0.89 1.08 1.26 1.26
Germany 286 300 311 293 0.40 0.59 0.72 0.81
France 450 450 555 618 0.87 1.23 1.74 2.18
Switzerland 318 333 336 319 2.90 4.97 5.75 6.29
Netherlands 266 316 295 236 1.54 2.36 2.35 1.93
Belgium 85 110 120 120 0.87 1.45 1.81 1.98
Italy 102 99 112 113 0.23 0.34 0.42 0.49
Spain 88 95 150 206 0.28 0.50 0.87 1.15
Sweden 93 49 48 48 1.39 0.95 1.05 1.25
Denmark 81 90 188 144 1.11 1.68 3.94 3.49
Norway 49 70 88 93 1.21 2.23 2.31 2.45
Finland 109 74 59 44 2.19 2.39 2.31 1.95
Czech Rep. 13360.09 0.12 0.12 0.23
Hungary 14560.03 0.25 0.21 0.32
Israel 7 7 10 4 0.30 0.29 0.44 0.22
Turkey 9 9 17 25
South Africa 9 23
Japan 2,609 2,857 2,666 1,990 1.34 1.94 1.97 2.40
South Korea 171 135 174 228 1.51 1.40 1.80 2.58
China, Taiwan 31 59 37 0.51 1.17 1.12
Australia 122 192 185 223 0.85 1.53 1.57 2.04
China 77 283
Mexico 6 25 50 70 0.02 0.10 0.13 0.22
Chile 9 22
Other 138 155 172 215
Sources: USDA, Economic Research Service. R&D expenditures and GDP for the Food, Beverage and Tobacco manufacturing industry are from
OECD (2010). Local currency nominal expenditures were converted to U.S. dollars using offi cial exchange rates (World Bank) and then adjusted
for infl ation using the U.S. Gross Domestic Product implicit price defl ator (Economic Report of the President, 2009).
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tures are likely allocated to new product innovation rather than cost-reducing
processing innovations. Several factors infl uence decisions to engage in the
various types of research in food manufacturing.
Consumer demand
Consumer demand plays a large role in the nature of R&D in the food
manufacturing industry. For example, innovations in poultry production
often have been motivated by consumer demand for certain traits, such as
greater amounts of white meat, pre-cooked products, and specialty shapes
(e.g., “chicken nuggets”). Consumer convenience is a key factor, driving
demand for time-saving products, such as bagged salad and prepared break-
fast sandwiches (Martinez and Stewart, 2003). Additionally, consumers
prefer variety in food products and product characteristics (Gopinath et al.,
2003). According to Datamonitor, more than 20,000 new food products are
introduced each year in the United States, although over 90 percent of these
are classifi ed as “not innovative” (USDA/ERS, 2010a). Examples of new
product innovations include specialty Macaroni & Cheese from Kraft (e.g.,
the SpongeBob Squarepants variety) and private-label products (Martinez,
2007b; 2009). Delgado-Gutierrez and Bruhn (2008) note that high-valued
characteristics of new food products include superior taste, longer shelf life,
higher nutritional content, health benefi ts, and environmentally friendly
packaging. These factors would motivate technical change that is focused on
product development rather than process innovation.
New information or labeling requirements on the health attributes of food
products can spur private R&D. Unnevehr and Jagmanaite (2008) found that
new information on potentially adverse health effects of trans fats (and a new
U.S. Food and Drug Administration regulation requiring disclosure of trans
fat content on nutrition labels) led to fairly rapid development of new products
low in trans fats. Innovations included the development of improved oilseed
varieties, notably low linoleic soybeans, as well as dedicated supply chain
coordination to produce trans fat-free food product alternatives.
Intellectual property protection
The role of intellectual property protection, such as patents and trademark
protection, in motivating R&D spending by the food manufacturing industry
is unclear. The industry is complex, with many heterogeneous products.
Few new products succeed, and the industry is rife with product imitations
(Gopinath and Vasavada, 1999). Patents are expensive to obtain, and new
products with only minor modifi cations may not qualify for patent protection.
Moreover, the effective market life of many new product innovations is often
far less than the 20 years covered by patent protection. Thus, the transitory
nature of food products may reduce the incentive to invest in such an expen-
sive form of intellectual property protection (and the costs of enforcing it).
Moreover, process innovations (innovations that improve manufacturing effi -
ciency) are rarely patented (Gopinath et al., 2003). At the same time, intra-
industry knowledge “spillovers” have been shown to play a signifi cant role
in the food processing industry (Gopinath and Vasavada, 1999). Spillovers
are gains from research and innovation that benefi t the industry as a whole
but which cannot be fully captured by the fi rm(s) conducting the R&D.
Signifi cant R&D spillovers are likely to contribute to underinvestment by
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rms in R&D because innovators have diffi culty earning the full returns to
their innovations (Gopinath and Vasavada, 1999).
Industry structure
The food manufacturing industry has an oligopolistic structure in which
product markets tend to be dominated by a small number of large fi rms
(Gopinath and Vasavada, 1999; Bolotova et al., 2007). Factors favoring
this kind of market structure are economies of scale and scope found in
processing, joint distributing, storing, and marketing (Bolotova et al., 2002).
High sunk costs can act as a barrier to entry by new fi rms (Bolotova et al.,
2007; Paul, 2000).
Industry consolidation (i.e., decreases in the number of fi rms) has been
rising in a number of food manufacturing subsectors. Between 1972 and
1992, consolidation increased in eight U.S. food processing industries
(Ollinger et al., 2005). These include meat (packing and processing), dairy
(fl uid milk and cheese processing), fl our milling, corn milling, and feed and
soybean processing.
Concentration (the relative size of the largest fi rms in an industry) has also
increased as the structures of processing and manufacturing industries
have changed. Concentration in beef packing has been a concern since the
1880s (Paul, 2001). Paul (2001) reports that the top four U.S. meatpacking
companies accounted for 82 percent of the industry’s output in 1994. In hog
slaughter, the largest market share of the four fi rms reached 64 percent in
2004 (Martinez, 2007a). Concentration in the U.S. corn and fl our-milling
industries exceeded 70 percent as of 1992 (Ollinger et al., 2005). The
industry has become increasingly vertically integrated (Henry and Rothwell,
1995; Martinez, 2002). Processed fruit and vegetable production is also often
vertically integrated.
Using rm-level data for the U.S. food processing sector, Gopinath and
Vasavada (1999) fi nd positive correlations between patents and R&D and
patents and market structure. Firms with higher market shares earned more
patents, suggesting that they were also investing more in R&D. Additional
evidence shows that concentration in food manufacturing is positively
related to productivity of the sector, at least up to a point. Gopinath et al.
(2003) fi nd that concentration in food industries improved total factor
productivity (TFP) growth in an invert-U fashion, with productivity growth
initially rising with higher concentration but eventually slowing in indus-
tries that became too highly concentrated. Chan-Kang et al. (1999) fi nd that
productivity growth in the Canadian food processing sector fell behind that
of the United States when U.S. fi rms engaged in extensive mergers. Chan-
Kang et al. also fi nd that R&D per unit of output for Canada was signifi -
cantly less than that for the United States. They attribute Canada’s general
underinvestment in technical change to its failure to cut costs and merge
manufacturers as the United States had done. Paul (2000) suggests that
concentration and enhanced productivity may have been the result of the
same stimuli, as indicated by cost economies, shortrun rigidities, innova-
tion, and product differentiation.
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Innovation and Productivity in Food Manufacturing
One reason to suspect a high share of R&D investment on product innova-
tions and a low share on processing innovations is that growth in TFP in the
food manufacturing industry is relatively low. The KLEMS-EU project has
developed internationally comparable estimates of value-added TFP growth
in primary and manufacturing industries, including the food manufac-
turing industry (O’Mahony and Timmer, 2009). Value-added TFP measures
output (net of payments for energy and raw materials) relative to the capital
and labor employed in the industry. At the industry level, growth in TFP
primarily refl ects process innovations that reduce labor and capital required
to produce outputs.
From 1980 to 2006, TFP growth in food manufacturing was substantially
below that in total manufacturing and agriculture in the United States, the
UK, the “Eurozone,”5 and Japan (table 9.3). While TFP in total manufac-
turing in the United States increased by 92 percent during the period, TFP
in food manufacturing grew by only 7.8 percent. U.S. agricultural TFP
growth grew by 146 percent over the same period. Other countries show
similar patterns. Japanese food manufacturing actually registered a sharp
fall in food manufacturing TFP even as its total manufacturing TFP grew
by over 50 percent. The valued-added TFP indexes shown in the table indi-
cate the rate of capital- and labor-saving technical change in an industry,
and fi ndings reveal that relatively little of this innovation occurred in food
manufacturing overall.
Gopinath and Roe (1996) suggest that many of the sources of productivity
growth in food processing lie outside the sector, especially through link-
ages with primary agriculture. Using U.S. data from 1960-91, they fi nd that
the food manufacturing industry benefi tted from productivity growth in the
primary agricultural sector, which led to more abundant, lower cost raw
materials for processing. Paul (2000) cites studies that found that produc-
tivity growth in the agricultural production sector (i.e., before the farm
gate) reduced costs in the food processing industry in the United States and
the UK.
5Eurozone countries include Austria,
Belgium, Finland, France, Germany,
Greece, Ireland, Luxembourg, Italy,
Netherlands, Portugal, and Spain.
Table 9.3
TFP growth in agriculture, food, and total manufacturing in OECD
countries, 1980-2006
Country or
region
Agriculture,
forestry, and fi shing
Food
manufacturing
Total
manufacturing
TFP1 index in 2006 with base year 1980=100
U.S. 245.8 107.8 192.3
Eurozone2288.1 104.2 149.2
UK 192.9 121.8 190.4
Japan 112.7 57.2 151.0
OECD = Organisation for Economic Co-operation and Development.
1Total factor productivity (TFP) is based on value-added output relative to capital and labor
inputs employed in the industry.
2The Eurozone consists of Austria, Germany, France, Belgium, Netherlands, Luxembourg, Italy,
Greece, Spain, Portugal, and Finland.
Source: USDA, Economic Research Service using EU-KLEMS.
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Conclusions
Firm-level data on food manufacturing R&D are limited and incomplete.
Data from OECD’s Business Expenditure on R&D, which provides industry-
level data by country, suggest that expenditures on food manufacturing R&D
increased, both in real expenditures and as percentage of industry value added.
Research intensity in food manufacturing, however, is low compared with that
in manufacturing as a whole and in other agricultural input industries.
Among the drivers of R&D in this sector, consumer demand is particularly
important. Convenience is one of the most desired traits among consumers;
others are quality and value. Consumers expect many new products with
these characteristics; as a result, the food manufacturing system moves
swiftly in the area of technical change. Most of the R&D in the industry
appears to be directed to product, as opposed to process, innovations.
Formal intellectual property protection plays a smaller role in motivating
research. The industry abounds with imitators, and products change quickly.
While patent protection is used, it is generally too costly for most innova-
tions, particularly because the 20-year period of protection provided by
patents usually is not needed.
The food manufacturing industry is oligopolistic in structure. The level of
industry concentration in subsectors of the food industry may affect incen-
tives for research. Studies have found that concentration is correlated with
productivity growth in the industry. Thus, concentration is most likely posi-
tively related to research investments. Productivity growth in food manufac-
turing (as measured by value-added TFP), however, has been small relative to
that of total manufacturing and agriculture. The value of some kinds of inno-
vations, such as new products with novel characteristics, may not be re ected
in this TFP measure.
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