Capturing Value, Funding Innovation

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Accessing superior genetics and seed is one way to ensure that Canada remains competitive in global agriculture. We talk with industry experts about the mechanics of funding innovation in cereals research through the concept of value creation/capture.

Many years of discussion about how to ensure more innovation in cereal seeds is finally coming to fruition.

Historically, cereal seed breeding has been dominated by public institutions, supported by taxes and producer contributions. Because of this, and because Agriculture and Agri-Food Canada (AAFC) has indicated it will not be increasing its level of investment in cereal breeding, many industry players have been calling for a way to make sure private breeding firms are enticed to do more cereal breeding — by securing their return on larger investments.

Some time ago, a task forcecalled the Value Creation Working Group was created to look at the issues, and two leading funding models eventually emerged. One is a producer-facilitated royalty collection system of varieties registered after Feb. 27, 2015 (known as an end-point royalty). Royalties generated would be distributed to breeders based on a variety’s market share, possibly using existing collection systems. However, if a royalty is collected on seed, no royalty would be collected on harvested material.

The other contender — the preferred option of the Canadian Seed Trade Association’s Intellectual Property Committee — is a royalty collection system enabled by contracts, where breeders or their representatives use contracts when selling certified seed of varieties registered after Feb. 27, 2015. This system involves the collection of royalties on any farm-saved seed, known as a trailing royalty.

The latter is clearly the winner, reports Lorne Hadley, task force member and executive director at the Canadian Plant Technology Agency. “The seed industry has had long discussions about this over the last eight years and both the CSTA and the Canadian Seed Growers’ Association have endorsed the model of trailing royalties,” he says. “Certain companies want to proceed with this and market this value to producers.”

Hadley notes that producers already decide what seed to buy based on expected value, and those varieties that have value and are priced appropriately will have the market share. “We are trying to put in place a system to start by using pedigreed seeds, and the best varieties among them get the most return.”

For his part, Darcy Pawlikbelieves the trailing contract model is the right one as it’s based on well-understood principles of by existing contract law. The head of the Syngenta Cereals Portfolio for North America and vice-chair of the CSTA’s IP Committee notes the trailing royalty option is ideal for all acres grown of the varieties in question to be tracked, and also provides flexibility for the breeder in terms of the parameters that can be set.

Rod Merryweather, CEO of FP Genetics and a member of several seed organizations, points out that this model could involve existing collection mechanisms already established by licensees of grain varieties, such as single-use contracts. He adds that the existing system for confidentially tracking every grower who uses midge tolerant wheat could be easily be adapted to collect trailing royalties.

“This system would also enable us to also track the use of certified seed, and make sure that a grower is not paying twice for the use of the variety.”

Another benefit of the trailing royalty model, says Merryweather, is that trailing royalties also enable differential royalties on different varieties and crops. He says differential trailing royalties would be competitive in that breeders would be fairly compensated for every use of the variety, with growers deciding to use new varieties where the royalty appears worth the investment.

How it Might Work

While there is much to still be decided on, Hadley notes that an efficient electronic contracting system is envisioned. Similar to how canola is marketed, distributors will decide if payments will be applied per acre or pound of seed. There will be no interference with provincial check-offs.

Pawlik believes the end result will draw on similar situations elsewhere. In his view, an effective system must include the ability to simply and transparently track seed sold and acres planted, and a flexible pricing mechanism associated with the value of individual varieties.

In Merryweather’s view, rollout of a trailing royalty system will be quite simple.

“A database would be developed or modified to fit the collection of purchase information on certified seed for every grower which would then identify every purchase of certified seed,” he says. “This information would be available to the licensee to administer the royalties. Growers would declare each year what crops have been planted and which variety was used to seed. After harvest, they would then declare production on each field.”

Growers would therefore ‘pay on production’ and companies would then invoice them for the trailing royalty after verifying certified seed purchases and deducting such purchases (a pre-determined amount) so there is no possibility of paying twice. “The licensee would have the right to audit a grower if there was any dispute,” he says. “All such audit costs would be charged to the licensee.”

 Hurdles

In Pawlik’s view, one of the largest hurdles would be a transfer of a significant portion of the costs associated with breeding activities to growers. But he believes that “so long as our objective remains truly aligned among the various stakeholders and parties in that we want to encourage greater investment by the private sector into cereal and pulse breeding, as well as the desire to have the strongest and most globally competitive ag sector, these hurdles can be overcome.”

Along with that, Pawlik believes there will be a continued requirement for engagement, transparency, cooperation and foresight. “This will be critical if we are to achieve the vision and reverse the tide of investment that is flowing to other jurisdictions at the expense of Canadian agriculture, farmers and competitiveness.”

As with any significant change, Pawlik notes that this new system will demand the acceptance of “a certain level of ambiguity,” as well as the “patience to ensure the system evolves to best serve the needs of the participating stakeholders.”

Tom Steve, general manager for the Alberta wheat and barley commissions, notes the idea of value creation hasn’t come without controversy.

“I hear from farmers that wheat is a lower margin commodity on their farm, but they don’t want to change anything. There’s a fundamental contradiction there. Of course, no one wants to pay more for seed if they don’t get an immediate return — they have a legitimate concern there,” he says. “But here’s the thing — we need to look longer term at where our competition is coming from, and where the yields and quality of our product need to go to be competitive long term. And the only way to do that is through value creation.”

One of the only hurdles Merryweather can think of is getting agreement on the development of one system to track all aspects of the trailing royalty from seed purchase to future use of the variety.

“However, we have done this with midge tolerant wheatstewardship and on single-use agreements, so it is not that difficult,” he reports. “However, we will need to be very transparent about how the system works so that there is trust in the system by all who use it. [We will also need to get] agreement from all interested parties to ensure that trailing royalties are fair and equitable.”

At this point, Hadley notes the task force is now reaching out to farming organizations such as Grain Famers of Ontario and Alberta Wheat Growers, and meetings and presentations are being scheduled. “Producers need clarity about how it will work,” he says. “The producer groups want to be sure that if they are paying more, they are getting more value…They just want the assurance that this program will actually increase the number of breeders and breeding programs going forward.”

Pawlik is among those who believe that will indeed occur.

“We can expect, over time, an expanded diversity of materials to make their way through the research stages and into new product development,” he says. “We will also see greater utilization of tools like marker assisted selection, double hapolids and, hopefully, new plant breeding innovations such as genome editing, for example.”

Value Creation: What do Farmers Think?

The chairmen of Alberta Wheat and Alberta Barley say growers are largely uninformed and unsure about the conversation surrounding value creation in cereals.

Jason Lenz – Chairman, Alberta Barley

On whether growers are very informed on the topic of value creation:

“I don’t think farmers are very informed about any of these discussions about value capture, or furthermore, about the Seed Synergy initiative. Certainly, anyone involved within industry organizations are somewhat aware of it, but I don’t think the general farming public is aware at all.”

On why planned consultations regarding value creation are so important:

“As a commission we’re most concerned about the reasons behind value creation, and further, the details of the preferred collection model of the Canadian Seed Trade Association’s Intellectual Property Committee, that being the trailing royalty model. Right now, there’s not much detail. We suspect there will have to be a lot of administration built into it. What’s the plan for any sort of compliance or enforcement? We don’t have those answers to convey to our stakeholders.”

On what it will take for many growers to accept the idea of value creation in cereals:

“As chairman and a farmer myself, I understand the need to attract more private investment into wheat and barley breeding, but farmers need to see benefit from that. Whether it’s done through checkoffs or a royalty system, wheat and barley farmers need to see increased value come out of it and back into our operations. We need to see either significant yield improvement or improved disease resistance in wheat and barley varieties. I suspect that this will need to be viewed as a long-term investment by farmers.”

Kevin Bender – Chairman, Alberta Wheat

On why the topic of end-point/trailing royalties is controversial among growers:

“There’s a reluctance among farmers to have to pay yet another fee, and that is a historical phenomenon. Some growers are often critical about the high cost of canola seed, but yet most often the highest priced seed is the first to sell out. This is because our potential return on investment is better than it is with lower priced or older varieties. I think the same could be true for wheat. If there is value, growers will invest. By nature, we don’t want to pay more or see another deduction on our grain check unless it’s clear or proven that it will generate more profit.

On why many growers are not informed on the topic of value creation:

“No matter how hard we try to get the message out to stakeholders, it doesn’t always get there, or it doesn’t always get taken up. It’s a hard one.”