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OCR for page 128
B
Private Sector Research
Activities and Prospects
CharIes M. Benbrook
The level and focus of publicly supported research
and development (R&D) in the food and agricultural
sciences must be evaluated in relation to research
needs and ongoing private sector R&D activities.
Corporations now account for nearly $2.5 billion in
food and agricultural sciences R&D, over half the
nation's approximate $4.6 billion annual total invest-
ment. Table B.1 summarizes the scale of public and
private sector R&D expenditures by major categories
in 1986, the last year for which a reasonably complete
set of estimates on private sector R&D is available.
Accurate and comprehensive data on industry R&D
trends are difficult to obtain. Estimates in this pro-
posal draw upon date compiled by several government
agencies, trade associations, private firms, and the
press. An annual survey by Business Week magazine
of corporate R&D is one of the most useful data sets.
Battelle Memorial Institute also issues an annual re-
port on probable levels of R&D expenditures, drawing
on National ScienceFoundation andotherdata sources.
The tables and analysis provided in this appendix are
offered as a general overview of corporate R&D.
The capacity of private fops to support R&D is a
function of gross sales, profit levels, and the percent-
age of either gross sales or income that a company is
willing to commit to R&D. There is a remarkable
range in the willingness of companies to commit funds
to R&D, either as a percentage of gross sales or net
Income.
PRIVATE R&D SUPPORT BY AREA OF
TECHNOLOGY
Private sector R&D data are generally reported by
company or industry subsector. It is more difficult to
obtain private R&D data disaggregated by field of
research or area of technology. In a recent review of
private sector R&D, Pray and Neumeyer (1989) pre-
sented data for 1984 that provide some perspective on
R&D focus (see Table B.2~. About two-thirds of
private sector R&D is carried out by agricultural input
industries; one-third is done by firms engaged in the
postharvest processing and marketing of food prod-
ucts. Agnchemical company R&D focusing on the
development of improved crop protection chemicals
accounts for 45 percent of the total research effort on
manufactured production inputs, even though the sale
of pesticides accounts for between 10 and 15 percent
of manufactured input expenditures. The very low
rate of R&D expenditures on plant nutrients (2.3
percent) is modest compared with expenditures on
fertilizers by farmers (about 20 to 30 percent of input
expenses).
Charles M. Benbrook is executive director of the Board on Agriculture of the National Research Council.
12X
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APPENDIX B
TABLE B.1 Public and Private Sector Agriculture R&D Expenditures, 1986
1986 Expenditures as Percentage of:
Expenditures Total Public Total Private Public and Private
(millions Expenditure Expenditure Expenditures
Sector and Category of dollars)
Public
ARS 478.1 24.3 10.8
State agricultural
experiment stations
Formula programs179.0 9.1 4.0
Other federate176.4 9.0 4.0
State741.7 37.8 16.7
Private industry85.1 4.3 1.9
Other nonfederal139.7 7.1 3.2
U.S. Forest Service 120.1 6.1 2.7
Economic Research Service 44.1 2.2 1.0
Total Public 1,964.2 99.95 44.3
Private
Agriculture chemicals 695.0 28.2 15.7
Fertilizer 40.0 1.6 1.0
Seed industry 170.0 6.9 3.8
Farm machinery 300.0 12.2 6.8
Animal health 323.0 13.1 7.3
Food processing 940.0 38.1 21.2
Toud private 2,468.0 lOO.l. 55.8
Toud public and private 4,432.2
aOther federal includes competitively awarded and contract funds from other federal science agencies National Institutes of Health,
National Science Foundation, U.S. Department of Energy, Agency for International Development, U.S. Department of the Interior, and
the U.S. Environmental Protection Agency).
bTotals do not add to 100 percent because of rounding.
SOURCE: Public sector expenditures adapted froth: U.S. Department of Agriculture, Cooperative State Research Service. 1988.
Inventory of Agricultural Research, Fiscal Year 1987. Washington, D.C.: U.S. Department of Agriculture. Private sector expenditures
adapted from the following: For agricultural chemicals, National Agricultural Chemicals Association. 1986. Industry Profile Survey,
1986. National Agricultural Chemicals Association, Washington, D.C. Photocopy. For the fertilizer end seed industries, Agricultural
Research Institute. 1985. A Survey of U.S. Agricultural Research by Private Industry m. Bethesda, Md.: Agricultural Research
Institute. For farm machinery, data were based on 3.75 percent rate of R&D expenditures and $8.0 billion in gross sales a. H.
Ebbinghaus, Farm and Industrial Equipment Institute, personal communication, 1989). For animal health, Animal Health Institute,
Domestic New Sales Survey, press release, May 16, 1988. For food processing, Institute of Food Technologists. 1988. Table 6 in
Special Report: The Growth and Economic Impact of the Food Processing Industry. Chicago: Institute of Food Technologists.
129
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130
TABLE B.2 Private Sector Food and Agricultural Research
Expenditures for Input and Postharvest Industries, 1984
Technology Area
Expendituresa Percentage
of Total
(millions of dollars)
Input industries
Plant breeding115 7.5
Pesticides695 45.2
Plant nutrients36 2.3
Policy/economics14 0.1
Biologics147 9.6
Biotechnology152 9.9
Animal nutrition68 4.4
Machinery290 18.9
Energy21 1.4
Total inputs1,538 99.36
Postharvest processing
and marketing
Human food636 84.0
Food biotechnology80 10.6
Tobacco4 0~05
Packaging28 3.7
Natural fibers9 1.2
Total postharvest757 99.55b
Arable 2 in the report by Pray and Neumeyer (1989; see complete source below)
provides four estimates of R&D by technology field. The single expenditure levels here
are considered most likely estimates, taking into account sampling methods and other
data.
bPercentages do not add to 100 because of rounding.
SOURCE: Adapted from Pray, C., and C. Neumeyer. 1989. Table 2 in Trends and
Composition of Private Food and Agricultural R&D Expenditure in the United States.
New Brunswick, NJ.: Department of Agricultural Economics, Cook College, Rutgers
University.
Further perspective can be gained on private sector
research priorities by assessing research expenditures
in light of the value added at each stage within an
industry-production, transport, processing, manu-
facturing, and retailing. Table B.3 summarizes the
relationship between the value added and R&D as
food products flow from the farm to the consumer.
It is evident from Table B.3 that the intensity of the
research effort declines markedly at each subsequent
stage in the food production system, even when R&D
expenditures are expressed as a percentage of the
value added at each stage in the food system.
INVESTING IN RESEARCH
TRENDS IN PUBLIC AND PRIVATE SECTOR
RESEARCH FOCUS
Over time sizable shifts have occurred between the
public and the private sector roles in agricultural
research (see Table Bob. The private sectorR&D role
has increased markedly relative to that of public sector
R&D in the areas of plant protection and nutrition,
mechanization,andpostharvestresearch. The relative
role of the public sector has grown appreciably in only
one area, livestock research. Surprisingly, evidence
suggests remarkable stability in the share of overall
OCR for page 131
APPENDIX B
TABLE B.3 Private Sector R&D Priorities at Various Stages in the Food Production
System, 1985 (in billions of dollars)
Farm FoodService
Production Manufacturingand
Stage Sector ProcessingRetailing
Gross sales $144 $300$406
Value added 63 104100
R&D expenditures 1.54 0.75NA
R&D as percentage of value added 2.4 0.7
NOTE: NA, Not available. R&D in the retail sector is very low and focuses on consumer trends.
SOURCE: For farm production sector gross sales, adapted from U.S. Department of Agriculture, Economic
Research Service. 1987. Table 4 in Farm SectorReview. Report ECIFS 7-4. Washington, D.C.: U.S. Department
of Agriculture. The value-added figure is gross sales minus expenses, including farm origin and other operating
inputs from U.S. Department of Agriculture, Economic Research Service. 1987. Table 6 in Farm Sector Review.
Report ECIFS 7-4. Washington, D.C.: U.S. Department of Agriculture. For food manufacturing and processing,
adapted freon Best, D. 1988. Competing through R&D. Prepared Foods November:72-76. For service and
retailing, U.S. Department of Agriculture, Economic Research Service. 1988a. Table 88 in Food Consumption,
Prices, and Expenditures, 1966 87. Statistical Bulletin No. 773. Washington, D.C.: U.S. Department of
Agriculture.
TABLE B.4 Public and Private Sector Support for Food and Agricultural Research,
1961 and 1984 (in constant 1984 dollars)
19611984
Research Area PublicPrivate Public Private
Crop breeding
and management $155$68 $228 $29
Plant protection, nutrition 200139 262 638
Livestock 148113 359 215
Mechanization 1653 13 295
Postharvest 187567 100 727
Totala 8091,081 1,770 2,359
Percentage of public plus
private sector total
4357
43 57
gibe total is not the sum of the columns because it includes other categories and expenditures that could not be
classified.
SOURCE: Adapted from Pray, C., and C. Neumeyer. 1989. Trends and Composition of Private Food and
Agricultural R&D Expenditure in the United States. New Brunswick, NJ.: Department of Agricultural
Economics, Cook College, Rutgers University.
131
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132
public and private sector R&D. As recorded by Pray
and Neumeyer ~ 19X9), the private sector accounted for
58 percent of overall research expenditures in both
1961 and 1984.
PRIVATE SECTOR CAPACITY TO
INCREASE R&D
Further insight into the capacity of the private
sector to support increased R&D in the future can be
gained by disaggregating the total sales of agricultural
products and production inputs across all U.S. farm
operations according to major types of farms and
categories of inputs and by reviewing likely trends in
crop prices and planted acreages.
Private R&D undertaken by each industry sector
within the food and fiber system is generally limited in
focus to some feature, aspect, or process within that
sector that can be sold as a production input, machine,
tool, or service. Agrichemical firms conduct research
related to plan/physiology, insectecology, chemistry,
end environmentalfateofchemicals. Seed companies
work on plant breeding techniques and the inco~pora-
tion of desirable traits into new cultivars. Food proc-
essing companies support research on manufacturing
INVESTING IN RESEARCH
techniques and ways to modify food properties. In
recent years some food companies have begun R&D
programs, often in collaboration with biotechnology
research fops, to alter certain key properties and traits
of food crops to improve the efficiency or consistency
of food manufacturing processes or to otherwise
improve product quality.
Across all farms in 1986, farmers earned about
$152 billion in gross cash income, which included
$ 11.8 billion in direct payments from the government.
Crop farms earned $72.0 billion, and livestock pro-
ducers earned $80.0 billion. Crop farmers had total
cash expenses of $45.2 billion, while livestock pro-
ducers incurred $54.9 billion in expenses, yielding a
net crop farm income of $26.8 billion and a net
livestock farm income of $25.1 billion. Table B.5
summarizes this information by type of farm and
major crop.
The capacity of the private sector to support addi-
tional research vanes greatly across areas of science
and reflects the commercial potential to market prod-
ucts in industry subsectors. The level and scope of
private sector R&D activity in the six major program
areas described in Chapter 5 are presented in Table
B.6. Industry-by-indusay reviews of prospective
research funding trends follow.
TABLE B.5 Economic Indicators of the Production Sector of the U.S. Food and Fiber System by Type
of Farm, 1986 (in nominal dollars)
Farm Type Number of Farms Millions of Current Dollars
and Crop (thousands) Gross Income Total Expenses Net Income
Crop farms887$71,963$45,191$26,772
Wheat704,9112,9032,008
Com16513,8389,4824,356
Soybeans934,3403,2301,110
Livestock farms1,32760,00254,86325,140
Dairy22921,90016,8895,011
Cattle67728,19220,5027,690
Hogs1279,8977,0202,826
Poultry2712,1453,0109,135
All farms2,214151,966100,05451,912
SOURCE: Adapted from U.S. DepaItment of Agriculture, Economic Research Service. 1988b. Income distribution by type of farm,
1985-1986. Table 8 in Econonuc Indicators of the Fann Sector Farm Sector Review, 1986. Report ECIFS 6-3. Washington, D.C.:
U.S. Department of Agriculture.
OCR for page 133
APPENDIX B
TABLE B.6 Private Sector R&D Activity in Six Major Program Areas
Industry Sector Level of Scope of
Program Area Performing R&D Investments Ongoing R&D.
Plant productivity Seed, agrichemical, High Moderate
and fertilizers
Animal productivity Pharmaceutical, High Broad
animal genetics,
~ . ~ . .
feed manufacturing
Nutrition, food Food processing, Modest Moderate
quality, and health consumer products
Natural resources Machinery, Modest Narrow
and environment agrichemical
Engineering, products, Equipment, food Modest Narrow
and processes processing,
commodity
processing
Markets, trade, and Multinational Modest Narrow
policy companies
aHigh, moderate, or modest, as indicated by the percentage of net profits devoted to R&D.
bBroad, moderate, or narrow relative to the research needs within each majo' program area
Pesticide Industry
The agrichemical industry accounted for about
$5.5 billion in total sales in 198~about $4 billion in
the United States and $1.5 billion abroad. Of the $5.5
billion total, about $700 million-or about 13 percent
of gross sales was invested in R&D (National Agri-
cultural Chemicals Association, 1986~.
It is important to note that only a portion of
agnchemical industry R&D supports basic and ap-
plied research that advances scientific knowledge.
Two factors limit the relevance of agrichemical R&D
in supporting scientific progress. First, much research
effort is required to develop the information needed to
attain or defend pesticide registrations from the U.S.
Environmental Protection Agency. This work is often
of limited value in advancing scientific knowledge
since it is product and situation specific and is de-
signed to satisfy regulatory requirements rather than
advance scientific knowledge. Second, the results of
much agnchemical industry R&D never fully enter
the public arena because of the need of private compa-
nies to protect proprietary knowledge and technologi-
cal production and R&D methods.
133
The capacity of the industry to expand this total by
increasing the percentage of sales directed to research
is doubtful because of several factors:
· R&D expenditures rose sharply in aggregate and
as a percentage of sales in the late 1970s and early
1980s.
· Most agrichemical companies are divisions of
larger chemical and energy companies. R&D expen-
ditures as a percentage of chemical industry sales
average only 3.7 percent, or 31.8 percent of profits.
Agrichemical divisions within most major companies
already support total R&D at rates at least twice those
of the industry-wide averages as a percentage of sales
or profits.
· Competition in the industry is growing as a
number of effective new products in major markets are
driving down pesticide prices and profit margins on a
per-acre-treated basis.
· Consolidation within the industry on a world-
wide basis is reducing the number of firms with viable,
ongoing R&D programs and will probably reduce
total R&D investment (see the section "Corporate
Consolidation" later in this appendix).
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134
Costs to defend existing registered products
increase as the U.S . Environmental Protection Agency
moves ahead with the pesticide reregistration process.
There are fewer unexploited opportunities re-
ma~ning in chemical synthesis and screening in fami-
lies of chemistry from which viable products have
emerged.
· Experimentation by farmers and research at state
agricultural experiment stations focuses on alterna-
tive biological and cultural practices for pest control.
· Genetic resistance is emerging in certain target
pestpopulations, a factor that limits the average useful
life of several products.
· The relatively high cost of capital has shortened
the time period during which R&D investments must
demonstrate the capacity to earn profits.
Expanded crop production acreage in 1989 and
future years will tend to increase gross agrichemical
industry sales and, hence, R&D. The acreage planted
to major field crops is expected to rise by about 15
percent in 1989, which could increase industry sales
by $500 million to $700 million. If the industry-wide
average committed to R&D remains unchanged at
12.7 percent of gross sales and planted acreage re-
mains at or about the 1989 level for several years, both
of which are optimistic assumptions, the expansion of
harvested acreage and product sales might result in a
$60 million to $90 million annual increase In agrichemi-
cal industry R&D in the 1990s.
Over the next decade, price competition, efforts by
farmers to cut production costs, and renewed interest
in integrated pest management and other cultural pest
control methods are likely to place downward pres-
sure on agnchemical prices. For these reasons, even
under an optimistic scenario for planted acreage and
prices, agrichemical industry R&D in the 1990s could
remain comparable to that in 1989. Under less favor-
able circumstances, planted acreage could retract back
toward 1986-1987 levels, soft commodity prices could
place further downward pressure on all cash produc-
tion expenses, and the percentage of sales and profits
devoted to pesticide R&D might fall toward the aver-
age for the entire chemical industry. Taken together,
these bearish factors could reduce pesticide industry
R&D by 5 to 20 percent in the 1990s. The possible
passage of restrictive and costly new environmental
regulatory laws by states, the federal government, or
both must be regarded as a major source of uncer-
tainty.
INVESTING IN RESEARCH
Seed Industry
Farmers spentjust over $3 billion on seeds in 1987.
Two leading seed companies, Pioneer Hybrid Interna-
tional and DeKalb, spent $49.9 million and $24.9
million, respectively, on R&D. or 5.9 and 6 8 r)ercent
resDectivelv. of ~ros.s .~1~
, _ ~,
O ~ .
Together, Pioneer and DeKalb account for over
one-third of total seed industry sales. The commit-
ment of these firms to R&D is very high. Pioneer
devoted over 50 percent of its profits to R&D; DeKalb
devoted over X6 percept. Across theindustry,between
5 and 7 percent of gross sales is devoted to research-
an estimated $150 million to $210 million annually.
Seed industry sales are even more responsive to
planted acreage than are agrichemical industry sales.
While seed production and sales were down in 1988
because of the severe drought and government land
retirement policies, inventories are generally ade-
quate, and stronger sales are anticipated in 1989. The
volume of industry-wide sales in the 1990s, however,
is not expected to rise much above the 1989 level and
would retract moderately if surpluses were to return.
No change from current levels is expected in the
percentage of sales devoted to R&D under a pessimis-
tic forecast of the economic conditions that affect the
industry.
Under an optimistic scenario for future R&D, there
is some prospect that a higher portion of total seed sale
revenues will be devoted to R&D because of the rapid
infusion of biotechnology techniques in all facets of
plant variety assessment, development, and improve-
ment. Advances in biotechnology that improve plant
resistance to stress or plant responsiveness to water,
sunlight, or production inputs add value to crop culti-
vars. Hence, farmers may be willing to pay a some-
what higher price for such improved varieties. This
prospect of delivering new value to farmers through
seeds has attracted considerable new capital to support
private sector research in this area, both in traditional
seed companies and agrichemical and biotechnology
firms, many of which are integrating into the seed
industry through acquisitions andjoint ventures. In an
interesting and relatively recent development, many
companies that have never conducted plant breeding
or molecular biology research (like Eastman Kodak
and Frito-Lay) are pursuing ways to modify the chemi-
cal, nutritional, cooking, or storage stability of basic
crops through biotechnology.
A change in government com modify and conserva-
tion policies may also increase seed industry sales. At
OCR for page 135
APPENDIX B
present, most farmland planted to row crops (about
175 million acres) is left barren in the fall after crops
are harvested. In order to help control erosion, im-
prove water quality, and increase farm income, new
policies are under consideration to encourage the
establishment of cover crops in the fall. The annual
planting of such crops as vetch, clover, rye, and oats
would markedly increase demand for certain types of
seed.
Under an optimistic scenario for successful com-
mercial applications of biotechnology in plant variety
development and government policies that have an
impact on industry sales, the portion of gross sales
devoted to R&D might rise from about 5 to 7 percent
to as much as 10 to 12 percent. Over the next several
years, this increase would generate a cumulative in-
crease of perhaps 50 to 75 percent in seed industry
R&D, amounting to some $75 million to$150 million
in additional R&D expenditures annually. This new
private sector research activity could prove vital in
moving new molecular biology techniques from the
laboratory to the field.
Fertilizer Industry
Farmers annually spend some $5.4 billion on fertil-
izers. These products are manufactured and sold by an
industry with a very low rate of R&D as a percentage
of gross sales. Fertilizer industry R&D is not expected
to contribute markedly to advancing the nation's sci-
entif~c knowledge base, although it does support
important work on the properties and effects of basic
plant nutrients following the use of particular fertilizer
formulations, and on methods to improve the effi-
ciency of fertilizer applications.
Machinery
Farm equipment and machinery manufacturers
devote about 3.5 to 4.0 percent of their gross sales to
R&D. Industry sales were about $8.0 billion in 1988,
reflecting a much stronger demand for tractors, com-
bines, and other large farm equipment than during the
mid-1980s. Data are not available to disaggregate
industry R&D estimates based on consumer lawn and
garden and recreational equipment sales (snowmo-
biles, lawn mowers, garden tillers, trimmers, chain-
saws, etc.~.
The impact of industry consolidation on R&D
investments during the 1980s is also not yet clear,
135
given the volatile record of industry sales and profita-
bility in the 1980s.
Under an optimistic scenario, the general recovery
of the agricultural sector will continue, strengthening
the demand for farm machinery. Farmers will replace
equipment that they retained through the 1980s and
will diversify their machinery base to include new
tillage, planting, and harvesting machines. Industry
sales could reach $1 billion, with 3.75 percept of sales
devoted to R&D. This would provide a $75 million
increase in R&D over the 1987-1988 level. Under a
pessimistic scenario, however, R&D investments will
not grow above the estimated 1988 level.
Livestock Industry
The total production expenses of livestock opera-
tions was about $55 billion in 1986, about $16 billion
of which was for feed and $ 10 billion was for breeding
stock, calves, feeder pigs, and other livestock. This
$26 billion in production expenses is generally paid to
other farmers or businesses that largely act as interme-
diate handlers of farm commodities. These expendi-
tures thus are not likely to support private sector R&D
investments directly. One of the nation's largest
animal feed and agricultural commodity processing
firms, Archer Daniels Midland, devoted just 0.1 per-
cent of its sales and 1.2 percent of its pretax profits to
research in 1987 (Business Week, 1988~. This re-
search focused mostly on the conversion of corn to
ethanol and biodegradable plastics.
Animal drug and pharmaceutical companies sold
$2.34 billion in health care products to livestock
farmers in 1987 (Animal Health Institute, Domestic
New Sales Survey, press release, May 16, 1988~.
Table B.7 summarizes Animal Health Institute data on
sales and research expenditures by major category of
product sales.
The average 15.7 percent commitment of gross
sales of animal health care products to research is
extremely high by any standard. The major compa-
nies undertaking such work are almost all active in
human medicine and drug manufacturing. The health
care industry as a whole devoted an estimated 7.9
percent of gross sales to R&D, just over half the rate
in the animal health care business (Business Week,
1988~. Four major firms that are active in both
businesses Upjohn, Merck, Pfizer, and Eli Lilly-
committed 14.1, 11.2, 8.2, and 12.8 percent, respec-
tively, of gross corporate sales (both in medical and
OCR for page 136
136
TABLE B.7 Gross Sales and Research Expenditures in the Animal Health Care Industry,
1987
Gross Salem R&D Expenditures Percent R&D
Product Class (millions of dollars) (millions of dollars) of Gross Sales
Pharmaceuticals
Andmicrobials 268.3 NA NA
All over 692.4 NA NA
Total 960.7 233.6 24.3
Biologicals 242.3 39.8 16.4
Feed additives
Anubacterials 301.6 NA NA
All other 839.8 NA NA
Total 1,141.4 78.4 6.9
Industry totals 2,344.4 369.0b 15.7
NOW: NA, Disaggregated data not available.
Preliminary estimates for 1987.
Dusty total includes $16.0 million of R&D on insecticides and $1.2 million on diagnostics.
SOURCE: Adapted from Animal Health Institute, Domestic New Sales Survey, press release, May 16, 1988.
animal care divisions) to R&D. These are all well biotechnologies.
above the industry average.
The prospects for increased R&D rest largely on
the likelihood of increased product sales. In recent
years industry sales have grown well ahead of the rate
of inflation. A range of emerging technologies and
products, including new diagnostics, vaccines, growth
hormones, and probiotics, among others, suggests
considerable long-term growth potential in industry
sales.
An optimistic scenario for animal care industry
R&D rests on four assumptions:
1. Continued progress by the animal product in
dustry in improving the nutritional attributes of meat,
poultry, and dairy products and hence, consumer
demand for livestock products.
2. Successful commercialization of animal growth
hormones, particularly bovine and porcine soma
totropins.
3. Resolution of current controversies about the
use of certain drugs, hormone therapies, and new
INFESTING IN RESEARCH
4. Improved recognition by farm managers of the
need for animal health maintenance and monitoring as
key steps in preventing disease and poor performance.
Optimistically, industry sales could continue to
grow at 5 percent annually in real terms, with no
decline in the current percentage of commitment of
sales revenue to R&D. This would result in an $18.4
million annual increase in R&D expenditures (0.05 x
$2,344.4 x 0.157 = $18.4~.
Less favorable conditions could result from emerg-
ing food safety concerns and setbacks in the regulatory
review of new animal health care biotechnologies.
Farmers may also prove to be less willing to adopt the
new generation of growth-promoting and disease-
preveniing drugs. Based on more pessimistic trends,
animal health care research could slip back toward 12
percent of sales and gross sales might drop up to 15
percent from 1987 levels. Under these conditions,
animal research expenditures would fall nearly $130
million, or by about one-third.
OCR for page 137
APPENDIX B
Veterinary Services
Total animal health care expenditures include the
purchase of drugs (about $2.3 billion in 1987) and
payments for veterinary services. A 1985 survey
estimated annual agriculture veterinary service ex-
penses at $638 million (B. E. Hooper, American
Veterinary Medical Association, personal communi-
cation, 1989~. Veterinary expenditures for compan-
ion animals Principally, dogs and cats) currently
exceed $5 billion annually and constitute over 85
percent of total veterinary expenditures.
Veterinarians are private business people and rarely
conduct research. The nation's R&D effort in veteri-
nary medicine is carried out at 27 schools of veterinary
medicine, which spend some $163 billion in research
(1988-1989 estimate based on R&D activity at 26 of
27 schools). Federal support for research on food-
producing animals, which has fallen from $ 15 million
in FY 1979 to $10.8 million in FY 1987, is currently
less than 7 percent of veterinary school R&D (B. E.
Hooper, American Veterinary Medical Association,
personal communication, 1989~. Most veterinary
school R&D focuses on companion animals and horses.
FACTORS INFLUENCING PRIVATE
SECTOR R&D
A variety of factors will influence corporate R&D
priorities, as well as the overall level of private R&D
expenditures. Clearly, the general economic status of
the farm sector and trends in planted acreage are
critical variables, since sales in many agricultural
inputindustries are roughly proportional to the amount
of land planted in crops each year.
Corporate Consolidation
Another factor that warrants attention is corporate
consolidation, a trend which is occurring in all major
agricultural input, food processing, consumer prod-
uct, end retail industry subsectors. Three meet packers
now account for most red meat sales. Eight chemical
companies hold 70 percent of the $17 billion world
market for agrichemicals, and also dominate the U.S.
market (S. Cath, Agricultural Research Institute, per-
sonal communication, 1989~. A half dozen companies
dominate the seed, farm machinery, and animal health
industries on a worldwide basis and in most countries,
including the United States. Further consolidation on
a global scale is expected in the' 1990s because of
137
increasingly fierce competition, growth in the size of
company needed to support state-of-the-art R&D and
marketing activities, and economic and political ad-
vantages gained by large companies that are able to
secure raw materials, locate manufacturing plants,
and penetrate markets anywhere in the world.
The impact of corporate consolidation and lever-
aged buyouts on R&D investments has been studied
by the National Science Foundation. Twenty-four of
200 leading private performers of R&D that were
involved in recent mergers or leveraged buyouts re-
duced combined R&D spending 5.3 percent between
1986 and 1987 (measured in current dollars). The
other 176 leading firms supporting private R&D in-
creased R&D by 5.4 percent in the same period (Na-
tional Science Foundation, press release, February 2,
1989~. As a result, growth in private sectorR&D since
1985 "has all but disappeared" (National Science
Foundation, 1989~.
A recent food processing industry R&D survey
found that R&D investments by companies with less
than $10 million in sales averaged 3.0 percent or more
of sales but dropped significantly to less than 1.0
percent of sales for companies with sales exceeding
$250 million (Best, 1988~.
Corporate restructuring can also have an impact on
R&D priorities. Several seed companies have been
boughs by agrichemical companies in the 1980s, often
because of the perceived potential of pesticide-pr~
ducing companies to increase the* market share
through sales of pesticide-resistant plant varieties. A
flurry of research in both public and private sector
laboratories in the 1980s on biotechnological methods
to develop pesticide-resistant varieties was driven
more by perceived near-term commercial opportuni-
ties than intrinsic scientific interest or broad consen-
sus that pesticide-tolerant plant varieties offer great
promise in addressing environmental concerns.
Mergers involving large food processing and
manufacturing companies with major retail firms raise
different concerns with regard to consumer choice in
the marketplace. Because of the proliferation of new
products, there is strong competition for shelf space in
supermarkets. Companies that gain preferential in-
store placement and that promote new or established
products can gain an important edge.
Corporate consolidation across national bounda-
ries provides companies the opportunity to reduce
costs by securing low-cost raw materials, locating
plants where manufacturing costs can be minimized,
and moving the finished products into several differ
OCR for page 138
138
ent consumer markets. Multinational companies in-
creasingly view the United States as a rich consumer
market but as a costly place to locate manufacturing
facilities. The ability of U.S. agriculture to serve as a
reliable, low-cost supplier of basic farm commodities
has also been questioned in recent years because of
aggressive policies designed to hold land out of pro-
duction in order to increase commodity prices and
farm income. Sometimes erratic government trade,
regulation, tax, and food safety policies in the United
States also cause corporations to reflect on the reliabil
INVESTING lN RESEARCH
ity and cost of using the United States as a source of
raw commodities or as a place to locate a production
facility.
Overall, corporate restructuring will influence the
level, focus, and impact of private sector R&D. The
full range of consequences from the wave of leveraged
buyouts that began in the mid-1980s is not yet clear,
nor is there any indication that the trend toward con-
solidation has slowed. Nonetheless, the evidence to
date raises several concerns that warrant ongoing
analysis and monitoring.
Representative terms from entire chapter:
animal health
