Genetic Editing (GE) Versus Genetic Modification (GM) in the Research and Development of New Crop Varieties: An Economic Comparison

Genetic editing (GE) offers an additional tool to traditional crop breeding and genetic modification (GM) for developing new traits in agricultural crops. Surveys of leading crop technology companies and a review of the literature indicate that GE may offer considerable economies of scale when compared to GM crop development. These economies are generally attributed to lower R&D costs, higher probability of R&D success (particularly in the initial discovery phase), and the fact that GE crops do not require an extra regulatory approval step (at least in most countries outside the EU) that adds considerable cost and uncertainty to the GM development process. This study examines the economics of GE versus GM crop development from the perspective of the minimum required market size (in terms of potential crop area) of a potential crop in order for the technology firm to expect to break even in terms of the real option value (ROV) of the project. The valuation model is unique in that it combines a decision tree with a binomial lattice in the valuation of an abandonment real option on the new crop technology. The decision tree is used to model the R&D process (which is non-market driven) while the binomial lattice is used to value the market-driven commercialization of the candidate crop variety. A survey of industry experts provided a range of values with regards to the time and cost of each R&D phase for both GE and GM crop development, so stochastic simulation was incorporated into the ROV model. A primary result from the empirical model is that across a wide range of trait values, the required cropping area for breaking even on a GE crop variety was consistently 96.3% less than the area required for a GM crop with the identical trait value and commercialization profile. Sensitivity analysis indicated that the GM (and GE to a lesser extent) required area was highly sensitive to the probability of success in the discovery phase. Somewhat surprising, the results for GM and GE were not sensitive to the abandonment option parameters – an indication that this type of real option adds little value to projects primarily due to the low volatility of returns during the commercialization phase.