Acceptability in Commercial
Channels of GMO Hybrids
—by Neil E. Harl?
The announcement on April 15 that A.E. Staley & Co. and Archer-Daniels-Midland would not buy genetically modified corn until its approval for shipment to Europe injects a great deal of uncertainty into seed purchase transactions and product sales at or after harvest. Basically, it is a contract issue. Contracts are instruments of choice for dealing with uncertainty. Ultimately, the outcome will depend, however, on economic forces.
Here are the major areas of uncertainty—
1. It may be too simple an answer for a farmer to check the label and stick with non-genetically modified hybrids. There is a chance that genetically modified organisms (GMOs) may appear in bags of non-GMO seed. At the moment, it appears that seed companies are not in a position to warrant that non-GMO seed is GMO free. Seed companies concede that contamination, particularly from pollination, can occur and likely does occur but at a fairly low level. Some estimate the contamination at less than one-tenth of one percent. The problem is that no tolerances have been set for GMO germ plasm in non-GMO seed. For these reasons, the obvious avenue for a producer to take (request an express warranty from the seed company that the seed contains no GMO germ plasm) may be greeted with a counter offer to state that the seed was produced without using GMO germ plasm. That may not be an adequate defense if tolerances are set at low levels.
There are tests for determining whether seed contain GMO germ plasm but those tests are not widely used, the equipment is not widely available and, apparently, seed companies are not routinely testing their seed. Moreover, there are questions about the reliability of testing.
2. Producers who grow GMO varieties should be prepared, by harvest 1999, to segregate their crop (using their own separate storage or by arrangement with the elevator or other purchaser). The question is whether a two track marketing system will emerge. There are numerous outlets for GMO grain but those outlets may not be as conveniently located as the local elevator (which may not be equipped to implement a two track marketing scheme). The pricing of GMO grain is expected to be based on demand-supply considerations. The outcome could be some discount for the GMO crop. The speculation has been that consumers would be willing to pay a premium for the non-GMO crop and that willingness would be translated into differential pricing. However, the way the issue is being framed raises a question about that outcome.
A major element of uncertainty on the product side is how widespread the opposition to GMO hybrids becomes. Several possibilities can be readily identified—(1) the European Union imports of GMO crop; (2) EU plus other countries (possibly including Japan, Australia and New Zealand) might impose the limits; (3) the opposition could extend to products processed or produced from GMO hybrids, including corn gluten, meat, and other products. The ultimate extent of the opposition cannot be ascertained at the moment.
The problem is complicated by the fact that firms buying the crop at original point of purchase locations (such as local elevators) are not equipped to test for the presence of GMO germ plasm. Therefore, purchasers are likely to move to impose warranty conditions on producers. It is reasonably clear that the grain marketing system will endeavor to push the problem back to or toward the producer. This puts the producer in a difficult position by not knowing conclusively that non-GMO seed is free of GMO and in being expected to warrant to the purchaser that the crop is GMO free.
Without testing at the point of entry into the marketing system, which is likely to be the case for some time, it is very difficult to hold producers liable for selling GMO grain into a non-GMO marketing channel or selling non-GMO grain contaminated with GMO germ plasm. Thus, for the near term, exporters are in a position of vulnerability.
As reliable testing becomes more widespread, the responsibility will move down the marketing channel.
One contract was recently reviewed in which the contract between the supplier of seed (and purchaser of the crop) and the producer recited that the producer warranted that the crop would pass without objection anywhere in the world. This type of approach may become more common.
3. Because this problem is inherently a contract problem and involves the law of warranty, a quick review of warranties is in order—
a. Express warranties generally result from explicit statements made by the seller and may be created in three ways—
(1) Any affirmation of fact or promise by the seller which relates to the goods and becomes part of the basis of the bargain. The warranty is that the goods will conform to the affirmation or promise.
(2) Any description of the goods which is made part of the basis of the bargain. The warranty is that the goods will conform to the description.
(3) Any sample or model which is made part of the basis of the bargain. The warranty is that the whole of the goods will conform to the sample or model. But "puffing" talk, statements of value or mere opinions of the seller would generally not create warranties.
b. Implied warranties are imposed by law to assure a fair result—
(1) A warranty of merchantability is imposed on all goods sold by merchants-–
(a) The goods must be able to pass without objection in the trade under the contract description. For example, goods listed and sold as "top of the line" must bear that general quality.
(b) Fungible goods (goods whose components or parts are substitutable such as corn) must be of "fair average quality" within the description. Fair average quality refers to goods centering around the middle range of quality.
(c) The goods must be fit for the ordinary purposes for which they are to be used.
(d) The goods must run of even kind, quality and quantity within and between units except as variations are permitted by the agreement.
(e) The goods must be packaged and labeled adequately in accordance with the agreement.
(f) The goods must conform to promises or affirmations of fact appearing on the container or label.
(2) An implied warranty of fitness is imposed on the seller if the seller has reason to know any particular purpose for which the goods are required and if the buyer is relying on the seller's skill and judgment in providing such goods.
(3) Disclaimer of warranties-–
(a) An implied warranty of merchantability may be excluded or modified by the seller if done orally or in writing in language that mentions merchantability. If in writing, the disclaimer must be conspicuous.
(b) An implied warranty of fitness can be excluded or modified only by conspicuous, written provisions in the contract.
(c) A seller may be excused from implied warranties if the goods are sold "as is," "with all faults" or if the buyer has examined or refused to examine the goods before signing the contract to the extent that an examination would have disclosed the defects. A professional buyer will be held to a higher standard of observation than a nonprofessional.
Producers as sellers of crop should examine very carefully any language in contracts for sale of the crop. In particular, careful attention should be given to any representation about the genetic make-up of the crop being marketed. Language should be approached with particular care that involves warranty language on use or destination of the crop. Statements that the purchaser anticipates that the crop will be exported to the EU could invoke an implied warranty of fitness, for example. Note that implied warranties of fitness can only be disclaimed by conspicuous, written provisions in the contract.
Producers may not be in a strong bargaining position over the terms of contracts of sale. Contracts may be offered on a take it or leave it basis.
4. The obvious conclusion that one can draw is that producers are ultimately in a vulnerable situation—
a. Unable, as a practical matter, to do more than rely on labels and seed company representations as to what is GMO and non-GMO seed.
b. Subjected at harvest 1999 to providing assurances that the crop being sold is non-GMO.
5. In the event the grain trade develops a two-track grain handling and marketing system, which will, in all likelihood ultimately emerge, the problem can be managed even if opposition becomes widespread. Obviously, pricing differences would be expected to reflect any increase in opposition to GMO product. Thus, producers would be expected to balance the advantages, if any, against any price differential and make production and marketing decisions accordingly.
6. Although producers will ultimately bear the economic brunt of the problem, seed companies may encounter pricing pressures for seed of GMO hybrids.