RS21558 -- Genetically Engineered Soybeans: Acceptance and Intellectual Property Rights Issues in SouthAmerica Updated October 17, 2003 The United States is the world's leading producer and exporter of soybeans. However, South American soybean production and tradehas expanded rapidly during the past 15 years, greatly increasing the competitiveness of international oilseedmarkets. Together, theUnited States, Argentina, and Brazil are expected to produce nearly 83% of the world's soybeans in 2002/03, andto account for over90% of all soybeans traded on international markets. (1) Given a highly competitive international soybean market and growinginternational debate over the nature of production and trade in genetically- engineered (GE) crops, controversy hasemerged in recentyears over the growing pirated use of Roundup Ready (RR) soybeans, a GE variety, by producers in Argentina andBrazil. (2) Thispractice appears to provide a competitive advantage to Argentine and Brazilian soybean exports, and to be aviolation of theintellectual property rights (IPR) of the RR technology producer, Monsanto. Roundup Ready (RR) soybeans are genetically engineered to be resistant to the herbicide glyphosate. Glyphosate also was developedby Monsanto and is marketed under the brand name Roundup. RR soybeans are patented in the United States byMonsanto. (3) Monsanto licenses the RR technology to seed companies, which incorporate it into their conventional soybeanvarieties and sell theGE seeds to farmers. Among other things, the patent gives Monsanto and those companies to whom it has licensedthe technologymore control in setting prices and restricting the product's use. For example, U.S. farmers pay a technology feeestimated at $7.44 oneach 50-pound bag of RR planting seed. (4) In addition,as part of a signed purchase agreement, U.S. farmers are prohibited fromsaving seed from harvest for future planting or for resale to other farmers. Despite the additional cost andrestrictions, RR soybeansare favored over traditional varieties because they significantly lower production costs, offer more flexibility in cropmanagement, andin many cases increase yields. According to USDA's March 31, 2003, Planting Intentions Report , 80%of the soybeans planted in theUnited States in 2003 will be RR varieties. The Monsanto company is based in St. Louis, Missouri, but has offices throughout the world where its seeks to market its technologyto agricultural producers. Since 1960, a total of 30 countries have approved Monsanto's RR soybean technologyfor import orplanting. (5) However, Monsanto has been unable toobtain patent protection in either Argentina or Brazil. In 1995, Monsanto'sapplication for a patent for RR soybeans in Argentina was rejected. Subsequent applications have not succeeded. (6) In Brazil, thecommercial status of GE soybeans (and GE crops in general) remains in dispute in the courts and no patents on RRtechnology havebeen issued. The status of GE soybeans in Brazil is particularly important to international oilseed markets sinceBrazil representsessentially the last potential major source for non-GE soybeans to world markets. Although RR soybean seeds are not patented in Argentina, Monsanto has agreements with other seed firms in Argentina allowingthem to use the RR technology in their seeds. As a result, Argentine farmers have access to and have increasinglyswitched to RRsoybean varieties. In 2001, about 90% of Argentina's soybean crop was planted to RR varieties. (7) The RR share of the 2003 crop isnearly 100%, according to news reports. An Argentine seed law (Act No. 20247; 1973) requires that all seeds must be certified for commercial use. However, Argentinefarmers have reportedly ignored this law and routinely save RR soybean seeds for planting or resale. Since thegovernment does notenforce this law, a large black market for RR soybeans in Argentina has developed that keeps seed prices low anddiscourages anyattempts by Monsanto or licensed companies to assess technology fees on RR soybeans. According to Monsanto,it is not feasible tocharge a technology fee on soybean seeds in Argentina without patent protection. (8) As a result, Argentine farmers save about $8 to $9per metric ton on the technology fee. (9) This is aconsiderable cost advantage over U.S. soybeans in a highly competitive internationalsoybean market. (10) In September 1998, the Brazilian Biosafety Commission (CTNBio), acting under government authority, approved the commercialplanting of RR soybeans. Two major groups opposed to the use of GE crops -- Greenpeace and the BrazilianConsumer DefenseInstitute -- immediately filed lawsuits in Brazilian courts challenging the CTNBio approval. In 1999 a lower courtissued aninjunction suspending the CTNBio approval of commercial planting of RR soybeans before any approvedcommercial plantingactually occurred. The case was appealed to a three-judge panel of the Brasilia Appeals Court, where it haslanguished. In February2002, the lead judge of the three-judge Appellate Court publicly announced in favor of commercial planting of RRsoybeans. However, a majority of the three-judge panel has yet to render a decision on the commercial use of RR soybeans. As a result, itremains illegal to plant GE soybeans in Brazil. However, Brazilian farmers are aware of the benefits of RRsoybeans and havereportedly smuggled seeds into Brazil from Argentina's black market. Despite the lack of government approval,80% of the crop inthe southernmost state of Rio Grande do Sul is estimated to be planted to RR soybean varieties. (11) USDA estimates that 10 to 20% ofBrazil's total soybean crop may be planted to RR soybean varieties (trade estimates range as high as 30%). (12) As in Argentina, notechnology fees are paid by RR soybean growers in Brazil. (13) The American Soybean Association (ASA) claims that the technologyfee savings for Brazilian growers ranges from $9.30 to $15.50 per acre depending on yields. (14) More recently, other international events have forced the Brazilian government to temporarily alter its official position on GEsoybeans. In June 2001, China -- the world's leading importer of soybeans -- issued controversial rules governingthe use, sale, andimportation of GE soybeans. Under the rulings, China will only accept GE soybeans that have been approved forexport by the sourcecountry, along with certain other conditions. On January 10, 2003, China rejected Brazil's initial application toexport GE soybeans,in part because Brazil does not officially recognize the domestic production and export of GE soybeans. In lateMarch 2003, underpressure from producer groups, the Brazilian government announced temporary Regulation 113 (R113) as an interimmeasureallowing official sales of RR soybeans from the 2002-03 (April-March) crop for both domestic uses and export. R113 expires inMarch 2004, after which Brazilian growers are expected to comply with the current law. Because Brazil's courts have been unable to resolve the crisis prior to this year's October-December planting period, the Lulagovernment has been forced to issue a second temporary reprieve from the GE planting ban. Temporary Regulation130 (R130),signed into law on September 25, 2003, approves the planting of GE soybeans for the 2003-04 growing season andextends thepossible sale period of RR soybeans through December 2004. In an attempt to curb black market trade in RRtechnology, farmersseeking to sell GE soybeans during this period must sign a document pledging not to buy seeds of untraced originin the future. (15) Inaddition, Brazilian soybean farmers are limited to planting GE seed stocks already on hand because R130 containsno provision forimporting or selling GE seeds in Brazil. Also, lack of any labeling protocol for GE crops is likely to complicatedomestic marketing. The Lula government states that it is preparing a comprehensive "bio-safety law" to address these regulatory gaps,but this legislationhas been slow to emerge. The Lula government remains split on this issue. The Minister of Agriculture favorsprompt legalization,while the Minister of Environment is opposed and has asked for an environmental impact study beforecommercialization isallowed. (16) Both ministers agree that rigidenforcement of existing regulations would mean the incineration of all GE crops and theimprisonment of growers for 1 to 3 years at great cost to the country's agricultural sector. Within Brazil, two principal camps argue against legalizing GE soybeans, but for very different reasons. Some consumer andenvironmental groups argue that, because the risks associated with GE crops are unknown, they should not belegalized. Peasantgroups such as the Landless Workers Movement (MST), on the other hand, are not against GE crops per se, butargue that legalizingGE crops will accelerate large-scale farming and give control over Brazil's agriculture to multinational corporationssuch asMonsanto. (17) Brazilian producer groups claim that lack of access to RR technology would place them at a competitive disadvantage in internationalmarkets. To date, no significant market premium for non-GE soybeans has emerged in either domestic orinternational marketssufficient to offset the cost advantages of adopting GE varieties. Given the rapid growth and widespread use of GEsoybeans,legalizing their commercial use may be the only viable solution for Brazil's government. GE Labeling in Brazil. Brazil's food labeling regulation for products containingGE ingredients took effect on December 31, 2001. (18) The law mandates the labeling of all foods for human consumption when morethan 4% of the ingredients are derived from GE commodities. R113, the first temporary regulation allowing GEsoybean planting, hasimposed stricter GE labeling conditions on Brazil's food marketing system. Under R113, non-GE soybeans are tobe segregated witha 0% tolerance level from GE soybeans. (19) Inaddition, labeling is required on all shipments into or out of Brazil with a GE soybeanpresence in excess of 1%. (20) Since improperlabeling is subject to a severe fine, and since Brazil's marketing system is not set up tohandle such strict segregation requirements, it is likely that all soybeans passing through Brazil's marketing systemwill have to belabeled as having GE content. It is reported that Brazil's National Agriculture Federation (NAF) estimates the costof testing thecurrent 2002/03 crop for GE content at about $277 million. The NAF says that passing this cost on to consumerswould make itimpossible for Brazil to remain competitive in the global soybean market. (21) International Market Implications. According to many market analysts, thedecision on the status of GE crops in Brazil will have significant market implications, especially for global soybeanmarkets. First, ifBrazil permanently legalizes GE soybeans, nearly all (about 90%) of the world's internationally traded soybeans willbe of GEvarieties. Second, a decision in favor of GE crops will be nearly irreversible because of mixing in the distributionand transportationsystems. Some analysts suggest that the current widespread planting of GE crops in Brazil is already irreversible. In short, a decisionin favor of GE soybeans by Brazil could do much to moot the debate about whether or not GE soybeans should belabeled or eventraded because there simply would not be any major international supplier of non-GE soybeans left. According to the U.S. Trade Representative, the U.S. is committed to a policy of promoting increased intellectual property protection,both through the negotiation of free trade agreements that strengthen existing international laws and through useof U.S. statutorytools as appropriate. (22) The U.S. Administration'sposition regarding GE crops is that, not only are food products made from GEcrops as safe as their conventional counterparts, but their production has the potential to spur agriculturalproductivity whilebenefitting the environment. (23) Congress hasgenerally supported this position. For example, both the Senate ( S.Res. 154 ) and the House ( H.Res. 252 ) have passed resolutions in support of the Administration's dispute settlementcase atthe World Trade Organization (WTO) brought against the European Union's ban on imports of GE crops. In hearings by the Senate Foreign Relations Subcommittee on Western Hemisphere, Peace Corps, and Narcotics Affairs on May 20,2003, to discuss opportunities for U.S. agriculture in agricultural trade negotiations in the Western Hemisphere, theIPR issue of RRsoybean piracy in Brazil was raised in testimony given by the ASA and Monsanto. (24) In the absence of patent protection in Argentinaor Brazil, accusations of IPR violation may be difficult to sustain in a court of law. However, both Argentina andBrazil are membersof the WTO and, as such, have agreed to abide by the WTO agreement on Trade-Related Aspects of IntellectualProperty Rights(TRIPS Agreement). As a result, if Monsanto were able to eventually obtain patent protection for the RRtechnology in eitherArgentina or Brazil, Monsanto could then seek recourse for IPR infringement via the legal systems of thosecountries perrequirements of the WTO TRIPS agreement.

Summary: U.S. soybean growers and trade officials charge that Argentina and Brazil -- the UnitedStates' two major export competitors in international soybean markets -- gain an unfair trade advantage by routinelysavinggenetically-engineered (GE), Roundup Ready (RR) soybean seeds from the previous harvest (a practice prohibitedin the UnitedStates) for planting in subsequent years. These groups also argue that South American farmers pay no royalty feeson the saved seed,unlike U.S. farmers who are subject to a technology fee when they purchase new seeds each year. The cost savingto South Americansoybean growers on the technology fee alone nets out to about $8 to $9 per metric ton -- a considerable costadvantage over U.S.soybeans in the highly competitive international soybean market. This practice also raises concerns about theintellectual propertyrights (IPR) of Monsanto (the developer of RR technology). Commercial use of RR soybeans in Brazil remains illegal despite apparent widespread planting. A 1998government approval of theircommercial use remains suspended by court injunction, and resolution over their commercial legality is beingconsidered by anappellate court. However, two recent Presidential decrees have given temporary reprieve to the ban on planting andmarketing GEsoybeans through December 2004. The eventual outcome on commercial legalization of GE crops in Brazil mayhave importantconsequences for intellectual property rights, as well as for international trade in GE crops. This report will beupdated as needed.