Overcoming Obstacles to Change

by Paul O'Connell, Director, Alternative Agricultural Research and Commercialization Center (AARC), USDA, Washington, DC., and Gregory R. Gajewski, Agricultural Economist, Economic Research Service, USDA, Washington, DC.

The U.S. farm sector has an excellent record of moving the results of conventional production research and development into commercial use, and doing so quickly. However, efforts to commercialize nonfood uses beyond the farm gate have been less spectacular. More work and improved structure are needed.

There is a growing awareness that industrial uses of both existing and new agricultural products offer one of the most promising areas for expansion of markets for U.S. agriculture. USDA and others have done a great deal of research and development on industrial uses, but all too often progress stops where actual commercial application begins. Overcoming this barrier is what "commercialization" is about.

Before private firms will invest in commercial-scale plants to process raw industrial materials from agriculture, they must have technical information from industry laboratories and those findings must be validated in prototype facilities. Some specific examples of commercialization activities are:

1. Identifying viable market needs;

2. Designing equipment;

3. Testing products for performance and consumer acceptance;

4. Obtaining regulatory clearance;

5. Scaling up prototype equipment to a commercial level;

6. Conducting precommercial runs;

7. Verifying that the technology performs on a commercial scale, and;

8. Developing technical, cost, price, and other economic data for financial institutions.

In Japan and the European Community (EC), the overall rate of investment in these developmental activities for new industrial uses of agricultural materials is higher than in the United States, in part because their governments give more up-front support to commercialization.

Why Not More Commercialization?

Many private firms cannot afford to wait the 5 to 10 years required to obtain adequate returns on their investment in promising technologies. Often, their limit is 2 years or less. In addition, private companies hesitate to commercialize new products or technologies because "being first" can put them at a competitive disadvantage later. For example, a firm building the first commercial-scale plant will go through a "learning by doing" period that, unless kept secret, will benefit competitors by enabling them to build a second-generation plant that produces at a lower cost.

There are two "gaps" in the U.S. commercialization process: the first is a gap in funding and the second is a gap in institutional structure. In this country, the Federal Government provides the majority of funds for basic research. Public expenditures are justified because the timing and size of the payoffs are often too far off and too uncertain for private firms to undertake. At the other extreme, the private sector provides most of the funds for manufacturing and marketing activities. In between is the funding gap (see fig.1).

In the EC and Japan, the public sector is aware of the problems private firms face in bringing new products to the marketplace and has programs to promote commercialization. For example, in agriculture, the EC awarded $83.9 million to 35 private/public partnerships in 1989 to fund research and development of new industrial uses from agricultural materials. The EC also has a Research, Technology Development, and Demonstration (RTD&D) program that is funded through 1994. The program includes $58 million for commercialization of nonfood industrial uses. In general, the EC's RTD&D commercialization projects require private firms to put up 70 percent of the funding.

Japan has a similar, but better funded, program to find naturally occurring agrichemicals and pharmaceuticals from plants and animals. In addition, Japan has a different institutional structure. In the United States, the economy is organized along functional lines by disciplines. Research and commercialization tend to be done by totally separate entities. But Japan's economy is organized along project lines, with a great deal of interdisciplinary interaction. Researchers are assigned to commercial production facilities.

As a result of these structural differences, other countries have all too frequently learned of U.S. research findings, commercialized them, and then exported the new products to the United States. Some experts maintain that while the functional structure found in the United States is well suited for basic research, the project structure, more common in Japan, seems better suited for commercializing technologies.

Who Benefits?

The task at hand is to benefit farmers and consumers by finding and commercializing new industrial uses for agricultural materials. The United States now has excess productive capacity to produce agricultural materials and new industrial products. In 1991, about 60 million acres of cropland were idled under Government programs, and direct Government payments to farmers totaled $9 billion. While progress at the Uruguay Round of the GATT trade talks would help open new markets for U.S. farmers, export markets are not the sole answer to growth in real farm income. New markets are needed, and commercialization of farm products for industry is a key to unlocking new prospects.

Benefits will also go to the communities in farm States where the industrial crops are grown. Jobs and income will be generated as the crops are taken from the farm gate through the processors to the wholesalers and retailers. The post-farm-gate activity will provide jobs in the transportation, manufacturing, distribution, and support sectors.

Accelerating the use of agricultural materials in industrial products holds promise for employing idled farm and rural resources. As more agricultural materials are used in industrial products, more farm inputs and outputs will be used in farm States. In addition, many of these agricultural materials have low bulk density, and at least initial processing will occur relatively near where they are produced.

The question is sometimes asked, "Why should taxpayers invest in these activities?"

Studies have shown that finding new uses for farm commodity program crops will lessen farmers' reliance on Government support programs and will generate benefits to consumers of new products. And with the increased planting flexibility authorized by the Food, Agriculture, Conservation, and Trade Act (farm bill) of 1990, these effects are likely to follow finding new uses for new crops as well.

The Federal Government has a time-honored tradition of funding successful agricultural research. Most of it has focused on raising yields and reducing the costs of producing traditional crops. This research infrastructure can equally well be directed to research and commercialization of new industrial uses that will increase the demand for agricultural materials.

In general, farm-grown raw materials may impose fewer environmental costs than synthetic sources especially materials derived from petroleum. Also, renewable resources will be used instead of nonrenewable resources. Examples include degradable plastics, lubricants, alcohol fuels, cosmetics, and a host of other products.

Compared to the early 1980's, the United States is importing a higher percentage of total agricultural materials purchased. Including food, fiber, fish, and forest products, these imports amounted to $45 billion in 1991 (see fig. 2). Yet the United States has excess productive capacity to produce agricultural materials. Commercializing new industrial uses likely will cut the trade deficit, especially imports of petroleum.

To date, however, there have been no cost-benefit studies or studies of the rate of return on USDA commercialization projects. Most of the industrial products are new, and marketing is still in the experimental stage.