oversight

Methodological Considerations for a Study of Pesticide Price Differentials in the United States and Canada

Published by the Government Accountability Office on 1999-02-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      National Security and
      International Affairs Division


      B-281994

      February 26,1999

      The Honorable Byron L. Dorgan
      United States Senate

      Subject: Methodological Considerations for a Studv of Pesticide Price Differentials in the
               United States and Canada

      Dear Senator Dorgan:

      Differences in the prices of agricultural pesticides in the United States and Canada are one of
      several important issues in bilateral trade discussions. Farmers in each country have voiced
      concern that they face consistently higher prices for pesticides than they would on the other
      side of the border. In December 1998, the two countries signed a Record of Understanding
      that addresses several long-standing agricultural trade issues. As part of that agreement, they
      committed to carry out a jointly conducted pesticide price comparison study; this study
      would be completed in 6 months.’

      You asked us to review methodological issues related to carrying out a price comparison of
      agricuhurral pesticides in the United States and Canada As agreed with your office, this letter
      provides an overview of technical issues that should be addressed when designing an
      international price-comparison study of agricultural pesticides.


      SUMMARY

      This letter does not advocate a methodology to carry out the U.S.-Canadian pesticide price
      comparison, nor does it recommend how to assess the causes of price differences. Rather,
      this letter highlights some issues and elements that experts agree are critical to this type of
      study.

      Agricultural economists and experts with knowledge of pesticide issues concur that the
      design of the study requires a clear articulation of the specific goals and that the
      methodological approach be consistent with these goals. The purpose of the study largely
      determines technical issues, such as what crops to consider, which classes of pesticides to
      include, the regions in the two countries to analyze, the method of summarizing price
      differences, and the choice of exchange rate. The permutations are infinite, but the sample of
      pesticides analyzed will frame the interpretation of the study’s results. Experts also agree


      ’ Some of the other issues included in the Record of Understanding are tmnsportation of U.S. grain through Canada, quarantine
      restrictions on animal trade, and cooperation on biotechnology issues.




                                                                                     GAO/NSLAD-99-74RPesticide Price Differentials
B-281994


that a rigorous study of price differentials should contain measures of the reliability of the
data, statistical tests evaluating the accuracy of the results, and an exploration of the
sensitivity of the results to alternative methodologies. In addition, the price study should
include explicit caveats and a discussion of limitations in the data and/or the analysis.

BACKGROUND

Agricultural pesticides in both the United States and Canada are highly diversified chemical
products, most of which fall into three major categories: herbicides (to control weeds),
insecticides, and fungicides (to control fungal infections on crops). Pesticides are developed
and used with particular crops and pests in mind.’ Agricultural pesticides sold at the retail
level contain one or more active ingredients that eradicate or control pests, such as
glyphosate, 2,4-D, or acetochlor. Pesticides can also include inert ingredients that do not
directly affect the pest but, nonetheless, may be crucial for pesticide performance.s

Pesticides are registered separately for use in Canada and the United States. Jn both
countries, the company seeking the registration must submit proof that the pesticide does not
pose an unacceptable risk to humans or the environment. Yearly maintenance fees are
charged for pesticides used on large market crops (cotton, soybeans, and wheat) as well as
for pesticides used on minor crops, such as fruits and vegetables (carrots, berries, and
Belgian endive).’ Experts report that in order to maximize profits, companies first register
their pesticides for large market crops with higher expected sales volume and then seek
registration for pesticides for smaller crops with lower expected sales5 Therefore, crops that
have recently been introduced to the market or small-market crops usually have fewer
pesticides available.

Companies choose whether to register a pesticide for use on a particular crop in the United
States, Canada, or both countries. A pesticide registered for a particular crop in one country
may or may not be registered for that crop in the other country. However, even if the exact
same or substantially similar pesticide is for sale in Canada, U.S. farmers face restrictions on
importing the pesticide for use on their fields in the United States. According to a Canadian
official, Canadian farmers also face restrictions on importing U.S. pesticides for use in
Canada.




’ For example, in Canada, Hoe&ass 294” is used on several crops such as wheat, soybeans, and potatoes to control weeds such
as wild oats, green and yellow foxtail, and Persian darneb however, it is not for use on corn and it does not control Russian
thistle, sunkweed, or qua&pass. Its equivalent product in the U.S. is Hoelor?.

3Some inert ingredients are needed to help keep the pesticide spray in solution while it is in the spray tank or to improve the way
it sprays, sticks to, or penetrates the crop. Without these inactive ingredients, some pesticides would be considerably less
effective at controlling their target pest.

’ In Canada, companies are also charged a fee when they submit an application for a new pesticide registmtion.

’ Claude Courbois, ‘Determinan ts of Pesticide Registmtion for Food Crops,” Paper presented at the American Agricuhural
Economics Association, 1998Meeting (Salt hake City, UT: May 14,1998), p. 2. See also, Michael Ollinger and Jorge Femandez-
Comejo, “Innovation and Regulation in the Pesticide Industay,” ~micuhmal and Resource Economics Review, V.2’7#l, pp. 1527.




Page 2
B-281994


Observers have noted that cross-border prices vary for identical or similar pesticides and that
sometimes the reported price differences are substantial6 At different points in time and for
different classes of pesticides, farmers in each country have voiced concern that they face
consistently higher prices for pesticides than they would on the other side of the border.
GAO found few studies that examine patterns of pesticide price differentials in the two
cotmtries.

GOALS OF STUDY DETERMINE METHODOLOGY

Experts in statistics, agricultural economics, and the pesticide market concur that the goals
of the price study should largely determine the design and methodology of the study.
Important methodological decisions to be made include the type of price data, the unit of
analysis, sample selection, and currency conversion to allow international comparison. While
the particular characteristics of pesticides complicate the analysis, the choice of methodology
should be consistent with the goals of the study.

Price Data

Researchers experienced in price analysis affjrm that the goals of the study largely determine
which price is chosen for carrying out the analysis, but they also point out that the availability
of data may limit the options. There are several types of prices that can be used as the basis
of an international comparison of agricultural pesticide prices. The type of price used in the
study has implications for the inferences that can be drawn from the tidings. For example,
should the study consider the price that farmers paid for the pesticide, the “suggested retail
price,” or the price that a distributor quotes in his price list? Should the price include taxes,
rebates, application fees, discounts, or any other price adjustments? If the study aims to
examine the differences that farmers pay for name-brand commercial pesticides, then the
researcher should collect data on the prices paid by farmers. If a researcher is more
interested in differences that formulators7 or distributors pay on either side of the border,
then he or she should collect data on a different set of prices.

Unit of Analvsis

Another example of how the purpose of the study affects methodological considerations is
the issue of the unit of analysis. The unit of analysis determines whether the study compares
the prices of name-brand products or the prices of active ingredients found in a variety of
products in the two countries. Researchers agree that a meaningful price comparison must
strive to compare the prices of identical or nearly identical items. However, this goal of an
“apples to apples” comparison is complicated because some pesticides are not available in
both countries. It is reported that identical pesticide formulations can also have different
names, be packaged in different sixes, or be distributed or manufactured by different


6One would expect prices to differ when resale across the border is illegal or costly. With geographically segmented markets,
the characteristics in each country (demand for the product, patent protection, regulatory environment, transportation costs,
taxes, etc.) influence the price in the country, permitting nearly identical products to sell for different prices. Price variations
also occur within national boundaries. Pesticide prices within the United States vary by state, region, and crop application.

’ Formulators are companies that purchase all or some of the chemical components they need to create a final pesticide product.




Page 3
B-281994


companies in the United States and Canada Furthermore, the inactive ingredients, as well as
the proportion of active ingredient to inactive ingredients, can vary even for products with the
same name.

An alternative to comparing identical commercial pesticide products is to calculate and
compare the price of the active ingredients found in these products. For example, the U.S.
Department of Agriculture (USDA) calculates the average prices of the main active
ingredients used in pesticides in the United States.8 A researcher using this data can compare
the relative prices of the most common active ingredients found in the multitude of name-
brand formulations. Commercial marketing firms, on the other hand, gather and present data
for a sample of name-brand formulations of pesticides. This data facilitates comparison of
the price of a specific product to competing products in particular crop and regional markets.

Again, dete rmining the appropriate unit of analysis depends upon the final goal of the study.
A researcher may choose to compare namebrand product prices if, for example, the purpose
is to compare the price paid by U.S. farmers for a liter of Roundup@ to the price paid by
Canadian farmers for the same product. On the other hand, a researcher may choose to
compare active ingredient prices if the goal is to look at how much farmers in the United
States and Canada paid for an active ingredient found in a selection of commercial herbicides
applied to corn and wheat.

Samrtle Selection

Experts point out that the purpose of the price study should also determine the criteria for
selecting the sample of pesticides included in the study. The sample of pest&ides for
comparison can be restricted by crop, class of pesticides, or geographic region, although the
sampling options may be limited by availability of data For example, a researcher may
choose to study fungicides and insecticides applied to potatoes in Idaho and Alberta, or all
herbicides applied to corn, wheat, and barley in three provinces and bordering U.S. states. If
time-series data is used, the fact that some pesticides are newly registered or lose their
registration in one or both countries may lead to samples of pesticides that differ over tie.
The permutations are infinite, but the sample of pesticides analyzed will frame the
interpretation of the study’s resuhs9




%ee epricultmal Prices (Washington, D.C.: USDA/National Agricultmal Statistics Service [NASS]). The method NASS used
imputes a value to an active ingredient based on the proportion of the active ingredient found in the formulation. For example, a
$625gsllon of Pursuit@ that has a formulation of 50 percent imazethapyr, the active ingredient, yields a $312.50price for the 0.5
gallon of imazethapyr. This method, therefore, assumes that alI inert ingredients have the same value per unit as the active
ingredient in each formulation. There is some debate over whether this is a valid method of estimating the price of active
ingredients in pesticides.

’ The issue of sample selection would also incorporate methodological problems such as how the sample of data sources was
constructed. For example, in a data set of prices gathered from farmers, it would be important to know if the sample was
representative of fsrmers (in terms of farm acreage or technology) in the two counties.




Page 4
B-281994


Sumtnarizinn Price Differences

Experts have pointed out that the method of summarizing price differences is fundamentally
determined by the goals of the study. The preferred method of surmnarizing price differences
is to construct a price index that shows how the average price of pesticides varies across
countries. A researcher can gather data on pesticides in the sample and compare prices of
pesticides one by one, but in order to summarize the overall differences in pesticide prices in
the two countries the researcher must calculate an average price or price index. There are a
‘number of methods for constructing the index. For example, one could construct a simple
arithmetic average of prices (sum and divide by the number of pesticides in the sample), or
assign weights to the pesticide prices based on criteria such as volume of sales of the
pesticide, acres applied, pounds of active ingredient applied, etc.

Currencv Conversion

Researchers conducting international price comparisons recognize that these studies have an
added dimension of complexity because they require converting currencies. A researcher
confronts a variety of conversion methods, but purpose and availability of data drive the
method chosen. While it is relatively straightforward to convert from metric to U.S. units of
measurement (liters to quarts), currency conversions are not straightforward. One problem
is that exchange rates vary over time. Ideally, the exchange rate should correspond to the
same time period for which the price data was gathered. Pesticide price data may be
gathered over a period of days or weeks during the growing season or on different days in the
two countries. It is possible to use daily, weekly average, end of period, or annual exchange
rates-the appropriate choice depends on the price data and the purpose of the study.

TECHNICAL MEASURES OF ACCURACY AND RELIABILITY

Experts also agree that a complete study of price differentials must include measures of
accuracy of the results and tests of data reliability. Some analysts also suggest that a study
include an examination of how the results might change if alternative methodologies were
applied A researcher can use several methods to verify data reliability or the accuracy of
their estimates. However, the results of the study will be more credible if a rigorous
examination of validity and reliability is included.

STUDY LIMITATIONS AND CAVEATS

Explicit caveats and discussion of limitations in the data and/or the analysis are essential
elements of any economic analysis with policy implications. As previously discussed,
technical issues can be resolved in a variety of ways and each methodological choice will
affect the outcome of the study. Other researchers may make different methodological
choices, get different results, and come to different conclusions.

Data limitations may result in methodological approaches that are not ideally suited for the
purpose of the study and any contradictions between method, data and purpose should be
explicitly addressed in the report. For example, pesticide prices are not static. Prices change
from season to season in the United States and Canada New pesticides enter the market, and
others are taken off the market. The demand for different pesticides depends on the kinds of
pests that farmers need to control. Therefore, a study based on a one period cross-section of


Page 5
B-281994


agricultural pesticide prices in the two countries only shows price differences at that one
point in time. An important caveat for such a study is that its findings may not be
generalizable to other time periods or for all pesticides.

The methodological issues previously discussed demonstrate that there are multiple methods
to carrying out such a study. The researcher should explicitly recognize that the methods
chosen will affect the outcome of the study.

SCOPE AND METHODOLOGY

In order to identify technical issues common to international price comparisons and pesticide
price studies in particular, we conducted a review of the pertinent literature. We also
reviewed analyses of the pesticide industry, pesticide usage, and studies of the relationship
between regulation and pesticide registration in the United States.

To compare different methodologies used to compile price data sets, we reviewed the
documentation of a number of sources of data including the NASS’s survey of prices paid by
farmers for agricultural chemicals, a description of the methodology followed by Statistics
Canada to compile average pesticide prices and the pesticide price index for Canada, a study
of farm input prices from 1993 to 1997 in Ontario and border states in the United States, and
the description of the survey methodologies used by private sector marketing firms and
consultants that collect price data

To draw on the expertise of those who collect and analyze pesticide price data, we spoke to
pertinent government officials in the United States and Canada and private marketing
consultants. At NASS, we interviewed agricultural statisticians in the Livestock and
Economics Branch charged with the design, implementation, and compilation of the pesticide
price surveys USDA carried out. Similarly, at Stat&tics Canada, we interviewed officials who
calculate the farm input price index and oversee the pesticide price surveys. From the
private sector, we spoke with statisticians and methodologists who collect and analyze
pesticide price data.”

In order to gather opinions of experts about the principal issues involved in carrying out the
study of pesticide price differentials, we interviewed researchers that either specialized in
issues of price indexes and price comparisons or were recognized experts in pesticide issues.
These researchers included economists at USDA’s Economic Research Service, the Bureau of
Labor Statistics, North Dakota State University, North Carolina State University, and the
University of Minnesota. We also spoke to marketing experts from pesticide manufacturers
that operate in both the United States and Canada.

For information on pesticide registration procedures in the United States and Canada, we
consulted guidance documents on the registration process issued by the U.S. Environmental
Protection Agency and the Pest Management Regulatory Agency of Canada We also


I0We spoke to individuals responsible for survey design and data compilation at Doanes Market Research (St. Louis, MO),
Criterion Research CorpQ’oronto, Canada), Produce Studies Ltd. (United Kingdom), and Development Planning Research
Association (DPRA) (St. Louis, MO).




 Page 6
B-281994


interviewed an official from each agency who is responsible for pesticide registration
procedures.

In order to learn about farmers’ concerns regarding pesticides and their prices, we
interviewed officials from farmer organizations in the United States and Canada We also
interviewed a private, independent agricultural consultant with expertise in pesticide issues
along the United States-Canadian border.

We conducted our work between December 1998 and February 1999 in accordance with
generally accepted government auditing standards.

AGENCY COMMENTS

We discussed a draft of this letter with the Director of the Market and Trade Economics
Division of USDA’s Economic Research Service and a Trade Policy Officer in USDA’s Foreign
Agricultural Service. The director stated that the letter addresses the major methodological
issues that would arise in a pesticide price comparison study and would be very helpful to
USDA as it conducts its study. The officer also stated that the letter would be helpful to
USDA



As agreed with your office, unless you publicly announce the contents earlier, we plan no
further distribution of this letter until 30 days after its issue date. At that time, we will
provide copies to interested congressional committees and the Secretary of Agriculture. We
will also make copies available to other interested parties on request.

Please contact me at (202) 512428 if you or your staff have any questions regarding this
letter. Major contributors to this letter were Phillip Thomas, Kimberly Gianopoulos,
Samantha Roberts, and Valerie L. Nowak.



Sincerely yours,




International Relations and Trade Issues




(711378)



Page 7
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