Economic drivers for biosecurity at the business level

Story by Chris O’Connor, NGIA

Biosecurity is probably the issue for industry at the moment. On the surface it would appear that biosecurity obligations require that growers expend a lot but where are the returns?

Much has already been noted in industry communications on the internal returns which can be achieved by having a dedicated and systematic on ground approach to biosecurity management. These systematic approaches can drive efficiencies in production practices and reveal cost savings such as reduced pesticide use and reduced throw-out rates, all of which can be applied directly to the businesses bottom line.

Examples of this include the recent case studies of Pohlmans Nursey and Proteaflora Nurserywhich highlighted savings of $350,000 annually and stock loss reduction of 3%.

The asymmetric market place

Looking beyond the individual business we can now look at the influence of biosecurity within the market place.

Plant health and biosecurity have traditionally been seen as having a strong element of public good and this holds true. It is for this reason that government has invested and continues to invest significant resources into the biosecurity activity.

However the plant health space is not entirely a public good, as opposed to a private good as it has elements of both. High plant health status in a country for example provides growers with benefits such as reduced need for pesticides in production, and enhanced market access.

One catch to this however is that with respect to plant health, and by extension plant quality, the market place is asymmetric. An asymmetric market place exists when buyers do not have the same information about a product as sellers do. In this case purchasers of plants are not aware of what, if any, diseases the plant may have, the risks around how it was produced or where it was sourced from.

The results of this are that in the absence of information the market may lean towards lower quality. An example of this happens is cited by Matt Cavallaro - consider a used car market with only one type of car. One group of sellers is offering automobiles in good shape for $13,000, and another group is selling low-quality automobiles or lemons for $7,000. The average price that a buyer would be willing to pay for a car from this market is $10,000 ([$13,000 + $7,000]/2).

At a $10,000 average price point, only the sellers of low-quality cars will be willing to sell. Because sellers of high-quality cars want $13,000, most will not be willing to sell for $10,000. So this market would deal primarily in lemons, thus reducing overall product quality.

The lemons problem theory was originally described by George Akerlof in a 1970 paper titled "The Market for Lemons: Quality Uncertainty and the Market Mechanism."

However, there are ways of countering this tendency in the market place and the core tenant is to increase the information available to the purchaser. Cavallaro notes two mechanisms as being the adoption of Industry Standards and External Product Certification. For the nursery industry this can be seen in the Nursery Production Farm Management System (NIASA, EcoHort BioSecure HACCP). Individual businesses can also use their accreditation through these programs as a means of signalling. In the theory of asymmetric markets, signalling, as proposed by Michael Spence, is a means for the informed party to demonstrate the quality of their product. In this example accredited growers should promote their accreditation on their products and within their marketing materials.

Likewise Joseph Stiglitz suggested that buyers (or the uninformed) can use screening or looking for indicators of quality or a risk assessment, as a means of overcoming the information deficient. In this case this could include signals such as NIASA accreditation and other aspect such as a clean orderly nursery, professional appearance, well presented stock free of obvious signs of pest or disease etc.

Knowledge empowers the market

By addressing the asymmetric market place which exists in our industries plant health status, growers can drive economic returns for themselves and make the process of screening for their customers a much easier practice.

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