The U.S. Economic Impact of the IR-4 Ornamental Horticulture Project

Transcription

1 The U.S. Economic Impact of the IR-4 Ornamental Horticulture Project December 4, 2008 Steven R. Miller and Abdullahi Abdulkadri Center for Economic Analysis Michigan State University

2 Executive Summary The IR-4 Ornamental Horticulture Project was founded in 1977 to provide agrichemical registration support for non-food specialty crop growers that include ornamental horticulture plants grown in greenhouses and nurseries, landscape plantings, Christmas tree farms, sod farms and interiorscapes. This program directly contributes to the health of this industry by providing necessary research and EPA registration support for an industry that otherwise would have few resources to address agrichemical usage and research tools to form enlightened management decisions for controlling pests in an efficient and ecologically friendly manner. Agrichemical companies bear a substantial cost for the research necessary to gain product/application registration. This cost is spread over a wide range of acres of application for program crops, but sales volume for many specialty crops is not expected to cover the research costs of product registration. The passage of the Food Quality Protection Act of 1996 (FQPA) imposed stricter standards that resulted in the cancellation, or substantially restricted the use of several agrichemical products. Ongoing regulatory changes, adaptation of floriculture pests and changing consumer demand place ongoing needs to identify agrichemical solutions for floriculture producers. The total value of floriculture production in terms of wholesale sales in 2006 was estimated at $16.9 billion according to the USDA. Because of the size of floriculture sales, in terms of the total value of transactions, the IR-4 Ornamental Horticulture Project research is capable of producing large economic impacts. The IR-4 Ornamental Horticulture Project operated on a budget of $1.4 million in Additional in-kind contributions from industry and state experiment stations contribute to the total value of program delivery. We estimate that the IR-4 Ornamental Horticulture Project contributes $2.588 million in direct expenditures for research and administration. Industry productivity estimates effects of the IR-4 Ornamental Horticulture Project are estimated based on peer-reviewed academic publications of the aggregate return to investing in agrichemicals. Productivity impacts are measured in terms of contribution to annual industry sales is estimated to be $760 million. Standard economic impact models are applied to measure the economic impact of the IR- 4 Ornamental Horticulture Project. These models produce an economic multiplier effect that accounts for economy-wide transactions associated with research, wages, and industry production. Accounting for all direct and indirect impacts of the IR-4 Ornamental Horticulture Project, we estimate its impact contributes $1.176 billion to gross domestic product annually and supports 16,903 full and part-time jobs in the U.S. with annual income of $719 million.

3 Table of Contents Introduction... 1 The IR-4 Project and the IR-4 Ornamental Horticulture Project... 2 Ornamental Crop Industry:... 3 Pest Management of Ornamentals... 5 Economic Impact of the IR-4 Ornamental Horticulture Project... 8 Direct Impacts...12 Total Economic Impact of the IR-4 Ornamental Horticulture Program...14 Other Non-Measured Benefits of the IR-4 Ornamental Horticulture Project Conclusion Bibliography... 17

4 Introduction Floriculture crop producers access to effective agrichemicals for pest management and growth regulation is an important factor in maintaining low-cost and competitive production of crops. Agrichemicals are associated with reduced crop losses, increased productivity, and improvements in product quality. To protect against unintended impacts, agrichemicals for food crops are governed by pesticide label restrictions administered by the Office of Pesticide Programs (OPP) and authorized under Section 3 of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). The FIFRA provides federal control of crop chemical distribution, sale, and use, requiring that all covered agrichemicals used in the United States must be registered through the Environmental Protection Agency (EPA). Registration specifies the crops/sites on which an agrichemical may be applied, and each use must be supported by research data. Such registration assures that pesticides will be properly labeled and that, if used in accordance with label specifications, they will not cause unreasonable harm to the environment and health. The companies involved in developing and marketing crop protection chemicals commonly generate the research data supporting product registration. For most program crops, it is in the best interest of the agrichemical industry to supply the necessary data to support registration, as sales volume generated from labeled uses are sufficient to cover the cost of generating the necessary research data for registration. However, these companies do not view the relatively small markets associated with specialty crops and minor uses as priority business objectives because of the limited potential economic return on investment. Pesticide producers generally find that supplying the necessary residue and efficacy data required under FIFRA is cost prohibitive for many specialty crop applications, as the total acreage is not sufficiently large enough to generate sales volume sufficient to recoup the extensive research costs for registration. Consequently, there exist insufficient financial incentives for the agrichemical industry to invest in registering pesticides for specialty crops despite the high value of these crops (U.S. Environmental Protection Agency, 2007). Further complicating the task of pest management, ongoing restrictions or eliminations of pesticides and the dynamic nature of arthropod and plant stocks create an ongoing need for updated and new pest management solutions for growers (Schumacher, et al., 2006). The Food Quality Protection Act of 1996 (FQPA) imposed stricter standards that resulted in the cancellation, or substantially restricted the use, of several agrichemical products. Stricter standards under the FQPA increased the cost of completing a new product registration while cancelling labels of many existing pesticide applications. Subsequently, the new standards adversely impacted agrichemical innovations and discouraged the development of pesticides for minor crop markets (Ollinger and Fernandez-Cornejo, 1995). While stricter standards have facilitated the development of agrichemicals with preferential health and environmental characteristics, it has reduced their accessibility to minor-use crop growers. Furthermore, field resistance to pesticides and consumer demand for new varieties of specialty crops create an ongoing need to update the agrichemical and research needs of floriculture producers. The Interregional 1

5 Project, # 4 (IR-4 Project) provides the research necessary to support agrichemical registrations for specialty crop usage; providing agrichemical solutions that would not be available in its absence. The IR-4 Project and the IR-4 Ornamental Horticulture Project 1 The IR-4 Project was established in 1963 by State Experiment Station Directors of the U.S. Land-Grant education system and the USDA Cooperative State Research Service to provide disease, insect, weed and plant growth regulator solutions for specialty food-crop producers. Specialty food-crops are high-value, small-acreage crops that include food crops such as fruits, vegetables, nuts, and herbs and non-food crops such as turf and ornamental landscape plants and contribute approximately $45 billion to the total U.S. value of output in terms of sales. The sale value of specialty crops comprise about 33 percent of total farm crop value in the United States, where specialty crop sales for 26 states make up more than 50 percent of state agricultural crop sales (CSREES, 2008). About 50 percent of EPA approvals are associated with IR-4 submissions for specialty food and ornamental crops (The IR-4 Project, 2007). Furthermore, since its founding, the IR-4 has developed the data necessary to endorse over 20,000 food use and ornamental horticulture label clearances (CSREES, 2008). Today, the IR-4 Project operates three distinct programs, the Food Use Program, the Ornamental Horticulture Program, and the Biopesticide Program that transcends both food and ornamental crops. The IR-4 Project also has numerous ongoing initiatives and activities to support specialty crop growers. These initiatives span seed technologies, help to synchronize U.S. and international pesticide tolerances for minor uses, establish research guidelines, and establish widely recognized crop groupings to reduce the total effort required to register pesticides across the vast array of specialty food and ornamental crops. Furthermore, the IR-4 Project responds to new and foreseeable threats with provisional initiatives like the Methyl Bromide Alternatives Program initiated in 1998 to provide alternative applications following the Montreal Protocol phase-out of the use of Methyl Bromide. Through these efforts, the IR-4 Project continues to innovate and facilitate specialty crop growers and the markets for specialty crops for both food consumption and ornamentation. The IR-4 partners with several regulatory and research organizations including State Agricultural Experiment Stations, USDA, Agriculture and Agri-Food Canada (AAFC) Pest Management Centre, the EPA, and other regulatory agencies (The IR-4 Project, 2007). The IR-4 personnel also maintain regular interaction with growers, commodity organizations, food processors and agrichemical producers to effectively address industry needs. Through these collaborations, the IR-4 Project takes a pivotal role in addressing industry needs from growers to regulators. 1 Cristi Palmer, Program Manager of the IR-4 Ornamental Horticulture Project contributed to the content of this section. 2

6 By collaborating with industry, research, and government entities, the IR-4 is a true interregional research project with wide-spanning collaborations across states and industries. Direct funding for the IR-4 Project comes from a variety of government, university and industry sources. Primary funding for the IR-4 Project comes from Cooperative State Research, Education, and Extension Service (CSREES), Agricultural Research Service (ARS), Foreign Agriculture Service (FAS). The IR-4 Project leverages these funding sources with industry, commodity groups and university experiment stations, who contribute both funding and in-kind support. The IR-4 Project headquarters are located at Rutgers University in New Jersey. The IR-4 Project expanded in 1977 with the addition of the Ornamental Horticulture Program. This program provides agrichemical registration support for non-food specialty crop growers, which include ornamental horticulture plants grown in greenhouses and nurseries, landscape plantings, Christmas tree farms, sod farms and interiorscapes. Approximately 36 percent of the value of sales of all specialty crops falls within this ornamental horticulture category. Over the Ornamental Horticulture Program s history, the primary focus has been to generate crop safety information and to add new crops to labels. This changed during the 2003 Annual Workshop where attendees established high priority projects to focus the research efforts on key issues in each discipline. At that workshop attendees selected Phytophthora Efficacy, Scale & Mealybug Efficacy, and Herbaceous Perennial Tolerance to Select Herbicides. Since then, the program has also conducted research on several high priority projects such as efficacy for Borers, Beetles, Pythium, Q biotype Whiteflies, Thrips, and White Grubs, and crop safety on a number of herbicides. The 2008/2009 research priorities include efficacy for Armored Scale, Downy Mildew, and Borers, and crop safety for Freehand, Tower, among other herbicides. High priority project selection starts with growers, landscape care professionals, extension agents or researchers identifying a need an area where current management tools are not registered, such as for a newly introduced pest or for crops where little phytotoxicity information is available. Research has been sponsored on most active ingredients registered for ornamental horticulture since Ornamental Crop Industry: The ornamental crop industry makes up an important component of specialty crop agriculture. According to the 2002 Census of Agriculture, the total value of sales of these Table 1: 2002 Market Value of Crops Sold $1,000 Percent Crops, including nursery and greenhouse 95,151, % Major Program Crops 45,579,597 48% Specialty Food Crops 26,529,501 28% Specialty Non-Food Crops 15,086,239 16% Other Crops 7,929,618 8% Source: 2002 Census of Agriculture 3

7 industries exceed $15 billion and make up over 15 percent of the total value of sales of all production crops and 36 percent of the value of sales of all specialty crops (National Agricultural Statistics Services, 2004). Table 1 shows the value of ornamental crops sold in 2002 against other specialty crops and program crops. Ornamental crops exclude plants intended for commercial food production and include floriculture and nursery crops. Floriculture crops include bedding and garden plants, cut flowers, potted flowering plants, indoor foliage plants, and cuttings and other prefinished plants generally sold to other growers for further growing. As in indication to the total value of ornamental crops, Jarardo estimates that sales per U.S. Households are about $147 at wholesale based on 2005 estimates (Jerardo, 2006). The Floriculture and Nursery Crops Yearbook for September 2007 enumerates the current size of ornamental crop industry (Jerardo, 2007). This reference compiles National Agriculture Statistics Service (NASS) survey data of floriculture and nursery growers from two survey series. Floriculture surveys are sent to all known growers of floriculture crops in 15 major producer states, requesting quantity of units sold, percentage of sales at wholesale, the wholesale price, and the value of sales by crop. Similarly, nursery surveys are sent to nursery crop producers in 17 major producer states to collect quantity of units sold, percentage of sales at wholesale, the wholesale price, the value of sales by crop, crop acreage, and employment. Growers surveyed are identified by the previous Census of Horticultural Specialties. Table 2 shows that the top four states, in terms of wholesale cash receipts, are California, Table 2: Grower Wholesale Cash Receipts by State Percent of US Sales 2006 State Percent of US Sales 2006 State 2001 Sales 2006 Sales 2001 Sales 2006 Sales California 3,179,558 3,804, % Arizona 82, , % Florida 1,592,807 1,753, % Missouri 97, , % Texas 1,235,512 1,496, % Idaho 67, , % Oregon 830,938 1,040, % Hawaii 88,597 99, % North Carolina 1,049,889 1,026, % Iowa 92,006 89, % Michigan 515, , % Kentucky 59,693 81, % Ohio 573, , % Louisiana 73,198 76, % Pennsylvania 392, , % Utah 59,544 66, % New York 315, , % New Mexico 57,763 62, % Georgia 259, , % New Hampshire 51,879 62, % New Jersey 323, , % Kansas 51,922 52, % Washington 347, , % Arkansas 49,525 51, % Maryland 286, , % Mississippi 46,627 45, % Colorado 226, , % Rhode Island 34,449 43, % Illinois 267, , % Maine 33,651 42, % Alabama 234, , % Delaware 33,250 34, % South Carolina 266, , % Nebraska 25,800 33, % Tennessee 271, , % Montana 16,860 32, % Connecticut 196, , % Vermont 20,813 27, % Wisconsin 228, , % South Dakota 20,058 23, % Virginia 104, , % Alaska 14,020 14, % Minnesota 178, , % North Dakota 8,125 9, % Oklahoma 139, , % Wyoming 5,645 6, % Indiana 135, , % Nevada 13,010 6, % Massachusetts 139, , % West Virginia Source: Alberto Jerardo, Floriculture and Nursery Crops Yearbook 4

8 Florida, Texas, and Oregon, who collectively produce nearly 50 percent of total U.S. production of floriculture crops valued at $16.9 billion. Furthermore, the top 15 producing states make up about 80 percent of total U.S. floriculture wholesale receipts. Floriculture crops are mostly concentrated in select states around the country. These top producing states are not necessarily confined to states with temperate climates. However, temperate climate states account for the top four producing states. Less temperate states, such as Michigan and Ohio, place heavy emphasis on greenhouse operations, but these greenhouses are conducive to many pests and require very different approaches for pest control. Unlike field crops, greenhouses, especially those that produce year-round, engender pest organisms throughout the year. Greenhouses provide both barriers against pests but habitable environments for the propagation of pest once introduced. To exemplify, spider mites pose a serious threat to greenhouse growers and have adopted well to greenhouse climate by no longer reacting to diapause-inducing environments (van Lenteren, 2000). Consumer desire for cosmetically unblemished ornamental plants demands substantial investment in agrichemical solutions. Presentation is a vital component in the value of ornamental crops. Consumer perception of the quality of ornamental crops rests wholly on external attributes, such as absence of defects, uniformity of size, and shape. Ornamental growers must contend with demand for blemish-free ornamentals. To address customer demand, growers have a small portfolio of options to support unblemished ornamental crop production that include integrated pest management approaches, environmental controls in greenhouses, pesticides, and growth regulators. However, regulatory oversight of pesticide usage and unfavorable agrichemical industry risk-reward relationships for ornamental crop registration creates a market failure condition for ornamental crop growers; reducing access to agrichemicals available to other growers. This known issue was addressed in the creation of the IR-4 Ornamental Horticulture Project to coordinate and sponsor research for data generation required for registering floriculture uses. Pest Management of Ornamentals The ornamental nursery industry intensively manages pests because a low threshold for economic damage is dictated by the consumer's demand for aesthetically rich floriculture stocks. High quality plants with no damage is the benchmark for this industry and any damage related to disease or insect feeding will dramatically lower or eliminate the cropvalue. Where disease is present, the very least symptomatic plants are thrown away at an economic loss. Hence, the use of pesticides for control of pests represents a significant economic cost to ornamental crop producers. According to 2001 estimates, floriculture producers on agrichemical inputs spend approximately $380 million, or 2 percent of the value of 2001 wholesale cash receipts of floriculture crops, annually. This estimate is consistent with estimates by Parrella et al. (1999) and Hodges et al. (2003) of greenhouse growers. 5

9 Table 3: 2006 Pounds of Active Ingredients: Nursery and Floriculture 1,000 Ponds Percent Herbicides % Insecticides % Fungicides 1,888 34% Other 1,782 32% All 5, % Source: USDA: Agricultural Chemical Usage: 2006 Nursery and Floriculture Summary The USDA documents agrichemical usage of nursery and floriculture producers (National Agricultural Statistics Services, 2007) while the EPA (Kiely, et al., 2004) provides estimates of total usage and expenditures for agrichemicals. Table 3 provides estimates of active ingredients applied in six program states by floriculture producers with sales in excess of $10,000 per year. According to the USDA study, fungicide applications accounted for the largest single category at 34 percent of total pounds of active ingredients. Other agrichemicals including growth regulators, rodenticides and other animal repellents, soil fumigants and others make up the second largest category at 32 percent of total pounds of application. Along with agrichemical solutions, floriculture growers rely on non-chemical means to control pests. A USDA National Agriculture Statistics Services survey finds that nursery and floriculture producers employ a wide range of integrated pest management (IPM) strategies to reduce the use of agrichemicals (USDA: National Agricultural Statistics Services, 2007). IPM practices provide a vast array of complementary approaches for reducing agrichemical usage through mechanical devices, physical devices, genetic, biological, management, and chemical applications. IPM emphasizes prevention techniques to reduce the need for agrichemical applications and targeted chemical applications rather than comprehensive applications to reduce operating and environmental costs of floriculture production. In applying IPM approaches, growers seek to reduce the use of agrichemicals in production. As reported in the NASS study, most IPM management practices tend to arise from prevention and monitoring activities. Applicable practices are mostly site specific, as some facilities are more conducive to efficiency gains from some practices but not others. The most commonly reported activity is pruning or removing infected plants or plant parts, inspecting incoming stock, scouting and monitoring, and applying ground cover. Using insect or disease-resistant varieties was common, with almost 50 percent indicating this practice (USDA: National Agricultural Statistics Services, 2007). IPM practices have not been universally adopted, but degrees of IPM practices are generally practiced among growers for both environmental and cost reasons (van Lenteren, 2000). The use of biological alternatives to agrichemical usage is also common among floriculture producers. Other studies find that approximately 50 percent of floriculture producers across the US use or have used biological controls (Schumacher, 2002). Increasingly, ornamental producers are introducing IPM strategies (van Lenteren, 2000); 6

10 combining host-plant resistance with biological control, selecting cultivars that attract natural enemies and produce better environments for biological control agents. Biological control agents create additional benefits by not encouraging antibiotic resistance. Biological approaches to pest management have gained in popularity among floriculture producers, as producers struggle with label recalls and limited access to agrichemical options. Concerted pest control efforts in greenhouses are especially important to floriculture producers. Greenhouse environments, common environments for ornamental crop production, create ideal conditions for pest control, but also present unique challenges to pest control. Since greenhouses are relatively isolated units, greenhouses can be cleansed of pest organisms. Year-round production in greenhouses, however, complicates pest control once pest organisms are introduced. Heating in the winter facilitates year-round incubation of pests and provides an ideal environment for pest fruition once introduced. Hence, rates of population growth in greenhouses often exceed that in the field for any given pest (van Lenteren, 2000). Pest adaptation, or field resistance, is a critical concern for the ornamental horticulture industry. Pesticide resistance occurs when pests targeted by pesticides develop a decrease in susceptibility to particular pesticides. Such adaptation is expedited by certain pest management practices and especially by repeated applications of a single pesticide for control. Resistance to a pesticide is commonly managed by alternating among pesticide classes. Biopesticides are increasingly turned to as an agrichemical alternative without the risk of field resistance (van Lenteren, 2000). The IR-4 promotes both agrichemical and biopesticide solutions to provide growers options for controlling both pests and pest resistance. According to the USDA, nursery and floriculture operations applied 374 different active ingredients in 2006 (National Agricultural Statistics Services, 2006). The most common herbicide active ingredients applied by floriculture crop producers include Glyphosate isopropylamine salt, Napropamide, and Oxyfluorfen. For insecticides, the most common active ingredients include Petroleum distillate, Acephate and Chlorpyrifos. Fungicide applications centers on Mancozeb and Chlorothalonil, while Metaldehyde, Methyl bromide and Chloropicrin make up the dominant active ingredients within the other category. Table 4 highlights the specialized pesticide needs of nursery and floriculture producers, by contrasting the distributions of active ingredients for nursery and floriculture Table 4: Distribution of Agrichemical Active Ingredients Nurseries and Floriculture All Agriculture Uses Herbicides 24% 67% Insecticides 26% 11% Fungicides 50% 22% All 100% 100% Sources: USDA and EPA and author's calculations 7

11 production relative to all agricultural uses. Table 4 excludes the Other category of agrichemical inputs reported in Table 3. Herbicide applications, for example, make up the largest proportion of chemical applications for all agricultural uses but represent the smallest proportion for nursery and floriculture producers. Similarly, fungicide applications make up a sizable component of nursery and floriculture production while playing a minimal role in agriculture as a whole. The contrast between pesticide uses of nursery and floriculture producers to all agricultural uses reflects the need to address the agrichemical needs of these specialty crop producers. Program crops that include highacreage crops like wheat, corn and oats, have sufficient incentives in place to promote registration. Overall, agricultural uses of agrichemicals are not representative of the specialized agrichemical needs of nurseries and floriculture producers. To further enumerate the contribution of agrichemicals to the production of floriculture crops, Table 5 provides estimated nursery and floriculture expenditures on herbicides insecticides and fungicides adjusted to Herbicides and insecticides make up the smallest categories of investment in agrichemicals for floriculture producers, while fungicides and other agrichemicals make up the largest two investments. Floriculture producers invested over $380 million in agrichemicals in These estimates exclude biopesticide expenditures, scouting and labor costs associated with pest management. Table 5: Nurseries and Floriculture Agrichemical Expenditures: 2001 ($000) Herbicides 63,234 Insecticides 67,248 Fungicides 128,394 Other 121,217 All 380,093 Sources: USDA and EPA and author's calculations Economic Impact of the IR-4 Ornamental Horticulture Project The IR-4 Ornamental Horticulture Project supports the US nursery and floriculture industry valued at $16.9 billion in terms of sales. In 2007, the IR-4 conducted 622 efficacy trials and over 620 phytotoxicity studies for ornamental horticulture registration. The IR-4 Ornamental Horticulture Project database has over 1,700 researchable research efficacy and phytotoxicity study results used for 144 active ingredients and over 250 ornamental crop products as of June of These trials and studies are representative of the last 5 years of the program s efforts. Through these trials and studies, research data for product registration are generated and results are routinely used by industry for decision-making. Growers rely on such research to make efficient decisions on pest and growth management options. The annual operating budget for the IR-4 Ornamental Horticulture Project for 2007 included $400,000 from CSREES, $582,000 from ARS, industry and other contributions 8

12 of $162,000, and in-kind contributions of $1.44 million from state agriculture experiment stations; contributing researcher time, materials, and other resources for carrying out research studies on efficacy and phytotoxicity of pesticides and growth regulators. In all the IR-4 Ornamental Horticulture Project invested nearly $2.588 million in research for the support of US floriculture production. We base economic impacts through two channels. The first is the level of economic activity that results in research expenditures. The second is productivity impacts on industry. Pesticides are known to increase growers productivity through higher yields in terms of value, greater output, longer product shelf-life, and through labor-savings (Cooper and Dobson, 2007). However, the impacts estimated in this study exclude the potential cost savings of existing landscape protection measures made available to commercial landscapers and households, potential environmental impacts through growers access to more targeted and less toxic agrichemicals, and reduced threats of invasive species. All of which are worthy research questions in themselves but beyond the scope of this study. While this study overlooks some channels that may positively affect the total outcome, it also overlooks some channels with the potential to reduce the total impact. In estimating the impact of research expenditures, we do not attempt to establish that the IR-4 Ornamental Horticulture Project is creating expenditures that would not have taken place in its absence. Similar, productivity impacts may also arise if research investment in IR-4 Ornamental Horticulture is diverted to other research topics. Regardless, this analysis makes no assumption of the alternative uses of research investment. It is difficult to identify alternative expenditures that will likely take place in the absence of investing in IR-4 and how those expenditures will ultimately affect the economy. It is also difficult to predict what practices producers will adopt in the absence of certain chemical application options. Such findings are beyond the scope of this study. However, findings from this study provide guidance to the value of this program in real economic terms; thereby, providing resources for sound policy decisions. Both productivity and IR-4 expenditure impacts will be modeled within a standard economic impact framework that traces the value of transactions across industries, households and other institutions, which make up the US economy. Initial transactions, termed direct effects, bring about a ripple effect throughout the economy as other industries respond to changes in the demand for goods and services. These secondary transactions, termed indirect effects, arise from increased demand for goods and services used in the production or generation of the goods and services purchased in the initial transactions. If we consider a greenhouse example, the value of the purchase of 100 potted chrysanthemums from a local greenhouse is an example of the direct effect. The greenhouse will use some of the funds from the sale to purchase various inputs, such as potting soil, pots, and stems, and pay wages. The beneficiaries of these purchases will instigate a secondary set of purchases for inputs in a similar manner. The sum value of these secondary transactions comprises the indirect effects. Within this modeling framework, economy-wide impacts of the initial transactions extend up the production chain toward raw material suppliers. Ripples do not travel down the production chain to 9

13 consumers however, as the modeling framework assumes foreign suppliers facilitate these transactions in the absence of domestic production. For example, foreign suppliers will provide the 100 chrysanthemums for retail purchases if they are not provided domestically. Regardless the transactions up to the final purchase for consumption are expected to take place regardless of whether the final product was produced domestically or by foreign producers. Only those purchases of inputs domestic production contribute to the total economic impact. As long as transactions continue to circulate within the economy, the series of consequent transactions will take place, and the overall value of transactions will be larger than the initial infusion. This tendency for overall economic impacts to exceed their direct effects is summarily referred to as the multiplier effect. The structure of standard impact evaluation models lends to the interpretation that the total impact is some multiple of the initial infusion of transactions. The total impact to the economy is the sum of the direct and indirect effects. A simple ratio of the total effect to direct effect provides a value of the multiplier used to calculate the total impact from the initial direct effect. The IMPLAN Pro Version 2.0 (IMPLAN) software environment is used to provide the economic impact-modeling framework of the IR-4 Ornamental Horticulture Project. The IMPLAN modeling system employs economic and demographic measures from a host of government statistical reporting agencies including the Bureau of Economic Analysis, Bureau of Labor Statistics, and the U.S. Census Bureau to specify the model (Minnesota IMPLAN Group Inc., 2004). The structure of the model relies on the social accounting matrix that is a restatement of the Annual Industry Accounts provided by the Bureau of Economic Analysis. Industry productivity impacts are estimated using existing estimates of the production impacts of pesticide use on growers. Productivity impacts provide the direct impacts associated with growers access to agrichemical solutions. The contribution of pesticides to crop yields is not well understood. While the hazards of agrichemical usage are well documented, research around the benefits is not so complete (Cooper and Dobson, 2007). Several researchers have presented the question of the economic impact of agrichemical use by examining the impact of reducing producers accessibility to agrichemicals (Knutson, 1999, Knutson, et al., 1990). Others have taken a production-process approach to estimating the bottom-line impacts of agrichemical usage (Babcock, et al., 1992, Carrasco-Tauber and Moffitt, 1992, Headley, 1968). These studies establish that there exist known economic benefits to the use of agrichemicals. Using aggregate crop production functions, several researchers have addressed the question of how pesticides contribute to crop production. Under such studies, researchers control for non-agrichemical inputs, such as labor, fertilizer, capital, and others, to isolate the contribution of pesticide expenditures to the value of crop production. These studies generally compare the yields and costs of generating such yields under various applications and omission of applications of agrichemicals. In his article, Headley estimates a $4.16 return for every dollar invested in pesticides; concluding that pesticide expenditures make up 10.5 percent of the value of total agricultural crop output (Headley, 10

14 1968). Carrasco-Tauber and Moffitt (1992) replicate Headley s approach and compare this result to alternative model specification. Their estimated returns where higher than those found by Headley between $5.66 and $7.53. However, one specification produced results much lower than Headley s. Others have modified Headley s initial finding through improved estimation approaches; finding smaller impacts (Carpentier and Weaver, 1997). Chambers and Lichtenberg (1994) estimate a more modest $2.70 return for every dollar invested in pesticides. Fernandez-Cornejo, et al. place the return at $1.89 (1996). Teague and Brorsen use a time-series approach to find that the average rate of return is $7.96 between 1949 and They further find that the returns decline over time to $4.16 for 1991 (Teague and Brorsen, 1995). This decline is possibly attributed to field resistance of pest and increasing costs per application of agrichemicals. More recently, Pimentel finds support for Headley s initial finding; suggesting that there exists a four-fold return on pesticide use (Pimentel, 1997, Pimentel, et al., 1992) These studies highlight the contribution of agrichemicals to the value of crop production. However, studies presented above mostly relate pesticide use to food-crop outcomes. No study found to date approached the question of the aggregate economic return to agrichemical use in floriculture production. However, Vasquez, et al. (Vasquez, et al., 2006) find that the cost of aphidius colemani releases was 4.7 times greater than the cost of treatment for greenhouse-grown chrysanthemums. Their finding is consistent with the estimated impacts of agrichemical use described above. Furthermore, several other researchers document the intense need of floriculture producers to deliver pest-free and un-blighted crops to meet consumer expectations (Daughtrey and Benson, 2005, Skirvin, et al., 2002, van Lenteren, 2000, van Lenteren and Woets, 1988). Industry tolerance for crop damage to ornamental crops is low. Damage related to disease or insect feeding dramatically lowers floriculture crop value or renders crops unmarketable. In extreme and not uncommon cases, where crop is destroyed, the actual return on managing pests is as high as the value of the crop. Hence, floriculture producers place a high value on access to a wealth of agrichemical and IPM options. Studies indicate that the agrichemical use is of the utmost importance for floriculture producers. To estimate the productivity impact of agrichemical use of ornamental crops, a productivity factor consistent with Pimental and Vasquez et al. is used. That is, $1 investment in agrichemicals application provides $4 in return. This measure of return is a midpoint rate of return based on the above studies and low with regard to Vasquez et al. estimate of $4.7. Consistent with methods of estimation, the productivity factor used in this study measures the contribution to crop yields with no accounting for labor savings or machinery investment. It also does not consider environmental, ecological, or health impacts. While such non-measured impacts are of concern, there exists a great deal of debate whether such impacts constitute costs or benefits 2 2 See Cooper, J., and H. Dobson. "The Benefits of Pesticides to Mankind and the Environment." Crop Protection 26(2007): for a complete treatment of non-measured impacts of pesticides. 11

15 Direct Impacts Two direct impacts are estimated; those resulting from research expenditures and those resulting from increased industry performance. Correctly specifying the direct impacts is vital to estimating the total economic impact, as the direct effects are the root driver of the economy-wide impacts. The direct impact of research expenditures are broken out into multiple categories to accurately reflect how research dollars are spent. Table 6 provides estimated direct effects of research expenditures base on the 2007 IR-4 Ornamental Horticulture Project budget. These direct effects measure the value of transactions directly attributable to the IR-4 research, including wages of researchers and administration and research expenditures. Also measured is the direct effect of producer sales that provides estimates of the productivity gains in terms of industry sales at the wholesale level. Three distinct activities are modeled representing three distinct roles the IR-4 Ornamental Horticulture Project takes. Each activity is associated with a different set of inter-industry transactions and therefore plays different roles in the overall impact. Appropriations from ARS and CSREES are allocated to all three sectors, while in-kind contributions of state agriculture experiment stations and industry contributions are allocated to agricultural services and university and industry research efforts only. Table 6: Direct Impacts ($000) Research Expenditures Sector Value University and Industry Research 1,306.0 Agricultural Services Administration Total Research Direct Impacts 2,588.0 Industry and Productivity Sector Value Greenhouse and Nursery Prod. 760,186.0 Total Industry Direct Impacts 760,186.0 The IR-4 Ornamental Horticulture Program directly impacts floriculture producers by providing registration of a vast variety of agrichemical solutions to growers and by providing efficacy and phytotoxicity tests necessary for effective management decisions. Prior studies have indicated that when properly applied, pesticides and other agrichemicals have real productivity impacts. The direct effects in this study are estimated based on prior research findings of the returns to investing in cropagrichemicals and total expenditures on such chemicals. A productivity factor of four, relating a $4 return for every dollar invested in agrichemicals, is used to estimate productivity direct effects. The total floriculture and ornamental production expenditures 12

16 on agrichemicals is estimated at $380 million, and is taken from Table 5 above 3. A report by the EPA suggests that 80 percent of all new pesticides registrations for specialty crops have gained registration through efforts of the IR-4 Project (U.S. Environmental Protection Agency, 2001), the EPA generally notes that the IR-4 Project has contributed to 51 percent of the total existing and new pesticide registrations for specialty crop applications. Hence, only 50 percent of total floriculture industry expenditures on agrichemicals are attributed to the IR-4 Ornamental Horticulture Project. Based on these assumptions and using a productivity factor of 4, the direct impact of floriculture s productivity through IR-4 Ornamental Horticulture Project is equivalent to $760 million in floriculture sales annually over all U.S. producers. This increase in productivity manifests itself into measurable direct impacts through increased net revenue for producers, who in turn generate economy-wide impacts through transactions to expand production or expand household expenditures. More common measures of economic activity than value of sales include the value of gross domestic product, employment, and income. Baseline ratios of these activities are used to the value of transactions to these economic measures. The following equations exemplify the transformation from output measures into gross domestic product, employment, and income for each direct effect measured, i. GDPi,0 GDPi = Salesi Salesi,0 Employmenti,0 Employmenti = Salesi Salesi,0 Incomei,0 Incomei = Salesi, Sales i,0 where the subscript 0 denotes baseline values not subject to change. These baseline ratios for each direct effect are used in conjunction with the evaluation framework to provide impact measures on gross domestic product, employment, and income. Table 7 reports the direct effects; relating industry productivity gains and research expenditures to measures of gross domestic product, employment, and income. The $2.588 million invested through for IR-4 research and administration contributes $1.64 million to gross domestic product that supports 79 full- and part-time jobs with wages of $1.78 million. Similarly, productivity gains provide floriculture producers gains of $760 million through increased sales that contributes to $628 million in gross domestic product, supports 9,453 Table 7: U.S. Direct Impacts of the IR-4 Ornamental Horticulture Program Investment in Research Industry Productivity Direct Impacts Total Value of Transactions* ($000) 2, , ,774 Gross Domestic Product ($000) 1, , ,977 Income ($000) 1, , ,631 Employment 79 9,453 9,532 3 Nursery and *Sales ornamental and purchases enterprise budgets on the web sites of Louisiana State University, Auburn, Rutgers were referenced to provide checks of the values used in this analysis. 13

17 full- and part-time jobs with income of $405 million. These direct effects will be used to drive the total economic impact estimates. Taken together, the IR-4 Ornamental Horticulture Project provides direct benefits that contribute $630 million to gross domestic product, supports 9,532 research, administration, and industry jobs with total wages of $407 million. Total Economic Impact of the IR-4 Ornamental Horticulture Program The direct impacts, as measured in the investment of research and productivity gains of floriculture producers, only constitute a portion of the total impact that the IR-4 Ornamental Horticulture Program has on the U.S. economy. As described above, initial expenditures will propagate secondary transactions, and secondary transactions propagate other rounds of transactions across industries and individuals. Productivity impacts disseminate through a similar set of secondary and subsequent transactions. Floriculture producers, benefitting from IR-4 research through increased access to agrichemicals and decision-making tools, extend spending that spawns additional transactions across the economy. Through these secondary transactions- indirect transactions- a total economy wide impact is measured. Table 8 shows estimated total economy-wide impacts of the IR-4 Ornamental Horticulture Program; breaking out research impacts and floriculture industry productivity impacts. Floriculture industry productivity impacts are much more far reaching than research expenditure impacts. While research expenditures are disseminated through direct expenditures, the benefits of these expenditures are disseminated through thousands of growers. Therefore, floriculture industry impacts are expected to be much higher than the initial research. Table 8: Total U.S. Economic Impacts of the IR-4 Ornamental Horticulture Program Research Expenditures Industry Productivity Total Impact Total Value of Transactions* ($000) 8,147 1,776,755 1,784,902 Gross Domestic Product ($000) 4,587 1,171,698 1,176,285 Income ($000) 3, , ,754 Employment 92 16,811 16,903 *Sales and purchases Table 8 provides estimates of the overall contribution of the IR-4 Ornamental Horticulture Project to the U.S. economy in terms of employment, income and gross domestic product. Including direct and indirect impacts, the IR-4 Ornamental Horticulture Project contributes $1,176 million to gross domestic product annually through direct and indirect effects. These impacts support 16,903 U.S. full and part-time jobs with annual income of $719 million. 14

18 Other Non-Measured Benefits of the IR-4 Ornamental Horticulture Project There exists a host of other benefits to U.S. residents of the IR-4 Ornamental and Horticulture Project whose measurement is beyond the scope of this study. While these benefits are difficult to measure, they are real and should be considered when appraising the benefits of this program. By supporting agrichemical labels and research on agrichemical efficacy, the IR-4 Ornamental Project increases the availability of pesticide tools useful in preventing or controlling organisms that harm other human activities or structures (Cooper and Dobson, 2007). Growers are better able to avoid shipping destructive organism with nursery products. In this, the IR-4 Ornamental Horticulture Project also aids in containing pest outbreaks locally reducing the chances of such organisms being transported outside the growers regions. Reducing the possibility of exporting pests to other regions buoys U.S. exports of floriculture. Furthermore, having access to a host of pesticides lessened Americans concern about catastrophic pest epidemics in the U.S. Americans tend to not consider catastrophic pest epidemics in the U.S. as a present threat to the nation s food supply. Many of the organisms that threaten the floriculture industry also threaten the food production industry. Effective control systems, partially championed by the IR-4 Ornamental Horticulture Project, have rendered such threats improbable. Research that goes into the labeling of agrichemical products for growers also benefits households and commercial landscapers. Aesthetics plays an important role in the quality of life of residents. Retailers and other businesses use floral landscapes to increase the attractiveness and appeal of their business for customers and employees. The desire for aesthetically pleasing locations has established a broad U.S. industry for commercial landscaping services that has real implications to real estate values and impacts stemming from quality of life factors. The $16.9 billion in annual wholesale sales of floriculture products is testament to the value of floriculture to U.S. residents. There exist environmental and health considerations as well. The IR-4 Ornamental Horticulture Project has provided the research necessary to put lower-toxic alternatives in reach of floriculture producers that reduce the environmental threat of agrichemical usage. Lower toxicity of new pesticides is instrumental at protecting ground- and surface-water from pesticide contamination and external harm to desirable organisms. Furthermore, lower toxicity of agrichemical inputs reduces unintended health impacts of introducing floriculture to indoor environments. Conclusion This report documents the limited economic impact of the IR-4 Ornamental Horticulture Project through program funding and industry affects using standard economic evaluation methods and conservative industry productivity estimates. A set of standard economic multipliers are used for gauging the economy-wide impacts. 15

19 The U.S. floriculture industry makes up $16.9 billion dollars in annual sales at wholesale prices. Directly, industry productivity is estimated to increase by $760 million dollars annually in wholesale sales through increased yields in terms of wholesale sales, output, and labor productivity. Through productivity gains and direct expenditures for research, we estimate that the IR-4 Ornamental Horticulture Project contributes $1.176 billion to gross domestic product annually. Such impacts support 16,903 full and part-time jobs in the U.S. with annual income of $719 million. These expected impacts result from financial considerations and do not take into account potential non-measured attributed environmental, ecological, and health considerations. They also do not estimate the value of IR-4 research that contributes to professional landscape businesses and household use of pesticides. Furthermore, no attempt was made to place an economic value on environmental impacts of producers having access to lower toxic pesticide solutions. In addition, quality of life measures supported by access to low-cost ornamental crops are excluded in our analysis and preferential health issues associated with research behind the labeling and use of agrichemicals is excluded from this analysis. 16