A FARM-LEVEL APPROACH TO THE METHYL BROMIDE PHASE-OUT: IDENTIFYING ALTERNATIVES AND MAXIMIZING NET-WORTH USING STOCHASTIC DOMINANCE

Transcription

1 A FARM-LEVEL APPROACH TO THE METHYL BROMIDE PHASE-OUT: IDENTIFYING ALTERNATIVES AND MAXIMIZING NET-WORTH USING STOCHASTIC DOMINANCE AND OPTIMIZATION PROCEDURES by MARK MCCULLOH BYRD (Under the Direction of Cesar L. Escalante) ABSTRACT Methyl bromide (MeBr) is an effective yet toxic soil fumigant that is subject to an accelerated phase-out under the Montreal Protocol on Substances That Deplete the Ozone Layer. As a result of the phase-out, Georgia farmers now require a substitute fumigant and herbicide combination that can control for weeds, pests, and diseases while delivering comparable yields to those of MeBr. This study analyzes the economic viability of alternative production methods on a representative Georgia pepper farm. The analysis is addressed through stochastic dominance analysis, an enterprise budget, and the development of a linear programming model. Alternative fumigants are ranked, analyzed within the budgetary framework, and subjected to production constraints such as farm acreage, capital structure, and asset allocation within the programming model. Compared with MeBr, the models prescribe results supporting the economic feasibility of several alternative fumigants, and thus serve to educate Georgia vegetable farmers on available input-substitution strategies. INDEX WORDS: Methyl Bromide, Bell Pepper, Stochastic Dominance, Enterprise Budget, Linear Programming, Optimization-Simulation iv

2 A FARM-LEVEL APPROACH TO THE METHYL BROMIDE PHASE-OUT: IDENTIFYING ALTERNATIVES AND MAXIMIZING NET-WORTH USING STOCHASTIC DOMINANCE AND OPTIMIZATION PROCEDURES by MARK MCCULLOH BYRD B.S.A., University of Georgia, 1999 A Thesis Submitted to the Graduate Faculty of The University of Georgia in Partial Fulfillment of the Requirements for the Degree MASTER OF SCIENCE ATHENS, GEORGIA 2005

3 2005 MARK MCCULLOH BYRD All Rights Reserved

4 A FARM-LEVEL APPROACH TO THE METHYL BROMIDE PHASE-OUT: IDENTIFYING ALTERNATIVES AND MAXIMIZING NET-WORTH USING STOCHASTIC DOMINANCE AND OPTIMIZATION PROCEDURES by MARK MCCULLOH BYRD Major Professor: Committee: Cesar L. Escalante Michael E. Wetzstein Esendugue Greg Fonsah Electronic Version Approved: Maureen Grasso Dean of the Graduate School The University of Georgia August 2005

5 DEDICATION This thesis is dedicated to all of my friends within the College of Agriculture: Peter, Katy, Hongsin, Feng (Frank), Rui (Carolyn), Xiaohui (Sarah), Yingzhuo, Marianna, Laxmi, Joe, Jordan, Horacio, Katia, Tatiana, Dmitriy, R.J., Vahe, Doris, and Carrie. One of my greatest future challenges will be to surround myself with such a diverse, kind, and intelligent group of people. Thank you for all the good times. iv

6 ACKNOWLEDGEMENTS I cannot begin to thank Dr. Michael Wetzstein for his influence on my academic and personal life. Your enthusiasm and commitment to the teaching profession, along with your encouragement, respect, intellect, and laughter, is greatly appreciated and will never be forgotten. To Dr. Cesar Escalante, it is a rarity to work with such a fine person. Your guidance on this project has been invaluable. Thank you for your patience and support while juggling the demands of a devoted father and beginning professor. I want to thank Dr. Esendugue Greg Fonsah, for his valuable insights and contributions to this study. Next, I want to express my deepest thanks to my parents, Paul McCulloh Byrd and Alice Kathryn Gatlin, for their support and encouragement during my graduate education. You have shown me more love than I could ever hope to repay. I love you, and I could not have done this without you. To my brothers, Paul and Ben, I am proud of your accomplishments, and I love you both. I wish you the greatest success the world has to offer. Finally, no words can express my love for you Rhiannon. Your optimism and zest for life has taught me to see the world in a different way. I will never forget our journey to the Lost Coast, our plumerias and mangoes in Hawaii, thousands of miles of road, fireworks in Cuba, backpacking in Canada, jazz clubs in New York City, Sunday reading with endless cups of coffee, examinations, and the joy and laughter attached to each of them. Thank you for showing me that unconditional love truly exists. v

7 TABLE OF CONTENTS Page ACKNOWLEDGEMENTS...v LIST OF TABLES... viii LIST OF FIGURES...ix CHAPTER 1 INTRODUCTION...1 Background Information...1 Objectives...7 Organization LITERATURE REVIEW...9 Economic Impact Assessments...9 Methyl Bromide Alternatives Outreach...13 Additional Economic Impact and Viability Studies COMMERCIAL PEPPER PRODUCTION...28 United States Pepper Industry...28 Georgia Pepper Production...30 Marketing...31 Farm Management EMPIRICAL METHODOLOGY...41 Expected Utility, Risk Aversion, and Efficiency Criteria...41 vi

8 Interpretation of Dominance Analysis, Enterprise Budget, and Programming Model ANALYSIS OF RESULTS...69 Stochastic Efficiency-The Final Four Production Methods...69 Results of the Enterprise Budget Analyses...71 Programming Solutions SUMMARY AND CONCLUSION...93 Study Summary...93 Conclusions...95 Future Research...97 BIBLIOGRAPHY...98 APPENDICES A Bell Pepper Fresh Market Variable Cost Budget for Methyl Bromide B C D E Bell Pepper Fresh Market Variable Cost Budget for C35 + KPAM Bell Pepper Fresh Market Variable Cost Budget for C35 + Chloropicrin Bell Pepper Fresh Market Variable Cost Budget for Telone II + Chloropicrin GAMS Program for the Base-Case Farm Model using Methyl Bromide vii

9 LIST OF TABLES Page Table 4.1: Pre-Operating Balance Sheet...66 Table 4.2: Description of Constraints and Requirements...67 Table 4.3: Description of Portfolio Activities...68 Table 5.1: Efficiency Ranking of Final 8 Production Methods Using Second Degree Stochastic Dominance...83 Table 5.2: Cumulative Distribution Functions for Final 8 Production Methods...84 Table 5.3: Financial Efficiency and Break-even Analyses Using Experimental Yield Results...85 Table 5.4: Financial Efficiency and Break-even Analyses Using Constant Yield Results...86 Table 5.5: Comparison of Costs per Carton for Final Four Production Methods...87 Table 5.6: Programming Solutions and Financial Ratios of Five-Year Averages for all Production Methods...88 Table 5.7: Yearly Programming Solutions for Decision Variables and Key Financial Measures Using Methyl Bromide...89 Table 5.8: Yearly Programming Solutions for Decision Variables and Key Financial Measures Using C35 + KPAM as Methyl Bromide Substitute...90 Table 5.9: Yearly Programming Solutions for Decision Variables and Key Financial Measures Using C35 + Chloropicrin as Methyl Bromide Substitute...91 Table 5.10: Yearly Programming Solutions for Decision Variables and Key Financial Measures Using Telone II + Chloropicrin as Methyl Bromide Substitute...92 viii

10 LIST OF FIGURES Page Figure 3.1: Leading U.S. Bell Pepper Producing States (2002)...36 Figure 3.2: U.S. Fresh Bell Peppers, Production, Import, Export and Domestic Use ( )37 Figure 3.3: U.S. Bell Pepper Import Values from Selected Countries of the World ( )38 Figure 3.4: Georgia Farms, Farm Sizes, and Harvested Acreage (2002)...39 Figure 3.5: U.S. Bell Peppers Season Average Prices and Per Capita Consumption ( )40 ix

11 1 CHAPTER 1 INTRODUCTION 1.1 Background Information Historical Framework On September 16, 1987, the signatures of 24 countries resulted in the Montreal Protocol on Substances that Deplete the Ozone Layer. Former President Ronald Regan later committed the United States to the international agreement on April 5 th, Effective January 1, 1989, the Protocol s signatory nations began actively working toward fulfilling the guidelines established under the Protocol. Between the meetings of the parties, scientists assessed the toxicity of many chemicals and created an index which identified substances causing the most damage to the ozone layer. As substances were listed, amendments were added to the original treaty which recognized the need to accelerate the phase-out of these dangerous substances. Methyl bromide (MeBr) was identified as one of the most toxic contributors to ozone depletion. It was recommended during the Ninth Meeting of the Parties (1997) in Montreal, Canada that MeBr face an accelerated phase-out schedule. Methyl Bromide is an agricultural fumigant that is used to control weeds, nematodes, soil-borne pests, and diseases. Methyl Bromide is widely accepted by agricultural producers because they understand its chemical properties, it is inexpensive, and it is effective in most U.S. climates. According to the United States Environmental Protection Agency, the U.S has "one of

12 2 the largest agricultural bases in the world and has historically used more MeBr than any other country (EPA, 2005)." A controversy now surrounds the use of MeBr and its phase-out schedule as developed nations face a complete elimination of the substance by Within the U.S., California and Florida consume the largest amounts of MeBr as their combined total domestic usage is greater than 75% (Carpenter et al., 2000). Thus, Florida and California have conducted most of the research on the costs and benefits of MeBr because they will absorb most of the total cost associated with the phase-out. Florida and California use MeBr on fruits and vegetables to fight microscopic parasitic roundworms known as root-knot nematodes, and major soil-borne diseases such as bacterial wilt, southern blight, fusarium wilt (fungus), and fusarium crown and root rot. Weeds are also effectively handled with repeated applications of MeBr (Carpenter et al., 2000). Many of the problems faced by growers in Florida and California are the same as those faced by Georgia producers. This study addresses the potential economic impact to Georgia bell pepper producers at the farm level under the MeBr phase-out. Georgia ranks third in the U.S. in acreage of fresh market vegetables planted, and vegetables are the second most valuable crop in Georgia with an approximate farm-gate value of $901.2 million (Boatright and McKissick, 2003, p.59). Vegetable growers in Georgia state that eliminating MeBr will reduce yields and increase production costs as a result of adopting more expensive and less effective alternatives (Seabrook, 2005). They requested that the United Nations Environment Programme (UNEP) consider their nominations to continue using MeBr as defined under the critical use exemptions clause of the Protocol.

13 Montreal Protocol and Critical Use According to a USDA Economic Research Service (ERS) report (USDA, 2000), over 160 countries have agreed to reduce ozone depleting substances (ODS) by ratifying the Montreal Protocol. Methyl bromide is individually classified within the Protocol as an Annex E controlled substance with an ozone depleting potential (ODP) of 0.6 (UNEP, 1995). The ODP indicates the amount of ozone destroyed by the emission of a particular gas relative to chlorofluorocarbon-11 (CFC-11), a major ozone depletor (Carpenter et al., 2000). Substances with an ODP over 0.2 are considered Class I ozone depletors and are required to be phased out under the Protocol and the United States' Clean Air Act. Additionally, Section 602(e) of the Clean Air Act states, Where the ozone-depletion potential of a substance is specified in the Montreal Protocol, the ozonedepletion potential specified for that substance under this section shall be consistent with the Montreal Protocol (USEPA,1990 ) However, MeBr's contribution to agriculture, and its integral role in facilitating international trade have lead to a general agreement that there needs to be allowances for critical, quarantine, and pre-shipment uses. The term critical use was introduced to identify uses pertaining specifically to MeBr. Decision IX/6 of Appendix 1 to the Protocol lays the foundation of critical use as decided upon at the Ninth Meeting of the Parties (UNEP, 2000). Decision IX/6 states: (a) That a use of methyl bromide should qualify as critical only if the nominating Party determines that: (i) The specific use is critical because the lack of availability of methyl bromide for that use would result in a significant market disruption; and (ii) There are no technically and economically feasible alternatives or substitutes available to the user that are acceptable from the standpoint of environment and health and are suitable to the crops and circumstances of the nomination;

14 4 The Protocol delineates the phase-out schedules of MeBr according to parties considered developed or developing nations. Article 2H of the Protocol defines the phase-out schedule of MeBr to be administered by all Parties identified as developed nations, and stipulates that these Parties shall ensure its calculated level of the controlled substance in Annex E does not exceed, annually, its calculated level of consumption in 1991 (UNEP, 2000). The 1991 baseline figure also applies to those parties involved in the production of MeBr. The phase-out schedule for Article 2H countries is: 25% reduction in % reduction in % reduction in % reduction in 2005 Preshipment and quarantine uses exempt Critical and emergency uses allocated after Methyl Bromide Alternatives Critical uses not withstanding, Georgia producers must identify alternative production methods that incorporate chemical substitutes as a replacement to MeBr. As noted, California and Florida have been the two states to predominantly research alternatives and conduct economic impact analyses concerning the phase-out. These states rely on MeBr for the benefits accruing to the production of strawberries and tomatoes. Florida uses 237% more MeBr in the production of fresh market tomatoes than ten other states combined (Carpenter, 2000). California uses 277% more MeBr for fresh market strawberry production than nine other leading states combined (Carpenter, 2000). California alone accounts for half of the 35 million pounds (active ingredient) of MeBr used annually for preplant fumigation in the U.S. (USDA ERS,

15 5 2000). Moreover, Florida consumes 30% of the total MeBr used for preplant fumigation in the U.S. (USDA ERS, 2000). The total values to California and Florida for fresh market strawberries and tomatoes are estimated at $1.4 billion and $920 million, respectively (USDA NASS, 2005). These states combined account for 95% and 68%, respectively, of the total U.S. fresh market value of strawberries and tomatoes (USDA NASS, 2005) Technically Viable Alternatives Before conclusions could be made regarding the economic impact of the MeBr phase-out, substantial resources were invested in identifying technically viable alternatives. The USDA Economic Research Service (ERS), the University of Florida, and the National Center for Food and Agricultural Policy (NCFAP) worked together to develop studies that analyzed the regulatory limitations and economic impacts of technically viable alternatives to MeBr (USDA ERS, 2000). Scientists and growers are interested in chemicals that can produce yields exceeding or comparable to MeBr. The majority of experiments that focused on yield were conducted on California and Florida's strawberry and tomato crops. Thus, yield data concerning other vegetables, vineyards, orchard, and nursery crops is limited (USDA ERS, 2000). Early studies focused on the possibility of methyl iodide (MI) (iodomethane) as a technically viable alternative to MeBr (Hueth et al., 2000). Studies conducted at the University of California, Riverside indicate that MI is advantageous to MeBr because it is quickly broken down and lasts in the atmosphere for a period of one to two days as opposed to MeBr's two years (Zhang et al., 1998). Further, because MI is handled as a liquid and MeBr is handled as a gas, worker safety is increased throughout the production process. Studies tested the performance of MI under a broad range of environmental conditions such as soil moisture, temperature, texture, and fumigation time. They found that MI was," consistently more effective than MeBr, on a

16 6 molar concentration basis, under a range of soil moistures, temperatures, soil textures and fumigation times (Zhang et al., 1998, p.78)." An additional study by Becker et al. (1998) tested the dose responses of MeBr and MI against three parasitic nematodes and one fungal plant pathogen. California growers are susceptible to nematode infestations and fungi without the use of an effective fumigant. In every case MI proved more effective at controlling for these pests than MeBr. Finally, (Ohr et al., 1996) evaluated the effectiveness of MI for the control of fungi, weeds, and nematodes in a series of fifteen field trials, and again found MI to be as efficacious or more than MeBr. Florida growers face different environmental conditions than those in California. In addition to fungi, nematodes, and bacteria, the most problematic pests for growers in Florida and the southeast are weeds. Yellow and purple nutsedge are common weeds that thrive in Florida due to a long growing season and humid climate. Purple nutsedge is considered to be the most noxious of all weeds found in tropical and sup-tropical regions of the world (Gilreath et al., 2004), and few herbicides are registered for use throughout the entire growing season. Thus, it is necessary to apply a combination of plastic mulch, fumigants, and herbicides to crops such as tomato and pepper (Gilreath et al., 2004). A list of fumigants such as metam sodium (MNa), chloropicrin (teargas) (Pic), anhydrous ammonia (AHN4), and 1,3-dichloropropene (1,3-D) were analyzed in comparison to MeBr. These fumigants were tested in combination with the herbicides napropamide, metolachlor, and pebulate. Gilreath et al. (2003) tested the effects of these chemicals on bell peppers and cucumbers when applied under plastic polyethylene mulch with drip irrigation. This work furthered studies performed on tomatoes by Locascio et al. (1997). Both studies found the combination of 1,3-D + Pic to be effective at controlling for nematode infestations, but the same combination failed to control for purple and yellow

17 7 nutsedges. With respect to tomatoes and peppers, combining the fumigants with pebulate significantly reduced nutsedge levels up to 22% compared to those treatments not receiving herbicides (Gilreath et al., 1994). The results of the 2003 study suggest that there are, "several viable alternatives for MeBr in vegetable rotations (Gilreath et al., 1994, p.4)." However, changes in rotations and planting seasons could affect the observed values. Unfortunately, the erratic nature of fumigant efficacy on weed control does not allow for a single replacement for MeBr (Gilreath et al., 2003). Many field trials and indoor experiments conducted throughout the U.S. explored the efficacy of alternative fumigants, fungicides, and herbicides with respect to MeBr. It is noted in the scientific literature that local environmental conditions will dictate which combinations of these chemicals and their respective application methods are most suitable for growers. Agricultural economists use these results to conduct economic impact studies that account for the regional demands and limitations of producers. 1.2 Objectives The specific objectives of the research are as follows: 1) Identify and classify feasible fumigant alternatives to MeBr for Georgia growers through the use of stochastic dominance analysis. 2) Combine available alternative fumigants with current production technologies to produce economically viable production methods for Georgia growers. 3) Provide agricultural extension agents with a tool to educate Georgia vegetable farmers on the resulting economic impact of varying input substitution strategies. Stochastic dominance analysis, a tool that considers risk-return tradeoffs in identifying more efficient methods among alternative production plans, will be used to address the first

18 8 objective. The second and third objectives are accomplished by employing an enterprise budget developed for Georgia pepper producers in conjunction with an optimization/simulation programming model. This combination recognizes the unique factors inherent to pepper production and offers tailored solutions for Georgia producers. Enterprise budget analysis will determine the comparative financial feasibility of a pepper production enterprise under production plans involving MeBr and its substitutes. Optimization-simulation techniques employed in a multi-period programming framework will determine the relative overall economic viability and feasibility of optimal production and financial plans prescribed under production systems that involve MeBr and its substitutes. 1.3 Organization The remainder of this thesis is divided into five chapters. Chapter 2 examines the economic literature with respect to stochastic dominance, and the optimization and simulation procedures related to mathematical programming techniques. Chapter 3 identifies issues related to commercial pepper production and management in the U.S. and Georgia. The development of the theoretical model employed in this study is then discussed in Chapter 4. In addition to the descriptive data and enterprise budgets used as support for the theoretical models, Chapter 5 presents the results of the stochastic dominance analysis and the simulation and optimization procedures. The final chapter, Chapter 6, summarizes the study, presents the conclusions, addresses limitations of the study, and offers suggestions for future research.

19 9 CHAPTER 2 LITERATURE REVIEW 2.1 Economic Impact Assessments A chemical's technical feasibility is a necessary, but not independently sufficient, condition for its economic feasibility. Published research on a crop's yield or survival, subject to chemicals under various environmental or controlled conditions, does not satisfy requirements of economic feasibility such as regulatory approval, sustainability, or a consistent positive return on investment (Schaub, 2004). These requirements constitute potential barriers to economic feasibility and dictate the use of economic assessment studies to evaluate the MeBr phase-out. As noted in the previous chapter, regional differences in soil type and weather conditions may produce large discrepancies among the efficacy of alternatives to control for a variety of pests and diseases. Research conducted in California and Florida examines these differences and constitutes a majority of the information concentrated on identifying MeBr alternatives (VanSickle, 2000) (Carpenter, 2000). In addition to these states, studies cited in this section investigate the economics of pesticide use in the U.S., the economic values of alternative production methods and chemicals, and the economic impact of the MeBr phase-out among regions, state, and countries. The literature provides alternative empirical methods of assessing economic impacts through the use of partial budgeting analysis, stochastic dominance analysis, and optimization/simulation procedures. The use of integrated pest management (IPM) is of contemporary importance to

20 10 producers subject to the phase-out. The literature emphasizes that IPM will likely be a necessary component of the production process for these growers. Literature surrounding the MeBr phaseout acknowledges the variability and usefulness of IPM techniques among producers. However, IPM is usually evaluated as a secondary consideration to the more important task of identifying viable chemical substitutes (Lynch et al., 1997) Economic Impact Assessments of Pesticide Use Fernandez-Cornejo et al. (1998) investigated the economic value of pesticide use in agriculture. The report summarized the empirical evidence related to the economics of pesticide use. It emphasized the estimation of the value of pesticides in U.S. agriculture, the economic effects of reducing or restricting pesticide use, and the promotion of IPM to reduce the potential health and environmental effects associated with pesticide use. The study identified marginal productivity calculations, the expected loss to pests, and the economic effect of banning pesticides as three perspectives used to estimate the economic value of pesticide use. It is generally recognized that producers' per acre expenditure for pesticides increases as the value of the crop increases. For example, while wheat and corn producers spent approximately $6 and $22 per acre in 1995, respectively, on pesticide use, cotton and strawberry producers spent nearly $48 and $1600 per acre, respectively, during the same time period (Fernandez-Cornejo et al., 1998). According to Fernandez-Cornejo et al. (1998), estimates of the value of the marginal product (VMP) of pesticide use provide growers and policymakers with an indirect measure of the cost "in terms of foregone agricultural output" of reducing pesticide use. They note that under the usual assumptions, a farmer would maximize profits by increasing pesticide use up to the point where the expected marginal return (VMP) equals the pesticide marginal cost (Fernandez-Cornejo et al., 1998). They found that the VMP of pesticides appears

21 11 to be falling, but the methodology surrounding alternative empirical models is controversial. Further, when farm risk is assessed in combination with pesticide use, they concede that the conventional view recognized pesticide use to be risk reducing; however, there was no empirical consensus that determined the effect of risk on the VMP. Studies found that uncertainty about output price and yield leads to lower optimal levels of pesticide use by individual farmers, whereas uncertainty about other variables such as pest density leads to a higher optimal pesticide use under risk aversion (Fernandez-Cornejo et al., 1998). Thus, the authors concluded that the VMP of most pesticides in the U.S. is higher than their corresponding price. Fernandez-Cornejo et al. (1998) examined studies that focused on the expected yield losses relative to a current or potential yield and the respective impact these losses have on the value of pesticide use. They recognized that, "estimates of crop yield losses that might result without the availability of pesticides are difficult to obtain because these losses vary by crop, soil, and weather condition. In addition, yields may vary by year because of technological developments (i.e. new plant varieties), changes in cropping practices (destruction of crop residues), appearance of new pests, and weather (Fernandez-Cornejo et al., 1998, p.470)." The resulting empirical estimates are highly variable and tend to be based on judgments of experts in different fields of natural science (Fernandez-Cornejo et al., 1998). The authors summarized yield losses for several major U.S. crops and concluded that fruits and vegetables have high losses when subject to the elimination of insecticides and fungicides. They estimated that the elimination of herbicides results in yield losses ranging from 0% to 53%. Fernandez-Cornejo et al. (1998) cite a study conducted by the USDA in 1997 that calculated the productivity of pesticides to be approximately $3 to $4 of pesticide expenditure.

22 12 The article further assessed the economic effects of total or partial bans on pesticide use in general or in individual case studies. The authors identified partial budgeting and large scale econometric models as two methods that are generally used to estimate these effects. Partial budgeting estimated the value of the production lost without pesticides assuming that output prices remained constant, while the econometric models allowed for input and output substitution during production (Fernandez-Cornejo et al., 1998). Fernandez-Cornejo et al. (1998) concluded that a total ban of pesticides would increase annual consumer expenditures by $228 per household (in 1989 dollars), amounting to approximately $30 billion per year. The production of fruits and vegetables is examined as well as a corresponding total ban in these industries. The result of a total ban in these sectors may require producers to increase production acreage by 2.5 million acres (44%), and increase unit production costs by 75%. In turn, wholesale prices of fruits and vegetables could increase 45%, returns to producers could decrease by 30%, retail prices could increase by 27%, and domestic consumption could fall by 11% (Fernandez-Cornejo et al., 1998). However, the studies received criticism for assuming a total ban would be realistic, and for failing to acknowledge that future research may minimize impacts. Fernandez-Cornejo et al. (1998) noted that authors of the original studies agree that further research needs to identify intermediate points between current practices and a total ban. The availability of alternative means of pest control influences the value of a pesticide's use to agricultural producers and consumers (Fernandez-Cornejo et al., 1998). Thus, assessments of partial bans of pesticides offer more realistic estimates of economic impacts. For example, Fernandez-Cornejo et al. (1998) reviewed a study conducted in 1991 that assumed a 50% reduction in pesticide use. This study concluded that the total costs of reduction would be approximately $1 billion per year although the true impact would be difficult to determine

23 13 because there are different mechanisms in which to implement a ban (Fernandez-Cornejo et al., 1998). Finally, Fernandez-Cornejo et al. (1998) considered the value of integrated pest management in the context of both governments' attempts to reduce the detrimental effects of pesticides to human health, and as an option for producers to maintain viable business operations. IPM uses multiple techniques to," maintain pest infestation at the most economically sensible level rather than attempting to completely eradicate all pests (Fernandez-Cornejo et al., 1998, p.478)." Some of the more important techniques adopted by producers are scouting, soil testing, pheromone traps for pests, and cataloging data on weather patterns that identify the development and activity of specific pests. Additionally, biological controls of pests such as natural predators, parasites, and pathogens result in minimal environmental hazards, and may result in an equivalent amount of pest control in some situations. Fernandez-Cornejo et al. (1998) stated that the empirical evidence on the effect of IPM on the use of pesticide use is mixed. The authors cited a study conducted by the National Foundation for IPM Education that concluded IPM reduced pesticide use by 15% while delivering net returns to producers. 2.2 Methyl Bromide Alternatives Outreach The Methyl Bromide Alternatives Outreach (MBAO) is an organization focused on facilitating the exchange of information concerning viable alternatives for MeBr. The organization began holding the Annual International Research Conference on Methyl Bromide Alternatives and Emissions Reductions in Their goal is to establish a forum that promotes the exchange of research information among agricultural and forestry specialists from governmental, academic and private institutions. Several years after the beginning of the

24 14 conference, as scientists had had time to conduct experiments on alternatives and publish their results, discussions began to incorporate the economic impact surrounding these developments. The earliest economic impact assessments, analyzed and presented by Lynch et al. (1997), provided researchers with a base-line from which to evaluate the impact of the MeBr ban. Lynch et al. (1997) identified changes regarding the costs of technically feasible chemical and non-chemical alternatives, the initial economic results of studies conducted in California and Florida, the regulatory environment surrounding alternatives, and comparisons of the efficacy of alternatives. Results presented that same year by Hueth et al. (1997) focused on the economic impact of banning MeBr in California agriculture. Hueth's study measured the cost of prohibiting MeBr use in California by directly measuring the change in consumer and producer welfare. The methodology was based on data concerning the changes in per acre yields and production costs resulting from the adoption of available alternatives. Hueth et al. emphasize that their research was an estimation of the short-term impact of removing MeBr completely, and that it adds to the literature by providing a more general analysis of the impacts of banning MeBr. The authors further acknowledged that the impacts reported in the study were uncertain because of the limited experimental opportunities and the inability to forecast outcomes related to future innovations. The study concluded that the impact on growers' profits may experience a wide range of values corresponding to the infiltration of exotic pests. In good years growers may lose as little as $71 million while in years of high infestation they may lose as much as $334 million in profits. The net impact, which accounts for consumer benefits and losses as well as grower losses, exhibited the same dramatic range with yearly impacts from $60 million to $242 million (Hueth et al., 1997).

25 15 Presentations made in 1998 and 1999 by Lynch and Carpenter focused on identifying the most likely alternatives for producers, and investigating the impacts of phasing out MeBr for the United States, respectively,. The 1998 study sought to identify the impact to producer yields and costs by gathering information from research documents, expert opinions, and workshops. Their research concluded that both Florida and California growers would increase usage of the combination of 1,3-D and Chloropicrin. To maximize profits, the study found that Florida growers would likely use an accompanying herbicide, and California growers would increase the percentage of Chloropicrin in the mixture. Lynch and Carpenter (1999) then compare MeBr with the next best alternative over a range of fruits and vegetables grown not only in California and Florida, but also in Georgia and North Carolina. Assuming regulatory restrictions, cost, and environmental factors dictate these alternatives, the authors, "computed the increase in revenue from using one pound of MeBr rather than the next best alternative assuming the market prices do not change for the crop (Lynch and Carpenter, 1998, p.2)." These revenues serve as the value of MeBr to producers on a per pound basis. After making assumptions for producer usage rates of MeBr, a grower's loss was then calculated as a function of the amount of MeBr used per acre. The value of MeBr to fruit and vegetable growers in California ranged from $3.85/lb. for peppers to $41.43/lb. for southern coast strawberries. The value to Florida fruit and vegetable growers ranged from $4.25/lb. for tomatoes to $33.48/lb. for strawberries. Lynch and Carpenter's (1999) study identified these estimates as one approach to estimating the economic impact of the MeBr phase-out. Their second approach examined the annual crops that use MeBr extensively, and allowed for adjustments to acreage and prices. Crops such as tomatoes, strawberries, peppers, watermelon, cucumber, squash, and eggplant are

26 16 crops primarily grown by horticulturalists in California and Florida with additional production taking place in South Carolina, North Carolina, and Georgia (Lynch and Carpenter, 1999). The authors used this presentation to introduce the phase-out as a spatial partial equilibrium problem. Furthermore, Carpenter et al. (2000) fully developed the model used in the 1999 study within a comprehensive study published the following year. The report by Carpenter et al. (2000) was funded by the USDA's Economic Research Service and published through the National Center for Food and Agricultural Policy. The authors developed a regionally disaggregated model that emphasized California, Florida, Georgia, and South Carolina as the primary users of MeBr, and identified Texas and Mexico as their competitors. The model used calculations of baseline equilibrium production, monthly shipments between production areas and markets, and monthly consumption given current technologies as a guide to compare with changes resulting from the phase-out (Carpenter et al., 2000). Crop prices for each market were introduced, and as MeBr is phased out, production technologies shift; resulting in changes in production costs and expected monthly yields. The alternative technologies used in the study were identified through previous research acknowledged during MBAO conferences. The study defined the best alternative technology as the one with the lowest per-unit cost (Carpenter et al., 2000). The authors use a simulation approach, rather than econometric, because data for individual producers was unavailable. Costs were allowed to vary among regions and yields were assumed to be non-stochastic. The goal of the model was to maximize producers' returns and consumers' benefits while recognizing constraints on available land in each region, and the amounts sold to consumers could not be greater than the amount supplied (Carpenter et al., 2000).

27 17 California strawberry growers were expected to shift from using MeBr to a combination of Chloropicrin and Vapam at an additional cost of $97.50 per acre. Florida strawberry and tomato growers were expected to substitute Telone C-17 and various herbicides at an increased cost of $ per acre. Georgia and South Carolina growers would switch to Telone C-17 and pebulate at an excess cost of $13.36 per acre (Carpenter et al., 2000). The study did not present the additional costs per acre for pepper producers in Georgia, and acknowledged that little research was conducted into alternatives for peppers in Florida. The authors assumed yield losses among Florida pepper growers to be approximately 12.5%, and that they would use a combination of Telone C-17 and herbicides costing $ per acre. The results of the study were presented in comparison to the pre-ban baseline. Carpenter et al. (2000) stated that consumers incur the heaviest cost from the ban as consumer surplus is expected to decrease by $158 million. The decrease in consumer surplus for strawberries and tomatoes was estimated to be 10.3% and 1.7%, respectively. Consumer surplus for peppers was expected to decrease $4.5 million, or 1.1% (Carpenter et al., 2000). With respect to producers, the model predicted that California growers will increase strawberry production with a corresponding decrease in tomatoes. Florida producers will increase the acreage planted of strawberries, but will reduce the acreage planted of tomatoes and peppers (Carpenter et al., 2000). Georgia producers were expected to increase their production of tomatoes, but the study does not present any figures concerning increases or decreases in peppers. However, total U.S. pepper production was estimated to decrease 14% (Carpenter et al., 2000). Alternatively, the authors noted that changes in price may make it profitable for growers to continue operations. They calculated the price impact to peppers resulting from the ban to be in the range of -$39.82 to $51.96 per ton (Carpenter et al., 2000).

28 18 Carpenter et al. (2000) analyzed the impact on producer revenues across regions and compared them with the baseline. Revenues did not include the costs of production, and as a result it was possible for a producer to experience post-ban revenues that were higher than preban revenues as a result of price increases (Carpenter et al., 2000). The model estimated that Florida producers will experience decreases in revenues for tomatoes and peppers of $57.3 million and $12.6 million respectively (Carpenter et al., 2000). In California, strawberry and tomato producers may experience a respective change of $38.8 million, and -$35 million in receipts (Carpenter et al., 2000). The model prescribed that shifts would occur in production among regions to compensate for dramatic losses in specific areas. However, the U.S. grower that loses is expected to experience a decrease in revenues of $153.9 million (Carpenter et al., 2000). Finally, the report indicated that if revenues were used to gauge the overall impact to U.S. consumers and producers, the model estimated a total net decrease in welfare of $76.5 million (Carpenter et al., 2000). More recent studies presented at the MBAO conferences evaluated alternative production methods and used current data in an attempt to assess the options and impacts to growers facing the phase-out. A study conducted by Jovicich et al. (2003) investigated the economic benefit associated with the greenhouse production of peppers. The study found that growing colored peppers for the specialty market can result in economically viable operations. The research was conducted through the Protected Agriculture Project at the University of Florida and emphasized the use of screened plastic greenhouses with passive venting as an economical alternative to field production (Jovicich et al., 2003). The cost of these systems was estimated at $2 to $4 per square foot, and it was demonstrated that fungal diseases decreased, fruit quality improved, and yields were up to ten times that of field grown peppers (Jovicich et al., 2003). Although the

29 19 growing season could be extended for producers under this method, start up costs and knowledge requirements may prohibit greenhouse adoption by established growers. During the 2004 MBAO proceedings, Sydorovych et al. (2004) presented research focusing on the economic impact of MeBr alternatives for strawberries. Their objective was to evaluate the economic viability of chemical alternatives using a partial budget analysis. Several characteristics of this study are relevant to the goals of our research. For example, researchers first developed a cost model for a plasticulture production system on a five acre representative strawberry farm in the Piedmont and Coastal Plain regions of North Carolina (Jovicich et al., 2003). The production practices used in the study resulted from consultations with research specialists and agricultural extension agents of North Carolina State University. An important assumption of the Jovicich et al. (2003) model is that the machinery and equipment used in the enterprise budget can be applied to other farming enterprises other than strawberries. This is characteristic of the farming operations of many small to medium size growers found in the southeastern United States. As a result, machinery expenses, not including fumigation and irrigation costs, reflect the equipment costs for a total farm business (Jovicich et al., 2003). Partial budgeting analyzes small production adjustments on farm profitability by comparing the negative effects of applying a new treatment relative to a base or standard treatment (Jovicich et al., 2003). The study found that production costs increased if an alternative treatment resulted in either higher fumigation costs and/or higher yields because higher yields result in both higher labor and material costs. The chemical alternatives tested in the study were Telone-C35, Telone II, chloropicrin, Inline, and metam sodium. Methyl bromide was recognized as the base treatment with respect to yields and revenues. Interestingly, MeBr resulted in the highest cost to producers per acre at $1,267, while chloropicrin reduced costs

30 20 relative to the base by $92.00 per acre. Further, chloropicrin and Telone-C35, when used independently, produced yields greater than MeBr. A comparison of revenues resulted in chloropicrin, Telone-C35 and metam sodium applied by shank injection each providing additional returns above MeBr of $1,767.60, $290.79, and $3.18 respectively. The study did not list returns for Telone II and Inline. 2.3 Additional Economic Impact and Viability Studies Economic Viability of Methyl Iodide While most viability studies examining the efficacy and economic feasibility of alternatives focus on a menu of choices available to producers, researchers may some times focus on the economic impact of a single chemical alternative. Hueth et al. (2000) compared the effectiveness of methyl iodide (MI) against MeBr for preplant fumigation, "through an analysis that combines information on the current world market of iodine, the implications of limited studies on MI effectiveness, and past analyses of the economic benefits of methyl bromide to California producers (p.45)." An important assumption of the study was that the researchers considered 1,3-D and chloropicrin to be the primary alternatives used in place of MeBr for California growers. Thus, their study of MI was not an endorsement, and MI's demand schedule was constructed by analyzing its cost and effectiveness against these alternatives (Hueth et al., 2000). The efficacy of MI compared to MeBr was established through the studies noted in Chapter one. Hueth et al. (2000) assessed the potential market for MI by calculating the per-unit value of MI, and developing demand curves for MI under six different scenarios. The study defined the value of the marginal product (VMP) of MI as the value resulting from a discrete change from one control material to another. The VMP represented the benefit of using MI compared to

31 21 the next best alternative (Hueth et al., 2000). The study restricted the demand of MI to commodities where the VMP was positive. After calculating the VMP, demand schedules were mapped out over a range of prices under optimistic, average, and pessimistic scenarios regarding changes in application rates and non-chemical application costs (Hueth et al., 2000). The expected price for MI was assumed to be the current price of $11.00/lb., and at least as high as the $2.25/lb. price paid for MeBr. The results indicated that as the price per pound of MI increases, the demand for MI under each scenario decreases rapidly. The study evaluated demand schedules for those producers using both tarping and non-tarping operations. As expected, the demand for MI decreased at a greater rate for producers using a low density polyethylene tarp because tarping added additional costs to operations and provided additional protection against pests. The demand for MI was less across all prices and alternative scenarios when compared to non-tarping operations. The authors acknowledged that their analysis was not representative of the entire California market, and therefore the potential demand for MI would likely be much higher (Hueth et al., 2000). Their results indicated that at a price of $11.00/lb. demand could reach four million pounds in California alone. As demand increased for MI due to the phase-out, suppliers may be encouraged to innovate and enter this new market (Hueth et al., 2000). However, limitations surrounding MI are its current costs of extraction and limited supply compared to MeBr. Current production of MI could supply the demand of niche markets in the U.S., but additional investments in extraction are needed in order to supply larger regional markets (Hueth et al., 2000). Overall, the authors identify MI as a viable alternative to MeBr.

32 Economic Impacts within the U.S. Vegetable Industry Analyses conducted by (Spreen et al., 1996) (VanSickle, 2000) investigate the impact of the phase-out with respect to the U.S. winter fresh vegetable market and the U.S. vegetable industry as a whole. Both studies make important contributions to the literature by recognizing and quantifying the impacts to producers that rely heavily on MeBr. Spreen et al. (1996) estimated the impact of the phase-out on the winter market for fresh vegetables such as green peppers, squash, cucumbers, tomatoes, eggplant, and watermelons. The primary impact of the phase-out to this market will be felt by Florida because they are the leading domestic supplier of these products (Spreen et al., 1996). Previous research had failed to assess the impact to Florida independently by region or season. Although California is a major consumer of MeBr it does not compete with Florida's vegetable market due to the seasonal differences between the two states. The study s model focused on months in which Florida is a supplier of vegetables to the U.S. market (Spreen et al., 1996). Spreen et al.'s model served as the basis for the model used by (Carpenter et al., 2000). However, in this case researchers characterize the North American winter fresh vegetable market as a spatial equilibrium problem rather than the entire U.S. market (Spreen et al., 1996). The authors constructed the winter fresh vegetable market by disaggregating Florida into four regions of production and acknowledging Texas and Mexico as dominant suppliers during the winter season occurring from November through May. A quadratic programming model was developed to determine factors such as equilibrium consumption of each commodity in every month and region, optimal levels of shipments between areas of supply and demand, optimum acreage employed for each cropping system, and optimum monthly production of commodities by region (Spreen et al., 1996). Solutions for total

33 23 supplies accounted for the double cropping systems common to Florida growers and the production of commodities under each system. Total demand was estimated through an inverse Rotterdam system of demand equations developed in previous studies, but was expanded to include the additional commodities used in this study (Spreen et al., 1996). For simplicity, all parameters of the model were assumed to be non-stochastic although the yields of fresh vegetables were known to be highly variable. The authors noted that constraints imposed on the model did not include land, labor, and machinery. They justified this approach because, "it could not be established that effective resource requirements restricted the production of fresh vegetables in Florida, Mexico, or other U.S. supply areas (Spreen et al., 1996, p.436)." The model was initially solved for a base-case scenario without accounting for the elimination or reduction of MeBr. This analysis generated results that conformed to past data with respect to shipping among supply regions, quantity of the crop produced, and the acreage employed for production of the six crops. However, the model did fail to produce realistic results concerning pepper production in Florida. Under the base case, Southwest Florida was expected to grow no peppers although it has historically been the largest pepper producing region in the state (Spreen et al., 1996). After modifying the model to account for the loss of MeBr, the solution indicated that the production of peppers, tomatoes, eggplant, and cucumbers would be eliminated in one of Florida's four regions. All other regions throughout Florida were expected to experience adverse effects from the ban due to a severe contraction in production of these crops (Spreen et al., 1996). The model predicted that Mexico and Texas would provide for most of the lost production in Florida as neither region was affected by the ban (Spreen et al., 1996). Of the six crops analyzed in the study, peppers and tomatoes were subject to the greatest reduction in