An Evaluation of the Organic Cotton Marketing Opportunity

Transcription

1 An Evaluaton of the Organc Cotton Marketng Opportunty Margl Funtanlla Conrad Lyford Chenggang Wang Dept. of Agrcultural and Appled Economcs Texas Tech Unversty Correspondng Author Dr. Conrad Lyford Dept. of Agrcultural and Appled Economcs Texas Tech Unversty Lubbock, Texas, USA Emal: Selected Paper prepared for presentaton at the Agrcultural & Appled Economcs Assocaton s 2009 AAEA & ACCI Jont Annual Meetng, Mlwaukee, WI, July 26-28, Copyrght 2009 by Funtanlla, Lyford and Wang. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded ths copyrght notce appears on all such copes.

2 An Evaluaton of the Organc Cotton Marketng Opportunty The prospects and demand for organc farmng products are on the rse as consumers become more ecologcally concerned and health conscous. Ths s apparent n the steady growth of the organc food market n the U.S. wth sales growng at an annual rate of 20.9% n 2006, and the non-food sector closely trackng ths trend (Organc Trade Assocaton, 2007). Moreover, a Manufacturer Survey conducted by the Organc Trade Assocaton (OTA) n 2003 showed that the overall US sales growth from organc fber products are startng to outpace sales growth of organc food. OTA (2004) recorded nearly 23% growth n sales to reach $85 mllon annually. Such expanson n the organc fber market s backed by a 35% annual average estmated growth rate n the global retal sales of organc products (Organc Exchange, 2006). U.S. cotton farmers, partcularly those located n the Texas Hgh Plans (THP), have responded by plantng more organc cotton, and expandng the amount of land undergong converson from conventonal farmng to organc. In 2001, THP comprsed about 73% of the total U.S. certfed and transtonal cotton fber acreage (Guerena and Sullvan, 2003), and consstently leads organc cotton producton (OTA 2004, 2006). In addton, the organc cotton fber has establshed an mportant market nche for whch Texas has developed ts capablty through state developed certfcaton standards and an organc cotton marketng cooperatve. 1

3 For cotton to be labeled and sold as organc, t must be certfed by an ndependent organzaton subject to a set of organc producton standards. Elmnaton of synthetcally compounded chemcals such as fertlzers, pestcdes, defolants and other chemcal nputs s requred under these standards. However, applcaton and certfcaton ntally requres substantal costs and tme. Cotton growers who decde to convert to organc methods must undergo a three-year transton from conventonal producton practces before ther farms are certfed as organc (Hanson et al., 2004). In spte of the many ecologcal advantages and farmer health benefts that come from farmng organcally (Lampkn and Padel 1994; PAN UK 2005; Myers and Stolton 1999), proft s stll consdered as the best ncentve for most farmers to engage n a partcular famng system. However, knowledge about proftablty of organc cotton enterprse partcularly n the U.S. s lmted. Ths lmtaton s understandable snce t s a farly new area of actvty (approxmately eghteen years). Although aggregate organc cotton acreage and producton data s avalable from OTA, Organc Exchange, and USDA (fgures 1 and 2), pertnent farm-level nformaton specfc to organc cotton s warranted. Gven the domnant role played by the Texas Hgh Plans n the US organc cotton ndustry and the lmted lterature on the actual performance of the enterprse, t would be useful to assess the proftablty of organc producton through costs and returns analyss of both organcally-produced and conventonal cotton. Efforts to provde a bass for any mprovement n ths segment of U.S. agrculture s also extended to measure the techncal effcency of cotton farmers. Measurng the degree of organc cotton growers success n 2

4 attanng maxmum output gven the resources avalable to them s explored to prop up the economc compettveness, or otherwse, of adoptng organc technques. Tzuovelekas, Pantzos, and Fotopoulos (1997) has noted that determnng farm effcency would also allow for determnng farm potentals for rasng productvty and mprovng resource use. Hence, proftablty and effcency measurements allow us to evaluate the vablty of organc method of producng cotton as an alternatve system. Ths artcle ams to produce a comprehensve analyss of the potental economc costs, and returns of organc cotton producton n Texas Hgh Plans; to estmate the techncal effcency of the sample organc and conventonal cotton farms n Texas Hgh Plans; and, to dentfy the factors contrbutng to farm effcency. The avalablty of ths nformaton wll support better nformed decsons by current producers and users of ths organc fber. Furthermore, understandng of the producton and marketng aspects of the organc cotton ndustry, partcularly the cost structures, also allow non-organc producers and consumers to more clearly see the potentals of growng and consumng organc cotton. Data and Descrptve Statstcs Survey questonnares were maled-n to certfed organc cotton farmer-members of the Texas Organc Cotton Marketng Cooperatve (TOCMC) n August Gven the relatvely small number of TOCMC members, whom are beleve to comprse majorty of the organc cotton growers n the THP, a complete enumeraton was employed. The 3

5 survey obtaned prmary data that ncludes nput costs, volume of producton, and market prces receved by the producers durng cotton crop year The questonnare s desgned to elct separate nformaton from the producers rrgated and dryland cotton farms. It s noteworthy however, that secondary data on custom rates are also utlzed 2. Among the twenty-one questonnares that were targeted, only eleven were completely flled-out and returned by the organc farmers. These producers are responsble for the producton of 11,752 (79%) of the 14,878 organc and transtonal bales produced by cooperatve members who grew organc cotton n 2007 (Pepper, Ph. Intervew, 2008). A group consstng of twenty-one non-organc control producers also stuated n Texas Hgh Plans was randomly selected from a lst of cotton farmers provded by the Texas Agr-Lfe Research Staton Lubbock. Ths allowed the proftablty and techncal comparson of the organc and conventonal cotton farmng systems. Most of survey questonnares returned are properly flled out except for two conventonal cotton producers who dd not plant cotton n the perod under study. Ths reduced the usable conventonal questonnares nto seven. Soco-Demographc Profle of Sample Farmers All but one conventonal farmer utlzed both rrgated and dryland acreage to produce cotton n crop year 2007, whle less than half of the organc sample devoted both ther rrgated and dryland portons to organc cotton. The rest have chosen to produce cotton under one ecosystem only. Irrgated farms that produced cotton have average sze that 4

6 range from 348 to 438 acres across farmng systems, whle farms under dryland condtons were planted to an average of 508 to 627 acres (table 1). An mportant caveat f that combnng the data collected on rrgated and dryland farm szes does not depct the aggregate agrcultural landholdng per farmer 3. On average, sample organc farmers have 10 years of experence under organc farmng method. Pror to engagng n organc practces, these farmers have been growng cotton usng non-organc methods wth a mean of 23 years whle conventonal farmer sample has started a bt earler wth 26 years mean cotton farmng experence. Farmer s mean ages across cotton farmng methods ranged from 47 to 52 years. In addton, majorty of the organc producers have attaned a Bachelor s Degree (64%), about 27% have reached some college, and 9% got a hgh school dploma. Lkewse, much of the conventonal cotton growers acqured a Bachelor s Degree (43%), leavng the rest equally dvded nto those who have attended college (29%) and had a Graduate Degree (29%). Measurng Organc and Conventonal Cotton Costs and Returns The producton costs and yeld (pounds) of organc and conventonal composte farms used n the analyss are drectly suppled by the sample farmers on a per acre bass 4. To account for the effects of ecosystems, the data used n the enterprse budgets are organzed nto four groups: (1) Organc-Irrgated; (2) Organc-Dryland; (3) Conventonal-Irrgated; and (4) Conventonal-Dryland. 5

7 Costs ncurred by organc and conventonal producers are dvded nto two categores, total drect expenses and total fxed expenses. Total drect expenses nclude seeds, fertlzers, herbcdes, nsectcdes, other chemcals (whch may nclude fungcde, etc.), harvest ad (chemcal defolants), Crop Consultng Servce fee, crop nsurance, energy costs (consummated by rrgaton), Organc Certfcaton Fee, nterest on captal, labor, and repar and mantenance. The last two mentoned components are further subdvded nto several actvtes that are most common n cotton (organc and non-organc) producton. Labor s the aggregate custom rate per acre of performng dfferent labor farm operatons. Repar and mantenance s the sum of costs per acre of mplements, tractors, pck-up, and center pvot 5. The total specfed expenses are computed by combnng the total drect expenses and total fxed expenses, and correspond to total farm costs per acre. Gross value of cotton produced s the quantty of harvested organc or conventonal cotton per acre multpled by the market prce (US$) per pound receved by the cotton farmer. Returns above drect expenses are computed as gross value less total drect expenses, whle returns above total specfed expenses s the dfference between gross value and total specfed expenses. The latter s equvalent to the cotton farms net proft per acre. Survey Results The budgets developed n ths artcle serve as an ntal step n analyzng the compettveness of the organc cotton enterprse. Table 2 summarzes ths nformaton, 6

8 and tables 3 and 4 supplement such nformaton by provdng the result of test of means of costs and returns of organc and conventonal cotton operatons, under rrgated and dryland ecosystems. Revenue On average, sample organc farmers produced 976 lbs/acre cotton from rrgated acres, a sgnfcantly lower volume than 1395 lbs/acre cotton harvested by conventonal producers under the same ecosystem. Organc cotton produced from dryland farms s about 649 lbs/acre, whle 772lbs/acre are obtaned by conventonal producers. Dryland cotton farm yelds, on average, are not sgnfcantly dfferent across farmng systems. Ths mples a 30% and 16% lower average cotton yeld for rrgated and dryland organc farmers, respectvely. Further nspecton of table 2 reveals hgher actual market prces receved for organc cotton ($1.27/lb and $1.15) compared wth conventonal cotton prces ($0.64/lb and $0.63/lb) durng crop year The gross value earned by organc farmers from cotton harvested n rrgated and dryland acreage n 2007 are $1237/acre and $743/acre, respectvely. Conventonal cotton farmers have made $895/acre and $489/acre from rrgated and dryland portons. Evdently, the average revenue earned by conventonal farmers n 2007 s reduced by the lower prces receved from ther cotton whereas the average prce premum receved by organc producers ($0.63/lb and $0.51/lb) allowed them to obtan sgnfcantly hgher gross returns. 7

9 Patterns and Costs of Input Use The organc method of producng cotton s based on a system of farmng that protects the long-term fertlty of sols wthout the use of toxc and persstent pestcdes and fertlzers (Lampkn and Padel, 1994). Ths s ndcatve of the prncples and practces that can be expected n producng and handlng the fber. Seeds Sample organc farmers ncurred consderably lower seed costs per acre n rrgated (about 85% lower) and dryland cotton farms (about 82% lower). Under the USDA Natonal Organc Standards, organc producers are only allowed to use cotton varetes that are not genetcally-modfed/enhanced, or more commonly referred to as Non-GMs. Consequently, the use of Roundup Ready and smlar varetes that are popular to West Texas conventonal cotton producers are not permtted under organc practces. Ths GM cotton known to be herbcde tolerant and relatvely prcey gven that: (a) technology fees are ncluded n the prce and (b) farmers are requred to buy new seeds every plantng season contrary to customary seed savng practces (Myers, 2001). However, proponents of ths type of seeds clam that producers could save on herbcdes and labor costs ncurred n controllng weeds, and expect hgher yeld. Non-GM seeds, sourced from the Texas Organc Cotton Marketng Cooperatve (TOCMC) or from ndependent seed companes, allowed for lower average seed costs per acre under organc method of farmng despte hgher seedng rate. As ndcated n the data provded by the surveyed farms, organc farmng demands for hgher amount of seeds per acre than conventonal counterparts. A mean of 18lbs/acre and 14lbs/acre seeds 8

10 are sown n rrgated and dryland organc grounds, respectvely, whle conventonal farmers placed 11lbs and 8lbs on rrgated and dryland grounds. In spte of ths, sample organc producers spent an average of only $8/acre (rrgated) and $6/acre (dryland) on seeds relatve to $51.7/acre and $34.3/acre expended by conventonal producers. In addton, the fact that organc producers are allowed to catch ther own seed and have t delnted for plantng may have contrbuted to lower average seed costs. Fertlzer As shown n table 2, fertlzer average costs per acre n rrgated and dryland organc farms are $78/acre and $42/acre, respectvely. Conventonal producers on the other hand ncur $65/acre mean fertlzer costs n rrgated acres, and $25/acre was expended on fertlzers appled to dryland portons. Inspecton of tables 3 and 4 shows, that the means among organc and conventonal cotton producers fertlzer costs are not sgnfcantly dfferent across producton systems. However, the types of fertlzer appled under organc practces dffer from what conventonal farms use to mantan the proper amount of nutrents n the sol. Survey data and personal feld vst relate that organc farmers abde by the USDA-Natonal Organc Program (NOP) standards that elmnate synthetc fertlzers n organc producton. Most organc farmers n the sample feed the sol wth compost that s mostly from anmal waste. Some use green manure, partcularly rye, whle one farm use concentrated lqud chcken compost 6. Wth conventonal practce, chemcal fertlzers are commonly used to enhance sol qualty. The majorty of the sample conventonal producers apply purely chemcal fertlzers except for one, who used dgested chcken manure as a supplement. 9

11 Chemcal costs The lterature on organc cotton producton contends that the absence of pestcdes and other chemcals, such as chemcal defolants used as harvest ads, partly dstngushes the product from cotton grown conventonally. Inspecton of the budgets presented by the artcle denotes the strct complance of organc farmers to federal standards and prncples of the farmng system they have adopted. Conversely, applcaton of synthetcally compounded chemcals s paramount under the conventonal approach of producng cotton. Ths concurs wth the sample conventonal producer s recorded chemcal costs. The average costs of herbcde treatment of sample rrgated cotton farms s $24/acre, and $14/acre n dryland farms. Such costs account for 4% and 5% of the total drect expenses of conventonal rrgated and dryland cotton farms, respectvely (table 5). Moreover, the average nsectcde costs n rrgated ($5/acre) and dryland acres ($1/acre), relatvely lower than herbcde costs, consttute 0.8% and 0.4% of the rrgated and dryland productons drect expenses, respectvely. It s noteworthy that the lower mean nsectcde cost n dryland ecosystem s due to few conventonal farmers n the sample who dd not use nsectcde to wrng out nsects n crop year The survey further reveals that other chemcals add up to the producer s drect expenses. However, such cost ($5.9/acre) s only present n the sample farmer s rrgated farms. The harvest ad cost component, contrbuted 3% ($17/acre) to the rrgated cotton producton drect expenses, and 4% ($12/acre) to dryland cotton expendtures. Overall, chemcal costs consttute 8% and 9% of the total drect expenses n rrgated and dryland conventonal cotton producton, respectvely. 10

12 Crop Insurance Crop nsurance polcy n farmng organc cotton s not mandatory, just lke n any conventonal cotton producton, but the majorty of sample organc farms nsure ther crops. Organc producers have ther entre dryland cotton acreage and 94% rrgated acreage covered. Lkewse, most conventonal cotton producers n the sample purchase coverage as part of ther rsk management strateges. About 92% of the total rrgated conventonal acres are nsured, whle one farmer-respondent cultvatng a sgnfcantly large dryland area dd not purchase crop nsurance, pullng down the total dryland area coverage to only 36%. The means of crop nsurance pad per acre by organc and conventonal producers have no sgnfcant dfference, but components of such costs ncurred by producers from both farmng systems may dffer. The survey does not provde nformaton wth regard to the specfc type and number of crop nsurance polces held by the organc and conventonal farmer-respondents. However, a personal ntervew wth one organc famer belongng to the sample offers a general dea about such nformaton. As related, Mult-Perl Crop Insurance (MPCI) that provdes a safety net aganst losses from a number of uncontrollable causes s very popular among organc cotton farmers. Other farmers prefer Hal Insurance over MCPI despte ts lmted coverage, but some farmers have both. Energy Several studes comparng energy nput use n organc and conventonal farm systems (Shearer et al. 1981; Pmentel, 2005; Gundogmus, 2006) found less energy use n organc farmng. Comparng the means of energy cost per acre under the two cotton farmng systems reveal a sgnfcantly hgher energy costs per acre pad out by organc producers. 11

13 Although reports from organc and conventonal cotton farmers n the sample only nvolve energy nput costs n rrgaton actvtes, the artcle found results that s consstent wth fndngs from a proftablty study of organc soybean producton n several states n the U.S., where McBrde (2008) reported a sgnfcantly hgher energy costs per acre (throughout the producton process) n the organc soybean felds. The reported mean energy costs used n rrgaton by sample organc cotton farmers ($91/acre) from Texas Hgh Plans are reasonably hgher as farmers would not rsk ther crop s yeld by mnmzng use of water. Gven that organc cotton market prces are found to be sgnfcantly hgher than conventonal cotton, organc farmers would desre to maxmze the yeld potentals of ther cotton and thus use more water. Organc Certfcaton Fee Adoptng the organc technque of growng cotton requres farms to undergo a certfcaton process that s consdered costly. However, the measures and processes provded for by the Texas Department of Agrculture brng credblty to the organc fber as t s transmtted nto the market. Certfcaton allows buldng consumer confdence n organc products and to sustan and stmulate growth of the ndustry as a whole. The strct standards set forth by the organc certfer open markets for the fnal product. Labor Total labor costs remarkably domnate the total drect expenses ncurred by the organc and conventonal sample farmers. The average labor costs for rrgated organc and nonorganc farms are not on the average sgnfcantly dfferent whereas dryland mean labor costs for organc farms are sgnfcantly hgher than ther conventonal counterparts. About 62% (rrgated) and 65% (dryland) of the organc farms total drect expenses went to labor payments. Under conventonal practces, 52% and 57% were pad-out to custom 12

14 operatons n rrgated and non-rrgated farms, respectvely. Apparently, hand hoeng (54% n rrgated, 33% n dryland) and harvestng through strppng and/or pckng method (18% n rrgated and 24% n dryland) have magnfed the organc producers labor costs. On the other hand, conventonal farmers have spent a lot on scoutng for nsects wth about 25% (rrgated) and 15% (dryland) of labor costs allotted to these actvtes. Repar and Mantenance The costs of mplements, tractors, pck-up, and center pvot are assumed the same under both organc and conventonal farmng technques. TOCMC organc farmer-members relate through feld vst and personal conversatons that they dd not buy addtonal equpments after decdng to swtch to organc farmng. The same assumpton holds for nterest on captal and fxed expenses ncurred by both farmng systems. Budgets show that rrgated farms has total repar and mantenance expenses of about $49/acre, whle non-rrgated farms spent $26/acre. Emprcal Estmaton of the Stochastc Fronter Producton Model A producton fronter provdes the standards aganst whch the performance of a producer can be evaluated n respect to techncal effcency. Producers who employ the optmal combnaton of actvty operate on ther producton fronter. Often however, producers do not succeed as optmzers due to unusually favorable envronment that s beyond ther control. Thus, t s unlkely that producers operate at ther fronter and n effect, they are not able to maxmze ther output. 13

15 The stochastc producton fronter approach to measurng techncal effcency s employed n ths artcle consderng the random varatons n the sample farm operatons beng studed. A general stochastc producton fronter model s specfed by Kumbhakar and Lovell (2000) as: y = f ( x ; β ) exp{ v } TE, (1) where y s the scalar output of farmer, = 1,..., I, x s a vector of N nputs used by farmer, f ( ; β ) s the determnstc producton fronter common to all farmers, and β x s a vector of technology parameters to be estmated, TE = exp{ u } s a one-sded nonnegatve error representng output-orented techncal neffcency of farmer. Hgher values of u ndcate greater techncal neffcency. Equaton (1) decomposes the error term ε nto two components as compared wth the determnstc producton fronter model, y = f ( x ; β ) exp{ u}, that attrbutes the entre shortfall of observed output y solely to techncal neffcency. Two-sded stochastc nose error component, v, captures the effects of farmer-specfc random events that are lkely assocated wth unmeasured producton factors. Rearrangng terms, TE = f y, (2) x ; β ) exp{ v } ( defnes techncal effcency as the rato of the observed output to maxmum feasble output n an envronment characterzed by exp{ v }. In equaton (2) a farmer s techncally effcent f ts output level s on the fronter, whch mples that TE = 1. Otherwse, TE 1 provdes a measure of the shortfall of observed output from maxmum 14

16 feasble output n an envronment that accommodates whte nose allowed to vary across producers. Assumng that the producton fronter that takes a Cobb-Douglas functonal form, the stochastc producton fronter model expressed n natural logarthmc form can be specfed as: ln y = β + β ln x + v u, (3) o n n n where the whte nose component v s assumed to be d and symmetrc. Ths s ndependently dstrbuted wth u.maxmum Lkelhood Estmaton (MLE) yelds consstent estmates of the producton technology parameters, β and varance parameters, 2 2 1/ 2 = ( σ u σ v ) and λ = σ u / σ 7 v. σ + Accordng to Jondrow et al. (1982), subsequent to ths a farmer-specfc neffcency term s generatng by the condtonal dstrbuton f ( u ε ). As effcency vares across producers, t s useful to determne the factors that contrbute to varatons. The lterature provdes two approaches n fndng these determnants, the sngle and two-stage approach. However, the former whch s developed by Battese and Coell (1995) s mostly preferred n the effcency lterature. Battese and Coell (1995) ponted out that the model specfcaton n the second stage under the latter procedure conflcts wth the assumpton that u s ndependent. 15

17 Under the sngle-stage approach, the techncal neffcency effects are hypotheszed to be a functon of the explanatory varables related wth farm-specfc characterstcs. The neffcency term u s specfed as: u = δ z + w where w s a random varable assumed to be d, defned by the truncaton of the normal 2 dstrbuton wth mean zero and varance σ (such that w δz ); and z s a vector of farm-specfc neffcency varables. Emprcal Specfcaton Followng Battese and Coell (1995), emprcal estmaton n ths artcle s conducted usng the techncal neffcency model. Estmaton usng the cross-sectonal data set from sample organc and conventonal cotton farms, already descrbed n the prevous sectons, s carred out usng the computer program FRONTIER 4.1. The program, developed by Coell (1995) s used to obtan ML estmates of the parameters of stochastc producton models. A Cobb-Douglas functonal form s assumed gven ts smplcty and the small amount of data avalable. The model to be estmated s: lny 0 + β1 ln Materals + β 2 = β lnwater + v u, and (4) u = 0 + δ1exp + δ Educ 2 + δ 3 δ Area + W (5) where Y s the total value (US Dollars) of cotton produced by the th farm; Materals refer to the value of seeds, fertlzers appled, chemcals (herbcde, nsectcde, chemcal defolants, and other chemcals) used durng the producton; Water s the combned amount of appled water and ranfall (acre-nch); Exp (years) s the number of farmng 16

18 experence of the cotton grower; Educ s a dummy varable that has a value of 1 f the farmer has at least went to college; and Area refers to land area (acres) devoted to cotton. Estmaton Results Table 6 presents the result of stochastc producton fronter estmaton based on (4). The maxmum lkelhood estmate for the rato parameter γ (1.000) denotes that farm-specfc techncal effcency s of consderable mportance n explanng the total varablty of organc and conventonal cotton produced. As regards to the maxmum lkelhood parameters of the explanatory varables consdered n ths artcle, both materals and water have postve coeffcents as expected. In addton, these two varables are statstcally sgnfcant n both models. The elastcty of output for water n organc and conventonal farmng has regstered hgher values relatve to the elastcty of output for materals. Ths suggests that water as an nput to cotton producton has major mpact under both farmng systems, although the elastcty value (0.4306) n conventonal farms are relatvely hgher than organc farmng (0.3588). Ths comes as no surprse gven that conventonal farmers are able to apply more water to ncrease cotton yeld, wthout rskng the growth of unwanted weeds. Unlke n organc farmng where use of round-up ready seeds and weed control chemcals s not permtted, non-organc farms commonly use herbcde to control weeds wthout damagng the cotton. Conventonal farms also exhbt a hgher responsveness to materals (0.3810) relatve to organc counterparts (0.2475). Clearly, chemcals are mportant under non-organc technques of farmng. 17

19 Techncal Effcency and Ineffcency Effects Interpretng techncal effcency scores of two dfferent methods of farmng always come wth an mportant caveat,.e. the hgher scores exhbted by one farmng system wth respect to the other does not ndcate that the former are more effcent by some degree than the latter (Tzuovelekas, Pantzos, and Fotopoulos 2001, 2002; Oude Lansnk et al. 2002, 2005). The sample farms consdered n ths artcle are facng dfferent producton technologes. As these authors have always ponted out, hgher techncal effcency score of one sample farmer relatve to ther counterpart means that, on average, the former lay closer to ther specfc producton fronter than the sample counterpart does wth ther respectve producton fronter. On average, the estmated techncal effcences of sample organc and conventonal cotton farms are 46 % and 78%, respectvely. Ths reveals that n general, the sample organc and conventonal farms have not been successful n maxmzng the level of output attanable gven ther producton technology. Gven the estmated effcency scores, t s stll possble for organc farmers to ncrease ther producton by as much as 54% gven ther current technology and wthout usng more resources than are actually avalable. Conventonal farmers are stuated relatvely closer to ther producton fronter, but output can stll be stretched to 22%. Furthermore, nvestgatng the varaton of farm effcency scores ndcates that all conventonal farmers recorded effcency rates from 50% to 100%, whle only 27% of the organc farms are n the sad range. Interestngly, most organc farms (67%) were found to have an effcency level between 30% and 50%. 18

20 Table 6 also shows the coeffcents of the explanatory varables n the neffcency model (5). The sgn of the coeffcents n the model used to estmate neffcency n the organc farmng sample are as expected. Experence, educaton, and area show postve effect on effcency. Estmated experence coeffcent suggests that the longer years of growng cotton organcally, the less techncally effcent organc farmers are. The estmate for the coeffcent of educaton mples that organc cotton farmers who have at least started college are less neffcent. However, these relatonshps are weak gven that exp and educ are not sgnfcant. Evdently, area s postvely related to organc farms effcency level. On the contrary, the estmated coeffcent of area n conventonal farms s postve suggestng dseconomes of scale. Educaton s postvely related to techncal effcency n non-organc farms, although found to be nsgnfcant. Fnally, experence shows strong negatve relatonshp wth techncal effcency, whch ndcates that farmers who have longer experence growng cotton conventonally are less effcent. Concluson Ths artcle evaluated the proftablty and techncal effcency of organc cotton farmng usng sample data from organc and conventonal cotton growers Texas Hgh Plans. In comparatve terms, analyss of costs and returns reveals sgnfcantly hgher average returns above total specfed expenses n organc farmng relatve to ther conventonal counterparts. Evdently, sgnfcantly lower average yelds n organc rrgated and dryland farms relatve to non-organc farms have been compensated by the prce premum receved by the organc producers, makng hgher profts possble. It s 19

21 noteworthy however, that total labor costs appear to domnate among the other components of total drect expenses under both organc and conventonal practces. In spte of the hgher proftablty recorded by sample organc farms, emprcal estmaton reveals that, n general, organc farmers have not been successful n attanng the maxmum output gven the resources avalable to them. On average, the current effcency level of organc cotton farms can stll be stretched up to 54% wth the exstng technology, and wthout usng more resources than are actually avalable. Conventonal cotton farms are found to exhbt a relatvely closer poston wth ther respectve producton fronter, although ncreasng producton by 22% s stll feasble. The relatvely lower techncal effcency of sample organc farms s farly reasonable. As ponted out n the frst secton, organc cotton producton as an alternatve to U.S. conventonal cotton practces s a relatvely new area of actvty that began n the U.S. n The opportuntes presented by developng a non-tradtonal producton system n organc cotton n West Texas appear to be substantally more proftable than conventonal cotton over the years studed. However, organc acreage s stll only a very small fracton of total producton acres. Ths proftablty s n large part the result of successful group marketng efforts by the Texas Organc Cotton Marketng Cooperatve that consstently acheves much hgher prces for ther organc cotton. The ablty to mantan those premums and overall returns to organc cotton producton wll be a key challenge n the current economc clmate. 20

22 Lst of References Battese, G. E., and T. J. Coell A Model for Techncal Ineffcency Effects n a Stochastc Fronter Producton Functon for Panel Data. Emprcal Economcs 20: Canavar, M., Ghelf, R., Olson, K.D., and S. Rvarol A Comparatve Proftablty Analyss of Organc and Conventonal Farms n Emla-Romagna and n Mnnesota In Kent D. Olson, ed. Organc Food Consumers' Choces and Farmers' Opportuntes. New York: Sprnger, pp Delate, K. M. & Duffy, Mchael & Chase, C. & Holste, A. & Fredrch, H. & Wantate, N, "An Economc Comparson of Organc and Conventonal Gran Crops n a Long-Term Agroecologcal Research (LTAR) Ste n Iowa," Staff General Research Papers 11818, Iowa State Unversty, Department of Economcs. Eyhorn, F., Mader, P. and M. Ramakrshnan The Impact of Organc Cotton Farmng on the Lvelhoods of Smallholders: Evdence from the Makaal bore Project n Central Inda. Research Insttute of Organc Agrculture (FBL). Avalable: Gardebroek, C Comparng Rsk Atttudes of Organc and Non-organc Farmers wth a Bayesan Random Coeffcent Model. European Revew of Agrcultural Economcs. 33(4), pp Guerena, M. and P. Sullvan Organc Cotton Producton. Natonal Center for Approprate Technology. Avalable: Hanson, J., Dsmukes, R., Chambers, W., Greene, C. and A. Kremen Rsk and rsk management n organc agrculture: Vews of organc farmers. Renewable Agrculture and Food Systems 19, pp Jondrow, J., Lovell, C.A.K., Materov, I.S., and P. Schmdt On the Estmaton of Techncal Ineffcency n the Stochastc Fronter Producton Functon Model. Journal of Econometrcs 19, pp

23 Kumbhakar S.C. and C.A.K.Lovell Stochastc Fronter Analyss. Cambrdge, UK: Cambrdge Unversty Press. Lakhal, Salem and Souad H Mda The Economcs of Organc and Conventonal Cotton Cultvaton n Mal: Country and Farmers Analyss Paper presented at Oxford Busness and Economcs Conference, Oxford Unversty, UK, Lampkn, N.H. and S. Padel The Economcs of Organc Farmng An Internatonal Perspectve. UK: CAB Internatonal Lantng, H., Raj, D., Srdhar, K., Ambatpud, and S. Brenchandran Case Study on Organc versus Conventonal Cotton n Karmnagar, Andhra Pradesh, Inda. Paper presented at Second Internatonal Symposum on Bologcal Control of Arthropods, pp Mahoney, P. R., Olson, K. D., and P. M. Porter. (2001). Rsk Analyss of Organc Croppng Systems n Mnnesota. Presented at AAEA annual meetng, Chcago, Illnos. McBrde, W. D. and C. Greene A Comparson of Conventonal and Organc Mlk Producton Systems n the U.S. Paper presented at AAEA annual meetng, Portland, Oregon, 29 July-1 August. McBrde, W. D. and C. Greene The Proftablty of Organc Soybean Producton. Paper presented at AAEA annual meetng, Orlando, Florda, July. Myers, D. and S. Stolton Organc Cotton from Feld to Fnal Product. London, UK: Intermedate Technology Publcatons Ltd. Organc Exchange Organc Cotton Fber Report Sprng Oakland, Calforna:Organc Exchange. Organc Exchange Organc Cotton Market Report Prelmnary Hghlghts. Berkeley, Calforna:Organc Exchange. Organc Exchange Organc Cotton Farm and Fber Report Berkeley, Calforna:Organc Exchange. Organc Trade Assocaton (OTA) Manufacturer Survey Report. Organc Trade Assocaton (OTA) and U.S. Organc Cotton Producton and Marketng Trends. Avalable at: 22

24 Oude Lansnk, A., Petola, K. and S. Backman Effcency and Productvty of Conventonal and Organc Farms n Fnland European Revew of Agrcultural Economcs, 29(1), pp PAN UK Moral Fbre A Begnner's Gude to the UK Market. Pestcde Acton Network UK. Avalable at: Splänen, T. and A. Oude Lansnk Learnng n Organc Farmng An Applcaton on Fnnsh Dary Farms. Paper presented to the XI th Congress of the EAAE, Copenhagen, Denmark, August. Tzuovelekas, V., Andreakos, I. Mattas, K., and E. Papanagotou Estmaton of techncal effcency n Greek Lvestock Farm. Cahers d econome et SocologeRurales , pp Tzouvelekas, V., Pantzos, C., and C. Fotopoulos Economc Effcency n Organc Farmng: Evdence from Cotton Farms n Vota, Greece. Journal of Agrcultural and Appled Economcs. 33(1): Tzouvelekas, V., Pantzos, C., and C. Fotopoulos Emprcal Evdence of Techncal Effcency Levels n Greek Organc and Conventonal Farms. Journal of Agrcultural and Appled Economcs. 33(1): Welsh, R The Economcs of Organc Gran and Soybean Producton n the Mdwestern Unted States. Henry A. Wallace Insttute for Alternatve Agrculture. 23

25 Table 1. Soco-economc Characterstc of the Sample Farmers, 2007 Characterstcs Organc Conventonal Mn Max Mean Mode Mn Max Mean Mode Farm Sze (Acre) Irrgated Acres Dryland Acres Farmer's Farmng Experence Cotton Farmng Organc Farmng Farmer's Age (Years) Farmer's Educaton Hgh School 1 0 Some College 3 2 Bachelors Degree 7 3 Graduate Degree

26 Table 2. Estmated Costs and Returns per Acre, Organc and Conventonal Cotton Organc Conventonal Items Irrgated Dryland Irrgated Dryland Yeld , Prce Gross value 1, cost/lb Total Drect Expenses Seeds Fertlzers Herbcdes Insectcdes Other chemcals Harvest ad Crop Consultng Servces Crop Insurance Energy for rrgaton Organc Certfcaton Fee Labor Stalk shreddng/cuttng Chselng Dskng Lstng Rod weedng Fertlzer app Insectcde app Herbcde app Plantng Scoutng Rotary hoeng Sandfght Cutvatng Hand hoeng Harvest Ad app Other actvtes Harvestng-Strp/Pck Gnnng Repar and Mantenance Implements Tractors Pck-up Center Pvot Interest on Op. Captal Returns Above Drect Expenses Fxed Expenses Implements Tractors Pck-up

27 Center Pvot Total Fxed Expenses Total Specfed Expenses Returns Above Total Specfed Expenses

28 Table 3. Comparson of Means on Producton Costs and Returns of Irrgated Organc and Conventonal Cotton Operatons, 2007 Organc Conventonal Pr > t a Pr > t b Items Irrgated Pooled Satterthwate (N=8) (N=7) Yeld 976 1, *** *** Prce <.0001*** <.0001*** Gross Value 1, *** *** cost/lb *** *** Total Drect Expenses Seeds <.0001*** <.0001*** Fertlzers Herbcdes *** *** Insectcdes * * Harvest ad *** *** Other chemcals ** ** Crop Insurance Crop Consultng Servces Energy for rrgaton ** ** Organc Certfcaton Fee <.0001*** *** Labor Stalk shreddng/cuttng Chselng Dskng ** ** Lstng Rod weedng * * Fertlzer applcaton Insectcde applcaton *** *** Herbcde applcaton * * Plantng Scoutng Rotary hoeng * * Sandfght Cutvatng <.0001*** <.0001*** Hand hoeng <.0001*** <.0001*** Harvest Ad applcaton *** *** Other actvtes Harvestng - Strp/Pck * * Gnnng Repar and Mantenance Implements Tractors Pck-up Center Pvot Interest on Op. Captal Returns Above Drect Expenses ** ** Fxed Expenses Implements Tractors Pck-up Center Pvot Total Fxed Expenses Total Specfed Expenses Returns Above Total Specfed Expenses ** ** a-b *sgnfcant at 10% level; **sgnfcant at 5% level; ***sgnfcant at the 1%level 27

29 Table 4. Comparson of Means on Producton Costs and Returns of Dryland Organc and Conventonal Cotton Operatons, 2007 Organc Conventonal Pr > t a Pr > t b Items Dryland Pooled Satterthwate (N=7) (N=6) Yeld Prce <.0001*** <.0001*** Gross Value * * cost/lb ** ** Total Drect Expenses Seeds <.0001*** *** Fertlzers Herbcdes *** *** Insectcdes Harvest ad *** *** Other chemcals Crop Insurance Crop Consultng Servces Energy for rrgaton Organc Certfcaton Fee <.0001*** <.0001*** Labor ** ** Stalk shreddng/cuttng ** ** Chselng ** ** Dskng Lstng Rod weedng ** ** Fertlzer applcaton Insectcde applcaton *** *** Herbcde applcaton Plantng Scoutng Rotary hoeng Sandfght Cutvatng <.0001*** <.0001*** Hand hoeng *** *** Harvest Ad applcaton * * Other actvtes Harvestng - Strp/Pck Gnnng Repar and Mantenance Implements Tractors Pck-up Center Pvot Interest on Op. Captal Returns Above Drect Expenses * * Fxed Expenses Implements Tractors Pck-up Center Pvot Total Fxed Expenses Total Specfed Expenses Returns Above Total Specfed Expenses * * a-b *sgnfcant at 10% level; **sgnfcant at 5% level; ***sgnfcant at the 1%level 28

30 Table 5. Input Costs Share to Total Drect Expenses n Organc and Conventonal Cotton Operatons, 2007 Organc Conventonal Items Irrgated Dryland Irrgated Dryland Total Drect Expenses Seeds 1.0% 1.6% 8.4% 11.1% Fertlzers 9.9% 11.0% 10.5% 8.1% Herbcdes 0.0% 0.0% 3.8% 4.6% Insectcdes 0.0% 0.0% 0.8% 0.4% Other chemcals 0.0% 0.0% 1.0% 0.0% Harvest ad 0.0% 0.0% 2.7% 4.0% Crop consultng servces 0.5% 0.1% 0.0% 0.0% Crop nsurance 3.2% 3.9% 1.9% 3.1% Energy for rrgaton 11.6% 0.0% 8.2% 0.0% Organc Certfcaton Fee 3.7% 9.2% 0.0% 0.0% Labor 61.46% 64.90% 51.61% 57.30% Stalk shreddng/cuttng 1.7% 3.4% 2.5% 3.2% Chselng 0.8% 6.5% 0.4% 0.9% Dskng 1.5% 0.5% 0.4% 0.0% Lstng 1.7% 3.3% 1.8% 3.1% Rod weedng 1.6% 3.5% 1.0% 1.4% Fertlzer app. 1.2% 1.5% 3.2% 2.9% Insectcde app. 0.0% 0.0% 0.8% 0.4% Herbcde app. 0.0% 0.0% 3.9% 4.7% Plantng 1.8% 3.6% 2.8% 5.0% Scoutng 2.6% 0.2% 25.1% 15.1% Rotary hoeng 2.8% 1.9% 1.5% 0.5% Sandfght 1.8% 3.0% 3.3% 7.3% Cutvatng 4.9% 9.7% 1.6% 2.0% Hand hoeng 53.9% 33.4% 2.7% 2.8% Harvest Ad app. 0.0% 0.0% 1.9% 1.6% Other actvtes 0.3% 0.0% 1.1% 2.4% Harvestng-Strp/Pck 18.2% 23.5% 36.9% 37.2% Gnnng 5.1% 6.0% 9.2% 9.6% Repar and Mantenance 6.22% 6.93% 7.93% 8.54% Implements 25.48% 52.26% 25.48% 52.26% Tractors 24.09% 47.13% 24.09% 47.13% Pck-up 0.57% 0.61% 0.57% 0.61% Center Pvot 49.86% 0.00% 49.86% 0.00% Interest on Op. Captal 2.49% 2.29% 3.18% 2.83% 29

31 Table 6. Maxmum-Lkelhood Estmates for Parameters of the Cobb-Douglas Stochastc Producton Fronters Organc Cotton Conventonal Cotton Varable Parameter Estmate a t-rato Estmate t-rato Constant β *** *** (0.4127) b (0.1578) log(materals) β ** ** 3.65 (0.1086) (0.1045) log(water) β * ** 5.68 (0.1976) (0.0759) Constant δ *** (0.2651) (0.4007) Experence δ *** (0.0159) (0.0025) Educaton δ (0.2015) (0.4007) Area δ ** *** 8.89 (0.0002) ( ) 2 σ = σ ** *** u σ v γ σ σ + σ u / u v (0.0180) (0.0145) = *** *** (0.0093) (0.0003) Log lkelhood Mean Techncal Effcency a *Sgnfcant at 10% level; **sgnfcant at 5% level; ***sgnfcant at the 1%level b Fgures n the parenthess are standard errors 30

32 Acres Year Note: Actual area planted to organc cotton n 2009 s not avalable yet. Thus, presented above s OTA's acreage projecton. Source: Organc Trade Assocaton (2004); Organc Trade Assocaton (2006); and Fgure 1. Estmated U.S. organc cotton area,

33 3,350 1,000 1,950 2,400 1,550 1,300 1,900 2,900 1,625 2,159 1,302 1,010 1,968 2,512 1,918 2,716 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 Year Source: Organc Trade Assocaton (2004) and Organc Exchange (2008) Fgure 2. Estmated U.S. organc cotton producton (MT), 1992/1993 to 2007/

34 Notes 1 Access to ths group of farmers was allowed through coordnaton wth the cooperatve. Hence, we would lke to acknowledge the support provded by the Texas Organc Cotton Marketng Cooperatve, as well as Dr. Jacke Smth of Texas Agr-Lfe Research Staton Lubbock, n makng ths artcle possble. 2 Informaton taken from the 2004 Custom Rates Statstcs handbook about rates on dfferent operator labor under cotton farmng actvtes are converted nto equvalent dollar amounts n For nstance, besdes the organc cotton acreage declared n the survey, a fracton of land were cultvated by three sample organc cotton producers durng the above-mentoned crop year usng conventonal technques as well. One of three farmer-respondents who has not yet consdered full converson of ther whole cotton acreage to organc farmng systems, has 3% of hs cotton feld apportoned to conventonallygrown cotton. The other two farmers ndcated 34% and 18% of respectve total cotton acreage cultvated under organc technques and equvalently, bgger portons reman under conventonal system of farmng. 4 A composte of farms s descrbed by the AAEA Task Force on Commodty Costs and Returns (2000) as a smple or weghted average of enterprse budgets for some perod or for some group of ndvdual or representatve farms. 5 The components of repar and mantenance and fxed expenses are provded for by the Texas Agr-lfe Research Staton s projected budget for 2007 cotton producton. 6 Green manure s a type of cover crop grown not for ts food value but to provde ground cover to hold the sol n place to prevent sol eroson. Rye cover feeds the mcro-organsms n the sol when turnng the cover crop back nto the sol by dskng or plowng, thereby provdng natural nutrents for future plants grown on that sol (Sullvan, 2002). 7 The parameter λ s an ndcator of the relatve varablty of the two sources of varatons. If λ s close to zero, the dscrepancy between the observed and the maxmum attanable levels of output s domnated by random factors outsde the control of the farmer. Otherwse, the more λ s greater than one the more the producton s domnated by varablty emanatng from techncal neffcency. 33