The Structure and Profitability of Organic Field Corn Production

Transcription

1 The Structure and Proftablty of Organc Feld Corn Producton Wllam D. McBrde* Catherne Greene Lnda Foreman Selected Paper prepared for presentaton at the Agrcultural and Appled Economcs Assocaton s 2013 & CAES Jont Annual Meetng, Washngton, DC, August 4-6, 2013 Abstract: Results from long-term expermental trals suggest that smlar yelds and lower costs are possble from organc compared wth conventonal feld crop producton, but there s lttle nformaton about the relatve costs and returns on commercal farms. Ths study examnes the structure and proftablty of feld corn producton usng a natonwde survey of corn producers for 2010 that ncludes a targeted sample of organc growers. Propensty score matchng was used to develop a sample of smlar conventonal and organc farms based on farm and operator characterstcs. Treatment-effect models were estmated usng the matched sample to solate the effect of choosng the organc approach on varous levels of corn producton costs. The procedure accounts for the mpact of both observable and unobservable varables on corn producton costs. *The authors are wth the U.S. Department of Agrculture, Economc Research Servce. The vews expressed heren are those of the authors and do not necessarly reflect the vews or polces of the U.S. Department of Agrculture. Drect any correspondence to: wmcbrde@ers.usda.gov, (202)

2 The Structure and Proftablty of Organc Feld Corn Producton Organc croppng systems rely on ecologcally based practces, such as bologcal pest management and compostng, and exclude most synthetc chemcals. Under organc croppng systems, the fundamental components and natural processes of ecosystems such as sol organsm actvtes, nutrent cyclng, and speces dstrbuton and competton are used as farm management tools (Greene and Kremen). For example, crops are rotated, food and shelter are provded for the predators and parastes of crop pests, anmal manure and crop resdues are recycled, and plantng/harvestng dates are carefully managed. U.S. crop acres under certfed organc systems have grown rapdly durng the past decade. Organc crop acres were more than 4 tmes hgher n 2008 than n 1995, as acreage ncreased from 638,500 to over 2.6 mllon acres (USDA, Economc Research Servce, a.). A large part of ths growth was n major feld crops, corn, soybeans, and wheat. Certfed organc producton of corn, soybeans, and wheat ncreased from about 200,000 acres n 1995 to about 736,000 acres n Sustaned hgher prces for conventonal corn, soybean, and wheat snce 2008 (USDA, Natonal Agrcultural Statstcs Servce) may have lmted organc acreage n more recent years. Despte the nterest n organc feld crop producton there s lttle nformaton about the relatve costs and returns of organc and conventonal producton systems, and the characterstcs of farms that are choosng the organc approach. Several researchers (e.g., Delate et al.; Mahoney et al.; Hanson et al.; Pmentel et al.; Smth et al) have examned organc crop producton n a long-term expermental settng, but lttle has been reported about the commercal producton of organc feld crops (McBrde and Greene). Ths study utlzes farm survey data from U.S. feld corn producers from the 2010 crop year n a comparson of conventonal and organc systems.

3 One objectve s to descrbe characterstcs of farms adoptng the organc producton approach and to contrast these wth other farms. Another objectve s to estmate the dfference n costsof-producton for each system on smlar farms, usng these costs to ndcate prce premums that make organc systems compettve wth conventonal systems. Data from a targeted sample of organc feld corn producers, as part of USDA s annual Agrcultural Resource Management Survey (ARMS), support the research n ths study. Organc samples of corn producers, along wth conventonal samples, were collected n the 2010 ARMS. Ths report contrasts organc and conventonal corn producton. A matched sample of organc and conventonal corn producers, based on farm and operator characterstcs, was generated n order to measure costs dfferences between farm operators and operatons of a smlar type and sze. Treatment-effect models were estmated usng the matched sample to solate the effect of choosng the organc approach on varous levels of corn producton costs. The procedure accounts for the mpact of both observable and unobservable varables on corn producton costs. Expermental Trals Much of what s known about organc croppng systems stems from multdscplnary research conducted wth long-term expermental trals that compare the agronomc, economc, and sometmes envronmental performance of organc and conventonal systems. The dentcal weather and sol condtons under whch feld experments are conducted provde opportuntes not possble wth on-farm studes, such as replcaton, precse feld measurements, and long-term comparsons. In these types of studes, descrptve and analytcal data are collected on crop yelds and management practces, and the productvty, economc vablty, and n some cases the potental envronmental mpacts of dfferent farmng systems are statstcally assessed. 2

4 Results of an economc analyss of organc croppng systems usng data from were reported from the Neely-Knyon Long-Term Agroecologcal Research ste n Iowa (Delate et al.). Ths study compares a conventonal corn-soybean rotaton wth organc rotatons that nclude corn, soybeans, oats, and alfalfa. Both corn and soybean producton costs are sgnfcantly hgher n the conventonal system compared wth the organc systems manly due to hgher costs of chemcal versus mechancal weed control, whle crop yelds are much the same. Results ndcate that returns to corn and soybean producton are sgnfcantly hgher under the organc systems. Returns to land, labor, and management are hgher wth the organc rotatons regardless of whether an organc prce premum s receved. Senstvty analyss of labor charges reveal that organc systems have hgher returns even when labor s valued at $50 per hour. Data from 22 years of experments from the Rodale Insttute Farmng Systems Tral n Pennsylvana were used to compare conventonal, organc anmal, and organc legume systems (Pmentel et al.). Crop yelds are smlar wth each system durng normal years, but are hgher for two organc systems under drought condtons. Energy nput use, ncludng fuels for farm machnery, fertlzers, seeds, and herbcdes, s about 30 percent less under the organc systems. Net returns to the organc rotatons, wthout prce premums, are smlar to those for conventonal rotatons durng typcal years, but are less when the costs of transton years are ncluded. However, the organc prce premum requred to equalze returns s only 10 percent above the conventonal prce, much lower than normal prce premums for organc grans. Long-term croppng system data durng were used to examne the relatve proftablty of organc croppng systems n southwestern Mnnesota (Mahoney et al.). The research 3

5 examnes varous corn, soybean, oats, and alfalfa rotatons and fnds that even though crop yelds are lower under the organc nput strategy, so too are producton costs n comparson wth conventonal strateges. As a result, the organc nput strategy provdes net returns that are not statstcally dfferent from those of conventonal strateges wthout any organc prce premum, and are sgnfcantly hgher when hstorcal organc prce premums are pad. A smlar analyss of organc and conventonal crop rotatons n the northern Great Plans of Canada was conducted wth data from (Smth et al). Wheat, barley, peas, and forage crops are part of the rotatons. Some organc croppng systems are found to be more proftable than conventonal systems, but ths s condtonal on the prce premum and croppng system. Also, there s as much varaton n net returns wthn organc and conventonal systems as between the two. When costs of transton are taken nto account, organc rotatons have hgher returns relatve to many conventonal rotatons wth prce premums at ther most lkely level, but requre hgher premums to compete wth the most proftable conventonal rotatons. Data from long-term feld trals coverng n southeastern Pennsylvana were used to evaluate the net returns to organc and conventonal rotatons usng corn, wheat, soybeans, and forages (Hansen et al.). Annual returns to organc rotatons compare favorably wth those of conventonal rotatons after the transton perod, but hgh transton costs may not justfy the use of organc systems n some cases. The organc rotatons requre much more famly labor than conventonal rotatons. Ths could hnder organc adopton among farmers who prmarly work off-farm because of the hgh opportunty cost of swtchng to organc farmng that would result from foregone wages and benefts. 4

6 Long-term agrcultural experments are leadng to an mproved understandng of the man bophyscal and economc processes assocated wth dfferent farmng systems, addressng basc research questons about yelds, proftablty, and envronmental mpacts. In most of the stuatons studed, organc croppng systems generate economc returns equal to or greater than those of conventonal systems, and sometmes much greater returns. Despte ths progress, comparsons between conventonal and organc croppng systems are problematc manly because the latter employ unque approaches to nutrent avalablty, pest control, and sol management that are profoundly dfferent and may not be easly employed outsde of the expermental settng. These experments also leave out the human factor that valuable system of local knowledge and expertse that every farmer acqures through on-farm experence that plays a crucal role n organc farmng. Our research enhances the long-term expermental tral lterature by reportng on actual farmer experence wth organc systems. Data Data used n ths study come from farm operator reports made to USDA s 2010 Agrcultural Resource Management Survey (ARMS) admnstered by the Natonal Agrcultural Statstcs Servce and Economc Research Servce. The ARMS data nclude detaled farm fnancal nformaton, such as farm ncome, expenses, assets, and debt, as well as farm and operator characterstcs. Ths study uses a verson of the 2010 ARMS that ncludes detaled nformaton about the producton practces and costs of U.S. feld corn producton. The corn verson targeted producers n States that ncluded over 90 percent of U.S. planted corn acreage n USDA targeted organc producers of feld crops n commodty versons of the ARMS n 2006 (soybeans), 2009 (wheat), and 2010 (corn). Each ARMS commodty verson ncluded a sub- 5

7 sample targetng organc acreage of each crop. Of the total 2010 corn sample of 3,893 farms, 627 samples targeted organc operatons. After accountng for out of busness operatons, survey refusals, and questonnares wth ncomplete data, 1,087 conventonal corn farms and 243 organc corn farms from IL, IN, IA, KS, MI, MN, MO, NE, NY, ND, OH, PA, SD, and WI were used n ths study. Farm survey weghts on the ARMS data ensure that samples expand to represent the approprate crop acreage n the surveyed states, and that organc operatons represent ther correct proporton of the target populaton despte ther dsproportonate share of the sample 1. Costs of organc and conventonal corn producton are computed accordng to procedures used by USDA (USDA, Economc Research Servce, b) and endorsed by the Amercan Agrcultural Economcs Assocaton. Costs are computed per bushel and dvded nto three categores: operatng costs, operatng plus captal costs, and total economc costs. Operatng costs nclude costs for seed; fertlzer; chemcals; custom operatons; fuel, lubrcaton, and electrcty; repars; purchased rrgaton water; hred labor; and operatng nterest. Captal costs nclude the annualzed cost of mantanng the captal (economc deprecaton and nterest) used n corn producton, and costs for non-real estate property taxes and nsurance. Total economc costs are the sum of operatng and captal costs, plus opportunty costs for land and unpad labor, and allocated costs for general farm overhead tems. Total operatng costs s an ndcator of the relatve success of operatons n terms of ther ablty to meet short-term fnancal oblgatons. The sum of operatng and captal costs provdes an ndcator of whether operatons can replace captal assets as needed and stay n busness over 1 Certfed organc corn acreage represented less than 1 percent of total corn acreage n 2008 (USDA, Economc Research Servce, a.), but 18 percent of the ARMS survey respondents. 6

8 tme. Other costs are prmarly opportunty costs of owned resources (land and labor) that may or may not nfluence producton decsons. Opportunty costs of owned resources may vary sgnfcantly among producers and producers may be wllng to accept returns to these resources dfferent from assumed charges. Lfestyle preferences and costs of swtchng occupatons, among other factors, affect producers perceptons of ther opportunty costs. Emprcal Procedure Identcal weather and sol condtons and feld management practces under whch croppng system experments provde precse feld measurements are not possble usng producer survey data. When usng producer survey data to measure cost dfferences between croppng systems, other factors that affect costs should be addressed. A smple comparson of the mean dfference between conventonal and organc producton costs can be msleadng because other dfferences, such as n farm sze, locaton, technologes, nput qualty, and management, may also nfluence cost levels. To measure the cost dfference between conventonal and organc corn producton, a two-step approach s followed. In the frst step a propensty score matchng (PSM) model s used to match each organc corn farm wth a smlar conventonal corn farm based on the observable farm and operator characterstcs of each. To mplement the PSM model a probablty model for adopton of the organc approach s estmated and used to calculate the probablty, or propensty score, of beng organc for each observaton. Each organc farm s then matched to a conventonal farm wth a smlar propensty score. In ths analyss, the sngle nearest neghbor matchng technque (Dehja and Wahba) s used, where each organc farm s pared wth the conventonal farm that has the closest propensty score. All other conventonal farms are 7

9 dscarded from the analyss. The dfference n costs between the matched organc and conventonal farms s then evaluated. Whle the matchng technque accounts for observable dfferences between organc and conventonal corn farms, unobservable varables that may affect both the choce of producton technque and producton costs are not accounted for drectly. Ths correlaton of unobservable varables wll ntroduce self-selecton bas nto estmates of the dfference n producton costs. To account for the potental bas caused by unobservable varables, a treatment-effect model (Greene) s employed n the second step. The model s estmated on the matched conventonal/organc sample 2. Unobservable dfferences are addressed n the treatment-effect model by assumng a jont normal dstrbuton between the errors of a selecton equaton (choce of the organc approach or not) and treatment equatons (measures of producton costs). Ths technque corrects for selfselecton bas and allows for an unbased estmate of the mpact that choce of the organc approach has on producton costs. For example, dfferences n nput qualty and management are unobservable but may be correlated wth both the choce between organc and conventonal producton and the level of producton costs. These dfferences cannot be accounted for n the PSM model. 2 It has been argued that matchng models are specal cases of selecton models whch assumes that condtonng on observable varables elmnates self-selecton bas (Heckman and Navarro-Lozano; Mayen et al.). That s, matchng models create the condtons of an experment n whch the treatment varable s randomly assgned. However, the matchng model cannot drectly account for correlaton among unobservable varables that could bas the treatmenteffect. Imbens argues that the assumpton that the dstrbuton of unobserved varables s smlar for treated and untreated agents s ultmately an emprcal queston. 8

10 Applyng the treatment-effect model, the decson to choose the organc approach or not can be expressed wth the latent varable compared to not usng, so that: * O ndcatng the net beneft from usng ths approach (1) O * * Z u ; where O 1 f O 0, 0 otherwse, where Z s a vector of operator, farm, and regonal characterstcs. If the latent varable s postve, then the varable ndcatng organc producton O equals one, and equals zero otherwse. A measure of the mpact of the organc approach on producton costs y can be expressed by: where (2) y X O X s a vector of farm and operator characterstcs, and farm producton practces. Equaton (2) cannot be estmated drectly because the decson to choose the organc approach may be determned by unobservable varables that may also affect producton costs. If ths s the case, the error terms n equatons (1) and (2) wll be correlated, resultng n a based estmate of. Ths selecton bas can be accounted for by assumng a jont normal error dstrbuton wth the followng form: u ~ N 0 0, 1 2 and by recognzng that the expected cost of choosng the organc approach s gven by: (3) E y O 1 X where s the nverse Mlls rato. To derve an unbased estmate of, the two-stage approach begns wth a probt estmaton of equaton (1). In the second stage, estmates of are used to compute the nverse Mlls rato, whch s ncluded as an addtonal term n a least-squares 9

11 estmaton of equaton (2). Ths two-stage Heckman procedure s consstent, albet not effcent. Effcent maxmum lkelhood parameter estmates can be obtaned by maxmzng: L,,, A 0 0 f A, y ; *,,, dyda A * 1 0 f A, y ; *,,, dyda * * where f A, y ;,,, s the jont normal densty functon, whch s a functon of the parameters. In practce, the negatve of the log of the lkelhood functon s mnmzed usng the estmates from the Heckman procedure as startng values. The model s specfed usng the three levels of producton costs as the dependent varables: operatng costs, operatng plus captal costs, and total economc costs. The ARMS provdes data on a varety of farm and operator characterstcs, and farm producton practces that are used as ndependent varables. Once estmated, the dfference n costs between organc and conventonal systems s determned by (Greene): (4) E y O 1 E y O 0 (1 ) where φ s the standard normal densty functon and Φ s the standard normal cumulatve dstrbuton functon evaluated usng the selecton equaton estmates. Survey Results A summary of the 2010 ARMS data of corn producers ndcates that organc corn producton was conducted on smaller farms wth less corn acreage than conventonal producton. Conventonal corn producers harvested an average of 289 corn acres as part of 794 total farm acres, compared to 103 corn acres on 451 total farm acres by organc corn producers (table 1). Operator characterstcs, ncludng age and off-farm employment were not statstcally dfferent 10

12 between organc and conventonal corn produces, but fewer organc producers had completed hgh school than had conventonal producers. Among corn regons, organc producers were more lkely to be located n the Lakes States (MI, MN, and WI) and Northeast (NY and PA), and less lkely to be located n the Plans States (KS, NE, ND, and SD) than were conventonal producers. The percent of organc farms n the Corn Belt (IL, IN, IA, MO, OH) was not statstcally dfferent than the percent of conventonal farms. Organc producton practces vared from those used for conventonal corn. Most conventonal producers planted corn n rotaton wth row crops, manly soybeans. Organc producers more often used an dle year and a meadow crop n rotaton wth corn. Organc producers more often controlled weeds by usng ntensve tllage practces wth 65 percent usng a moldboard plow, compared wth only 9 percent of conventonal corn producers. More than a thrd of conventonal producers used a no-tll corn planter, plantng varous types of genetcally modfed seed (92 percent), and reled on chemcal weed control. Only 5 percent of organc corn growers used a no-tll planter and 68 percent used a row cultvator for weed control. Commercal fertlzers were appled by more than 90 percent of conventonal corn producers, whle 75 percent of organc producers appled manure or compost. More than half of organc corn growers adjusted plantng dates and used buffer strps, possbly n an attempt to prevent the cross pollnaton of organc corn wth the genetcally modfed varetes used on conventonal farms. Propensty score matchng was used to match the organc sample wth smlar conventonal farms based on farm and operator characterstcs. Consequently, the dfferences n farm and operator characterstcs of the matched conventonal/organc sample were n most cases not statstcally sgnfcant (table 1). A hgher percent of farm acres were owned on matched organc 11

13 farms, but dfferences n operator age, educaton, and the dstrbuton of farms by regon were not sgnfcantly dfferent. However, the matched conventonal farms had more corn acreage on average, and ther producton practces were very dfferent than among the matched organc farms and more lke those of the entre conventonal sample. Ths dfference n producton practces reflects nherent dfferences between the organc and conventonal producton systems. Mean operatng and operatng plus captal costs per acre of producng corn were sgnfcantly less for organc than for conventonal corn farms, whle the dfference n total economc costs was not statstcally sgnfcant (table 2). Conventonal corn growers had sgnfcantly hgher seed, fertlzer, and chemcal costs than organc growers, but lower costs for fuel, repars, captal, and labor as organc producers substtuted these nputs for fertlzers and chemcals. Total operatng costs and operatng plus captal costs per acre for organc corn were about $80 and $50 per acre lower, respectvely, than for conventonal corn. The average yeld for organc corn was 118 bushels per acre n 2010, compared wth 161 bushels for conventonal producers. Wth lower yelds, average operatng costs per bushel of organc corn producton were about the same as those for conventonal producers, whle average operatng plus captal and total economc costs were sgnfcantly hgher among organc corn producers. Average total economc costs were $1.25 per bushel hgher for organc than for conventonal corn producers. Despte hgher costs, the average prce reportedly receved for organc corn n 2010 was $7.15 per bushel 3, compared wth a harvest-perod prce of $4.32 per bushel for conventonal corn. Wth an average organc prce premum of $2.83 per bushel n 3 Organc feed grade corn comprsed 90 percent of organc corn sales and receved lower prces than food grade corn. The average prce receved for organc feed grade corn was $6.96 per bushel compared wth $7.92 per bushel for organc food grade corn. Producton cost dfferences between organc food and feed grade corn were not statstcally sgnfcant. 12

14 2010, average returns above all costs were hgher for organc corn than for conventonal corn producton. Organc corn producers reported that they had been producng organc corn for an average of 8 years as of 2010, and reported an average of 39 total hours used for organc corn certfcaton, or about 2.6 hours per acre. About 40 percent of organc corn producers reported controllng weeds as the most dffcult aspect of producng organc corn. Thrty-four percent reported certfcaton paperwork as the most dffcult aspect and 12 percent reported achevng yelds. Less than 5 percent reported each of sourcng nputs, controllng nsects, certfcaton complance costs, and other as the most dffcult aspect of organc corn producton. Model Results Estmates for a bnomal probt model of choce of the organc approach by corn producers are shown n table 3. These estmates are nearly dentcal to those n the selecton equatons estmated n the treatment-effect models and are shown nstead for brevty. The bnomal probt model s estmated for both the full sample, and the matched conventonal/organc sample to show mpacts of the matchng technque. In the model estmated wth the full sample several of the farm and operator characterstcs had a statstcally sgnfcant mpact on choce of organc corn producton. The larger the farm, the less lkely t was to produce organc corn as the lkelhood of organc corn producton declned wth sze at a decreasng rate. Younger and less educated producers were more lkely to be organc corn producers, as were producers whose prmary occupaton was farmng. Ths profle 13

15 of organc growers may be ndcatve of those wth fewer off-farm job opportuntes, as well as reflect the greater labor requrements assocated wth organc producton. Farms wth a hgher percentage of farm acreage owned were also more lkely to produce organc corn. Locaton n the Lake States relatve to the Corn Belt was assocated wth the adopton of organc corn, possbly due to less weed pressure whch facltates organc producton n the areas further north. Producers located n the Plans States were less lkely to be organc than those n the Corn Belt. None of the farm and operator characterstcs specfed n the model estmated wth the matched conventonal/organc sample had a statstcally sgnfcant mpact on choce of organc corn producton (table 3). Ths s another ndcaton that the matchng technque resulted n farms smlar wth respect to the observed farm and operator varables. Estmates for the treatment-effect cost equatons usng the matched conventonal/organc sample are shown n table 4. Coeffcents on farm operator characterstc varables are not statstcally sgnfcant n any of the treatment-effect models of corn producton costs, but those for farm locaton are sgnfcant (table 4). Specfyng the Corn Belt as the reference group, coeffcents on varables for locaton n the Northeast regon ndcate hgher corn operatng, and operatng plus captal costs per bushel. Hgher corn yelds among Corn Belt farms compared wth the Northeast contrbuted to hgher unt costs n the Northeast 4. Economes of sze were ndcated for all cost levels, but the coeffcent on sze was statstcally sgnfcant only for total economc 4 Average corn yelds n 2010 among farms n the matched conventonal/organc sample were 172 and 133 bushels per acre n the Corn Belt and Northeast, respectvely, and 179 and 140 bushels per acre n the Lake States and Plans States, respectvely. 14

16 costs. Total economc costs per bushel for corn declned as sze, measured as the number of corn acres, ncreased. Despte sgnfcant dfferences between the producton practces used n organc and conventonal corn producton, none of the specfed producton practces had a statstcally sgnfcant effect on corn producton costs usng data from the matched conventonal/organc sample. The estmated coeffcents n table 4 on the varables for organc corn producton are statstcally sgnfcant n the operatng plus captal costs and the total economc costs equatons. These results and the estmated coeffcents for sgma and rho were used n equaton (4) to estmate the dfference n costs between organc and conventonal corn producton. The results ndcate that operatng costs for organc corn producton were $0.16 per bushel hgher than for conventonal corn producton, although ths result was not statstcally sgnfcant. Operatng plus captal costs were $0.68 per bushel hgher, and total economc costs were $1.53 per bushel hgher n 2010, after accountng for the nfluence of both observable and unobservable factors on corn producton costs (table 5). The estmated correlaton of errors for the selecton and cost equatons, rho, was not statstcally sgnfcant n any of the corn producton cost models. Ths ndcates that self-selecton bas was not an ssue n the matched conventonal/organc data. Self-selecton bas was ndcated n estmates made from the full sample, as the value of rho was statstcally sgnfcant n the operatng and captal cost and total economc cost equatons. Ths suggests that the matchng procedure mtgated the mpact of selecton bas on the estmates of conventonal and organc cost dfferences for feld corn producton. 15

17 Wth the lack of selecton bas ndcated n the conventonal/organc sample data, t s nterestng to compare the full model estmates to those of a smple comparson of means and those where the model s estmated usng only ordnary least squares. These results show estmates of the dfference of operatng and captal and total economc costs that were consstently lower, from 10 to 20 percent, than those estmated wth the full model. Thus despte the absence of selfselecton bas n the matched conventonal/organc data, the model accountng for both observed and unobserved varables found a greater dfference between conventonal and organc corn producton costs than was ndcated wth other methods. Transton Costs The estmated cost dfferences ndcate the addtonal costs ncurred by operatons producng organc corn relatve to conventonal corn, but do not nclude the costs assocated wth the transton to organc producton. Before an operaton s certfed to sell organc corn the cropland must be managed organcally for a mnmum of 36 months. Ths means that operatons must undergo 3 years of hgher costs before sellng corn as certfed organc. Hgher costs for 3 years can be consdered an nvestment necessary to return hgher corn prces over the expected lfe of the operaton. The nvestment was determned by the estmated addtonal costs ncurred by organc operatons from the treatment-effect models for each year of the 3-year transton perod. The annualzed cost of ths nvestment was computed usng the captal recovery approach lke the other captal costs. The nvestment was spread over an expected lfe of 20 years. 16

18 The estmated transton costs and total addtonal costs on organc operatons are shown n table 5. Transton costs were $0.12 per bushel for operatng plus captal costs and $0.28 per bushel for total economc costs. Thus, the total estmated addtonal costs for producng organc relatve to conventonal corn were $0.16 per bushel for operatng costs, $0.80 per bushel for operatng plus captal costs, and $1.81 per bushel for total economc costs. Conclusons Ths study takes advantage of unque and detaled data collected n an economc survey of U.S. corn producers for the 2010 crop year. The data are unque because data from a targeted survey of organc producers sampled at a much hgher rate than ther occurrence n the populaton s ncluded along wth data from conventonal corn producers. Ths allows for a statstcal analyss of dfferences between conventonal and organc crop producton systems. Sze of operaton s found to be one of the prmary factors determnng the lkelhood of an operaton usng the organc approach. Because of economes of sze, small farms lkely vew the organc approach as among the few alternatves to reorganze current resources to mprove farm returns. Larger farms lkely have less ncentve to consder alternatves because of economes of sze. Also, sgnfcant labor requrements assocated wth organc crop producton may make organc producton less practcal on larger farms due to the need to hre addtonal labor, whle the labor requrements on smaller farms are often meet by operator and other unpad sources. Results of the analyss n ths study ndcate that the average operatng costs for producng organc compared wth conventonal corn were $0.16 per bushel hgher, operatng plus captal costs were $0.80 per bushel hgher, and total economc costs were $1.81 per bushel hgher, after 17

19 accountng for the nfluence of both observable and unobservable factors on producton costs, and organc transton costs. These hgher costs compare to an average prce premum of $2.83 per bushel for organc corn n Ths mples that organc corn producers, on average, when compared wth conventonal producers, earned hgher returns above operatng costs of $2.67 per bushel, and hgher returns above operatng plus captal costs of $2.03 per bushel, and hgher returns above total economc costs of $1.02 per bushel n Prevous research, based on long-term croppng system data, suggest that sgnfcant returns are possble from organc corn producton. However, these returns are often the result of obtanng smlar conventonal and organc yelds and lower organc producton costs. Fndngs of ths study show organc corn yelds to be much lower than those of conventonal growers, averagng about 40 bushel per acre less, and total organc producton costs to be smlar to those for conventonal corn. These results are same regardless of whether organc corn producers are compared to all conventonal growers or a sample of conventonal producers matched on farm and operator characterstcs. A reason for the yeld dfferences observed n the ARMS data may be the unque problems presented from mplementng organc systems outsde of the expermental settng, such as achevng effectve weed control. Also, t s lkely that the genetcally modfed conventonal varetes that are commonly used are smply hgherperformng than standard organc varetes. The man reason that organc corn returns are hgher n the analyss of the 2010 ARMS data s not hgher organc corn yelds, but rather the prce premums pad for organc corn. Whle results of ths study provde nsght about the returns to organc corn producton, the fndngs are based only on a sngle year of data. The producton of organc corn, n contrast to 18

20 conventonal corn, s more often part of a mult-year rotaton of crop enterprses and dled land. Organc corn producers may rotate wth less proftable enterprses, lowerng overall croppng system returns, or the synergsm assocated wth the management of multple crop enterprses may result n greater returns than ndcated by ths sngle-enterprse analyss. A more thorough study of the economc returns to organc systems would account for the nherent mult-year nature of organc croppng systems. 19

21 References Amercan Agrcultural Economcs Assocaton Commodty costs and returns estmaton handbook. A Report of the AAEA Task Force on Commodty Costs and Returns. Ames, Iowa. Deheja, R. H. and S. Wahba Propensty Score-Matchng Methods for Nonexpermental Causal Studes. Revew of Economcs and Statstcs. 84: Delate, K. M. Duffy, C. Chase, A. Holste, H. Fredrch, and N. Wantate An Economc Comparson of Organc and Conventonal Gran Crops n a Long-Term Agroecologcal Research (LTAR) ste n Iowa. The Amercan Journal of Alternatve Agrculture. 18(2): Greene, C. and A. Kremen. U.S. Organc Farmng n U.S. Dept. of Agrculture, Economc Research Servce, Agrcultural Informaton Bulletn Number 780, February Greene, W. H. Econometrc Analyss, 5 th edn. New Jersey: Prentce Hall Hanson, J.C., E. Lchtenberg, and S. E. Peters Organc Versus Conventonal Gran Producton n the Md-Atlantc: An Economc and Farmng System Overvew. The Amercan Journal of Alternatve Agrculture. 12(1):2-9. Heckman, J. and S. Navarro-Lozano Usng Matchng Instrumental Varables, and Control Functons to Estmate Economc Choce Models. Revew of Economcs and Statstcs. 86: Imbens, G.W Nonparametrc Estmaton of Average Treatment Effects Under Exogenety: A Revew. Revew of Economcs and Statstcs. 86:4-29. Mahoney, P.R., K.D. Olson, P.M. Porter, D.R. Huggns, C. A. Perllo, and R. K. Crookston Proftablty of Organc Croppng Systems n Southwestern Mnnesota. Renewable Agrculture and Food Systems. 19(1): Mayen, C. D., J. V. Balagtas, and C.E. Alexander Technology Adopton and Techncal Effcency: Organc and Conventonal Dary Farms n the Unted States. Amercan Journal of Agrcultural Economcs. 92(1): McBrde, W.D. and C. Greene The Proftablty of Organc Soybean Producton. Renewable Agrculture and Food Systems. 24(4): Pmentel, D., P. Hepperly, J. Hanson, D. Doubs, and R. Sedel Envronmental, Energetc, and Economc Comparsons of Organc and Conventonal Farmng Systems. BoScence. 55(7): Smth, E. G., J.M. Clapperton, and R.E. Blackshaw Proftablty and Rsk of Organc Producton Systems n the Northern Great Plans. Renewable Agrculture and Food Systems. 19(3):

22 U.S. Dept. of Agrculture, Economc Research Servce. a. Organc Producton. <accessed January 3, 2012>. U.S. Dept. of Agrculture, Economc Research Servce. b. Commodty Costs and Returns. <accessed January 3, 2012.>. U.S. Dept. of Agrculture, Natonal Agrcultural Statstcs Servce. Agrcultural Prces. <accessed January 3, 2012.>. 21

23 Table 1. Test of equalty of means on characterstcs and practces of U.S. conventonal and organc corn farms, 2010 Type of farm Matched Item Organc (N=243) Conventonal (N=1,087) Conventonal (N=243) Farm Characterstcs: Farm acres operated (per farm) ** 508 Percent of acres owned 69 55** 59** Farm operator Off-farm occupaton (percent) Age (years) Less than 50 years (percent) Educaton (percent) Less than hgh school Completed hgh school 29 45** 33 Attended college Locaton (percent) Corn Belt (IL, IN, IA, MO, OH) Lake States (MI, MN, WI) 40 24** 35 Northeast States (NY, PA) 14 6* 16 Plans States (KS, NE, ND, SD) 6 21** 9 Lvestock operaton (percent) 64 50* 59 Corn Producton Practces: Harvested corn acres (per farm) ** 197** GM Seed (percent) 0 92** 89** Crop rotaton (percent) Monoculture Contnuous row crop 17 77** 67** Idle year 35 10** 18** Rotaton wth meadow 48 13** 15** Feld Operatons (percent) Moldboard plow 65 9** 18** No-tll planter 5 35** 31** Row cultvator 68 5** 6** Other practces (percent) Irrgaton d 7** 2 Appled commercal fertlzer 51 97** 95** Appled manure or compost 75 22** 34** Pest control practces (percent) Choce of crop varety 20 52** 48** Adjustment of dates 52 14** 11** Buffer strps 53 4** 3** Notes: Astersks denote a statstcally sgnfcant dfference wth the organc mean at the 10 percent (*) and 5 percent (**) levels. d=nsuffcent data for legal dsclosure. Source: 2009 Agrcultural Resource Management Survey, USDA Natonal Agrcultural Statstcs Servce and Economc Research Servce. 22

24 Table 2. Test of equalty of means on producton costs of conventonal and organc U.S. corn farms, 2010 Type of farm Matched Item Organc (N=243) Conventonal (N=1,087) Conventonal (N=243) dollars per planted acre Gross value of producton ** ** Operatng costs: Seed ** 81.04** Fertlzer ** ** Chemcals ** 23.63** Custom operatons Fuel, lubrcaton, and electrcty ** 22.18** Repars ** 24.02** Purchased rrgaton water Hred labor Operatng captal ** 0.39** Captal ownershp costs: Captal recovery ** Taxes and Insurance ** 8.03** Other costs: Opportunty cost of unpad labor ** 26.30** Opportunty cost of land ** * General farm overhead ** 20.07** Cost summary: Operatng costs ** ** Operatng plus captal costs ** ** Total economc costs Value of producton less: Operatng costs ** ** Operatng plus captal costs ** ** Total economc costs ** ** dollars per bushel Cost summary: Operatng costs Operatng plus captal costs ** 2.23** Total economc costs ** 3.29** Yeld (bushels per planted acre) ** ** Prce (dollars per bushel) ** 4.27** Notes: Astersks denote a statstcally sgnfcant dfference wth the organc mean at the 10 percent (*) and 5 percent (**) levels. d=nsuffcent data for legal dsclosure. Source: 2009 Agrcultural Resource Management Survey, USDA Natonal Agrcultural Statstcs Servce and Economc Research Servce. 23

25 Table 3. Bnomal probt maxmum lkelhood estmates: Choce of organc producton by U.S. corn producers, 2010 Sample Varable Descrpton Full coeffcent (std. error) Constant ** (0.140) Sze (100 acres operated) * (0.009) Sze squared 1.19e-4** (5.89e-5) Age class (less than 50 years) * (0.114) Age class (more than 65 years) ** (0.127) Educaton class (less than hgh school) ** (0.184) Educaton class (attended college) (0.105) Prmary occupaton s off-farm ** (0.120) Owned acres (percent of farm acres) 0.385** (0.150) Lvestock operaton on farm (0.103) Locaton n Lake States ** (0.117) Locaton n Northeast States (0.196) Locaton n Plans States ** (0.140) Matched coeffcent (std. error) ** (0.218) (0.012) 3.25e-6 (7.82e-5) (0.140) (0.193) (0.225) (0.156) (0.158) (0.192) (0.144) (0.149) (0.221) (0.205) Log lkelhood -11,838-9,714 Pseudo R Notes: Dependent varable n the probt equaton s whether the farm produced organc corn (0,1). * and ** denote statstcal sgnfcance at the 10 percent and 5 percent levels, respectvely. 1 Deleted age class s years. 2 Deleted educaton class s graduated from hgh school. 3 Deleted locaton s Corn Belt. 24

26 Table 4. Treatment-effect model maxmum lkelhood estmates effect equaton: Costs of U.S. corn producton, Matched conventonal/organc sample, 2010 Varable Descrpton Operatng costs Operatng plus captal costs Total economc costs Coeffcent (std. error) Coeffcent (std. error) Coeffcent (std. error) Constant 1.879** (0.616) 2.472** (0.890) 4.098** (1.465) Age (years) -1.75e-5 (0.006) (0.007) (0.010) Educaton (years) (0.036) (0.051) (0.080) Prmary occupaton s off-farm (0.205) (0.308) (0.502) Locaton n Lake States (0.135) ( (0.281) Locaton n Northeast States ** (0.295) 1.042** (0.488) (0.749) Locaton n Plans States (0.175) (0.194) (0.292) Sze (100s of harvested corn acres) (0.021) (0.033) ** (0.051) Sze squared (0.001) 0.002** (7.28e-4) 0.003** (0.001) Rotaton-contnuous corn (0.245) (0.341) (0.544) Rotaton-corn wth dle year (0.200) (0.302) (0.488) Rotaton-corn wth other crops (0.220) (0.313) (0.490) No-tll planter (0.134) (0.194) (0.296) Moldboard plow (0.301) (0.416) (0.722) Irrgaton (0.208) (0.261) (0.394) Commercal fertlzer (0.263) (0.387) (0.629) Manure (0.169) (0.243) (0.387) --contnued-- 25

27 Table 4 (contnued). Treatment-effect model maxmum lkelhood estmates effect equaton: Costs of U.S. corn producton, Matched conventonal/organc sample, 2010 Varable Descrpton Operatng costs Operatng plus captal costs Total economc costs Coeffcent (std. error) Coeffcent (std. error) Coeffcent (std. error) Organc (0.230) 0.701** (0.319) 1.629** (0.537) Sgma 1.000** (0.125) 1.401** (0.182) 2.195** (0.295) Rho (0.235) (0.017) (0.018) Log lkelhood -99, , ,928 Notes: Dependent varables n each equaton are the operatng, operatng plus captal, and total economc costs per bushel of corn producton, respectvely. * and ** denote statstcal sgnfcance at the 10 percent and 5 percent levels, respectvely. Selecton equaton estmates are nearly dentcal to the probt estmates shown n Table 3. 1 Deleted locaton s Corn Belt. 2 Deleted rotaton class s corn wth feld crops (soybeans, wheat, etc.) 26

28 Table 5. Addtonal costs ncurred for organc corn producton n relaton to conventonal corn producton, Matched conventonal/organc sample, 2010 Operatng costs Operatng plus captal costs Total economc costs Addtonal costs from: dollars per bushel Producng organc Transtonng to organc na Total addtonal costs na=not applcable. Notes: Transton costs are treated as a captal nvestment necessary to return the hgher organc corn prce over the expected lfe of the operaton, and thus are not part of annual operatng costs. 27