© 2013 Plant Management Network. Accepted for publication 6 January 2012. Published 29 April 2013.
A Cost Comparison of Organic and Conventional Apple Production in the State of Washington Mykel Taylor, Assistant Professor, Department of Agricultural Economics, Kansas State University, Manhattan, KS 66506; and David Granatstein, Sustainable Agriculture Specialist, Center for Sustaining Agriculture and Natural Resources, Washington State University, Wenatchee, WA 98801 Corresponding author: Mykel Taylor.
[email protected] Taylor, M., and Granatstein, D. 2013. A cost comparison of organic and conventional apple production in the state of Washington. Online. Crop Management doi:10.1094/CM-20130429-05-RS.
Abstract Organic apple production expanded rapidly during the past decade due to strong demand, new technology, and price premiums, which suggests it is profitable for growers. No rigorous analysis of cost of production has been done to help project profitability in the face of continued increase in supply. The data presented here compare two methods of estimating cost of production and find that production of organic apples in Washington State, the leading producer, is approximately 5 to 10% more costly than conventional production on a per-acre basis.
Introduction Organic apple production expanded rapidly during the past decade, reflecting increased consumer demand and new technology to control chronic pests and problems (3,5). Organic apple acres in the United States nearly doubled from 9,270 certified acres in 2000 to 17,626 acres in 2008 (9). As organic apples have moved from a niche product to a commodity, there is concern among growers and the industry about retaining a premium price that can help cover the perceived additional costs and reduced yields with organic production (4). The apple industry compiles detailed sales and price information for organic and conventional apples (e.g., Washington Growers Clearinghouse), but rigorous estimates of the cost of production are lacking. A question facing the apple industry is just how profitable organic production will be in the long run. What if price premiums shrink or disappear? Will organic production continue or will it revert to conventional production? Economic theory suggests that a price premium decline could result from an increased supply of organic apples through either expanded production acres or greater yields on existing acres. Price premiums attract more growers such that in the long run the supply of organic apples will reach a level where economic profits are driven to zero by declining prices. Table 1 displays projected prices for Washington organic apples based on increased sales volume (6). The price premium is estimated to drop to zero once organic apple sales reach 12% of total Washington sales volume. During the 2009-2010 marketing year, organic apples sales were 6% of total apple sales for Washington. The average price received that year for all apples was $19.05 per 40 lb box (FOB) and $24.89 per box for all organic apples. These prices and corresponding volumes are very close to the values predicted by O’Rourke.
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Table 1. Impacts of expanded organic apple shipments on price. Organic shipments as percent of all Washington apple shipments Conventional apple price ($/box)x
6%
8%
10%
12%
Predicted organic apple price ($/box)
20.00
26.77
24.45
22.13
19.82
17.00
22.75
20.78
18.81
16.85
14.00
18.74
17.11
15.49
13.87
x
Prices are FOB. Source: O'Rourke 2009 (6).
This article summarizes cost of production data on organic versus conventional apple production, for the state of Washington. The production cost data are then used to determine the level of profitability for organic apple production under different yield and price scenarios. This information will enable the apple industry to better understand the long-term profitability of organic production. Cost of Production Estimates Using the 2007 ARMS The first set of production cost data used in this study is from the 2007 Agricultural Resource Management Survey (ARMS) of United States apple producers. This survey was conducted by USDA-NASS and is the first ARMS survey to be conducted for a specialty crop. Individual apple producers were interviewed to collect detailed information on their apple enterprises. The survey was comprised of questions regarding production methods, inputs used, yields, and itemized costs and returns, among others. The questions were all asked based on the 2007 production year and interviews were conducted three times, once during the growing season to determine if they were still in production for the crop of interest and two subsequent times to gather costs, returns, and production data after harvest and marketing of the 2007 crop. Apple orchards in seven states were sampled in the survey (California, Michigan, New York, North Carolina, Oregon, Pennsylvania, and Washington), which represent over 90% of the apple production in the United States. In addition to the primary sample of apple orchards, a subsample of organic orchards was also included in the survey (8). The vast majority of organic growers who responded to this survey were located in Washington. (For further details on sample selection and survey design of the ARMS survey, refer to the ERS site). Due to the limited response of organic growers in other states, a comparison of production costs between organic and conventional orchards is presented for Washington only. A typical production cost or enterprise budget lists costs in two primary categories: variable costs and fixed costs. Variable costs are defined as costs that occur during a single production year and would not be incurred if production was stopped for some reason. Examples of variable costs include fertilizer and chemical (both the inputs and the labor for application), water and electricity used for irrigation, and harvest labor and hauling costs. The fixed cost category includes costs that are born by the farm whether they choose to produce in a given year or not. Examples of these costs include interest payments on land and machinery, depreciation, and property taxes. While these costs can be avoided in the long run if the farm assets are sold, they must be paid in the short run regardless of whether or not a crop is harvested. The costs of production for both conventional and organic orchards are listed in Table 2. The costs are grouped into categories within fixed and variable costs and given on a per-acre basis. The conventional production costs are based on 121 orchards in the state of Washington with an average apple acreage of 218.5 acres. The organic production costs are calculated using a smaller sample of 31 organic Washington orchards that average 88 acres of apples. (Orchards with less than 10 acres of apples were omitted from the sample used to calculate the
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production costs.) The results of the ARMS survey suggest that, on average, the cost of production for organic apples is $496.52/acre (9.5%) higher than the costs for conventional production. The primary difference in costs appears to come from labor costs, which average $357/acre more for organic apples. Based on these data, which reflect a single growing season, the revenue from organic apples needs to be high enough to cover an additional $497/acre for profitability to be no different than it is for conventional apples. Table 2. Production costs for conventional and organic apples from 2007 ARMS. Production costs for all conventional apples ($/acre)x
Production costs for all organic apples ($/acre)y
Variable costs
Variable costs
Labor
2,382.76 Labor
2,740.07
Chemicals & fertilizer
578.32 Chemicals & fertilizer
610.32
Maintenance & repairs
168.29 Maintenance & repairs
217.01
Fuel & oil
177.75 Fuel & oil
199.45
Irrigation/electric charge
142.69 Irrigation/electric charge
150.39
Custom work
69.07 Custom work
81.49
Crop insurance
49.15 Crop insurance
87.37
Other expenses
471.12 Other expenses
Total Variable Costs
4,039.15 Total Variable Costs
Fixed costs
418.80 4,504.90
Fixed costs
Depreciation
414.44 Depreciation
492.98
Interest
162.65 Interest
246.45
Property & estate taxes
75.78 Property & estate taxes
82.67
Insurance (all farm)
67.32 Insurance (all farm)
48.25
Rent & lease payments
58.26 Rent & lease payments
17.28
Capital replacement
383.81 Capital replacement
305.40
Total Fixed Costs
1,162.26 Total Fixed Costs
1,193.03
Total Costs
5,201.41 Total Costs
5,697.93
x y
Costs calculated from 121 orchards in the state of Washington. Costs calculated from 31 orchards in the state of Washington.
Cost of Production Estimates: 2009-2010 WSU Enterprise Budgets One of the advantages of data collected from the ARMS survey is the level of detail it provides to researchers. This detail facilitates a wide variety of analyses and greatly expands our knowledge of what producers are doing and how they make decisions for their orchard enterprise. A drawback of such a detailed survey is that it is expensive to conduct and, consequently, does not occur regularly. While a single year of data provides much insight, it may also have been an unusual year for certain variable cost centers. Therefore, we consider an alternative source of information on the costs of production for both conventional and organic apples in Washington to provide a basis for overall comparison. The alternative sources are enterprise budgets published by Washington State University Extension for conventionally (2) and organically (1) produced Gala apples. The data used to create these budgets are collected in a very different manner from the ARMS survey. Rather than taking a random sample of both organic and conventional apple growers, a panel of growers with
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extensive experience was selected to be interviewed jointly. First, the panelists decided on certain characteristics for a block of Gala apples, including the methods of production, rootstock, trellis structure, and other technologies that would be employed. They subsequently decided on the costs that would be typically incurred, based on the assumptions of the given block and their own cost of production data. Rather than a survey of what growers are currently doing and the corresponding costs, these budgets are meant to reflect the latest developments in apple production and the full economic costs of both establishment and full production of an apple orchard. To capture the full economic costs of production, opportunity costs are included in the budget. For example if the growers own the land, then they may not report an interest cost for land in the ARMS survey. In the Washington State University (WSU) enterprise budget, however, an interest cost is included to account for either interest explicitly paid on a land loan or the opportunity cost of using land that is owned outright in the production of apples. Other economic costs that are included in the WSU budgets are those attributed to establishment costs. For a grower to fully establish a 40-acre Gala block, they will spend approximately $1 million dollars in the first year alone. Whether this is paid by the grower in cash or a loan is taken out to fund the four years of establishing a Gala block, an amortized cost needs to be included in the budget for either explicit loan payments or the opportunity cost of cash used to pay for the investment. Therefore, cost categories such as management cost (cost of owner's time), interest on land, and amortized establishment costs are included in the WSU budget, but are not necessarily going to appear in the ARMS cost data and the per-acre costs will be substantially higher for the WSU budgets as compared to the ARMS data. The variable cost estimates from the WSU budgets for conventional and organic Gala apples are shown in Table 3. These budgets indicate the per-acre cost difference between organic and conventional production for Gala apples is $462/acre or 4.3% greater for organic. Unlike the ARMS survey where labor costs were very different between organic and conventional production, the biggest difference in the WSU budgets is the additional $618/acre cost for chemicals (pesticides and growth regulators) and fertilizers for organic production. Based on the WSU budgets, organic growers would require $462/acre more revenue than a conventional grower to be equally profitable producing Gala apples.
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Table 3. Production costs for conventional and organic apples from 2010-2011 WSU budgets. Production costs for conventional gala apples ($/acre)
Production Costs for organic gala apples ($/acre)
Variable costs
Variable costs
Labor
2,652.35 Labor
2,590.00
Chemicals & fertilizer
900.00 Chemicals & fertilizer
Maint., repairs, fuel & oil
485.00 Maint., repairs, fuel & oil
560.00
Irrigation/electric charge
100.00 Irrigation/electric charge
100.00
General farm labor
500.00 General farm labor
550.00
Crop insurance Other variable costs Total Variable Costs
86.52 Crop insurance 927.60 Other variable costs 5,651.47 Total Variable Costs
Fixed costs
1,518.00
86.52 966.00 6,370.52
Fixed costs
Depreciation
403.87 Depreciation
363.47
Interest
819.90 Interest
850.40
Property & estate taxes
75.00 Property & estate taxes
75.00
Insurance (all farm)
50.00 Insurance (all farm)
50.00
Management cost
400.00 Management cost
400.00
Capital replacement
218.75 Capital replacement
250.00
Amortized establishment costs Annual certification fee Total Fixed Costs Total Costs
3,138.10
Amortized establishment costs
0.00 Annual certification fee 5,105.62 Total Fixed Costs 10,757.09 Total Costs
2,823.74 36.00 4,848.61 11,219.13
Conclusion The budgets shown in this study provide insight into the cost of producing both conventional and organic apples in the state of Washington. Comparing costs from the 2007 ARMS survey and the 2009-2010 WSU enterprise budgets allows for a better understanding of the range of costs that growers face in the apple industry. The nature of the ARMS survey is such that certain economic costs may not be captured and the single year snapshot may alter the average costs if some orchards faced unusual production or management circumstances. The WSU budgets are more comprehensive in the inclusion of all economic costs, but also assume a high level of production and management. Therefore, the per-acre costs should be considered a plausible range for apple production, with the ARMS data providing a lower bound and the WSU budgets an upper bound. The comparison between organic and conventional costs of production is similar, regardless of the data source used. It appears that the per-acre cost of producing organic apples is approximately 5 to 10% greater than conventional apples, at least for the state of Washington. This result may not hold for other growing regions in the United States, especially those prone to different disease and pest problems. Growers in the semi-arid region of the western United States face less daunting pest and disease problems than growers in more humid regions. With estimates of the cost of production for both organic and conventional apples, it is possible to estimate profits to growers. Table 4 displays the projected profit per acre for several different price and yield scenarios. Previous research has suggested that, on average, organic growers will produce approximately 10% less per acre then their conventional counterparts (4). The
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profit sensitivity analysis presented here accounts explicitly for yield differences between organic and conventional apples. We do not assume a quality difference. This is based on previous research which found no significant difference in fruit quality between organic and conventional apples (7). Assuming this yield difference and a $50 per bin price premium for organic apples, the sensitivity of profits to variability in yields and price appears to be similar for organic and conventional orchards. Either production method can yield a loss if either prices or yields (or both) are low enough. As an example, if prices were to be $300 per bin for both organic and conventional apples, a conventional grower would benefit from higher yields and be profitable. Organic growers would be more susceptible to a negative profit due to lower yields. Table 4. Profit Sensitivity of Organic and Conventional Apple Production Conventional apple profit per acre Yield (bins/ acre)y
200
40.0
-2,757.09
45.0 50.0 Total z cost x
Price ($/bin)x
Organic apple profit per acre
300
Yield (bins/ acre)
250
-757.09
1,242.91
36.0
-2,219.13
-419.13 1,380.87
-1,757.09
492.91
2,742.91
40.5
-1,094.13
930.87 2,955.87
-757.09
1,742.91
4,242.91
45.0
250
10,757.09 $/acre
Total z cost
Price ($/bin) 300
350
30.87 2,280.87 4,530.87 11,219.13 $/acre
Price at the door of the packing house, including transportation from orchard to packing house. Price is after packing, storage and other charges have been taken out.
y
Assumes a packout of 18 fresh packs per bin (all grades) and bin size of 925 pounds. Organic apple yield is assumed to be 10% less than conventional. z Total cost per acre from the WSU enterprise budgets for Gala apples. Assumes full economic costs, including amortized establishment costs.
To answer the industry's question of the long term profitability of organic apple production, organic apples grown in Washington are not considerably more expensive to produce than conventional apples. However, profits are a function of both costs and revenue. As shown in Table 4, if either prices or yields are low enough, profitability for both organic and conventional apple growers can be negative. Under a scenario of no price premium for organic apples, profitability will be comparable to conventional productions if yields for organic apples are also comparable. Literature Cited 1. Galinato, S., Granatstein, D., and Taylor, M. 2011. 2010 cost estimates of establishing and producing organic Gala apples in Washington. Coop. Ext. Factsheet FS041E. Washington State Univ., Pullman WA. 2. Gallardo, K., Taylor, M., and Hinman, H. 2010. 2009 cost estimates of establishing and production Gala apples in Washington. Online. Coop. Ext. Factsheet FS005E. Washington State Univ., Pullman WA. 3. Granatstein, D., Kirby, E., and Willer, H. 2010. Organic horticulture expands globally. Chron. Hortic. 50(4):31-38. 4. Granatstein, D., Lehrer, N., and Lapierre, M. 2011. Organic orchards: Needs and priorities. Online. Survey conducted at Wilbur-Ellis organic grower meeting, Feb. 11, 2001, Prosser, WA. Tree Fruit Res. & Ext. Center, Washington State Univ., Wenatchee, WA. 5. Kirby, E. and Granatstein, D. 2008. Status of organic tree fruit in Washington State, 2008. Online. Center for Sustaining Agric. and Natural Resources, Washington State Univ., Wenatchee, WA. 6. O’Rourke, D. 2009. Will the organic apple gamble pay off? Proc. of the 104th Annual Meeting 2008. Washington State Hortic. Assoc., Wenatchee, WA. 7. Reganold, J. P., Glover, J. D., Andrews, P. K., and Hinman, H. R. 2000. Sustainability of three apple production systems. Nature 410:926-930.
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8. Slattery, E., and Greene, C. 2009. Results from the 2007 USDA apple survey: Production characteristics. Online. Organic Agric. Briefing Room, USDA-ERS, Washington, DC. 9. USDA. 2000-2008. Organic production datasets. Online. USDA-NASS, Washington, DC.
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