|
Section D: The Economics of Horticultural Production
Projected
Outcomes
Students will learn how sustainable practices
can affect farm profitability.
Students will learn how government programs can
affect farm profitability.
Students will learn about hidden costs of cheap
food, including:
- Environmental costs
- Farm business failures
- Increase in obesity and persistence of hunger
in US and worldwide
Background
/ Lessons
Introduction
The profitability of horticultural crops is in
large part the product of
- The costs of production
- Yield
- Price
This section begins by looking at how sustainable
agriculture affects costs of production, yields,
and prices. It then goes on to introduce some
of the other forces that affect the economics
of fruits and vegetables in the food system, including
government policies and the handling of external
costs.
Back to top 
Costs
of Production
Sustainable farmers generally seek to replace
purchased inputs with resources recycled on-farm.
This approach can significantly reduce some costs
of production, but not others. Let’s look
at typical production costs one by one.
Labor needs vary considerably depending on the
crop, but most fruit, vegetable, and flower production
requires substantial amounts of labor. Many sustainable
farms try to minimize or eliminate use of most
pesticides. This means that they rely on added
labor and management to help control weeds and
insects. On smaller farms it may also not be economically
viable to invest in labor-saving machinery. Since
many sustainable farms are relatively small operations,
the lack of low-cost, small-scale equipment can
also raise labor demands. However, equipment designed
for small farms is becoming increasingly available. Finally, a sustainable farm will strive to pay laborers fairly for their work, which may raise labor costs.
Land in general, land costs are determined by
costs elsewhere in the county and by soil type
more than by farming practices. Thus, in most
cases, land costs should not be affected by whether
the farm uses conventional or sustainable practices.
If the farmer owns the land, sustainable farming
practices should, over time, help the land hold
or increase its value.
Fertilizer sustainable practices such as including
legumes in the crop rotation and applying manure
can reduce fertilizer costs. In addition, building
soil organic matter and preventing erosion help
keep nutrients on the farm.
Seed costs may be higher on sustainable farms,
depending on the specific practices and varieties
used. Certified organic seed is usually more expensive
than standard seed. Seeds for unusual crops and
varieties can be expensive as well. However, some
sustainable farmers save their own seed, which
can hold down seed costs.
Pesticides sustainable operations generally have
considerably lower expenditures for herbicides
and insecticides than other farms.
Machinery, fuel, repairs, and machine hire can
be higher or lower for sustainable operations.
Conservation tillage and carefully integrated
management can reduce trips over the field and
associated fuel costs. On the other hand, practices
such as flaming and cultivating for weed control
require fuel and specialized equipment. Many sustainable
farmers manage machinery costs by being excellent
mechanics who build or adapt and maintain their
own equipment.
Back to top
Yield
Often, people assume that sustainable practices
result in low yields. Some sustainable practices
may reduce yields, at least temporarily, but others
have little impact on yields, or can result in
yield increases over time. Let’s look at
some examples of sustainable practices to see
how they might affect yields.
Integrated Pest Management (IPM) is a set of
practices for managing pests with minimal reliance
on pesticides. Use of IPM can result in both increases
and decreases in yield. For example, one basic
principle of IPM is to weigh the costs of a pesticide
application against the economic costs of pest
damage. If the pest is at low levels, very slight
yield losses may not justify the costs of applying
a pesticide. Also, IPM requires good data collection
and analysis. If an inexperienced IPM practitioner
makes a mistake, that could result in a yield
reduction. On the other hand, because IPM combines
a variety of pest management strategies, over
the long run it may result in higher yields than
conventional pest control programs.
Conservation tillage is another sustainable practice
that can boost or lower yields, depending on circumstances.
Minimizing tillage can improve soil structure
and water retention, and therefore yields. However,
soil borne diseases can be more difficult to manage
with conservation tillage. Whether conservation
tillage will improve or reduce yields depends
on a variety of factors, including other parts
of the management system, the crop, and weather
conditions.
Organic agriculture is a set of practices, including
a requirement that no synthetic fertilizers or
pesticides be used. During the 3-year transition
period from conventional to organic production,
farmers often see significant reductions in crop
yields. However, long-term organic farmers note
that after the initial transition, yields for
many crops generally recover. Depending on the
particular conditions of each individual farm
and the crop in question, established organic
yields may be slightly lower than or equal to
yields for conventionally grown crops.
Crop rotation is a sustainable practice that
consistently results in yield increases. However,
it is important to select the right crop sequence,
since some quite different crops can be susceptible
to the same diseases and/or insects or can be
antagonists for other reasons.
Back to top
Price
A growing number of consumers are willing to
pay more for fruits and vegetables that are produced
sustainably (for example, locally, by family farms,
without use of pesticides, and/or organically).
The challenge for sustainable farmers is to find
a marketing method that will reach those consumers
and allow farmers to benefit from the higher retail
price.
Two marketing methods that allow sustainable farmers
to retain the value added by sustainable practices
are direct marketing to consumers and organic
certification.
Direct marketing outlets include farmers’ markets, CSAs, and on-farm sales such as U-Pick
operations and farm stands. In recent years, high-end
restaurants have also become important customers
for local, sustainable produce. Chefs are willing
to pay a premium for flavorful, beautiful ingredients.
Although direct marketing provides higher prices
to the seller, it also requires more labor than
selling to brokers or processors.
Organic certification also requires additional
labor and management, but wholesale organic produce
prices often run 50 to 100% higher than prices
for conventional produce (see the New
Farm Organic Price Index –OPX). Farmers
who direct market organic produce can capture
an added premium. However, because direct marketing
allows for direct communication between the producer
and the buyer, certification is not as big a factor
in direct market sales as in the wholesale market.
Organic certification is one example of an ecolabel.
Basically, an ecolabel is a way to retain the
value of sustainable production practices when
a product enters the wholesale market. Most ecolabels
document environmental practices, such as reduced
pesticide use, and/or social practices, such as
fair wages. There are a number of ecolabels besides
the organic one, though they have not gained as
much recognition. The Consumers Union maintains
a website that tracks
eco-labels. Examples of ecolabels in the Midwest
include the Midwest
Food Alliance and Healthy
Grown Potatoes. See E Magazine for an article comparing different coffee ecolabels.
Back to top
Government
policies
We like to think that the US has a free market
system, in which the economy operates without
government intervention. But in reality there
is no such thing as a free market. Although there
are no direct US subsidies for horticultural crops,
government policies affect the economics of agriculture
in many ways, from decisions about transportation
infrastructure to environmental and pesticide
regulations to trade policies to purchasing programs.
Discussion questions
- How do federal and state transportation
policies affect the economics of fruit and vegetable
production?
Federal, state, and
local governments all invest tremendous resources
into our transportation infrastructure ($39
billion into the federal highway system alone
in 2006). Because most fruits and vegetables
are highly perishable, a good transportation
system is critical to help farmers quickly move
their products to market. However, policies
that keep transportation costs artificially
low also encourage regional concentration of
fruit and vegetable production and hurt small-scale,
local growers.
- Think of some government policies
that help sustainable fruit and vegetable farmers.
In recent years both the USDA and
state and local governments have devoted resources
to help establish farmers markets and to allow
some people on government assistance to purchase
food there. See the Farmers
Market Nutrition Program for seniors and
for women, infants, and children (WIC). The
USDA also has some grant programs that have
supported projects in sustainable horticulture.
- Give examples of government policies
that might hurt sustainable farmers.
1) In international trade policy the US
and other nations have worked to prohibit all
barriers to trade, including regulations designed
to protect the environment and labor. Agreements
such as the WTO and NAFTA prohibit countries
and states from requiring imports to meet their
standards for production, unless the production
process makes a measurable difference in the
final product. For example, the US can only
keep out imports of crops treated with DDT or
other pesticides banned in the US if the food
still has detectable residues of those pesticides
on it when it reaches the border. If a product
was grown using forced child labor, which does
not affect the product itself, other countries
cannot restrict its importation. These trade
policies put pressure on governments to lower
their own regulations so they can compete in
international markets. UN
Institute for Sustainable Development, Environment
and Trade: A Handbook, section 5.1 , Anti
CAFTA Flyer, Private
Rights, Public Problems.
2) Although some government grant money is available
for research and projects in sustainable agriculture,
the amount is tiny in comparison to the government
funds invested in conventional agriculture,
from major water projects that disproportionately
benefit large-scale, industrial growers to research
on pesticides and transgenic crops.
3) Over the last twenty years, US law on intellectual
property has changed to allow patenting of crops.
This change has hurt the development and distribution
of crops suited to sustainable production, especially
since much of the seed industry is now controlled
by large corporations that also produce pesticides.
- Try to imagine an economy without
any government regulation. What kind of money
system could you have without government intervention?
What would happen if no one required truth in
labeling (including accurate weights and measures)?
In fact, why would one have economic exchange
at all – why not just take what you want?
Back to top
The
Hidden Costs of Cheap Food
The combination of government policies and infrastructure,
industrialized farming, an abundance of good farmland,
and a wealthy population have resulted in cheap
food for the average American. Overall, Americans
only pay around 10% of their income for food.
This is the lowest percentage in the world. In
general, having affordable food is a good thing.
But the way our society is providing it turns
out to have some steep hidden costs.
Cost 1: Struggling farmers
Food may be cheap compared to what the rest
of the world pays, but what the consumer pays
for food at the cash register has stayed about
the same in the last 30 years, when controlled
for inflation. What has dropped by more than
half in real terms* is the price received by
the farmer. Where does the difference go? To
processing, packaging, advertising, and transportation
(Visit the USDA's dollar
bill graphic and figure
1-9 ). The result is very narrow or non-existent
profit margins for the farmer, and a steady
decline in the number of farms.
* For a brief explanation of inflation, see
Module
II, Section D
Cost 2: Environmental damage
The pollution that results from agricultural
activities has real costs, but they don’t
show up in the dollars and cents people pay
for food. Some of them show up as extra water
treatment costs that communities and their residents
have to pay for safe drinking water. Others
are harder to translate to monetary terms, such
as declines in healthy fish, frog, and bird
populations. Still other costs, such as higher
rates of cancer and birth defects in some rural
areas, may be the result of agricultural pollution,
but people are not completely certain.
Economists have a special name for costs that
result from the production of an item but that
are not reflected in the price of the item:
external costs or externalities.
Externalities are a social justice problem,
because someone sometime does pay their costs,
just not necessarily the person or people responsible
for them. According to one rough estimate, external
costs of agriculture in the US add up to around
$20 billion per year (for comparison, the entire
budget for the US Environmental Protection Agency
for the year that calculation was made was a
little over $7 billion) (Jules Pretty, Agri-Culture:
Reconnecting People, Land and Nature, 2002,
London, Earthscan Publications, p. 58).
Activity 1: Price Tags, Cost Tags
Activity 2: Design Your Own Ecolabel
Cost 3. Persistent hunger, increasing
obesity
Activity
3: Food inequality
You might think that cheap food would mean
that no one in America would need to go hungry,
but that is not the case. Nearly 35 million
people in the US (11%) live in households that
experience food insecurity. About 9.4 million
people in the US (3.5%) experience outright
hunger some of the time. Food insecure households
are those that are not able, for financial reasons,
to get a sufficient diet at all times over the
course of a year. Households labeled hungry
are those where one or more household members
experienced hunger due to lack of financial
resources at some time in the year. The Census/USDA
definitions are rigorous and assure that only
those experiencing significant hunger or food
insecurity are so classified. (Food
Research and Action press release, USDA
briefing)
How can we have so much hunger and cheap food
at the same time? One reason is that while the
US is a very wealthy country in world-wide terms,
we are also a very unequal country. That means
that we have a lot of extremely rich people,
but also a lot of poor people. While the average
American pays 10% of disposable income for food,
getting enough to eat may take more than 50%
of poor people’s income, forcing them
to choose between adequate food and shelter,
or providing neither. (Other wealthy countries,
such as Canada, Japan, and western European
nations, have less inequality because they impose
higher taxes on their wealthy and provide more
social and financial services to all.)
At the same time that the age-old problem of
hunger persists, we have a new problem: too
much of the wrong foods. More than 60% of US
adults are overweight, and half of those are
obese. Obesity is also increasing among children.
Two factors contribute to this problem. One
is a decline in physical activity. The other
is an increase in food consumption, especially
the consumption of fats, refined carbohydrates,
and sugars. Corn, wheat, and soybeans contribute
sweeteners (or sugar), refined carbohydrates,
and oil (or fat) to our food system. These crops
are subsidized by government payments (and therefore
cheap), they make processed foods taste better,
and when we eat too much they contribute to
heart disease, diabetes, and a host of other
health problems. (For information on health
risks of obesity see the CDC's
Overweight and Obesity Frequently Asked Questions
and for the USDA's
summary of changes in US patterns of consumption)
In contrast, although nutritionists agree that
most Americans should eat more fruits and vegetables,
these crops receive no direct government subsidies.
Conclusion
Many factors influence the profitability of horticultural
production. Some sustainable farms are more profitable
than their conventional neighbors, others less
so, depending on their management strengths and
the specific practices they use.
The economics of agriculture in this country
(and others around the world) are heavily influenced
by government programs. US agricultural economic
policies have had several different goals which
often conflict, including the following:
- Make food cheap for consumers. US food is
indeed relatively cheap, but cheap food has
not solved the problem of hunger, which persists
in the US. Fresh fruits and vegetables do not
get direct production subsidies and are relatively
expensive compared to grain-based products.
- Support the income of farmers. Although some
farmers benefit handsomely from government subsidies,
for many real farm income has declined, and
bankruptcies are common. Direct subsidies are
targeted to grain and cotton farmers. There
are no direct government subsidies for fruit
and vegetable farmers in the US.
- Open foreign markets to US agricultural products
- Protect US markets from cheap foreign agricultural
imports
Finally many costs of agricultural production
are not normally considered in agricultural economics,
including environmental and health impacts.
Back to top
|
