Regardless of the fact that the evaluation methodology to be employed is based on analysis of the financial flows generated by this productive activity during the period of time addressed by the said investment, the determination of production costs is an indispensable reference.
Traditionally, an initial analysis of the viability of a crop has been conducted by calculating its production costs per hectare, and by estimating its annual yield. This makes it possible to calculate so-called profitability thresholds, which are defined according to the cost structure used. Thus, if, within the said structure, we consider the so-called opportunity costs of the businessman (income from land, interest on invested capital, etc.), this threshold will be the price above which the businessman covers all his production costs, and thus can earn a profit through his business activity proper (Cabalero P., et al, 1992).
However, in order to be able to determine the flow of receipts and payments further out in time, and especially payments stemming from this productive activity, both initially and annually, we can use the cost structure, namely the so-called variable costs, as a reference for calculating them.
The cost system that we shall use (Caballero et al., 1992) is among the most widely accepted systems. With very slight differences, it is used in other highly respected studies of fruit crops (Caballero and De Miguel, 1988; Buxton and Del Campo, 1994), and corresponds to a structure of variable and fixed costs, classified by type (Tables IV and V).
Table IV
Costs of growing oranges (Pta./Ha)
Conventional production | Organic production | |
A. Variable costs of factors of production | ||
A.1. Raw materials | ||
A.1.1. Irrigation water | 160 000 | 151 600 |
A.1.2. Fertilizers | 74 846 | 165 000 |
A.1.3. Insecticides, fungicides, herbicides,... | 135 440 | 12 883 |
A.1.4. Other inputs | 8 000 | 8 000 |
A.2. Labour (includes irrigation, pruning, treatments, labour and machinery rental) | 172 790 | 433 412 |
Total variable costs of factors of production | 551 076 | 770 895 |
B. Interest on working capital (annual, taking into account duration of average period) | 16 073 | 19 272 |
C. Fixed costs | ||
C.1. Amortization of planting | 16 800 | 16 800 |
C.2. Interest on planting | 10 500 | 10 500 |
C.3. Amortization of capital for equipment | 60 000 | 60 000 |
C.4. Interest on capital for equipment | 15 000 | 15 000 |
C.5. Costs of replacing trees and maintaining equipment | 10 000 | 10 000 |
C.6. Income from land | 80 000 | 80 000 |
C.7. Taxes and insurance | 40 000 | 40 000 |
C.8. Certification | 1 000 | |
Total fixed costs | 232 300 | 233 300 |
D. Total costs (2 + 3 + 4 + 5) | 799 449 | 1 023 467 |
Source: Authors, based on Caballero P., De Miguel M. D., Juliá J. F., 1992.
Table V
Costs of growing mandarins (Pta./Ha)
Conventional production | Organic production | |
A. Variable costs of factors of production | ||
A.1. Inputs | ||
A.1.1. Irrigation water | 160 000 | 151 600 |
A.1.2. Fertilizers | 74 846 | 165 000 |
A.1.3. Insecticides, fungicides, herbicides,... | 182 844 | 17 392 |
A.1.4. Other inputs | 8 000 | 8 000 |
A.2. Labour (includes irrigation, pruning, treatments, labour and machinery rental) | 203 892 | 511 426 |
Total variable costs of factors of production | 629 582 | 853 418 |
B. Interest on working capital (annual, taking into account duration of average period) | 15 739 | 21 335 |
C. Fixed costs | ||
C.1. Amortization of planting | 18 480 | 18 480 |
C.2. Interest on planting | 11 550 | 11 550 |
C.3. Amortization of capital for equipment | 60 000 | 60 000 |
C.4. Interest on capital for equipment | 15 000 | 15 000 |
C.5. Costs of replacing trees and maintaining equipment | 10 400 | 10 400 |
C.6. Income from land | 80 000 | 80 000 |
C.7. Taxes and insurance | 42 600 | 42 600 |
C.8. Certification | 1 000 | |
Total fixed costs | 238 030 | 239 030 |
D. Total costs (2 + 3 + 4 + 5) | 883 351 | 1 113 783 |
Source: Authors, based on Caballero P., De Miguel M.D., Juliá J.F., 1992.
The following is a description of all categories listed in the cost tables:
Using the technical elements employed in defining the farms addressed in this study, and in accordance with the assumptions made, we can determine the economic parameters defining the investment.
First, we determined the so-called investment cost, or the outlay needed to set the investment in motion. In our case, this payment is limited to the cost of the seedlings and the labour required to plant them, as well as irrigation equipment (Table VI). This investment cost, which is based on the assumption that the conventional growing system will be used until the ninth growing year, will not vary if the investment analysis is carried out with the conventional growing system and the organic growing system.
Table VI
Investment cost (Pta./Ha)
Orange | Mandarin | |
Planting | 420 000 | 462 000 |
Installation | 600 000 | 600 000 |
Investment cost | 1 020 000 | 1 620 000 |
Source: Authors, based on consultations with experts.
The flow of receipts and payments generated by the investment during the investment's life will give the so-called cash flows. In this regard, it should be mentioned that in addition to ordinary receipts and payments, extraordinary receipts and payments, stemming from the renovation of equipment during the life of the investment, will also be taken into account.
To determine receipts, we began with the data provided by the farms analysed, and compared that data with figures provided in other studies (Caballero P. et al, 1992, and Roselló J., Domínguez A., and Gascón A., 2000). We did not observe any significant differences. We followed the same procedure with regard to prices (Tables VII, VIII, IX and X), taking the average prices earned in the field by the farms studied, and comparing them with those published by the Organic Farming Board of the Valencia Region, for some of its registered farmers. Although we did find a few slight differences, they are scarcely worthy of mention (Annex IV). Thus, for the present study, we shall use sensitivity analysis, with variation intervals, having also noted that they undergo a greater variation, both by season and market.
With respect to production yields, although a slight reduction in yields was observed for organic crops, in the farms studied, the experts consulted (Agricultural College of the Autonomous Government of Valencia) say that in a favourable agro-environmental context, and with appropriate management and technology, that fall in production would occur between the first three and four years after conversion, with the yield recovering thereafter.
Nevertheless, it should be noted that a favourable environment is found with plots of a certain size, which allows a certain degree of isolation of the crop in terms of the effects of conventional agriculture of surrounding plots of land since, on small farms located in production zones where most farmers practise conventional agriculture, it is hard to imagine that a favourable ecosystem can be created.
In the light of all these factors, we shall assume that yields will fall over the first four years after conversion, but will then rise to levels close (ninety percent) to those earned with the conventional growing system.
Table VII
Normal receipts of growing oranges using the conventional system
Years 1-3 | Year 4 | Year 5 | Years 6-25 | |
Production (Kg/Ha) | --- | 10 000 | 20 000 | 36 000 |
Price (Pta./Kg) | 35 | 35 | 35 | 35 |
Receipts (Pta./Ha) | --- | 350 000 | 700 000 | 1 260 000 |
Source: Authors, based on data provided by the farms consulted.
Table VIII
Normal receipts of growing oranges using the organic system
Years 1-3 | Year 4 | Year 5 | Years 6-9 | Years 10-11 | Years 12-13 | Years 14-25 | |
Production (Kg/Ha) | --- | 10 000 | 20 000 | 36 000 | 29 000 | 29 000 | 32 500 |
Price (Pta./Kg) | 35 | 35 | 35 | 35 | 35 | 45 | 45 |
Receipts (Pta./Ha) | --- | 350 000 | 700 000 | 1 260 000 | 1 015 000 | 1 305 000 | 1 462 500 |
Source: Authors, based on data provided by the farms consulted.
Table IX
Normal receipts of growing mandarins under the conventional system
Years 1-3 | Year 4 | Year 5 | Years 6-25 | |
Production (Kg/Ha) | --- | 14 000 | 22 000 | 28 000 |
Price (Pta./Kg) | 63 | 63 | 63 | 63 |
Receipts (Pta./Ha) | --- | 882 000 | 1 386 000 | 1 764 000 |
Source: Authors, based on data provided by the farms consulted.
Table X
Normal receipts of growing mandarins under the organic system
Years 1-3 | Year 4 | Year 5 | Years 6-9 | Years 10-11 | Years 12-13 | Years 14-25 | |
Production (Kg/Ha) | --- | 14 000 | 22 000 | 28 000 | 22 500 | 22 500 | 25 000 |
Price (Pta./Kg) | 63 | 63 | 63 | 63 | 63 | 84 | 84 |
Receipts (Pta./Ha) | --- | 882 000 | 1 386 000 | 1 764 000 | 1 417 500 | 1 890 000 | 2 100 000 |
Source: Authors, based on data provided by the farms consulted.
With regard to the costs of citrus farming, it should be noted that they do not match total estimated costs, since some fixed costs are not shown as such. The cash criterion used in this methodology does not match that of accrued interest. Thus, instead, we consider the initial cost of investment and of extraordinary receipts and payments, which includes equipment renovation (Tables XI, XII, XIII and XIV).
Table XI
Normal costs of growing oranges using the conventional system (Pta./Ha)
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Years 6-25 | |
Inputs | ||||||
Irrigation water | 15 835 | 33 470 | 63 340 | 110 850 | 142 600 | 160 000 |
Fertilizers | 31 800 | 36 880 | 46 750 | 61 270 | 70 063 | 74 846 |
Insecticides, fungicides, herbicides,… | 19 151 | 19 151 | 83 957 | 110 595 | 110 595 | 135 440 |
Other inputs | 5 500 | 6 000 | 6 500 | 7 000 | 7 500 | 8 000 |
Labour 1 | 122 400 | 130 840 | 140 815 | 151 860 | 162 350 | 172 790 |
Rep. trees/M. instal. | 6 000 | 8 000 | 10 000 | 10 000 | 10 000 | 10 000 |
Taxes and insurance | 40 000 | 40 000 | 40 000 | 40 000 | 40 000 | 40 000 |
Total payments | 240 686 | 274 341 | 391 362 | 491 575 | 543 108 | 601 076 |
1 (includes irrigation, pruning, treatments, labour and machinery rental)
Source: Authors, based on data provided by the farms consulted.
Table XII
Normal costs 1 of growing oranges under the organic system (Pta./Ha)
Year 10 | Years 11-25 | |
Inputs | ||
Irrigation water | 151 600 | 151 600 |
Fertilizers | 165 000 | 165 000 |
Insecticides, fungicides, herbicides,... | 12 883 | 12 883 |
Other inputs | 8 000 | 8 000 |
Labour 2 | 433 412 | 433 412 |
Rep. trees/M. instal. | 10 000 | 10 000 |
Taxes and insurance | 40 000 | 40 000 |
Certification | 16 000 | 1 000 |
Total costs | 836 895 | 821 895 |
1 Payments for years 1-9 match those of the conventional growing system, under the hypothesis with which we are working.
2 (includes irrigation, pruning, treatments, labour and machinery rental)
Source: Authors, based on data provided by the farms consulted.
Table XIII
Normal costs of growing mandarins under the conventional system (Pta./Ha)
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Years 6-25 | |
Inputs | ||||||
Irrigation water | 15 835 | 33 470 | 63 340 | 110 850 | 142 600 | 160 000 |
Fertilizers | 31 800 | 36 880 | 46 750 | 61 270 | 70 063 | 74 846 |
Insecticides, fungicides, herbicides,… | 22 850 | 24 130 | 105 786 | 139 350 | 139 350 | 182 844 |
Other inputs | 6 200 | 6 500 | 7 200 | 7 400 | 7 800 | 8 000 |
Labour 1 | 140 760 | 155 466 | 161 937 | 174 639 | 186 702 | 203 892 |
Rep. trees/M. instal. | 6 000 | 8 200 | 10 400 | 10 400 | 10 400 | 10 400 |
Taxes and insurance | 42 600 | 42 600 | 42 600 | 42 600 | 42 600 | 42 600 |
Total costs | 266 045 | 307 246 | 438 013 | 546 509 | 599 515 | 682 582 |
1 (includes irrigation, pruning, treatments, labour and machinery rental)
Source: Authors, based on data provided by the farms consulted.
Table XIV
Normal costs 1 of growing mandarins under the organic system (Pta./Ha)
Year 10 | Years 11-25 | |
Inputs | ||
Irrigation water | 151 600 | 151 600 |
Fertilizers | 165 000 | 165 000 |
Insecticides, fungicides, herbicides,... | 17 392 | 17 392 |
Other inputs | 8 000 | 8 000 |
Labour 2 | 511 426 | 511 426 |
Rep. trees/M. instal. | 10 400 | 10 400 |
Taxes and insurance | 42 600 | 42 600 |
Certification | 16 000 | 1 000 |
Total payments | 922 418 | 907 418 |
1 Payments for years 1-9 match those of the conventional growing system, under the hypothesis with which we are working.
2 (includes irrigation, pruning, treatments, labour and machinery rental)
Source: Authors, based on data provided by the farms consulted.
The extraordinary receipts and payments generated by the investment consist of those stemming from the renovation of equipment, produced over the life of the investment. In this case, therefore, they will be determined by the renovation of the irrigation system, which has a useful life of 10 years, which will require two renovations, with a residual value of 10 percent for the first two renovations, and 60 percent at the end of the investment's life (Table XV).
The subsidy that may be granted to organic farmers could constitute an additional extraordinary receipt to be considered during the years in which it's granted. It should be noted, however, that since the aforementioned subsidy is suspended (as noted in the first part of our report), it has been decided not to include it in our analysis, although everything points to the approval of further aid in the future. Annex I shows the economic and financial evaluation incorporating the subsidy level that has been granted in the past.
Table XV
Extraordinary receipts and payments (Pta./Ha)
Year 10 | Year 20 | Year 25 | |
Receipts | 60 000 | 60 000 | 360 000 |
Payments | 600 000 | 600 000 |
Source: Authors.