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    Snapshot of Costs Associated With Organic Foods (The Daily Meal, March 2012)

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    There are various additional costs associated with organic goods production compared to conventional production. These include higher costs of inputs like labor instead of chemicals, higher costs of certification, and lower yields. As a result, the costs are passed on to consumers in the form of higher prices for organic goods. On average, organic foods cost double conventional options. However, as supply chains have improved, prices have reduced. While organic farming has higher costs, it also provides environmental and social benefits in addition to financial returns. A cost-benefit analysis is needed to evaluate organic farming investments.

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    Snapshot of Costs Associated With Organic Foods (The Daily Meal, March 2012)

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    ashu1403
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    There are various additional costs associated with organic goods production compared to conventional production. These include higher costs of inputs like labor instead of chemicals, higher costs of certification, and lower yields. As a result, the costs are passed on to consumers in the form of higher prices for organic goods. On average, organic foods cost double conventional options. However, as supply chains have improved, prices have reduced. While organic farming has higher costs, it also provides environmental and social benefits in addition to financial returns. A cost-benefit analysis is needed to evaluate organic farming investments.

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    There are various additional costs associated with organic goods production compared to conventional production. These include higher costs of inputs like labor instead of chemicals, higher costs of certification, and lower yields. As a result, the costs are passed on to consumers in the form of higher prices for organic goods. On average, organic foods cost double conventional options. However, as supply chains have improved, prices have reduced. While organic farming has higher costs, it also provides environmental and social benefits in addition to financial returns. A cost-benefit analysis is needed to evaluate organic farming investments.

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    44 views5 pages

    Snapshot of Costs Associated With Organic Foods (The Daily Meal, March 2012)

    Uploaded by

    ashu1403
    There are various additional costs associated with organic goods production compared to conventional production. These include higher costs of inputs like labor instead of chemicals, higher costs of certification, and lower yields. As a result, the costs are passed on to consumers in the form of higher prices for organic goods. On average, organic foods cost double conventional options. However, as supply chains have improved, prices have reduced. While organic farming has higher costs, it also provides environmental and social benefits in addition to financial returns. A cost-benefit analysis is needed to evaluate organic farming investments.

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    There are various types of costs associated with organic goods production.

    Besides the basic time and equipment costs, other costs associated with these products include higher costs of inputs, increased labor changes, higher cost in terms of more time taken up to reap the harvests. Snapshot of costs associated with organic foods (The Daily Meal, March 2012). 1. Organic farmers do not use pesticides and chemicals to enhance productivity, reduce cost of production and work more efficiently and quickly. Unlike conventional farmers they use labor to hand-weed the crop and clean polluted water. This adds to their costs, since this extra labor is more expensive than the chemicals used. Other cheap inputs used by conventional farmers are chemical fertilizers and sewage sludge. Organic farmers use animal manure and compost instead of the inexpensive solutions. In addition, they use methods like crop rotation to keep the land fertile and enrich it in nitrogen. All these differences are costly both in terms of time and resources used. This cost is thus passed on to the products that come out of organic farms.

    2. There is a large gap between supply and demand of organic foods. A survey showed that 58% Americans preferred organic foods to the non-organic counterparts. On the supply side, the output of organic farms is much less than the conventional farms. Statistics showed that in 2008, 0.9% of total farmland accounted for organic farms.

    3. The output of organic farms is relatively lesser than conventional farms. This adds to their transportation and handling costs i.e. similar transportation costs are incurred for lesser produce. Organic farms also require USDA certification. This is neither easy nor inexpensive. Compliance with standards requires incremental resources. Annual certification fee adds an expense of $400-$2000 to the farmer. The subsidies for organic foods were a very small proportion of total farm subsidies. Thus there is very little support from the government to support this programme.

    We can see the additional costs of organic foods in the following table (Russell McLendon, Oct 2010 ). On an average, organic food costs double the conventional foods of the same type (2006 values approximate). Organic Salad Eggs Milk Rice $8.14 $3.99 $4.43 $2.35 Conventional $3.85 $1.35 $2.28 $0.93 $3.23 $1.59 $0.80 $4.45 $0.95 Excess 111% 195% 94% 152% 59% 39% 196% 93% 133%

    Strawberries $5.14 Carrots Poultry Spinach Broccoli $2.21 $2.37 $8.59 $2.22

    As the supermarkets started investing in supply chain management, the organic goods were more readily available. It also helped bring down the relative costs of these products. The profit markup on these products was higher than other conventional products because of limitation of supply and greater transaction costs. It commanded higher production, procurement and processing costs too. The supermarkets efficient supply chain management used the economies of scale to bring the products from cheapest source of production. This reduced the premium these products commanded. It is important to note that organization of retail industry decides the price of the goods. For organic goods, the countries where supermarkets dominate the supply of these products, price premiums are lower. In such countries, organic product sales greater and their share is higher in total food retail sales (SADC Trade)

    An organic foods retailer has to organize its purchase functions through its procurement centers at regional and national level, depending on where the production is located. It needs to have processing and distribution centers again based on its geographic

    spread. Some of these need to focus specifically on perishables since they have a very quick turnaround time. Marketing and advertising strategy is variable. Some stores prefer word-of-mouth and testimonials from its customers. This way they can reduce their already exorbitant operating expenses. The operating costs associated with the retail store are usually more than 90% of sales.

    Cost Benefit Analysis (Y. Mehmood, September 2011) Total costs = Cost of seeds + Cost of manure + Cost of plant protection (weeding etc.) + Cost of labor + Cost of land preparation (rotation of crops etc.) + Cost of irrigation + Cost of harvesting + Cost of transportation & handling + Cost of storage + Miscellaneous costs Subtracting total variable cost from the total return gives the gross margin. This is the tangible profit. Apart from these tangible profits, there are much more environmental and social benefits of organic foods. Benefit Cost Ratio is the relative value (in monetary terms) of benefits associated with the activity with respect to costs incurred to complete the activity. BCR = Gross Margin/ Total Cost Return on Investment. Return on investment is given by the profit that can be generated with the investment in a particular business. Although organic food is a niche market, it has seen a growth of 9.8% in 2011 to reach a value of $67.2 billion worldwide. Americas take up largest share of this market by accounting for about 50.3% (Research and Markets, Jan 2013). This is both a capital as well as labor intensive industry as compared to the conventional foods industry. To ensure a good return on investment it is advisable to assess demand and volume numbers carefully. All stakeholders in the value chain need to make adequate profit to make the business model viable. Organic farmers need to improve their direct involvement in the value chain, processors and co-packers will

    have to rationalize their cost of production and finally the distributors should be able to cover their costs by planning the logistics well (Russ Christianson , October 2007)

    References: Benefit cost ratio analysis of organic and inorganic rice crop production; evidence from district sheikhupura in Punjab Pakistan, Y. Mehmood, B. Anjum and M. Sabir, September 2011, via http://www.paas.com.pk/images/volume/pdf/1956972184-(12).%206-11.pdf

    10 reasons organic food is so expensive, The Daily Meal, March 2012 via http://www.foxnews.com/leisure/2012/03/11/10-reasons-organic-food-is-soexpensive/#ixzz2O6wG9yKd

    Is organic food worth the cost?, Russell McLendon, Oct 2010 via http://www.mnn.com/earthmatters/translating-uncle-sam/stories/is-organic-food-worth-the-cost-0 Trade information brief : Organics, SADC Trade http://www.sadctrade.org/files/Organic%20Produce%20Trade%20Information%20Brief.pdf Organic Food: 2012 Global Industry Guide on the $67 Billion Market, Research and Markets , Jan 2013 via http://finance.yahoo.com/news/research-markets-organic-food-2012103800181.html

    Grow Local Organic , Russ Christianson and Mary Lou Morgan, October 2007 http://www.organicagcentre.ca/Docs/GrowLocalOrganic_wwf_Oct-07.pdf

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