Costs of OA Programs: Conceptual Issues

The costs of adopting OA programs fall into the following categories:

• Training costs and costs of organizing smallholder groups
• Subsidies on inputs to organic farmers
• Transition costs
• Inspection and certification costs

In each case, we need to distinguish between costs borne by the farmers, costs borne by the private sector, including non-government organizations (NGOs) and costs borne by the public sector, including from donor funds.

Training Costs

Farmers need to be trained in organic methods, if they are to adopt these successfully. Usually, the training is done in two stages. First, a number of ‘trainers' are trained who then go on to train the individual farmers. The direct costs consist of building the capacities of trainers, and then paying these trainers to train individuals. These costs can be borne by the state, or by the promoters of the organic program (which may be firms or NGOs, frequently foreign but sometimes domestic).

In calculating the training costs per farmer, it is important to allow for an attrition rate: not all farmers maintain their training, and efforts and resources expended on those that do not complete the training are considered wasted. These attrition rates can be as high as 50% but can also be as low as zero. In the Thai experience the rate has been less than 5%. Depending on the training methodology and participant selection, we can improve attrition rates significantly. If we invest adequately in the training of trainers and training methodology development, it should be possible to maintain the overall attrition rate at 20% or less.

In addition, we have to account for the lost earnings of farmers when they are participating in the training. This is usually valued at the wage rate applicable to the sector in which they are active. However, this is probably an overestimate of the costs. If the training is organized during the slack season when there is no farming activity, the opportunity costs are much lower than the wage rate.

Finally, it is important to include any costs of organizing smallholder groups. They are sometimes included as part of the training costs but focusing on non-technical related matters, such as dealing with administrative matters and social functions.

We can consider the initial training as a capital investment, followed by additional ‘top-up training' which is provided every year. The costs of this, of course, need to be included in the cost assessment. All costs are amortized over 10 years to derive an annual cost of the training.

Subsidies on Inputs to Organic Farmers

In many OA programs, farmers are supplied with seed and other inputs at subsidized prices. These inputs are usually supplied by the contractor who agrees to buy the production from the OA farmer, but in some cases, the state can also provide inputs. In our case studies, these input subsidies vary considerably—from as low as 10% of all costs to as much as 57%. Note that the subsidies are not always or even mainly provided by the state. In many cases, they are provided by private firms that buy the products. Where available, we have provided a breakdown of the share of the subsidy coming from each source.⁴

Transition Costs

In moving from conventional farming to organic farming, there can be a period when farmers' incomes decline, before the benefits of organic farming are reaped. Yields are still low and output cannot yet benefit from the premiums tied to organic products before soil conditions are certified as fully organic. These costs are largely borne by the farmers, although even here, promoters may provide some financial support to ease the burden. We have estimated the transition costs as between 6 and 20% of total costs.⁵ The decline in income, however, should be viewed together with the reduction of production costs and the transition costs measured in terms of loss of net income. Depending on organic production technologies available to farmers, the net income may not decline during transition, e.g., the rain-fed rice production system has been shown to have a positive gain of net income during transition.

Inspection and certification costs

The last category of costs is those arising from inspection and certification of the organic production process. This can be most problematic when they have to be borne by the farmer, and can act as a market-entry barrier. Inspection and certification can be carried out by local agents or can require foreign specialists or their local-based counterparts representing the target market. If products are to be sold in more than one market, separate certifications may be required for each market. While the costs of foreign certification can be substantial, there are two mitigating factors as far as the farmer is concerned. First, in commercial projects, produce buyers generally pay certification costs, and second, while farmers bear the initial burden the premium price in the foreign market reflects the costs of certification. In other words, if certification costs were lower, so would be the premium on the product. We should also note that there are ways of reducing these costs. With large-scale⁶ organic conversion, the inspection-certification costs are cheaper as inspectors can combine several inspections in one visit. Also, organizing farmers into grower groups (with an internal control system) will reduce inspection-certification costs. Finally, with more organic conversion a local certification body will start to develop, bringing the inspection-certification costs down significantly.

In our case studies, the costs of inspection and certification ranged from as little as 3% to as much as 57% of total costs. The high end of the range emerges from Sri Lanka, where internal control costs are very high. In the cases of the People's Republic of China (PRC) and Thailand, these costs are much more modest. From the experience in Thailand, certification costs should not exceed 5% when the organic project grows to optimum size. If costs are higher than 10%, the cause is either bad management or too-small project size. With large-scale conversion to organic, the costs should be between 2–10%.

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Comment(s)

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1. Prof. J. George
   (posted 19 February 2010 / 07:17:28 PM)
   
   The authors needs to be complimented for this study that is first of its kind particularly in so much as relating it to MDG. It is unfortunate that the UNESCAP-ADB-UNDP trio did not take cognisance of it while reviewing MDGs recession during the recent global financial crisis. The study is timely as it indicates the way out for rationalizing inclusive growth strategy in a region that is characterised by not only a larger proportion but also growing numbers of hungry and poor people in the world.
   Secondly, the paper completely compliments the UNEP-UNCTAD's path breaking longitudinal study in African and the Central American continents as well as trade and environment review of 2006 and and 2009.
   Thirdly, The study is also contemporary as it is a one shot answer to the the vexing question of climate change related mitigation and adaptation strategies.
   
   Fourthly, the study does reinforce that food security as enshrined in MDGs 1C is fully attainable at a cost effective manner. ADB need to take conscious decisions to explicitly reinforce it as its thrust area given that the strategy 2020 sounds hallo in the absence of a credible alternative. The paper provides a good indication to that pathway. The strategic economic management initiative as defined necessarily must be based on inclusiveness and organic agriculture restores that power in the hands of the producers for a number of opportunities for autonomous income enhancement amongst the poorer segments of the population, among other associated reform measures.