Section D: The Economics of Horticultural Production

• Projected Outcomes
• Background / Lessons
  • Introduction
  • How does sustainable agriculture affect the costs of production?
  • How does sustainable agriculture affect yields?
  • How does sustainable agriculture affect prices?
  • Government policies
  • The hidden costs of cheap food
  • Conclusion
• Activities
• Career Pathway content standards

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.

How does sustainable agriculture affect the 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.

How does sustainable agriculture affect yields?

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.

How does sustainable agriculture affect prices?

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 USDA National Retail Report – Conventional vs Organic). 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. Examples of ecolabels in the Midwest include the Food Alliance, Healthy Grown Potatoes, and Midwest Organic Services Association (MOSA). See Module V Section D, Eco Labels, and this article from Edible Communities Magazine. for discussions comparing different ecolabels.

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 ($189 billion just for the interstate highway system in 2020). 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, NAFTA, and USMCA 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, Private Rights, Public Problems, La Via Campesina, University of Iowa International Trade Issues: Child Labor. 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?

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 in America is cheap compared to what the rest of the world pays, and what the consumer pays for food at the cash register has stayed about the same in the last 30 years, when controlled for inflation. During the same time, the price received by the farmer has dropped by more than half in real terms.* Where does the difference go? To processing, packaging, advertising, and transportation. 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

Retail price of food versus prices received by farmers. (Image from USDA ERS; see their dollar bill graphic for more information.)

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 globally add up to around $6 trillion per year when accounting for land degradation, greenhouse gas emissions, health impacts, malnutrition, food loss and waste, and food safety. (World Bank)

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 Quick Facts, USDA Definitions of Food Security)

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. Nearly 74% of US adults are overweight or obese, with about 42% having obesity. 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 Index and for the USDA’s U.S. Trends in Food Availability and Dietary Assessment of Loss-Adjusted Foods 1970-2014) 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.

Career Pathway content standards