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Ecological Economics 78 (2012) 55–62

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Ecological Economics
journal homepage: www.elsevier.com/locate/ecolecon

Analysis

Organic farmers or conventional farmers: Where's the money?


Hiroki Uematsu, Ashok K. Mishra ⁎
Department of Agricultural Economics and Agribusiness, Louisiana State University AgCenter and Louisiana State University, Baton Rouge, LA 70803, United States

a r t i c l e i n f o a b s t r a c t

Article history: There is growing evidence that organic farming is a rapidly expanding economic sector in the U.S. However,
Received 13 October 2011 an unanswered question is whether organic farmers are better off than conventional farmers when it comes
Received in revised form 20 February 2012 to farm household income. Using large farm-level data and a matching estimator, this study explores the re-
Accepted 27 March 2012
lationship between organic certification and farm household income with its various components. Contrary
Available online 24 April 2012
to expectations, certified organic farmers do not earn significantly higher household income than conven-
JEL classification:
tional farmers. Though certified organic crop producers earn higher revenue, they incur higher production
Q10 expenses as well. In particular, certified organic producers spend significantly more on labor, insurance,
Q13 and marketing charges than conventional farmers. The results suggest that the lack of economic incentives
J43 can be an important barrier to conversion to organic farming.
C21 © 2012 Elsevier B.V. All rights reserved.

Keywords:
Organic farming
Propensity score matching
Average treatment effect
Nearest neighbor matching
Farm household income
Farm revenue

1. Introduction enhanced biodiversity (Greene et al., 2009), and improved soil condi-
tion (O'Riordan and Cobb, 2001). The Food, Conservation, and Energy
Compared to conventional agriculture organic agriculture seeks to Act of 2008 recognized these benefits by increasing mandatory fund-
augment ecological processes that foster plant nutrition while con- ing by 500% for organic programs (USDA, 2009). For the first time at
serving soil and water resources. Organic systems eliminate agri- the national scale, the Act also provided financial support to farmers
chemicals and reduce other external inputs to improve the converting to organic (Greene et al., 2009). With increasing consumer
environment as well as farm economics. Over the last decade, organic concern over the environment and food production methods, in con-
farming has become one of the most thriving segments in the U.S. junction with growing availability of certified organic products, the
farm sector, mainly due to growing demand for healthy food products outlook for continuing growth of organic trade is bright.
(Kuminoff and Wossink, 2010). One proof of this is that in 2007 more However, even with these progressive steps, U.S. suppliers of or-
than 600,000 acres operated by 9000 farms were undergoing the ganic foods have struggled to keep up with the rapidly increasing de-
transition from conventional to organic farming (U.S. Department of mand and consumers of organic products recently witnessed periodic
Agriculture, 2007). Between 1997 and 2008, retail sales of organic shortages of organic products (Dimitri and Oberholtzer, 2009). This
products increased from $3.6 billion to $21.1 billion (Dimitri and can be attributed to several factors documented as barriers for con-
Oberholtzer, 2009). ventional and beginning farmers to certify their operations as organic.
Organic products are popularly known for their health-related First, uncertainty surrounding the legislative environment causes
benefits, but organic farming may also be a part of the solution to farmers to press pause on initiating certification until more informa-
the growing social concern for environmental conservation in rural tion about subsidy payments and technical assistance becomes avail-
America. Environmental benefits of organic farming include but are able (Kuminoff and Wossink, 2010). Second, there are psychological
not limited to improved water quality due to diminished pesticide and sociological costs of converting to organic farming from peer
residues, reduced nutrient pollution, better carbon sequestration, farmers and family members (Gardebroek, 2006). Additionally, finan-
cial risks are unavoidable. For instance, once determined to convert to
(or start up) organic farming, farmers must go through a three-year
⁎ Corresponding author at: Dept. of Ag. Econ. and Agribusiness, 211 Martin D. Woodin
Hall, Louisiana State University, Baton Rouge, LA 70803, United States. Tel.: +1 225 578
transition period during which they are required to practice organic
0262; fax: +1 225 578 2716. farming but not allowed to sell products as organic. With the typically
E-mail address: Amishra@lsu.edu (A.K. Mishra). lower yields during this transition period, the conversion process

0921-8009/$ – see front matter © 2012 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2012.03.013
56 H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62

results in decreased cash flow for farmers. Other challenges include The rest of the paper is organized as follows. In the next section,
securing marketing channels for organically grown commodities we review existing studies on factors influencing adoption of organic
(Acs et al., 2007a,b; Khaledi et al., 2010; Lohr and Salomonsson, farming. The third section introduces theoretical motivation of the
2000) and diminishing profit margins for organic products due to average treatment effect and matching estimators with an emphasis
the recent increase in overall food prices (Fromartz, 2008) and economic on practical application. The fourth section describes data used in
recession (Greene et al., 2009). Another inherent risk is that organic this study, followed by empirical results in the fifth section. The
farming is subject to a greater degree of yield variability than conven- final section offers concluding remarks.
tional farming due to limited opportunities to prevent crop failures
through fertilizer and/or pesticide applications (Gardebroek, 2006).
Finally, organic farmers face a number of input constraints which may 2. Adoption of Organic Farming
limit productivity as they are not allowed to use synthetic chemicals,
antibiotics, genetically modified organisms, and hormones in crop and Organic farming has a longer history and a wider social recogni-
livestock production (Mayen et al., 2010). tion in Europe than in the United States, as European governments
Organic grains and soybeans are perhaps the most susceptible to have been more active in subsidizing organic farming to promote en-
these barriers as they are two of the slowest growing sectors in or- vironmental benefits (Flaten et al., 2010). Most empirical studies on
ganic farming in the United States (Dimitri and Oberholtzer, 2009). factors associated with conversion to organic farming are conducted
While acres devoted to organic pasture land increased by 220% be- in Europe using a various form of limited dependent variable models.
tween 2002 and 2007, the growth rate of organic crop acres was rel- In the U.K., Burton et al. (1999) estimated a multivariate logit
atively smaller at 76% during the same period. Furthermore, organic model to identify a range of sociological factors associated with certi-
soybean acres actually decreased by 28% from 174,000 acres in 2001 fied organic, non-certified organic and conventional farming for a
to 125,000 in 2008 (U.S. Department of Agriculture, 2010b). This is sample of 237 producers of horticultural crops in the United King-
of great concern, as organic grains and soybeans are crucial inputs dom. They found that female operators, awareness toward environ-
for organic dairy and meat products. Organic grain and soybean pro- mental issues and membership with environmental organizations
duction continues to be a bottleneck for the growth of organic farm- are positively associated with organic certification whereas farmers'
ing in the United States (Greene et al., 2009). age was negatively associated with organic farming. In Sweden,
Amid the debate about the unstable and often deficient supply of Lohr and Salomonsson (2000) employed a probit model to analyze
organic products and the potential barriers to convert to or start-up factors that determine the need for government subsidy to convert
organic farming, there is one important question that has gathered to organic farming. They found that more diversified farms or farms
much less attention in the economic literature: Are organic farms eco- with many sales outlets for organic products do not require subsidy
nomically better off than conventional farmers when it comes to farm to convert to organic farming. Flaten et al. (2010) used factor analysis
household income? and linear regression to examine the characteristics of farmers who
Of course, organic farmers can often receive higher price pre- had ceased organic operation in Norway. They found that regulations
miums (Nieberg and Offermann, 2003) and consumers exhibit higher regarding organic farming and economic reasons were the primary
willingness to pay for organic products (Stevens-Garmon et al., reasons for discontinuing organic production. In a study using panel
2007). Empirical evidence also suggests that organic farmers typically data from Finnish farms, Pietola and Lansink (2001) used a
obtain a positive profit margin. McBride and Greene (2007) show that switching-type probit model to estimate factors determining the
organic milk producers received an average price premium of $6.69 choice between organic and conventional farming. Factors such as
cwt. Organic soybean producers received an average price premium input and output prices and subsidy rates negatively influence the
of $9 per bushel despite lower yields and higher production cost probability of converting from conventional to organic. Specialization
(McBride and Greene, 2008). 1 Furthermore, long-term experimental in either livestock or crop production reduces the likelihood of con-
trials almost universally show that organic farming can be more prof- version as it allows conventional farmers to exploit economies of
itable than or at least competitive with conventional farming (Chavas scale and increase profitability. Finally, Gardebroek (2006) and
et al., 2009; Delate et al., 2003; Delbridge et al., 2011). While these Flaten et al. (2005) confirmed the generally held belief that organic
studies reveal the economic aptitude of organic farming, the results farmers are more risk prone than conventional farmers in the Nether-
are often based on experimental data generated by agronomists and lands and Norway, respectively.
experienced organic farmers (Delbridge et al., 2011) and do not In North America, a limited number of quantitative analyses ex-
take into account the time and learning costs of farming organically plore reasons for and barriers to converting to organic farming. For
(Chavas et al., 2009; Delate et al., 2003). example, Khaledi et al. (2010) estimated an upper-limit Tobit model
In summary, there is a dearth of economic studies using observa- to identify factors influencing the share of organic acres in total oper-
tional data that examine if certified organic production is profitable ated acres, using data from a survey of organic farmers in Canada.
from a farm household perspective after taking into account the poten- Higher satisfaction with marketing functions, fewer problems in mar-
tially large opportunity cost of organic farming, such as additional labor keting (both of which are measured on a Likert scale), and use of the
expenses and forgone off-farm income due to additional on-farm labor Internet for marketing positively influence the intensity at which
requirements for the operator.2 Herein lies the objective of this study. farmers adopt organic production. On the other hand, older farmers,
We empirically examine if certified organic farms in the United States farms with larger total cultivated acres, and longer distance from
are earning higher farm household income than conventional farms. the farm to cleaning location are associated with lower adoption in-
Our analysis employs a matching estimator developed by Abadie and tensity of organic production. Kuminoff and Wossink (2010) devel-
Imbens (2002) to assess the average treatment effect of organic certifi- oped a theoretical model to assess the option value to switch to
cation on farm household income and on various components of reve- organic farming and employed a switching regression model to
nue and production cost. Due to data limitations, the focus of this shed light on reasons for the slow growth of organic soybean farming
study is limited to certified organic crop producers and it does not in the United States. Uncertainty surrounding profitability of organic
include certified organic livestock producers. farming and sunk costs associated with conversion were crucial bar-
riers for U.S. farmers to convert to organic. Finally, MacInnis (2004)
1
Both studies were conducted in the United States using data from a nationwide
using a Tobit and a logit model, examined the effect of transaction
survey. costs on the choice of marketing channels for organic and conven-
2
See Klonsky and Greene (2005) and Greer et al. (2008) for a review. tional farmers in the United States. The results suggest that lack of
H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62 57

marketing channels for organic products can be a significant barrier that arises given a cross sectional dataset is that we can only ob-
to entry to organic farming. serve either Y1 or Y0, because the assignment to the treatment is
The above review exposes the absence in the existing literature mutually exclusive. Thus, estimating the ATE of being a certified or-
of an important argument. Few economic analyses have directly ex- ganic farm on farm household income centers on estimating the
plored economic implications of converting to or starting up certi- counterfactual or imputing missing data (Wooldridge, 2001). That
fied organic production not just for farm businesses but also for is, it is necessary to estimate farm household income that a certi-
farm households. The latent variable approach adopted in most of fied organic farm would have earned if the farm had not been cer-
the existing studies is based on the random utility framework. tified organic or farm household income that a conventional farm
The underlying assumption in the random utility framework is could have earned had it been certified organic. In this study, we
that farm operators are rational economic agents who would con- are interested in the former effect or the average treatment effect
vert to organic if the net present value of future income stream for the treated (ATT):
from certified organic production exceeds that of conventional
farming or any other occupational choices available to them. How- ATT ¼ E½Y 1 −Y 0 jT ¼ 1; ð2Þ
ever, non-economic factors can also play an important role in
explaining farmers' decision to convert to certified organic produc- where T is a binary variable that represents the treatment status
tion (Padel and Lampkin, 1994), especially for those who value land (T = 1 indicates assignment to the treatment, 0 otherwise).
stewardship and the environmental amenity of the farmland The biggest challenge in estimating such a treatment effect in
(Burton et al., 1999). Recent findings by Naoufel (2011) and observational studies is the fact that assignment to treatment is
Läpple and Rensburg (2011) lend support to this argument. In not random. Unlike in an experimental study in which participants
France, Naoufel (2011) showed that social and moral concerns are can be randomly selected to either control or treatment groups, in-
key factors explaining adoption of organic farming; farmers who dividuals often “self select” into the treatment in most of social sci-
place high value on peer opinion and social benefit gained from ence research with observational data. In the context of this study,
showing environmental concern are more likely to adopt, as well farmers are not randomly assigned to produce conventionally or or-
as those who report feeling less remorse about personal decisions. ganically. Instead, some farmers are more likely to voluntarily
On the other hand, farmers who are more concerned about eco- choose to obtain organic certification than others. When assign-
nomic returns are less likely to farm organically. Läpple and ment to the treatment is not random, simply comparing the out-
Rensburg (2011) found that, in Ireland, early adopters of organic come variable between the two groups ignores some underlying
farming were less profit oriented than later adopters, while positive factors that influence both assignment to the treatment and the
environmental attitudes and social networking with other organic outcome variable. For example, if farmers' educational attainment
farmers are found important for all adopters. We extrapolate is positively correlated with both acquisition of organic certification
these findings to the U.S. and hypothesize that non-economic fac- and farm household income, then the difference in farm household
tors may have played an important role in the growth of the U.S. income that may exist between the two groups of farm households
organic farming industry so far, and, if this is the case, the recent may be attributable to both the treatment status, i.e., organic or
slow-down in organic production could be explained by a lack of conventional, and educational attainment. Estimating the ATE with-
economic incentives. The potential lack of economic incentives for out controlling for this sample selection effects leads to a biased
organic grain production is notably more prominent in the United estimate.
States, due to the genetically modified crop varieties which have An alternative method to estimate the ATE that has gained a grow-
become so popular over the last 15 years because of their conve- ing recognition in the social science research is to match observations
nient features (Smith, 2002). in both the treatment and control groups based on some observable
characteristics. A number of “matching estimators” have been pro-
3. Average Treatment Effect and Matching Estimators posed based on the method employed to match observations from
the two groups. Rosenbaum and Rubin (1983) proposed the propen-
The objective of this study is to estimate the average treatment ef- sity score, for which one can use predicted probability of being in the
fect (ATE) of organic certification on various components of farm treatment estimated in either logit or probit model. An important fea-
household income. Estimation of the “treatment effect” under non- ture of the propensity score model is that it summarizes information
experimental settings has recently become increasingly popular in contained in the multi-dimensional vector into a single-index vari-
social science research. There have been a number of reviews on the- able (Becker and Ichino, 2002).
oretical background (Heckman et al., 1998; Imbens, 2004; Imbens In this study we use the nearest neighbor matching estimator
and Wooldridge, 2009; Morgan and Harding, 2006; Nichols, 2007) proposed by Abadie and Imbens (2002) using “nnmatch” com-
and practical applications (Abadie et al., 2004; Baser, 2006; Becker mand in STATA. The nearest neighbor matching estimator also em-
ploys a matching scale that summarizes information from multiple
and Caliendo, 2007; Becker and Ichino, 2002; Nannicini, 2007) as  1=2
well as some empirical applications in agricultural economics (Liu variables into a single index using the vector norm xv ¼ x′ Vx ,
and Lynch, 2007; Mayen et al., 2010; Tauer, 2009). where V is the positive definite variance matrix used to weight
An ideal situation to estimate the ATE is to simply compare two variables through normalization by standard deviation. The dis-
outcomes for the same unit: when the unit is assigned to the treat- tance between two observations is defined ‖z − x‖v, where z and
ment and when it is not (Imbens and Wooldridge, 2009). In the con- x are the vectors of observable characteristics for the two observa-
text of this study, for example, a farm's ATE can be estimated by tions. The “nearest neighbors” are identified after applying the
comparing household income when the farm is producing certified weighting index to all observations. For an application of the near-
organic crops and when it is not. The quantity of interest, the ATE est neighbor matching estimator using STATA, see Abadie et al.
on the outcome variable in the population of interest can be (2004). The estimator of the ATT is given as:
expressed as: N1 h i
1 X
ATT ¼ Y i −Y^0i ; ð3Þ
ATE ¼ E½Y 1 −Y 0 ; ð1Þ N1 i:T ¼1
i

where Y1 is the outcome variable with treatment and Y0 is the out- where N1 is the number of observations in the treatment and the
come variable without treatment. However, a practical problem subscript i represents individual observations. While Yi is the
58 H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62

observed outcome variable for ith individual, Y^0i are not observed accepted assumption is that conditional distributions of the depen-
and are given as follows: dent variable are identical at any values of the covariates except for
8 the means, which are to be estimated by the least squares method. 3
>
< Y i if T i ¼ 0 For all conditional distributions of the dependent variable given the
Y^0i ¼ 1 X ð4Þ covariates, the variances, skewness and kurtosis are assumed to be
> Y m if T i ¼ 1
:M identical. However, the estimators of the ATE are free from such dis-
m∈M i
tributional assumptions.
where M is the number of matched observations and Mi is the set
of observations in the control group matched to ith observation in 4. Data
the treatment. Y^0i if T i ¼ 1 is simply a weighted average of the
outcome variables for all matched observations in the control This study primarily utilizes data obtained from the 2008 Agricul-
group. The nearest neighbor matching estimator developed by tural Resource Management Survey (ARMS), developed by the Eco-
Abadie and Imbens (2002) allows users to specify the number of nomic Research Service (ERS) and the National Agricultural
matches, m, for each treated observation. The choice of an appro- Statistical Service (NASS). The 2008 ARMS queried farmers on all
priate m requires a trade-off. For instance, when m = 1, each trea- types of financial, production, and household activities. The ARMS is
ted observation is matched with an observation in the control also used to determine production costs and returns of agricultural
group with the closest distance, however, any unmatched observa- commodities and to measure net farm income of farm businesses. An-
tions in the treatment are not utilized in estimating the average other aspect of ARMS's important contribution is the information it
treatment effect. When m is larger, on the other hand, more obser- provides on the characteristics and financial conditions of farm
vations can be utilized, but the quality of match may be households, including information on input and risk management
compromised. strategies and off-farm income. ARMS uses a multi-phase sampling
An important assumption in using the matching estimator is that design and allows each sampled farm to represent a number of simi-
any remaining difference in the outcome variable after matching lar farms in the population, which is the survey expansion factor
can be solely attributed to the treatment status (Imbens, 2004) and (Dubman, 2000). The expansion factor, in turn, is defined as the in-
that assignment to the treatment can be considered purely random verse of the probability of the surveyed farm being selected. The sur-
among matched observations (Becker and Ichino, 2002). This as- vey collects data to measure the financial conditions and operating
sumption is termed in various ways, such as “ignorability” characteristics of farm businesses, the cost of producing agricultural
(Wooldridge, 2001), “selection on observables” (Fitzgerald et al., commodities, and the well-being of farm operator households.
1998), and “unconfoundedness” (Imbens, 2004; Rosenbaum and Operators associated with farm businesses representing agricul-
Rubin, 1983). The caveat, however, is that this is not a testable as- tural production across the United States are the target population
sumption. It is important to note, therefore, that matching estimators in the survey. USDA defines a farm as an establishment that sold or
do not completely eliminate selection bias due to unobservable fac- normally would have sold at least $1000 of agricultural products dur-
tors explaining assignment to treatment, but only reduce it (Becker ing the year. Farms can be organized as sole proprietorships, partner-
and Ichino, 2002). What is testable instead is the balancing property, ships, family corporations, nonfamily corporations, or cooperatives.
in case a probit or logit model is estimated for matching observations: For the purpose of this study, operator households organized as non-
family corporations or cooperatives were excluded. We also excluded
T⊥X jpðxÞ ð5Þ farms whose total value of crop sales is less than $5000, considering
that farms with less than $5000 of organic sales are not required to
where p(x) is the conditional probability of being in the treatment be certified organic and that the 2008 ARMS data only collected infor-
group. When Eq. (5) is satisfied, assignment to treatment is random mation about certified organic crop production. We have 2689 obser-
for observations with the same propensity score (see Becker and vations in this study after omissions. In addition to the 2008 ARMS
Ichino, 2002, for more detail). Although not required for the nearest data, we utilize two more variables obtained from the 2007 Census
neighbor matching employed in this study, we estimate a probit of Agriculture. We use the sum of average acres under and in transi-
model to 1) examine if variables used in the nearest neighbor match- tion to certified organic production at the county level. This variable
ing satisfy the balancing property necessary for many other matching is used to capture the peer effect on converting to certified organic
estimators described in Becker and Ichino (2002) and 2) analyze how production, mentioned in Gardebroek (2006). We also use county-
variables used in the nearest neighbor matching estimators are asso- level median household income to approximate regional demand
ciated with the acquisition of organic certification for U.S. crop for organically produced commodities.
farmers. Table 1 provides the definitions of the variables used in our anal-
The estimation of the ATT using the matching estimator is consid- ysis and the mean values for the entire sample, certified organic
ered a nonparametric approach as researchers can avoid assumptions farms and conventional farms. Of 2689 observations, only 65 of
common in regression models. First, we do not have to specify a func- them (or 2.4% of the entire sample) produced certified organic crops
tional form of the dependent variable. In a standard regression set- in 2008. The last column shows t-statistics or z-statistics that com-
ting, we implicitly assume that the dependent variable can be pare means of the treated and the control observations. For example,
specified as a linear combination of a set of independent variables, in- relative to conventional farmers, certified organic farmers, on aver-
cluding some quadratic terms and interaction terms. In production age, tend to engage in farming as a primary occupation and possess
economics, researchers often choose a specific functional form (e.g., a more diverse portfolio of enterprises but are less likely to grow ge-
Cobb–Douglas, trans-log, etc.) that conforms to the theoretical expec- netically modified crops and receive government payments. While
tation in a given context. However, the ATE estimator does not re- there are no statistically significant differences between the two
quire such an assumption. Second, we do not have to specify any groups in terms of uses of marketing and production contacts, organic
distributional assumption (Wooldridge, 2001). For example, in the farmers are more likely to use roadside stores, farmers markets, Com-
standard least squares model, a very restrictive but almost blindly munity Supported Agriculture (CSA), regional distributors, state
branding programs, and direct sales to local grocery stores, restau-
3
Of course, the least squares method can be extended to the generalized least
rants or other retailers as direct marketing outlets. On average,
squares method to handle heterogeneous variances in conditional distributions, i.e., counties in which certified organic farmers are located have signifi-
heteroskedasticity. cantly higher median income. Note that the t-statistics and z-
H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62 59

Table 1
Variable definitions and summary statistics.

Variable definitions Mean T/Z


scorea
Entire sample Conventional Certified organic

Certified organic (= 1 if yes, 0 otherwise) 0.02


Income variables
Total household income ($ per year) 209,565 208,407 258,340 − 0.60
Total off-farm income ($ per year) 35,470 35,721 24,915 0.71
Gross cash income ($ per year) 1,261,368 1,228,580 2,643,018 − 3.91***
Cost variables
Total cost of production ($ per year) 789,310 762,191 1,932,063 − 4.41***
Cash wage ($ per year) 155,615 146,302 548,056 − 4.99***
Total labor expenses ($ per year) 205,475 192,960 732,825 − 5.25***
Insurance expenses ($ per year) 30,997 30,989 31,364 − 0.04
Marketing charges ($ per year) 29,124 26,371 145,117 − 6.13***
Operator characteristics
Years of formal education 13.62 13.60 14.43 − 3.66***
Primary occupation (= 1 if farming, 0 otherwise) 0.88 0.87 0.95 − 1.93**
Age 55.30 55.30 55.29 0.004
Farm characteristics
Entropy index of diversification (= 1 if completely diversified, 0 if not at all) 0.01 0.01 0.02 − 2.01**
Genetically modified crops (= 1 if farm grows GM crops, 0 otherwise) 0.54 0.55 0.18 5.82***
Total acres in operation 1750.26 1765.50 1108.26 1.54
Debt to asset ratio 0.34 0.34 0.17 0.14
NRCS (= 1 if farm seeks advice from Natural Resource Conservation Service, 0 otherwise) 0.13 0.13 0.15 − 0.46
Government Payment (= 1 if farm receives government payments, 0 otherwise) 0.72 0.72 0.55 2.99***
High-value crops farm (= 1 if farm is classified as high-value crops farm, 0 otherwise) 0.79 0.79 0.88 − 6.78***
Internet (= 1 if used on farm, 0 otherwise) 0.24 0.23 0.60 − 1.78*
Marketing contracts 0.47 0.47 0.43 0.70
Production contracts 0.09 0.09 0.12 − 0.97
Use of direct marketing strategies (= 1 if used, 0 otherwise)
Roadside stores 0.05 0.05 0.14 − 3.24***
Farm stores 0.04 0.04 0.08 − 1.48
Farmers markets 0.04 0.03 0.12 − 3.91***
Community Supported Agriculture 0.00 0.00 0.03 − 4.19***
Regional distributors 0.02 0.02 0.12 − 5.73***
State Branding Program 0.01 0.01 0.03 − 2.06**
Direct sales to local grocery stores, restaurants or other retailers 0.06 0.05 0.15 − 3.47***
Regional dummy variables (= 1 if farm located in corresponding region)
Atlantic region 0.17 0.17 0.18 − 0.25
South region 0.15 0.15 0.03 − 7.44***
Midwest region 0.29 0.30 0.17 2.91***
Plains region 0.18 0.19 0.05 2.24**
West region 0.20 0.19 0.57 2.65***
County level variables
Total acres under organic production in county 18.76 21.46 75.31 − 8.84***
Median Household Income in county ($ per year) 45,346 45,651 49,638 − 2.98***
Urban (= 1 if the farm located in urban county, 0 otherwise) 0.47 0.47 0.40 1.13
Rural (= 1 if the farm located in rural county, 0 otherwise) 0.09 0.09 0.03 1.67*
Number of observations 2689 2624 65

***, **, and * indicates statistical significance at 1%, 5%, and 10%, respectively.
a
The differences in means are obtained by subtracting means for certified farms from those for conventional farms. T-test is used to compare the differences for continuous vari-
ables. The test on the equality of proportions is used to compare the differences for binary variables and Z-score is reported.

statistics in Table 1 simply compare the means of each variable for used in the probit model represents a vector of covariates used to cal-
both organic and conventional farmers without controlling for any culate the distance in matching observations using the nearest neigh-
underlying factors. The purpose of using the matching estimator is bor matching estimator. The variables are selected based on empirical
to overcome this issue and estimate the effect of the treatment vari- findings in the literature. To represent the farm operator's character-
able on the outcome variable. istics, we include operator's years of formal education, primary occu-
pation, and age. We expect that more educated and younger farmers
5. Empirical Results whose primary occupation is farming have a higher probability of
being certified organic. Farm characteristics included are the entropy
5.1. Probit Estimation index of enterprise diversification, a dummy variable for growing ge-
netically modified crops, total operated acres, debt to asset ratio, a
To eliminate the potential sample selection effect, it is important dummy variable for seeking advice from the Natural Resource Con-
to carefully choose the observable characteristics which will compose servation Service (NRCS) and a dummy variable for receiving govern-
the matching index specified in Section 3. As mentioned earlier, for ment payments.
many matching estimators, it is required to estimate a binary logit Considering the importance of marketing outlets for organic prod-
or probit model using the treatment status as the dependent variable. ucts in the existing literature (Acs et al., 2007a,b; Khaledi et al., 2010;
We estimate a binary probit model analyzing the factors affecting the Lohr and Salomonsson, 2000), we included dummy variables for
acquisition of organic certification in order to test for the balancing using marketing contracts, production contracts, and several direct
property specified in Becker and Ichino (2002). Table 2 reports pa- marketing strategies. Direct marketing strategies include use of road-
rameter estimates for the model. The set of independent variables side stores, farm stores, farmers markets, Community Supported
60 H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62

Table 2 The estimated probit model satisfied the balancing property using
Probit model parameter estimates. the algorithm detailed in Becker and Ichino (2002). The likelihood
Variables Coefficient Standard p-value ratio statistics of 122.23 suggests that the estimated model is statisti-
errors cally significant at the 1% level. We briefly review the results here.
Operator characteristics More educated operators and operators whose primary occupation
Years of formal education 0.082 0.036 0.024 is farming are more likely to be certified organic farmers. As expected,
Primary occupation 0.508 0.261 0.051 farmers growing genetically modified crop corn, soybeans, wheat or
Operator's age − 0.005 0.005 0.332
cotton are less likely to produce other types of crops with organic cer-
Farm characteristics tification. Farms that have a production contract or sell their com-
Entropy index of diversification 2.113 2.072 0.308 modities through regional distributors or a CSA are positively
Genetically modified crops − 0.487 0.186 0.009 associated with certified organic production. High-value crop farms
Total acres in operation 0.000 0.000 0.263 are also more likely to be certified organic. Farmers in the Atlantic,
Debt to asset ratio 0.000 0.016 0.992
South and Plains regions are less likely to be certified organic, relative
NRCS 0.099 0.171 0.560
Government payment 0.234 0.171 0.171 to the West region, which includes states such as California, where or-
Internet 0.029 0.189 0.878 ganic farming has become very popular. The county average acres
High-value crops farm 0.302 0.168 0.073 under or in transition to certified organic production have a positive
Marketing contracts 0.105 0.134 0.433
coefficient, supporting our expectation about the peer-effect that
Production contracts 0.377 0.192 0.049
farmers surrounded by organic farmers are more likely to convert to
Use of direct marketing strategies certified organic.
Roadside stores 0.171 0.241 0.477
Farm stores − 0.183 0.258 0.480 5.2. The Average Treatment Effect for the Treated
Farmers markets 0.361 0.258 0.161
Community Supported Agriculture 0.982 0.571 0.086
Regional distributors 0.596 0.262 0.023 The same set of variables included in the probit model is used to
State Branding Program 0.028 0.466 0.952 create the distance index to facilitate matching of observations in
Direct sales to local grocery stores, 0.076 0.229 0.739 the treated group against those in the control group. We estimate
restaurants or other retailers
the ATT using m = 1, … 5. The results in Table 3 show that, for all
Regional dummy variables (midwest region is the base category)
the variables for which the ATT is estimated, the choice of m does
Atlantic region − 0.329 0.186 0.078 not influence statistical significance, indicating robustness of the esti-
South region − 0.813 0.303 0.007 mated ATT.
Midwest region − 0.325 0.199 0.102 Table 3 lists the ATT of certified organic production on total farm
Plains region − 0.566 0.255 0.027
household income, total off-farm income, gross cash farm income,
County-level variables total production expenses, and various components of production ex-
Urban 0.188 0.150 0.211 penses. The ATT on farm household income is positive for all m = 1, …
Rural − 0.003 0.320 0.992 5, but the estimates are not significant even at the 10% level. Contrary
Total acres under organic 0.002 0.001 0.013
to the general assumption of profit maximization in many economic
production in county
Median household income 0.000 0.000 0.487
analyses, there is no statistically significant difference in terms of
in county ($ per year) farm household income between certified organic farms and conven-
Constant − 3.660 0.740 0.000 tional farms. The absence of economic profit from certified organic
Number of observations = 2689 LR test production in terms of total farm household income may in turn
statistic = 122.3
imply that there may be some important non-pecuniary reasons driv-
Log-likelihood = − 245.057 p-value
(LR = 0) b 0.00 ing farmers to convert to or establish certified organic production.
The result here is in accordance with the argument put forth by
Padel and Lampkin (1994) and recent findings by Naoufel (2011)
Agriculture (CSA), regional distributors, state branding programs, and and Läpple and Rensburg (2011) that non-economic factors such as
direct sales to local grocery stores, restaurants, and other retail stores. land stewardship and concerns for environmental conditions of the
Use of any of the above marketing strategies is expected to positively farmland can be important motivations for early adopters of organic
influence the decision to convert to certified organic production. farming.
High-value crop farms and farms with an Internet connection are The ATT on off-farm income is also insignificant for all m = 1, … 5,
expected to be positively associated with having organic certification. indicating that there is no significant difference in off-farm income
To capture potentially heterogeneous impacts of geographical loca- that can be attributable to treatment status. Because organic farming
tion of the farm, we included dummy variables for farms located in is often considered more labor intensive, it may be reasonable to sur-
urban and rural counties as well as for five production regions defined mise that conventional farmers earn higher off-farm income. Howev-
by the National Agricultural Statistical Service (U.S. Department of er, no such difference is detected at a statistically significant level
Agriculture, 2010a). Finally, we make use of two county-level statis- once we match certified organic famers with conventional farmers
tics obtained from the 2007 Census of Agriculture. The first statistic who are equally committed to farm operation.
is the number of acres under or in transition to certified organic pro- Certified organic farmers earn significantly higher gross cash farm
duction. We expect this variable to have a positive impact on the income than conventional farmers, but they also incur higher produc-
probability of being certified organic; a larger presence and a wider tion costs. The ATT on gross cash farm income ranges from $1 to $1.4
social acceptance of organic farmers in a county should positively in- million while the ATT on total production expenses is between
fluence the household decision to become a certified organic farm. $885,000 and $1 million. Although the ATT estimates of gross cash
The second statistic is the county-level median household income farm income are larger than those of total production expenses, the
which represents purchasing power and demand for organically pro- ATT estimates on the difference between the gross cash income and
duced commodities. Given that this variable exhibits a significant dif- production costs are not significantly different from zero for all
ference in means between conventional and organic farmers, it is m = 1, … 5. Even though certified organic farmers make significantly
expected to be positively associated with the amount of organically higher revenue relative to conventional farmers, a majority of revenue
produced commodities sold and consumed locally. margin is explained by higher production cost, which is consistent
H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62 61

Table 3 covert to organic farming (Acs et al., 2009), certified organic producers
Estimates of the average treatment effect for the treated (ATT). are actively hedging risks by spending more on insurance programs.
Variable Number of ATT Standard p-value Finally, certified organic farmers, on average, pay somewhere
matches (m) error between $110,000 and $120,000 more for marketing services than
Total household income ($) 1 126,279 129,374 0.33 conventional farmers. The existing literature often pronounces the
2 97,512 91,917 0.29 importance of securing sales outlets for organically produced com-
3 52,109 99,952 0.60 modities and the lack thereof as a potential barrier to converting to
4 52,112 89,605 0.56
organic (Acs et al., 2007a; Acs et al., 2007b; Greene et al., 2009;
5 29,922 86,940 0.73
Off-farm income ($) 1 374 12,346 0.98 Lohr and Salomonsson, 2000; MacInnis, 2004). The additional finan-
2 1196 12,896 0.93 cial burden of more than $110,000 that certified organic farmers
3 727 12,637 0.95 choose to bear attests to the significant marketing risks certified or-
4 − 1647 12,386 0.89 ganic farmers face in the United States.
5 − 1004 12,572 0.94
Gross cash farm income ($) 1 1,419,264 732,068 0.05
2 1,322,389 654,926 0.04 6. Conclusion
3 1,174,434 649,759 0.07
4 1,167,293 608,967 0.06 Although organic farming has been one of the most thriving seg-
5 1,043,621 595,396 0.08
ments in the U.S. farm sector over the last decade (Kuminoff and
Total production expenses ($) 1 1,028,366 528,706 0.05
2 1,055,155 515,823 0.04 Wossink, 2010), consumers recently witnessed periodic shortages of
3 982,724 522,926 0.06 organic products. This study sought to examine whether organic
4 999,293 504,467 0.05 farmers were better off than conventional farmers in terms of farm
5 885,084 500,464 0.08 household income, in an effort to explore reasons for the relatively
Gross cash farm income 1 390,897 246,109 0.11
low adoption rate of organic farming in the United States. Instead of
minus total production 2 267,234 176,653 0.13
expenses ($) 3 191,710 158,364 0.23 the conventional parametric regression method, we employed a non-
4 168,000 135,022 0.21 parametric approach and used the nearest neighbor matching meth-
5 158,537 127,117 0.21 od to estimate the average treatment effect of being a certified
Fertilizer and chemical 1 173,358 171,044 0.31
organic farm on farm household income, off-farm income, gross
expenses ($) 2 191,112 162,386 0.24
3 155,037 166,241 0.35
cash income (farm revenue), and various components of production
4 169,641 161,788 0.29 costs. The matching estimator allowed us to assess the marginal effect
5 156,078 159,847 0.33 of being certified organic producers on various components of farm
Labor expenses ($) 1 361,500 194,146 0.06 household income without specifying functional forms or making
2 381,912 179,552 0.03
distributional assumptions about the conditional distribution of the
3 375,262 181,661 0.04
4 356,794 172,416 0.04 dependent variables.
5 305,352 171,709 0.08 Our findings suggest that organic farmers are not significantly bet-
Cash wages ($) 1 292,514 149,747 0.05 ter off in terms of farm household income. Even though the average
2 302,029 143,712 0.04
gross cash income for certified organic farms is approximately $1 mil-
3 301,123 143,944 0.04
4 271,409 135,777 0.05
lion higher than that for conventional farms, they also incur signifi-
5 230,613 138,807 0.10 cantly higher production costs. Most of the additional cost for
Insurance expenses ($) 1 10,696 5811 0.07 organic farming is explained by labor cost, insurance expenses and
2 12,099 5750 0.04 marketing charges. Organic farms on average spend $310,000 to
3 12,219 6007 0.04
$361,000 more on labor, of which $230,000 to $300,000 is explained
4 12,439 5989 0.04
5 8485 5750 0.14 by cash wages paid to hired farm workers, not including custom
Marketing charges ($) 1 126,983 56,984 0.03 works. Despite the finding that organic farmers are more risk prone
2 124,390 56,376 0.03 than conventional farms, our findings suggest that they are very ac-
3 120,260 56,641 0.03
tive in hedging greater risk and uncertainty inherent in organic farm-
4 118,601 56,451 0.04
5 111,907 57,399 0.05
ing. Insurance expenses are up to $12,000 per year higher for organic
farms than conventional farms. Organic farms pays up to $120,000
more for marketing charges than conventional farms.
It is important to note that the additional production expenses
with the fact that the ATT on farm household income is not significant. that certified organic producers must bear do not include potentially
Given the fact that certified organic farmers incur much higher produc- very large fixed costs of converting to certified organic production.
tion costs than conventional farmers, we estimate the ATT on various Given the fact that most of the government subsidy for certified or-
components of production costs to delineate different cost structures ganic producers is currently directed toward conversion costs in the
that may exist between certified organic and conventional farmers. United States, we suggest that more policy efforts be made to provide
While the ATT on chemical and fertilizer expenses is not significant support for covering the additional variable costs such as insurance
for all m = 1,… 5, the ATT for labor expenses, insurance expenses, and payments and marketing charges to hedge extra risk and uncertainty
marketing charges are all positive and significant. The point estimates inherent in organic farming.
of the ATT indicate that, compared to conventional farmers, certified or- Finally, we note some limitations we faced in this study due to the
ganic farmers on average spend $310,000 to $361,000 more on labor, of nature of data. First, this study considers certified organic crop farms
which $230,000 to $300,000 are explained by cash wages paid to hired and the results cannot be extended to organic livestock farmers who
farm workers, not including custom works. Acs et al. (2007a) also may have different profit and cost structures. Second, our definition
reported a similar result. Certified organic farmers also pay $8000 to of organic farms includes both fully converted and partially converted
$12,000 more for insurance programs, relative to conventional farmers. farms and we were unable to delineate potential differences that may
This provides evidence for the view that organic production poses exist between the two types of organic farmers. We are also unable to
more risk and uncertainty to farmers (Gardebroek, 2006). Even though control for years of experience in certified organic production or ex-
organic farmers are more risk prone than conventional farmers (Flaten pertise with organic crop rotation. These factors may have a non-
et al., 2005; Gardebroek, 2006) and risk-averse farmers are less likely to negligible impact on farm income and production costs (Acs et al.,
62 H. Uematsu, A.K. Mishra / Ecological Economics 78 (2012) 55–62

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