Academic journal article Journal of Agricultural and Applied Economics

Assessing the Technical and Allocative Efficiency of U.S. Organic Producers

Academic journal article Journal of Agricultural and Applied Economics

Assessing the Technical and Allocative Efficiency of U.S. Organic Producers

Article excerpt

We develop measures of technical and allocative efficiency of producers in marketing certified organic products. A stochastic output distance frontier and the associated revenue share equations are estimated using comprehensive U.S. data on certified organic producers. Farmlevel measures of technical efficiency are calculated and factors that enhance performance are identified. Factors that systematically influence allocative efficiency are assessed. The revenue mix of organic producers is systematically inefficient as both male and female producers rely too heavily on revenue from organic markets relative to conventional outlets.

Key Words: organic farming, stochastic frontier, technical and allocative efficiency

JEL Classifications: D21, C31, Q01

Sustained growth in the market for organically grown foods in the United States has stimulated new national, state, and private research initiatives to facilitate marketing of organic products and to assist farmers in understanding how to deal with market outlets for organic farm products. Dimitri and Greene (2007) present evidence that growth rates of retail sales have equaled 20% or more annually since 1990. While indicators of budgeting and profitability studies can guide entry of farmers into the organic sector, the identification of efficient marketing strategies is essential to assist farmers in expanding their operations and maintaining a long-term commitment to organic production.

Three trends are highlighted in the marketing of organic products. First, the major marketing outlets for organic foods have shifted over time. Health and natural products stores and direct markets (such as farmers markets) were the major outlets for organic food from 1990-1996. By 2000 conventional supermarkets represented the primary purchasing outlet for organic food products. Even within the retail channel a shift in strategies is emerging. Giant Food Inc., a major supermarket chain owned by the Dutch conglomerate Royal Ahold NV, has introduced a store brand of organic products with the stated goal of preventing national organic brands from dominating their store shelves. Progressive Grocer (2004) commented that merchandising programs of institutional store accounts for organics are now considerably stronger. Large food companies have a growing interest in offering organic foods along with their standard products. WalMart is moving to become the leader in this product line with the goal of selling organic products for only 10% more than their conventional equivalents (New York Times, 2006). A clear implication is that organic farmers must understand how to assess profitable outlets for marketing their products and to bargain competitively with increasingly sophisticated marketing participants in the supply chain.

Second, organic farmers traditionally utilize a variety of marketing channels such as direct to consumer sales, direct marketing to grocery retailers and restaurants, along with sales through packers, brokers, and food processors. Organic producers have participated in the rejuvenation of farmers markets and developed innovative outlets such as community supported agriculture. Most farmers continue to rely on a variety of marketing outlets and to sell through a diverse set of supply chain entities supporting methods to evaluate marketing efficiency.

Third, buying patterns of the chain supermarkets are shifting as three of the nation's largest food retailers (Safeway, Ahold, and Kroger) have created central procurement systems for buying perishables with the goal of improving inventory control, guiding promotional and seasonal planning, and coordinating business activities across the operating divisions (Progressive Grocer, 2002). Independent regional produce buyers have responded by emphasizing their expertise in featuring high quality perishables for local markets and adapting pricing and promotional materials in response to new market conditions. …

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