2. Methodology

2.1 TECHNICAL AND ECONOMIC ASPECTS OF THE STUDY

Our first step is to define the elements making up the technical and economic parameters used to define the farms studied. We shall then subject those elements to the evaluation methodology outline below, and this will enable us to achieve our declared objectives.

The farms used as samples to obtain our initial data are farms that, both because of their structure and their agro-climatic characteristics, may be regarded as typical of citrus growing in the Valencia Region.

Thus, these farms are typical of the smallholdings found in the Valencia region, with a surface area of less than 1 Ha, traditional or locally specific irrigation systems, and agronomic characteristics that are not significantly different from those of most citrus farms in the region (Annex II).

We took data from farm plots belonging to members of two cooperative organizations that have been selling organic citrus over recent years (Table III), and whose growing methods, structurally speaking, were typical of citrus growing in this region, with the sole difference that they were organic farming methods, in contrast with conventional methods (Labrador J., et al, 1999).

They are therefore farms whose production figures, which will be used to determine their cost structure, may be considered representative. Moreover, their figures are, in the case of conventional farming for which data are available, similar to figures published in other studies.

With regard to prices, note that it is hard to pretend that they have great significance, given the considerable price swings observed with organic agriculture. Those swings have indeed been noted in some studies (Michelsen J. et al., 1999). Consequently, the evaluation methodology must include a sensitivity analysis able to give us a very broad price scenario, and is without doubt the most critical aspect of our study.

The expected trend in organic-citrus prices - which, in the opinion of the experts consulted (Anecoop, Coopego, Valfruit), will certainly be upward - requires that demand growth be synchronized with that of supply, and that suitable distribution channels be created. Some studies (e.g. Michelsen J. et al., 1999) make it clear that, despite price differences that are very often markedly in favour of organic products, a very high percentage of such products are, paradoxically, marketed as conventional products.

2.2. EVALUATION METHODOLOGY

Traditional assumptions

Given the objectives of the present study, since we are attempting to compare the economic and financial efficiency of organic citrus farming systems and conventional systems, and this requires analysis of investments with a time horizon of more than one year, the methodology used must necessarily include reference to discount values _ that is, as we have already mentioned, criteria that consider the value of money over time (Juliá J. F. and Server R. J., 1996).

Traditionally, this type of evaluation, which is known as economic/financial evaluation, and whose main indicators are Net Current Value, Internal Rate of Return, and Recovery Period, is formulated on the basis of an initial series of generally accepted assumptions, designed to simplify the process of evaluation (Romero C., 1998).

Those assumptions are:

• Receipts and payments for each year are recorded at the same point, at the end of each year. In this way, we can prepare updated figures on an annual basis. Under normal inflationary conditions, in developed countries, this does not impose any significant limitations.
  
  
• We know the value of money - or rather the cost of capital, which is the same thing. This value will be used as an interest rate for the purposes of calculation. While accepting that this value is not entirely certain in some economies (as in the case of Spain's economy, since it joined the European Monetary Union), it does enable us to assume a certain stability in the value of money, which is officially expressed by the central monetary authority of the European Union, in this case the European Central Bank.
  
  
• In principle, no consideration is given to monetary variations due to inflation. This is among those assumptions that are generally accepted. It is the equivalent, either of not taking inflation into account at all, or of supposing that its existence has such a great influence on the flow of receipts and payments, as well as the value of money, that it does not produce any variation. And yet, when it comes to investments in the agricultural sector, the reality can be different, since growth in prices and expenditures have in fact produced declines in farm incomes. Thus, we shall only initially accept, and thereafter establish, a differentiated hypothesis of inflation rates of receipts and payments if they include monetary variations.
  
  
• We are working within a context of certainty, or determinism, which means accepting that the technical and economic variables that will ultimately define the economic parameters of the investment that we are going to evaluate, are certainly known. This is undoubtedly the most restrictive assumption used in evaluating the profitability of any farming asset, and especially of the asset that concerns us in this study. If there is anything that defines farming activity in general, and citrus farming in particular, it is the necessity to assume risk, with respect both to one's own production (agronomic risk) and the prices one is able to charge (market risk). In this particular case, however, the situation is even more critical, since the methodology might contemplate the change from a context of certainty, characterized by known fixed values, to a context of probability which, in the absence of data sufficiently representative of market prices in organic farming, makes it advisable, from the outset, to consider the assumption of risk and establish a sensitivity analysis, including thresholds of anticipated prices.

Specific assumptions

Furthermore, we must also design a series of specific assumptions, since we are concerned with a few sample farms and a few determined agricultural models, which might in some cases be different. These assumptions are basically of a technical nature.

• In the case of already established crops, conversion to organic farming occurs in the tenth year, as is becoming common on farms changing to this growing system in the region under consideration in this study, with a two-year conversion period, fixed by current regulations.
  
  
• In the case of new plantings, note that another option to be borne in mind is to use conventional farming methods during the training period and perform the conversion during the first two years of the productive period. This is not the case in the present study, since most farms currently using organic farming methods have performed the conversion according to the method outlined above.
  
  
• The time horizon, or useful life, of the investment, equivalent to the farm's estimated period of positive yields, has been set, both for the organic system and the conventional system, at 25 years. Although this is a very conservative period, it is to be recommended, since varietal reconversion is presently occurring at a brisk pace, and that which, from the point of view of production, might make it possible to establish longer horizons, is counselled by the reality of the market.
  
  
• Farming machinery is rented, because these are small farms, divided into small plots, and so renting is the customary practice.
  
  
• The irrigation system is a specific local system, which is mostly found in new farms and is increasingly being installed in all of them.
  
  
• The planting frame is 6 x 4, since this is the frame that is becoming most popular for citrus production in the region addressed by this study.
  
  
• Two productive periods are used, covering the life of the farm: the so-called training period, and the full-production period, in which we estimate a constant average annual sold product (productive yield).
  
  
• The first period lasts for 5 years; the second for 20 years. This gives the 25-year time horizon for the investment indicated above.

The indicators and how they are formulated

• Net Current Value (NCV) is the difference between the cost of investment, which comprises both the cost of the planting proper and the discounted payments of the so-called training period, and the discounted cash flows, which represent the difference between receipts and payments. The formula used to obtain this value is the following:
  
  
  • For conventional farming:
    

    where:	K0 = cost of investment. Pj = payments made throughout the life of the investment. qj = production achieved. pj = price. i = discount rate.

    
    
    
  • For organic farming:
    

    where:	K0 = cost of investment. Pj = payments made with conventional growing system. qj = production achieved with conventional growing system. pj = price of product marketed as conventional. Poj = payments made with organic growing system. qoj = production achieved when growing system is organic. poj = price of product marketed as organic. i = discount rate.

    
    
    
• Internal Rate of Return (IRR), which is defined as the interest rate that, as a discount rate, would give an NCV of zero.
  
  
  • For conventional farming:
    

    where:	K0 = cost of investment. Pj = payments made throughout the life of the investment. qj = production obtained. pj = price. IRR = internal rate of return.

    
    
    
  • For organic farming:
    

    where:	K0 = cost of investment. Pj = payments made with conventional growing system. qj = production obtained with conventional growing system. pj = price of product marketed as conventional. Poj = payments made with organic growing system. qoj = production obtained with organic growing system. poj = price of product marketed as organic. IRR = Internal Rate of Return.

    
    
    
• Recovery Period (RP), which is defined as the time needed to recover the cost of the investment.
  
  
  • For conventional farming:
    

    where:	K0 = cost of investment. Pj = payments made throughout the life of the investment. qj = production achieved. pj = price. H = recovery period. i = discount rate.

    
    
    
  • For organic farming:
    
    

    where:	K0 = cost of investment. Pj = payments made with conventional growing system. qj = production obtained with conventional growing system. pj = price of product marketed as conventional. Poj = payments made with organic growing system. qoj = production achieved with organic growing system. poj = price of product marketed as organic. H = recuperation period. i = discount rate.