4. Results

4.1 FINANCIAL COMPARISON OF CONVENTIONAL AND ORGANIC SYSTEMS

In accordance with the methodology used and the economic parameters established on the basis of the general and specific assumptions, and the technical and economic elements of the project, we shall now proceed to determine the selected indicators. In the case of the NCV and the Recovery Period, it is necessary to define the interest rate.

Moreover, we should bear in mind that because of the evolution in prices, due to inflation, on the one hand, and market imbalances between supply and demand, on the other, it is difficult to accept our initial decision not to include monetary variations in the flow of receipts and payments generated by the project.

With regard to organic farming methods, it cannot be denied that this form of agriculture is profiting from a series of subsidies which represent an extraordinary receipt that affects financial profitability, and thus the viability, of this option. Also, there is no reason to suppose that these subsidies will be eliminated, at least over the medium term, as it is quite clear that the reform of Community Agricultural Policy under the "Agenda 2000" action programme, manifestly implies the commitment to greater integration with environment policy (Piccinini A., 1998). This suggests continued support for a form of agriculture such as organic farming, whose methods imply greater respect for the environment.

The selected profitability indicators were determined according to two working hypotheses:

• Hypothesis A: Hypothesis of non-inflationary markets.
• Hypothesis B: Hypothesis of saturated conventional markets.

These hypotheses will be developed using, as a calculation formula for the NCV, the effect of growth rates for receipts and payments, combined with a general inflation rate for the economy (Table XVI).

This hypothesis of saturated conventional markets allows us to establish a zero growth rate for receipts, assuming that supply meets demand sufficiently and assuming no growth in market prices for these products. This seems quite clear, moreover, if we look at the average price index earned by citrus farmers in Spain which, over the past four years, gives an average that is even slightly negative (1996: +13.4%, 1997: -23.48%, 1998: -10.16%, 1999: +8.08%)².

We assume a payments growth rate of 1 percent. Even if this is lower than the overall increase in prices, or inflation rate, it is no less certain that essentially, the evolution of farming methods, and especially the introduction of new technologies, allows us to make this assumption. It also matches the average price indices for prices paid by farmers over the past four years, which gives a slightly positive average rate of growth (1996: +4%, 1997: +2.28%, 1998: -1.16%; 1999: -1.33%)².

With regard to the inflation rate assumed, we established an average value of 2.5 percent, which is in line with the objectives set by the European Economic and Monetary Union, and is practically the same as the average inflation rate over the past four years (1996: 3.3%, 1997: 2.0%, 1998: 1.4%, 1999: 2.9%)³.

• 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. g = general inflation rate of the economy. = receipts growth rate. v = payments growth 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 with organic growing system. poj = price of product marketed as organic. i = discount rate. g = general inflation rate of the economy. = receipts growth rate. v = payments growth rate.

For both mandarins and oranges, results achieved under Hypothesis A show scarcely any differences between conventional and organic farming (Tables XVII and XVIII). Although in both cases the profitability rates may seem rather high, it should not be forgotten that we are working under the hypothesis of the non-inflationary market and of the non-existence of the risk, by accepting the general assumption of a context of certainty.

Table XVII
Results for oranges (Hypothesis A)

Source: Authors

Table XVIII
Results for mandarins (Hypothesis A)

Source: Authors.

The results under hypothesis B are shown below (Tables XIX and XX).

Table XIX
Results for oranges (Hypothesis B)

Source: Authors

Table XX
Results for mandarins (Hypothesis B)

Source: Authors.

Results according to Hypothesis B also show scarcely any differences, either for mandarins or oranges, although, under this hypothesis, profitability rates do fall slightly in all cases. Although they may still seem somewhat high, we must remember that we are not considering risk, since we accept the context of certainty.

4.2 SENSITIVITY ANALYSIS

We need to consider, at least, other possible market scenarios which might determine variations in prices. In this context, at least, we shall abandon our previously established assumption of a context of certainty. The wisest course would be to perform sensitivity analysis. Doing so will enable us to determine clearly the effects that this might have in terms of variations in profitability, and variations in receipts and payments.

Note that the market for organic products is paradoxical in the sense that, although prices of products sold as organic are significantly higher than those of conventional products, a significant proportion of those products are sometimes sold as conventional farming products (among fruits in general, the figure is around 10 percent). As long as organic production continues to grow, that proportion may increase if the appropriate marketing channels are not found.

With this aim in mind, the data obtained under Hypothesis B were subjected to sensitivity analysis, with variation intervals in prices and payments of ±20 percent (Tables XXI and XXII).

Source: Authors.

Source: Authors.

This first analysis shows quite clearly the enormous sensitivity that variations in product prices, and thus variations in receipts, implies in terms of profitability rates, especially in the case of organic orange production, where a 20 percent fall in the price of this product would hit profitability so hard that it would fall to negative levels.

Organic farming of mandarins is also somewhat more sensitive to variations in price than conventional farming, although less so than in the case of oranges, since a fall of 20 percent in receipts would produce a loss in profitability of 39.42 percent, giving an Internal Rate of Return of slightly more than 9.66 percent.

In order to express more clearly the comparison between organic and conventional farming of oranges and mandarins, we have provided, below, the profitability rates according to five different market hypotheses:

• Hypothesis 1: Markets with a very strong preference for organic farming (price differences between organic and conventional farming +40 percent).
• Hypothesis 2: Markets with a strong preference for organic farming (price differences between organic and conventional farming +30 percent).
• Hypothesis 3: Markets with preference for organic farming (between organic and conventional farming +20 percent). This hypothesis is the one initially regarded, for the purposes of this study, as the closest to the present price scenario.
• Hypothesis 4: Markets with slight preference for organic farming (price differences between organic and conventional farming +10 percent).
• Hypothesis 5: Markets without preference for organic farming (no price differences between organic and conventional farming).

Source: Authors.

Source: Authors.

2 Source: Authors' own figures, based on Monthly Statistical Bulletins of the Ministry of Agriculture, Fisheries and Food.

3 Source: Authors' own figures, based on data provided by the National Institute of Statistics.