Full Life Cycle Costs of Organic versus Conventional Food
A 2004 study by the Hartman Group found that around two-thirds of Americans at least occasionally consume organic products. In many cases, consumers have been willing to pay significant price premiums for these products. For example, a study conducted by the USDA found that the average premium paid for organic broilers between January 2004 and June 2006 was 200 percent while the premium for organic eggs was 278 percent. (Oberholtzer, et al., 2006) Similarly, another study was conducted by the USDA examining price premiums from 2000-2004 for organic broccoli and carrots at the farmgate and wholesale levels. This study found that the average annual organic premiums for broccoli ranged from 99 to 133 percent at the farmgate and 124 to 180 percent at wholesale. Average annual premiums for carrots ranged from 75 to 117 percent at the farmgate and 126 and 162 percent at wholesale. These price premiums are thought to exist primarily because of higher production costs and the relative level of supply and demand for organic food products. It is expected that these premiums will decrease over time as more firms enter the industry and economies of scale are realized for production (Oberholtzer, et al., 2005).
Consumers have demonstrated a willingness to pay higher prices for organic food products for a variety of reasons. One study by Bellows et al. supports the idea that consumption of organic goods is positively correlated with preferences for environmentally conscious food production. In this study, a telephone survey of 1,201 respondents revealed a positive and statistically significant correlation between consumers claiming to buy organic goods and expressed importance of environmentally benign organic production systems. (Bellows, et al., 2008) . Another study conducted by Lusk and Briggeman found that consumers valued the following food qualities relative to one another in descending order: safety, nutrition, taste, price, environment, natural, tradition, appearance, convenience, fairness, and origin when using a random parameters model. Furthermore, Lusk and Briggeman found positive and statistically significant correlations between consumers’ willingness to pay a premium for organic bread (a question that had been asked in their survey) and values of environment, fairness, natural, origin, and nutrition (Lusk, et al., 2008).
As evidenced above, consumers see value in organic food products because they are created using production methods that do not contribute to, or have a lesser contribution to, many of the negative environmental and health externalities associated with conventional food production. For example, it is estimated that the annual healthcare and environmental costs associated with pesticide use are around $12.5 billion. Similarly, the estimated public and environmental costs associated with soil erosion are thought to be in excess of $45 billion annually. Thus, there are significant damages that may not be included in the price of conventional goods (Pimentel, et al., 2005). This study seeks to use life cycle analysis and life cycle costing methodologies to assess what the true price of a conventional food product is relative to an organic food product. In doing so, it will also help to explain the true value of organic food products and how much of the price differential between organic and conventional goods is met by positive external benefits from their production.
A preliminary review of literature has revealed that very little work has been done internalizing the environmental degradation stemming from U.S. agricultural production. Many studies have established frameworks for analysis, but few have actually computed the externalized costs of production. Some studies have examined individual impacts from the production of certain goods, but comprehensive studies do not exist on goods-level. The USDA has conducted studies examining the benefits and costs conservation tillage, and a study by Pimentel examining the impacts of pesticide usage on a macro-level found that their environmental and social costs were around $5 billion annually. (Uri, et al., 1998), (Pimentel, 2005) Studies have also been conducted examining appropriate fertilizer application levels for strawberries, but damages associated with these levels have not been assessed. (Mulder, 2008) There has also been a considerable amount of research conducted in European countries. A comprehensive assessment of total agricultural externality cost was conducted by Pretty et al. in the UK. This study found total costs to be £2343 million in 1996. (Pretty, et al., 2000) Other studies have also examined external costs in Germany and the Netherlands. As a result studies like the one proposed here are needed to synthesize the results of previous studies in an effort to create a more complete picture of the benefits surrounding organic food production in the United States.