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Economics Of Organic Rice Production

Article in Journal of Food Agriculture and Environment · January 2011

DOI: 10.3126/aej.v12i0.7569

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The Journal of Agriculture and Environment Vol:12, Jun.2011 Technical Paper

ECONOMICS OF ORGANIC RICE PRODUCTION

Raj K. Adhikari MSc (Ag.)1
ABSTRACT
Interest on organic agriculture is growing gradually in Nepal and the development
interventions are concentrated more on technology generation and extension. But analysis
on its economic aspect is lacking far behind. In order to know the economic performance of
organic farming in general and that of organic rice production in particular, a survey
research was carried out in Chitwan in 2010. From the study, the average productivity of
organic rice production was found 3.15 Mt/ha which is consistent higher than national
average. Among the factor cost, labor cost was found to contribute highest in total cost of
production while poultry manure cost, human labor cost and oil cake cast were found to be
significant factors at (P value < 0.05) to contribute in total revenue. The B:C ratio of
organic rice production was found to be 1.15.
Key words: B:C ratio, Cobb-Douglas function, cost, organic farming, rice, revenue

INTRODUCTION
Rice (Oryza sativa L.) stands first among the cereal crops in Nepal, which accounts for 50%
of total edible cereal production and about 20% to Agricultural Gross Domestic Product
(AGDP) on the country (Bhujel and Ghimire, 2006) and provides more than 50% of the total
calories required to the Nepalese people (Basnet, 2008). Also, in terms of area under
cultivation rice comes first among the cereals which account about 50% of the total area
under food crops of 3.2 million hectare (Joshi and Pandey, 2005). However, Nepal is a net
food deficit country since 2005. The food produced in Nepal was sufficient to feed its
population until 1990 but during 1990 to 1999, the domestic food production was not
sufficient in Nepal. Again in 1999, cereal crop production boomed and fulfill the domestic
demand but this condition do not prevail after 2005 (NPC, 2010).
To meet the demand for foods and vegetables, various types of pesticides and fertilizers
are used in Nepal in an increasing trend. Department of Agriculture, Nepal has initiated the
application of chemical pesticides for crop protection since 1960s (Aryal, 2006). Although,
the national average of pesticide use (142 gm/ha) is comparatively lower than our
neighboring countries (Diwakar et al., 2008) but location, dose, frequency, target crops,
types and use practice of pesticides is more serious than anywhere (Diwakar et al., 2008;
Koirala et al., 2009). The pesticide consumption is increasing by about 10-20% per year and
pesticide expenses in market oriented production in Nepal is a major cost factor (Diwakar
et al., 2008). On average, pesticide use results in a health cost of NPR 144 per farmer per
year, which is nearly eight times higher than the health costs of people who do not use
pesticides (SANDEE, 2008). Nepal imports seventy-three types of common pesticides in 342
trade names from six different countries with local production in scant quantity (Koirala et
al., 2009). Study conducted during 1995-2004 revealed that out of 1034 sampled food
products 12.1% were contaminated with pesticides (Koirala et. al., 2007). The huge
numbers of pesticides are being used in number of crops ranging from kitchen garden to
commercial farms. Of the total pesticide consumption in Nepal, about 40-50% is used in rice
(MOAC, 2005).
Fertilizer is one of the prioritized inputs as mentioned in Agriculture Perspective Plan (APP)
but total consumption has been far below the level as envisaged. Nepal has consumed
11,711 Mt of chemical fertilizer worth about NRs.226.8 million in the year 2003/04 (CBS,

1
Market Development Specialist, Practical Action, Email: rajkadhikari@gmail.com

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The Journal of Agriculture and Environment Vol:12, Jun.2011 Technical Paper
2006). Although, the national average of the chemical fertilizer (26 kg/ha as of 2002)
consumption is low as compared to other SAARC countries (Pokhrel and Pant, 2009) but the
amount of its use in commercial farms and pocket areas has exceeded to a maximum
extent.
The problem of decreasing land fertility, use of high doses of inorganic fertilizer and
increasing the cost of inorganic fertilizers are factors considered harmful for sustainability
of production systems (K.C.et.al, 2004). Integration of legumes, green manuring and farm
yard manures use in rice-based cropping systems can increase soil fertility (Watanabe and
Lines, 1992; Bin, 1983) and yield higher than the conventional practices of using inorganic
fertilizers (Tripathi and Suwal, 1999).
Considering the negative consequences of different agrochemicals in production, trading
and consumption, organic agriculture is growing rapidly in the world. In Nepal also, organic
agriculture is getting attention from farmers, government, and non-government
organizations as well as market actors. Thus, the area and production and export volume of
different commodities is increasing. As reported by International Federation of Organic
Farming Movement (2006), the number of organic farms in Nepal is 1247, and the area
under organic management is 1000 ha. If the area under traditional farming where farmers
never used fertilizers and pesticides is considered, the area under organic farming should
be much higher.

OBJECTIVES
Studies on organic farming practices are very limited in Nepal. Whatever studies have done
are more concentrated on technical aspects only and economic aspect is lacking behind.
Some research outputs are available on some cash crops but economic aspect of the major
staple crop of Nepal i.e. rice is not available. Therefore, considering the need of such
study, a primary level study on organic rice production was carried out during 2010. The
major objectives of the study were:
• to calculate the productivity, profitability and benefit cost ratio of organic rice farming
• to estimate the factor share in organic rice production in Chitwan, and
• to identify the marketing system and marketing channel of organic rice in Chitwan,
Nepal of Calculate the Benefit Cost ratio in organic rice production in

METHODOLOGY
This study was mainly based on primary information collected from the farmers of Phoolbari
VDC Chitwan district of Nepal in 2010. That VDC was purposively selected for the study due
to availability of organic farmers. Sampling frame was prepared from the members
directory of organic agriculture producers cooperative Limited, Chitwan. Out of the
sampling frame, 25% of the household were taken as study sample for this study. Simple
random sampling method was used to select the required number of sample. Thus, selected
households were interviewed by using pre-tested semi-structured interview schedule.
The collected information were first tabulated, coded and entered into computer. All the
local measurements were converted into standard unit and final analysis was done by using
computer software packages: Microsoft Excel and Statistical Package for Social Science
(SPSS).
COST OF PRODUCTION
Rice being a short duration crop, only the variable cost was considered to calculate the cost
of production. The variable costs were the farm expenditure on seed, fertilizers, human
labor, bullock labor, etc. Total cost of production was calculated by adding all the
expenditure on variable inputs as below.

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The Journal of Agriculture and Environment Vol:12, Jun.2011 Technical Paper
Total cost = ∑ of cost of all variable inputs.
= cost of land preparation + cost of fertilizer + cost of human labor + cost of other inputs
GROSS MARGIN ANALYSIS
The gross margin provides simple and quick method for analyzing farm business. For any
enterprise, gross margin is the difference between the gross return and the total variable
cost incurred.
Gross margin = Gross return - total variable cost Where,
Gross return = ∑of gross returns
= return from grain + return from straw
BENEFIT COST RATIO ANALYSIS
Benefit cost ratio is ratio between the gross return and total cost of any enterprise. In this
study, benefit cost ratio was calculated by using the formula:
Gross return
B/C ratio =
Total cos t
ANALYSIS OF FACTOR SHARE TO TOTAL OUTPUT
Cobb-Douglas production function was used to estimate the elasticity of factors of
production used in rice cultivation. The form of Cobb- Douglas production function was as
follows:
Y = a Ab1 Lb2 Sb3 Fb4 Pb5 Cb6 Hb7 Ob8 eu Where, Y,L,S,F,P,C,O,H are the values (in Rs.)
of output, labor, seed, farm yard manure, poultry manure, oil cake, human labor and
other. Variable 'A' is area (ha) and 'u' is a random disturbance term. The intercept has been
denoted by ‘a’ and ‘bi’ is the slope coefficient of the associated variable, where i = 1…8.
However, due to the problem of multicollinearity the land variable is dropped and all the
values were converted into value term in per hector basis. Linear regression model was
used after converting the value of variables into natural log.

RESULTS AND DISCUSSIONS

CHARACTERISTIC OF FARMS AND FARMERS
Demographic characteristics
The mean age of respondent was 44.85 years. Looking upon the gender of the respondents,
72% were the male. On cast basis, majority of the respondent were Brahmin (65%) while
Chhetri and Janajati were equal (15% each). Regarding the education status of respondents,
55% of the respondents were having secondary education. Similarly, agriculture was found
to be the major occupation for 82.5% of the respondents followed by service (10%), business
(5%) and teaching (2.5%). The detail of respondent characteristics is presented in table 1.
Land holding
The average land holding of the respondent was found to be 0.57 ha. On the basis of land
holding, the respondents were categorized into 3 groups i.e. small (<0.5 ha), medium (0.5-1
ha) and large (>1 ha). Out of the total respondents majority (55%) were fall under medium
land size category followed by small (40%) and large (2%). It signifies that majority of
organic farmers are smallholder in nature.

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Table 1: Characteristics of respondents Cropping pattern

Parameter Characteristics Frequency Percentage Rice - vegetable - maize was the most
Gender Female 11 27.5 prominent cropping pattern of the
Male 29 72.5 study area. However, following types
Caste Bhramin 26 65.0 of cropping pattern were also found in
Chhetri 6 15.0
Chitawan district.
Dalit 2 5.0 Rice - Vegetable - Vegetable
Janajati 6 15.0
Rice - Vegetable - Maize
Education College 7 17.5
Illiterate 3 7.5 Rice - Wheat - fallow
Primary 8 20.0
Rice - Wheat - vegetable
Secondary 22 55.0
Occupation Agriculture 33 82.5 Rice - fallow - Maize
Business 2 5.0 Rice - fallow - fallow
Service 4 10.0
Teacher 1 2.5 Major source of information of organic
production
Source: Field Study, 2010

Table 2: Landholding size and frequency of For majority (60%) of the respondent,
respondents training was the first major source of
Category Frequency Percent information about organic farming
Small (< 0.5 ha) 16 40.0 technology followed by neighbor (32.5%)
Medium (0.5-1 ha) 22 55.0
and media (7.5%). Among the media,
print media, mainly poster and booklets
Large (>1 ha) 2 5.0
were the major sources.
Total 40 100.0
Source: Field Study, 2010 Return and Revenue analysis
The study found that the average
Table 3: Major source of information on productivity of organic rice is 3.15
organic farming Mt/ha which is higher than national
Percentage average productivity (2.90 Mt/ha) and,
Source Frequencies
s even higher average productivity of
Training 24 60 Terai belt of Nepal, i.e. 3.02 Mt/ha.
Neighbor 13 32.5 (MOAC, 2010). This proves that
Media (print and
3 7.5 productivity in organic farming practices
electronic) is not lower than non-organic practices.
Total 40 100
Source: Field Study, 2010 Calculating the return from organic rice

Table 4: Cost of production of organic rice production, average total

revenue is NRs. 66597.07/ha
Items Minimum Maximum Mean
that is accounted from grain
Land preparation cost 9166.67 26000.00 13809.26 (NRs. 56718.19/ha) and straw
Seed cost 1000.00 3545.45 1565.44 (NRs.9878.88/ha).
Farm Yard Manure Cost 225.00 37500.00 7496.40
Poultry Manure Cost 576.92 16500.00 From the analysis minimum
3677.52
Oil Cake Cost 1.50 5000.00
gross margin in organic rice
1254.01
production is NRs. 12995.00/ha
Labor cost 9900.00 20625.00 14280.90
and maximum is
Other cost 2500.00 6000.00 3975.62
NRs.58125.00/ha. The average
Total cost 19485.00 74005.00 32249.91
gross margin is NRs.
Source: Field Study, 2010 34347.16/ha. It indicates that
organic farming is profitable. From the study, the average B:C ratio was found to be 1.15

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which indicates that organic farming is profitable and the farmers are getting NRs. 1.15 in
average over their investment of one rupees . The detail is presented in table 6.
FACTOR SHARES TO TOTAL REVENUE
Table 5: Return from organic rice production
The Cobb Douglas production function
Source Minimum Maximum Mean
model was found to be best fit since the
Grain revenue 28421.05 75600.00 56718.19 F-ratio was highly significant (at 1% level
Straw revenue 2812.50 18750.00 9878.88 of significance). The coefficient multiple
determinations (R2) was found to be
Total revenue 40263.16 89250.00 66597.07 0.606 which indicates that the 60.6 %
Source: Field Study, 2010 variation in the dependent variable was
described by the explanatory variables
Table 6: Gross margin and B:C ratio included in the model. It was found that
only poultry manure, human labor costs
Particulars Minimum Maximum Mean
and, oil cake cost have significant (P
Total cost 19485.00 74005.00 32249.91 value < 0.05) contribution to total
revenue of organic rice production in
Total revenue 40263.16 89250.00 66597.07
Chitwan while seed and land
Gross margin 12995.00 58125.00 34347.16 preparation, farm yard manure costs
B:C Ratio .18 2.18 1.15
were not found to be significant factors
to contribute for total gross revenue.
Interestingly, other cost was found to be negatively contributing factor but insignificant.
The detail of contribution of different factors of production to the total revenue is
presented in Table 17.
Table 7: Factors share to total revenue in organic rice cultivation
Estimated Standardized
Variables Std. Error t-statistics P- value
Coefficient Coefficients
Constant 2.809 1.946 1.444 .159
Log land preparation cost .143 .129 .141 1.104 .278
Log seed cost .170 .107 .186 1.590 .122
Log FYM cost .065 .040 .232 1.615 .116
Log poultry manure cost .150* .044 .437 3.376 .002
Log oil cake cost .021** .009 .276 2.380 .023
Log labor cost .538* .143 .480 3.754 .001
Log other cost -.159 .173 -.136 -.919 .365
Multiple R = 0.779, R2 = 0.606, Adjusted R2 = 0.520, F-ratio = 7.042*
*significant at 1% level of significance, ** significant at 5% level of significance

MARKETING
The marketing system of organic rice in Chitwan was found to follow both conventional
inorganic channel as well as new organic one. After a long effort, the farmers became to
sell some of their produce through organic market outlets of different major cities;
however still majority of the production is entered into conventional market. This study
found that on an average, only about 30% of total organic production was marketed through
organic channel.
In organic system, it is found that the organic rice (and other agriculture products also) is
directly sold to the cooperative. The cooperative collects the demand from different
traders and accordingly collect the product form individual farmers. In most cases, the
cooperative collect the product from individual farmers and process it in its own processing
unit (milling center) but sometimes it ask the farmers to prepare the final product as per

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demand received from trader. Then only the product is sold to different traders and
ultimately reached to consumers. One of the most important things is that when the
produce is sold through organic channel, farmers were getting Rs.2/kg higher than price in
conventional market.

Fig.1: Marketing channel of organic rice in Chitwan

CONCLUSIONS
Most of the development agencies and agriculturist put their opinion on organic farming
incurs high cost of production and couldn’t meet the global food hunger. But, this study
revealed that organic farming is more cost effective than conventional one and, can yield
higher than the average. The higher productivity of organic rice than the national and
regional average proved that the organic rice production is a viable option for the
sustainable food production and food security. In spite of no significantly differentiated
organic market for organic commodities, the enterprise is profitable. It indicates, if the
separate market system could be established, this sector can support more in poverty
reduction.

ACKNOWLEDGEMENT
I would like to acknowledge the entire farm households of the study site for their
cooperation in field study. Organic Agriculture Producers Cooperative personals are highly
acknowledged for providing relevant information.

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Basnet, B.M.S., 2008. Environment Friendly Technologies for Increasing Rice Productivity. The Journal
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Bhujel, R.B. and S.P. Ghimire, 2006. Estimation of Production Function of Hiunde (Boro) Rice. Nepal
Agric. Res. Journal.7:88-97
Bin, J., 1983. Utilization of green manure for raising soil productivity in China. Soil Sci. 135:65-69.

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