South Dakota State University Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange Theses and Dissertations 2017 Encouraging Organic Agriculture: The ffecE ts of Conversion Subsidies Sarah Adams Inkoom South Dakota State University Follow this and additional works at: http://openprairie.sdstate.edu/etd Part of the Agricultural Economics Commons, and the Economics Commons Recommended Citation Adams Inkoom, Sarah, "Encouraging Organic Agriculture: The Effects of Conversion Subsidies" (2017). Theses and Dissertations. 1214. http://openprairie.sdstate.edu/etd/1214 This Thesis - Open Access is brought to you for free and open access by Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contact [email protected]. ENCOURAGING ORGANIC AGRICULTURE: THE EFFECTS OF CONVERSION SUBSIDIES BY SARAH ADAMS INKOOM A thesis submitted in partial fulfillment of requirement for the Master of Science Major in Economics South Dakota State University 2017 iii ACKNOWLEDGEMENTS I wish to express my sincere and absolute gratitude to God Almighty, who has been my constant hope and light in fulfilling this dream. I also want to extend my appreciation and special thanks to Dr. Evert Van der Sluis, my thesis advisor. Dr. Evert’s, guidance was the highlight in the successful completion of this thesis. I also wish to thank Dr. Larry Janssen who from the onset guided me in identifying a thesis topic. Thanks also goes to Dr. Wang Zhiguang and Dr. Nicole Klein, for accepting to be on my thesis committee. I am also grateful to Dr. Cempellin Leda the graduate faculty representative on my thesis committee, for accepting to take on that responsibility. Not forgetting all my colleagues, friends and family who provided their support and encouragement throughout my study here at South Dakota State University (SDSU). Finally, my sincere appreciation goes to all faculty of the Economics Department of SDSU for the knowledge and training I received from them. This thesis is dedicated to my mother who believes in my dreams and aspirations in life. iv TABLE OF CONTENTS LIST OF FIGURES ........................................................................................................................ vi LIST OF TABLES ........................................................................................................................ vii LIST OF APPENDICES .............................................................................................................. viii ABSTRACT ................................................................................................................................... ix CHAPTER 1: BACKGROUND OF STUDY ................................................................................. 1 1.1 Problem Statement .......................................................................................................... 4 1.2 Objectives ........................................................................................................................ 4 1.3 Justification ..................................................................................................................... 5 1.4 Organization .................................................................................................................... 5 CHAPTER 2: LITERATURE REVIEW ......................................................................................... 7 2.1 An Overview of the Organic Agriculture Sector ............................................................. 7 2.2 Forces Stimulating Organic Agriculture .......................................................................... 9 2.3 Subsidies ....................................................................................................................... 11 2.4 Collaborations with Private Entities .............................................................................. 12 2.5 Market Incentives .......................................................................................................... 13 2.6 Push Factors Associated with Moving to Organic Agriculture ..................................... 14 2.7 Inhibiting Factors for Organic Agriculture .................................................................... 15 2.7.2 Low Profitability ....................................................................................................... 17 2.7.3 Lack of Marketing Infrastructure .............................................................................. 18 2.11 Lack of Organic Knowledge ......................................................................................... 19 2.12 Lack of Institutional Support ......................................................................................... 19 2.8 Conclusion ..................................................................................................................... 20 CHAPTER THREE: METHODOLOGY ...................................................................................... 21 3.1 The Adoption Decision ................................................................................................. 21 3.2 Empirical Model and Estimation ................................................................................... 22 3.3 Modelling the Impact of Subsidies on the Adoption of Organic Agriculture ................ 23 3.4 The Utility Difference Model ........................................................................................ 24 3.5 Indirect Utility Function ................................................................................................ 25 3.6 Variables ....................................................................................................................... 26 3.7 Hypotheses .................................................................................................................... 30 CHAPTER 4: DATA AND DESCRIPTIVE ANALYSIS ............................................................ 33 4.1 Global Importance of Organic and Sustainable Agriculture .......................................... 33 v 4.2 Global Organic Demand and Supply ............................................................................. 33 4.3 Trends in Organic Agriculture ....................................................................................... 35 4.4 Data ............................................................................................................................... 37 4.5 Main Sources of Data .................................................................................................... 38 4.6 Geographical Area Considered ...................................................................................... 38 4.7 Acreage Size .................................................................................................................. 39 4.8 Farm Size ...................................................................................................................... 40 4.9 U.S. Organic Market Forces .......................................................................................... 42 4.10 Subsidies/ Cost of Production ....................................................................................... 44 4.11 Certified Organic Programs ........................................................................................... 49 CHAPTER 5: ANALYSIS AND RESULTS ................................................................................ 52 5.1 Introduction ................................................................................................................... 52 5.2 Results for Diagnostic Test ........................................................................................... 52 5.3 Results from Stationarity Test ................................................................................... 52 5.4 Results from Residual Correlation Matrix ................................................................. 52 5.5 Results for Multicollinearity ...................................................................................... 53 5.6 Results for Heteroscedasticity ................................................................................... 53 5.2 Empirical Findings ........................................................................................................ 54 CHAPTER 6: SUMMARY OF FINDINGS AND CONCLUSION ............................................. 63 6.1 Summary of Key Findings and Conclusions ................................................................. 63 6.2 Conclusions ................................................................................................................... 65 6.3 Limitations of the Study ................................................................................................ 67 6.4 Recommendations ......................................................................................................... 67 REFERENCES .............................................................................................................................. 68 vi LIST OF FIGURES Figure 1: Organic Agriculture As A Subset Of Sustainable Agriculture ............................ 9 Figure 2: Flow Diagram Showing Possible Sequence To Achieving Organic