The premium for organic wines

Transcription

1 Enometrics XV Collioure May 29-31, 2008 Estimating a hedonic price equation from the producer side Points of interest: - assessing whether there is a premium for organic wines, and which one - estimating a hedonic price equation from the producer side Alessandro Corsi, Steinar Strøm Dept. of Economics, University of Torino Organic farming - a form of agriculture that excludes the use of synthetic fertilizers and pesticides, plant growth regulators, livestock feed additives, and genetically modified organisms. As far as possible, organic farmers rely on crop rotation, green manure, compost, biological pest control, and mechanical cultivation to maintain soil productivity and control pests (Wikipedia) - in the EU, regulated by Regulation 2092/91: only products complying with the prescribed production rules, and undergoing a certification process, can be sold as organic - organic farming is increasing, though still a minor share of agriculture (in 2003, in the EU 3.6% of the UAA, 1.6% of the holdings) - organic wine-growing is also increasing (2% of wine sales in Piedmont)

2 - organic products in general are appreciated by consumers because more environment-friendly and based on their reputation of being healthier and tastier, which commands higher prices than conventional ones - organic wines, nevertheless, do not have a great reputation -production costs in organic farming are generally higher than in conventional farming - it is therefore important for prospects of organic wine to assess which is its premium, if any Hedonic wine price estimates -a quite large literature on the determinants of wine prices - the literature is focussed on the consumer side, and explores the variables affecting consumers marginal willingness to pay for particular characteristics (sensory quality, appellations, experts ratings, etc.) Hedonic wine price estimates - but hedonic prices stem both from consumers marginal willingness to pay for the characteristic and from marginal cost for producing it (Rosen, 1974) -hence, hedonic prices also reflect production conditions - we estimate hedonic price equations for organic and conventional wines precisely starting from the production side, i.e., from the characteristics of the farms and of the wines Data - total survey of all organic farms enrolled in the regional official list of Regione Piemonte in organic farms (1.4 % of total number) farms making wine on the farm records of wine by type and nature (organic 77%, conventional 23%) - no great and famous producers

3 Does organic wine benefit of a price premium? Hedonic equation Average prices, based on descriptive statistics: - organic wine: Euro 3.50 (St. Dev. 2.51) - conventional wine: Euro 3.35 (St. Dev. 2.57) log P i = X i β + ε i Variables affecting both consumers preferences and production costs - appellation (DOC and DOCG) -variety - organic grapes Variables not affecting consumers preferences - operator s age ( =experience? ) - operator s education (general and agricultural, professional courses attendance) - farm specialization (area under grapes/ total area) - quantity of wine produced (economies of scale?) Variables Estimates of coefficients t-values Constant DOC DOCG Arneis Bonarda Cortese Chardonnay Grignolino Freisa Moscato Barbera Dolcetto Nebbiolo Total quantity of wine Wine area relative to total agricultural area Age of producer Professional course Years of general education Agricultural education Organic produced wine No of observations 388 Adjusted R

4 Results: variables significantly affecting the log price - appellations: DOC +34%, DOCG +46% - Nebbiolo variety: +54% (Cortese -44%) - specialization: +0.5% for each +1% in the share of grapes - producer s age: +1% for each additional year - general education: +5% for each additional year - organic: + 23% Do explanatory variables affect in the same way organic and conventional wine prices? - estimation of two hedonic price equations: - organic wine (303 obs) - conventional wine (161 obs) Organic Conventional Variables Estimates of t-values Estimates of t-values coefficients coefficients Constant DOC DOCG Arneis Bonarda Cortese Chardonnay Grignolino Freisa Moscato Barbera Dolcetto Nebbiolo Total quantity of wine Wine area relative to total agricultural area Age of producer Professional course Years of general education Agricultural education No of observations Adjusted R Test of the hypothesis that the parameters in the hedonic equations for organic and conventional wine are equal, except for the constant (=dummy for organic) log P i = α + X i β +O γ + e i log P i = (α O + X i β ) O + ( α C + X i β ) (1-O) + e i = α O O + α C - α C O + X i β + e i = α C + (α O - α C ) O + X i β + e i vs: log P i = (α O + X i β O ) O + (α C + X i β C ) (1-O) + e i

5 Test the restriction: α = α C and γ = (α O - α C ) The likelihood ratio test rejects the hypothesis Organic and conventional wine prices are not affected in the same way by the explanatory variables Conclusions - organic wine does have a price premium - production conditions matter for prices - organic and conventional wines are not affected in the same way by explanatory variables - prospects for future research: - correction of the selection bias - exploration of which variables matter differently for organic and conventional wine