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 Center information
 Abstract
 Introduction
 Results and discussion
 Literature cited
 Table and figure






Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-8
Title: Valuing catastrophic losses for perennial agricultural crops
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 Material Information
Title: Valuing catastrophic losses for perennial agricultural crops
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-8
Physical Description: Book
Language: English
Creator: Adams, Damian C.
Kilmer, Richard L.
Moss, Charles B.
Schmitz, Andrew
Publisher: International Agricultural Trade and Policy Center, Institute of Food and Agricultural Sciences, University of Florida
Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2003
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Table of Contents
    Front Cover
        Page 1
    Center information
        Page 2
    Abstract
        Page 3
    Introduction
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
    Results and discussion
        Page 9
        Page 10
    Literature cited
        Page 11
    Table and figure
        Page 12
Full Text

PBTC 03-8


i ional Agricultural Trade and Policy Center




VALUING CATASTROPHIC LOSSES FOR PERENNIAL
AGRICULTURAL CROPS
By

Damian C. Adams, Richard L. Kilmer, Charles B. Moss, and Andrew Schmitz
PBTC 03-8 August 2003


POLICY BRIEF SERIES


i~fr


UNIVERSITY OF
FLORIDA


Institute of Food and Agricultural Sciences


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INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


MISSION AND SCOPE: The International Agricultural Trade and Policy Center
(IATPC) was established in 1990 in the Food and Resource Economics Department
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of
Florida. Its mission is to provide information, education, and research directed to
immediate and long-term enhancement and sustainability of international trade and
natural resource use. Its scope includes not only trade and related policy issues, but also
agricultural, rural, resource, environmental, food, state, national and international
policies, regulations, and issues that influence trade and development.

OBJECTIVES:

The Center's objectives are to:

Serve as a university-wide focal point and resource base for research on
international agricultural trade and trade policy issues
Facilitate dissemination of agricultural trade related research results and
publications
Encourage interaction between researchers, business and industry groups,
state and federal agencies, and policymakers in the examination and
discussion of agricultural trade policy questions
Provide support to initiatives that enable a better understanding of trade and
policy issues that impact the competitiveness of Florida and southeastern
agriculture specialty crops and livestock in the U.S. and international markets









VALUING CATASTROPHIC LOSSES FOR PERENNIAL AGRICULTURAL
CROPS

Authors
Damian C. Adams, Richard L. Kilmer, Charles B. Moss, and Andrew Schmitz

Department of Food and Resource Economics, IFAS, UF, Gainesville, FL 32611

Key Words: Citrus, perennial crops, catastrophic loss, damages, freeze

Abstract. Courts are often required to estimate changes in welfare to agricultural
operations from catastrophic events. For example, courts must assign damages in
lawsuits, such as with pesticide drift cases, or determine "just compensation" when the
government takes private land for public use, as with the removal of dairy farms from
environmentally sensitive land or destruction of canker-contaminated citrus trees. In
economics, the traditional method of estimating changes in producer welfare is the
computation of lost producer surplus, but courts rarely use this method. Instead, they turn
to substitute valuation methods that may not fully capture welfare change, such as
changes in land value, tree replacement value, and total revenue. This study examines
various measures for valuing the back-to-back catastrophic freezes that occurred in the
Florida citrus industry in the 1980s. We first use the traditional method to determine the
welfare change due to a freeze (1) for a citrus grove that loses one crop and is able to
return to full production the next year (simulating destruction of annual crops), and (2)
the lower measure of welfare loss due to a citrus grove that loses all of its trees and is
abandoned or is replanted. The lower measure is used to simulate the legal doctrine of
avoidable consequences. These measures are then compared to substitute valuation
measures that have been used by courts to determine welfare changes. For case 1, total
revenue overestimated losses by 35.6%. For case 2, total revenue overestimates losses by
55.3%, tree replacement value underestimates losses by 93.6%, and changes in land value
underestimates losses by 13.2%.









VALUING CATASTROPHIC LOSSES FOR PERENNIAL AGRICULTURAL
CROPS


Introduction


One cornerstone of applied economic analysis is the valuation of dramatic events

for policy analysis. For example, economists may estimate the effect of a disease

outbreak on the beef industry, as in the case of "Mad Cow Disease" or ecoli

contamination of packing facilities, or the effect of changes in agricultural or trade

policy, as in the case of FAIR or NAFTA. Courts, too, are often required to estimate

changes in welfare to agricultural operations from catastrophic events. For example,

courts must assign damages in lawsuits, such as with pesticide drift cases, or determine

"just compensation" when government takes private land for public use, as with the

removal of dairy farms from environmentally sensitive land or destruction of healthy

citrus trees within range of canker-contaminated trees.

In economics, the traditional method of estimating the effects of a catastrophic

event is the computation of lost producer surplus as developed in Just, Hueth, and

Schmitz (1982), but courts rarely use this method. Instead, they turn to substitute

valuation methods that may not fully capture producer losses, such as changes in land

value, replacement value, and total revenue.

This study examines various approaches for valuing catastrophic losses for

annual1 and perennial agricultural crops. One such catastrophic event was the back-to-


1 Although citrus crops are perennial crops, we simulate losses to annual crops, like corn, soybeans, and

wheat, by considering a grove that loses its fruit only following a light freeze, which results in the loss of

the current year's crop, but the grove can return to full production the following year.









back freezes that occurred in the Florida citrus industry in the 1980s. Following these

events, citrus in Florida retreated further to the south.2

We first calculate lost producer surplus, or change in producer welfare (AW) due

to the freeze events. AW is a function of the age of the original grove. Assuming a 30-

year planning horizon, price expectations based on market information available prior to

the 1983-84 marketing period, and using an age distribution assuming that the average

tree age structure for Lake County holds for the individual grower, the value of the loss

with and without tree replacement is computed using

30
(1) AW = (-) ((TRWo TVCW -Iw) -(TRt TVC I))


where AW is the value of the freeze loss in dollars; S'= (1/(1+.0465))tis the factor used

to discount future dollars back to current dollars at an interest rate of 4.65 percent as

suggested by Moss, Weldon, and Muraro (1991); TR, denotes total revenue in time t;

TVC, is the total variable cost in time t; I, is costs associated with tree replacement and

care in time t; and superscripts w and wo indicate, respectively, with and without the

freeze events, which are assumed to occur in time t=0.

For a typical 100-acre grove, a tree-age profile for Lake County is constructed

from the Florida Agricultural Statistics Service Commercial Citrus Inventories (1982-

1986) that implies a loss of 90.1% of trees and a lost yield of 24,927 boxes of oranges in

the freeze year. We estimate a second order autoregressive function to project expected




2 The citrus industry essentially shut down in the traditional northern groves around Orlando and

moved to the flatwood areas to the south.









future orange prices before the 1983-84 freezes3. Averaging over a projected 30-year

planning horizon yields an average orange price of $7.54/box with an expected price in

the 1983-84 marketing period of $7.99/box. A TVC, of $2.10 per box4 is assumed. AWis

calculated for the freeze year and over a 30-year planning horizon both without and with

tree replacement for a typical 100-acre grove (Table 1).

AW for annual crops is simulated by computing losses to the citrus producers in

the freeze year only (and thus assuming that the grove will produce a crop next year

because the bloom was not frozen). Investment is assumed to be unaffected. In this case,

AW = $-136,694 for the freeze year only.

When trees are lost, but not replaced, the AW must similarly be calculated over

the expected life of the grove and must consider differences in tree yields for trees of

different ages. We use tree age yield information from Zanzig, Moss, and Schmitz

(1997). When calculating yield differences over time, one must also consider grove age

distribution and attrition rates. Maintaining a citrus grove includes replacing under-

producing trees-those that produce less than 50% of their expected yield. Muraro and

Fairchild (1985) have stated that citrus trees have an age-dependent probability of

permanently under-producing, which for Lake County is 2.3% of citrus trees aged 0 to 3,

1.3% of those aged 4 to 10, and 3% of those aged 11 or more. Given a grove age

distribution at the time of a freeze, one can predict what that grove's age distribution and



3 Typical assumptions of welfare analysis as discussed in Just, Hueth and Schmitz (1982) are based on ex

ante expectations.

4Based on Muraro (1983a), and Muraro (1983b). This paper assumes that pick and haul costs remain

nominally fixed over the 30-year planning horizon.









number of trees would be both with and without the freeze, and with and without

replacement. Future grove yield is found by multiplying the grove tree age distribution by

the average yield per tree for a tree of each age. AW= $-930,654 million without

replacement. AW= $-748,623 with tree replacement. The legal doctrine of avoidable

consequences would require a producer to take steps to minimize losses following a

tortious act or state land taking. In this case, to simulate this doctrine, we would only

compensate the producer using the lower of the two welfare measures.

We will now compare the change in producer welfare based on welfare theory

with the measures used in the market place and by courts. These include tree replacement

value, the change in land values, and total revenue.


Tree Replacement

Tree replacement includes buying new citrus trees, preparing the land for trees,

and planting the new trees. For the Lake County tree age distribution, in year 2000

dollars, tree replacement cost is $482.70 per acre for trees and land work (Muraro, 1983),

or $48,270 for a 100-acre grove (Table 1). This is significantly less than the $930,654

welfare loss without tree replacement and the $748,623 loss with tree replacement (Table

1).


Change in Land Values

Another approach to valuing the cost of the catastrophic event is the change in

land values. Under traditional asset valuation concepts, the land value of a grove reflects

the normal profit from citrus production. Accordingly, after the freeze, rational investors

would incorporate the effect of the lost land use alternative (i.e. loss of economically-









viable orange production) into their bids for farmland in the area. The post-freeze value

of the citrus land should be equal to the land's pre-freeze next best use value. For

example, if the pre-freeze next best use were as a cattle ranch, then the change in land

values approach would measure damages as the difference between the net present value

of the land as a citrus operation and the net present value of the land as a cattle operation.

We assume that Lake County citrus land had no economically viable next best use. Under

these assumptions, the change in the land value between pre-freeze years and the post

freeze years provides an estimate of the economic loss of the shutdown.

According to the Lake County property register5, before the 1983 freeze event,

orange grove land in Lake County sold for about $10,376 per acre in year 2000 dollars.

After the freeze, land in the same area sold for almost $3,881 per acre. Thus, about

$6,495 per acre was lost due to the freeze. Multiplying this by 100 acres yields an

estimated economic loss of $649,500 in year 2000 dollars (Table 1). Figure 1 shows the

changes in average per acre land values for Lake County between 1981 and 1986.


Total Revenue Approach

A related methodology that is sometimes used to quantify the economic loss is the

total revenue approach. The total revenue approach overstates AW because total variable

costs and total investment costs are not included in the valuation. Following this

procedure, the total revenue loss on the 100-acre grove using Lake County is $1.16

million with tree replacement, and $3.70 million without replacement (Table 1).





5 Lake County land values were accessed using the Florida Deed Transfers and Tax Assessor Records
database from www.lexis.com/research.









Results and Discussion


The alternative measures of economic loss due to the freezes of the 1980s for the

typical 100-acre orange producer in Lake County, Florida using the estimated Lake

County tree replacement distribution are presented in Table 1.

Catastrophic events that permanently damage perennial crops pose a more

difficult problem than annual crops. Much more data is needed to calculate AW using

traditional economic measures and courts must also consider contingencies. In the case of

the freezes of the early 1980's, AW must be calculated with and without tree

replacement. It is the lower of the two loss calculations that should be used to simulate

courts' use of the doctrine of avoidable consequences. In our case, AW with tree

replacement is the lower measure by $182,031 (Table 1).

If a court needs to use alternative measures, it is important to know which method

performs best. For the typical 100-acre orange grove in Lake County, the AW is most

closely approximated by the change in land values, with total revenue and cost of tree

replacement providing much worse estimations.

The total revenue measure overestimates economic loss as compared to the

AW measures both with and without tree replacement. This is expected because the total

revenue concept pays the grove owner for variable costs that the grove owner did not

experience (e.g., pick and haul costs). Total revenue is an imprecise measure of economic

loss. For the typical 100-acre grove in Lake County, the total revenue measure with tree

replacement overestimates economic losses by $414,302, or 55.3% when compared to

AW with tree replacement (computed from Table 1).









The cost of tree replacement measure also does not perform well. It does not

consider the lost revenue from current or future income that will result from the

increasing tree yield as the tree gets older, so it severely understates the economic loss

experienced by the grove owner. Cost of tree replacement is a very imprecise measure of

economic loss. In this case, when compared to AWwith tree replacement, it

underestimates producer losses by almost $700,353, or over 93.6% (computed from

Table 1).

Finally, change in land value performs the best when compared with AWwith

tree replacement, but it underestimates producer loss. Here, the change in land value

when compared to AW with tree replacement, underestimates producer loss by $99,123

or 13.2% (computed from Table 1). Change in land values may not be a good estimate of

producer losses, especially when urban development pressures are strong.

In theory, successful lawsuits are meant to make the complaining party "whole"

or as well off with the court-awarded compensation as they were before the catastrophic

event. This is equally true for personal injury awards as it is for government takings

awards. In economics, the traditional method for determining the amount needed to make

the party "whole" is a AW estimation based on compensating variation (also known as

Ricardian rent and producer surplus). While the most accurate, this method requires

complicated calculations and an understanding of economics and statistics to make

appropriate estimations. As such, courts often turn to alternative measures, like change in

total revenue, change in land value, or cost of tree replacement. These measures may not

fully capture producer losses due to a catastrophic event. Our estimates suggest that this

is the case for the back-to-back freezes of the early 1980's.









Literature Cited


Florida Agricultural Statistics Service. 1982 1986. Commercial citrus inventory. Fl.
Agr. Stat. Serv.

Just, R. E., D. L. Hueth, and A. Schmitz. 1982. Applied Welfare Economics and Public
Policy. Englewood Cliffs: Prentice-Hall.

Moss, C. B., R. N. Weldon, and R. P. Muraro. 1991. The Impact of Risk on the
Discount Rate for Different Citrus Varieties. Agribusiness: An International
Journal 7(4): 327-38. (Abstr.)

Muraro, R. P. 1983a. Budgeting Costs and Returns: Central Florida Citrus Production,
1982-3. Univ. Fla., Inst. Food Agr. Sci., Econ. Info. Rpt. 185.

Muraro, R.P. and G. Fairchild. 1985. Economic Factors Affecting Postfreeze Production
Decisions in the Florida Citrus Industry. Proc. Fla. State Hort. Soc. 98:91-96.

Zanzig, B., C. B. Moss, and A. Schmitz. 1997. Natural Disasters and the Yield
Curve of Florida Valencias. J. Agr. & Resource Econ. 22: 402.











Lake County Grove Land Values


S12000
o 10000
E
< 8000
6000 --Avg. Per Acre
o Land Value
2 4000--------
< 2000
0. 0
1980 1981 1982 1983 1984 1985 1986 1987
Year of Grove Sale

Figure 1. Average per acre land values for Lake County orange groves before and after
the 1983 freeze event.


Table 1. Alternative measures of freeze loss for a

100-acre citrus grove in Lake County, Florida.

Method Lossa

AW without tree replacement $-930,654

AW with tree replacement -748,623

Tree replacement cost only -48,270

Lost land value -649,500

Total revenue w/out tree replacement -3,700,000


Total revenue with tree replacement


a Loss over life of grove (30 Years)


-1,162,925




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