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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 04-04
Title: Valuing catastrophic citrus losses
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Permanent Link: http://ufdc.ufl.edu/UF00089774/00001
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Title: Valuing catastrophic citrus losses
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 04-04
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: 2004
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Bibliographic ID: UF00089774
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.

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PBTC 04-04


i ional Agricultural Trade and Policy Center




VALUING CATASTROPHIC CITRUS LOSSES
By
Damian C. Adams, Richard L. Kilmer, Charles B. Moss, & Andrew Schmitz


PBTC 04-04 September 2004


POLICY BRIEF SERIES






I








n UNIVERSITY OF
FLORIDA
Institute of Food and Agricultural Sciences









INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


THE INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
(IATPC)

The International Agricultural Trade and Policy Center (IATPC) was established in 1990
in the Institute of Food and Agriculture Sciences (IFAS) at the University of Florida
(UF). The mission of the Center is to conduct a multi-disciplinary research, education and
outreach program with a major focus on issues that influence competitiveness of specialty
crop agriculture in support of consumers, industry, resource owners and policy makers.
The Center facilitates collaborative research, education and outreach programs across
colleges of the university, with other universities and with state, national and
international organizations. The Center's objectives are to:

* Serve as the University-wide focal point for research on international trade,
domestic and foreign legal and policy issues influencing specialty crop agriculture.
* Support initiatives that enable a better understanding of state, U.S. and international
policy issues impacting the competitiveness of specialty crops locally, nationally,
and internationally.
* Serve as a nation-wide resource for research on public policy issues concerning
specialty crops.
* Disseminate research results to, and interact with, policymakers; research, business,
industry, and resource groups; and state, federal, and international agencies to
facilitate the policy debate on specialty crop issues.









VALUING CATASTROPHIC CITRUS LOSSES


Authors

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

Additional Index 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 quantifying producer losses is estimating changes in
producer welfare, but courts rarely use this method. Instead, they turn to substitute
valuation methods that may not fully capture welfare changes, 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, 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 overestimates 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 CITRUS LOSSES

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 E. coli

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

trade policy as in the case of Federal Agriculture Improvement and Reform Act or North

American Free Trade Act. 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 the change in producer welfare, but courts rarely use this

method because sufficient data may be lacking and because the method may seem

complicated. 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 losses to producers of

perennial agricultural crops following a catastrophic event. One such catastrophic event

was the back-to-back freezes that occurred in the Florida citrus industry in the 1980s.

Following this event, citrus in Florida retreated further to the south. Using this

catastrophic event as an example, we first compute producer losses using the traditional

economic approach to valuing catastrophic losses-change in producer welfare. We then









compare these measures to other valuation approaches often used by courts and by the

marketplace to estimate producer losses, including tree replacement value, the change in

land values, and total revenue value. Although "Acts of God" are not a basis for

compensation by a court, this catastrophic freeze example nonetheless provides a means

for comparing the various valuation approaches. A summary of 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 valuation problem than annual crops. Much more data is needed to calculate

changes in welfare (AW) using traditional economic measures, and courts must also

consider contingencies. In the case of the freezes of the early 1980's, AW should be

calculated with and without tree replacement (Adams et al). It is the lower of the two loss

calculations that should be used to simulate courts' use of the doctrine of avoidable

consequences, which provides that a damaged party must try to limit losses as much as

possible. In our case, AW with tree replacement is the lower measure by $188,085 (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 $428,082 in year 2002 dollars, or 55.3%

when compared to AW with tree replacement (computed from Table 1).



Table 1. Alternative measures of freeze loss for a

100-acre citrus grove in Lake County, Florida.

Method Lossa

AWb without tree replacement $-961,608

AW with tree replacement -773,522

Tree replacement cost only -49,900

Lost land value -671,100

Total revenue w/out tree replacement -3,823,062

Total revenue with tree replacement -1,201,604


a Loss over life of grove (30 Years), in year 2002 dollars

b AW is defined as the dollar amount that will make the complaining party "whole"
or as well off with the court-awarded compensation as they were before the catastrophic event.


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 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 AW with tree replacement, it

4









underestimates producer losses by almost $723,647, 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 $102,420

or 13.2% (computed from Table 1). Although this method performs best among the

alternative methods, change in land values may not be a good estimate of producer losses,

especially when urban development pressures are strong. Figure 1 shows the changes in

average per acre land values for Lake County between 1981 and

1986.


Lake County Grove Land Values

$13,000
S $11,000
E $9,000
$7,000
a2 $5,000
$3,000
$1,000
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.



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. 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

accurately 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 (1) for a citrus grove that

loses one crop and is able to return to full production the next year and (2) for a citrus

grove that loses all of its trees and is abandoned or is replanted. For case 1, total revenue

overestimates 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%.



REFERENCE

Adams, Damian C., Kilmer, Richard L., Moss, Charles B., Schmitz, Andrew. 2004.

"Valuing Catastrophic Losses For Perennial Agricultural Crops: Citrus As A Model."

Proceedings of the Florida State Horticultural Society (Refereed Article) 116:286-288.




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