UNIT 1 COST OF PRODUCTION SYSTEM-

INCLUDINGSENEFIT COST RATIO

Structure
1.0 ' Objectives
1.1 Introduction
1.2 Benefit-Cost Ratio
1.2.1 Definition
1.2.2 Cost Components
1.2.3 Comparison between Organic and Conventional Production System
1.3 Economics of Organic Farming
1.3.1 Assessment of Economic Viability
1.3.2 Economic Viability under Conversion Stage
1.3.3 Role of Organic lnputs in the Economics of Organic Farming
1.4 Case Study with Different crops
1.4.1 Case Study with Cereals
1.4.2 Case Study with Oilseeds
1.4.3 Case Study with Other Crops
1.5 Calculation of BCR
1.6 Adoption of Organic Farming by the Farmers
1.7 Profitability against Net Return
1.8 Let Us Sum Up
1.9' Key Words
1.10 Further References
1.11 Model Answers

1.0 OBJECTIVES
This Unit is to introduce you with the economics of Organic Farming with
reference to Benefit Cost Ratio (BCR). After going through this Unit, you will
be able to:
learn the cost-benefit analysis of different crops in organic and chemical
farming practice;
distinguish the difference of production cost under organic and chemical
farming; and
realize that the net profits are higher in the organic farming system as
compared to chemical farming.

1.1 INTRODUCTION
India faces economic challenges that demand bold new initiatives.Organic
products has emerged as an important area of gainful farming and ils economic
benefits have been realized in many countries.Consumer demand for organically
produced food products provides new opportunities for farming and business
around the world. Despite having its potential, farmers are not fully aware of
organic cultivation and its economic viability. Majority of farmers are hesitant
7 Chemical Fertilizers 554.73 2101.50
8 Plant Protection Chemicals 90.66 340.00
9 Human Labour 2626.01 2802.21
10 Bullocks Labour 48 1.67 416.66
11 Machine Labour 430.23 535.00
12 Imgation Charges 50.00 50.00
13 Interest on Working Capital 253.21 264.56
Sub total 6583.69 6878.59
 Cost of Pruduction System-
B) FIXED COSTS (Rs.) Including Benefit Cost Ratio
1 Land Revenue 11.OO 11.00
2 Rental Value of Land 1500.00 1500.00
3 Depreciation 91.82 182.57
4 Interest on Fixed Capital 223.O 1 212.56
Sub Total 1925.83 1906.13
Total Cost of Cultivation 8509.52 8784.72
C) Returns
1 Gross Returns 17601.OO 14226.34

3 Benefit Cost Ratio 2.06 1.61

(Suresh and Kunnal, 2004)

The organic farm produced 21.93 per cent higher rice yield in comparison
with inorganic farm. The average cost of cultivation per acre of paddy on
organic farms was lower compared to that on inorganic farms.
1.2.2 Cost Components
The following components are considered for cost estimation:
Fixed cost : This includes land rent (cost of land or cost of
rent), land revenue, depreciation of farm
implements and interest on fixed capital.
Variable cost (Direct) : .It includes cost of seed/ planting materials and
organic inputs.
There are other costs like marketing cost which include's freight and transport
cost, cost of power consumption against irrigation, cost of storage, cost of
bagging, marketing margin etc.
In fact, the cost components in the analysis of Benefit-Cost Ratio (BCR)
mainly depends on inputs costs. Here the input cost is estimated as the sum
total of expenditure towards:
a) Cost of seeds, if purchased
b) Cost of manures, biofertilisers etc.
c) Cost of biopesticides etc.
d) Cost of irrigation
e) Cost of bullock
f) Cost of tractor
g) Cost of labour for tilling, manuring, sowing, transplanting, weeding,
threshing etc.

1.2.3 Comparison between Organic and Conventional

Production System
The conventional agricultural practice is mainly chemicals-based intensive
agriculture which depends on the useof chemical fertilizers and chemical
pesticides/herbicides,hormones/growthregulators etc.The indiscriminate use
Economics Of Production of chemical inputs have led to contamination of food, water and fiber in
several countries and thus, resulting in overall deterioration in soil health and
environment and water bodies.

On the other hand, the organic production system entails no use of synthetic
fertilizer, pesticides, growth regulators and livestock feed additives, while
relying more on organic manures and composts, biofertilisers, crop rotations,
with inclusion of legumes, mechanical cultivation; minerals bearing nutrients
and biological pest control measures.

The difference between organic farming and conventional farming can be

summarized as below:

1) Ecological orientation, sound 1) Chemical and fossil intensive

economy and efficient labour
2) Uses ten times more energy as

2) Fossil fuel emits less green 3) By use of nitrogenous

fertilizers, there is emission of

1) Off- Farm Inputs

2) Conservation of soil health, 2) Deterioration of soil health,

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Check Your Progress Exercise 1
Note : a) Space is given below for the answer.
b) Compare your answer with that given at the end of the Unit.
1) Why organic produce has emerged as an important area of interest?
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 What do you mean by benefit-cost ratio? Cost d~ProductionSystem-
2) Including Benefit Cost Ratio
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Production by organic fafming is site and region specific. We have 20 agro-

ecological zones spread over the different parts of the country. Therefore, it is
better to assess/compare the costs within the same state or region than
comparison/assessment between different states. As far as organic crops are
concerned, important savings are made in cost of seeds and planting materials
and inputs. The expenditure is high if inputs are outsourced. There:is also
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cost
of certification that is a must to organic production. .,
~ ~ ~ ~ m i ~ o f p ~ The
u c dindicative
~ n cost of conventional and orgal... -...... ,.v--...w.. ...
Maharashtra has been presented below.
Case S6udy II*
Tebte 1.1: Organic Cotton in Maharashtra (Costs US$/ha)
Inputs Organic Conventional
Human Labour 150.00 117.50
Bullock Labour 77.50 60.00
Seeds 33.50 95.50
Manures(Farm yard) 50.00 41.00
Fertilizers 30.00 70.00
Pesticides 40.00 117.50
Certification 45.00 -
Interest 42.50 50.00
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*The student may also refer the Table prcscnted In the Appendix for the case study II at the
end of the Unit I .
A study undertaken by Central Institute for Cotton Research, Nagpur (Table
1.2) indicated that the cost of cultivation is lower under organic cultivation.
The decrease in cost in organic farms has been mainly due to no use of
chemical fertilizers and insecticides.
mble 1.2: Production Coat (RsJper Acre) Under Organic via-8-via
Conventlonal Fannine

Seed 1400 300

Seed Inoculants 0 50

Interculture Operation 700 400

Vermicompost/FYM 0 1000

Basal Fertilizers 2220 0

Urea 400 0
Amrut Pani(a fermented mixture of

Biological Control Agents

Trichocards
Chrysoperla sp.
NPV
 1.3.2 Economic Viability Under Conversion Stage Cost of Production System-
Including Benefil Cost Ratio
Under conversion stage, it is very difficult to assess the economic viability
because it depends on the status of farm. If the farm has not been exposed to
conventional farming since many years, the cost of production will not be high
because of its favourable condition for conversion. However, in case of
conventional farming, there will be decline in yield during the first year of
conversion. It will steadily increases in the subsequent crop cycles. Once the
farm is completely established organic, the yield enhances and the cost of
production declines. Accordingly, there is deficit in the net income under
organic farming compared to conventional farming up to third year (Table1.3).
As input cost was low under organic farming and produce earned premium of
about 20%,the net income increased progressively the fourth year onwards.
The benefit in the net income was over 80% under organic farming in
comparison to conventional farming by sixth year.
Table 1.3: Yield and Economics of Organic Farming vis-h-vis Conventional
Farming (Results of Central Institute of Cotton Research,
(ICAR)

Fifth Year Organic 8.75 17500 3500 2 1000 13500 4500

Sixth Year Organic 10.00 20000 4000 24000 16500 7500

1.3.3 Role of Organic Inputs in the Economics of Organic

Farming
Organic farming is economically viable because the use of organic inputs play
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significant role in saving expenditure. For example:
There is reduction in the use of external inputs like FertilizersIPesticides.
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Organic growers mainly depend on on-farm organic inputs like crop

t residues, compost, FYM, vermicompost, herbal preparations, and other
traditional methods for controlling pets and diseases.
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As organic farming is based on sound agro-ecological principles supported
by balancing crop and animal diversity in the farm.
There is more productivity through the incorporation of natural processes
as nutrient cycles, biological nitrogen fixation and pest-predator
relationships into the agricultural production process.
There is profitable and efficient production with emphasis on improved
agronomic management and conservation of soil, water, energy and
biological resources.
Economics of Production
Check Your Progress Exercise 2
Note : a) Space is given below for the answer.
b) ~omp'areyour answer with that given at the end of the Unit.
1) It is better to assess/compare the costs within the same state or region
than comparison/assessment between states. Why?
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3) What costs are considered higher in organic farming?
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 of Production
Kco~~c,,~ics
i) Name and Address of : Shri Pitambar Jena, P.O. Chengua, distt. .
the Farmer Mayur Bhanj, Orissa.
ii). Soil Type : Sandy Loam
iii) Crop Type : Paddy(HYV) Kasturi
iv) Source of Seed : Purchased from other Farmer(P1).
(7.5 kg @ 5/kg = Rs.37.50 p)
v) Known Yield Potential of the : 20 qtls. Per Acre (Chemical)
Variety(Kasturi)
vi) Plot Size : 30 decimals (100 decimals = 1 acre)

Ingredients Applied
i) Sesbania(Dhaincha) : Seed @ 12 kglacre = 3 kg 600 g (@
Rs. 1 l k g = Rs.39.60 p)
ii) Pongam Oil Cake : @ 150 kg/acre = 45 kg.
(@ Rs.41kg = Rs.1801-)
iii) Cow Urine Soaked Cowshed : @ 4 quintalslacre = 1.2 quintals
Soil (Internal input)
iv) Fresh Cow Urine : @ 7-8 litres twice in a week for 6
weeks (Internal input)
v) Home made Heap Compost : 2 cart loads

Steps Followed
Sesbania seeds were sown in the soil after the first ploughing and allowed
to grow up to pre-flowering stage.
Then the field was ploughed and the plants were incorporated into the
soil together with Pongamia oil cake, cow urine soaked, cowshed soil
and home made compost.
After keeping overnight just enough to create a muddy condition, the
next day the field was transplanted with the paddy seedlings.
Thereafter the field was periodically weeded and fresh cow urine applied.
Observation:
i) Yield of grains at harvest : 8.5 quintals (@ 28.33 quintalslacre)

ii) Yield of straw at harvest : 9.9 quintals (@ 32.9 quintalslacre)

Analysis of Cost Benefit Index:
1) Total Expenditure Incurred: -
A) Ingredients (Purchased Input)
i) Cost of paddy seeds = Rs.37.50
ii) Cost of Sesbania seeds = Rs.39.60
iii) Cost of Pongamia oil cake = Rs.180.00

B) Labour
 Cost d Pduction System-
lneludlng Ben& Cost Ratlo

-- Rs. 100.00
Economics of Production the result as below:
In Himachal Pradesh, the net income per hectare from organic farming
was found to be 2-3 times higher than that in conventional farming over
three years in case of maize, wheat, raimah and peas. This was not only

In Haryana, the cost of production was lower and net returns higher (2-
3 times) in basmati rice, soyabean, arhar and wheat because of 25-30%
price premium on organic produce and lower cost of production and
marketing. The farmers net returns ranged from a low of Rs.8000 - 9000
on traditional vegetables and as high as Rs.17000-28000 in the case of
baby corn and exotic vegetables like broccoli and red and Chinese
cabbages.
In Maharashtra.'the farmers refer organic cotton for risk aversion. lower

cotton. Thus, the cost-benefit ratio of organic cotton was 1:1.63 as against
1:1.47 for conventional cotton.
In Gujarat, organic production of chickoo, banana and coconut had higher
profitability but field crops and mango had both lower input costs as
well as yields.
The CMA. Ahmedabad has also observed that organic farmers faces

certification. However, if farmers are aware of high Cost : Benefit Ratio

in organic farming, it will attract more and more farmers to adopt organic
farming.

Check Your Progress Exercise 3

Note : a) Space is given below for the answer.
b) Compare your answer with that given at the end of the Unit.
1) Mention some names of agencies who are engaged in analyzing Benefit-
Cost-Ratio against organic f s n g .
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 ..................................................................................................................... Cost of Production System-
Including Benefit Cost Ratio
2) What is the role of organic inputs in saving expenditure under organic

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1.8 LET US SUM UP

The farmers are not fully aware of economic return from organic farming. It
is necessary to collect data on cost-benefit-ratio both under organic and
conventional farming. Benefit-Cost Ratio (BCR) is the ratio of net value of
extra crop produced to the cost of input. The cost components in the analysis
of benefit-cost ratio depends mainly on input costs like cost of seeds, cost of
fertilizers, cost of pesticides, cost of bullock/tractor, cost of labour etc. Before
analysis of the BCR under both agricultural system, it is necessary to have
clear cut understanding on the difference between the practices of organic and
conventional (chemical) farming.

Organic farming being site specific, itis better to consider local costs during
BCR analysis. While the cost of inputs like fertilizers and pesticides is saved

After conversion from conventional to organic, the cost of production tends

to initially be slightly higher but the benefit in the net income comes by the
fourth year onwards.

As organic farming encourages incorporation of natural processes of nutrient

cycles, biological nitrogen fixation and pest-predator relationship or biocontrol
agents, this farming system becomes economically viable. It has been confirmed
by various agencies like Agriculture Universities, ICAR Institutes, NGOs etc.

It has been reported that the reason of slow adoption of organic farming
includes non-availability of bio inputs, lack of knowledge on technology, skill
inefficiency etc. However, there are several reports which indicate that organic
farming is profitable agri-business. 17
I 3) It includes cost of seeds, cost of fertilizer, cost of pesticide, cost of
irrigation, cost of bullock, cost of tractor, cost of labour etc.
Cost of Production System-
Including Benefit Cost Ratio

4) The organic farming and conventional system of agriculture can be

compared on the basis of input costs, quantity of input used, nature of
quantity and product's value under both the conditions.
Check Your Progress Exercise 2
1) It is always better to compare any production system with another with
in the same state or region because the cost of inputs viz., labour, manure1
fertilizer, cost of seeds etc., will not vary from one pocket to another.
The cost of production will be only governed by the amount and number
of inputs to be used to raise the crops.
2) In conventional farming system, the farmer relies on the chemical
fertilizers, chemical pesticides and seeds from outside (other than of his
own). These inputs are purchased from outside so the cost of production
goes up. It has been seen that after repetitive use of chemical in agriculture,
the vigour of soil is lost, hence, we need to add more quantity in subsequent
phases. This way cost of production also enhances.

3) As such in organic farming system, the cost of production is comparatively

less in comparison to that of conventional system of production because
most of the inputs are from on-farm. During conversion, the production
of the crops is less under organic farming system.
4) DGring conversion period, the production of the crop in organic farming
is less because sudden stopping of use of any chemical in the soil. So the
crop production for the first 2-3 years in organic farming system is
uneconomical.
Check Your Progress Exercise 3
1) There are number of agencies involved in analyzing the benefit cost ratio
of raising any crop or system. Almost every institution now a day calculate
B:C ratio in their final report of any project where cost and out put are
involved. Institutions like Indian Institute of Management, Ahmedabad
and ICAR Institutes are doing such works.
2) The organic inputs have greater impact on the economics of the production
system. In the organic production system, most of the inputs are arranged
from on-farm sources by the farmer, so no purchasing cost is involved.
Economics of Pduction Appendix
Case Study 11: Cost-Benefit Analysis of Sesame per acre. in Organic Farming

Activities Organic Package Cost(Rs.)/Acre

Land Preparation 1-deep ploughing or 1-harrowing 6001350
(in alternate year)
Manure (Basal) Bioorganic manure = 150-200 kg. 400
Top Dressing Cow urine spray or herbal spray 50
Sowing Tractor drilling 150
Seed Treatment Nil, seed sown mixed with sand -

Varieties Gujarat ?h(90-100 days) or Shiva

(65-70 days) -

Seed Rate of Spacing 1.0 kglacre; 30-45 x 10 cm 2.0 30

Weeding 1 interculture + 1 land weeding 250
Plant Protection Nil or neem product 100
Harvesting Cutting the crop on maturity 100
Drying Plants stacked vertical for 10-15
days in the field. -
Threshing 1-2 times, by beating the dried plants 100
Other Expenses Transport, cleaning etc. 100
Total Cost 1755 (1630 - 1880)
Seed Yield 275 (250 - 325)
Gross Income Average price 25kg 6875
CosUBenefit Ratio 1 : 3.9