The African Financial Review July-August 2014 | Page 54

at the same time meeting the latest requirements on quality,
traceability, packaging, and standards such as GLOBALGAP[3]
or organic might hold the key to good profits (Minot and Ngigi,
2004).

Most organic pineapples for the EU market are produced
in Ghana with an increasing amount coming from Costa Rica
(CBI Market Survey, 2008). Unfortunately, there are no official
trade statistics on organic products and there is no data available
that shows the development of volumes and values of the world
pineapple market divided according to conventional and organic
products. However, up to 40% of total pineapple exports from
Ghana are organic and/or fair-trade certified.

Trade in organic food products differs from trade in other
food commodities due to the organic certification requirement.
Certification according to regulation (EC) 834/2007 and (EC)
889/2008 is a prerequisite for any producer wishing to export
organic produce to the European market. Organic certification
requires producers to adopt certain environmental standards,
most importantly to refrain from using synthetic inputs. The rapid
growth of the organic food sector with an average growth rate of
13% between 2002 and 2006 creates niche market opportunities.
The market value was estimated at US$46 billion in 2007 (double
the value of 2000), and is expected to increase to US$67 billion
by 2012 (UNCTAD, 2008; Willer et al., 2008). In the EU, it
is now between 2.5 and 4.5% of total food sales. For organic
pineapples market growth has been even larger. The permission
to use ethylene for flower induction in organic production in 2005
played an important role in the high growth rates in the organic
pineapple market. Taken as a whole, Europe is the largest market
for organic products. This likely holds for the organic pineapple
market as well, although the available data is very imprecise and

Africa had been Europe’s major supplier of
fresh pineapples until it was replaced by
Central America.

often out-dated. According to estimations by the Sustainable
Markets Intelligence Centre (CIMS), the European market for
organic pineapple was about five times the size of the US market
in 2004.[4]

However, not only the growing demand makes organic
cultivation attractive for producers. Some studies explain the
growing interest in organic agriculture in developing countries
also by the fact that it requires less financial input and places more
reliance on the natural and human resources available (Willer
et al., 2008 amongst others). Hence, it is worthwhile to analyze
if swit ching from conventional to organic production might
indeed result in higher profits for farmers. As a starting point,
integration of the two markets is evaluated by looking at the price
developments for organic compared to conventional pineapple.

Conceptual Background

Consumers who buy organic products do so because of their
perceived superior attributes. To the best of my knowledge an
3

4

GLOBALGAP is a private standard founded in 1997 as EurepGAP by European
retailers. It is a business-to-business standard with the aim to establish one standard
for Good Agricultural Practices (GAP).Many of the large European retail and food
service chains, producers/suppliers are members (www.globalgap.org).
The US National Organic Program allowed the use of ethylene gas for flower
induction in pineapple in 2002, the EU only in 2005. We therefore expect that this
difference is even larger today.

54 | The African Financial Review

integrative theory that explains the cobehaviour of two markets
for the same product but with different hedonic characteristics
is lacking and therefore I apply relevant pieces from various
backgrounds. I primarily use hedonic demand theory to formalize
the relation between conventional and organic prices in order to
provide an analytical framework for the interpretation of empirical
results.

The hedonic approach disaggregates commodities into
characteristics and estimates implicit values for units of the
characteristics. The hedonic price function p(z) specifies how
the market price (p) of the commodity varies as its characteristics

Up to the late 1990s, the EU market was
dominated by pineapples from West Africa,
especially from Côte d’Ivoire.

(z) vary (Ladd and Suvannunt, 1976) assuming that utility is
derived from the properties or characteristics of goods. We focus
on one attribute of interest only, the organic nature of a product,
which is otherwise homogeneous. Then, the hedonic demand
function is derived from standard maximization of a consumers’
utility function which results in a vector of implicit prices of each
property (Rosen, 1974; Epple, 1987)

Our case is a simple hedonic model, where the number of
characteristics is fixed and z has only two values; let z = 1 if a
product is organic and z = 0 otherwise. We add a time dimension
for the price, which depends on past prices of the good in both
states (organic and conventional) and other hedonic characteristics
of the good. Other hedonic characteristics are time invariant.
Hence if organic pineapple is on average yellower from the
outside in time t=1, this is also the case in all other periods. In
addition, if information is imperfect, rational consumers gather
information about a characteristic if the marginal cost of obtaining
the information is smaller than or equal to the marginal utility
it generates (Combris et al., 1997). Accordingly consumers may
decide to make their choice primarily on the basis of the easily
accessible characteristics, for instance size and certification
status. This limits the number of relevant characteristics. Since
the status of z, the variety and the price are easy to assess, we
ignore other product characteristics, i.e. we assume that they do
not differ systematically between our groups of interest. These
simplifications make it easier to estimate the value of the organic
attribute, which can then be approximated by the price difference
between organic and conventional pineapple of the same variety[5].
We derive a number of hypotheses from the above described
hedonic price theory, but also drawing on other theories such as
the goal-based model (van Osselaer et al., 2012).

Conclusions

As the demand for organic products is growing, this paper has
tried to shed light on the longer-term profitability of organic
production. Taking hedonic demand theory as basis, we
empirically analyzed spatial price transmission between organic
and conventional pineapple on the world’s largest organic market
5
Furthermore, we ignore the household budget constraint because, by focusing on the

organic pineapple price premium, we touch such a tiny part of the overall household

budget that we can safely assume the constraint to be non-binding. Hence, we refer to

the case in which households have identical incomes and characteristics, and different
tastes.