Pineapple Value Chain: A Comparative Study on The Profitability of Organic and Conventional Pineapple Value Chain in Uganda

Introduction

Pineapple has increasingly gained importance in Uganda in the horticultural sub-sector and has been selected for export diversification and sustainable enhancement of household incomes. As a result, many farmers in most parts of the country have taken on pineapple production. Although it has been established that farmers are using both organic and conventional production methods in pineapple growing, this is being done without due consideration of which production methods are worth investing for maximum profitability.

This study was sanctioned to investigate the Profitability and Financial Analysis of Organic and Conventional pineapple production in Uganda in order to deliver evidence-based advocacy activities in support of the implementation of the National Organic Agriculture Policy (NOAP) 2019 and future investments in organic food production.

Methods

The study utilized both primary and secondary data. Data was collected using interview method through a well-structured questionnaire, and sourced from farm book keeping data as well as use of internet-based sources. A mixed sampling method was adopted for this study, where purposive and multi-stage convenient sampling techniques were utilized to draw the study areas and 78 respondents.

The analysis of the study variables mainly focused on profitability and financial analysis in order to meet the overall research objective. As such, data was analyzed using descriptive statistics and farm budget analysis. The descriptive statistics were used to describe the socio-economic characteristics of pineapple producing farmers in the study area. Furthermore, the farm budget analyses which include revenue, cost, gross margin and net farm profit were utilized for the cost and returns estimation of pineapple production segregated by organic and conventional production methods. The gross margin model used is expressed as:

GM = TR – TVC …………………………………. (1)

Where: GM = Gross Margin (Shs/Ha), TR = Total Revenue (Shs/Ha), TVC = Total Variable Cost (Shs/Ha)

Profitability ratio for both production methods was further used to examine the costs and return of the farmers. This is because gross margin though necessary is not a sufficient tool to determine the profitability level of an enterprise. Hence the model is presented thus:

Gross Profit Ratio = (Gross Margin/Total Revenue) × 100% …….(2)

In order to better understand the sustainability of organic pineapple production in the targeted areas, it was necessary to assess not only the profitability of pineapple gardens but also the financial sustainability of the business cycle, applying appropriate indexes. Therefore, financial analysis was carried out determining the Net Present Value (NPV) and the Internal Rate of Return (IRR) for both organic and conventional pineapple production. NPV was calculated with the following formula:

Where; GI = Gross Income (that is equal to the difference between gross production value and variable costs), FC = Fixed Costs, n = the lifetime of the investment, i = the year considered, r = the discount rate considering market conditions.

For this calculation, the considered investment was convenient where NPV is positive. Thus, choosing between investing in organic and conventional production of pineapples, the one with higher NPV value was more convenient (Tudisca et al., 2013). The IRR is the discount rate at which the discounted benefits are equal to the discounted costs, determining a NPV equal to zero. Mathematically, the IRR represents the discount rate for which the following equation is satisfied:

According to IRR, an investment is convenient if its IRR is higher than chosen discount rate (Kelleher, MacCormack., 2014).

Summary of Findings

Variable	Organic Pineapple Production (UGX)	Conventional Pineapple Production (UGX)
Average cost of production /Ha	2,228,499	2,860,047
Fixed Costs	2,361,947	2,361,947
Total Costs	4,590,446	5,221,994
Average Revenue	9,959,813	6,408,571
Gross Margin	5,369,367	1,186,577
Gross Profit Ratio	0.54	0.19
Gross Income	7,731,314	3,548,524
Gross Income (GI)-Fixed Costs(FC)	5,369,367	1,186,577
Life of investment (years)	3	3
Discount factor (r)	30%	30%
NPV	2,443,954	540,090
IRR	133.35%	107.41%

Based on an average of 2.96 ha under pineapple production, the gross profit margin for organic production was calculated to be UGX 5,369,367 with a corresponding gross profit ration of 0.54 which is equivalent to 54% while for conventional production, the gross margin was UGX 1,186,577 with a corresponding gross profit ration of 0.19 equivalent to 19%. A high gross profit ratio is an indication that the farmers are selling their produce at high profit level. Hence, the farmers are expected to have sufficient funds to pay for operating expenses while having high turnover.

Therefore, based on the results, organic pineapple production for smallholder farmers has a more profit level than conventional production by almost three folds. Considering an investment period of farmers with experience of more than 7 years, at 30% (lending rate), the NPV was calculated to be UGX 2,443,954 for organic production and UGX 540,090 for conventional production. This indicates that organic pineapple production among smallholder farmers in Uganda is financially viable using the NPV approach compared to conventional production.

For this calculation, given that organic pineapple production has a higher NPV value, is more convenient (Tudisca et al., 2013). Additionally, given that the IRR is higher than the discount rate (33.35%), organic production of pineapple in Uganda among smallholder farmers is financially viable using IRR estimation approach.

Cost build-up and profitability for Pineapple production on Hired land versus Own land in UGX

Variable	Hired Land	Own Land	Total
Total Variable Costs (/Ha)	3,226,847	1,821,699	5,088,546
Total Fixed Costs (/Ha)	2,361,947	2,361,947	4,723,894
Average Total Revenue	8,184,192	9,382,533	17,566,725
Gross Margin	2,555,398	5,198,887	7,754,285
Gross Profit Ratio	0.31	0.55	0.44
Gross Income	5,044,122	5,568,318	10,612,440
Gross Income(GI)-Fixed Costs(FC)	2,682,175	3,206,371	5,888,546
Life of investment (years)	3	3
Discount factor (r)	30%	30%
NPV	1,220,835	1,459,432
IRR	137.7%	143.4%

A comparative assessment was done to identify the profit feasibility from pineapple production using hired land and own land. Results show that production of pineapples on hired land is less profitable than own land. This may be attributed to attitudinal tendencies in application of sufficient fertilizer given that with hired land, the expectation of expiry of the lease brings mixed feelings on maintaining soil health that otherwise does not belong to the farmer. Thus, the differentials from fertilizer application on hired land versus own land.

Further analysis of the sustainability and viability of the production of pineapples from hired land versus own land recorded an NPV of UGX 1,220,835 for hired land and UGX 1,459,432 for own land.

Recommendations

The study findings suggest that if the prices of organic pineapple on international/export market trickles down to farmers through a well-established supply chain, it can tremendously increase the profitability at farm level but also act as an export substitution strategy for other common fruits like mangoes and bananas from Uganda, hence increasing on the GDP of the country.

While the markets for conventional pineapples are saturated, there is a growing demand for organic fresh pineapples and value-added pineapple products that are environmentally friendly and socially inclusive. Therefore, the government ought to support organic farmers by implementing the organic policy to facilitate investment into the organic sub-sector.

Furthermore, CSOs and farmer bodies need to redirect their advocacy efforts on organic production for sustainable income generation at household level and at national level as an export substitution strategy. The study further recommends that the implementation of the National Organic Agriculture Policy, 2019 be supported in view of attracting foreign investment in organic farming.

Also, to resolve pineapple production constraints, the following work might be done in the future; New varieties with high qualities should be introduced and popularized, Prevention and control of disease in fruits before harvesting – Black rot and water heart are important diseases in pineapple fruits. To prevent and control black rot, persuading farmers not spraying expansion agent before harvesting is important.