Economics of Organic Production
Organic Systems Make Good Economic Sense
|Organic vegetable transplants can fetch at least 30 percent more than conventional plants and are snapped up by eager gardeners at farmers markets across the country. Rebecca Sexauer of Deep River, Iowa, displays a tray of tomato transplants. |
– Photo by Jerry DeWitt
Organic farmers are often the first to admit that as they were transitioning to organic systems, their yields declined. Many studies have shown that, initially, a decline in yields occurs during the conversion to organic production.
However, once the transition period has passed - usually in three to five years - organic crop yields often rebound to within 90 to 95 percent of conventional yields, according to an Organic Farming Research Foundation review of comparative studies.
Perhaps even more important, once the farming system has been certified, price premiums for organic crops, added to the reduced production costs, help boost profitability. (See Table 2).
For many organic farmers, equivalent yields are not necessarily the goal. "High yields are not always connected to profitability," said Wende Elliott. On her farm, she expects a 37.5 percent operating profit margin, largely due to lower input costs and a premium price for organic poultry, hay and row crops.
Jeff Moyer, farm manager at The Rodale Institute in Kutztown, Pa., explains in a fact sheet published by the Institute (available at www.newfarm.org/depts/midatlantic/FactSheets/transition.shtml) how organic farming makes good economic sense. In 2001, his organic corn and soybean yields were only 90 percent of conventional yields, yet the organic corn fetched $4.70 bushel compared to $2.10 for conventional. The soybean price disparity was even larger - conventional soybeans went for $3.80 per bushel, while organic livestock feed beans brought $10.50 per bushel and organic food grade beans $15 a bushel.
Ed Fry, who farms 400 acres of grain and has 240 milk cows in Chestertown, Md., points out in a marketing fact sheet from Rodale that while his corn yields were comparable in 2000, his total production costs were lower for organic corn - $1.79/bushel versus $2.23 for conventional. The labor per acre was higher in his organic corn, but because the organic corn fetched $4 a bushel versus $2.50 for the conventional, he didn't need to farm as many acres for the same amount of profit.
In organic dairy operations, a similar principle of reduced production and higher profits applies. When Vince Foy and Debbie Yonkers of North Danville, Vt., converted their 70 Jersey cows to organic, their milk production decreased by 10 to 15 percent, but their gross income increased from $125,000 to $165,000. Moreover, they cut their debt-to-cow ratio in half.
In fact, said Lisa McCrory, dairy technical assistance coordinator for the Northeast Organic Farming Association of Vermont (NOFA-VT), "organic dairy producers almost always reduce their production numbers, due to management changes such as feeding the animals less grain." And even though the price of organic grain is higher, other costs such as veterinary bills, fertilizer and labor decrease, improving net income.
A statewide study conducted in Vermont by the Northeast Organic Dairy Producers Alliance showed that although milk production was lower in the organic systems, the organic producers received an average net return of $477 per cow per year compared to the conventional average of $255 per cow.
"Looking beyond production and making decisions based on profitability and the bottom line makes good business sense," McCrory said.
While more research is needed on the economics of transition, the long-term economic viability of established organic systems is quite positive. A 1999 Wallace Institute review of six midwestern land-grant university studies found:
Organic grain and soybean production systems are "competitive with conventional production systems." In fact, with current market premiums, producers of organic grain and soybeans earn higher profits than conventional growers.
Without a price premium for organic crops, half of organic systems were still more profitable than the conventional systems. Those systems less profitable than conventional quickly surpassed the conventional systems when organic premiums were figured in.
In cases where organic systems were more profitable without price premiums, it was generally due to lower production costs, higher net returns due to the types of crops in the organic systems, and better performance of the organic systems under drought conditions or in drier areas.
Production costs tend to be lower in established organic systems because of reduced input costs.
One exception to this, perhaps, is labor. Organic farming systems are often more labor intensive because of increased time spent managing weeds and monitoring pests. Labor costs, however, can be measured in different ways.
"If a farmer views his/her time spent on the farm in terms of its opportunity costs, e.g., what he or she could be earning off the farm, labor costs for organic farming are higher than conventional," said Jim Hanson, extension economist in the Department of Agricultural and Resource Economics at the University of Maryland. "However," he added, "for those farmers who don't view off-farm income as an alternative source of income the labor costs between the two systems are similar."
In a forthcoming study to be published by Hanson, he found that family labor was about 30 to 40 percent higher in an organic mid-Atlantic grain operation than in a conventional one, but hired costs were equivalent between the two systems.
Production costs also vary by region, climate and production system. For example in humid areas, pest and weed control measures can raise costs.
A recent study in a corn-soybean system in Iowa found costs of conventional production were only slightly higher than organic. The organic farms had lower fertilizer and pesticide costs, but higher seed and machinery costs.
However, in a SARE-funded project that compared organic and conventional apple production across California, Sean Swezy, formerly a researcher at the University of California and now director of UC-SAREP, found production costs of organic apples 10 to 25 percent higher than conventional ones in the coastal fresh market systems due to labor and material costs. However, statewide, the organic systems were determined to be commercially profitable.
Finally, in a SARE-funded potato study in Idaho comparing 18 conventional and organic farms, the average material costs were lower in the organic and the labor costs higher, but overall there was no significant difference in fixed and variable costs.
Organic livestock systems often cost less, thus can be a viable option for beginning farmers or those who have trouble raising capital, because those systems do not require elaborate or expensive housing. Poultry, for example, can be raised on pasture using inexpensive, easy-to-build structures.
As with any successful business, good management is essential. "I've discouraged some farmers from going organic if they were already struggling with their conventional farm and not ready to embrace the mind shift involved in transitioning to organic," said Brad Brummond, the extension agent from North Dakota who specializes in organic production. "Conversion is a learning process, not a fix for a failing conventional farm."