V A Growing Market: Organic Agriculture
 
 
Module V > Section D: The Economics of Organic Agriculture

Section D: The Economics of Organic Agriculture

Projected Outcomes

Students will learn how organic agriculture can affect farm profitability.
Students will learn how government programs can affect organic agriculture.
Students will learn about the current state of the organic market.
Students will learn about some of the critiques of organic agriculture.

Background / Lessons

Introduction

The profitability of an enterprise is the product of the:

Costs of production,
Yield, and
Price

This section begins by looking at how organic agriculture affects costs of production, yields, and prices at the farm level. It then goes on to introduce some of the other forces that affect the economics of organic agriculture, including government payments and the handling of external costs. Next, it briefly covers growth in organic demand. Finally, this section looks at the reasons why some consumers choose organic, while others do not.

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Costs of Production

In general, organic farmers rely on resources recycled on-farm and on management practices rather than on purchased fertilizers and pesticides. This approach can significantly reduce some costs of production. On the other hand, those inputs that organic farmers do buy tend to be more expensive than conventional inputs. For a side-by-side comparison of production costs for conventional and organic field crops see “Adapting Crop Share Agreements for Organic and Sustainable Agriculture.”) Let’s look at some typical production costs one by one.

Land is often the largest single production expenditure, especially for field crops. In general, land costs are determined by land prices and rents elsewhere in the county, by soil type, and by prevailing prices for conventional commodity crops more than by farming practices. In theory, certified organic land might command a premium price. In practice, it does not, at least not yet.

Fertilizer Organic practices such as including legumes in the crop rotation and applying manure or compost eliminate most fertilizer costs, other than lime. However, if an organic farmer does purchase fertilizer, the cost for many organically approved fertilizers is substantially higher than the cost of conventional fertilizer. Overall, fertilizer costs tend to be lower on organic farms.

Seed Certified organic seed is usually more expensive than standard seed. In addition, farmers who rely on rotary hoeing for weed management often plant at higher densities and so need to pay for more seeds per acre. Seeds for unusual crops and varieties favored by many organic vegetable growers can be expensive. So seed costs tend to be higher for organic farms, but seeds usually account for a small percentage of a farm’s overall costs of production.

Feed costs are a significant input on livestock farms. Purchased organic feed is often twice the cost of conventional feed. As a result, many organic livestock farmers rely heavily on grazing, plus growing their own feed. For those farmers feed costs tend to be low; but for organic farmers who purchase a lot of feed, those costs can be very high. See Center for Dairy Profitability study.

Pesticides Organic farmers almost never use pesticides on field crops and use relatively few pesticides on most other crops. Pesticide costs are low on most organic farms.

Machinery, fuel, repairs, and machine hire can be slightly higher on organic operations. Conservation tillage and carefully integrated management can reduce trips over the field and associated fuel costs, and organic farms do not require pesticide applications. On the other hand, practices such as ridge tillage, flaming for weed control, and incorporating small grains and hay in the rotation require specialized equipment. In addition, the need to clean equipment that moves from conventional to organic fields can make custom work more difficult or expensive to arrange. Many organic farmers manage machinery costs by being excellent mechanics who build or adapt and maintain their own equipment.

Labor needs on organic farms are usually greater than on comparable conventional farms. In addition to requiring more labor in the field, organic farmers need to keep more detailed records than their conventional counterparts, which adds to total labor demands. However, in some cases the greater overall labor needs may not translate to higher costs for hired labor. For example, on organic grain-livestock farms the labor needs are usually more spread out through the year because the farm is growing a wider variety of crops (with different planting and harvest dates) than conventional grain farms. This means that full-time organic grain farmers are less likely to need to hire additional labor at planting and harvesting than their conventional neighbors. Nevertheless, on average, labor needs and costs are higher for organic farms.

 

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Yield

Many people assume that organic agriculture produces low yields. This assumption holds true for some crops and some situations but not for others. Let’s look at some specific examples to see how organic practices affect yields.

During organic transition crop yields usually decline. However, after five or more years of organic management, yields on many organic farms recover to the same level or sometimes higher levels than when the same fields were under conventional management. There are two explanations for this decline and recovery. First, it takes several years for organic management practices to build soil health, populations of beneficial organisms, and the other ecosystem services that organic agriculture relies on. Second, it takes several years for the farmer to learn how best to manage his or her organic system. In essence, during the first few years the transitioning organic farmer is a beginner to the organic system, even if he or she has years of experience with conventional practices.

Organic grain yields on established farms are usually statistically equal to conventional yields on comparable fields (see side by side comparisons, including the Rodale Institute Farming Systems Trial (see also Cornell summary) that has been running more than 20 years and a more recent project conducted at Iowa State University, An economic comparison of organic and conventional grain crops in a long-term agroecological research (LTAR) site in Iowa ). The main difference in grain production is that organic rotations typically require some years in crops that may be more difficult to market, such as alfalfa and small grains. However, as organic meat and milk production has increased, so has demand for organic livestock feed. An apparent yield difference may emerge when farmers plant different varieties. For example, organic farmers often prefer to plant food-grade varieties of soybeans for the Asian market. Food grade soybean varieties have lower yields but can command far higher prices than soybeans used to feed livestock.

Some organic crops have lower yields than their conventional counterparts, at least for now. For example, commercial organic cranberry yields are often 50% lower than conventional yields. In other cases, yields may be similar in some areas but not others. Organic apple production in the Midwest and Northeast has lower marketable yields than conventional production, but in the Pacific Northwest, where insect and disease pressure is lower, organic and conventional apple yields are comparable. It is possible that research and plant breeding will reduce the yield gap between organic and conventional production of many crops.

Average organic milk production per cow per year is lower than average conventional milk production (70% of confinement production according to one study, and 80% according to another). It is important to recognize that many variables in dairy farming other than organic versus conventional can influence “yield.” For example, per cow milk production on non-organic grazing farms in Wisconsin was about 75% of average production on confinement farms—and very close to average production on organic farms. (See Kriegl study and PATS study)

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If all farmers switched to organic agriculture could the world produce enough food?

Some critics of organic agriculture claim that the world will have to choose between having enough food for a growing population and organic agriculture. How much truth is there to this argument?

  1. For many crops, yields under conventional and organic management are statistically equal, as we have seen. The claim that organic yields are always lower than conventional is based on assumptions rather than side-by-side comparisons. Still, in developed nations overall organic yields are somewhat lower than conventional yields, in part because many newer organic farmers have not yet perfected their systems and in part because some crops really do have lower yields under organic management. In countries with less industrialized agriculture, however, the situation may be different. Some scholars predict that in developing countries a shift to organic agriculture could bring significant yield increases over the current poorly managed conventional systems. “Meeting the food security challenge through organic agriculture,” Food and Agriculture Organization of the United Nations, May 2007; “Can Organic Farming Feed Us All?” Brian Halweil, Worldwatch Magazine, May/June 2006, Volume 19, No. 3. ; “Can Organic Farming "Feed the World"? Christos Vasilikiotis, Ph.D. summarizes a number of side-by-side studies of organic and conventional yields. A 2007 University of Michigan study concluded that organic farming methods could triple yields in some developing countries "Organic agriculture and the global food supply".
  2. At the present time, hunger in the world is not caused by insufficient food stocks but by uneven distribution. There is enough food in the world for everyone to eat, but poor people cannot afford to buy it, and people in war-torn areas often cannot access it. In other areas, many people suffer from excess food consumption.
  3. In 2006, about 18% of the US corn crop was used to make ethanol, and by 2011 just over 40% of the US corn crop was used for ethanol. Although some of the distillers grains left over after making ethanol can be fed to cattle, that US grain-fed beef is unlikely to feed the world's hungry. Unless energy consumption can be curbed, bioenergy production is likely to put far more pressure on world food supply than large-scale conversion to organic agriculture would. For example, the sharp increase in Mexican tortilla prices early in 2007 is attributed to the influence of ethanol production on corn prices.
  4. Many agricultural practices, from feeding grain to livestock to growing flowers, reduce the total amount of human food produced on agricultural land. Like organic agriculture, these practices do not take food away from the needy; rather, they add value for farmers and consumers in a world where hunger is caused by inequality, not global food shortages.

Solving world hunger is a complex challenge that will require balancing population control, distribution issues, and non-food demands on agricultural land. Agricultural production plays a critical role, but the evidence indicates that organic agriculture can be both efficient and compatible with “feeding the world.”


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Price

As any grocery shopper knows, organic foods usually cost more. Part of this added cost comes from higher processing costs for organic foods and from the distribution inefficiencies of a smaller food system. (Despite their rapid growth and high profile, organics still account for less than 3% of total US food sales) Still, organic farmers usually get significant price premiums. For example, organic food-grade soybeans can receive prices of $15 per bushel, and organic soybeans for feed and organic corn usually receive a 50 to 100% premium over their conventional counterparts. Organic milk premiums in Wisconsin from 2000 to 2004 ranged from $2.71 to $6.53 per hundredweight. (For current comparisons of organic and conventional prices, see New Farm or USDA ERS, for a discussion of the special requirements and challenges of marketing organic grains see Marketing Organic Grains.)

So if some production costs are higher and others lower, yields are the same or lower, and price is higher, what is the bottom line for farm profitability in organic agriculture?

  • During the transition period, when a farm has all the costs of organic agriculture, reduced yields, and no price premium, farms are usually less profitable than conventional farms.
  • However, once the transition is complete, yields generally improve and the farm products can get a significant price premium. For these reasons, established organic farms are often more profitable than their conventional counterparts.
  • As with conventional farms, management, timing, and regional cost and market variations are key to profitability.

Activity 1: Costs and Returns

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Government policies

The US has one of the most highly subsidized agricultural systems in the world. Overall, our subsidies are second only to those of the European Union (EU). Unlike the EU, the bulk of our subsidies go directly to support conventional commodity crops, rather than to support environmental or recreational benefits of agriculture. The structure of US subsidies puts organic farmers at an economic disadvantage because of their reliance on extended crop rotations and grazing. (See the Environmental Working Group website for information on US farm payments.)

The US Department of Agriculture has several conservation payment programs, some of which can benefit organic farmers. For example, under the Environmental Quality Incentives Program (EQIP) in Wisconsin and Iowa, farmers can apply for funds to help cover some of the costs of organic transition. However, the funds available for this program do not come close to meeting the demand, the program is poorly advertised, and the money available to support organic practices is proportionally far lower than the funds available to support conventional conservation practices, many of which cannot be used on organic farms. There is also a small program designed to help farmers with the costs of transitioning to organic agriculture, but most states have used up their share of the little funding allocated under this program.

Environmental and sustainable agriculture advocates have tried to change the structure of farm subsidies to make them more compatible with sustainable and organic agriculture. One promising new program is the Conservation Security Program, which is intended to provide payments based on the farm’s environmental stewardship. In its first years, however, the program has been under-funded by Congress and sidelined by the USDA, so it has applied to very few areas. The situation in the US contrasts with several European nations that have dedicated significant resources to encouraging farmers to go organic. http://www.ers.usda.gov/AmberWaves/February06/Features/feature1.htm

Some states are beginning to provide a little support to organic agriculture. Iowa has a state organic agriculture program, which offers certification services as well as information for organic farmers. Wisconsin recently hired a half-time organic agriculture specialist to coordinate information resources on organic agriculture.

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What is the state of the organic market in the US today?

The organic market is changing rapidly. From 1997 to 2005 organic sales grew between 14 and 21 percent each year, and growth is expected to remain in the double digits for the foreseeable future. Despite this rapid growth, organic sales in 2005 only accounted for about 2.5% of total US food sales.

Activity 2-- Wanted: Organic Consumer

What value does the consumer get for the added cost of organic?

According to market research, consumers buy organic foods

Industry Study on Why Millions of Americans Are Buying Organic Foods , Sandra Steingraber’s essay on organic pizza, Table of Claims and Myths about Organic Agriculture

So, are organic consumers getting what they pay for? Let’s take a closer look.

Personal health and food safety
The National Organic Program states: “USDA makes no claims that organically produced food is safer or more nutritious than conventionally produced food. Organic food differs from conventionally produced food in the way it is grown, handled, and processed.” A few organic critics claim that organic food is less healthy than conventional food because organic farmers use manure as fertilizer and because the prohibitions on antibiotics, irradiation, and many food additives give the food less protection against contamination.
Organic advocates claim that organic foods tend to be higher in beneficial nutrients and lower in risk factors such as pesticides, and many organic consumers tell stories of personal health improvement after switching to organic foods.
So which side is right? At this point, the research does not give us a clear answer, partly because relatively little research has been conducted on the health impacts of organic foods, and partially because organic production practices are only a few of the many factors that influence the healthfulness of food. But research can tell us some things about organic foods and health. Let’s look at a few of the facts.

Organic foods have lower pesticide residues than conventional foods. Only 23% of organic foods sampled had detectable pesticide residues, versus 73% of conventional foods, and residue levels in the organic samples were lower. See http://www.consumersunion.org/food/organicsumm.htm and Consumers Union Research Team Shows: Organic Foods Really DO Have Less Pesticides.
An organic diet can significantly reduce exposure to organophosphate pesticides. Urine samples from children who ate conventionally grown fruits and vegetables, then switched to organic fruits and vegetables, and then switched back to conventional produce showed greatly reduced levels of pesticides during the period when the children were eating organic food (Chengsheng Lu et al., Environmental Health Perspectives, February 2006). This indicates that their diet, rather than other environmental factors, was their primary exposure to these pesticides. For a list of foods that are more likely to have pesticide resicues see the “Dirty Dozen” list. For more information see http://www.organic-center.org/science.pest.php

Factors such as soils, micro-climate, variety, and post-harvest handling have a greater impact on the nutritional content of the item than whether or not it was grown organically. In a few studies some organic vegetables had higher concentrations of some beneficial nutrients than their conventional counterparts, but other studies have shown no difference or higher levels of certain nutrients in conventional foods. In any case, nutritionists still have much to learn about what the health impacts of different nutrients in foods are. As food writer Michael Pollen has pointed out, the more our society focuses on individual nutrients, the less healthy our overall diet seems to be. For more information see http://www.organic-center.org/science.nutri.php

Packaged and processed organic foods have fewer additives than conventional foods, since the organic standards prohibit the use of most food additives. For people who are sensitive to certain food additives this attribute of organic food can provide a health benefit.

Organic and conventional foods seem to be about equally susceptible to contamination by pathogens. The vast majority of food-borne illnesses result from conventional foods, but of course the vast majority of food eaten is conventional. A few critics of organic agriculture have claimed that organic foods are more likely to carry pathogens but their statistics seem to be made up or taken out of context from a small minority of studies. For more information see http://postharvest.ucdavis.edu/datastorefiles/234-208.pdf, http://www.organicconsumers.org/Organic/fecal-contamination.cfm, or http://www.organic-center.org/science.html.

Antibiotic resistance Many conventional meat animals, including swine, cattle, and poultry routinely eat antibiotics in their feed. Testing shows a low incidence of antibiotics in meat, but a high incidence of antibiotic resistant bacteria. Also, antibiotics get into the environment through the animals’ manure. In contrast, organically certified meat may not be fed antibiotics at any point in the animal’s life. Many medical researchers think that the widespread use of antibiotics in animal feed (about 70 percent of all antibiotics used in the US, according to one estimate) is a significant factor in the development of antibiotic-resistant bacteria. For more information on antibiotic use in agriculture, see the Keep Antibiotics Working website or look under "health" in the Evironmental Defense website.

In recent years, public and scientific pressure has started to influence some conventional meat production and processing corporations. A couple of studies also question the economic benefit of routine use of antibiotics. Several major meat and poultry producers claim that they no longer routinely use subtherapeutic antibiotics, but there is no independent verification of these claims, and there is no tracking of how much antibiotics they still use to treat or prevent illness in their animals. For example, careful reading of Smithfield's policy on antibiotic use in pork production reveals that preventive use of antibiotics is still allowed, and that antibiotic use will not be considered routine as long as it is not administered over the animal’s entire life. Thus, withdrawal of antibiotics from the feed for the last month would be enough to ensure compliance with this policy.

To date there have not been clinical studies of the long-term effects of consuming meat and dairy products from hormone-treated animals. In conventional US agriculture, producers inject hormones into steers and cows to promote growth and milk production. The European Union has banned this practice because of concerns about possible effects on human development and health, and the use of hormones is also prohibited in organic agriculture. For an excellent summary of hormone use in animal agriculture and the lack of information on human health impacts see the Cornell factsheet Consumer Concerns About Hormones in Food.

Likewise, there are no long-term studies on the human health effects from eating genetically modified organisms. Use of genetically modified organisms is prohibited in organic agriculture.

For a bibliography of studies on health impacts of organic foods see the Alternative Farming Systems Information Center website at http://www.nal.usda.gov/afsic/pubs/srb0802.shtml and http://www.nal.usda.gov/afsic/pubs/srb0803.shtml.
Literature reviews such as the Scientific Status Summary of Organic Foods by Carl K. Winter 1 Sarah F. Davis in the Journal of Food Science, 2006 (accessed at 1 http://www3.interscience.wiley.com/cgi-bin/fulltext/118601430/HTMLSTART) and AFSIC's summary by Mary Gold, 2008 (accessed at http://www.nal.usda.gov/afsic/pubs/faq/BuyOrganicFoodsIntro.shtml) can provide a helpful overview.

Flavor
Many top chefs prefer the flavor and quality of organic ingredients. Many regular consumers also cite better flavor as a key reason to buy organic foods. However, flavor is quite subjective; what one person likes in a food may be exactly what another dislikes. Also, some of the high quality of organic foods may be a result of the varieties chosen and care taken in post-harvest handling, rather than the organic production standards per se. What is clear is that unlike the 1980s, when organic produce was hard to find and often unattractive and no longer fresh, organic foods today usually match and often exceed conventional foods in both appearance and taste.

Environmental Impact
Organic standards are primarily focused on minimizing the environmental impact of agriculture. Overall, organic agriculture reduces pollution and protects biological diversity compared to conventional agriculture (see Section C add http://www.plantmanagementnetwork.org/pub/cm/symposium/organics/Reganold/). However, organic agriculture is not the only path to environmental stewardship. Many ecologically minded farmers choose not to conform to all the rules of organic agriculture.

Other Values
Historically, organic agriculture has been associated with a number of social values, including animal welfare, small-scale family farms, entrepreneurial small business, and better treatment of hired labor. While some organic farms and processors embody all these values, they are not all enforced by organic standards.

The organic regulations do address animal welfare, though some of the standards are not as high as those for other organizations, such as the Animal Welfare Institute. How rigorously the standards are applied continues to be a topic of heated discussion within the organic industry. For example, organic animals must have "access to the outdoors" during good weather. To some that means the animals must be out on pasture; to others an open door to a fenced yard is enough. Summary of some animal welfare claims

The organic regulations do not address farm or business size or structure at all. In recent years several very large farms and major food processors http://www.certifiedorganic.bc.ca/rcbtoa/services/corporate-ownership.html# have entered the organic market.

Organic regulations also do not address treatment of workers at all, though the prohibition on use of many pesticides probably benefits farmworker health.

See Section E on more information concerning other values in agriculture.

Activity 3: Decision Time -- Is Organic Worth the Money?

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Conclusion

Organic agriculture can be profitable for farmers, although the transition period is often financially difficult. The organic sector accounted for less than 3% of total food sales in the US in 2005, but growth is strong and is projected to remain well above 10% per year. This strong growth has attracted the attention of large corporations, from processors and distributors such as Kraft and General Mills to retailers such as Wal-Mart.

Until passage of the Organic Foods Production Act in 1990, there was no support at the federal level and extremely little support in the states for organic agriculture. This situation is beginning to change, but government support for organic agriculture remains disproportionally low in the US. Twenty years ago the driving forces for organic agriculture were concerned consumers and farmers. Today large corporations have entered the market and the consumer base has expanded from a very small number of highly committed consumers to a large number of people who buy just a few organic products.

The question about organic agriculture is no longer whether it can produce or be profitable but what direction it will take as it grows and whether it can address social as well as environmental aspects of sustainability. See Section E for a discussion of the concerns many organic activists have about the future of this sector of agriculture.


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