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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?
- 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".
- 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.
- 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.
- 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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