Corinne Alexander
Department of Agricultural Economics Purdue University
Gary Reding
Langeland Farms, Inc.
Greensburg, Ind.

How do the economics of organic field crop production compare to conventional crop production? We are going to attempt to shed light on this very important question by summarizing three university crop budgets and comparing their findings to Gary Reding’s, an organic grower in Indiana, crop budgets. We will also comment on the different risks in organic compared with conventional agriculture.

In terms of comparing returns of organic and conventional production, it makes sense to examine each component separately, where:

One of the reasons to look at each component separately is that there are a lot of assumptions about organic yields, which may or may not accurately reflect the yields in your area.

Reding’s per acre crop budgets
Reding’s crop budgets include corn, soybeans, wheat, hay and popcorn. In projecting revenues using estimates yields and prices, Reding assumed fairly conservative yields. The price of hay in the budgets is the same as conventional as it is only recently that Reding has found a premium market for organic hay and has been able to receive 1.5 times to 2.0 times the value of conventional hay. The buyer is willing to pay $118 per ton delivered to his farm for late-cut first cutting hay.

The cost of fertilizer varies greatly between the organic crop budgets. In Gary Reding’s budget, he has priced the cost of 3 tons of chicken manure and plants either wheat or oats as a cover crop for all crops except hay. Reding’s fertilizer costs are consistent with Farm A in the 2003 Kansas budget. However, the other university budgets, that do not derive their costs from actual organic farms, estimate much higher costs for fertilizer.

A second component of the fertility costs for organic farms is the cover crop. Reding plants either wheat or oats as a cover crop, and so the cost of the cover crop is assumed to be the cost of the wheat seed. Organic farmers often times use saved seed from their own organic production for soybeans and small grains. The seed cost will be less than or equal to conventional seed costs because there are no genetically modified traits to pay for. However, organic producers have reported that seed availability can be an issue. The only crop that is dried in the bin is No. 2 yellow corn. The machinery fuel and repair costs are estimated using the University of Minnesota’s Farm Machinery Cost Estimates for Late 2005, by William Lazarus and Roger Selley. The hauling charges are assumed to be double conventional crop, because the distance to a buyer is likely to be longer. However, many buyers of organic grains pay for the hauling charges, so this may or may be a cost. Reding has assumed a much higher insurance charge than that faced by conventional crops because of the difficulty of finding organic crop insurance.

Table 1: Reding’s crop budget

Summary of per acre variable costs, not including land, labor and machinery
Examining other organic crop budgets, we were not able to find budgets for popcorn or hay, so we only compare the budgets for corn, soybeans and wheat.

Overall, the total per acre variable costs for corn and soybeans appear to be similar for organic and conventional crops. Reding’s total per acre variable costs are higher than most of the organic crop budgets and that is partly due to his decision to be conservative in his estimate of costs. Since Reding is located in Indiana, it is worth noting that his costs for organic production of corn is $4 per acre less and for organic production of soybeans is $14 per acre more than conventional production in Indiana. Since the overall costs of organic and conventional are in the same ball park for corn and soybeans, this implies that the relative profitability of organic and conventional production depends more on the revenue differential than the cost differential.

Wheat, where we could find other organic crop budgets, appears to be more expensive to grow organically than conventionally. (Part of the higher cost on the wheat is the alternating years of fertilizer application. This should technically be spread over all crop years instead of just the applied years.) Reding’s costs for organic wheat in Indiana are $45/acre more expensive than conventional wheat in Indiana. Reding’s costs are also substantially higher than costs in either Kansas, and for spring wheat in North Dakota. It is worth noting that both Kansas and North Dakota have advantage growing wheat relative to the Eastern Corn Belt.

Table 2: Summary of per acre variable costs (not including land, labor and machinery) for both conventional and organic crop budgets

Comparison of organic and conventional revenues
In comparing organic and conventional revenues the area where there are the most assumptions and uncertainty is with respect to organic yields. For example, the South Dakota crop budget assumes that organic yields are 75% of conventional yields. By comparison, an Iowa state research project “Comparison of Organic and Conventional Crops at the Neely-Kinyon Long-term Agroecological Research (LTAR) Site” reported organic soybean yields at or above conventional yields for 2003 to 2005, and organic corn yields at or above conventional yields in 2004 and 2005, though slightly below in 2003. Ohio State also released organic corn yield trials for 2005 with yields ranging from 121.2 to 173.9 with an average of 153 bu/acre at the Bowling Green location and yields ranging from 130.4 to 212.2 with an average of 171.4 bu/acre at the Apple Creek location. For producers who are transitioning to organic production, it is safest to assume that yields will be on the low side, at least for the first few years of production.

With respect to organic prices, the highest prices will be for food-grade corn and soybeans. However, buyers expect very high quality for food-grade organic grains that may be difficult to achieve. Feed-grade corn and soybeans receive a lower price, with the advantage that buyers accept lower quality and many of the feed-grade varieties are higher yielding than the food-grade varieties. Another positive note is that the demand for organic feed is being driven by the rapidly growing organic dairy and livestock sectors. This is causing organic feed grain prices equal to or higher than organic food grain prices in 2006. Over the long term, organic growers should expect to see the prices for organic grains decline as the supply of organic grains increases. In the short term, organic growers can expect organic prices to remain high relative to conventional prices for two reasons: 1) demand for organic grains is growing faster than supply; 2) the 3-year transition period slows the process of conversion of land to organic. The largest threat to high organic prices in the near term is from imports.

Combining information prices and yields for corn and soybeans, Table 3 compares the revenues from organic and conventional crops. Because of the higher prices for organic corn and soybeans, even assuming a 20 bushel yield drag for organic corn and a 14 bushel yield drag from organic soybeans, the revenues from the organic crop are clearly higher than the conventional crops. The worst case revenue scenario on organic corn is still $30/acre higher than the best case on conventional, and the worst case on organic soybeans is $75/acre higher than the best case on conventional.

Table 3: Comparison of corn and soybean revenues from organic and conventional production

Economics of rotation
Because the National Organic Program (NOP) requires a minimum of a 3-year rotation for organic crop production, it is important to compare returns over the whole rotation, i.e. for 3 or more years (the North Dakota crop budget provides a good example of this calculation). Here, we examine the estimated earnings for a 1,200 acre farm comparing Reding’s two organic rotations to a similar Purdue crop rotation. Reding’s cc,b,w,h rotation is no. 2 yellow corn, followed by soybeans, wheat and hay with each crop on 300 acres. Reding’s pc,b,w,h rotation starts with popcorn, followed by soybeans, wheat and hay, again with each crop on 300 acres. Purdue’s c-b,c-w rotation is 400 acres of corn in rotation with 400 acres of soybeans and 200 acres of corn in rotation with 200 acres of wheat for 600 acres of corn, 400 of soybeans and 200 of wheat. We assume that all this land faces the same rental charge of $134 per acre, the family and hired labor is paid the same amount. Drying and handling costs are slightly higher for the organic crops.

Table 4: Annual net returns for a 4 year rotation for a 1200 acre farm

Comparison of risks in organic and conventional
Conventional wisdom says that organic farming is more risky than conventional, but there has not yet been any research on this topic. Organic farms tend to be more diversified than conventional farms, in part because the NOP requires a minimum of a three-year rotation, and crop diversification is one of the best ways to manage risk. Organic farms face more marketing risks than commodity producers, though the risks are similar to conventional specialty crop producers. The prices of organic crops are totally independent of conventional grains or the futures markets so hedging is out of the question. One advantage is that organic producers can lock in prices before production to minimize risk of price movements. Normally, producers can lock in a profit based on average yields and their remaining risk will be growing conditions. Reding always puts in an act of God clause so that he is only responsible for what the yield is on any particular year from his acreage and does not have to replace any shortfall in production.

As previously discussed, any producer targeting the food-grade organic market will face the risk of not meeting the quality standards. As the organic feed market grows, the penalty for not meeting the food-grade quality standards will decrease. Because the organic market is smaller, producers will likely spend more time negotiating with buyers and may wait longer for payment. Organic corn producers face the risk of GMO contamination from pollen drift. Organic producers also need to maintain good records to manage the risk of losing their certification. Finally, probably the largest risk faced by new organic producers is the “learning curve.”

Transitioning to organic
For an established organic farming operation such as Reding’s, organic farming is clearly profitable compared to conventional farming. That said, the transition to organic farming is still a challenge. In order to be certified organic, the land must be managed organically for three years and during those years the producer will most likely have lower yields and will need to sell at conventional prices. Reding has not found any markets that offer price premiums for chemical and fertilizer-free grain.

If preplanned properly, transition can be planned with the use of fall and early spring planted small grains to minimize the number of seasons it takes to make the transition. By making your last fertilization with conventional products no later in a year than the first date you intend to harvest your first organic crop, you can meet the 36 month prior to first harvest rule. This allows for essentially a two crop season transition time. By planting a forage crop with the small grain crop, you can harvest the small grain the first year and the hay the second year as revenue crops during transition. The forage crop will then provide the green manure to be plowed in for a nitrogen source on your first organic crop to be harvested. This also provides a cover crop during transition and builds your organic matter in the soil. This type of transition plan minimizes the loss of revenue typical of the transition years.

References
Indiana, conventional crop budgets:

http://www.agecon.purdue.edu/extension/pubs/id166_Feb06.pdf

Illinois, corn:

http://web.aces.uiuc.edu/value/factsheets/corn/fact-organic-corn.htm

Illinois, soybeans:

http://web.aces.uiuc.edu/value/factsheets/soy/fact-organic.htm

North Dakota, multiple crops:

http://www.ext.nodak.edu/extpubs/agecon/ecguides/2003org.pdf

Kansas, multiple crops:

http://www.kansasruralcenter.org/publications/Organic%20cropping.pdf

Organic field trials in Iowa:

http://extension.agron.iastate.edu/organicag/rr.html

Organic field trials in Ohio:

http://agcrops.osu.edu/corn/documents/2005OrganicTestReport_000.pdf