Els Wynen

e-mail: els.wynen@elspl.com.au website www.elspl.com.au

The details in this paper combine information from several previously published papers (see A4, A7 and A11 on http://www.elspl.com.au). They were presented at a Workshop ‘Opportunities in Organics’ for broadacre producers on March 2-3, 2000 at Agriculture Victoria Rutherglen. In October 2000, a similar paper was published by the Kondinin Group in 'The Organic Alternative - A complete guide to organic farming'.

This paper is copyright. Apart from any fair dealings for the purposes of study, research, criticism or review, no part may be reproduced by any process without permission from the author.

Is broadacre organic agriculture economically viable? This is still one of the first questions asked about organic agriculture, although a study on the economics of organic agriculture in the mid-1980s demonstrated that organic agriculture can be as profitable as farming under conventional management.

A second question often asked is whether organic farming would still be profitable if these techniques were widely adopted. Price premiums, which some farmers get at present, are then expected to be reduced or eliminated through more competition. Research undertaken in the mid-1990s indicates that, although profits may be lower in such a case, on average the reductions in profits are small if they occur at all.

A third issue concerns the conversion to organic agriculture. Even if organic farming is profitable once the system has been established, that does not necessarily mean that it is easy to move from the one system to the other. What are the problems? What are the chances of going broke in the transition process?

The only comprehensive survey of the financial and physical characteristics of broadacre organic farmers was undertaken in 1985-86. Although dated, the results nonetheless provide useful insights into the differences between organic and conventional cereal-livestock farming in Australia. A survey of 13 organic farmers, located in the five mainland South Eastern States was undertaken. Of those, 8 were 'fully organic', and 5 'semi-organic'. That is, although there was no organic certification scheme at that time, 8 would probably have qualified as fully organic, and the other 5 would have qualified if some more measures would have been taken. All had farmed under the new management methods for at least 5 years. This is an important point, as the economic situation during the first years after transition may be different from in later years when an equilibrium has been reached. The results of the study presented here are mainly those of the 8 'fully' organic farmers. The exception is the data on farmers' opinions, for which all 13 farmers are included.

Given the low numbers of organic farmers, the question can be asked why farmers use that kind of management anyway. About three quarters of the answers given by cereal-livestock farmers in the survey related to issues of health (of the farmer and the farming family; and of soil, crops and livestock), and off-farm environmental problems. Of the rest, the largest part of the answers indicated a preference for that lifestyle (13 per cent). A decrease in input prices and increase in output prices was mentioned in only 8 and 3 per cent of the answers, respectively. Five per cent indicated that the conventional farming system was not working. In short, the most important reasons for conventional farmers to move towards organic broadacre farming were problems they experienced while applying conventional farm management methods. Overseas studies showed similar reasons for conversion (see, for example, Lockeretz and Wernick (1980); Lockeretz and Madden (1987)).

In comparing different production processes, it is often tempting to conclude that any apparent difference in success may be due to more favourable climate, soils or perhaps managerial ability in one group or another. To minimise the effect of these factors the organic farmers were each compared with one neighbour who also was a broadacre cereal grower. To find an appropriate comparison, local officers of the Department of Agriculture were asked to nominate a conventional farmer who, in their opinion, was at least as good a manager as the organic farmer. Other factors were tried to be matched, such as soil type, local climate, and farm size.

Because the management skill of farmers is a major influence on farm profitability, it is important, when comparing farm profitability, to find farmers with similar management skills. In the survey, every pair of farmers was asked to grade themselves and their neighbour as managers. Of the group of organic farmers, two of the ten respondents thought that they were better managers than their neighbour, six that they were similar, and two that they were worse managers. Of the eleven conventional farmers, six considered themselves better managers than their neighbour, and five similar to their neighbours. None thought they were worse. In other words, more conventional farmers thought that they were better than, or similar to, their organic neighbours in management skills than the other way round. For most pairs of farmers the grading was similar. The exception was two pairs, where both farmers thought that the conventional farmer was a considerably better manager.

For years coventional farmers have talked about the cost-price squeeze, with rising input costs and stagnant or falling output prices. Such talk is more likely to be heard in times of high inflation. In such times farmers' attention is even more than usual directed towards methods to avoid these trends. It is tempting to look at a system where less inputs are needed and premium prices exist, as is generally believed to be the case in organic agriculture. But is that really the case?

From the survey it was clear that input costs on Australian cereal-livestock farms were, on average, indeed lower than on conventional farms. The first column in Table 1 shows the costs on organic farms, the second those on conventional farms, and the third and fourth show the difference between the two, in $ per hectare and percentage respectively. The fifth column tells us whether that difference is 'statistically significant'. If the measure is significantly different (indicated by one or more * ) we can be confident that, if we were to survey all organic farmers we would come up with the same result. If there is no statistical difference (indicated by 'n.s.') then we can't be sure that the difference found in this sample is caused by a difference in farm system.

In Table 1 input costs are shown both for area cropped and for area operated. The reason for showing both these measures is that the costs per hectare cropped show how the management of soil fertility and pest problems compare under each management system. But that does not provide an overall picture of the returns of the total farm. Some costs, such as interest and labour, are difficult to apportion to parts of the farm, and are shown only on the basis of the total farm.

Table 1: Input use on organic and conventional farms in South-eastern Australia

The two measures give a different picture. Taking area cropped, only the expenditure on use in nutrients (including materials allowed under organic management such as rock phosphate) and pesticides are significantly lower on organic farms than on conventional farms. But per hectare operated, all costs are lower on organic farms with the exception of interest and labour costs. Note that, although labour costs is often thought to be relatively high on organic farms, this survey shows that, in the cereal-livestock sector in Australia at least, that is not the case.

In an Australian study in 1995, Hassall and Associates (H&A) reported that 70 per cent of the 50 responses to their survey of farmers classified as 'grain/cereal' farmers, mentioned that they estimated their input costs to be lower than on conventional farms. One quarter of this group reported higher labour costs, and ten per cent lower costs, with two thirds similar costs.

The difference in costs per hectare cropped in nutrient and pest management (here taken as including all forms of pests, such as insects, weeds, fungi, etc.). between the system will not surprise anybody. However, it is interesting to dwell upon this a bit longer. Part of the way in which organic farmers cope with soil fertility and pests is by trying to avoid problems in the first place, through a shift in management. For example, where conventional farmers use herbicides, organic farmers may rotate their crops, or use livestock in smaller paddocks. This may affect requirements for capital goods, such as machinery and equipment. Where under conventional management the emphasis is on growing the most profitable crop as much as possible, a shift in rotations under organic management to avoid fertility and pest problems means inclusion of less profitable enterprises. This affects the mix of total production on the farm, and leads to lower returns to farming. So in a sense, the decrease in some of the farm costs on organic farms is off-set by a decrease in returns. The important issue therefore is the net effect, discussed later.

Another aspect of input costs on organic farms is the price per unit of input. In general, prices per unit of input in organic and conventional farming can differ greatly. Those inputs which are not used by most conventional farmers, for example rock phosphate, may well cost more per tonne than super phosphate. The higher costs are partly due to the low total volume used in a particular area, which means that economies of scale in the production and marketing don't apply. For example, transport of the input may be much more costly if backloading of the one truck with the input is difficult to find. Of course, if and when more farmers use this input, opportunities for cost saving, for example through sharing transport costs, occur.

This picture of lower input costs on organic farms also emerges overseas. In a publication in which economic studies on organic farming from all over the world were combined, variable input costs are reported to be typically 50 to 60 per cent lower on organic farms with cereals and grain legumes (Lampkin and Padel 1994). Fixed costs (depreciation and fixed labour) on organic farms were generally similar to those on conventional farms, with the exception of some studies from the USA. In a more recent study in Denmark, input costs on 38 dairy farms (with extensive cash cropping) were found to be 17 per cent lower than on average conventional farms (Wynen 1998).

It is often assumed that yields (production per hectare) suffer under organic management as compared with conventional farming. However, the Australian survey did not show any difference in wheat yields on organic and conventional farms in 1985-86, where they were 2.4 t/ha and 2.5 t/ha on organic and conventional farms on average, respectively.

Overseas, the relative yields when those farms changed to organic practices where found to directly relate to the intensity of the conventional farming system (Lampkin and Padel 1994). Switching from the intensive conventional systems of Europe would lead to greater losses than in countries such as Canada, the United States and Australia, were agriculture is less intensive. Furthermore, relative yields were not the same for all crops. For example, differences in wheat yields were greater than in yields of crops such as oats and field beans.

In Australia in particular, where droughts or dry conditions are not uncommon, yield variability between years is of interest to farmers. In the survey, many of the organic farmers mentioned that in dry years, their crop seemed to suffer less from lack of water than their neighbours'. Tests carried out on the limited data available suggest that yields indeed tended to decrease less on organic farms than on conventional farms in years with dry weather conditions. In wet years (such as in 1992-93) this trend may well be reversed, as nutrient availability may then become the limiting factor on organic farms. This was not necessarily the pattern overseas, where droughts are less common.

Many people think that organic produce always fetches a premium. But, in 1995, almost 25 per cent of interviewed organic farmers who sold grain/cereals, mentioned that they did not receive any premium for their products at all (H&A 1995). Less than half mentioned a premium of 10 to 20 per cent, and just under one third mentioned a premium of between 20 and 50 per cent.

Marketing products as organic does incur costs. In order to be allowed to sell the produce as 'certified organic', a farmer has to pay for the cost of inspection of the farm and certification. Inspection cost of up to $600, and a cost of one per cent of the gross income of organic produce, is typical.

In addition, marketing of organic produce might be more costly than of conventional produce, as no established markets might be available. Just over one third of respondents to the H&A questionnaire reported higher marketing costs as compared with conventional farms. Some (7 per cent) mentioned lower costs, while the majority of respondents (almost 60 per cent) reported no change in costs.

With lower input costs, a change in rotation and therefore total production, and possibly higher output prices on organic farms, the measures of returns to farming are different for the two management systems. The comparisons are shown in Table 2.

Organic farms could not be shown to be any more or less profitable than conventional farms in terms of cash returns. Only the total cash cost can be shown to be statistically lower on organic farms.

Cash measures, however, do not show where the farm is headed over time. A better measure is 'returns to capital and management', which includes depreciation costs and family labour. At $37 per hectare operated (3.0 per cent of capital) for organic farms and $21 (1.2 per cent) for conventional farms, no significant difference could be shown. In other words net returns to farming could not be shown to differ between the two systems.

Table 2: Financial aspects of organic and conventional farms in South-eastern Australia

($ per hectare operated), 1985-86

The returns to capital and management as reported above includes interest costs and rent for the farm. In order to be able to compare the financial aspects of farming itself, the cost of interest and rent should be deducted from the total cost of farming, which gives the 'adjusted' returns. Also those figures ($42 and $37 for organic and conventional farming, respectively) showed no difference between the groups of organic and conventional farmers. Whichever way we looked at it, we are not able to conclude that there is a difference between the two systems in terms of profitability.

The data were analysed taking account of premiums. The financial returns were also calculated assuming average conventional prices for the major crop, wheat. That is, premiums received for wheat produced under organic farming conditions were disregarded. This measure is shown in the last part of Table 2, and shows no statistical difference in financial returns for the two management systems.

The production mix on organic farms is often different from that on conventional farms. The relative profitability of organic and conventional is therefore influenced by relative crop and livestock prices. For example, when grain prices increase relative to livestock prices as they have done in the 1990s, organic farming will become less profitable as compared with conventional farming as studied in the survey. Changing relative prices will, of course, also change the enterprise mix on farms over the longer term, as witnessed more recently when crop prices increased with low livestock and livestock product prices. This rotation change is true for both farm types, although organic farms may be somewhat more limited in their ability to change by their need to prevent pests through this tool.

If many farmers adopt organic practices, many things will change. First of all, input costs are likely to change, but it is not clear in which direction. A higher demand for the product may increase the possibility of lower production cost per unit of input, and also lower marketing costs. At the same time, as the demand gets stronger, input producers may try to see if the market will bear a higher price. With sufficient competition, though, in the long run prices can be expected to drop. Second, total productions and output prices would change.

As, at present, around one per cent of farmers are organic, answering the question 'what would happen' means that no actual data can be gathered, as could be done to find out about the profitability of organic broadacre farming. This means that only an estimate can be made of the effect, and this estimate needs to be based on assumptions regarding inputs, production and output prices. A detailed study was done recently (Wynen 1997), and a summary is provided here.

First of all, average figures from the Australian Bureau of Statistics (ABS) for the years 1992-93, 1993-94 and 1994-95 were used for area cropped and yields in 11 regions around Australia. Variable inputs were taken from budget handbooks from the Department of Agriculture in the 11 regions.

To compare this with the situation where 30 per cent of farmers are organic, the conventional data were adjusted according to results as described in Table 1. Costs for fertilisers, pesticides and labour were reduced, and fuel increased. The difference in machinery cost was based on the difference in area cropped, as costs on both farm types were based on contracting services, similar for both management types. The area cropped on organic farms was assumed to be 61 per cent of the area in crop on conventional farms.

Yields were assumed to reduce by 20 per cent on organic farms for all crops except cotton, where the difference was taken to be 50 per cent. This 20 per cent difference is higher than the survey comparison showed, but it was considered that not all farmers may be able to make organic farming work as the first pioneers did.

Organic output prices were set at 15 per cent for crops, with no premium for livestock products, as this seemed close to prices found in the H&A (1995) study. Premiums were then assumed to reduce by 0.5 per cent with every one percentage point increase in number of organic farmers. This assumption leads to zero premium when 30 per cent of farmers had adopted organic management, a rather severe restriction.

With all these restrictions, the total returns to the whole of the sector is estimated to change from $3.91 billion per year to $3.77 billion per year, a loss of $0.14 billion per year, or less than 4 per cent of the total returns. These figures were reached with rather severe assumptions for the organic sector on yields (minus 20 per cent) and low organic premiums (declining to 0 at the end point). In addition, these figures do not incorporate lower depreciation costs on organic farms as found in the earlier survey. An assumption of less yield loss, higher output prices and lower depreciation costs on organic farms would reduce the gap between the returns from conventional and organic agriculture in Australia. In fact, the lower depreciation costs on the Australian organic cereal-livestock farms (over $20,000 on an average farm of 800 hectares) would wipe out the difference.

In summary, although only a rough estimate can be made of what would happen to the total of the agricultural cereal-livestock sector in Australia if quite a number of farmers would farm under organic management, the first estimates suggest it may be worthwhile considering this option more carefully. The same conclusion was reached in a study in Denmark, where a switch of up to 20 to 25 per cent of all farmers in Denmark to organic management did not change the total returns to agriculture greatly (Wynen 1998). A change of 80 per cent did result in considerable losses, at least under present input and output prices. Changes from conventional to organic agriculture take place over a number of years, though. During that time, improvements in the productivity of organic methods are likely. Future estimates may therefore well show different outcomes for the higher levels of adoption of organic agriculture.

Even if established organic farmers have similar returns to conventional farmers, that does not necessarily mean that it is easy to get to that stage. There are quite a number of hurdles to overcome. Work defining the transition period and its impact on cereal-livestock farming in Australia was done in the early 1990s (Wynen 1992). Overseas, a number of conversion studies are included in Lampkin and Padel (1994).

Costs identified as conversion costs can include:

• Gathering information about aspects of production and marketing:

• Biological equilibrium:

• Capital expenditure:

• Prices received:

The above-mentioned factors affect returns to farming. In Australia, this has been estimated for a 400 hectare cereal-livestock farm in the Tatiara area in South Australia. The study was based on assumptions regarding the actual changes in area farmed; crops grown; yields; use of fertilisers, pesticides, machinery and labour; livestock numbers and output; investments needed; and method of transition (partial or whole-farm). Details can be found in Wynen (1992).

In the example, with input and output prices (no premiums) for 1990-91, decreases in gross returns to farming reached a maximum of $15,000 in year 2 and went down over the years to $6,000 in year 12. With premiums for organic products, the losses were much lower and less long. A maximum loss in the second year at $12,000, was changed into a profit after the fourth year, at a maximum in year 12 for $7,400. However, the results are totally dependent on the assumptions for the particular farm. As all farms are different, farm specific estimates are required if guidance is needed.

Respondents to the H&A survey (1995) in the 'seed, grains and cereals' group were divided on the issue of how their annual income changed. Just over half (56 per cent) said it decreased, and the rest mentioned an increase during the conversion process.

Evidence available to date implies that organic cereal-livestock farming can be financially as rewarding as conventional farming, both for individual farmers, and for the sector as a whole. This is the case even when a considerable number of farmers move towards that type of agriculture, although the situation may be less positive during the conversion period. This conclusion holds at least for the years that the different studies have been done. It would be useful to have more up to date data in Australia, but as organic agriculture does not have a high priority in research in general, updates of these studies have not occurred as yet. But, as results in other parts of the world (obtained in different years with different climatic conditions, input and output prices) show the same kind of trends, it is likely that the big picture is still valid.

Individual farmers contemplating converting to organic methods would need to consider the sustainability of their current systems, their ability to withstand possible diminished returns in the conversion period and their preference to farm in a way that requires more attention to rotations and a greater use of livestock. Organic farmers are also more likely to be involved in the marketing of their products. While these methods won't suit everyone, there is mounting evidence that more and more farmers find a switch to organic methods worth contemplating.

Australian Bureau of Statistics (1995), Agricultural Census 1993-94.

Hassal and Associates (1995): 'The Market of Organic Produce in Australia', Sydney, September.

Lampkin, N. H. and Padel, S. (1994), The Economics of Organic Farming - An International Perspective, CAB International, Wallingford, UK.

Lockeretz, W. and Madden, P. (1987), 'Midwestern organic farming: a ten-year follow-up', American Journal of Alternative Agriculture 2 (2), 57-63.

Lockeretz, W. and Wernick, S. (1980), 'Commercial organic farming in the Corn Belt in comparison to conventional practices', Rural Sociology 45 (4), 708-22.

Wynen, E. (1990), 'Sustainable and Conventional Agriculture in South- Eastern Australia - A Comparison'. Economics Research Report No.90.1, School of Economics and Commerce, La Trobe University, Bundoora.

Wynen, E. (1992), 'Conversion to Organic Agriculture in Australia: Problems and Possibilities in the Cereal-Livestock Industry', National Association for Sustainable Agriculture, Australia, June.

Wynen (1997), 'Impact on Australian Broadacre Agriculture of Widespread Adoption of Organic Farming'. Report funded by the Rural Industries Research and Development Corporation. Centre of Resource and Environmental Studies, Australian National University, April.

Wynen, E. (1998), ‘Organic Agriculture in Denmark – Economic Implications of a Widespread Change’, Danish Institute of Agricultural and Fisheries Economics, Report No. 99, Copenhagen.