Organic farming offers higher profits with challenges

Organic grain farming can increase farmers’ incomes significantly, but there are also challenges, particularly in transitioning to organic. This was a key message at a Beginning Organic Farming Workshop held at Purdue University this past February.

Gary Reding, president of Langeland Farms, Inc., discussed the “real life” economics of growing organic and conventional crops, including popcorn, dry beans, soybeans, wheat, and corn on 900 acres in Greensburg, Indiana.

Reding compared revenues from conventional and organic farming. Referring to 2005 data compiled by Purdue University, Reding pointed out that conventional farms lose money each year. Total crop revenues plus government subsidy payments fall far short of covering overhead costs for machinery, drying/handling, labor, and land rent. According to Purdue’s data, a 1200-acre conventional farm with high productivity soil suffers a loss of more than $50,000 (see Figure 1).

By contrast, Reding said that a 300-acre organic farm growing a crop rotation of corn, soybeans, wheat, hay, and popcorn, produces a net revenue of $3675 (see Figure 2). “Earnings are $54,723 better than the best conventional 1200-acre farm,” said Reding.

Extending these figures to a 1200-acre organic farm would produce net earnings of $132,900, said Reding.

Organic crops command much higher premiums than conventional with per bushel prices of $6.25 for corn, $20 for soybeans, $6 for wheat, and $60 per ton for hay.

David Conner, research specialist at Michigan State University, said organic corn and soybean production also use one-third less energy than conventional production.

Crop diversity key to managing risks
Corinne Alexander, Purdue grain marketing expert, also said that organic farms earn significantly more revenue than conventional, in some cases as much as double (see Figure 3).

Alexander said that variable costs for both conventional and organic farms are similar.

Key to the success of organic farms is crop diversity. “Diversity is a key strategy to managing risks,” said Alexander.

Higher organic profits are not limited to grains. Organic dairy farmers may receive as much as $5 more than conventional farmers selling 100 pounds of milk, said Joe Balagtas, an assistant professor of agricultural economics at Purdue. Balagtas cautioned there is no guarantee price premiums will last. “We don’t really know what’s going to happen in these markets,” he said. For now, David Robb, manager of business development, Indiana-based Traders Point Creamery, said markets for organic dairy are “exploding.” “There is a shortage of supply, and we can’t meet the demand,” he said. Organic vegetable producers are also succeeding. Conner described research that looked at 12 organic vegetable farms in the Northeast United States. “Are people making a living? Yes,” said Conner.

To encourage more organic production, Conner said more organic farming research is needed at land-grant universities.

Transitioning challenges
While the organic market offers many opportunities, Reding said transitioning to organic is a mental challenge. “Farmers have to ask themselves ‘can I make a living growing organically?’”

Reding described three transition scenarios, ranging from a gradual transition to one he described as “suicidal.” In general, Reding said farmers would lose money in the three-year transition period to organic, but then earn it back in following years.

Reding warned against transitioning an entire farm at once. “To take an entire farm and transition to organic is too much too fast,” he said.
Alexander said, “Transitioning is tough, and there’s no two ways about it.” A big reason is limited markets for transitional crops.

Alexander said organic farmers may need to find additional revenue sources to fill the three-year gap until the farm becomes certified organic. “Will your banker support you through the transition?” she asked.

To make the transition to organic easier, Alexander recommends converting small sections of a farm to organic. “You don’t need to convert all at once, especially with grains,” she said. “Convert a little at a time and learn how to farm organically.”

Alexander also recommends using government programs, such as organic certification cost share and value-added agricultural producer grants, to help the transition.

Learning curve
Transitioning involves a learning curve to adjust to new production methods. New equipment may be needed. “If you got rid of your moldboard plough, you may have to buy another one,” said Alexander. The new organic farmer must learn how to respond to pest and disease challenges without using chemicals. More labor may be required.

Another challenge is low yields, which new organic farmers can expect for the first three years. But yields will eventually improve, according to research at Iowa State University. “After three to five years, yields may be 90-95% of conventional grains,” said Alexander.

While food-grade corn and soybeans command higher premiums, organic farmers must meet quality demands to earn those premiums. Though quality is not as important with feed-grade corn and soybeans.
Organic certification also presents challenges. “You need to have good records,” said Alexander.

Then there are marketing risks. Alexander said organic farmers may need to negotiate more with buyers over prices, and may have to wait longer to receive payments. Additional storage may also be needed to store grains while the farmer finds a buyer.

Finally, organic farmers face increasing challenges from genetically modified crops, which now make up the majority of corn and soybeans grown in the United States. Pollen drift is a big concern with corn, while seed contamination and commingling in grain handling is a problem with soybeans.

Figure 1.
1200-acre conventional farm growing corn, soybeans, and wheat
Margin (income) $200,200
Government payment 45,852
Total revenue 246,052
Total overhead costs 297,100
Net loss -51,048
(Source: January 2005 Purdue Crop Cost & Return Guide)

Figure 2.
300-acre organic farm growing corn, soybeans, wheat, and hay
Margin (income) $83,175
Government payment 8,100
Total revenue 91,275
Total overhead costs 87, 600
Net earnings 3,675

Figure 3.
Organic Conventional
Corn prices $4.00-$7.25 $1.71-$3.29
Corn yields per bushel 135 155
Revenues $540-$978 $265-$510
Soybean prices $10-$14.75 $5.15-$5.60
Yields 35 49
Revenues $350-$516 $252-$275
(Source: www.newfarm.org and IL)