Where is the organic market headed?

Organic Farm Field with sign reading Organic Farm Field Do Not SprayMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One question that pops up over and over involves the future of organic products. Some people rhapsodize about the virtues and benefits of organic for consumers and the environment, while others grouse about a waste of productivity and foolishness. There really isn’t a way to reconcile these two views, and economics doesn’t add much to the pop psychology of the debate. However, economics can help anticipate how the two different, but related segments will influence each other going forward. In a system, the different parts connect and impact each other through direct and indirect feedback loops. For example, farmers and livestock producers who compete for the same resources find themselves connected through profits and losses.

Conventional Organic Chart

You can paint a picture where organic operators don’t care about profits. They just want to do well by doing good, but the system of life doesn’t let anyone remain isolated. The price of farm and ranch ground revolves around how much income it can generate, and the equipment and inputs prices also respond to the profitability of their usage. Organic operators need to bid for ground, equipment, and inputs relative to the conventional market. If the profitability of conventional farming goes up, conventional producers will bid up the costs for the organic and vice versa. Likewise, if the profitability of organic farming increases, conventional farmers will move to take advantage of the opportunities by moving into organic.

One of the many problems with looking at economics through the lens of spreadsheets and equations includes the promise of false precision. Most people prefer a simple answer that is simply wrong to an answer that acknowledges the messiness of the real world. The system’s approach to economics reflects the reality of sloppy linkages which reliably work, but don’t lend themselves to precise forecasts. In our agricultural world, conventional commodity prices influence organic commodity prices (and vice versa), but the timing and the degree never repeat themselves. While we can anticipate, we can’t predict.

One factor that we should anticipate is that the price and profit gap between organic and conventional products will narrow as larger and more capable farmers and ranchers enter organic in search of better profits. They will bring capital and sophistication to control of costs and reduction of the yield gap between conventional and organic farming practices. This should be true for all organic crops and livestock products, but the process will be messy and painful for the participants. Those that manage the change better than their fellow participants will reap the outsized benefits.

What is the current situation? Looking at the last five years in the Minnesota Farm Management database, we can see some of the basic issues of organic versus conventional farming spring into focus. Instead of looking at the volatile prices and yields, let’s look at the relative prices and yields that will encourage or discourage the switching of producers between the two options. First, there are way more conventional farmers than organic farmers in reality, and included in the database, but the FINBIN data is the best public data available for the comparison. I made an adjustment to use the same cash rents for both groups. The smaller number of organic producers had lower cash rents, but if the organic acreage increases, it will need to compete on an equal footing to rent ground. Other than that, I left the numbers unadjusted for cost and yield.

Organic to Conventional Corn

Organic and conventional yields move together based on weather, but they don’t necessarily move in lock step. Poor growing weather hits organic yields harder than conventional crop yields which implies a bigger downside risk which farmers hate with a passion. Overall, organic farmers have 40% yield penalty versus conventional, and on average they yielded 63 bushels less per acre. The lower yield also increases the cost of production per bushel because the fixed and variable expenses per acre have to be spread over fewer bushels. Organic farmers spent a little less per acre in variable expenses with lower seed and fertilizer costs, but otherwise the cash expenses were very comparable. All said and done, the cost of production per bushel ends up 60% higher for the organic farmers. Currently, they receive a very nice price compensation for that yield and cost penalty.

Over the last five years, organic corn prices were 270% of conventional corn prices resulting in a clear winner. Organic profitability per acre was on average $588 higher each year. And, the following table shows that soybeans follow corn’s broad pattern.

Organic to Conventional Soybeans

So why have so few farmers switched to organic in this database? There are any number of non-economic reasons. First and foremost, people fear change. Many people would rather fail conventionally than fail unconventionally. Additionally, the three-year transition to organic creates a barrier where farmers suffer the yield penalty, but don’t get the price benefit. Likewise, it takes time and money to acquire the knowledge and practices to become a top performing organic producer compared to the readily available information for conventional practices. Lastly, organic farming requires almost twice as many hours of fieldwork per acre which restricts the number of acres that an operator can manage. Too many farmers forget that they are paid by the bushel, not by the acre. They prefer being a 2,000-acre operator losing money to being a 1,000-acre operator making a great profit. Down at the coffee shop, everyone knows that big acreage and big iron represents success.

Even so, the feedback never sleeps or blinks. With organic corn and soybeans offering a $588 and $175 per acre advantage respectively over the last five years, more farmers will overcome their aversion to change and public image. They will plant more organic acres which will narrow the price gap and slowly eliminate the organic price advantage. Eventually, conventional farming will be just as profitable or money losing as organic because of acreage adjustments, but that economic truism misses the point.

Those enterprising farmers willing to change now will reap much better results as the process plays itself out over a long time period. For a smaller acreage operator currently losing money, now is the time to make a move while the market still needs to pay a premium. They can let the future sort itself out later, but at least they will be there to participate.