Organic farming – is it still a profitable enterprise?

Martin Davies

20 September 2013

In recent years sales of organic products have been down, as the impact of the recession bites on consumer spending power. This squeeze has had an impact on individual organic farmers; life has been more difficult, and many have struggled to keep their businesses viable. Some have decertified, and most will have at least wondered idly whether farming in tune with the soil and nature is really worthwhile, and whether peering over the hedgerow to their non-organic neighbours would reveal greener grasslands, or an equally difficult struggle to make a living.

To examine the economic case for organic farming Nic Lampkin from the Organic Research Centre has examined data collected over the last six years by Defra in its annual Farm Business Survey. Nic’s full report will be available later in the year, but in this piece Martin Davies, the Soil Association’s head of farming, looks at the story the data tells for organic cropped, mixed and livestock farms. The data shows that all farmers have been squeezed in recent years, and the performance of organic farms has held up well in comparison to non-organic holdings. Looking at the overall picture, especially the average trend over time, can help individual organic farmers understand what the long-term prospects for the sector are, and that the grass probably isn’t much greener on the other side.

Organic markets in the UK have been under pressure since the economic crisis started in 2008, and many organic producers are questioning whether riding out the economic rollercoaster and staying organic is the right option. The key question for farmers thinking about decertifying and reverting to non-organic production, is whether such a move is likely to pay over the long-term, or will they remain in a position where they feel squeezed, just in different ways? Our forthcoming report examines these questions with reference to data collected over the last six years as part of the Farm Business Survey, where the numbers come from real working farms. It compares the performance of organic and non-organic farms within each farming sector.

For organic farmers, the headline news is positive. The mean gross margin (£/ha) over the six-year period shows that organic enterprises are out-performing non-organic, in some sectors to the tune of almost £100 per hectare per year. Even between 2008 and 2011, when UK organic sales were in decline, organic farming remained more profitable than non-organic production.

The exception to this rule was 2011-12, when the unprecedented rainfall hit organic farming hard. Though most farmers suffered last year, the impact of the rain was felt particularly acutely in the organic sector, which depends on longer dry windows for planting, weeding, harvest and silage production. Nevertheless, on average over the six years, organic farms have out-performed their non-organic counterparts, as the table below shows. Even taking the worst three years for organic farms in each sector, average gross margins were higher for organic dairy, mixed farming and LFA beef and sheep.

The figures in this table show the difference in gross margin (£/ha) between organic and equivalent non-organic farms over the last six years

Farm type 06/07 07/08 08/09 09/10 10/11 11/12 Six year mean
Cropped £130 £44 £19 £118 -£4 -£150 £26.17
Mixed £277 £135 £110 £70 £30 -£60 £96.67
Dairy £271 £109 £1 £203 £7 £2 £98.83
Lowland Beef & Sheep -£16 £80 £3 £51 £38 -£30 £28
LFA Beef & Sheep £68 £150 £79 £51 £105 £0 £75.50
Group mean £146 £103 £42.40 £98.60 £35.20 -£47.60 £63.03

 

While squeezed organic prices and a rough ride from the weather may make the grass look greener for non-organic farms, when you take all income and costs into account organic farms have usually been more profitable than their counterparts. Business has also generally been more stable – the biggest ups and downs in the table above come from boom and bust fluctuations in non-organic prices and performance. Organic farmers clearly haven’t had it easy – this has been a tough time for all of farming – but their chances overall have been better.

Looking back over the last six years, it is clear that performance varies between farm sectors, both in the organic and non-organic samples. Data from the largest farming sectors follows, but it must be stressed that all the figures are averages and that the overall picture is variable.

When assessing the potential impact of certifying or decertifying as organic on any individual farm, it is vital to look closely both at the financial performance of the organic sector as a whole, and at specific factors that relate to individual enterprises. One should avoid focusing on premium prices or income in isolation; what is important is the bottom line. Likewise, data from individual years means little; what matters are the trends. Understanding the impact of differing inputs and approaches on a farm’s cost base is essential in determining whether an organic farm is performing well, and how its profitability can be improved. It is also important to understand what factors affect the costs of inputs on non-organic farms, as these are different, and are vulnerable to a different set of risks to organic farms. For example, the impact of rising oil or fertiliser prices, or tighter environmental legislation, can have a disproportionate impact on the non-organic sector.

Cropped farms

6 year average organic margin compared to non-organic (£/ha): +£26.17

Commentary: Cropped farms, on which cereals and other crops account for more than two-thirds of the total standard gross margin, have reported a steady increase in financial output per hectare over the last six years for both organic and non-organic farms. Organic output per hectare has been slightly higher than non-organic for all but the most recent year. Having relatively few livestock to use the fertility-building phase of rotations, these organic farmers have had to rely on higher prices for organic crops.

Wheat makes up about 50% the cereals grown on organic farms, compared with 70% on non-organic farms. Conventionally grown crops may have double the yield, but their lower prices and higher variable input costs enabled organic producers to achieve higher gross margins for wheat, even in 2011/12.
While the data from organic wheat enterprises were encouraging, they need to be considered alongside the performance of other crop and livestock enterprises that form part of the whole system, as it is hard to operate organic systems producing only wheat.

Strengths of organic: The return on organic wheat has proved to be steadier, and offers a more reliable income stream compared with the return on non-organic wheat, which has fluctuated due to the influence of external factors such as the cost of oil and fertiliser.
The crop input costs per hectare on non-organic farms were much higher, as would be expected due to the use of fertilisers and crop protection products. In practice this has a greater impact on cash flow, with higher borrowing requirements and costs in the non-organic sector compared with similar organic enterprises.

The lower yields typical on organic cropped farms mean lower costs on crop storage and handling compared with non-organic, with lower capital and borrowing for fixed infrastructure as a result. This helps explain in part why gross margins compare positively.

Challenges for organic farmers: Organic farmers have had higher labour and machinery costs per hectare, as non-organic farmers have reduced tillage. Also, the timing of operations such as mechanical weed control is critical on organic farms, and requires specialist tools – this often means that organic farmers are less able to benefit from the use of contractors.

The smaller size of the organic sector also affects road haulage costs negatively. With fewer organic producers, there is a lack of volume, a potential for erratic quality, and a higher than average distance to the mill compared with conventional producers.

One of the biggest challenges for organic producers is the cost of transfer of ownership. Each transfer usually results in a charge calculated as a percentage of the farm-gate price – this increases the price of processing a higher value product compared with a lower value one, even though in many cases the cost to the processor is similar. Although both road-haulage costs and transfer of ownership costs may in practice be picked up by consumers rather than individual farmers, these challenges are not to be ignored – inflating the organic premium consumers pay for ‘non-organic’ reasons ultimately impacts on demand, which reduces the viability of the market. Hence, the importance of establishing local buying groups to reduce costs and allow proper business planning.

Future trends: Oil futures predict a rise in the cost of oil, which will lead to an increase in fertiliser prices. When fertiliser prices rise, farmers tend not to apply optimum levels, which is reflected in a fall in crop yield, so the difference between organic and non-organic farming narrows. According to a talk given by William Waterfield at the Organic Research Centre producer conference, a small increase in organic yields of just 10%, through innovation and management, has the potential to increase net margins by as much as 20%, whereas for non-organic farmers a 10% increase in the cost of nitrogen can reduce profits by as much as 13%.

Mixed farms

6 year average organic margin compared to non-organic (£/ha): +£93.67

Commentary: Total returns are slightly lower on organic mixed units due to lower crop incomes. Since 2008, total outputs per hectare have been lower by about £100/ ha for the organic farms, which reflects the lower percentage of farmland available to be allocated for crop production in organic mixed farm systems. Both organic and non-organic farms have benefited from improvements in red meat prices post 2007/08, and organic units have benefited from higher agri-environmental support, which compensates somewhat for lower crop returns.

However, when looking at costs, organic farms have an edge. Because generally organic mixed farms have a greater proportion of land devoted to livestock enterprises than cropping, this, together with the reduced use of crop inputs per hectare, results in lower total costs on organic farms. Fixed costs and livestock costs are similar on both, with labour costs slightly higher on organic units. Overall, these lower costs mean the organic farms have a mean farm business income of £51/ha more than non-organic.

Although organic farms had lower stocking rates per forage hectare, the total livestock numbers on organic mixed farms were higher, particularly pigs and poultry (although there has been a major reduction in their numbers over the last two years, reflecting the challenging financial situation for these enterprises). Suckler beef cows were more prevalent on the organic farms, and their numbers remained consistent over the period, but total numbers of cattle on the conventional farms increased to similar levels to organic at the end of the period. The higher total livestock numbers is due to the nature of the organic system, which requires a higher proportion of grassland to cereal production in any given year.

Strengths of organic: Crop costs were higher for the non-organic sample reflecting the use of fertilisers and sprays, while other costs such as livestock and labour costs per hectare were similar, such that overall costs per hectare were lower on organic farms. Organic farmers also benefit from higher level agri-environmental support, which in part compensates for the reduced area available for growing cereal in organic systems.

Challenges for organic farmers: While the high price of organic wheat is good for the arable sector, it puts pressure on livestock enterprises that rely on bought-in feed. This means that a fall in the cost of organic wheat, and subsequent reduction in the cost of feed, would help organic livestock farms to be more competitive, as would more emphasis on home-grown proteins and alternative food sources such as silage. Using livestock innovatively, for example including pigs and poultry in the rotation, can help fertility and control weeds.

Future trends: Again the spectre of volatile and rising oil and fertiliser costs looms over the non-organic sector. Although the price of nitrogen seems to have reduced and stabilised since a peak in 2008, it could be misleading to assume this risk has reduced. The long-term trend since 2001 shows that nitrogen prices have trebled from an average of £100/t in 2001-03 to an average of £319/t between 2011/13. If this trend continues it will have a continued disproportionate impact on non-organic farms’ cost bases.

Dairy

6 year average organic margin compared to non-organic (£/ha): +£98.83

Commentary: The dairy sector is under pressure, with small margins for both organic and non-organic production. Stocking rates per forage hectare on the organic farms are typically 20% lower than non-organic, which reflects the higher use of nitrogen fertilisers on non-organic dairy farms and the reliance on purchased feed. The tendency of organic producers is to prioritise forage to maintain livestock numbers, and this is reflected in organic crop outputs, which were on average only 40% of those of non-organic farms over the period. The crops grown tended to be more diverse, with more grain legumes and less wheat. Some of the organic farms were using cereals as a whole crop, while non-organic crops included forage maize. Livestock and other outputs were similar, with organic farms on the whole tending to be slightly larger for the same number of cows.

Strengths of Organic: Total input costs per hectare were much lower on the organic farms, mostly due to crop input costs being 75% lower, highlighting the non-organic reliance on fertilisers. Livestock inputs per hectare were similar, despite higher organic feed costs. Over the whole period, farm business incomes per hectare were slightly higher on the organic farms when compared with similar non-organic dairy farms, by just under £100 /ha, although in the last couple of years this difference has reduced due to a lag in the organic premium on milk.

Challenges for organic farmers: As mentioned above, due to the relative organic milk price not keeping up with increases in non-organic prices in the last couple of years, the organic sector has appeared to underperform recently in terms of farm business income. While a 5-6ppl premium may be sufficient to maintain relative incomes, anything below is insufficient – in 2011/12 the premium was 4ppl.

This premium is necessary because milk output per hectare is 35% lower on organic farms, as a result of 15% lower yields per cow and 20% lower stocking rates. As a result, the total production costs per litre are higher because the costs are spread over a smaller volume of milk. Although lower quantities of concentrate are fed on organic farms, the higher costs of the concentrate result in higher feed costs per litre.

Future trends: The cost of production can be significantly influenced by the dairy system chosen, and in particular, the calving pattern. Increased emphasis on high-forage, low concentrate systems and reduced reliance on forage maize may help to protect organic dairy producers from variability in organic concentrate prices.

The key message for dairy enterprises is viability. For small to medium-sized dairy farms to survive they have to think differently from the larger units. Niche markets are proving to be vital to the success of some organic dairies, for example specialist milk, farmhouse cheese, ice cream, yoghurt and even butter. There are other options too, such as setting up on-farm bottling plants or door-to-door deliveries.

Beef cattle and sheep farms

6 year average organic margin compared to non-organic (£/ha): +£21

Commentary: Lowland cattle and sheep farms, both organic and non-organic, showed increasing output over the five-year period, a result of higher conventional red meat prices which underpinned organic prices. In recent years, premiums for organic beef have strengthened due to a shortage of supply, as significant proportions of the lamb and beef produced on organic farms have been sold through conventional channels.

The net result was a similar or higher farm business income per ha on the organic farms, except in 2011/12 when the non-organic sample recorded a substantial improvement. Both groups saw a steady improvement in business income per hectare over the period, but despite this, the farm business income values per farm were low compared with other farm types, as were returns to capital invested.

The difference in enterprise output is in part due to the greater prevalence of suckler cows and their replacements on the organic farms, with higher cattle sales values on the non-organic holdings due to more cattle purchased and finished on these farms. The lack of a market for organic calves from dairy herds, and the costs associated with rearing organic beef calves for finishing, contribute to the increased reliance on suckler cows on organic farms, but producers need to be aware of the cost implication of keeping suckler cows on a small scale.

Strengths of organic: In most years, livestock and crop input costs per hectare were lower on the organic farms. Total inputs per hectare were similar for both groups, with a slight advantage to the organic farms in some years. Because variable costs (in particular forage costs) tended to be slightly lower on the organic farms, this meant that there were similar or higher gross margins per head for the organic samplesample, although the larger farm size of the organic sample meant that more livestock were kept per farm. Suckler cows and other cattle were the most significant part of this, with sheep less prevalent in the organic sample.

Challenges for organic farmers: Stocking rates were typically 10% lower on organic farms, and this has an impact on fixed costs per animal, which increase as a result – meaning margins per animal are typically higher on the non-organic farms. As with other enterprises, costs per kg produced were higher on the organic farms, even though costs per ha were similar, due to the lower stocking rates and lower quantities of meat produced per ha.

Future trends: To improve productivity, organic farmers have the opportunity to make better use of clover and move to a more extensive pasture-fed system. This has the potential to supply up to 200 kg N/ ha, which would remove the limitation on stocking rates, and increase margins per animal on organic farms. Innovative techniques such as mob grazing could help to maximize the use of forage. It could be advantageous to consider stocking breeds that are more suited to organic systems, such as easy care sheep that do not require shearing, lamb easily and have a good disease and parasite resistance.

The future is organic?

There have been the first signs of an upturn in UK organic retail sales in recent months, with the horsemeat scandal generating renewed consumer interest in organic food. The number of certified UK organic producers has declined over the last few years, and now supply shortages are emerging ahead of increased demand, especially for beef, but increasingly also for eggs and dairy products. So far, retailers have not responded by raising farm gate prices, but they will be under pressure to pay producers higher prices in order boost supplies in line with demand. There is a high price perception barrier to increased consumer purchasing, often not reflecting reality, which the organic movement as whole need to tackle through improved promotion and communication with consumers. As the organic market emerges from the downturn, there should be opportunities to tackle this with increased confidence and energy.

In the short term, some people are thinking about decertifying because of uncertainty over future market prospects and policy support. We have seen producers in England choose not to renew participation in some support schemes for a further five years, appearing to prefer the flexibility to be able to drop organic certification if market conditions do not improve. Uncertainty over future CAP ‘greening’ and organic support arrangements may also be contributing to this reluctance. Achieving a stable policy support framework with sufficient continuity to give producers confidence to convert and stay organic is essential, and the Soil Association, alongside international partners like IFOAM, is currently working hard to make the case for support of organic agriculture in the new CAP arrangements. Whatever the outcome of these discussions, any farmer thinking about certifying or decertifying in this current time of uncertainty needs to consider different scenarios of future CAP support, and consider waiting for the new policy framework to clarify before making long-term decisions.

In conclusion, the financial impact of organic management is a very farm-specific question and for many farms organic will be by far the most profitable option. For others considering a move back to non-organic, the costs of investing in new infrastructure, equipment, fertilisers and sprays may be prohibitive.
Increasing yields and overall productivity may be worth pursuing, but not if the increase in purchased inputs exceeds the gain. The key issue for many organic cropped farms is the lack of income generation from the fertility-building phase, especially where livestock enterprises are not a component of the farming system. For some farms there is potential to use the fertility building phase as a fertility break and at the same time to grow biomass for energy production, which could alter whole farm profitability for organic farms in the future.

Premium prices should not be seen as the sole, or even the main, factor determining profitability. Organic farming brings the potential to reduce input costs and working capital requirements, as well as reduced crop storage costs and machinery investments. These cost savings, combined with existing policy support, and premium pricing, lead to similar – or sometimes higher – levels of profitability for most farm types. It is this combination of factors that should lead more farmers, and their advisers and land agents, to look again at the business case for organic farming.

Over the last decade organic production’s advantage has been from greater engagement with consumers, a price premium for organic produce and higher levels of agri-environment support. In the future, it should be possible to argue that organic farming continues to deliver more public and environmental goods and services and justifies higher levels of agri-environment support. Producers, processors, and retailers will need to continue to engage with consumers to justify any product premium, but the future for many organic farms may well be less about product premiums and more about lower costs of production, with fewer inputs and less volatility induced by lower input use.






Mother Earth journal cover

 

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