Section D: The Economics of Organic Agriculture

• Projected Outcomes
• Background / Lessons
  • Introduction
  • How does organic agriculture affect the costs of production?
  • How does organic agriculture affect yields?
  • And if all farmers switched to organic agriculture could the world produce enough food?
  • How does organic agriculture affect prices?
  • Government policies
  • What is the state of the organic market in the US today?
  • What value does the consumer get for the added cost of organic?
  • Conclusion
• Activities

Projected outcomes:

1. Students will learn how organic agriculture can affect farm profitability.
2. Students will learn how government programs can affect organic agriculture.
3. Students will learn about the current state of the organic market.
4. Students will learn about some of the critiques of organic agriculture.

Background/Lessons:

Introduction

The profitability of an enterprise is the product of the:

• Costs of production,
• Yield, and
• Price

This section begins by looking at how organic agriculture affects costs of production, yields, and prices at the farm level. It then goes on to introduce some of the other forces that affect the economics of organic agriculture, including government payments and the handling of external costs. Next, it briefly covers growth in organic demand. Finally, this section looks at the reasons why some consumers choose organic, while others do not.

How does organic agriculture affect the costs of production?

In general, organic farmers rely on resources recycled on-farm and on management practices rather than on purchased fertilizers and pesticides. This approach can significantly reduce some costs of production. On the other hand, those inputs that organic farmers do buy tend to be more expensive than conventional inputs. For a side-by-side comparison of production costs for conventional and organic field crops see Comparative Economics of Conventional, Organic, and Alternative Agricultural Production Systems). Let’s look at some typical production costs one by one.

Land is often the largest single production expenditure, especially for field crops. In general, land costs are determined by land prices and rents elsewhere in the county, by soil type, and by prevailing prices for conventional commodity crops more than by farming practices. In theory, certified organic land might command a premium price. In practice, it does not, at least not yet.

Fertilizer Organic practices such as including legumes in the crop rotation and applying manure or compost eliminate most fertilizer costs, other than lime. However, if an organic farmer does purchase fertilizer, the cost for many organically approved fertilizers is substantially higher than the cost of conventional fertilizer. Overall, fertilizer costs tend to be lower on organic farms.

Seed Certified organic seed is usually more expensive than standard seed. In addition, farmers who rely on rotary hoeing for weed management often plant at higher densities and so need to pay for more seeds per acre. Seeds for unusual crops and varieties favored by many organic vegetable growers can be expensive. So seed costs tend to be higher for organic farms, but seeds usually account for a small percentage of a farm’s overall costs of production.

Feed costs are a significant input on livestock farms. Purchased organic feed is often twice the cost of conventional feed. As a result, many organic livestock farmers rely heavily homegrown harvested feed. For those farmers feed costs tend to be low; but for organic farmers who purchase a lot of feed, those costs can be very high. Total feed inputs for organic farmers are on average 1.5x higher that their conventional counterparts. See Organic Costs and Returns: Milk Production, USDA ARMS

Pesticides Organic farmers are not allowed to use synthetic pesticides, per USDA Organic rules. However, they are allowed to use inputs that are registered on OMRI (Organic Materials Review Institute). Organic doesn’t necessarily mean chemical free, but overall pesticide costs are low on most organic farms.

Machinery, fuel, repairs, and machine hire can be slightly higher on organic operations. Conservation tillage and carefully integrated management can reduce trips over the field and associated fuel costs, and organic farms do not require pesticide applications. On the other hand, practices such as ridge tillage, flaming for weed control, and incorporating small grains and hay in the rotation require specialized equipment. In addition, the need to clean equipment that moves from conventional to organic fields can make custom work more difficult or expensive to arrange. Many organic farmers manage machinery costs by being excellent mechanics who build or adapt and maintain their own equipment.

Labor needs on organic farms are usually greater than on comparable conventional farms. In addition to requiring more labor in the field, organic farmers need to keep more detailed records than their conventional counterparts, which adds to total labor demands. However, in some cases the greater overall labor needs may not translate to higher costs for hired labor. For example, on organic grain-livestock farms the labor needs are usually more spread out through the year because the farm is growing a wider variety of crops (with different planting and harvest dates) than conventional grain farms. This means that full-time organic grain farmers are less likely to need to hire additional labor at planting and harvesting than their conventional neighbors. Nevertheless, on average, labor needs and costs are higher for organic farms.

How does organic agriculture affect yields?

Many people assume that organic agriculture produces low yields. This assumption holds true for some crops and some situations but not for others. Let’s look at some specific examples to see how organic practices affect yields.

During organic transition crop yields usually decline. However, after five or more years of organic management, yields on many organic farms recover to the same level or sometimes higher levels than when the same fields were under conventional management. There are two explanations for this decline and recovery. First, it takes several years for organic management practices to build soil health, populations of beneficial organisms, and the other ecosystem services that organic agriculture relies on. Second, it takes several years for the farmer to learn how best to manage his or her organic system. In essence, during the first few years the transitioning organic farmer is a beginner to the organic system, even if he or she has years of experience with conventional practices.

Organic grain yields on established farms can equal conventional yields on comparable fields (see side by side comparisons, including the Rodale Institute Farming Systems Trial that has been running more than 30 years and an economic comparison of organic and conventional crops that analyzes the farm profitability of both systems based on 50 cases). One of the main differences in production is that organic rotations typically require some years in crops that may be more difficult to market, such as alfalfa and small grains, since the goal of organic systems is to maximize long-term soil health as well as profitability. As organic meat and milk production has increased, so has demand for organic livestock feed. An apparent yield difference may emerge when farmers plant different varieties. For example, organic farmers often prefer to plant food-grade varieties of soybeans for the Asian market. Food grade soybean varieties have lower yields but can command far higher prices than soybeans used to feed livestock.

Some organic crops have lower yields than their conventional counterparts, at least for now. For example, cereal crops can have a 20-35% lower yield than their conventional counterparts, according to this Purdue comparison. In other cases, yields may be similar in some areas but not others. Organic apple production in the Midwest and Northeast has lower marketable yields than conventional production, but in the Pacific Northwest, where insect and disease pressure is lower, organic and conventional apple yields are comparable. As more research and plant breeding are done, scientists are hoping to reduce the yield gap between organic and conventional production of many crops.

A study done in Minnesota from 2016-2020 showed organic alfalfa yielded about 0.8 ton/acre less and organic corn 60 bushel/acre less than their conventional counterparts. However, crops grown organically sell for higher prices in the market, but are subject to higher labor, equipment, and manure costs than crops grown conventionally. They also don’t have fertilizer or large pesticide costs. As shown in the table below, organic crops can have a larger per acre profit than conventional crops. (Conventional and Organic Enterprise Net Returns)

Average organic milk production per cow per year is lower than average conventional milk production (30% lower according to a USDA study). It is important to recognize that many variables in dairy farming other than organic versus conventional can influence production. For example, 90% of conventional Wisconsin dairies manage cows in confinement. Confinement farming produces higher milk yields, but also adds costs for hauling manure and grain, and more time from the farmers themselves. Grassland 2.0, an initiative based at UW-Madison and funded by the USDA, has brought attention to rotational grazing and grassland farming. Though milk production per cow is lower in these systems, the costs for feed, grain harvest and storage, machinery, and labor are also lower. In addition, well-managed grazing systems bring many ecosystem benefits, including increased biodiversity, soil restoration, less nutrient runoff and cleaner water, better animal health, and higher profit margins per cow. The USDA organic label requires farmers to give their animals access to pasture, and says that cows should get at least 30% of their dry matter intake from grazing during the grazing season, which must be at least 120 days per year. As a result, it is easier for livestock farmers who already practice grazing to become certified organic. However, this doesn’t mean that all milk labelled “organic” doesn’t come from confinement farms- in fact much of the organic dairy sector has become industrialized. (See this Wisconsin State Farmer article, Economics of Conventional and Hybrid Grazing Dairies Relative to Organic and Organic Non-Grain Dairies, this Washington Post article, and The Industrialization of Organic Dairy).

And if all farmers switched to organic agriculture could the world produce enough food?

Some critics of organic agriculture claim that the world will have to choose between having enough food for a growing population and organic agriculture. How much truth is there to this argument?

1. For many crops, yields under conventional and organic management are statistically equal, as we have seen, and organic yields can be higher in adverse weather conditions like drought. The claim that organic yields are always lower than conventional is based on assumptions rather than side-by-side comparisons. Still, in developed nations overall organic yields are somewhat lower than conventional yields, in part because many newer organic farmers have not yet perfected their systems and in part because some crops really do have lower yields under organic management. In countries with less industrialized agriculture, however, the situation may be different. Some scholars predict that in developing countries a shift to organic agriculture could bring significant yield increases over the current poorly managed conventional systems. (“Can Organic Feed the World?” Rodale Institute, “How Organic Can Help Achieve Food Security & SDG 2“, Organic Agriculture and Food Security Factsheet)
2. At the present time, hunger in the world is not caused by insufficient food stocks but by uneven distribution. More than 800 million people are hungry, yet 1/3 of food grown is wasted and goes to landfills. The focus also needs to shift from increasing yields of what is currently grown and instead shift to grow what is required for a healthy diet. There is an overproduction of grain, sugars, and fats in our current global system, and not nearly enough vegetables and fruits grown to meet a healthy diet. (“Can Organic Feed the World?” and “Paper Shows Current Food Production Nutritionally Inadequate“, Rodale Institute)
3. In 2000, about 6% of the US corn crop was used to make ethanol, but from 2010 to 2020 between on average 38% of the corn harvest has been used for ethanol, with annual fluctuations depending on corn yields and miles driven (US Department of Energy). Although some of the distillers grains left over after making ethanol can be fed to cattle, that US grain-fed beef is unlikely to feed the world’s hungry. Unless energy consumption can be curbed, bioenergy production is likely to put far more pressure on world food supply than large-scale conversion to organic agriculture would.
4. Many agricultural practices, from feeding grain to livestock to growing flowers, reduce the total amount of human food produced on agricultural land. Like organic agriculture, these practices do not take food away from the needy; rather, they add value for farmers and consumers in a world where hunger is caused by inequality, not global food shortages.

Solving world hunger is a complex challenge that will require addressing income inequality and distribution issues, slowing population growth, and reducing non-food demands on agricultural land. Agricultural production plays a critical role, but the evidence indicates that organic agriculture can be both efficient and compatible with “feeding the world.”

How does organic agriculture affect prices?

As any grocery shopper knows, organic foods usually cost more. Part of this added cost comes from higher processing costs for organic foods and from the distribution inefficiencies of a smaller food system. (Despite their rapid growth and high profile, organics still account for only 6% of total US food sales). In addition, organic farmers usually get significant price premiums. For example, organic food-grade soybeans can receive prices of $22 per bushel, and organic soybeans for feed and organic corn usually receive a 50 to 100% premium over their conventional counterparts. Organic milk premiums in the US average roughly $1.50 per half gallon. (For current comparisons of organic and conventional prices, see Mercaris Market Prices and USDA AMS Dairy Market News Weekly Printed Report (Current Report) and for a discussion of the special requirements and challenges of marketing organic grains see Getting Started with Organic Grain Markets).

So if some production costs are higher and others lower, yields are the same or lower, and price is higher, what is the bottom line for farm profitability in organic agriculture?

• During the transition period, when a farm has all the costs of organic agriculture, reduced yields, and no price premium, farms are usually less profitable than conventional farms.
• However, once the transition is complete, yields generally improve and the farm products can get a significant price premium. For these reasons, established organic farms are often more profitable than their conventional counterparts.
• As with conventional farms, management, timing, and regional cost and market variations are key to profitability.

Activity 1: Costs and Returns

Government policies

The US has one of the most highly subsidized agricultural systems in the world. Overall, our subsidies are second only to those of the European Union (EU). Unlike the EU, the bulk of our subsidies go directly to support conventional commodity crops, rather than to support environmental or recreational benefits of agriculture. The structure of US subsidies puts organic farmers at an economic disadvantage because of their reliance on extended crop rotations and grazing. (See “Examining America’s Farm Subsidy Problem” and “How Farm Subsidies Affect the US Economy” for explanations on farm subsidies in the US).

The US Department of Agriculture has several conservation payment programs, some of which can benefit organic farmers. For example, under the Environmental Quality Incentives Program (EQIP) in Wisconsin, Iowa, and other states farmers can apply for funds to help cover some of the costs of organic transition. The Farm Service Agency (FSA) offers some programs to help farmers with costs of transitioning to organic, getting organic certified, repairs, and insurance among other things (USDA Help for Organic Farming).

Environmental and sustainable agriculture advocates have tried to change the structure of farm subsidies to make them more compatible with sustainable and organic agriculture. The FSA also oversees multiple agricultural conservation programs, like the Conservation Reserve Program (CRP) which pays farmers to set aside land from production and plant environment-enhancing species.

What is the state of the organic market in the US today?

According to the Organic Trade Association, US organic food sales have grown between 9 and 12.8 percent each year since 2011, while total U.S. food sales over this time period have grown in the range of only 2 to 4 percent a year (OTA Press Release, 2020).

Activity 2: Wanted: Organic Consumer

What value does the consumer get for the added cost of organic?

According to market research, consumers buy organic foods

• For their personal health
• Because they think it tastes better
• Because of food safety concerns
• To help the environment
• To support other values such as animal welfare and family farms

“What motivates consumers to buy organic foods? An empirical study in the United States” (Gundala and Singh, 2021).

So, are organic consumers getting what they pay for? Let’s take a closer look.

Personal health and food safety

The National Organic Program states: “USDA makes no claims that organically produced food is safer or more nutritious than conventionally produced food. Organic food differs from conventionally produced food in the way it is grown, handled, and processed.” A few organic critics claim that organic food exposes consumers to more biological contaminants since manure is commonly used in organic systems. Organic advocates claim that organic foods tend to be higher in beneficial nutrients and lower in risk factors such as pesticides.

So which side is right? It’s less of a question of who is right and wrong because there are some truths in both sides. Food can get contaminated, no matter if grown conventionally or organically, though organically grown foods are not higher risk. Organic systems do have lower pesticide exposures for both farm workers and consumers. However, the FDA sets limits on allowable levels of pesticides in conventionally grown foods that are intended to protect consumer health. Let’s dive deeper into these facts.

Organic foods have lower pesticide residues than conventional foods. (Mayo Clinic) Conventionally grown produce is four times more likely to have pesticide residues than organically grown produce, according to a review done in 2014. An organic diet can significantly reduce exposure to organophosphate pesticides, which have always been banned in organic systems. In conventional agriculture it can take many years to prohibit a pesticide, even after health concerns are raised. For example, chlorpyrifos, a very commonly used pesticide that affects the nervous system whether exposed long or short term, was recently banned in 2022. This action came after 57 years of use and 15 years after environmental organizations petitioned to have it banned (EPA Release, 2021). 

On the other hand, organic production doesn’t always mean no pesticides were used. While synthetic pesticides are prohibited, many natural pesticides are allowed if cultural methods don’t control the pest (What, Organic Farmers Use Pesticides?, Rodale Institute). Still, organic produce generally has lower pesticide residues than conventionally grown produce. See “From Crop to Table Pesticide Report” to learn more about human health risks associated with certain pesticides. Many scientists and public health experts think that pesticide residues on conventional produce are below levels that pose a health concern for consumers (PDP Annual Summary,  Appendix F. Pesticide Residues by Commodity, p. 192-198). You can check out pesticide residue levels by fruit or vegetable in this Pesticides in Produce Report. However, farmers, farm workers, and residents of rural agricultural communities that have long term exposures to pesticides are at higher risk for conditions such as asthma, bronchitis, non-Hodgkin’s lymphoma, Parkinson’s, and prostate and lung cancer (“Stop Eating Pesticides“, 2020).

Factors such as soils, micro-climate, variety, and post-harvest handling have a greater impact on the nutritional content of the item than whether or not it was grown organically. Healthy soils have higher organic matter content, thus higher supplies of plant macro- and micronutrients essential for plant growth and development. Among the nutrients we get from eating fruits and vegetables are also phytochemicals, bioactive compounds produced by plants that can be beneficial to human health beyond basic nutrition (“Potential Synergy of Phytochemicals in Cancer Prevention: Mechanism of Action”, Liu, 2004). A recent preliminary study done in 2022 looked at the correlations between soil health and nutrient density in foods raised in conventional and regenerative agriculture systems. It concluded: “Despite small sample sizes, all three crop comparisons show differences in micronutrient and phytochemical concentrations that suggest soil health is an under appreciated influence on nutrient density, particularly for phytochemicals not conventionally considered nutrients but nonetheless relevant to chronic disease prevention.” Varieties are usually chosen for how well the farmer will thinks they will perform in the field, with each one having slightly different nutrition from another. The best thing a consumer can do is eat a variety of varieties (“Nutritional Values Vary Among Same Varieties”, 2018). Post-harvest handling also plays a role in the nutrition we get, since nutrients can break down over time, especially if the food is not handled properly. See this assessment of post-harvest handling practices in Northern Tanzania.

Packaged and processed organic foods have fewer additives than conventional foods, since the organic standards prohibit the use of unreviewed food additives. For people who are sensitive to certain food additives this attribute of organic food can provide a health benefit. See this article on Packaged Organic Foods done 2019-2020.

Organic and conventional foods seem to be about equally susceptible to contamination by pathogens. The vast majority of food-borne illnesses result from conventional foods, but of course the vast majority of food eaten is conventional. A few critics of organic agriculture have claimed that because they rely on manure as a key source of soil fertility, organic foods can be expected to be more likely to carry pathogens. However, studies comparing microbial contamination of organic and conventional produce do not show consistent differences (Microbiology of Organic and Conventionally Grown Fresh Produce, Batalha et. al, 2016).

Antibiotic resistance Many conventional meat animals, including swine, cattle, and poultry routinely eat antibiotics in their feed. Testing shows a low incidence of antibiotics in meat, but a high incidence of antibiotic resistant bacteria. Also, antibiotics get into the environment through the animals’ manure. In contrast, organically certified meat may not be fed antibiotics at any point in the animal’s life. Many medical researchers think that the widespread use of antibiotics in animal feed (about 70 percent of all antibiotics used in the US, according to one estimate) is a significant factor in the development of antibiotic-resistant bacteria. For more information on antibiotic use in agriculture, see the Keep Antibiotics Working website or look under “health” in the Evironmental Defense website.

In recent years, public and scientific pressure has started to influence some conventional meat production and processing corporations. A couple of studies also question the economic benefit of routine use of antibiotics. Several major meat and poultry producers claim that they no longer routinely use subtherapeutic antibiotics, but there is no independent verification of these claims, and there is no tracking of how much antibiotics they still use to treat or prevent illness in their animals. For example, careful reading of Smithfield’s policy on antibiotic use in pork production reveals that preventive use of antibiotics is still allowed, and that antibiotic use will not be considered routine as long as it is not administered over the animal’s entire life. Thus, withdrawal of antibiotics from the feed for the last month would be enough to ensure compliance with this policy.

To date there have not been clinical studies of the long-term effects of consuming meat and dairy products from hormone-treated animals. In conventional US agriculture, producers inject hormones into steers and cows to promote growth and milk production. The European Union has banned this practice because of concerns about possible effects on human development and health, and the use of hormones is also prohibited in organic agriculture. For an excellent summary of hormone use in animal agriculture and the lack of information on human health impacts see the Cornell factsheet Consumer Concerns About Hormones in Food.

Likewise, there are no long-term studies on the human health effects from eating genetically modified organisms. Use of genetically modified organisms is prohibited in organic agriculture.

For a bibliography of studies on health impacts of organic foods see the Alternative Farming Systems Information Center website at http://www.nal.usda.gov/afsic/pubs/srb0802.shtml and http://www.nal.usda.gov/afsic/pubs/srb0803.shtml.
Literature reviews such as the Scientific Status Summary of Organic Foods by Carl K. Winter 1 Sarah F. Davis in the Journal of Food Science, 2006 (accessed at 1 http://www3.interscience.wiley.com/cgi-bin/fulltext/118601430/HTMLSTART) and AFSIC’s summary by Mary Gold, 2008 (accessed at http://www.nal.usda.gov/afsic/pubs/faq/BuyOrganicFoodsIntro.shtml) can provide a helpful overview.

Flavor
Many top chefs prefer the flavor and quality of organic ingredients. Many regular consumers also cite better flavor as a key reason to buy organic foods. However, flavor is quite subjective; what one person likes in a food may be exactly what another dislikes. Also, some of the high quality of organic foods may be a result of the varieties chosen and care taken in post-harvest handling, rather than the organic production standards per se. What is clear is that unlike the 1980s, when organic produce was hard to find and often unattractive and no longer fresh, organic foods today usually match and often exceed conventional foods in both appearance and taste.

Environmental Impact
Organic standards are primarily focused on minimizing the environmental impact of agriculture. Overall, organic agriculture reduces pollution and protects biological diversity compared to conventional agriculture (see Section C add http://www.plantmanagementnetwork.org/pub/cm/symposium/organics/Reganold/). However, organic agriculture is not the only path to environmental stewardship. Many ecologically minded farmers choose not to conform to all the rules of organic agriculture.

Other Values
Historically, organic agriculture has been associated with a number of social values, including animal welfare, small-scale family farms, entrepreneurial small business, and better treatment of hired labor. While some organic farms and processors embody all these values, they are not all enforced by organic standards.

The organic regulations do address animal welfare, though some of the standards are not as high as those for other organizations, such as the Animal Welfare Institute. How rigorously the standards are applied continues to be a topic of heated discussion within the organic industry. For example, organic animals must have “access to the outdoors” during good weather. To some that means the animals must be out on pasture; to others an open door to a fenced yard is enough. Summary of some animal welfare claims

The organic regulations do not address farm or business size or structure at all. In recent years several very large farms and major food processors http://www.certifiedorganic.bc.ca/rcbtoa/services/corporate-ownership.html have entered the organic market.

Organic regulations also do not address treatment of workers at all, though the prohibition on use of many pesticides probably benefits farmworker health.

See Section E on more information concerning other values in agriculture.

Activity 3: Decision Time — Is Organic Worth the Money?

Conclusion

Organic agriculture can be profitable for farmers, although the transition period is often financially difficult. The organic sector accounted for less than 3% of total food sales in the US in 2005, but growth is strong and is projected to remain well above 10% per year. This strong growth has attracted the attention of large corporations, from processors and distributors such as Kraft and General Mills to retailers such as Wal-Mart.

Until passage of the Organic Foods Production Act in 1990, there was no support at the federal level and extremely little support in the states for organic agriculture. This situation is beginning to change, but government support for organic agriculture remains disproportionally low in the US. Twenty years ago the driving forces for organic agriculture were concerned consumers and farmers. Today large corporations have entered the market and the consumer base has expanded from a very small number of highly committed consumers to a large number of people who buy just a few organic products.

The question about organic agriculture is no longer whether it can produce or be profitable but what direction it will take as it grows and whether it can address social as well as environmental aspects of sustainability. See Section E for a discussion of the concerns many organic activists have about the future of this sector of agriculture.