Is organic farming more profitable?

Organic Agriculture Centre of Canada

Organic farming, in general, is more profitable than conventional farming. This is the conclusion of a paper published by the UN’s Food and Agriculture Organization in 2009. The author, Noémi Nemes, examined the results of more than fifty studies that compared the economics of organic and conventional agriculture.

In the U.S. and Europe, organic farms are generally more profitable because of higher prices and/or lower input costs than conventional farms. In developing countries, the profit margin is greater for organic farms because they have greater yields and higher prices than their non-organic counterparts have.

Yields
Yields in well established organic farms are most often lower than conventional. However, American studies showed that in wetter areas (e.g., the Corn Belt), conventional yields are higher than organic, but in dry areas, organic yields surpass conventional. In developing countries, organic yields are generally higher than conventional but are much higher under less favourable conditions (e.g., drought).

If yield comparisons took into account the quality of the target crop, this could compensate for lower yields of organic farms in industrialized countries. When comparing relative yield and composition of vegetables over 12 years, conventional farms yielded 24% more, but organic vegetables had 28% higher dry matter. Also, organic produce has also been found to have higher levels of vitamins, minerals, healthy fatty acids and phytonutrients.

Production costs
Production costs are generally lower for organic farms. Most European studies found that variable (operating) costs are 60-70% lower but fixed costs were higher, compared to conventional farms. Overall, the total production costs of organic farms are lower.

Data are based on relatively cheap input costs. The increase in the price of fossil fuels is creating an increase in the cost of related inputs. This will likely have the greatest effect on conventional farms, particularly those that rely heavily on fuel, synthetic fertilizers and pesticides. Among organic farms, the operations that are highly mechanized and dependent on the use of plastic mulch will be most affected.
Production costs vary with regions. For example, in the U.S., organic dairy farms in Wisconsin have lower feed and labour costs than similar New England farms, and are consequently more profitable. Throughout North America, the higher cost of organic feed creates the greatest differences in the economic performance of organic and conventional dairies. 

Labour costs, however, are often greater on organic farms. European studies found labour costs to be 10-20% greater than on comparable conventional operations. Interest on loans is not often considered in calculations of production costs; however, conventional farmers have significantly higher debt loads than organic farmers, particularly those in developing countries.

Profitability
Organic farms have lower yields than conventional but this is compensated for by lower costs of production and higher prices for organic products. In some cases, the organic price premium is needed to provide greater gross margins. Nemes writes, “Reliance on price premium may jeopardize the long-term economic viability of organic farming. Since the market for high-value crops can get saturated, and premiums can fall as a consequence, a strategy of diversification is advised...”

Profitability, Nemes argues, goes beyond the balance sheet. Farming incurs environmental, health and social costs. The environmental costs include damage from soil erosion, water pollution and destruction of wildlife habitat. In general, conventional agriculture contributes more to these problems but does not pay the associated costs incurred by society at large.

Conclusion
“Organic agriculture,” Nemes concludes, “faces an unfair competition in the marketplace due to:

• the distorting effect of current subsidy schemes that favour conventional production;
• the unequal availability of research and extension services; and
• the failure to capture the real environmental, social and health externalities in market prices of conventional foods.”

If subsidies and extension services were less biased towards conventional production, organic  yields may increase and organic farming could become even more profitable. If the actual costs (i.e., environmental, social and health consequences) of agriculture were considered, the true profitability of organic farming could be measured.

Reference:
Nemes, Noémi. 2009. “Comparative analysis of organic and non-organic farming systems: a critical assessment of farm profitability.” Food and Agriculture Organization of the United Nations. Natural resources management environment department. ftp://ftp.fao.org/docrep/fao/011/ak355e/ak355e00.pdf [PDF - 455 kB]

This article was written by Janet Wallace on behalf of the OACC with funding provided by Canada’s Organic Science Cluster (a part of the Canadian Agri-Science Clusters Initiative of Agriculture and Agri-Food Canada's Growing Forward Policy Framework).  The Organic Science Cluster is a collaborative effort led jointly by the OACC, the Organic Federation of Canada and industry partners. For more information: oacc@dal.ca or 902-893-7256.

Posted February 2012