The Economics of Transitioning from Conventional to Organic Dairy - Ontario, Canada Funded
by the Ontario Ministry of Agriculture, Food and Rural Affairs and the
University of Guelph |
Abstract:
At the beginning of this study eleven
dairy farms were known to have recently transitioned to organic in Ontario,
Canada. This current study examined eight
of these dairy farms, the earliest of which to transition to organic was in
2002. Economic data were collected for
the last conventional year, three transition years and the first organic
year. Comparisons were made for revenue,
cost and yield differences for each of the five stages between the subject farm
and an industry average; and between year differences for each farm data set
over the five stages of transition. Data
was adjusted to 1998 dollars.
It was observed that our host farms
were predisposed to the organic philosophy for many years prior to beginning
the transition to organic. These farms
had poorer yields, lower revenues, but smaller costs, and lower net income
during their last conventional year than did the industry norm (ODFAP). During the transition phase, economic
parameters became worse; for example annual net income per cow was reduced by
$251 (1998$) between the transitioning farm’s first organic year and their last
conventional year. Although these farms had
some reduction in economic prosperity during the transition, they remained
economically viable.
Fertilizer, chemicals, health costs,
purchased feed costs, and marketing costs were all reduced on a per cow basis,
while only fuel and fixed costs went up.
The largest impact was a 9.8% reduction in milk yield for our host farms
between their first organic year and their last conventional year. Importantly, these farms were 35% below the
industry norm for milk yield in their first organic year. During the first transition year, milk yield started
to diminish suggesting that crop issues were immediately having some negative effect
on the cows. Perhaps the cause was poor feed
crop yields or poor feed quality.
Because purchased feed costs went down it is expected that farmers were producing
more of their own supplements. Some work on organic feed rations may be needed.
Statement on Animal Care:
This project did not involve
the direct use of animals. Only records
of animals were used. The respective
animals were owned and housed on private farms, and to the best of my knowledge
were treated humanely and in accordance with best management practices and the
voluntary code of practice within the industry.
(dairy cattle, organic,
transition, economics)
Acknowledgements:
Acknowledgements are due to the Ontario Ministry of
Agriculture, Food and Rural Affairs, and the University of Guelph for their
financial assistance and funding throughout the duration of this research; the
farmers who offered farm data and so graciously hosted us in their homes during
our data collections; and to my Waterloo Coop students Calvin Johnston, Cristy
Knott, Emilie Morin, Angela Straathof and Liza Lee.
It is well accepted that cows under
organic management have lower milk yields than those under conventional
management and losses may be more exaggerated during the transition phase. Past studies have suggested that health,
marketing, labour, and feed costs are higher on organic farms while reduced
energy use, reduced amounts of inputs and price premiums counteract the
increases. There is disagreement as to
whether the cost changes and price premiums compensate for the decrease in milk
yield. There is little in the literature that describes the business challenges
encountered during the transition phase.
The goal of this study was to determine
the financial effects during transitioning from conventional to organic dairy
farming in Ontario Canada. The last year of conventional, the three years of
transition and the first year of organic farming were important to this study.
Objectives:
Objective (a): Survey
Ontario dairy farmers who have recently transitioned from conventional to
organic farming.
Objective (b): To
investigate the differences between the average dairy farm and our
transitioning farms.
Objective (c): To investigate the differences between years
as our survey farms’ transition from conventional through three years of
transition to organic.
Literature
Review:
When a conventional dairy farmer
converts to organic, a mandatory transition period is imposed to ensure that
abolished chemical agents are completely purged from the farm products. Under standards introduced in 1999 by the
Canadian General Standards Board (CGSB), crop farming practices must comply
with organic standards for two years and prohibited chemicals must not be used
for three years prior to organic certification.
Dairy cows require one year of organic treatment, including exclusive
use of organic feed, before their milk is certified organic. Therefore, a transition to organic dairy
production without use of imported feed takes at least three years, during
which in transition year-3 the farm has both the effects of transitioning
cropland and transitioning dairy cows.
During the transition period, farm
products cannot be marketed as “organic” (CGSB, 1999), so farmers do not
benefit from price premiums attained by certified organic products. When combined with yield losses and other
confounding factors, the transition period can substantially affect farm
finances.
All Canadian dairy producers are
regulated by the country’s supply-management system. Under regulations imposed by this system, most
dairy products cannot be imported or exported across the Canadian border, both
securing and limiting the size of the Canadian dairy market. Also, Canadian dairy farmers cannot sell
their milk directly to consumers, whereas direct-to-customer distribution is a
core channel for most non-dairy organic products (Henning, Thomassin, &
Baker, 1990; Parsons, 2005).
To distribute their product, organic
farms must integrate themselves into existing distribution systems by selling
their milk to one of a small number of organic milk processors; Ontario has
only three (Dairy Farmers of Ontario, 2004).
From these, the milk is usually sold to the consumer through
organic-specific retailers, but conventional food retailers eager to profit
from the relatively new market niche are also putting organic milk on their
shelves (Felix, 2004). According to data
gathered in 2003 by the Organic Agriculture Centre of Canada (OACC), retail price
premiums for organic milk in large Canadian cities average about 40-50%. However, premiums vary widely by geography,
and, since organic milk is a niche market, price premiums are sensitive to
small changes in supply and demand (Blank & Thompson, 2004). For example,
between June and December 2003, retail premiums for organic milk ranged from
78% to 43% in Vancouver, from 15% to 30% in Toronto, from 52% to 129% in
Montreal, and from 10% to 60% in Halifax (OACC, 2004). Pricing instability has been a complaint of
organic farmers for a number of years (Henning et al, 1990), but prices are thought
to become more stable as the market grows (Blank & Thompson, 2004).
Many personal motivations spur the
decision to convert a conventional farm to organic production. McEachern and Willock (2004) surveyed 125
organic farmers in the UK; environmental concerns topped the list of reasons
for conversion, followed by ethical, societal, and finally financial
motivations. Only about 25% of those
surveyed converted due to financial motivations. Similarly, in a survey of 69 organic farmers
in Saskatchewan, financial goals fell well below environmental and ethical
goals in importance (Moulder, Negrave, & Schoney, 1991). However, financial issues are one of the
greatest barriers that farmers must overcome in the transition. Neglecting the financial details of the farm
can make the transition a very difficult experience. Unplanned financial complications, such as
varying revenue, complicated marketing, and non-uniform prices, contribute
heavily to reversion statistics, for example a 60 to 70 percent failure rate in
transitioning fruit and vegetable farms (Parsons, 2005). Aspiring organic farmers enticed by romantic
notions of farming in a healthier, more ethical, or more
environmentally-friendly way soon face the harsh realities of changing farm
economics (Block, 1998). Transitioning farms experience all the hardships of
organic farming without a compensatory price premium.
One of the most detrimental changes to
the economics of an organic farm is a reduction in yield. Most studies have found that yields on
organic farms are significantly less than those of equivalent conventional
farms (Pimental, 1993; Refsgaard, Halberg, & Kristensen, 1998; Halberg
& Kristensen, 1997). Dairy farms are
no exception. In Europe, several
independent studies found that organic cows produced less energy-corrected milk
than conventional cows (Hamilton et al., 2002; Krutzinna, Boehncke, &
Herrmann, 1996; Refsgaard et al., 1998; Reksen, Tverdal, & Ropstad,
1999). Stonehouse, Clark, and Ogini
(2001) repeated those results with cows in Ontario, attributing the difference
to “superior technical performance” in conventional herds. An investigation into the possible causes of reduced
milk yields on organic dairy farms by Roesch, Doherr, and Bumm (2005) pointed
to a range of factors broadly classified as: “breed, nutrition, management, and
udder health.”
Transitioning farms may be even more
affected by yield reduction than established organic farms. Zinati (2002) found that crop yields are most
depressed during the transition period; once organic pest and weed control
systems such as crop rotations have been established, yields tend to slowly
recover. Lampkin (1994a) agreed that
farmers should expect conversion-specific yield declines, but Dabbert (1994)
confirmed that many crop yields improve in the first few years after
conversion. The United States Department
of Agriculture warns transitioning farmers of markedly reduced yields in the
transition period, followed by slow recovery (USDA, 1980). Dabbert and Madden (1986) modeled the transition
phase on a Pennsylvania crop farm and theorized that transition-specific yield
losses are due to three effects: the “biological transition effect” whereby
pest and weed populations thrive until crop rotations are established, the
“rotation-adjustment effect” whereby arable production may be stalled to set up
crop rotations cycles, and the “learning effect” since the farmer must learn
new farm-specific organic techniques. In
a similar modeling project in Quebec, Forest (1992) theorized that transitioning
gradually and transitioning with the presence of livestock lessens the impact
of those effects. Unfortunately, the effect of transition-specific yield
reduction does not seem to have been conclusively tested in dairy cattle,
although a study of two English dairy farms revealed no such effect (Lampkin,
1994a).
To help offset the decline in yield,
farm costs must be managed. Many costs
change when a farm changes to organic production. Vaarst et al. (2001) found
that health costs increase in the transition to organic dairy due to increased
incidence of mastitis, which also helps to explain reduced yields among
transitioning dairy herds (Hortet & Seegers, 1998). Pimental (1993) found that organic farms have
lower energy costs than conventional equivalents; Refsgaard et al. (1998)
echoed that result on dairy farms. Buchardi and Thiele (2003) found that
processing and marketing costs were greater for organic milk. Lampkin (1994b) considered several British
studies and concluded that labour costs are higher on organic farms. In an
attempt to combine the costs into an overall cost difference, Butler’s (2002)
study of California dairies found a 10-20% higher cost of production for
organic dairies on a per cow and per hundredweight basis. The increased costs were primarily attributed
to higher labour costs, higher feed costs, higher herd replacement costs, and
transition costs. Butler estimated that the transition alone costs about US$288
per cow per year.
Local conventional-organic comparison
studies support evidence from foreign sources and contribute additional
information about the characteristics of organic dairy farms in Ontario.
Sholubi (1993) compared the financial status of eight organic dairy farms in
Ontario to statistics produced by surveys of conventional dairies in Ontario.
Stonehouse et al. (2001) also compared organic dairy farming systems with
conventional dairy systems in Ontario.
Both found that organic dairy farms had lower revenues than conventional
dairy farms due to reduced yields. However,
contrary to Butler (2002), both studies found a large decrease in farm
costs. The cost savings were explained
by a decreased reliance on a broad range of imported inputs such as crop seeds,
feedstuffs, fertilizers, and pesticides. Conventional dairy farms also devoted
more land to cash cropping and thus had additional production and marketing
costs. The lower costs on organic dairy farms more than compensated for the
loss of yields, resulting in higher net incomes.
Farmers acknowledge that one of the
greatest hindrances to organic conversion is a lack of information about
organic processes and markets (Fairweather, 1999; Henning, 1994). Most transition-related information is
derived from farmers’ own personal experience and from fellow organic farmers
who have been through the process (Henning et al., 1990).
Methodology:
A total of 11 dairy farms were
identified as converting between 2002 and 2005 in Ontario; 8 of which participated
in this study. Each farm was visited, the
farmers were interviewed and various financial documents were collected. Milk
production information was taken from DHI[1]
information sheets as well as DFO[2]
milk checks. Farm costs were collected
from farm financial records.
As with Stonehouse et al. (2001) whole
farm budgeting is used as opposed to enterprise budgeting. Dairy in this case, is a separate enterprise
to the feed production enterprise, and so for a pure enterprise budget the feed
should be ‘sold’ to the dairy enterprise at market value. In this fashion the profit in each of the two
enterprises is seen. Also one dairy
enterprise can be compared to another more readily. Whole farm budgeting is not as preferred
because farms with different mixes of each enterprise cannot as effectively be
compared. Never-the-less, if financial
records are insufficient to produce enterprise budgets then whole farm
budgeting may be used.
Data was manipulated in several ways to
compensate for the effects of time (inflation); and year effects on yield,
costs and price. Rather than compare
year data, for example 2002 costs of one farm to those of another; data was
compared for five year types including the last conventional year, three
transition years and the first organic year.
So farms were compared to each other on their stage of transition rather
than fiscal year. In this fashion
comparison of one farm’s transition year-1 was compared to another farm’s
transition year-1, even though these may have been different fiscal years. To compensate, only differences were used and
these were discounted to 1998 dollars.
For comparisons of our transitioning
farms with the conventional dairy industry average, differences were recorded
between each of the host farm and ODFAP[3]
data for the corresponding year. The
data included differences in dollars amounts and percentages between the
transitioning farms and industry averages; and for host farms between their
last conventional years, through their transition years to their first organic
year. All data was averaged and discounted
to 1998 dollars. Whole farm ODFAP
budgets were used.
During the farm interviews it was clear
when farmers became certified organic.
It was somewhat clear when the official transition years were
ongoing. What was not always clear was
the last conventional year, because farmers in this study had practiced the
organic philosophy for many years.
Nowhere did we find a ‘typically’ conventional dairy farmer who suddenly
had decided to convert to organic. And
so, the effects of transitioning may be muted due to the fact that they were
somewhat on their way to becoming organic when for the purposes of this study they
were deemed to have started.
Initially all raw data from the organic
farms were entered into an Excel spreadsheet. Likewise, information from the
Ontario Dairy Farm Accounting Project and Annual CanWest DHI Ontario Progress
Reports were also entered into the spreadsheet and served as an industry
average for conventional dairy production. For each farm, the last conventional
year, transition-1, transition-2, transition-3 and the first organic years were
designated. On the farms where there were more than 3 transition years, the
middle years were averaged to get transition-2. All data values were then multiplied by the Farm
Input Price Index (FIPI) to correct for inflation, using 1998 as a base year.
The FIPI values were taken from CANSIM.
Because of the small data set, sever limitations were expected in the
results. Table 1 includes data from all
farms including farms where data was missing. This table is in dollars and does not
represent any specific year. Caution
must be used when comparing this budget data directly to year specific industry
norms. Table 2 again includes data from all farms and records the differences
in dollars and percentage between the host farms and the industry average for
each year type. Each year is used for
the next year’s base to find the percent difference and so averages do not add
across or down. Table 3 is a comparison
including only complete farm data and provides a more consistent table. The conventional year is used for each year’s
base to find the percent difference and so averages do add across and
down. Table 3 cannot be compared with
Table 1 or Table 2. On Table 2, the milk
price determined was clearly discernable on only one farm mainly because farm
records were not sufficient to provide clear information on the price premium
received. Price
premium effects were included in whole farm revenue, but seldom was data clear
enough to determine it on a per liter basis.
Results and
Discussion:
Milk Production and Sales:
The difference between the converting
farms’ last conventional year and the Ontario dairy average (ODFAP) was -828 kg,
a difference of -11.6% (Table 2). Before
beginning to transition to organic, the converting farms’ milk production was
below average. Based on the literature, yields were expected to decrease during
the transition years and this was evident in our study. During the transition
years, the converting farms dropped a further 546 kg per cow below the ODFAP or
9.4% (Table 2).
During the first year of being certified
organic, farms were producing 5,880 kg of milk per cow per lactation (Table 1). The difference between the first organic year
and the ODFAP was -2,055 kg of milk, a difference of -35.0% (Table 2). Between our host farms’ last conventional year
and their first organic year there was a total difference of -702 kg of milk
per cow per year or a loss in milk yield of 9.8% (Tables 3).
During the transition period milk
production did decrease. When compared
to the ODFAP, our transitioning farms first went down -899 kg lower than the
norm (from -828), then in transition year 2 went way lower to -1,466 kg and
then in year 3 improved slightly to -1,374 kg and then way lower again to
-2,055 kg below the norm during their first organic year (Table 2). The
greatest decreases seem to occur during transition years 2 and 3 as farmers began
their cows on the organic regime. When
milk yields are compared within our host farms over time (Table 3) we see
yields fell most notably in transition year 1 by 760 kg, then by -128 kg in
transition 2 and then went up by 73 kg in transition 3 and up again in the
first organic year by 113kg. So as the
dairy industry in Ontario was improving yields over time, our transitioning
farmers were not. Rather they were
struggling with their transition and/or perhaps, they were not philosophically as
concerned with yields as they were with the organic product and its attributes.
Milk sales being price time’s yield
follows much the same analysis as production above. Certified organic milk commands a price
premium, which can help to offset lower yields; however, farmers do not receive
a price premium during their transition years. Milk sales begin $393 lower than
the ODFAP and remain consistently below the norm during the transition period;
by -$618 in transition year 1, by -$820 in year 2 and by -$1086 in year 3
(Table 2). Comparing milk sales within our host farms
over time (Table 3), milk revenues fell $508 between the first organic year and
the last conventional year; $345 less in transition year 1, $301 less again in
year 2 and improved by $213 in year 3. Remembering
that transition year 3 is where we expect to see the effects of transitioning
the cows, it appears that farmers are preparing there livestock in advance for
the organic regime; and it appears that the transition of crops has more effect
on milk production than does the transition of the cows.
Revenue from crop sales was recorded
for this study, even though any direct implication to organic dairy is not
possible. Comparisons were made using the whole farm
budgets of the ODFAP. Our host farms
sold more crops than did the ODFAP during their conventional year (Table 2) and
by the time they became organic, crop sales were comparable to the OFMAP. When comparing host farms over time (Table 3)
crop sales went up $2,425 per year between the first organic and the last
conventional years; up $5,657 in transition year 1, down $1,982 year 2, and
down $3,066 year 3, then up again in the first organic year $1,816. Crop sales of ODFAP farms were growing during
this era and transitioning farms although also growing were not keeping up
compared to the ODFAP farms. This was
perhaps due to lower crop yields of our host farms during their transition.
Livestock sales (Tables 2, 3) did not
differ substantially from the ODFAP nor did our host farms change their sales
of livestock over the test period.
Total revenues begin $656 lower than
the ODFAP and remain consistently below the norm during the transition period;
by -$878 in transition year 1, by -$860 in year 2 and by -$1,029 in year 3
(Table 2). In the first organic year
the farms are $910 below the average.
They started out in the conventional year 14.4% below the norm and ended
up during their organic year 20.4% below the norm, a difference of 6.0% or $254
per cow per year. Comparing the host
farms over time, total revenues were lower by $292 between their first organic
year and the last conventional year, -6.4% (Table 3). During the transition years total revenues go
down 2.7% in year 1, down 0.9% in year 2, up 4.5% in year 3, and down again in
the first organic year by 7.3%.
The offsetting effects of reduced yields
(milk and crop) versus price premiums on revenue appear to be limited to about
a 6% decrease. Farmers seemed to be able
to maintain relatively stable total revenue over the transition period.
Variables
Costs:
Two crop accounts of note were
recorded; seed and the other was fertilizer, Lime, pesticides & chemicals
(FLP&C). The average difference in seed costs between the converting farms’
last conventional year and the ODFAP was $700 more per year, a difference of 10.6%
(Table 2). During the transition, seed
costs were lower than the ODFAP in year 1 by -$873, were higher in year 2 by $1,552,
were lower in year 3 by -$372, and then were $1,347 higher in the first organic
year. Comparing our host farms over time
(Table 3), seed costs went down by -$3,478 in transition year 1, went up $881
in year 2, went down by -$161 in year 3 and finally went up by $1,376 in the
first organic year. Overall, annual seed
costs went down by $1,541 or -23.3% for our host farms between the first
organic year and the last conventional year.
Compared to the industry norm, seed
costs were above the norm to begin with which is consistent with the notion
that they also had higher crop sales. By
the time they were organic; they sold just as much crop as the norm, but spent
more on seed which reflects the higher cost of organic seed. When we look at the host farms over time,
their seed costs decreased over time even though their crop sales went up and
even though organic seed is more expensive.
Crop sales may have gone up perhaps because of carry-over of crop from
the conventional to the first transition year.
And perhaps seed costs went down because these farmers were using their
own seed which might partially explain suspected low yields.
The difference in fertilizer, lime, pesticides
& chemical costs (FLP&C) between the converting farms’ last
conventional year and the ODFAP was -$4,492, a decrease of 86.5% (Table 2). The
converting farms were spending less on these costs than the average Ontario
dairy farm to begin with. During the transition years, the converting farms
continued to reduce these costs as follows; $4,031 less than the average in
year 1, $6,409 less in year 2, $6,770 less in year 3 and $7,466 less in the
first organic year. Comparing FLP&C
costs of the converting farms over time (Table 3) saw an overall annual reduction
of $1,822 between the first organic year and the last conventional year, a
35.1% reduction. During transition year
1 this cost fell $1,916, then in year 2 went up $1,798, in year 3 went down
$329, and then in the first organic year went down $1,376. The confounding issue here was a couple of
farms liming their soils. Other than
that FLP&C costs would have been reduced by 100% as would be expected.
Two cost accounts for livestock were also
recorded; veterinary, breeding fees & drugs (VBD) and purchased feed, supplements,
grains & forage (PSGF). The average difference in VBD costs between the
converting farms’ last conventional year and the ODFAP was $40 more, not a
large dollar amount but a difference of 26.6% (Table 2). The converting farms
were spending more on VBD than the ODFAP in their last conventional year.
During the transition years, the expense of VBD consistently fell compared to
the norm with a difference of $25 in transition year 1, $3 in year 2, was $28
less than the norm in year 3, and was $25 less than the norm in the first
organic year. Most of the decrease in
VBD can be seen in the third transition year as the livestock are
transitioning. Between the converting
farms’ last conventional year and its first organic year (Table 3) there was a
total decrease of $87 per cow per year or 57.7%, most of which occurred in
transition year 3. However evidence is
apparent from transition years 1 and 2 that producers were preparing their
livestock for the organic regime early in the process.
VBD costs were expected to decrease
because the organic regime for cows does not allow the use of drugs
(antibiotics), hormones or any other synthetic products. Consequently, the
farmers were able to save on the cost of the actual drugs and some of the
veterinarian’s time for administering the drugs. Also during the interviews,
farmers often stated that their organic herd seemed generally healthier and had
fewer health problems than their conventional herd.
The difference in PSGF between the
converting farms’ last conventional year and the ODFAP was -$127 per cow per
year, a difference of -23.3%. The converting farms were spending less on purchased
feeds than the norm even when they were conventional. During the transition
years, the converting farm spent consistently less on this cost than the norm; $227
less during transition-1, $178 less in transition-2, $156 less in transition-3
and $272 less during the first organic year (Table 2). Between the converting farms’ last conventional
year and its first organic year there was a reduction of $151 on PSGF costs
(Table 3) which is a decrease of 27.7%.
PSGF costs decreased during the transition
mainly because purchasing organic supplements and feeds is very expensive. One of the most important lessons for an
organic dairy producer is to not be short of winter feed. Organic farmers therefore tend to rely on
home-grown crops to provide more of their total feed supply than conventional
farmers, including supplements. Cattle
nutrition could partly explain the large decrease in milk yield.
Total
Expenses:
The difference in total variable costs
of the converting farms’ last conventional year and the ODFAP was -$160, a
difference of -7.8%. Our converting
farms were lower cost producers compared to the norm to begin with. During the transition years, the variable
costs were consistently lower than the norm; $149 less than the norm in year 1,
$258 less in year 2, $234 less in year 3, and $431 less during the first
organic year (Table 2). Between the converting farms’ last
conventional year and its first organic year (Table 3) there was a reduction of
$245 in total variable costs per cow or -12.0%.
Fixed costs were also lower for the
converting farms in their last conventional year when compared to the norm by
$245 per cow or 14.5% (Table 2). Fixed
costs remained consistently below the norm throughout the transition
years. For the converting farms, annual fixed
costs went up per cow by $170 between the first organic year and the last
conventional year (Table 3), perhaps more because the number of cows was
reduced within the same capital structure than because of new investment.
The average difference in total costs
of the converting farms’ last conventional year and the ODFAP was -$405, a
difference of -10.8% (Table 2). Between
the converting farms’ last conventional year and its first organic year there was
a total decrease of $75. It appears that
while the ODFAP conventional farms were increasing in total costs over time,
the transitioning farms were marginally reducing their costs per cow.
Net
Income:
The average difference in net income of
the converting farms’ last conventional year and the ODFAP was -$251, a
difference of -30.0% (Table 2). The converting farms generally earned less
income than did the industry norm during their last conventional year. During the transition years, net income was
consistently lower than the ODFAP; $584 per cow lower in year 1, $379 lower in
year 2, $654 lower in year 3, and $314 lower in the first organic year. Between the converting farms’ last
conventional year and its first organic year (Table 3) net income went lower by
$217 or -25.9%. The converting farms
started out earning less than the norm.
During the transition period net income fell further especially compared
to the gains conventional farmers were achieving.
Only one farm had records good enough
to discern milk price. The converting
farm had a 3 cent premium compared to the ODFAP in its last conventional year
(Table 2). During the transition years
the farm continued to have a premium; 6 cents in year 1, 2 cents in year 2 and
zero in year 3. In the first organic
year the farm had a 9 cent premium or 11.72%.
The early price premiums can somewhat be explained by higher milk components
as seen in Table 2, and by an organic premium in the organic year.
Some debate in the literature exists
about the overall effect of lower costs, price premiums and yield losses on
profits. Organic milk premiums of 11.72%
were observed (these are 1998 dollars) (Table 2) and total costs were reduced
about 2% (Table 3). This was not
sufficient to offset the 9.8% reduction in milk yield observed on these farms
(Table 3), at least not in the first year of organic production.
While converting these host farms to
organic a total of $217 of net income per cow per year was lost; which is 29.5%
of income. This decrease in net income is
not insurmountable particularly if yield improvements and better premiums can
be captured during the first few years of organic production.
Conclusions:
Comparing organic farms to conventional
farms is a difficult process for several reasons; these farms do not begin in
the same economic situation; few transition during the same time span; they do
not have the same measures for success as conventional farmers; and there are
so few of them. Farmers must
economically survive the transition phase to become organic as have the few in
this study. Transitioning farms have been compared to the industry norm and to
themselves over time to assess how they differ compared to the norm and how
they adjusted themselves through the transition period.
Compared to the industry norm, milk
yields were drastically reduced, variable expenses and fixed expenses both were
less, and net income was below average consistently throughout the transition
phase. However, our converting farms
began the transition in this fashion, remained worse off throughout the
transition, and ended up with annual per cow net income only about $217 worse
off during their first organic year than their last conventional year.
FLP&C costs were lower than the
norm to start and were reduced during the transition for our host farms. Seed was higher than the norm to start and
was reduced by our host farms during their transitions. Health costs were more than the norm to start
and reduced by our host farms during their transitions. Purchased feeds were lower than the norm to
start and reduced further by our hosts during the transition. This is not to say that total feed costs were
more or less for our hosts farms, because only purchased feeds were recorded. Marketing expense was less than the norm to
start and was reduced by our host farms during the transition, mainly because
of the reduction in milk yield. Fuel consumption
started out less compared to the norm and actually increased compared to the
norm and also increased on our host farms during the transition, perhaps due
more to the cost of fuel increasing over time.
The greatest impact seen for the
converting farm was a loss in milk yield.
Although crop yields were not reported to us, crop yields were expected
to also be low. The economic effects of transitioning were muted because our
host farmers generally practiced the philosophy of organics to start with. And so converting farms earned less than the
norm during their last conventional year, and earnings went down during the
transition phase and then recouped a little once organic, although not enough
to earn as much as when they were conventional.
It was also clear that transitioning farmers prepared their livestock
for the organic regime prior to the last transition year. Transition years 1 and 2 seem to have a
fairly large effect on milk yields, perhaps due to crop quality and ration
formulation issues.
The premiums received during the first organic year plus the reductions in costs were not great enough to offset the decrease in milk yields by the first organic year. This is not to say that as the organic business matures the adverse effects of yield cannot be somewhat reversed to the point where organic producers compete economically with their last conventional year. It can be argued whether organic farms should be expected to compete economically with the conventional average farm (ODFAP). The good news is that these converting farmers remained profitable during their transitioning years, although profits were not as great as the norm and their profits did diminish somewhat during the process.
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