Klinefelter: By the Numbers

Pressed for Profits? Consider Organics

Premiums for organics like this Michigan corn may be worth the effort, even with yield drags and three-year certification requirements, economist Danny Klinefelter said. (DTN photo by Elaine Shein)

First of all, I'm not a "foodie." At the same time, I don't hold anything against anyone who is -- except when they make unfounded claims about conventional crop production or turn organics into religious fanaticism. It's the consumer's choice; producers just need to decide which market best suits their objectives.

The fact is that between the 2007 and 2012 Census of Agriculture, organics were the fastest growing segment of the market, even though they were still -- and will likely always be -- only a fraction of the market for those who can afford them. The rest of the 9 billion people expected to be in the world by 2050 just want to be able to eat. As opposed to previous numbers, most of the growth from 2007-2012 was on commercial sized farms. Despite all the interest, organics are only about 1% of overall crops.

The reason I think more producers should at least consider organics is economics and financial performance in a period of narrow to negative margins in many commodities. Organic corn in the Midwest is currently selling for $11 to $13 per bushel, and in Texas it is $12 to $14 because of added freight.

For more information check ERS-USDA report number 188 "The Profit Potential of Certified Organic Field Crop Production" published in July 2015 (http://goo.gl/…) and www.ams.usda.gov/grades-standards/organic-standards. (See also a review of profitability in the current issue of Amber Waves, http://www.ers.usda.gov/…)

The main issues are the three-year transition period, the increased cost of production, the burden of certified organic paperwork, and yield drag. To obtain certified organic status requires not using commercial fertilizers, pesticides (herbicides and insecticides), and using non-GMO seed. Because of lower pest pressure, the U.S. regions best suited for organics have been the Northeast, the Upper Midwest, and the Texas Panhandle. Requirements also differ slightly on food grade crops and those to be used for livestock feed.

For natural fertilizer, those farmers located near commercial feedlots, confinement dairy, hog and poultry operations are best suited. Municipal sewage (not industrial sewage which may contain heavy metals and toxic materials) can be used for crops going into livestock feed.

In general, yield drag can range from 10% to 40%, depending on how good the farmer is, and production costs on corn have generally been $80 to $100 per acre higher. Most organic operations also used conventional tillage and not no-till for weed and pest control reasons.

Using averages as an example and a conventional historic yield of 160 bushels per acre, a 27% yield drag (117 bushels), $4.50 per bushel conventional corn and $12 organic, per acre revenue would increase $684 ($1,404 vs. $720). If expenses went up $100 per acre, the net increase would be $584 by growing organic corn. The problem is getting by on lower yields, a much smaller non-GMO premium and higher production costs for three years while making the transition. Some have tried raising alfalfa or converting pastureland that is potentially productive farmland as a conversion strategy. Organics are also more likely to need on-farm storage for segregation and to hold the crop until the buyer needs it.

The potential long-term problem is there is a limit to the demand for organics and if there is a significant shift to organics, the price premium will likely drop. Still, I think it is food for thought.

EDITOR'S NOTE: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Grains Pro subscribers can access all of his columns online using the News Search feature under News.

(MZT/CZ)