Introduction

In recent years it has become clear in many countries that organic agriculture2 has something to offer the farming community as well as the society as a whole. The possibility of the total of net private returns to farming minus the net externalities of organic farming being similar or greater than those of conventional farming have made the community aware that organic agriculture is at least worthy of consideration.

Although a number of studies have shown that net private returns (the measure on which many farmers would base their decisions) to organic farming can be as high as to conventional farming (with Klepper et al. 1977, being one of the first and most well-known), in no country is there a general move towards organic agriculture. One of the reasons might well be that the transition period is a problem (Lampkin, 1990). These problems are usually attributed to factors such as a drop in crop yields due to time needed for the soil microbiological organisms to establish an equilibrium; the farm manager needing time to learn about the practicalities of the new system; and price premiums not being available during the first years after conversion.

In addition, transition to organic farming requires a change in input use. Apart from the more obvious, such as fertilisers and pesticides (which are replaced by a change in technologies involving changes in, for example, rotations and livestock use), additional capital inputs (such as fencing, machinery and storage space) might be required.

1 A more extensive version of this paper is publlished in Wynen (1992), Chapter 12.

2 For a definition of organic agriculture see Wynen and Fritz (1987)

In this paper the likely impact of changes in farming system on farm returns during the transition from conventional to organic farming is estimated for a typical cereal-livestock farm in southern Australia. A simulation model was developed in which a number of variables such as cash costs, cash receipts, farm cash operating surplus and returns to capital and management for the first years of transition are examined, and compared with figures for a conventional farm and an established organic farm. A sensitivity analysis is carried out for changes in output prices (for both organic and conventional products), and for yield.

In the model, estimates of different variables are used which reflect conditions of a conventional farm, an established organic system, and a farm in transition from the conventional to the organic system. The figures for the transition period are estimates of the effect of the new management system on the input costs, yield and total output.

Use of the model shows the trend and magnitude of the costs for farmers of transferring from conventional to organic cereal-livestock farming in southern Australia, and identifies how these costs vary as various output prices and yield change.

Data Sources

Data for the conventional cereal-livestock sector were supplied by the Department of Agriculture of South Australia for the year 1990-91. Estimates for the established organic farm and for an organic farm in conversion are based on interviews with an organic farmer in conversion in the Tatiara district in South Australia, and on the survey of organic cereal-livestock farmers for the year 1985-86 (Wynen, 1989).

Assumptions

In order to estimate the cost of conversion, a number of assumptions need to be made. These are described below.

Each farm is 400 hectares of arable land, valued at $350,000, with $130,000 worth in other capital (machinery and livestock). Fertiliser and pesticide use (kg per hectare) and costs ($ per hectare) for the two farming systems were included as estimated by the different sources (Tables 1 and 2). The costs of fuel, labour, machinery and equipment are estimated to be similar in both systems (Wynen, 1989; 1992), with the exception of extra capital items needed in the conversion stage, such as a combine seeder ($4000), storage ($12,000 over 12 years) and fencing ($8000 in the first four years). No interest costs are calculated, with the exception of the amount on extra investments made by organic farmers in transition.

Table 1. Fertiliser types and rates used in the different agricultural production systems (kg/ha)

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Crop Conventional Organic

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Super Urea DAP Mineral fertiliser

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Wheat 110 50 - 100

Barley 90 - 100

Oats

- grain - - - 100

- hay - - - 100

Beans 180 - -

Peas 100 - -

Canola 40 100 - -

Chickpeas - - - 100

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Price 195 322 415 210

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Table 2. Cost of fertilisers and pesticides in different farming systems ($/ha)

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Crop Fertiliser Pesticide

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Conventional Organic Conventional

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Wheat 38 21 18

Barley 18 21 20

Oats:

- grain - 21 -

- hay - 21 -

Beans 35 - 42

Peas 20 - 47

Canola 54 - 53

Chickpeas - 21 -

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Yield figures and the rotations were simulated for a conventional and an established organic farm, and for a farm in conversion, where the conventional farmer crops 9 out of 12 years, and the established organic farmer 6 out of 9 years. The rotations of the two systems are as follows:

Conventional farm

peas - canola - wheat - beans - wheat - barley - peas - wheat -

barley - pasture - pasture - pasture

The final rotation on the organic farm after transition:

oats (hay) - barley - chickpeas - oats (hay) - wheat - oats (grain) -

pasture - pasture - pasture

It is assumed that returns from livestock per hectare grazed are similar for the two management systems (Wynen, 1989). The figures used are those for a self-replacement flock and are $55.79 per hectare.

For the sensitivity analysis the following variations are modelled:

- premium prices for organic cereals (between 44 and 56%) (Table 3);

- increased returns for livestock ($100 per hectare)

- increased prices for conventional crops (wheat, barley, oats; between 25 and 50%);

- diminished decrease in yields in the transition stage (equal to yields in an established organic system) (Table 3).

Table 3. Yields (kg/ha) and output prices ($/tonne) in the different farming systems (1990-91).

Crop Yield Output price ________________________________________________

Conventional Organic Conventional Organic

Static Transition

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Wheat 3.0 3.0 2.5 84.0 121.0

Barley 3.5 3.0 2.5 85.0 125.0

Oats:

- grain 3.0 2.5 2.2 80.0 125.0

- hay 4.0 3.5 3.5 85.0

Peas 2.0 195.0

Beans 2.5 190.0

Canola 1.4 280.0

Chickpeas 2.1 1.8 1.5 280.0

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Results

Table 4 shows the results of the simulation of activities on a conventional and an organic farm, under assumptions as discussed in the previous section.

Under conditions of conventional prices, the total cash receipts (TotCashRec) and the total cash costs (TotCashCosts) are approximately $15,000 per year less on the established ('static') organic farm, resulting in similar levels of farm cash operating surplus (FCOS) (cash receipts minus cash costs) on the two different farms.

As labour and depreciation were assumed to be alike, the returns to capital and management (RetCapMan) (farm cash operating surplus minus non-cash cost, such as family labour and depreciation of machinery and equipment) are also similar.

When a conventional farm like the one modelled here incorporates organic practices, resulting in a gradual moving toward an organic farming system, the private returns (that is, the returns to the farmer) are considerably decreased over the next years. The biggest decrease is in the second year of transition ($15,658), when the total area under crop (that is, the non-pasture area) decreases from 267 to 233 hectares (as in the third and fourth year) before it increases again to 267 hectares, its final level. In later years the difference in returns, as compared to the conventional system, becomes less severe, but is still significant in year 12 ($6321).

The variation in farm returns over the years is considerable. This can be explained partly by the fact that, when moving from a 12-year rotation (conventional) to a 9-year rotation (organic), while not varying the field size, each individual crop might be planted in two fields depending on the year (Wynen, 1992). In years in which a high value crop such as chickpeas is included in two fields, the returns will be higher than in a year when wheat or barley are included twice. In practice, of course, as the farmer has already carried out fencing, smaller fields are available and the move towards one crop (or pasture) per 44 hectares (instead of per 33 or 66 hectares), would probably take place more gradually than in this model. It is therefore more realistic to take averages of two years in the model as an indicator of the trend of differences between the transition stage and conventional farming.

In the model the change in field size (from 33 to 22 hectares) occurred in the tenth year, when the first field had completed one full rotation under organic management. This meant that, from year 10 onwards, two fields (44 hectares) represented each crop or pasture phase. The decrease in difference in returns between the farm in transition and the conventional farm is, from year 10, due to the increase in yield on the organic farm, which happens progressively over the next years when more fields are in an organic crop for the second time, so that the yields of an established organic system can be assumed.

The figures quoted above are estimates of returns to farming in a situation where no premiums are obtained for the organic produce, where input and output prices are as in 1990-91, and with certain yield reductions. It is likely that one or a combination of these factors will be different in practice.

If farmers receive a premium for their grains (wheat, barley, oats), the severity of the deficit as compared to the conventional farm is considerably less, especially in later years ($12,325 in year 2, the worst year - Table 4). Decreased returns only occur in the first four years of transition, after which the organic farmer has higher returns than the conventional farmer. The deficits would be even more ameliorated if there was a market for organic chickpeas and hay, which is not incorporated in this model. In practice, farmers who start out as organic farmers often do not have an established market for their (new) products and sell only part of their crops as organic. This would, of course, result in a picture somewhere between that calculated for premium prices and for conventional prices.

Returns to livestock were low in 1990-91. For this reason a simulation was carried out with higher livestock prices ($100 per hectare grazed instead of $56). As can be expected, farmers in transition gain more than conventional farmers from such price changes, as they have more area in pasture. The result is a smaller difference between the two systems than under prices in 1990-91 ($12,325 at the peak in year 2, and generally approximately $1500 less than under previously assumed prices).

Changes in some conventional crop prices ($120 per tonne for wheat and $100 per tonne for barley and oats (grain and hay), as compared to $84, $85 and $80 per tonne, respectively, increase the difference between the conventional farmer and the organic farmer in transition by roughly $2000 per year (not shown in Table 4). This is because the conventional farmers grow more crops. An increase of both livestock and crop prices by the abovementioned amounts results in a higher deficit between the two systems in half of the years and lower in the other half of the years (not shown in Table 4).

The question of lower yields in the transition period under Australian conditions is debatable. If yields in the transition time are not lower than in the established organic system, farm returns decrease to a lesser extent than if yields are lower. This is especially the case in the middle years when the organically cropped area is increasing (up until year 6), while no field is yet in the 'static' stage (before year 10).

If all conditions are favourable for organic farms as compared to conventional farms (that is, if premiums are received for organically grown crops, if livestock prices are high, and if yields are relatively high) there is still a considerable deficit for the organic farmer in the first two years of conversion ($5864 and $7275; not shown in Table 4). But this becomes a surplus in year 3, and from year 5 onward the surplus is between $10,000 and $20,000 per year.

In summary, a transition from conventional to organic agriculture can be costly in terms of net financial returns to cereal-livestock farmers, especially in the first years of transition. This is especially the case if no premiums are obtained by farmers, while stock prices are low (as in 1990-91) and yields are relatively low during the transition stage.

Summary And Conclusions

There is little doubt that, when cereal-livestock farmers in Australia move from conventional to organic farming, the returns possible under conventional management are reduced. The question is by how much this reduction is likely to be.

The answer depends considerably on the assumptions which are made in connection with a number of variables, the main ones of which are the availability of premium prices for organic products, changes in conventional output prices, the level of yield reductions, changes in rotations and new investments needed.

In this paper a model was set up to imitate as closely as possible a typical conventional farm, together wtih an organic farm, in the Tatiara distict in South Australia. Conditions were then changed such that a conversion towards organic agriculture was approximated according to the data available at present.

Such a simulation shows that, without the aid of premium prices, farmers' decrease in gross returns can be considerable (reaching a maximum of $15,658 in year 2 and decreasing over the years to $6321 in year 12). With premiums for organic products, these decreases are considerbly less, although the first four years are still negative (at a maximum of $12,325 in year 2). Increased livestock prices and similar cereal yields in the transition period to those on the established organic farm decrease losses in the transition period, but not to the extent that premium prices do. Increased conventional product prices widen the gap between in-transition and conventional farms.

In practice it is likely that all of these factors occur to some degree - most farmers will be able to sell some of their crop on the organic market and secure a premium, the livestock prices might well increase in the near future and not every farmer will have yield decreases as severe as those mentioned in this paper.

We can therefore be reasonably sure that the picture painted of farm returns under conventional prices is pessimistic. In the most optimistic scenario (where the organic cereal crops are sold for a premium, prices of livestock and livestock products have almost doubled, and no transitional yield decreases eventuate), the (considerable) decrease in farm returns occurs only in the first few (two) years of conversion, while there is a large surplus from year 5 onwards. It is also not likely that this scenario is realistic.

Before detailed conclusions are drawn from this model a word of warning about the validity and applicability of the model.

The model was not optimised, that is, no attempt was made to discover that rotation which would provide the least loss in income. Although improvement of the model might well be possible, the scope for altering activities (by changing the rotation) is somewhat limited.

The particular yields and rotations are peculiar to the particular enterprise and area discussed. Although the general principles (such as decrease in yield and a change in rotations) and trends (decreased income in the early years of transition, improving over time) are likely to apply anywhere else, absolute figures should be treated with care.

The results pertain to conditions in 1990-91, especially for output prices. With changes in those conditions, the results in absolute terms might well be completely different. For example, in 1990-91 prices for canola and chickpeas were close to $300 per tonne, while in 1991-92 these had dropped to between $220 and $230 per tonne. Prices of wheat were at a low in 1990-91 ($85 per tonne) as compared to expected prices for 1991-92 ($115 per tonne). Changes in prices cannot but have an effect on the relative values in this model.

In spite of these limitations, use of the model has shown the trend and magnitude of the costs of transfer from conventional to organic cereal-livestock farming in Australia, and identified how these costs vary as various output prices and yield vary.

References

1. Lampkin, N. (1990). Organic Farming. Farming Press Books, Ipswich, UK.

2. Klepper, R., Lockeretz, W., Commoner, B., Gertler, M., Fast, S., O'Leary, D., Blobaum, R. (1977). 'Economic performance and energy intensiveness on organic and conventional farms in the corn belt: a preliminary comparison'. American Journal of Agricultural Economics 59(1),1-12.

3. Wynen, E. (1989). Sustainable and Conventional Farming in South-Eastern Australia: A Comparison. Economics Research Report No. 90.1, School of Economics, La Trobe University, Bundoora.

4. Wynen, E. (1992). 'Conversion to Organic Agriculture in Australia: Problems and Possibilities in the Cereal-Livestock Industry'. National Association for Sustainable Agriculture, Australia. Sydney.

5. Wynen, E. and Fritz, S. (1987). Sustainable Agriculture: A Viable Alternative. Discussion Paper No.1, National Association for Sustainable Agriculture, Australia. Sydney.