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		Ministry of Agriculture and Forestry Te Manatu Ahuwhenua, Ngaherehere

Issue 11 October 2002

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Understanding the Costs and Risks of Conversion to Organic Production Systems

In conjunction with a number of studies on sustainable resource development policy issues, MAF Policy commissioned research into the costs and risks of conversion to organic production systems. The following article by Duane Redward discusses the results of this research.

In 2000/01 research was commissioned by MAF Policy with the objective of identifying, prioritising and quantifying the risks and costs associated with the main behind-the-gate constraints to organic production. To do this, a series of facilitated sector-based workshops was held for sheep and beef, dairying, deer and arable sectors to identify and prioritise the constraints. In addition, a financial analysis using MAF Farm Monitoring models was undertaken to quantify the impact of each constraint on the financial performance of the business.

The financial analysis used MAF Farm Monitoring models as a base model for comparison and the workshops to gain information on what the MAF Farm Monitoring model would look like if it were under an organic regime.

The major and common technical constraints to organics, identified by the organic sectors and highlighted by participants at all the workshops, included _ nutrient and soil management, animal health (i.e. gastro-intestinal parasites in all livestock, mastitis in dairy cows, lung worm in deer), woody weeds, and the limited skills, knowledge and access to information. In contrast to the technical challenges, there were few similarities between sectors in infrastructure and industry constraints.

Sheep and Beef

Loss of premium was identified as the major constraint facing the sheep and beef industry as it has an immediate and devastating effect on financial viability. The radical change to the stock policy, with a shift to more and older cattle, resulted in the need for a premium because of the lower profitability of older age-class cattle finishing policies.

The MAF base model used for comparison was the Hawkes Bay/Wairarapa Summer Moist model. The following table summarises the results of the financial analysis:

MAF base model

Organic 

Organic

Gross farm revenue

299,459

223,562

294,401

Cash farm expenditure

138,677

127,682

127,682

Cash farm surplus

118,258

53,355

124,194

Gross farm revenue decreases in the no premium organic model, with no premiums due to a 10 percent reduction in the stocking rate together with a change in stock policy to become self contained, reducing the amount of stock traded. Cash farm expenditure in both organic models decreases despite increases in labour, fly control and compliance costs due to large decreases in animal health and weed and pest costs.

The organic model with premiums shows returns based on a premium of 50 percent for both lamb and beef, with 60 percent of lambs and 90 percent of cattle finished to specification. This shows that for organic sheep and beef farms to be as profitable as conventional properties, substantial premiums are required.

For more extensive sheep and cattle systems than those examined in this study, fewer changes to the existing livestock policy would be needed to accommodate the constraints to organic production and hence the impact on the financial performance of the operation would accordingly be reduced.

Arable

Both the cropping and livestock components of the arable business require a substantial premium to be profitable because of the changes necessary in the balance of the cropping and livestock operations, and from the low nitrogen environment for crop growth. Given this, it is reasonable to assume that the conversion process would be financially difficult because premiums are generally not available during conversion.

Weed control and maintaining fertility are major issues for organic properties. Cultivation is required to control weeds, however, repeated cultivation increases pressure on soil quality and increases fuel consumption. In addition, under an organic regime there are reduced options for processing and fewer crop options as it is difficult to grow feed wheat, grass seed, clover seed, vegetables and silage.

The MAF base model used for comparison was the Canterbury Arable model. The results of the financial analysis are summarised in the following table:

Gross revenue in the organic model with no premiums decreases due to lower crop yields as a result of weeds and fertility, decreased stocking rate, change in stock policy from
buying in lambs to rearing own stock, and a different crop mix.

Cash farm expenditure reduced in the organic model due to lower fertiliser, seed dressing and weed and pest costs.

Premiums range between 167 percent and 333 percent for arable crops and 50 percent for sheep and cattle with 80 percent of livestock being sold as certified. A 46 percent premium across all organic produce is required to generate a comparable cash farm surplus to the MAF base model.

Deer

The deer workshop concluded that extensive, low-stocking-rate deer operations are close to complying with certification for organic supply and require little change and support during conversion. More intensive deer operations, however, would have to drop in stocking rate to remain viable so it is reasonable to assume that the conversion period would be financially difficult. In addition lung worm is easier to manage under extensive systems and was considered likely to prevent many intensive deer farmers from converting to organics.

The MAF base model used for comparison was the South Island Deer model. The results of the financial analysis are summarised in the following table:

Gross farm income and cash farm surplus are forecast to decrease dramatically under an organic system as workshop participants considered that market premiums are limited due to the current perception that venison production is natural and close to being organic. In addition the stocking rate decreased from 11.86 su/ha to 9 su/ha.

It was calculated that a venison price of $2.11/kg (29 percent) more than what is received by conventional farmers is required by organic farmers to achieve similar profit levels

Dairying

In contrast to the sheep and beef and arable sectors, dairying was not dependent on a premium to be viable. Major challenges of organic dairying are the ability to maintain soil fertility and control of mastitis, as it reduces the numbers of cows in milk.

The MAF base model used for comparison was the Waikato Bay of Plenty Dairy model. The results of the financial analysis are summarised in the following table:

The organic dairy model is calculated differently from the other sectors. Instead of including premiums, the above model represents the break-even gross revenue for the organic model, for which the break-even price premium is 12 cents/kg milk solids. A 10 percent premium on milk alone, or on milk and the value of all stock sales would increase gross farm revenue by 14.6 percent and 16.6 percent respectively above that of the MAF base model. Due to a lack of processing and marketing capability there is little information on the extent of premiums available for the organic dairy industry.

Cash farm expenditure decreases in the organic model due to savings in animal health and grazing expenses while maize silage costs increase. The workshop concluded that the cost of the conversion process is minimal as no major changes to stock policy are required.

Conclusion

Nutrient and soil management, animal health, limited skills, knowledge and access to information limit the growth of all four organic sectors studied. However, financial factors had differing impacts. A substantial premium was identified as critical for the organic sheep and beef and arable sectors, but for extensive deer and dairying the "size" of the premium was not a major constraint to growth. The lack of processing and marketing capability was identified as the single biggest factor limiting the growth of the organic dairy sector.

Duane Redward
Policy Analyst
MAF Policy Information and Regions

Duane has been employed by MAF for three years in the Hastings office. He is involved in Sustainable Land Management issues with a particular focus on erosion and biodiversity. In addition, Duane is involved in farm and pipfruit monitoring, pipfruit industry issues, primary sector taxation and is responsible for the production of RM Update.

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Amber Duncalfe
Editor - RM Update
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Tel: +64 4 894 0710
Fax: +64 4 894 0745
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