Cotswold Seeds Ltd. Organic Farming - How will it affect my income?

Organic Farming:
“How would it affect my income?”

There will be few farmers who, for financial reasons, have not considered the possibilities of switching from a strictly conventional enterprise to an organic system. John Zarb, a consultant researcher in North Yorkshire, has weighed up some of the most recent research on the economic implications of operating organic based forage-based systems.

Having been a farm worker for ten years before becoming involved in agricultural research in 1989, John has a particular interest in practical interest in practical agriculture and works in collaboration with farmers, businesses and academic institutions including Aberdeen University Centre for Organic Agriculture.

Organic farming is just one of a number of so-called biological farming systems which aim to create environmentally sustainable agricultural production systems by managing natural processes and resources. This is in fact an extremely rational approach to farming because it makes the most efficient use of local resources, it does not rely on financially and environmentally costly inputs such as synthetic fertilisers and pesticides, and it gives farmers greater independence. Forage-based systems offer great opportunities to establish sustainable organic practices.

Although there is now a trend moving from technological dependence towards more self reliant and environmentally benign farming methods, the key question asked by so many farmers is “How would organic farming affect my income”? A brief review of recent research on forage-based systems shows how this question is being addressed in the UK and abroad.

The term “organic” refers to the concept of the farm as an organism consisting of a number of integrated, interdependent and interacting processes. Important characteristics of such enterprises include:

  • The use of manure together with legume based leys as forage breaks or undersown with other crops to maintain long-term soil fertility and nitrogen self-fertility and nitrogen self-sufficiency
  • Early autumn or spring cultivations, together with the use of natural mulches and cover crops to minimise N leaching and improve soil structure and fertility
  • The use of disease, pest and weed control techniques that include crop rotations, mechanical and manual weed control, the selection of resistant cultivars, and the maintenance of a species rich environment
  • Extensive livestock management according to the natural carrying capacity of the land
  • Close attention to the possible environmental impact of farming practices

1. Forecasting the cost of conversion
Whilst some of us would examine a spade full of soil or look at the crop in a field to get an impression of a farm, some researchers and businesses analysts are keen to try and plan ahead and predict farm performance from computer stimulations. This involves making certain assumptions about the farm such as the number of cows, milk yields, silage yields, costs, farm size, legislation and so on, and then using the computer to calculate what effects changing these assumptions would have on gross margins or other outcomes. It is easy to scoff at this approach but it can be a valuable one if the information on which the initial assumptions are based is accurate and detailed.

1.1 Forecasting the economic consequences of conversion from conventional to organic dairy farming in Holland
Researchers at the Agricultural University at Wageningen, Holland, used computer simulations to estimate the economic and environmental consequences of converting conventional dairy farms to organic systems. Two 28 hectare enterprises typical of the region were examined: an intensive farm and a less intensive enterprise with a smaller herd and a lower milk yield.

The conventional system was based on high fertiliser nitrogen and herbicide inputs for forage maize and grass production, a high concentrate diet and the routine use of calf milk replacers. Nitrogen in the organic system was supplied from grass-legume mixtures and manure. The use of cow’s milk for calf feeding was mandatory. No pesticides were purchased. Milk yields were lower in the organic system.

The computer model took into account the full range of production factors on each farm. These included calving time, milk production, rate of herd replacement, energy and protein requirements, N fertilisation levels, fodder beet and maize production, purchased feed costs, other input costs, energy production from fodder, the nitrogen contribution of grass and red or white clover leys and conventional N fertiliser requirements. The possible effects of imminent changes in environmental legislation on ammonia emissions and phosphate leaching on the farms were also examined. The financial consequences of a low input organic system are summarised in Table 1.

Table 1. relative changes in income from extensive and intensive dairy farms after converting to organic production with or without) levies on environmental pollution
	Extensive Organic vs. Conventional	Intensive Organic vs. Conventional
Total Income	104% (110%)	116% (100%)
Return on labour and management	121% (146%)	72% (91%)

These results show that the extensive farm would benefit financially from organic conversion by a 4-10% increase in total income whilst the intensive farm would lose income mainly due to increased concentrate and labour costs. This is interesting because it shows that organic dairying could be a viable proposition for less intensive enterprises. However, slurry applications to maintain soil N levels in the extensive organic enterprise would lead to over-fertilisation and leaching of phosphate. This would result in financial penalties should new environmental legislation be introduced. But being able to forecast this event is valuable because it allows tactical changes in slurry use to be implemented to pre-empt changes in the law.

This work also demonstrated how critical milk price changes were to financial viability. The price premium for organic milk is a major factor in the profitability of organic systems but this is an unreliable way of sustaining a business in the long term because it is so vulnerable to market influences.

2. Economic comparisons of real farm systems
Whilst computer models are useful within certain limits, a lot of practical information on farm performance can be obtained from comparisons of real farms or farming systems. For the past thirty years or so, conventional dairy production based on perennial ryegrass with high fertiliser N inputs allowed considerable increases in milk yield but this apparent success backfired once it led to the now familiar problems of nitrate leaching and overproduction, and the imposition of quotas. Apart from the environmental damage caused by nitrate leaching, this loss of purchased nitrogen is a waste of money. There are therefore environmental and financial reasons to adopt more extensive systems of milk production to remain within quota and to reduce input costs.

White Clover - an essential part of the organic farming system

2.1 Milk from grass-clover systems in the UK
Recent work by the Scottish Agricultural College at Crichton Royal Farm, Dumfries had two objectives. (1) To show whether the physical productivity already achieved from white clover in experimental plots could be obtained on a farm scale. (2) To show how the physical productivity and viability of a grass clover based dairy system compared to conventionally fertilised ryegrass swards. Two seventy-cow Holstein-Friesian herds were compared under each system for three years. The most prominent aspects of the economic performance of the two systems are shown in Table 2.

Table 2. Financial performance of grass/clover and grass only (N-fertilised) dairy systems
	Grass/Clover			Grass Only
	Yr 1	Yr 2	Yr 3	Yr 1	Yr 2	Yr 3
Milk Price (p per 1)	18.13	18.98	19.43	18.03	18.99	19.35
MOPFF* (£ per cow)	778	823	903	791	828	866
Gross Margin (£ per cow)	823	814	841	846	835	818
Gross Margin (p per l)	14.56	14.49	14.70	14.68	15.12	14.30
Surplus** (£ per ha)	702	614	561	749	710	683
* margin over purchased feed and forage costs ** total gross margin for cows, young-stock and over-wintered sheep minus fixed costs

These values are highly dependent on the prices of milk, fertiliser and concentrate. The gradual increase in the margin over purchased feed and forage costs in both herds is due to a reduction in the use of concentrates. Although these results could be criticised for having been obtained under ideal experimental conditions, they nevertheless demonstrate that a viable dairy enterprise can be based on the use of grass-clover swards to replace purchased nitrogen resulting in environmental and financial benefits.

2.2 Direct comparison of organic and conventional dairy farms
It is a very well showing that computer-simulated and experimental organic forage-based systems can be financially viable as well as environmentally sustainable, but what about real farms? What little information there is on financial performance of grass-clover dependent UK organic dairy systems suggests at a glance that reduced stocking rates and the higher cost of purchased organic feeds can result in poor performance compared to conventional enterprises. In fact it is a widespread assumption that farm income is greater on conventional rather than organic dairy farms.

However, there are at least three main problems with comparing farm financial and physical performance that could contribute to this view of organic farming in general which are not always accounted for in the farming press.

  1) Gross margins are not necessarily a reliable indication of whole farm performance. The gross margin is the difference between the enterprise output and variable costs, and does not take into account fixed costs. Therefore gross margin comparisons between enterprises with different types of fixed costs could be misleading, especially where conventional variable costs such as fertiliser and agrochemicals are replaced by fixed costs like machinery and labour in an organic system.

  2) Comparisons between individual enterprises can be highly misleading because the particular enterprise is an integral part of the whole farm system. Judging farm performance on the basis of one enterprise is like putting a car through an MOT on the basis of having examined only one tyre.

  3) Certain practices such as manure application or the use of fertility-building crops have a residual effect on subsequent crops so that the cost of application is an investment in following crops. A long-term appreciation of the economic and physical performance of the farm is therefore essential.

Comparisons of individual commodities fit the specialised nature of many conventional farms. Organic farms however usually involve the integration of several enterprises with more complex rotations and crop diversity, and with some “unprofitable” enterprises supporting others for the benefit of the whole farm.

2.3 Comparison of organic and conventional dairy systems in Ontario, Canada
A study at the University of Guelph, Ontario compared the economic performance of organic and conventional dairy farms in Ontario. Eight organic farms, which also grew feed cereals and legumes, as well as perennial forage, were contrasted with 120 conventional farms. The latter relied on fertilised forage maize and grass, along with purchased feeds and other inputs.

Due to the small sample size of organic farms compared to conventional, a case study approach, rather than a formal statistical analysis, was used to compare the systems. This involved the use of questionnaires and data forms in a survey of the farms to construct enterprise budgets, balance sheets and income/expense statements. The results of this study are summarised in Table 3.

Table 3. Relative costs and productivity of organic and conventional dairy systems
	Organic vs. Conventional
Total farm income	93%
Total production costs	77%
Production costs per cow	72%
Production costs per hectare	63%
Milk production per cow	100%

Although total farm income was 7% lower on organic farms, production costs were 23% lower whilst milk production equalled that of conventional farms. These results challenge the widely held belief that non-sustainable high input-dependent systems relying on purchased feeds, fertilisers and agrochemicals are essential for producing high yields. In the Canadian study, dairy farmers who converted to organic production not only remained productive in terms of milk output, but were commercially competitive because of reduced costs.

Farmers should look more closely at organic systems to reduce production costs, and be aware of the practical differences between organic and conventional methods that influence economic performance. This is especially true for forage-based systems in which the use of clover and other legumes has the potential not only to provide 100% of crop nitrogen requirements but also contribute to long term soil fertility and soil structure.

Forage Matters Autumn 2000

John Zarb was a farm worker for ten years before obtaining a degree and Ph.D in agriculture. Based in North Yorkshire, he is a consultant researcher in sustainable farming with a particular interest in practical agriculture.
- by Ian Wilkinson of Cotswold Seeds

The Cotswold Seeds Database

Detailed information and articles on grass seed and related matters

Organic Farming:
“How would it affect my income?”

The Cotswold Seeds Database

Detailed information and articles on grass seed and related matters

Organic Farming: “How would it affect my income?”

Organic Farming:
“How would it affect my income?”