The Studied Microeconomics of Converting Farmland from Conventional to Organic Production

I have been doing research on organic farming and produce and have some recommendations and advice to impart on you. I understand that you have 100 acres of farmland formerly used for growing corn that you would like to put to use for organic production. I have taken a closer look at the microeconomics of the situation and have listed my findings below.

Determinants of Demand

Organic produce has grown in popularity very quickly over the last few decades. Various reasons prompt consumers to buy organically-grown products over conventional alternatives. In terms of income, there is no set profile for the consumer. Organic produce may be purchased by environmentally-conscious college graduates struggling to make a living and it may be bought by wealthy business owners. Demand for organic foods is affected far more by lifestyle than it is by level of income.

Consumer preference can be broken down into the three following categories: attitude, subjective norms, and behavioral control. The first of these, “an individual’s attitude towards consuming a product[,] is one of the most important antecedents for predicting and explaining consumers’ choices across products and services, including food products” (Dimitri and Oberholtzer, 2009). The consumer’s thoughts, beliefs, and emotions determine her attitude toward organic produce and their subsequent willingness to purchase organic food. Environmental concerns, as well as a concern for personal health, form the individual’s attitude toward organic food. When this attitude is positive and strong enough, it compels them to purchase organic products.

Subjective norms constitute societal pressure that positively influences willingness to purchase organic food. In some cases, personal attitude may not be enough for the individual to buy organic products, however “individuals’ intention to consume organic food are likely to be

strengthened if they believe that loved ones expect them to do so, or if they wish to be identified with other individuals who are consuming organic food” (Voon, Ngui, and Agrawal 2011, p. 106). Finally, behavioral control mediates interest in consumption. The perception a consumer has about the ease or difficulty of a given behavior affects whether they choose to engage in it. Thus, “cost and convenience form the perception of affordability of organic food” (Voon et al. 2011, p. 107).

Buyers come in various forms, as many groups of people are interested in purchasing organic produce. Buyers can range from roadside stands, farmers markets, local grocery stores, and Community Supported Agriculture (CSA) subscriptions, as well as produce wholesalers, produce auctions, restaurants, and health food stores. Community Supported Agriculture subscriptions are ideal for farmers starting out, as they provide payment early in the growing season. With CSAs, members share the risks with the farmers. Consumers purchase a share, and in return receive a bag, box, or basket of seasonal produce each week throughout the growing season.

In terms of substitute goods, the only goods that really compete with organic produce are conventionally-farmed foods. According to a price comparison study published in January of 2011 by the Northeast Organic Farming Association of Vermont (NOFA-Vermont), organic produce is typically more expensive. To put it precisely, “aside from cantaloupe, squash, and head lettuce, organic produce was more expensive than conventional produce at farmers markets in Vermont. At grocery stores, organic cantaloupe was the only item less expensive than the conventionally grown counterpart,” (Post 2012, p. 3). Corn, potatoes, and individually sold cucumbers are about the same price, organic or otherwise. With that said, consumers committed to an organic lifestyle are typically willing to put up with the price hike for the environmental and health benefits.

The final determinant of demand is based on expectations for the future. It is expected that prices will increase in the future, which means demand increases in the present, as does expectation that an individual’s income will increase with time. As the article in the textbook indicates, price and supply are also influenced by subsidies and other forms of government involvement. Farmers in the UK switched organic farmland back to conventional agriculture and food production when subsidies began to dry up. Future prices are tied, then, to how much farmland will be devoted to organic farming.

Price Elasticity of Demand

The data in Table 1 is from the United States Department of Agriculture, gathered monthly in the years 2004-2006, comparing the prices of organic and conventional spinach.

(Table 1 omitted for preview. Available via download)

Spinach accounts for 2.71%, 4.08%, and 5.91% in those years (Williams, Law, Schmitz, and Jacobsen, 2011). Organic food sales increased from $11 billion in 2004 to $13 billion in 2005 to $15 billion in 2006 (USDA ERS). The average price of spinach (per pound) in 2006 was $8.59, a 1.41% increase from $6.09 dollars in 2004. Meanwhile, the change in consumption was $2.99 billion (roughly 491 million lbs.) to $7.68 billion (894 million lbs.), a %2.57 increase. The price elasticity of demand, then, following the midpoint formula, is 1.82.

(Figure 1 omitted for preview. Available via download)

Figure 1 depicts the demand curve for a sample organic produce – spinach. The recorded change in quantity demanded occurs over a two-year span, where the price of spinach increases from $6.09/lb. in 2004 to $8.59/lb. in 2006. Over 404 million more lbs. were sold in 2006, showing the steep increase in demand precipitating the correlating increase in price.

Determinants of Supply

The factors to take into consideration when looking at production cost include the price of certification, an organic system plan, record-keeping, production methods tailored for organic farming, the price of transitioning from conventional to organic farming methods, seed selection and planting, pest and soil management, harvest, storage, and labor. The certification cost and the original transitional cost are fixed, while record keeping, pest management, and harvest are variable. Production methods, storage, labor, and seed selection are marginal, as they change based on the quantity produced. The relevant costs are listed in Table 2 for organic soy in 2006.

(Table 2 omitted for preview. Available via download)

Developed from the 2006 Agricultural Resource Management Survey of soybean producers. Most of the technology from a 100-acre corn farm can be carried over into an organic farm, but new methods must be employed to handle pests. Organic pesticide can be expensive, so strategies to produce the highest quality crop must be put into practice. These strategies include using crop rotations that disrupt the pest life cycle, employing biological control, improving soil quality, practicing good sanitation, timing planting and transplanting operations to avoid high pest populations, using optimum planting densities, and growing resistant varieties.

Once the transition is complete and the initial costs accounted for, sellers will come in the form of CSAs, farmer’s markets, and local grocery stores. Though costs will increase for organic foods in the future, supply should remain largely unaffected. For a three-year transitional period during which the farm goes from conventional to organic, a temporary shutdown seems to be the only option. After this period, profit ought to increase due to the high prices of organic produce.

Price Elasticity of Supply

(Figure 2 omitted for preview. Available via download)

Since some of the land will not be ready to yield soy immediately after the three-year transitional period, we can compare the supply and demand from the 84-acre soy farm in the “All farms” region to the 99-acre farm in the Northern Crescent. This represents a 1.18% increase in supply accompanied by a 1.05% change in price. With the midpoint formula for price elasticity of supply, we find the elasticity to be 1.12. See Figure 2 for a visual representation.

Recommendations

Dear Uncle, I recommend you begin the certification process for organic farming as soon as possible. I suggest you do your own research on pest control and crop cycles in order to avoid exorbitant pesticide costs. Begin by growing popular organic produce such as soy, spinach, kale, and blueberries, and pick up as many CSA subscriptions as possible. These will help with the cash flow necessary for this transition. In time, you can allocate some farmland for building infrastructure for raising organic dairy cows and cage-free chickens, as milk and eggs can attract buyers for other organic produce. I recommend establishing a presence in local farmer’s markets and grocery stores before eventually introducing your produce. In order to profit, you will need a loyal base of consumers. Your best bet is to sell your product either directly to your consumers or through large stores such as Whole Foods; these sellers take trucking costs into consideration as they purchase your produce. As your supply increases, you can increase your price and also increase your total profits.

References

Chase, C., Delate, K., & Johanns, A. M. (n.d.). Making the transition from conventional to organic. Retrieved March 20, 2014, from http://www.extension.iastate.edu/agdm/crops/html/a1-26.html

Dimitri, C., & Oberholtzer, L. (2009). Marketing U.S. organic foods: Recent trends from farms to consumers. Economic Information Bulletin, 58, 10-14.

Martin, H., & Collins, D. (2000, December 9). Starting an organic farm. Retrieved March 20, 2014, from http://www.omafra.gov.on.ca/english/crops/facts/09-073.htm

PCO | Assuring the integrity of organic agricultural products through education, inspection and certification of growers, processors and handlers.. (n.d.). PCO. Retrieved March 20, 2014, from http://www.paorganic.org/how-long

Post, E. (2012). Understanding organic pricing and costs of production. National Sustainable Agriculture Information Service, n/a. Retrieved March 20, 2013, from http://web.extension.illinois.edu/smallfarm/downloads/51366.pdf

USDA ERS - Chart: Consumer demand drives growth in the organic food sector. (n.d.). Retrieved March 20, 2014, from http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=35003&#.Uyqc6q1dXh4

USDA ERS - Commodity costs and returns: Organic costs and returns. (n.d.). Retrieved March 20, 2014, from http://www.ers.usda.gov/data-products/commodity-costs-and-returns/organic-costs-and-returns.aspx#.UyrHNK1dXh4

Voon, J. P., Ngui, K. S., & Agrawal, A. (2011). Determinants of willingness to purchase organic food: An exploratory study using structural equation modeling. International Food and Agribusiness Management Review, 14(2). Retrieved March 20, 2014, from http://ageconsearch.umn.edu/bitstream/103989/2/20110041_Formatted.pdf

Williams, M., Law, D., Schmitz, J., & Jacobsen, K. (2011). Organic crop production. University of Kentucky Cooperative Extension Service, n/a. Retrieved March 20, 2014, from http://www.uky.edu/Ag/CCD/introsheets/organicproduction.pdf