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Best of NAMA 2020

Blog by Michael Langemeier, Center for Commercial Agriculture, Purdue University

Due to continued increases in demand for certified organic grains, crop farmers that have transitioned from conventional to certified organic grains report higher net returns per acre (McBride et al., 2015; Greene et al., 2017; Langemeier et al., 2020; Center for Farm Financial Management, 2021). Despite this, certified organic land accounts for less than 2 percent of U.S. farmland (U.S. Agricultural Census, 2017). Information pertaining to the relative profitability of conventional and organic production is often lacking.

A farmdoc daily article written in September 2020 (September 4, 2020) compared net returns for conventional and organic crop enterprises using FINBIN data from 2015 to 2019. This article uses FINBIN data from 2016 to 2020 to update comparisons of crop yields, gross revenue, total expense, and net returns for conventional and organic alfalfa, corn, oats, soybeans, and winter wheat. The organic enterprise data represents farms that have already transitioned to organic production, and thus do not include information pertaining to the transition phase.

Crop Yields
Table 1 shows the average conventional and organic crop yields for alfalfa, corn, oats, soybeans, and winter wheat. The ratio illustrated in the last column of the table was computed by dividing the organic crop yield by the conventional crop yield. Alfalfa and oats exhibited the smallest differences in crop yields between conventional and organic crops. The yield drags for corn, soybeans, and winter wheat were 32 percent, 37 percent, and 53 percent, respectively.

Gross Revenue, Total Expense, and Net Return to Land
Gross revenue, total expense, and net return to land per unit for alfalfa, corn, oats, soybeans, and winter wheat are presented in Table 2. Gross revenue includes crop revenue, crop insurance indemnity payments, government payments, and miscellaneous income.

Total expenses include all cash and opportunity costs, other than those associated with owned farmland. Farmland costs included in the total expense reported in Table 2 were comprised of cash rent, real estate taxes, and interest, which would be lower than the full opportunity cost on owned land. Just to give the reader some idea as to how large this excluded cost may be, you would need to add an estimated $0.25 per bushel ($0.85 per bushel) to the total expense for conventional corn (conventional soybeans) if you wanted to account for the full opportunity cost on owned land. Also, note that the per unit net returns presented in Table 2 represent a net return to land rather than an economic profit.

Though conventional and organic crops face different market phenomena, it is common to compare conventional and organic crop prices. Comparing organic to conventional gross return per unit reported in table 2, the smallest ratio of organic to conventional gross return was for alfalfa (1.28) and the largest ratio (2.39) was for corn. Organic oat and soybean prices were approximately double their conventional counterparts, while organic wheat price was approximately 1.75 times higher than conventional wheat price. It is important to note that these price ratios represent five-year averages.

The price ratios for individual crops vary from year to year. For example, during the 2016 to 2020 period, the corn price ratio ranged from 1.84 in 2020 to 2.74 in 2017.

Examining gross revenue and total expense per unit for each enterprise reported in Table 2, it is evident that economic losses occurred for oats and winter wheat grown conventionally, and for winter wheat grown in an organic rotation. Economic profit was approximately zero (i.e., breakeven level) for conventional corn and organic oats. The lack of profits for the organic small grains has important implications for organic crop rotations. Numerous organic crop rotations include a small grain in the rotation.

Market opportunities for organic small grains vary substantially by region, and it can be difficult to find markets for these crops. It is also useful to examine differences in net returns per unit for each crop (e.g., corn versus organic corn). The largest differences in net return per unit occurred for corn and organic corn, and for soybeans and organic soybeans. The difference in net returns per unit between the two crop rotation systems was very small for alfalfa.

It is important to note that the net returns reported in Table 2 are on a per-unit basis. Given the differences in crop yields between conventional and organic crops, it is often more relevant to examine differences in per acre net returns than per-unit net returns. The average difference in net returns to land between the organic and conventional crops was $73 per acre.

The largest difference was $370 per acre for corn. The difference for soybeans was $115 per acre, while the difference for oats was $27 per acre. The differences for alfalfa and winter wheat were -$35 and -$112 per acre, indicating that the conventional alfalfa and winter wheat were more profitable than organic alfalfa and winter wheat.

To view the complete report, click here.

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