By Michael Langemeier and Xiaoyi Fang
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; Greene and Vilorio, 2018; Center for Farm Financial Management, 2020). 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. This article compares the long-run net returns to land of conventional corn/soybean and corn/soybean/wheat crop rotations to that of an organic corn/soybean/wheat rotation. Ten-year enterprise budgets for each crop rotation were developed so that we could capture the net returns of both the transition years and organic production years for the organic crop rotation.
Price, Yield, and Cost Comparisons
Certified organic grains tend to receive higher crop prices and have lower crop yields (McBride et al., 2015 and Center for Farm Financial Management, 2020). Using FINBIN data for the 2014 to 2018 period, organic corn and soybean prices were more than double the corresponding prices for their conventional counterparts. Organic wheat prices were approximately double the average winter wheat price. The crop yield drags for organic corn, organic soybeans, and organic wheat were approximately 32 percent, 33 percent, and 24 percent, respectively. Combining crop prices, crop yields, government payments, crop insurance indemnity payments, and miscellaneous revenue for both conventional and organic crops, gross revenue for the organic crops was higher, with the most significant difference associated with corn.
Organic crop production often involves higher manure, machinery, and labor costs, and lower fertilizer, herbicide, and insecticide costs. Using FINBIN data for the 2014 to 2018 period, total expenses for organic production in comparison to conventional production were slightly higher for corn, and from 30 to 40 percent higher for soybeans and wheat.
Enterprise Budget Summary
Enterprise budgets were developed for conventional, transition, and organic corn, soybeans, and wheat for a ten-year period. Conventional corn, soybean, and wheat enterprises were used to estimate net returns per acre for a corn/soybean and a corn/soybean/wheat rotation. Transition soybeans and wheat were used along with organic corn, soybeans, and wheat to estimate net returns per acre for an organic corn/soybean/wheat rotation. Soybeans and wheat were used as transition crops, and the transition was assumed to take place over time rather than just the first two years of the ten-year period. The organic crop rotation was set-up to ensure that the first organic crop would be corn, which has historically been the most profitable organic crop. More detail pertaining to the enterprise budgets can be found here.
Table 1 illustrates the crop prices that were used for year 1 and years 2 through 10. After being lower in the first year (i.e., 2020), crop prices were assumed to stabilize and reach a long-run equilibrium. The historical difference between conventional and organic prices was used to estimate the organic prices. Sensitivity analysis related to organic crop price assumptions can be found below.