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Steamboat - Ski Town, USA

Organic Trends Benefit Farmland by T. Marc Schober

Organic farming entails tasks like planting and harvesting, but organic farmers have additional work that differs greatly from conventional farmers. Organic production is very specific to comply with certifications and requirements mandated by the National Organic Program (NOP), which was created through the Organic Foods Production Act of 1990 (OFPA). The NOP develops, implements, and administers national production, handling and labeling USDA standards.

When dealing with food production, the term, “organic” is not interchangeable with natural, free-range, or hormone-free. Organic grains, primarily corn and soybeans, can be very profitable for farmers as organic grains can sell for large premiums from farmers who are certified. The growing consumption of organic foods is also helping increase the value of U.S. farmland because more land is required to produce organic food since yields are typically lower than conventional farming.

What is Organic?

Organic foods and grains are produced without using pesticides, non-organic fertilizers, antibiotics, and hormones. Farmers that use organic production methods, and that have been certified organic by the NOP’s 55 domestic or 42 foreign accredited certifying agents, can sell their grains to organic handlers and producers. For a farmer to be certified, they must present an application to an accredited certifying agent with four items included:

• The type of operation to be certified
• A history of substances applied to land for the previous 3 years
• The organic products being grown
• The organic system plan describing practices and substances used in production

Before farmers are able to be certified, their fields must remain organic (free of certain fertilizers and chemicals) for three years. During those three years, farmers are practicing organic farming without the ability to sell their crop at the higher organic prices. After being approved, farmers must maintain accurate records in order to continue their organic certifications.

Here is a short overview of organic farming from the Agriculture Marketing Service at USDA:

Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations. Organic meat, poultry, eggs, and dairy products come from animals that are given no antibiotics or growth hormones. Organic food is produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; or ionizing radiation. Before a product can be labeled “organic,” a Government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet USDA organic standards. Companies that handle or process organic food before it gets to your local supermarket or restaurant must be certified, too.

Conventional vs. Organic

Although organic grains typically sell for a premium versus conventional grains, the USDA has no claims that organic is safer or more nutritious. The demand for organic foods has grown substantially as health conscious consumers demand a healthier diet.

The key differences between conventional and organic farming include variations in soil composition, weed control, yields, and prices. For organic farmers to be profitable, the organic price premium must cover their yield loss and higher input costs. Fertilizer is cheaper since synthetic fertilizers are prohibited, but cultivation and other weed control methods consume diesel and time in comparison.

Any plant material grown on a farm field will promote organic material in the soil. Since organic farm fields have a lot more growing in them than just the targeted crop, organic material in the soil is being built at a faster rate than most conventional farm fields. Increased levels of organic material in soil will translate into higher yields over time for farmers.

Weed control is the most noticeable difference between organic and conventional farm fields. Organic farmers will mow and cultivate weeds when they are small, with the intention to kill the weed before the weed’s seeds are able to spread. Many organic farmers will also add another crop to their rotation, like rye to follow corn, to make nitrogen, phosphorus and potassium more accessible for the next crop. Rye and other filler crops discourage weeds as well.

Yields are the most important statistic a farmer follows. For organic farmers, typically their yields will be lower than conventional farmer yields. Yields of organic crops are tied to the crop rotation practiced by the farmer.

Research from Iowa State University shows that organic corn yields are very different depending on the crops corn is rotated with. In a corn-oats/annual alfalfa rotation, organic corn yields were 146.4 bushels per acre from 2000-05. Yields were 163.7 bushels per acre if organic corn was in a corn-soybean-oats-alfalfa rotation. During these same years, conventional corn yields were 177.6 bushels per acre while in a corn-soybean rotation and 156.0 in a corn-corn rotation.  

Organic corn yields were proven to be significantly higher when in a four crop rotation, but farmers are only able to capitalize on organic corn prices every four year in a four crop rotation.

Organic farmers may have lower yields, but at times the price of organic grains can more than offset their lower yields. Organic grain prices follow some of the same trends as conventional grains, but the two are not completely correlated. Organic prices depend heavily on consumer demand and discretionary spending. During recessions, organic prices suffer due to lower demand.

Consumption Trends

Consumption trends show that the U.S. demand for organic foods is growing. Currently, 3.7% of total food sales in the U.S. are organic, according to the 2010 Organic Industry Survey. In the most concentrated organic food sector, fruits and vegetables, sales increased by 11.4% from 2008 to 2009, up to 38% of total sales.

Consumers are continuing to turn to organic foods, even in the recession. A recent study from Mambo Sprouts Marketing found that 88% of consumers have been taking additional steps to promote family health and wellness. Of the 88%, 59% were buying more organic foods and 53% were increasing organic food consumption. The trends show that the organic demand is not letting up anytime soon. If demand for organic food continues to grow, the entire food supply will continue to shrink.

Organic Demand Affecting Farmland Values

The U.S. economy is slowly coming out of its recession, which means organic food demands should increase as the economic conditions improve. As organic food demand increases, it will require more farmland for production since yields are not as high on organic farms. It takes over 20% more land to grow the same amount of organic corn as it does conventional corn, according to comparisons of Iowa State University yield tests. Luther Tweeten of Ohio State thinks it can take nearly twice as many acres to produce organic crop yields equivalent to conventional crop yields. The growth of organic grain production will increase the demand for farmland, as well as farmland values.

Organic farming is becoming more efficient due to improving technology, but will increased production be able to meet the increased demand of organic food? The current U.S. supply of corn is at less than 30 days, according to the November USDA WASDE Report. Farmland will undoubtedly benefit from the increased amount of organic production due to limited supply of farmland and tight grain supplies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.


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