Abstract
Several studies show that organic farming is more profitable than conventional farming. However, in reality not many farmers convert to organic farming. Policy makers and farmers do not have clear insight into factors which hamper or stimulate the conversion to organic farming. The objective of this paper is to develop a dynamic linear programming model to analyse the effects of different limiting factors on the conversion process of farms over time. The model is developed for a typical arable farm in The Netherlands central clay region, and is based on two static liner programming models (conventional and organic). The objective of the model is to maximise the net present value over a 10-year planning horizon. The results of the analysis of a basic scenario show that conversion to organic farming is more profitable than staying conventional. In order to arrive at the actual profitable phase of organic farming, the farmer has to pass through the economically difficult 2-year conversion period. Sensitivity analysis shows that if depreciation is 25% higher than conventional fixed costs due to machinery made superfluous by conversion, conversion is less profitable than staying conventional. Also the availability of hired labour, which can be constrained in peak periods, has a strong effect on the cropping plan and the amount of area converted. Further analysis shows that a slight drop (2%) in organic prices lowers the labour income of the farmer and makes conversion less profitable than conventional farming. For farmers, a minimum labour income can be required to ‘survive’. The analysis shows that constraint on minimum labour income makes stepwise conversion the best way for farmers to overcome economic difficulties during conversion. © 2006 Elsevier Ltd. All rights reserved.
Generated Summary
This study employs a dynamic linear programming (DLP) model to analyze the conversion process of arable farms in the Netherlands from conventional to organic farming. The model aims to maximize net present value over a 10-year planning horizon, incorporating two static linear programming models (conventional and organic). The research explores how various factors, such as depreciation costs, labor availability, organic market prices, and minimum labor income requirements, influence the conversion process. The study focuses on a typical arable farm in the central clay region of the Netherlands. The model’s structure includes annual crop activities, seasonal labor, and constraints related to land availability, crop rotation, labor, nutrient balances, and other regulatory requirements. The DLP model seeks to determine the optimal cropping plan and conversion strategy at the farm level, offering insights into the economic consequences of conversion.
Key Findings & Statistics
- 2.49%: The percentage of organic land area in the Netherlands in 2005.
- 10%: The target percentage of organic land area in the Netherlands by 2010.
- 136%: The percentage of the conventional gross margin that organic farming is more profitable than in equilibrium states.
- 2 years: The minimum time it takes for the conversion process from conventional to organic farming.
- 4%: The assumed discount rate in the basic scenario.
- 102,424 Euro/year: The conventional fixed costs.
- 109,426 Euro/year: The organic fixed costs.
- 2255 h/year: The average labour supply in the region for a 48-ha arable farm.
- 158 h/fortnight: The household labour can supply a maximum of this amount in peak periods.
- 18 Euro/h: The skilled labour cost.
- 9 Euro/h: The unskilled labour cost.
- 27.5: The yield of ware potatoes (Mg).
- 7150: The revenue of organic ware potatoes (Euro).
- 2255: The costs of organic ware potatoes (Euro).
- 20.6: Labour need of organic ware potatoes.
- 20.6: Labour need of ware potatoes (h).
- 150: Nutrient requirement for N of ware potatoes (kg).
- 48: Nutrient requirement for P2O5 of ware potatoes (kg).
- 8 years: The payback period for organic conversion.
- 640 h/fortnight: Availability of hired labour to maintain the same cropping plan.
- 160-400 h/fortnight: The partial conversion to organic farming occurs in this range.
- -20,000 Euro/year: Complete conversion is only possible until the minimum labour income is restricted to this value.
- 92%: In the conventional year, this percent of the variable costs are direct costs of crop production.
- 62%: In the conversion years, this percent of the variable costs are direct costs of crop production.
- 76%: In the organic years, this percent of the variable costs are direct costs of crop production.
- 32%: In the conversion years, this percent of the total variable costs are for hired labour.
- 23%: In the organic years, this percent of the total variable costs are for hired labour.
- 251,719 Euro: The revenue from a 10 year plan.
Other Important Findings
- The basic scenario analysis indicates that conversion to organic farming is more profitable than remaining conventional.
- The conversion process includes a 2-year period of economic difficulty.
- Sensitivity analysis reveals that higher depreciation costs due to conversion can make conversion less profitable.
- The availability of hired labor significantly affects cropping plans and the extent of land conversion.
- A slight drop in organic prices (2%) can reduce farmer labor income, making conversion less attractive.
- A minimum labor income requirement can necessitate stepwise conversion for farmers to overcome economic challenges.
- The model determines the optimal cropping plan, including the number of hectares for each crop and conversion decisions.
- During conversion, the cropping plan differs, with spring wheat, seed potato, seed onion, sugar beet, and alfalfa being cultivated.
- Organic farming requires more labor than conventional farming, particularly during conversion years, with additional labor needed during the summer.
- The model’s economic results demonstrate that organic production yields more than twice the labor income compared to conventional production.
Limitations Noted in the Document
- The study’s reliance on average empirical data may not fully capture the variability among different farms.
- The model’s approximations and assumptions, such as those related to yields, costs, and resource requirements during the conversion period, are based on limited empirical evidence.
- The study does not account for the learning effect, which can reduce income during the conversion period due to a lack of experience with organic methods.
- The model assumes a minimum of 1/6 of the cultivated area is planted with legumes, whereas in practice it is recommended that the minimum area with legumes is 1/4 or 1/3 of the total area.
- The study acknowledges that factors such as crop prices, input costs, and yields can change and that the rotations can change accordingly.
- The model’s output is based on the Dutch government’s target.
- Model results of the basic scenario and also of most of the sensitivity analyses shows one step conversion.
Conclusion
The study’s analysis indicates that converting to organic farming is more profitable in the long run, but farmers face economic challenges during the 2-year conversion period due to lower yields and conventional prices. Despite the potential for higher long-term profits, many farmers are hesitant to convert. The research identifies several factors influencing the economic performance of farms, impacting the decision to adopt organic production. These factors include depreciation costs, hired labor availability, organic market prices, and minimum labor income requirements. The study emphasizes the importance of economic optimization and legislative requirements in the context of organic farming. The analysis suggests that policies aimed at stimulating conversion should consider regional labor supply and the potential impact of additional costs. The study’s findings indicate that stepwise conversion may be the best approach for farmers facing economic difficulties. Governmental incentives, such as subsidies, could play a role in motivating farmers to convert, particularly if organic farming faces challenges like extra depreciation costs or lower organic prices. The model developed in this study provides insights that could be valuable for future investigations into the effects of economic incentives and the long-term sustainability of organic agriculture. The need for additional research regarding the impacts of pre-cropping, more precise market prices, and crop yields remains a critical area for future studies.