Profitability of organic farming in Europe

Introduction

Organic farming in Europe has seen a dynamic development over the past few years. From 1993 to 1999 the area under organic management more than tripled, and a further significant increase is foreseen. Financial performance is widely seen as an important factor determining the acceptance of organic farming. Still, as several surveys have shown, the motives for conversion to organic farming are numerous, and in the past the ‘economic’ incentive was often less important in this decision than other factors, such as concerns about the environment (see e.g. Schulze Pals 1994). This aspect should be kept in mind when evaluating the economic data of organic farms. However, the strong growth in the adoption of organic management practices following the introduction of financial support for organic farming in most countries highlights the increased importance of financial aspects.

Materials and methods

Data collection for this study was carried out by national experts in each of the EU and three non-EU-countries. Guided by a standardised questionnaire, the national experts were advised to draw on scientific journals, specialised literature as well as the relevant grey literature, on the results of ongoing research projects and on farm accounting data.

The comparability of economic calculations between countries is a common problem for economic analysis, due not only to the differences in definitions. Different costs of living and purchasing power parities make comparisons of absolute figures less meaningful. Therefore, all analysed indicators of the organic farms were related to those of comparable conventional farms, as conventional farming usually represents the most common alternative agricultural production system. A comparison of these ratios can be made between countries and studies, with differences in methodology and definitions being of much less consequence for the results.

Results and discussion

Resources and production structure

In most countries, organic farms are on average larger than conventional farms. Labour use is higher than on comparable conventional farms, but the extent of the higher labour requirements is strongly dependent on the farm type. The majority of the studies evaluated report an increase of labour needs in the range of 10-20 %. While intensive livestock farms may even reduce their labour needs due to a reduction in stocking rates, extensive livestock farms often have similar labour requirements to conventional management, while horticultural farms may need more than twice the labour input of conventional farms. Production structures of organic farms differ significantly from conventional ones, quite generally the area of cereals, oilseeds and maize for silage is reduced. On the other hand, the area of leys, fodder crops, vegetables, potatoes and pulses is relatively larger. Stocking rates are on average lower, at 60-80 % of the respective rate on comparable conventional farms.

Yields

In Europe, yields in organic crop production are in general significantly lower than under conventional management. But, these yield differences vary between crops, and partly also between countries and regions analysed. For cereals, the range of observed typical yield ratios is quite narrow for most countries, especially in central and western Europe. Cereal yields are typically 60-70% of those under conventional management. For most countries the studies evaluated show a high variation in both the absolute and the relative yield levels of potatoes. This variation exists within countries, between countries, and for data of different years. Vegetable yields are often just as high as under conventional management. Few data are available on pasture and grassland yields in organic farming, reported values lie in the range of 70-100% of conventional yields, depending on the intensity of use. In livestock production, performances per head are quite similar to those in conventional farming. But, due to the lower stocking rates observed in organic farms, performances per ha are lower.

Prices

An important aspect of the profitability of organic farms is the opportunity of receiving higher farm gate prices for organically produced goods than for conventionally produced ones. Prices vary considerably between the different marketing channels. The realised average organic price depends on the level of these prices and on the quantities market via the respective sales channels. For many products, the calculation of an ‘average organic farm gate price’ has to take into account that in many cases part of the production still has to be sold at conventional prices. Currently, premium prices are very high for most crop products. In nearly all countries analysed, average farm gate prices for organically produced wheat were 50-200 % higher than for conventionally produced wheat, while for potatoes average premia were in the range of 50 % to up to more than 500 %.

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In contrast, the average premium prices realisable for livestock products are generally significantly lower. Organically produced milk received on average a premia of 8-36 % on conventional prices. Data on prices for organically produced meat was available for only a few countries. While average farm gate prices for organic beef exceeded conventional prices by 30 %, the respective premia was 20-70 % for pork. Still, during the last few years, prices for some crop products came under pressure, while for livestock products, premium prices can increasingly be realised.

Payments for organic farming

Organic farming is supported in all the countries analysed within agri-environmental programmes. Payment levels and eligibility conditions vary significantly between countries, and thus the impact of these grants on the financial performance of organic farms may differ regionally. While most countries support both conversion to and continuation of organic farming, in France and Great Britain only conversion is supported. Payment levels for arable land in first two years of conversion range from 100 EURO/ha/year in Great Britain to 470 EURO/ha/year in Finland and more than 800 EURO/ha/year in Switzerland (Lampkin et al. 1999).

Profits

As far as possible, the definition of profit was based on the definition of ‘Family Farm Income’ according to Farm Accountancy Data Network of the European Commission, i.e. profit represents the return to the farm family’s own labour, land and capital. The most notable exception is the UK, where net farm income was used as an indicator of profitability.

The analysis of the economic situation of organic farms in Europe shows that on average profits are similar to those of comparable conventional farms, with nearly all observations lying in the range of +/- 20 % of the profits of the respective conventional reference groups (Figure 1), but variance within the samples analysed is high. Profitability varies between the countries surveyed, and between different farm types.

Due to the high price premia realisable in the last few years, and the design of the general Common Agricultural Policy (CAP) measures (set-aside, compensatory arable payments), organic arable farms have in several countries been more successful than the average. For dairy farms, in general relative profitability is higher if measured per family work unit than if measured per ha utilisable agricultural area. With the exception of one study in Italy, the observed profits per family work unit were equal to or higherthan in comparable conventional farms in all countries for which data was available. On the other hand, only for a few samples average profits per ha were at least similar to the conventional reference group. Very few data is available on horticultural and pig and poultry farms. The respective studies highlight both the risks and the opportunities that exist for these farms. For specialised, highly intensive farms, it would as a rule currently not be profitable to convert to organic farming.

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The economic performance is in most countries significantly influenced by the support payments for organic farming, which on average contribute approximately 16-24 % of profits in Austria, Denmark, Germany and Switzerland. Even more important is often the marketing situation. Data from Great Britain and Germany show higher prices for organic products to account for 40-73 % of profits for arable farms, while the respective share is lower for dairy farms (10-48 %).

Longer time series for profits of organic and comparable organic farms were available for Germany and Switzerland (Figure 2). Profits of the organic farms were slightly higher in almost all years in both countries. In Switzerland, profits were clearly affected by the introduction of direct payments for organic farmers after 1993, and the market entry of a large retail chain. In Germany, falling profits per ha may possibly be due to the expiration of the former extensification program, which offered higher payments than the current support programmes according to EC-Reg. 2078/92. But what is astonishing is the extreme similarity of the curves for conventional and organic farms over the years. This indicates that external, non-systeminherent factors like climate, prices and general agricultural policy are influencing both farming systems in very much the same way.

Figure 1:     Profits of organic farms relative to comparable conventional farms in different countries

Source: Own calculations based on FAT (diff. years) and BMELF (diff. years).

Figure 2:     Development of profits of organic and comparable conventional farm in Switzerland and Germany.

Frank Offermann and Hiltrud Nieberg

Institute of Farm Economics and Rural Studies

Federal Agricultural Research Centre, Bundesallee 50, D-38116 Braunschweig, Germany

e-mail:frank.offermann@fal.de, hiltrud.nieberg@fal.de

Keywords: Profitability, Economics, Policy, Europe

Outlook

The development of the political framework in the European Union is likely to contribute to a further increase of organic farming in the following years. The latest agricultural policy reform (‘Agenda 2000’) will further reduce production-related price support and move towards more decoupled transfer payments, which increases the relative profitability of organic farming systems. Several governments have included the goal of increasing the area under organic management in their political programme and raised support payment levels. However, in the long run, a sustainable expansion of organic farming will depend on consumers willing to pay a premium for organic products.

Acknowledgement

The paper is based on a report which has been carried out with financial support from the Commission of the European Communities, Agriculture and Fisheries (FAIR) specific RTD programme, Fair3-CT96-1794, „Effects of the CAP-reform and possible further development on organic farming in the EU“. It does not necessarily reflect its views and in no way anticipates the Commission’s future policy in this area.

References

BMELF (1991-2000). Agrarbericht. Bonn: Bundesministerium für Ernährung, Landwirtschaft und Forsten.

BMLF (1998, 1999). Grüner Bericht. Wien: Bundesministerium für Land- und Forstwirtschaft.

DIAFE (1999). Account Statistics of organic farming, 1997/98. Danish Institute of Agricultural and Fisheries Economics. Ministry of Food, Agriculture and Fisheries, Serie G, nr. 1.

FAT (1991-1997). Bericht über biologisch bewirtschaftete Betriebe, Ergebnisse der Zentralen Auswertung von Buchhaltungsdaten. Tänikon: Eidgenössische Forschungsanstalt für Agrarwirtschaft und Landtechnik.

Lampkin, N., Foster, C., Padel, S. and Midmore, P. (1999). The policy and regulatory environment for organic farming in Europe. Organic farming in Europe: Economics and Policy. Volume 1. Universität Hohenheim.

Offermann, F. and Nieberg, H. (2000). Economic performance of organic farms in Europe. Organic farming in Europe: Economics and Policy. Volume 5. Universität Hohenheim.

Schulze Pals, L. (1994). Ökonomische Analyse der Umstellung auf ökologischen Landbau. Münster: Landwirtschaftsverlag GmbH. Schriftenreihe des BMELF, Reihe A, Angewandte Wissenschaft, Heft 436.

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