Organic conversion – if the price is right

Organic farming has been in the doldrums during the past five years.

When the recession hit in 2008, the more expensive organic food sector took a big knock. Sales tumbled from a peak of more than £2bn and farmers started baling out too.

In 2009 just under 750,000ha of the UK was organically managed, but by 2013 this had dropped to 606,000ha, with 6,487 producers and processors.

And yet, the trade winds could be picking up again. Thanks to the UK’s tentative economic recovery, organic sales in the UK grew 2.8% last year to £1.79bn – the first improvement since 2009.

Healthy and beauty products and textiles grew fastest, but dairy sales grew 4.4%, vegetables rose 3.4% and meat, fish and poultry grew 2.2%.

Kantar Worldpanel communications director Edward Garner said this was “good news”, but the growth was driven by strong brands like Yeo Valley, Green & Black’s and Rachel’s Organic, who can compete against non-organic competition.

But, if the economic recovery continues, organic demand could keep growing. The Soil Association thinks it could be a good time to consider converting. It believes a new report on organic farm performance, the stricter requirements of the new CAP regime and the growing organic food market could make conversion worth another look.

Anyone considering converting has to be confident they can make money from it.

The Soil Association commissioned a report to compare how organic and non-organic farms have performed over the last six years.

Organic conversion tips

  • Careful costings are needed – run the numbers for your farm type and size, don’t rely on standard costings
  • Look at the organic premium for each sector and its track record
  • Consider how capacity such as storage would be used when freed up by lower output in an organic system
  • Plan your route to market – you might need to sell organic produce through different channels
  • Applications for the current OELS programme need to be made by August
  • Conversion currently offers £175/ha for the first two years
  • Conversion payments are likely to continue under the new CAP regime, but could be lower as more money is expected to be paid out in the annual OELS payments

Aberystwyth University and the Organic Research Centre gathered Farm Business Survey data from 882 farms across England and Wales.

The organic farms in the sample were about 20ha bigger than the conventional ones on average.

The headline results show the average farm business income across all farm types on a per hectare basis was better on organic farms between 2007 and 2012.

Organic LFA beef and sheep farms had the biggest advantage, at £79/ha a year better than conventional equivalents, and mixed farms also performed £72/ha a year better on average (see table).

Average financial benefit for organic farms, 2007-2012  
 Farm type  Difference in farm business income (£/ha/year)
 Arable  +26
 Mixed  +72
 Dairy  +42
 Lowland beef and sheep  +15
 LFA beef and sheep  +79

On mainly arable systems variable costs were £128/ha a year lower than on conventional systems. But fixed costs have to be spread over fewer units of production.

Soil Association farm business adviser Tim Bevan said organic performance was not as volatile year-to-year, as the impact of global commodity prices on inputs and products was not as significant as it was for conventional farmers.

“Organic farmers still have to make a profit and, on average throughout six years, organic farming comes out slightly better than conventional,” he said.

“A lot of organic schemes are more domestic-driven, not as exposed to world conditions. Average yields are about half of that on a conventional farm, but they are selling their crop at a premium and using agri-environment payments better.

“And the key factor is the lower variable costs: they do not use the fertiliser.”

While the table shows a better financial picture from organic production compared to conventional, the difference is largely due to the injection of £60/ha a year payments from Organic Entry Level Stewardship (OELS).

The future of organic payments in the new CAP environment has not been decided and the other serious concern is maintaining a sufficient farmgate premium for organic crops, milk and meat.

But Mr Bevan believes that less volatile business performance could be attractive in the long run, even if the organic-conventional price gap closes in the short term.

“People should not make a snap decision based on a year’s performance,” he said.

Subsidies have been essential to organic farm performance in the past five years and this will continue in the new CAP regime.

Stricter environmental demands from next year could encourage some farmers to take the leap and convert to organic.

From 2015, 30% of the basic payment scheme (BPS) cash farmers receive will be subject to meeting environmental “greening” rules.

Those with more than 30ha of arable land will have to grow at least three crops and those with more than 15ha will need to allocate 5% of their land to be an ecological focus area.

Certified organic farmers will automatically meet these greening rules, so won’t have to carry out extra environmental work on top of existing stewardship schemes.

Abacus Organic principal consultant Stephen Briggs believes this could make switching to organic a sensible business decision for some farms, especially if they are considering forgoing the 30% of BPS to avoid greening.

He punched in the numbers for a 1,000ha arable estate in different scenarios under the new CAP, comparing organic production under an OELS scheme and conventional farming with and without greening or an ELS scheme.

Best performer

In his model, organic performs best. An organic system under an OELS scheme would achieve a net margin of £109/ha. However, this is only £20/ha better than the next best scenario, of conventional farming with both greening and an ELS scheme.

He assumed the conventional feed wheat yield was 8.35t/ha, falling to 5t/ha under organic.

In the organic scenario, an organic grain premium of £75-80/t would not make up the yield shortfall. But total subsidies would be higher, with OELS payments paid on top of the £198/ha for BPS.

Mr Briggs predicted variable costs would be much lower, at £150/ha compared with £424/ha on a conventional system.

He has used the same fixed costs on conventional and organic farms, but believes some farms could make savings by using smaller machinery.

“In a post-CAP environment you have got to run the numbers, because in some situations it will fit better in terms of running costs and profit margins,” he said.

He said this would mainly apply on larger cropping farms, but any enterprise with more than about 50ha of arable specialised in one or two crops could possibly benefit from conversion, as the greening requirements could hit their economies of scale.

“People should not make a snap decision based on a year’s performance”
Tim Bevan

The situation is different in dairy where farmers are getting strong market returns and high production, and greening’s impact rears its head if they are growing more than 30ha of a single crop like maize.

Abacus consultant Sam Franklin thinks a switch in farming system could also leave room for some profitable changes to your business mix.

Lower grain yields could free up storage, drying and handling capacity, so buildings could be turned over to offices, retail, industrial use, a farm shop or even residential lets.

“If you are freeing up buildings on farm, these are income streams you should be looking at,” he said.

Laurence Gould consultant Claire Kingston said that financial motivations were unlikely to be the top priority for most people and, though the organic market was growing, different farm types would need to run the numbers and be certain about application detail.

The cut-off for submitting an OELS application is the end of July and the conversion start date must be no later than 31 December.

After then, there will be no organic scheme available for new applicants until the new scheme is expected to come into force in January 2016.

And from 1 January 2015, all new agreements started in 2014 will be paid on a January-December schedule, which may have some cashflow implications.

“Variable costs might be lower but the output is lower too,” Ms Kingston said.

“At the moment if you are going to go organic it is because you really want to go organic and follow that way of life.”

Organic premium indicators  
 Feed wheat  +£72-80/t
 Beef  +65-70p/kg
 Lamb  +0-40p/kg
 Milk  +8-10p/litre

Case study: Michael Houlden, St Clears, Carmarthenshire

Welsh sheep farmer Michael Houlden is weighing up the pros and cons of organic conversion.

He has 196 breeding ewes on his 128-acre farm near St Clears in Carmarthenshire but is about to begin a transition to dairying. Next month 10-15 pedigree Jersey cows will arrive to start his herd.

A premium on organic lamb of about 6p/kg has been not enough for him to consider conversion, but the move into milk has made him think again, as the premium in dairy makes it more viable.

He is confident he can sell organic produce – a local cheesemaker will buy his milk – but the numbers have to stack up for his size of farm and stocking levels.

“I have given it some serious consideration but my view is I am going to remain conventional for the time being,” he says.

“The day will come when the cow numbers are up to where they should be and I’ll have a greater understanding of what the farm capability is and whether I feel then I can adapt to organic conversion.”

Mr Houlden says the subsidies would be important for financial security but not the main incentive.

“Organic farming has to come from your heart – you have got to want to do it.”

See more