SLU news

Profitability and risks in organic production

Published: 21 September 2011

Åsa Sterte at SLU showed higher profitability and lower risks in organic farming in her recently published master's thesis.

Several previous studies have concluded that organic farming is more profitable than conventional production and some studies have also shown that the risk isn’t higher in organic production.

In a recently published study by Delbridge et al (2011) organic and conventional production of fodder crops in the United States were compared in terms of profitability and risks. Unlike many previous studies, the results are based on a long trial period (1993–2010). The analysis shows that organic production is characterized by higher profitability and lower risk. The explanation for the higher profitability is lower production costs and the price premium received. Although a price premium is a prerequisite for higher profitability, the results suggest that there is some margin if the premium would be reduced in the future. With regard to production costs, the authors clearly stated that there likely are additional costs (additional hours to inspect the fields, record keeping and marketing) associated with organic production that they have not taken into account because they are difficult to quantify.

In Asa Stertes master's thesis she compared organic and conventional crop production in Sweden, “Barriers to convert to organic farming and the role of risk - An empirical application on Swedish data” (2011). Her analysis showed similar results, i.e. higher profitability and lower risk in organic production. Several explanations for why not more farmers convert to organic production, despite higher profitability and lower risks, are presented. Some examples of these are conversion costs, uncertainty about future premium and political risk.

Although many studies have concluded that organic is more profitable than conventional production, it is not uncontested. For example, it was found Uematsu and Mishra (2011) in a U.S. study that focused on household income that organic production did not generate a significantly higher income than conventional production and that organic production was associated with a greater risk. Their results show that the cost of organic production (excluding conversion costs) are significantly higher primarily due to higher labour costs, higher insurance premiums and higher costs of product marketing. In light of their findings, they argue for measures that will allow organic producers to cover all their extra costs and not as now; mainly focus on conversion costs. Although conditions in Sweden are different from those in the United States shows the latter study that there is no clear answer on how organic production is relative to conventional production in terms of profitability and risk.