Converting to organic food production in the UK[1] - some financial implications from case study farms

Peter Grey, Georgina Holt and Richard Tranter

Introduction

UK agriculture is, arguably, facing its toughest period ever with farm incomes at their lowest real levels since the depression of the 1930s, and with all product sectors substantially affected. This inclement economic climate has forced many producers to re-consider their farming systems. Some have cut costs significantly, some have opted to diversify into non-farm businesses or have left agriculture completely, whilst a significant number are now considering organic methods. Indeed, between 1998 and 2001 nearly 10 per cent of all farmers in England and Wales contacted the Organic Conversion Information Service (OCIS), funded by the Department for Environment, Food and Rural Affairs (DEFRA) and the National Assembly for Wales (Soil Association, 2002a). Large premiums over ‘conventionally’ produced products and subsidies received whist converting have ‘pulled’ farmers towards the organic option at the same time as the downturn in profits in conventional farming is ‘pushing’ farmers in new directions.

The UK organic market is currently growing at a faster rate than in other EU member states, total retail sales of organic food rose from €245[2] million in 1995 to €1.5 billion in 2001 (Soil Association, 2002c). This is reflected by a dramatic increase over the past few years in the area of land, and number of producers, registered as organic or in conversion––from 700 producers farming 32,476 hectares in 1994 to 3,981 producers farming 680,000 hectares, 61 per cent of this being fully converted, by the end of 2001 (Soil Association, 2002b). These latter figures represent 3.9 per cent of UK farmland. However, over 80 per cent of converted land is rough grazing or permanent pasture (DEFRA, 2002) and production so far has not had the anticipated market impact, with over 70 per cent of retail organic food sales still accounted for by imports. Not withstanding the need to source non-seasonal and exotic products from third countries, provided the organic option is economically viable, there still exists scope to increase the share of UK organic production on retail shelves.

In order to assess barriers to conversion, 27 farms considering conversion were recruited between November 2001 and February 2002 through the Soil Association[3], the Organic Advisory Service, and the National Farmers’ Union into a case study in which participants took part in a detailed budgetary analysis of conversion to organic production, the findings of which are presented in this paper. Family Farm Income (FFI) was calculated for the current conventional system from financial accounts held by the farmer for harvest year 2000 or 2001. Budgets for conversion (Year 2) and organic (Year 3) systems were based on information obtained during interview, standard organic farm management performance handbooks, and published market information. For the conversion and organic budgets, product prices were based on farmer knowledge and / or published standard farm prices (Nix, 2002; Lampkin & Measures, 2001).

UK Government support for conversion

Following the 1992 McSharry agreement on CAP reform, and as part of an overall initiative taken by the European Union (EU) to provide a framework for EU member states to implement policies to support organic agriculture through the Agri-environment Regulation 2078/92 (EC, 1992), the Ministry of Agriculture, Fisheries and Food (MAFF) set up the Organic Aid Scheme (OAS) on 1^st August 1994. Differential payments were introduced for various types of land and over time, with higher payments available for the first two ‘income deficit’ years of conversion (Table 1). However, the rates of payments were low in comparison with other EU states and uptake by producers was relatively poor (Figure 1). The OCIS operated by Elm Farm (Organic) Research Centre (EFRC) under contract to DEFRA, successor to MAFF, was introduced in June 1996[4] but uptake of state aid did not improve significantly until the OAS was reformed. With the reaffirmed aim ‘to support and encourage the expansion of organic farming, to increase environmentally friendly production’, the Organic Farming Scheme (OFS) replaced the OAS in April 1999 (DEFRA, 2002a).

Table 1. Organic Conversion Payments for England 1994-present

€ per hectare	OAS 1994-9	OFS from 1999					OAP[5]
	Total	Total	Y1	Y 2	Y3	Y4-5	Y1-5
AAPS[6] eligible and land in permanent crops	409	736	368	220	82	33	49
Other improved land	82	573	286	172	65	25	38
Unimproved land[7]	60	82	41	17	8	8	8

With the introduction of the OFS, the maximum area of 300 hectares eligible for aid under the OAS was removed (but the minimum requirement of 1 hectare remained) and a lump sum ‘stand alone state aid’ payment of €750 per holding spread over three years, for purchase of consultancy advice was introduced. In addition, payment rates were considerably more attractive (Table 1) and the scheme was forced to close after six months due to over subscription, only to be reopened in January 2001. In England, the OFS as operated under Regulation 2078/92 was carried forward into the England Rural Development Programme (ERDP). This is funded and administered by DEFRA under Articles 22-24 of Regulation 1257/1999 which provide for support to be granted for agricultural production methods designed to contribute to the Community’s policy objectives to protect the environment and maintain the countryside. Figure 1 indicates that the rate of land converted has followed more closely the trend in state aid available in England than in Scotland, presumably due to the higher proportion of unimproved land converted in Scotland at a lower rate of support. In England, approximately 45,000 hectares, managed by around 650 producer beneficiaries, are now converted or converting to organic production per year.

Figure 1. Comparison of conversion payments and area England and Scotland

Source: DEFRA (2002a)

At the time of the study, no ongoing support payments for land under organic management were available in the UK, unlike most other member states, but the recent Organic Action Plan (OAP) now allows land that has completed conversion to enter into new five-year agreements (Table 1). There is also a new tier for top fruit production of €982 per ha for Years 1 to 3, and €49 per ha for Years 4 to 10 (DEFRA, 2002b).

Figure 2 Growth of organic production sector in relation to state aid (UK)

Source: DEFRA (2002a)

DEFRA (2002a) figures imply that more land is now being converted to organic methods than is accounted for by conversions alone. In other words, established organic farmers are converting more land on their existing holdings. Critics of government support for organic farming would argue that subsidising farmers might lead to distortion of the market and cause producer prices to fall. There are also fears that conversion grants could encourage commercialisation of organic farming, thus leading to the loss of traditional values and principles held by organic farmers (CRER, 2002). However, the further financial enhancements of the OFS, announced in the OAP, and an increase in Government funded research has to be interpreted as a positive commitment to organic agriculture by the UK government.

Participating case study farms

Farms were located throughout the UK with especially good representation of the west of England and Wales, regions where livestock farming is typical. The majority of participating farms were lowland with only four farms located in upland Less Favoured Areas (LFAs). Participants were classified into three broad categories by the main product output: meat, dairy, and cereals or horticulture, and then into three size categories representative of UK agriculture in general:

	<50ha	50-150ha	>150ha
Meat	6	8	2
Dairy	0	2	3
Cereal	0	3	3

The sample recruited, with a larger number of farms classified as ‘meat’ and fewer dairy and cereal/horticultural producers, in part reflects the types of farms that could be expected to be interested in conversion to organic farming at the time of study considering the availability of price premiums on the one hand and farming system constraints on the other. For example, price premium for organic meat was very attractive during the latter part of 2001, whilst during the same period however, surplus organic milk production, amounting to 81 million litres in 2001/02 (Soil Association, 2002d) and the difficulty of obtaining an organic milk contract, in combination with improved prices for conventional milk after a long period of decline, explain the lack of interest in participation from dairy farmers. Arable and horticulture have traditionally been the most profitable parts of organic systems (Lampkin, 1998) and, although the premium for organic cereals remained high throughout 2001, the lack of interest in participation is likely to reflect the prevalence of specialised arable rather than mixed arable systems in the UK. Indeed stockless organic systems are few (Lampkin, 1998) and can lead to technical problems, e.g. controlling weeds and maintaining soil fertility, consequently increasing costs and reducing output. Those arable producers that did participate, favoured part-conversion.

Average farm size of 180 hectares compares favourably with the recorded average organic farm size in the UK, 189 hectares (Soil Association, 2002c), whilst average holding size in England was 79 hectares for 2001 (DEFRA, website). However, many UK farm businesses possess multiple holdings so that actual farm size is probably larger than this. The predominately cereal/horticultural farms were, on average, 352 hectares since this sub-group included the two largest farms in the study (769 and 877 hectares, which, however, were interested in part-conversion only). Dairy farm average size was 247 hectares and ‘meat’ farm average size was 95 hectares.

Just over half the land in the study was owner-occupied, a third was rented long term and the remainder was rented short term. Nearly two thirds of the farms were family partnerships and ten of the farms relied solely on family labour. Seven farms employed the spouse on-farm in some capacity. However, only eight of the farmers’ children were recorded as working on the farm and the average off-farm household income was 45%. These factors reflect the particular economic difficulties experienced by the traditional, family farm sector of the UK agricultural industry, which has been forced to consider new opportunities in the light of depressed farm incomes over the past few years. One such possibility is organic farming and growth in organic production is now much more based on conversion of large existing farming businesses (Colman, 2000) rather than the new entrants to farming, typically operating smaller units, considering conversion in the past (Padel & Lampkin, (1994), Burton et al (1999)). Thus, farms participating in this study were, on the whole, medium to large sized, well-established family holdings seriously exploring opportunities to boost their incomes.

Previous studies of farmers adopting organic methods have reported a high involvement of younger farmers and women, many from an urban background, and possessing high levels of education (Padel & Lampkin, 1994; Rigby, et al, 2000). Socio-demographic attributes in this study were similar but not identical with this typical profile; most farmers were male, aged between 30–59 years, from a rural background, and with an agricultural educational attainment to technical college or equivalent, two thirds having undertaken general or agricultural higher education. However, it is notable that very few farmers had received specific training in organic farming methods. In addition, although three quarters of the farmers in the study were male, all the female farmers said they were definitely going to convert to organic production or were still considering it, whereas one quarter of male farmers had already ruled out the organic option by the end of the study. This agrees with previous work by Burton et al (1999) where it was found that in the UK female farmers were more likely to convert than their male counterparts. Also, female farmers reported they would convert for ‘organic values’ (improved environment, health, and/or personal satisfaction) whereas male farmers were more likely to perceive that they would make more profit by converting to organic farming, and by implication the decision to convert is dependent on market performance rather than on quality of life values. These findings suggest that the gender influence reported in previous studies is still indicative when considering motivation to convert.

Enterprise considerations for conversion

Twenty-four of the twenty-seven producers planned to keep organic livestock on their farm after conversion with half of these growing some organic cereals, either for feed or sale. This highlights the importance of livestock for the efficient operation of the organic system. Anticipated main enterprises after conversion were beef and/or sheep (17), dairy (4), cereals (4), and horticulture (2). All projected conversions involved changes to cropping and livestock regimes. The most common of these were reduction in livestock numbers, or increase in forage area to reduce stocking density, and enlargement or start-up of a beef suckler herd (twelve producers). Two would start growing organic soft fruit and only one farmer would change product sector, from milk to meat. All producers that had decided to convert (ten out of the twenty-seven) would not change their current farm enterprises once organic.

For conversion in the UK, all grassland and annual crops must undergo a minimum two-year conversion whilst permanent crops, such as fruit trees, require a three-year conversion period. For livestock conversion two options exist––simultaneous and fast track. Under simultaneous conversion, livestock husbandry adheres to full organic standards for twelve weeks, after which progeny have full organic status for breeding but products cannot be sold as organic until all associated land has finished conversion. Fast track is the more common method for conversion of dairy farms. Livestock are maintained to full organic standards for veterinary and welfare practices only during the last nine months of the two-year land conversion period, with feeding to full organic standards only in the last twelve weeks, leading to substantial savings on feed costs. Livestock are then classed as organic for breeding and milking purposes. The UK also recognises the value of staged or part conversion, which is particularly applicable to arable and horticultural enterprises, giving the farmer increased flexibility and allowing time to adjust the farming system and agricultural practices.

Case study meat and dairy producers would opt predominantly for whole farm conversion, meat producers via simultaneous conversion and dairy producers via fast track conversion. However, only one of the six cereal producers was considering whole farm conversion and this was planned over an eight-year period at the same time as setting up an organic suckler herd. Other cereal producers would part-convert either continuing as organic arable or switching to organic horticultural production. On average, these cereal/horticultural producers would convert less than one third of their total land holding.

Motivation to convert to organic farming

Several elements of the data collection and analysis process were designed to elicit information about farmers’ perceptions and attitudes. The interview schedule incorporated open-ended questions and a series of attitudinal statements were scored on a Likert scale. These were analysed using qualitative coding and statistical techniques (Principle Components Analysis, Mann-Whitney (2 Independent samples) and Kruskal-Wallis (K Independent samples) tests). Farmers were asked about various aspects of the conversion process: what were the perceived benefits; what the conversion process entailed; and what problems they thought would likely be encountered. The findings from these procedures help to build a profile of UK farmers’ motivation for organic conversion. This is detailed below

· Farmers considering conversion were motivated mostly by economic factors (with 32% of producers mentioning this), especially ‘better prices for produce’ and ‘greater income’, but personal satisfaction (23%) and improving the farming system (22%) were also important factors in the decision to convert.

· In general, farmers believed the conversion period was a time for planning and adjustment to organic farming practices (24%)––including green manure cultivation, maintaining soil fertility and husbandry, but 13% of responses also indicated that farmers thought there would be few changes because they already managed an extensive system, often considered de facto organic, i.e. without certification. Indeed, the perceived administrative burden of certification accounted for an additional 16% of responses relating to what the conversion process involves.

· Padel and Lampkin (1994) suggested that conversion to organic farming might be hampered by the following reasons: perceptions (image of organic farmers, size of market); access to technical and financial information; institutional barriers (problems in getting loans, certification constraints) and social barriers (fear of being an outsider). By far the most concerns expressed about conversion related to technical issues (45%) within this, the most frequently cited specific problem was uncertainty about their ability to control weeds and disease without the use of chemical inputs. Financial concerns including the possibility of reduced incomes and economic viability of organic farming were also frequently cited (26%). Another frequently mentioned barrier was the burden of paperwork that organic certification entails and the additional bureaucracy required to operate complex organic standards (19%). Surprisingly, farmers envisaged few problems with marketing their organic produce or coping with the change in ideology that farming organically implies.

· Most case study farmers scored high agreement with statements suggesting that organic farming benefits environment, marketing, animal welfare and quality of organic products.

· In particular, small farms, meat producers, and farms with greater than 50% percent off-farm household income had high mean scores for statements suggesting that organic farming improves quality attributes.

· Most of the farmers gave low agreement to “Organic products looks better than conventional products”, “I will make more profit by converting to organic farming”, and “There are enough processors of organic food”

· Farmers with high off-farm income, predominantly the small-scale meat producers, appeared to be more optimistic than other farmers that the market for organic food is growing.

Financial performance of case study farms

Recent studies have reported that organic farming can provide similar or even improved returns when compared to conventional farming (Leake, 1999) for all major product sectors (dairying, cropping, mixed farming and horticulture) (Colman, 2000). Gross margins for crops are similar between organic and conventional systems as the lower yields, between 10 – 15% less, are often offset by lower variable costs (Lampkin, 1998). In order for organic livestock gross margins to become comparable to conventional systems, a 10 – 15% price premium would be required (Lampkin, 1998). However, other studies (Vine & Bateman, 1981) found that although variable costs, and to a lesser extent fixed costs, were reduced, this was not sufficient to offset lower yields and thus net financial returns fell.

The process of converting to organic production can be a complex procedure lasting several years and typically leads to loss of income. These reductions in income are a result of: output reductions; new investments; information and experience gathering; fixed costs increases and lack of access to premium prices despite the lower yields (Lampkin and Measures, 2001). Conversion costs over a five-year period are likely to be in the region of: €246 and €328 ha/year for specialist cereal or mainly arable farms; €164 ha/year for specialist dairy farms, but possibly lower depending on intensity of the system; and €82 to €164 ha/year for livestock and mixed livestock/arable farms (Padel and Lampkin, 1994).

Family Farm Income (FFI)

The poor existing agricultural financial performance of many participating farms is reflected in the proportion of off-farm income received. Figure 3 indicates a general trend for farms with low or negative farm income to be most reliant on off-farm income but two distinct groupings can be seen for meat farms––low farm income combined with low off-farm income, and very low farm income compensated for by very high off-farm income.

Figure 3. FFI at present on the case study farms by percentage household income off-farm

Table 2. Family Farm Income and investment for conventional and organic management[8]

	Dairy	Meat	Cereal/Horticultural	All farms
FFI present (€ per farm)	76,683	-2,631	25,996	18,120
Average farm size (ha)	247	95	105	126
FFI present (€ per ha)	310	-28	247	143
FFI conversion (€ per ha)	196	69	277	142
FFI organic (€ per ha)	513	117	481	299
Investment (€ per ha converted)	13	253	384	202

Average[9] current Family Farm Income (FFI) was €18,120 (€143 per ha) but varied substantially between product sectors (Table 2). Dairy farm average FFI was €76,683 (€310 per ha), whilst average FFI for meat producers was negative, -€2,631 (-€28 per ha) reflecting low farm gate meat prices and the small scale and extensive nature of participating meat producers. Organic conversion leads to improved financial performance for twenty-five farms and even in the ‘income deficit’ second year of conversion, FFI would be elevated from the present situation for seventeen farms. During the second year of the conversion period, average FFI for all farms would be €17,913 (€142 per ha), virtually the same as pre-organic FFI but again there is variation between product sectors. Cereal/horticultural and meat producers showed an average increase of €30 and €97 per ha respectively, whereas milk producers experienced an average fall in FFI, or cost of converting, of €114 per ha. The rise in FFI for cereal producers during the conversion period may be partly explained by the low conventional grain prices realised during 2000/2001. In effect, the opportunity cost of converting to organic production, e.g. reduction of yields during the conversion period, is reduced somewhat by these lower conventional prices as it consequently brings about a smaller reduction in revenue than if higher prices prevailed. In addition, the conversion subsidies received during this period also help compensate, and in some instances more than compensated, for this. Meat producers also experienced an improvement in FFI during the conversion period. Again, this was largely due to the poor conventional beef and lamb prices experienced during 2000/01 causing nine of the sixteen meat producers to record a loss during this accounting period. The fall in dairy farm FFI during the conversion period was due to the reduced revenue, a combination of reduced yields whilst still obtaining the conventional milk price.

Once organic, FFI increased 110 per cent on average to €37,723 (€299 per ha) over the present situation. Only two farms showed a reduction in FFI. Cereal/Horticultural producers would see the biggest increase, €234 per ha, with both milk and meat producers also seeing substantial increases, €203 and €145 per ha respectively.

These findings are comparable with previous work carried out by the Welsh Institute of Rural Studies (WIRS) that compared the financial performance of several organic farms to their conventional equivalents over a number of years (Colman, 2000). Occupiers Net Income (ONI) was calculated in WIRS work and this is a fairly similar measure to FFI, the main difference being ONI attributes an imputed value for any unpaid labour. It should also be noted that figures used in WIRS work are actual and relate to the period 1997/98, whilst organic figures quoted from this work are budgeted and equate to the period 2000/01. Nevertheless, the results make interesting comparisons not least because WIRS collected data from three different farm types, namely: cropping; dairy; and lowland cattle and sheep. These were broadly equivalent to the ones used in this study.

Conventional cropping farms’ ONI was €192 ha whilst the organic sample averaged €280 ha, a 45% improvement. Average FFI at present, i.e. conventional farming, in our sample of cereal/horticultural farms was €247 ha, with the budgeted organic figure being €481 ha, a 95% increase.

ONI for dairy farms in the WIRS study was €567 ha for conventional, whilst organic managed €1007 ha, a 77% difference. Dairy producers FFI at present was €310 with the budgeted organic figure increasing to €596 ha, a 92% increase. Colmans (2000) figure for organic dairying is considerably higher than that calculated in this study and one reason for this is that the budgeted figure uses an organic milk price of 25 ppl[10], whilst the figure obtained by dairy farmers during 1997/98 was likely to have been higher. Secondly, two of the four dairy farms considering organic milk production were large (400 ha) units with other, smaller, enterprises, and those used in WIRS work were far smaller, averaging 98 ha, indicating they were probably more specialised dairy farms.

Lowland cattle and sheep farms’ ONI was €197 ha for conventionally managed units, and €23 ha for organic ones. This is in stark contrast to meat producers’ FFI in this study where the present situation averaged –€28 ha, increasing dramatically to €117 ha once organic. The reasons for this are probably three fold. First, Colman (2000) cites poor management structure of the organic farms as a reason for their low ONI. Second, in recent years meat prices have been severely affected by food scares and this could account for low FFI figures at present. Finally, the market for organic meat has strengthened since 1997/98, in part due to these food scares, meaning organic prices premiums for 2000/01 were good, thus helping to improve FFI.

Fixed costs and investments

It is often assumed that organic systems require considerably more labour than conventional farms. In reality this is only the case for certain enterprises, such as vegetables, or if livestock are introduced into an arable system (Lampkin, 1998). Typically, the increase in labour over the conversion period is between 10 – 25%, and is associated with the production of high value, more labour intensive crops (Lamkin and Padel, 1994). Other fixed cost increases can be attributed to the depreciation charge of conversion-related investments and producer-licensing fees (Lampkin and Measures, 2001).

All farms would have the added cost of €573-900 for a producer-licensing fee[11]. Other fixed costs liable to change after conversion include (regular) labour, fuel, interest payments, and depreciation (of conversion-related investments). Less than a quarter of farms would increase, and three would decrease, employed labour once organic giving an average fixed labour increase of only €458 per farm. Total average increase in fixed costs from the present to the first year of organic status was €1,440 but varied considerably between farms from a decrease of €86,135 for the dairy farm changing to meat production (and shedding labour) to a €35,327 increase for a predominately dairy producer increasing labour. For sixteen farms fixed costs would increase less than €8,000 suggesting these businesses would not expand following conversion.

Average investment amounted to over €24,200 (€202 per ha of land converted), two thirds of which related to buildings and breeding livestock and consequently varied between product sectors. Investment would be highest for cereal/horticultural farms, €37,450 (€384 per ha) incurred through ‘establishment costs’ for new enterprises, such as soft fruit beds, and livestock. The smallest investment, €3,270 (€13 per ha), would be for dairy farms, none of which would add livestock or improve buildings. A comparison of FFI with average investment for the three product sectors (Table 2) reveals that although FFI increases significantly once organic for all product sectors, for cereal/horticultural and meat producers conversion would be accompanied by considerable investment costs.

Discussion

OFS support payments play an important role in sustaining farmers economically during the conversion period. Case study farms would be eligible to claim an average €18,590 (€154 per ha of land converted) during the second year of conversion, and €5,346 (€44 per ha of land converted) in the first year of being fully organic (Table 3). This support contributed an average fourteen per cent (ranging from nearly thirty to less than 0.1 per cent) in the second year of conversion and four percent in the first year of organic to total farm output (sales plus subsidies before costs of production) respectively, a figure that would have been higher had some farms not undertaken part-conversion. Without government subsidy for conversion, average whole farm FFI for all case study farms during the second year would be -€677 compared to the €17,913 calculated. Dairy farms receive the highest conversion support both in terms of per hectare converted and whole farm due to their high proportion of AAPS eligible land, and because they convert, on average, the largest area. Meat and arable farms receive similar lower levels of support both per hectare and whole farm.

Table 3. Average conversion subsidies received

€ (€ per ha of land converted)	Average conversion subsidies received
	Conversion – Year 2	Organic – Year 3
Cereals/Horticulture	15,040 (154)	3,431 (35)
Dairy	50,010 (195)	14,305 (56)