Organic Agriculture in Denmark - Economic Implications of a Widespread Change

Summary

To assess the effects of a hypothetical widespread adoption of organic practices in Denmark, a four-region, partial equilibrium model of the Danish agricultural sector, the Danish Organic Agriculture Project (DOAP), was constructed for the Danish Institute of Agricultural and Fisheries Economics (SJFI). DOAP contains 3 farm sectors, crops, dairy and pigs, and permits farmers to have up to 16 cropping activities. Detailed costs of production are modelled in each sector and region. DOAP contains two production structures, one conventional and one organic, currently representing less than 2 per cent of Danish farms. By exogenously specifying the number of farms using each method of production, the impact of a switch to organic methods on national outputs and farm returns can be estimated.
SJFI survey data indicate that conventional and organic dairy farms differ in their physical and financial structure. Most obviously, synthetic fertiliser and pesticide use is minimal on Danish organic farms. What is registered under this heading presumably falls into categories allowed by the national organic standards. The use of certain other inputs such as animal feed and labour is also lower on organic farms. Other input use, including manure and depreciation on machinery, is similar to that on conventional farms. On the output side yields on organic farms in Denmark are lower than those on conventional farms, and thus farmers require a greater land area if they are to maintain per farm production. To maintain a given livestock output, a greater area in fodder production is required. Farmers respond by reducing their production of non-feed crops, such as wheat. At present, organic producers also grow less sugar beets and grass for seed, rapeseed and green peas because of agronomic constraints in the absence of pesticides and because of an absence of organic markets.
Financial data indicate that existing organic dairy farmers can outperform conventional farmers. Lower production per hectare (through changes in yields and rotation) on the one hand, and lower production costs and higher output prices (mainly through premiums) on the other, result in favourable net farm income comparisons for farms under organic management. Estimates of organic crop and pig farms suggest a similar story, although yields there are lower and prices for the livestock enterprise are higher than on dairy farms. This performance is turned around over time, as premiums are estimated to fall with increased supply of organic products. This assumes that present conditions of marketing structures (for inputs and outputs) and technology are maintained at present levels.
The main conclusion from the analysis of the model results is that primary agricultural sector income may stay the same, or rise slightly if less than 25 per cent of Danish farmers across all sectors adopted organic methods, but that considerable losses could accrue if a high percentage of farmers followed this approach (see Figure 1). It must be stressed that this estimate is valid under present conditions of input and output prices, level of tech-nology, and estimates in the crop and pig sector and future values. The slight initial gains occur because, according to the latest (1995 and 1996) SJFI survey data in the dairy sector and estimates in the crop and pig sector, organic producers - especially in the dairy sector which comprises half of the total number of organic farmers - are making greater profits than their conventional counterparts. This result of higher net returns per hectare does not hold as more and more farmers convert, because the organic price premiums that currently exist would be substantially or wholly eroded. Considerations of increased knowledge over time in organic management, possibilities in technological change, changes in combination of enterprises, sector and farm size, and especially increased efficiencies in the marketing of organic produce are not properly accounted for here. They are likely to enhance the financial position of organic producers to some extent. If age per se influences financial results, the difference in age between organic and conventional farmers would overestimate the relative financial position of organic farmers. The limitations of the data in the crop and pig sectors call for some caution in interpreting the results.
Using the model enabled several factors to be identified as key variables determining costs, production and net returns. The rotational constraints, the yield reductions, subsidies and the existence of the price premium on organic products are main factors. Changes in input prices were not modelled, except where the inputs are outputs (for example fodder crops) used in the livestock enterprise. An exogenous drop in output prices (as can be expected in the organic market) is found to be significant in decreasing the gap between organic and conventional farms at higher rates of conversion.