role of the natural hedge in organic farming – an adoption barrier?

Summary

The market for organic agriculture in Germany and other parts of the world has been substantially growing in the past. This raises interest of policymakers and economists in the conversion decision from conventional to organic agriculture. As one major effect of the difference in production methods between conventional and organic agriculture is the assumedly higher production risk in organic agriculture this seems to be a major determinant for the conversion decision of risk averse farmers. Natural hedge, i.e. the price-yield correlation of a crop, has been shown to be a natural risk management tool. The role of natural hedge in the conversion decision has though not explicitly been investigated yet. Using a net present value investment model and means of data simulation this research finds that natural hedge has an effect on the mean and variance of outcomes, and therefore on the conversion decision. Conversion preferences for wheat, barley, rye, potatoes, maize, field beans and sugar beets for the province of Bavaria in Germany are assessed. Assuming different levels of risk aversion of farmers one finds for the given data that a more positive (weaker) natural hedge makes cropping options more attractive. Addressing especially farmers downside risks with the introduction of a revenue insurance, results indicate that the introduction of revenue insurance for organic farming makes conversion more attractive. The more positive the natural hedge is, the greater is the possible effect of introducing insurance. Analysing natural hedge for Germany on a national and a provincial level, results point towards a more positive natural hedge for organic than for conventional crops. Given theoretical results natural hedge in Germany therefore favours conversion and makes the introduction of revenue insurance for organic farmers comparably efficient. A major obstacle in the analysis was scarce availability of data on organic agriculture. Results should therefore rather be interpreted qualitatively than quantitatively.