Organic Agriculture ……

Making the transition…

Craig Chase, Field SpecialistFarm & Ag Business Management

Profitability of Row Crop Systems

• The debate is over…organic systems offer the classic economic risk/reward opportunity.

• Organic systems, if managed properly, are more profitable per acre (on average) than conventional farms in Iowa.

• If your net farm income goal is $40,000 per year, an Iowa organic farm can reach this goal (on average) with less than 200 acres versus 2,000 acres (or more) for the conventional corn-soybean farm.

So then the main question becomes…

• How to transition - for row crops the following questions related to economics should be answered:– What’s the optimum rotation and order of

crops (which crop to transition first)?

– Whole farm or field-by-field transition?

– Weed management techniques; which combination of mechanical field operations?

Economic Transition Questions – cont’d– Machinery implements; purchase, lease or

custom hire for implements not already owned?

– Manure/compost source – should livestock be integrated into the whole farm system, which type, and if not, where should manure be sourced?

– Note: the economic evaluation should be focused on both individual enterprises and the entire farming operation.

Economic Evaluation – Is it Working?

• Individual enterprise evaluation– Develop enterprise budgets for each crop in the

rotation (both during and after the transition).– Enterprise budgets show where the weaknesses

and strengths are of the rotation and where production changes can be made.

• Whole farm evaluation– Combine all enterprise budgets including

livestock, if applicable, to determine whole-farm profitability.

Economic Evaluation – Is it Working?

• So what happened (comparison of alternative strategies)?– How profitable?

– What risks were involved?

– Which transition made more sense to you?

Organic Vegetables

Transitioning into higher profitability…

Craig Chase, Field SpecialistFarm & Ag Business Management

Profitability of Vegetable Crop Systems

• Organic systems again offer the classic economic risk/reward opportunity.

• The key to profitability with vegetable crop systems, however, is more focused on marketing outlets and pricing than rotation, weed management, and machinery acquisition.

• In addition, an understanding of profit margins (e.g., net income ratio) is necessary to price product effectively.

Vegetable Planning Questions

• How many acres do I need in production to meet my planning goals?

• What is my “best” market?

• What price do I sell my products at?

• What is my net income ratio and gross sales per acre?

• These questions are important because organic vegetable production is a highly labor-intensive business.

How big?

• You want to grow vegetables and want to have a net income of $30,000 per year.

• You estimate your gross revenue per acre will be $15,000 per acre.

• You want to achieve a net income ratio of 30%.

• You will need to produce vegetables on 6.7 acres ($30,000/30% = $100,000 sales / $15,000 / acre = 6.7 acres.

Pricing?

• You need to know your cost of producing and marketing your products.

• Assume your cost to produce and market your tomatoes is $2 per pound.

• You want to achieve a net income ratio (or profit margin) of 30%.

• You need to price your tomatoes at $2.86 per pound ($2/.7).

Bottom Line

• My view: To be profitable in the organic vegetable business you need to understanding profit margins (both revenues and costs) and price accordingly.

Economic Evaluation – Is it Working?

• Individual enterprise evaluation– For producers who grow a large number of

different products. Develop budgets for those products that contribute the most to business goals.

– Enterprise budgets can be used for pricing, as well as evaluating changes to production practices and product mix.

• In addition to crop enterprise budgets, a detailed look at marketing costs are necessary.

• Marketing costs (those costs associated with the marketing and delivery of the product from the farm to the customer) can be much greater than the cost of production.

Economic Evaluation – Is it Working?

Whole-Farm Records

• What if you don’t have records at the enterprise level?

• Economic evaluations regarding pricing and marketing outlets can be made using whole-farm records if you have a few enterprises.

Resources

• Agricultural Decision Maker(http://www.extension.iastate.edu/agdm/authors/cchase.html).

– Organic Crop Production Enterprise Budgets– Making the Transition from Conventional to

Organic– Developing Enterprise Budgets– Using Enterprise Budgets to Make Decisions– Using Financial and Production Records to Make

Decisions

Resources

• Agricultural Decision Maker(http://www.extension.iastate.edu/agdm/authors/cchase.html).

– Iowa Vegetable Production Budgets– Pricing for Profit – Price Determination for CSA Share Boxes

Resources

• Building a Sustainable Business http://www.misa.umn.edu/vd/bizplan.html

• ATTRA http://www.attra.org/

• Ag Marketing Resource Center http://www.agmrc.org/

• And… someone that has gone through the process already

Questions…..

Any questions or comments?

Thank You for This Opportunity!

Craig A. ChaseFarm Management-Local Food Systems and Alternative Enterprises

312 Westbrook LaneAmes, IA 50014(319) 238-2997

cchase@iastate.edu

http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html