Conventional vs Organic Crop Production Financial Analysis

Organic crop demand has continued to increase over the last two decades. Some crop producers have transitioned at least part of their land to organic production. Those crop producers have reported higher net returns. (Table 2) One of the issues though is the transition period that organic growers must go through. This transition period leads to lower net returns than either organic or conventional production due to the lower yields during the transition period which are sold at conventional prices. Long run organic returns are important to recoup reduced returns during the transition period.

Recent articles using real farm data were published at the University of IL Farmdoc DAILY web site. The data comes from the University of Minnesota’s Center for Farm Financial Management (CFFM) FINBIN web site. FINBIN is an aggregation of several state’s farm financial data, which is searchable and sortable based on the needs of the analysis. The authors of the recent articles compared corn/soybean and corn/soybean/wheat rotations of conventional, transition and fully certified organic crop production. Enterprise budgets were produced for all three crops and all three production methodologies. Transition yields would have to be about 17% lower for the transition and organic years to breakeven with conventional cropping. Organic prices would need to be 17.8% lower for the conventional cropping system to be equal in net returns. (Table 3) But organic crop producers show a much wider range of net returns, in the FINBIN data, than do conventional producers. Likely this wider range is due to management that conventional producers don’t experience. (See Figures 1 and 2 below)

Organic corn producers in all cases had higher net returns than One aspect of the variation of conventional versus organic soybeans is that the lowest 20% of organic soybeans do not perform better than conventional soybean production. (Figure 3) Some 70% of conventional soybean producers have positive net returns while 80% of organic producers have positive net returns.

Langemeier, M. and X. Fang. “Comparison of Conventional and Organic Crop Rotations.” farmdoc daily (10):103, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2020.

Langemeier, M. and M. O’Donnell. “Conventional and Organic Enterprise Net Returns.” farmdoc daily (10):161, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 4, 2020.

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2020 Net Farm Cash Income Projected to Rise

USDA’s Economic Research Service (ERS) is forecasting 2020 net farm income to rise by $19 billion from 2019. Net farm cash income is projected to rise by $4.9 billion. If these projections are accurate, this would put both measures above their 2000-2019 averages by small amounts.

Sector cash receipts projections were also released by ERS. All of the sector cash receipts are projected to decline from 2019 except fruits and vegetables.

            So, if cash receipts are declining where did the higher incomes come from? Farm Program and ad hoc payments to farmers will rise from 2019 by near 100%. The red section of the chart below became the largest portion of farm program payments in 2020 which includes Payments from the Corona Food Assistance Program and the Paycheck Protection Program.

            Another part of net income is expense. ERS projects the change of expenses by category. The categories projected to increase account for 69% of farm and ranch expenses while 31% of farm and ranch expenses are projected to decline. The net result is that 2020 farm and ranch expenses are projected to decline by 1.3% or $4.6 billion.

USDA ERS – Farm Sector Income Forecast. (n.d.). Retrieved September 3, 2020, from https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-sector-income-forecast/

Tenth Federal Reserve District Ag Credit Status

COVID-19 has continued to pressure financially farmers and ranchers across the 10^th Federal Reserve District. Nebraska is part of the 10^th District with its office in Kansas City.

Weak market conditions early in 2020 led to declining farm income and liquidity during Q2 of 2020. 10^th District farm income expectations declined at the fastest rate since 2016. Note in Chart 1 that farm income expectations for 2020 are lowest in Nebraska.

Chart 2 indicates that lenders in Nebraska expect slight improvement in borrower liquidity, current ratios. That is only because lenders do not expect the ratios will not go as low as earlier anticipated. All of the states served by the 10^th District show erosion in liquidity.

            Farm loan repayment rates are expected to decline further. Drought in much of the 10^th District may be behind some of the decline, Chart 6.

            Farmland values continued to rise slightly which supports the solvency of 10^th District farms and ranches but most lenders expect those values to decline.

            On average, 10^th District lenders expect cash rent rates to decline. But Oklahoma expects them to rise and the Mountain States, CO, WY and northern NM, to remain the same.

Pandemic Adds Pressure to Farm Finances. (n.d.). Retrieved September 2, 2020, from https://www.kansascityfed.org/research/indicatorsdata/agcreditsurvey/articles/2020/8-13-2020/pandemic-adds-pressure-to-farm-finances