Assessing the Profitability of Converting to Organic Farming: Key Parameters to Analyse

Pascal Liu,
Commodity Specialist, Commodities and Trade Division, FAO

Many conventional farmers consider converting to organic agriculture due to the rapidly growing market for organic products and the possibility of higher prices. However, they are also aware that organic farming may entail some constraints and possibly higher costs, and are therefore unsure whether they will be economically better off if they convert. The economic and financial evaluation method may help them make scenarios to assess the profitability of converting to organic farming. The three indicators used by this method are the Net Current Value, the Internal Rate of Return and the Recovery Period. An example of the application of this method is given in a case study comparing the profitability of organic and conventional citrus production in Spain.

In this example, production costs are higher in the organic farms than in the conventional ones, mainly due to the need for more labour and the higher costs of organic fertilizers. Moreover, yields are lower in the organic farms, in particular during the transition period. After this 3-year period, however, they tend to come back to levels close to those of conventional production. The case study shows that the profitability is lower in the organic farms, although the difference is small. It also examines the sensitivity of both production systems to variations in costs and producer prices. The organic system is found more sensitive than the conventional system. The study also shows that the organic citrus production system is more profitable than the conventional one only if the producer price for organic citrus is 30% higher than that of conventional citrus.

Of course, these specific findings cannot be extended to all organic production systems and no general conclusions on the comparative profitability of organic and conventional farming can be drawn from this case study. However, this method can be useful to producers who consider conversion to organic farming. It shows that the most important economic parameters that should be analysed are:

• Possible fall in yields (with the possibility of recovery later)
• Difference in production costs (labour costs tend to increase in particular)
• Price difference (organic prices tend to be higher, but not always)

All these parameters vary over time, which implies that various scenarios should be considered.

Pascal Liu
Commodity Specialist
Raw Materials, Tropical and Horticultural Products Service
Commodities and Trade Division
(email: [email protected])
phone: 39 06 570 55957
fax: 39 06 570 54495

Pascal Liu is an Agricultural Economist and has worked as a Commodity Specialist in the Horticultural Products Group of FAO since 1998. His work includes studies of the markets for organic fruit and vegetables and economic analysis of organic production. He was the coordinator and editor of the publication "World market for organic fruit and vegetables", produced in collaboration with colleagues from FAO, ITC and CTA in 2001. Pascal organized the Conference on Supporting the Diversification of Exports in Latin America and the Caribbean through the Development of Organic Agriculture with CTA, CDE and IICA in 2001. He has done research on various types of environmental and social certification programmes and has collaborated in publications on this topic. Before joining the FAO, he worked on agricultural development projects with farmer groups in North Africa and Southern France from 1990 to 1996.