Private Subsidies for Transitioning to Organic Production

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I recently read an interesting article, Paying Farmers to Go Organic, Even Before the Crops Come In. The gist of the article was that private food processing and marketing firms are seeing such an excess demand for organic food products that they are paying farmers during the three-year USDA organic certification and transition process, even though the products grown during those three cannot be sold under the organic label.

For an economist, this was song to my ears. It’s an indicator that markets work!

Consider a few major reasons that farmers may not want to transition to organic production:

  • The transition process may result in higher input costs (physical and labor inputs) then continuing conventional production practices.
  • Transitioning is likely to require acquiring additional knowledge of production practices.
  • While different and (potentially) higher inputs are necessary to produce a crop, those crops cannot be sold under the organic label during the three-year transition process. Therefore, these products cannot take advantage of higher price premiums.
  • Most of the production and marketing risk and uncertainty is borne by the producer.

If demand for organic products was sufficiently high and the quantity supplied was not large enough to meet that demand, economists would expect prices to rise to a point where the additional premiums that producers can gain by selling organic products after transitioning would create sufficient incentives for those producers to bear all of the transition risks. While some of this is happening, it does not appear to be enough.

For example, here is a graph of consumer expenditures on organic wheat-based products between 2007 and a projected 2017, and production in the northern Great Plains and United States.

Consumer Expenditure on and U.S. Production of Wheat Foods

Chart notes: Consumption data are from Euromonitor and Agri-food Canada. Data represent expenditures on organic bakery products, organic pasta, organic snack bars, organic noodles, and organic dessert mixes. Wheat production data are from the USDA National Agricultural Statistical Service. Northern Great Plains (NGP) wheat production are for Idaho, Montana, North Dakota, South Dakota, and Wyoming. 

The data in the graph indicate that retail expenditure on wheat-based food products is expected to grow by 58% between 2007 and 2017, organic wheat production in the United States actually declined by 2%. This decline is despite a growth of 55% in organic wheat production in the northern Great Plains (NGP). While the expenditure and production are not comprehensive indicators of supply and demand trends, these data suggest that consumption growth is outpacing production.

Here’s why the New York Times article made me so happy. The disparity between consumption and production trends seems to indicate that even $15 per bushel premiums for organic wheat relative to conventional wheat (as of July 2016) do not create sufficient incentives for enough farmers to enter organic production to meet market demand. However, because the excess demand at the consumer level is so apparently high, food processors and marketers see a sufficiently high profit opportunity that they are willing to subsidize agricultural producers’ transition process.

That is, the current share of the organic dollar paid by the consumer that is going to the farmer did not sufficiently incentivize a sufficient number of producers to enter the organic industry (because the costs of entry potentially exceeded the returns from entry). As a result, food processors are passing down a greater share of that dollar down to the farmers in order to raise the incentive bar.

Markets work!

Could we see a similar scenario play out in Montana and the northern Great Plains? Given the current trends in organic wheat-based food production, it’s certainly a distinct possibility.

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About Author

Dr. Anton Bekkerman is a former associate professor in the Department of Agricultural Economics and Economics at Montana State University. He currently serves as the director of the New Hampshire Agricultural Experiment Station. Bekkerman's primary areas of research are grain marketing, basis and price forecast modeling, understanding how grain prices are affected by changes in supply chain infrastructures and quality demands, and analyzing the economic trade-offs of adopting alternative dryland cropping systems in Montana. Although Bekkerman grew up on the east coast, he had made a small step toward production agricultural after ranching a flock of six backyard chickens.

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