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The economic implications of organic farming

Terry Cacek and Linda L. Langner

Abstract. Many farmers are turning to organic or "low input" farming as a strategy for economic survival Several comparisons of actual grain farms in the central and northern states showed that organic farming equals or exceeds conventional farming in economic performance. These findings are supported by studies that used yield data from research plots as inputs to economic models. However, models that relied more heavily on hypothetical data showed an economic disadvantage for organic farming This may have been a result of the failure of the hypothetical models to incorporate valid assumptions on conservation and efficient utilization of water, nutrients, fuel, labor, and capital Established organic farmers are less vulnerable to natural and economic risks than conventional farmers because their systems are more diversified. They also are less able, however, to take advantage of income tax deductions Future trends in commodity prices, input prices, pollution regulation, and research can be expected to have mixed effects on conventional and organic farmers, but the net impact will probably favor organic farmers. On a macroeconomic (i.e. national) scale, conversion to organic farming would have many benefits. It would reduce federal costs for supporting commodity prices, reduce depletion of fossil fuels, reduce the social costs associated with erosion, improve fish and wildlife habitats, and insure the productivity of the land for future generations However, widespread conversion to organic farming would have an undesirable impact on the balance of trade. Future research on the economics of organic farming at the farm or micro-economics level should be directed at horticultural crops, southern latitudes, marketing, and the process of con version from conventional to organic farming Future macroeconomic research should quantify the social benefits described above, enabling decision makers to compare organic farming with other policy options

During the past 20 years, farmers have shown steadily increasing interest in organic farming. Many farmers who adopted organic farming methods early in this period were motivated by reasons relating to the health and safety of their families, consumers, and livestock, and by idealistic convictions about soil and land stewardship. More recently, as costs of chemicals and credit have increased and commodity prices have stagnated, thousands of conventional farmers have begun to search for ways to decrease input costs. These economic pragmatists might deny identification with the organic farming movement, but they are moving in that direction. "Low input farming" is the new, socially-acceptable term for organic farming, and economic survival is the motivation for many newcomers.

This paper summarizes and analyzes available economic data on organic farming which is pertinent to decision makers at the farm (microeconomic) level and the national (macroeconomic) level. We will use the USDA's definition of organic farming (USDA, 1980):

"Organic farming is a production system which avoids or largely excludes the use of synthetically compounded fertilizers, pesticides, growth regulators, and livestock feed additives. To the maximum extent feasible, organic farming systems rely upon crop rotations, crop residues, animal manures, legumes, green manures, off-farm organic wastes, mechanical cultivation, mineral-bearing rocks, and aspects of biological pest control to maintain soil productivity and tilth, to supply plant nutrients, and to control insects, weeds, and other pests."

The term "conventional farming" will be used here to refer to a production system which employs a full range of pre- and post-plant tillage practices (e.g., plow, disk, plant, cultivate), synthetic fertilizers, and pesticides. Conventional farming is characterized by a high degree of crop specialization. By contrast, organic farming is characterized by a diversity of crops.

Economics of organic farming at the farm level

Research on the economic feasibility of organic farming can be grouped into three categories: 1) direct comparisons of economic returns between organic and conventional farms, 2) analysis of economic returns based on research plot yield data, and 3) modelling comparisons of organic and conventional farms.

Studies of actual farms

Several studies directly compared returns on organic and conventional farms. Lockeretz et al. (1978) compared the economic performance of 14 organic crop/livestock farms in the Midwest with that of 14 conventional farms. The study farms were paired on the basis of physical characteristics and types of farm enterprises. The market value of crops produced per unit area was 11 percent less on the organic farms. But since the cost of production was also less, the net income per unit area was comparable for both systems. A study by Roberts et al. (1979) compared data from 15 organic farms in the western Corn Belt with USDA data on representative conventional farms in the same area. In most cases the net returns were greater on the organic farms. Both studies showed that production costs were longer on the organic farms.

Two studies comparing cash grain farms were conducted in the state of Washington. In the first study, Eberle and Holland (1979) compared three organic and three conventional farms and found that net returns per unit area were 38 percent higher on the conventional farms. However, the author of a follow-up study of six organic farms found that net returns on these farms were 22 percent higher than on the representative conventional farms (Kraten, 1979). Berardi (1979) compared 10 organic and 10 conventional farms in New York and Pennsylvania for returns from wheat (Triticum aestivum) production only. When cash operating costs alone were included, the returns were higher on the organic farms. However, when the costs of land and unpaid family labor were included, the conventional farms had a higher average net return.

The above-mentioned studies comparing organic and conventional farms had several weaknesses. The most obvious was the small sample sizes, which made it diff~cult to do any statistical tests of differences. The averages did not reflect the high variability that occurred in both yields and net returns on both types of farms. Pairing farms for the studies also caused problems, especially in work by Eberle and Holland (1979) and Berardi (1978). Finally, none of the studies included the livestock enterprises, which may be essential for optimum economic performance of organic farms.

A 1984 survey of the members of the Regenerative Agriculture Association (Brusko et al., 1985) offered further information on the economic performance of organic methods compared to conventional methods. Of 213 respondents, 88 percent said their net income either stayed the same or increased when they began farming with fewer purchased inputs, while 12 percent said net income declined. The sample may not have been a representative sample of organic farmers, and many of the responses may have been based on perceptions rather than on well-kept records. Nevertheless, the survey seems to indicate a high lever of satisfaction with the economic performance of low input farming.

Studies involving data from research plots

The second type of research used yield data from research plots as inputs to economic analyses. A Nebraska study (Helmers et al., 1984) attempted to measure the performance of a fully organic system, so the first three years of data, which represented a conversion period from conventional to organic practices, were excluded from the analysis. Animal manure was available, but other aspects of the livestock operation were excluded from the economic analysis. Six possible cropping systems were considered, three organic rotations, two conventional rotations, and continuous corn (Zea mays). The organic systems had the lowest costs of production, and all rotational systems performed better than continuous corn. The scenario most representative of an organic farm assumed that straw was sold and that the cost of manure was equal to application costs only. With this scenario, the returns were comparable to those from the conventional rotations.

Yield data from the Rodale Research Center in Pennsylvania were used to evaluate profits during the period of conversion from conventional to organic farming (Brusko et al., 1985). The organic farming system with livestock had returns over variable costs that averaged $74 more per unit area than for the conventional corn-soybean (Glycine max) system. The organic farm system without livestock fell short, on the average, of the conventional grain system. However, the organic farm averages were hurt by the plots on which corn was planted in the first year of the conversion, an unlikely choice of crop for a farmer because of the potential problems with nitrogen deficiencies, weeds, and soil-borne insects. On the organic plots without animals, where the rotation was initiated with a clover (Trifolium spp.) and oats (Avena saliva) mix, the economic returns of the organic plots compared favorably with those from conventional grain plots.

Modelling comparisons

The third type of study involved modelling of organic and conventional farm systems and comparing the net returns.

A USDA study (1980) compared a conventional corn-soybean rotation with three organic rotations. The conventional rotation returned 22 to 44 percent more income above variable costs than the organic rotations. Profitability was directly linked with the proportion of corn and soybeans in the rotation.

An Iowa study (James, 1983) modelled six different scenarios that included livestock enterprises. Conventional farming was found to be more profitable than organic farming. The study concluded that organic practices were most feasible on small farms and on farms with large proportions of land in pasture. It also concluded that livestock operations were essential to maximize returns.

Although there are only a few studies in each category, and although they all have shortcomings, the direct comparisons and the plot data suggest that organic farming is economically feasible and can compete with conventional farming, at least in certain geographic areas and for certain farming enterprises. Only in the modelling studies were returns from organic farming consistently lower than returns from conventional farming. Some of the reasons for these results are examined in the next section.

Unmeasured economic benefits of organic farming

According to actual field data, organic farming is more economically successful than the modelers predict. The stated assumptions of the models seem reasonable. Therefore, examination of the unstated assumptions may be instructive, since there are differences between the two systems that are difficult to incorporate into models.

The models assumed that soil structure, infiltration rates, and erosion rates were the same for organic and conventional agriculture, or that any differences had no economic consequences. Some organic farmers claim their soils have better tilth and less compaction. They also claim that they use less power and operate their tractors in a higher gear, thereby saving fuel. These claims, although plausible, have not been sufficiently tested.

Changes in soil structure, coupled with improved ground cover, decreased runoff by about 10 to 50 percent and increased infiltration by about 10 to 25 percent. All these factors combined to reduce soil erosion on organic fields by at least two-fifths, and sometimes over four-fifths (Cacek, 1984). It is difficult to place a monetary value on the water lost as runoff and the nutrients contained in the eroded soil. In part, they are just displaced to other locations on the farm, where they remain available for crop production. Some nutrients are present in excess of crop needs and some are unavailable biochemically. Nevertheless, there may be a significant difference between organic and conventional farms in the costs of replacing needed nutrients and water.

Vulnerability to natural events may be a critical factor in comparing the performance of organic and conventional farms. During the conversion period, organically produced crops are vulnerable to weeds and nitrogen deficiences. However, once organic practices are established, the crops are often less vulnerable to drought and other natural disasters than conventionally grown crops. Organically farmed soils absorb more of the available rainfall, providing protection from drought (Cacek, 1984). Because organic farmers grow a greater diversity of crops, the entire production on a farm is not vulnerable to the same pests or seasonal weather events. If there is a total crop failure, organic farmers suffer fewer economic losses because they have invested less in purchased inputs.

The diversity of crops on organic farms can have other economic benefits. Diversity provides some protection from adverse price changes in a single commodity. Diversified farming also provides a better seasonal distribution of inputs. A corn farmer might require two tractors to plant all his land during the short corn-planting season. The tractors are then underutilized during the remainder of the year. An organic farm with the same total area would probably have less land in corn, so one tractor might be sufficient. The same tractor could then be used during other seasons to produce wheat, hay, and other crops that have staggered planting and harvest dates. Likewise, labor is more fully utilized. However, organic farms require more intensive management than specialized conventional farms.

Organic farmers need to borrow less money than conventional farmers for two reasons. First, organic farmers buy fewer inputs such as fertilizer and pesticides. Second, costs and income are more evenly distributed throughout the year on diversified organic farms. For example, profits from July's wheat harvest can buy fuel for the corn harvest, reducing the need to borrow for the corn harvest. Organic farmers have complained that they are discriminated against by lenders, a possible economic disadvantage of organic farming. However, Blobaum (1983) concluded that this problem is more perceived than real.

Organic farmers are generally at a disadvantage compared to conventional farmers with regard to the tax system. The U.S. tax code incorporates several features such as investment credit, accelerated depreciation, and interest deductions that were designed to stimulate investment. The definition of organic farming does not preclude the use of confinement feeding systems, irrigation systems, and other investments that offer substantial tax benefits. However, the reluctance of organic farmers to use prophylactic antibiotics decreases the feasibility of confinement feeding systems. Organic farmers have less need for irrigation because they use more crop rotations and because of higher soil permeability. Organic growers tend to be less capital intensive, so tax breaks are less advantageous to them.

Investigators once believed that organic farmers' reluctance to use fertilizers led to depletion of phosphorus, potassium, and other soil-borne elements, and that this depletion would have unfavorable long-term biological and economic consequences (USDA, 1980). It can be argued, however, that organic farming is a superior system for managing soil-borne elements because of manure recycling and reduced soil erosion (Cacek, 1984). Data from Washington State (Patten, 1982) indicate that organic farming may even increase the amount of biochemically available phosphorus in the soil. These arguments point to future economic benefits of organic farming from soil improvement.

Future trends

The relative economic performance of organic farming and conventional farming is sensitive to the ratio of input costs to the value of outputs. Both organic and conventional farmers are vulnerable to fluctuations in both input and output prices, but the effect of a given change will differ between the two farming systems.

The future of commodity prices is not clear. However, changes in commodity prices can be expected to have greater impacts on conventional than organic farmers. Conventional producers have higher average yields for most grain crops. Therefore, assuming constant production costs, price increases will increase the net returns of conventional farmers by a greater proportion than those of organic farmers. Conversely, price decreases will decrease conventional returns by a greater proportion than organic returns. Differential price changes (increases in some commodity prices and decreases in others) would also tend to have effects of greater magnitude, whether positive or negative, on conventional farmers, since they depend on fewer crops for their income. Because organic systems are more diversified, the effects of differential price changes on income would partially offset each other.

Increases in the cost of variable inputs would be less damaging to organic farmers because they purchase fewer inputs. The most likely price increases in the near future will be for energy, with consequent increases in the price of synthetic nitrogen fertilizers. Organic farmers use less energy than conventional farmers, primarily because they use less synthetic nitrogen. In the Lockeretz study (1978), the organic farmers used 60 percent less energy per unit of value of production. The Berardi study (1978) showed that conventional wheat farmers use 48 percent more energy for 29 percent higher yields.

Farmers may face increasing pressure from governments to control the movement of sediment, pesticides, and nutrients from farmland to the off-farm environment. Organic farming controls erosion and reduces or eliminates the use of pesticides and highly soluble forms of nitrogen. Therefore, organic farmers are already controlling pollution. If conventional farmers are forced through regulation or other policy instruments to control runoff, organic techniques and reduced tillage possibly would be their cheapest alternatives.

Finally, research on organic farming can improve the economic performance of organic methods. The lack of reliable information on problems specific to organic farming, such as non-chemical weed control, is a serious barrier to its adoption. Government-sponsored agricultural research has focused on chemical-intensive agriculture, leaving organic farmers to rely on the organic industry or a small number of organic research groups for information (Blobaum, 1983). Intensive research on agricultural chemicals has been conducted for four decades, but organic research is in its infancy. Therefore, the economic benefits to farmers from an incremental investment in organic research may be greater than from a corresponding investment in chemically-oriented research. Developments in genetic engineering could benefit both organic and conventional agriculture (Butter and Youngberg, 1983).

Organic farming and national policy

During the 1985 debates on agricultural legislation, the major concerns were soil erosion, the farm credit crisis, overproduction, and international trace. A shift toward organic farming would have favorable impacts on all but the lest problem. Organic farming was debated in the 99th Congress, but it was rarely mentioned as a solution to these problems.

The low prices received by farmers and the cost of federal programs aimed at increasing these prices are major policy issues. In the past five years, net budget outlays by the Commodity Credit Corporation for price supports and related programs have ranges from a low of $2.7 billion in 1980 to a high of $18.8 billion in 1983 (USDA, 1984). Despite these expenditures, farm income remains relatively dąpressed. Conversion to organic farming decreases the production of price-supported commodities by substituting hay crops, which receive no price supports, and by reducing yields. Therefore, conversion to organic farming could reduce the cost of federal programs while raisin" grain prices because of reduced supplies. However, improved grain prices could have an undesirable effect on the trace deficit. A study at Iowa State University predicted that a nationwide conversion to organic methods would decrease production, increase commodity prices, increase net farm income, decrease export potential, and increase the land used for agriculture (Olsen et al., 1980).

Energy conservation, a major policy issue during the energy crisis of the 1970's, is being overlooked during the energy glut of the mid-1980's. The glut is surely temporary and energy conservation should remain a national goal. Organic farming is more energy efficient than conventional farming, in some cases even outperforming reduced tillage (Cacek, 1984). Therefore organic farming could be an element in the nation's energy policy.

Soil erosion has macroeconomic as well as microeconomic implications. The Conservation Foundation estimated that off-site impacts of erosion-related pollutants from cropland cause $2.2 billion in damages annually across the nation (Clark et al., 1985). These damages involve recreation, water storage and transport facilities, navigation, flood damages related to sediments, and water treatment. Damages of this magnitude are an incentive for the government to control pollution from cropland, and regulation is often proposed as the solution. However, research and extension on organic farming and conservation tillage may be effective alternatives to regulation and should certainly supplement any regulatory effort.

Damage to wildlife was not included in the Conservation Foundation estimate. Federal, state and private fish and wildlife organizations spend several billion dollars per year conserving wildlife. The wildlife gains resulting from these expenditures, however, are overshadowed by agricultural land use changes that have caused precipitous declines in populations of farm game (Farris and Cole, 1981). Agricultural pesticides pushed brown pelicans (Pelecanus occidentalis) and peregrine falcons (Falco peregrinus) to the brink of extinction. Agricultural activities have harmed fisheries in 30 percent of all streams nationwide (Judy, 1984), and siltation has degraded waterfowl breeding habitat in the northern plains. Conversion to organic farming would improve upland habitat, safeguard wetland habitat from siltation, and reduce the pesticide threat (Cacek, 1984). Enhanced fish and wild life populations offer potential economic gains to farmers who can permit hunting or fishing on their farms for a fee.

Losses of soil productivity caused by erosion are of little concern in the near future (Crosson, 1984), but what of the loss of productivity over the centuries? The Middle East and Northern Africa are littered with the remains of ancient civilizations that abused their soils (Lowdermilk, 1975). Some Chinese soils, by contras", have been farmed with organic technology for 40 centuries. Perhaps in the final reckoning these soils will have fed more humans than America's conventionally farmed soils. Policies based on Crosson's conclusions could jeopardize the food supply for future generations. The availability of land for food production could become problem in the future, so protecting the productivity of existing land is all the more critical.

Conclusions and research needs

Organic farming is a sophisticated alternative agricultural system. Ample data exist to conclude that it can compete economically with convention farming in the Corn Belt and the semiarid Northwest. Further research is needed on the economics of organic farming with horticultural crops and in other geographic regions. Particular attention should be given to optimum approaches for conversion to organic farming. Information needs of organic farmers should be surveyed and information delivery systems should be tailored to meet those needs.

Organic farming benefits society substantially by reducing pollution and flooding; conserving energy, soil, nutrients, fish, and wildlife; reducing federal costs for grain price supports; and insuring the supply of food for future generations. However, virtually no credible data are available to policy makers on the magnitude of these benefits, they are unable to compare organic farming with other policy alternatives. Policy makers also need information on the impact of organic farming on international trace, input suppliers, the food marketing chain, and rural communities. In areas where organic farming is known to be economically feasible, federal policy barriers to conversion should be identified and evaluated. Finally, the impacts of the 1985 Farm Bill and other legislation on the economic viability of organic farming should be analyzed.

Organic farming is an attractive alternative for both farmers and policy makers. With the development and delivery of better information, both will be able to make the best use of this alternative.


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Citation : Cacek Terry, Langner L. Linda, 1986, "The economic implications of organic farming", Vol. 1, No. 1, pp. 25-29.

Copyright © 1986 Reprinted with permission.

Reprinted with permission.

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