2. Organic agriculture: concepts and policies
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Ministeriet for Fødevarer, Landbrug og Fiskeri Statens Jordbrugs- og Fiskeriøkonomiske Institut Rapport nr. 99 Organic Agriculture in Denmark - Economic Impacts of a Widespread Adoption of Organic Management Els Wynen Statens Jordbrugs- og Fiskeriøkonomiske Institut Rapport nr. 99 Organic Agriculture in Denmark Economic Impacts of a Widespread Adoption of Organic Management Els Wynen København 1998 -3- List of Contents List of content .................................................................................................................. 3 Preface ............................................................................................................................. 7 Sammendrag .................................................................................................................... 9 1. The issues in perspective ............................................................................................. 11 2. Organic agriculture: concepts and policies ................................................................. 2.1. Concepts ............................................................................................................... 2.2. Economic considerations ..................................................................................... 15 15 17 3. Modelling the widespread adoption of organic practices ............................................ 3.1. Production and consumption relationships .......................................................... 3.2. Model description ................................................................................................ 3.3. Some assumptions ................................................................................................ 3.4. Aggregation .......................................................................................................... 23 23 24 28 30 4. Data sources and assumption ...................................................................................... 4.1. Available statistics ............................................................................................... 4.1.1. Conventional farms .................................................................................... 4.1.2. Organic farms ............................................................................................. 4.2. Construction of data on organic farms ................................................................. 4.2.1. Variable costs ............................................................................................. 4.2.2. Fixed costs ................................................................................................... 4.2.3. Rotation ...................................................................................................... 4.2.4. Yield and output ......................................................................................... 4.2.5. Output prices .............................................................................................. 4.2.6. Elasticities .................................................................................................. 33 33 33 33 35 35 37 38 40 41 42 5. The current state of agriculture – the baseline .............................................................. 5.1. Land ..................................................................................................................... 5.2. Input costs ............................................................................................................ 5.3. Rotations and total land use ................................................................................. 5.4. Yields ................................................................................................................... 5.5. Output ................................................................................................................... 5.6. Output prices ........................................................................................................ 5.7. Returns to farming ............................................................................................... 47 47 48 52 55 58 60 62 -4- 6. Moving towards organic agriculture ............................................................................. 6.1. Inputs .................................................................................................................... 6.2. Rotations and total land use ................................................................................. 6.3. Yields and output ................................................................................................. 6.4. Output prices ........................................................................................................ 6.5. Returns to farming ................................................................................................. 6.5.1. Returns at 80 per cent rate of adoption ...................................................... 6.5.2. Returns to varying rates of adoption .......................................................... 69 69 71 74 76 78 78 79 7. Sensitivity analysis and limitations ............................................................................. 7.1. Sensitivity analysis ............................................................................................... 7.2. Limitations ........................................................................................................... 83 83 92 8. Summary and concluding comments .......................................................................... 8.1. Summary .............................................................................................................. 8.2. Policy implications ............................................................................................... 97 97 98 References ....................................................................................................................... 103 Appendix A ..................................................................................................................... 105 Appendix B ...................................................................................................................... 111 Tables Table 3.1. Number of full-time farms in different regions and sectors (1995-96) ....... 31 Table 4.1. Number of organic farms in different categories (1996-97) ....................... Table 4.2. Crop rotations on conventional and organic dairy farms ............................ Table 4.3. Elasticities of supply in dairy sector in Southern and Western Jutland ...... 34 39 43 Table 5.1. Table 5.2. Table 5.3. Table 5.4. 47 49 50 Table 5.5. Table 5.6. Table 5.7. Table 5.8. Table 5.9. Area per farm and total by region and sector (1995-96) ............................. Average input costs by sector at baseline .................................................... Average input costs on dairy farms at baseline ........................................... Crop rotation on full-time conventional farms and total land use by enterprise at the baseline (1995) .......................................................................... Rotations by sector and farm type in Southern and Western Jutland at baseline ........................................................................................................ Actual and estimated yields of different enterprises and management systems in Southern and Western Jutland ................................................... Productivity and prices on dairy farms ........................................................ Total crop production on full-time conventional farms (1995) ................... Average national output prices at baseline and as percentage of baseline (1995 and 1996) ........................................................................................... 54 54 56 58 59 61 -5- Table 5.10. Financial net returns on full-time farms at the baseline .............................. Table 5.11. Gross financial returns, subsidies and premiums per full-time farm at baseline ........................................................................................................ 63 Table 6.1. Average input costs at 80 per cent of organic management, by sector ....... Table 6.2. Average input costs on dairy farms at 80 per cent of organic management Table 6.3. Crop rotations on full-time conventional farms and total land use for different sectors at 80 per cent of organic management .............................. Table 6.4. Total crop production on full-time farms at 80 per cent of organic management ................................................................................................. Table 6.5. Average national output prices at 80 per cent organic management ........... Table 6.6. Financial net returns per full-time farm and total returns in agriculture at 80 per cent organic management ................................................................. Table 6.7. Gross finansial returns, subsidies and premiums per full-time farm at 80 per cent organic management ................................................................. Table 6.8. Net returns per sector at different rates of adoption of organic management 70 72 Table 7.1. Financial net returns per full-time farm at baseline in three sectors under different scenarios ........................................................................................ Table 7.2. Gross financial returns, subsidies and premiums per full-time farm at baseline with different scenarios ................................................................. Table 7.3. National net returns at different rates of organic management with different scenarios ............................................................................................... Table A.1. Average input costs under different management systems at baseline, by region and sector ..................................................................................... Table A.2. Input costs on dairy farms in different regions at baseline .......................... Table A.3. Crop rotations and total area per farm at baseline, by region and sector .... Table A.4. Regional crop prices at baseline (1995) ...................................................... Table A.5. Financial net returns per full-time farm and total returns in agriculture at the base-line, by region and sector .......................................................... Table A.6. Gross financial returns, subsidies and premiums per full-time farm at the baseline, by region and sector ................................................................. Table B.1. Average input costs under different management systems at 80 per cent of organic management, by region and sector ............................................. Table B.2. Crop rotations and total area per full-time farm at 80 per cent organic management, by region and sector .............................................................. Table B.3. Financial net returns per farm and total returns in agriculture at 80 per cent of organic management, by region and sector ..................................... Table B.4. Gross financial returns, subsidies and premiums per full-time farm at 80 per cent organic management, by region and sector ................................ 65 73 75 77 78 80 81 84 85 87 105 106 107 108 109 110 111 112 113 114 -6- Figures Figure 3.1. Relationships in agricultural production ...................................................... 24 Figure 5.1. Average input costs by sector at baseline .................................................... Figure 5.2. Yields on organic farms (1996) relative to yields on conventional farms (1995) ........................................................................................................... Figure 5.3. National production by crop, 1995 ................................................................ Figure 5.4. Organic price premiums for selected crops ................................................. Figure 5.5. Returns on– conventional and organic full-time farms at baseline ............. 49 Figure 6.1. Average input costs by sector at 80 per cent organic management ............. Figure 6.2. National production relative to baseline at 80 per cent of organic management ................................................................................................. Figure 6.3. National net returns at different rates of adoption of organic management.. 71 57 60 61 64 77 81 -7- Preface The objective of this report is to make a preliminary assessment of the possible economic impact of a widespread adoption of organic practices within Danish agriculture. This form of agriculture minimises or eliminates the use of synthetic fertilisers and pesticides, inputs that have been associated with the increase in adverse off-farm environmental impacts. Without an assessment and valuation of the environmental damage avoided, it is not possible to estimate the total costs and benefits of the adoption of organic agriculture. However, the study indicates the likely financial costs incurred by the primary agricultural sector, and provides analysis of the varying distribution of these costs across the crop, dairy and pig sectors in four regions of Denmark. Costs related to agricultural supply and processing industries have not been assessed. The report is part of the project The Potential of Organic Farming in Sustainable Development, funded by the Programme for Development of Organic Farming under the Danish Ministry of Food, Agricultural and Fisheries. The Danish Institute of Agricultural and Fisheries Economics is undertaking further work in this area to complement and extend this report both within a macroeconomic and a farm economic framework. The report was prepared by Els Wynen, a consultant of Eco Landuse Systems, Canberra, Australia. The author benefited from assistance from David Vanzetti, of the same organisation, who designed and described the modelling framework presented in the report and reviewed the draft. Ole Olsen, Statistics Division, provided the data in an accessible form for the analysis, and advised on its use. The work also benefited from assistance and advice from other staff members of the institute, in particular Bjarke Poulsen, Pia Folkmann and Nicolaj Nørgaard, and Tommy Dalgård, Danish Institute of Agricultural Sciences. The report was edited in cooperation with Aage Walter-Jørgensen. Danish Institute of Agricultural and Fisheries Economics, August 1998. Arne Larsen -8- -9- Sammendrag Med henblik på at vurdere virkningerne af en hypotetisk omfattende udbredelse af økologisk jordbrug i Danmark er der udviklet en partiel ligevægtsmodel for den danske landbrugssektor (DOAP). Modellen er specificeret for 4 regioner og 3 landbrugssektorer (planteproduktion, kvæg og svin), der giver mulighed for at beskrive 16 produkter. Produktionsomkostningerne er beskrevet i detalje for hver sektor og region. DOAP omfatter to produktionsstrukturer: Konventionel produktion og økologisk produktion, hvor sidstnævnte for øjeblikket repræsenterer mindre end 2 pct. af de danske landbrug. Ved at specificere antallet af bedrifter i de to kategorier er det muligt at få et skøn for indvirkningen på sektorens produktion og økonomi af skift fra konventionel til økologisk drift. Regnskabsdata fra Statens Jordbrugs- og Fiskeriøkonomiske Institut indikerer, at konventionelle og økologiske mælkeproducenter afviger med hensyn til deres fysiske og økonomiske struktur. Mest iøjnefaldende er, at brugen af syntetiske gødningsstoffer og pesticider er minimeret på økologiske bedrifter. Det, der er registreret som anvendt, falder formentlig inden for de kategorier, som er tilladt ifølge nationale standarder. Anvendelsen af visse produktionsmidler såsom fodermidler til husdyrholdet og arbejdskraft er ligeledes lavere på økologiske bedrifter, mens forbruget af andre inklusive husdyrgødning og afskrivninger på maskiner stort set svarer til konventionelle brug. På udbudssiden er udbytteniveauet generelt lavere på økologiske end på konventionelle brug, hvilket betyder, at økologiske landmænd har behov for større areal, hvis de skal opnå samme produktion som konventionelle. For at opnå en given animalsk produktion kræves derfor et større areal med foderafgrøder, hvilket landmændene typisk reagerer på ved at reducere produktionen af salgsafgrøder såsom hvede. Økologiske landmænd dyrker for øjeblikket også færre arealer med sukkerroer, frøgræs, raps og ærter, hvilket skyldes dyrkningsmæssige begrænsninger ved fravalg af pesticider, samt at der ikke er et marked for økologiske produkter på disse områder. Økonomiske data indikerer, at eksisterende økologiske mælkeproducenter kan opnå fuldt så højt et økonomiske udbytte som konventionelle producenter. Lavere produktion pr. ha (gennem ændringer i udbytte og sædskifte) på den ene side, og lavere produktionsomkostninger og højere produktpriser (hovedsagelig gennem merpriser) på den anden, resulterer i fordelagtige indkomstforhold for økologiske bedrifter. Opgørelser for økologiske plante- og svinebedrifter skønnes at give et tilsvarende billede om end udbytteniveauet er lavere og priserne er relativt højere end for mejeriprodukter. - 10 - Prisrelationerne forventes imidlertid at vende i takt med, at udbuddet af økologiske produkter stiger. Det forudsættes her, at den nuværende markedsstruktur (for produkter og produktionsmidler) samt den anvendte teknologi er uændret. Hovedkonklusionen af modelanalyserne er, at indkomsten i den primære landbrugssektor kan opretholdes eller stige svagt, hvis mindre end 25 pct. af danske landmænd går over til at være økologiske, men at det vil indebære betydelige tab, hvis en større procentdel af landmændene følger denne trend. Det understreges, at dette forudsætter, at de nuværende forhold med hensyn til faktor- og produktpriser, teknologi og skøn for planteproduktionens og svinenes økonomi kan opretholdes. Den lille stigning i sektorens afkast ved en begrænset omlægning bygger på, at SJFI’s regnskabsdata for økologiske kvægbedrifter (1995 og 1996) og skøn for plante- og svinebedrifter indikerer, at økologiske producenter - specielt i mælkesektoren - har større økonomiske afkast end deres konventionelle modpart. Mere end halvdelen af de økologiske bedrifter er klassificeret som kvægbedrifter i statistikken. Det højere økonomiske afkast pr. ha holder ikke, når flere landmænd lægger om til økologisk produktion. Det skyldes at merprisen for økologiske produkter, som for øjeblikket er gældende, vil blive reduceret eller helt elimineret, når udbuddet af økologiske varer stiger. Betragtninger omkring bedre viden om økologisk drift over tid, mulighederne for teknologiske ændringer, ændringer i driftsformen, bedriftsstørrelse og specielt bedre effektivitet i markedsføringen af økologiske produkter er ikke gjort til genstand for vurdering her. Sådanne ændringer vil have en tendens til at forbedre den økonomiske situation for økologiske producenter. På den anden side vil eksisterende forskelle i alder mellem økologiske og konventionelle producenter formentlig bidrage til at overvurdere de økologiske producenters økonomiske situation. Det understreges, at på grund af begrænsninger i det anvendte datamateriale for plante- og svinebedrifter skal resultaterne for disse sektorer benyttes med forsigtighed. Ved anvendelse af modellen er det muligt at identificere nøglevariable, der bestemmer omkostninger, produktion og nettoafkast. Blandt disse er begrænsninger i sædskifte, udbytteniveau, subsidier og tilstedeværelse af merpriser for økologiske produkter væsentlige faktorer. Der er ikke modelleret ændringer i priserne på produktionsmidler bortset fra de tilfælde (fx foderafgrøder), hvor produktionen benyttes i husdyrproduktionen. Et markedsbestemt fald i produktprisen (som kan forventes i det økologiske marked) vil have afgørende betydning for resultatet ved en mere omfattende omlægning til økologisk produktion. - 11 - 1. The issues in perspective Readers of Danish newspapers will be aware that the environmental costs associated with conventional farming are important issues in Denmark. Much discussion, and resources, are focused on figuring out the most efficient ways in which to deal with this aspect of farming. One approach is to seek high-tech solutions, such as genetic engineering or computer-aided fertiliser or pesticide applications; to reduce the negative environmental impact associated with high input use. An alternative approach is to radically reduce use of certain inputs, and use different management practices to maintain productivity at a viable level. Organic agriculture follows this approach, and has been widely advocated in the popular press. There are numerous examples of successful organic farms in Denmark, and these have prompted suggestions that organic practices should be widely adopted. The large-scale adoption of organic farming methods is seen as a means of solving several (environmental and health) problems at a stroke. To date, there has been little assessment of the potential economic effects of the major proportion of the Danish agricultural sector switching to organic methods. To enable policy makers to come to informed decisions, greater knowledge of production potential, the scope for reducing the negative externalities of the agricultural management system, the role of subsidies and premiums in farm level profitability, and many other factors related to organic agriculture is necessary. By filling in some of these gaps, this report contributes to more informed decision-making. The direct aim of this report is to examine, from an economic perspective, the effects on the Danish agricultural sector of a change of a sizeable proportion (such as 80 per cent) of farms in Denmark to organic management. To set the scene, in Section 2 a broad overview of organic agriculture is presented. The definition and a discussion of the concepts convey the essential issues. Where off-farm environmental issues are involved, there is clearly a role for government. Also private interests (consumers of agricultural products and of the environment) are involved. A summary of Denmark’s current public involvement with organic agriculture concludes Section 2. A large part of the study is devoted to the private aspects of farming in Denmark. The essence of that part is how farmers, and farm sectors and agricultural regions would fare if organic agricultural methods were employed. The key elements are simple. Organic producers in general in Denmark experience lower input costs and yields than conventional producers, but receive a price premium. For many existing organic farmers, survey data - 12 - suggest that the mixture of premium price, combined with lower input costs per hectare and changes in rotation and production, leads to higher net farm income. As more and more farmers switch into organic production, the premium is likely to be eroded, affecting the profitability of the industry, at least at present input prices and level of technology. Because changes in yields, input costs, production and premiums differ across industries, a detailed model of the agricultural sector is necessary to analyse large-scale changes. Such a model is developed, described and used in this report. The model covers 16 commodities in three different farm sectors (crops, dairy and pigs), and is disaggregated into 4 regions in Denmark. It is described in Section 3, in which also some general assumptions are explained. The level of aggregation of the data and problems that can be encountered with aggregation are discussed. A detailed description of the data and the assumptions made for this model, for inputs, rotations, yields, prices and price elasticities are discussed in Section 4. The fifth section contains a description of the baseline, the current situation. This is used not only as a basis for comparison following the adoption of organic practices in the following section, but it also shows how conventional and organic farms are performing currently. The economic impacts of a switch to organic practices are presented in Section 6. With an increasing number of farmers adopting organic practices, land use and product prices can be expected to change, which will influence enterprise mix and output. Farm financial performance in the different farm sectors, both at the individual and regional level, is assessed at various levels of adoption of organic management. The results of such assessments can depend to a considerable extend on the assumptions made in the study. In Section 7 a range of values for several key variables has been tested to see which of them are crucial to the results, and what the range is in the results if assumptions were to be changed. One of the aims of this study is to identify those factors in organic agriculture on which it will be most efficient to concentrate further work. The sensitivity analysis gives an indication of the importance of the different factors in further work. Furthermore, other main problems to be expected in a study on the effect in the agricultural sector, or possibly on a macro level, are highlighted so that early attention to those areas may mean avoiding problems at a later stage. Policy implications stemming from the farm performance are discussed. A policy change can be implemented in many ways, and some ways are better than others. A summary of the study together with different policy options in Section 8 conclude the study. - 13 - With the current level of technology, wholesale adoption of organic methods will involve a financial cost to the agricultural sector. Estimates of these losses indicate the scale of environmental costs we would want to avoid to justify such a change. No effort is made in this study to estimate or value the potential environmental savings. - 14 - - 15 - 2. Organic agriculture: concepts and policies 2.1. Concepts In the early 1980s, organic organisations in many countries defined organic agriculture and adopted standards that spelled out what the definition meant in practice. This meant that producers had production rules, and consumers could find out what they were buying. The International Federation for Organic Agricultural Movements (IFOAM) also designed standards based on experiences in the different countries, which then became the minimum standards for all organisations who wanted to be evaluated by IFOAM, often to facilitate international trade. In the early 1990s, the then European Community decided that conformity in the organic industry was needed. It adopted Council Regulation EC No.2092/91 (EC 1991), in which the word 'organic' was defined and standards for organic production were set. The standards follow to a large extent those of the International Federation for Organic Agricultural Movements (IFOAM). which with the EU to establish the EU standards. Note that they relate to the system of production, not to the end product per se. This has implications for the management of, for example, the marketing of the product, where checking the end-product is not sufficient to guarantee that a product has been grown under organic management. The regulation required each member state to specify which word it wanted to use for the form of agriculture specified. The Danes opted for the word ‘økologisk’; in English the word ‘organic’ was chosen. Hence, although this report is focused on Denmark, the word ‘organic’ is used in this report. Organic agriculture is often described as a form of agriculture where no synthetic fertilisers and pesticides are used. However, this is a rather narrow interpretation, as the essence of organic agriculture is to adjust the management in such a way that soil fertility and pest problems are prevented. In 1980 the US Department of Agriculture (USDA) recognised this point in its definition of organic agriculture as follows: '...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'. - 16 - The report also included the following observation: 'The concept of the soil as a living system which must be "fed" in a way that does not restrict the activities of beneficial organisms necessary for recycling nutrients and producing humus is central to this definition.' Thus, the aim of organic farming is to use inputs (including materials and management practices) in such a way that the biological processes of available nutrients and defences against pests are encouraged. 'Nature' is seen as a resource which can be manipulated to activate processes which increase farm productivity. More specifically, preventative actions to protect farm crops and livestock include crop rotations, strip cropping, manipulation of seeding rate and planting date, stock culling programs which emphasise genetic resistance against certain diseases, judicious stock buying programs, and limited field size (see, for example, Wynen and Fritz 1987, Lampkin 1990). The last author mentions that the organic approach gives '... an indication of the underlying view of the soil as a living system that the farmer, in harmony with nature, should seek to develop' (p.5). This view is often referred to as holistic1. This kind of management system implies other characteristics. For example, off-farm inputs are used to a lesser degree on organic farms than on conventional farms; some inputs, such as nutrients, are used in a less treated (processed) form. This makes the organic farmer less dependent on off-farm inputs, as a change in enterprise-mix can provide some inputs (such as nitrogen) by other means. Comparing organic agriculture with practices in conventional agriculture may clarify the picture. Of particular relevance here is a reliance on synthetic fertilisers for plant nutrition, and synthetic pesticides for protection against pests and diseases. The availability of these inputs meant that enterprises on the farm with the highest profits could be included in the rotation frequently, without running the risk of immediate nutrient and pest problems. It led to the development towards monocultures and the use of relatively large machinery. This kind of agriculture is therefore characterised by relatively intensive use of off-farm, manufactured inputs (fertilisers, pesticides, machinery) and is dependent on suppliers of such inputs. The emphasis of the management system is on the treatment of problems once they (are expected to) occur. In summary, although it is too simplistic to say that in conventional farming symptoms of problems are treated rather than causes, that is closer to being true than it is in the case of organic farming. Many single techniques used in either farming system are similar. In 1 The point about 'holism' relates to the fact that processes on the farm are seen as interdependent (one 'organism', hence 'organic'). - 17 - fact, there are few, if any, techniques practised on organic farms that cannot be used on conventional farms. However, what differentiates the systems is the focus of the approach. Under the organic system, there is a stronger focus on maintaining and improving the overall health of the farm's soil-plant-animal system, the holistic approach. However, it is difficult to measure this state, so that in standards for organic agriculture proxies (synthetic fertilisers and pesticides) are used. It is for this reason that those inputs are banned totally. Although these definitions of organic agriculture say nothing of off-farm environmental effects, the International Federation for Organic Agricultural Movements has as one of its ‘Principle Aims’ to minimise all forms of pollution that may result from agricultural practices’ (IFOAM 1996). 2.2. Economic considerations Private and social costs and benefits The costs and benefits of farming can be seen at two different levels. The private costs and benefits, that is, the net private returns to farming, have traditionally been the focus. The off-farm costs and benefits (negative or positive externalities) have enjoyed less attention. However, the existence of externalities justifies a role for government, through policy tools such as regulations and taxes or subsidies to change the behaviour of farmers, and for research and analysis to be carried out by public institutions to aid the search for cost-effective solutions. Externalities As with most forms of production, agriculture generally causes some sort of pollution. Until recently this was seen more as something like a ‘necessary evil’ than a serious problem requiring government action. This is partly due to the nature of agricultural externalities, in that the effects of one single agricultural production unit are difficult to establish. As opposed to many industries where pollution occurs at a particular point (such as at the outlet of a factory), the source of pollution in agriculture is often diffuse, for example over the whole of the catchment area or region where nutrients or pesticides are applied (non-point pollution). It is often difficult to identify and control the source of non-point pollution. Furthermore, setting absolute levels of input use will be inefficient if there are differences between farms in absorptive capacity. The timing of input use, soil characteristics and other factors result - 18 - in differences in environmental (off-farm) damage done even if the same amount of input is used. Administration costs of allocating externalities to these sources, so that appropriate charges can be made to the polluter, are very high, and have no doubt contributed to a lack of government intervention in this area. However, current policies imply that farmers do not pay the true cost of their production, and the divergence between private and public costs seems to be growing. Reasons for this include increased production (and pollution) levels over time; delayed surfacing of effects; increased awareness of problems due to an increased standard of living; and enhanced possibilities to measure effects. Unconstrained non-point pollution has lead to the de facto bearing of the external costs by others, such as other farmers, rural dwellers and by taxpayers in the form of, for example, additional health care costs and cleaning up of contaminated water and soil. Pimentel et al. (1993) estimated the total 'indirect' private and external (off-farm) costs (excluding the input price) of the use of synthetic pesticides to amount to US$ 8.1 billion annually in the USA, US$ 5 billion of which were environmental and public health costs. The total annual expenditure on pesticide treatments including materials and application was calculated to be US$ 4 billion, so that the non-material costs of pesticides was estimated to be twice as high as the costs of the pesticides themselves. The private benefits from pesticide use amounted to US$ 16 billion in revenues, giving farmers sufficient incentives to continue use. Such estimates are not available in Denmark, but they do raise an interesting question from the point of view of the society as a whole. Are there ways of reducing the costs without losing a greater amount in benefits, for example through a different farm system? Other work carried out show the costs of agriculture in a different way. For example, FAO (1996) estimated the change in private costs of a reduction by 55 per cent in pesticide pollution that occurs during the production of different vegetable oils. The estimates ranged from 175 per cent (soybeans) through 120 per cent (sunflower) and 36 per cent (palm oil) to 28 per cent (rapeseed) of total variable costs. In other words, for example for rapeseed, production cost would increase by 28 per cent if measures were to be taken such that pesticide pollution was reduced to 45 per cent of its present level. These percentages were calculated over the cost of several variable inputs including, apart from pesticides, also fertilisers and seeds. This means that the percentage cost would have been considerably higher if calculated as a percentage of pesticides only, as Pimentel et al. did. In the United Kingdom, Redman (1996) estimated that the costs of conventional farming of cleaning drinking water was over US$ 2 billion in initial investments and US$ 240 million annually. These cost were incurred in regulating and removing pesticides from drinking - 19 - water and to control and abate nitrate pollution of drinking water. In certain areas in Germany (around Munich) and France (Brittany) farmers are encouraged to convert to organic agriculture in a bid to maintain the drinking water quality (Heid 1996; Egmont-Florian 1996). The effect of a change in agricultural management practice, such as to organic agriculture, means that the cost of externalities is moved from the tax payer (who previously paid to ameliorate the effects) to the farmer (who tries to prevent the problem). Depending on the market structure, the farmer may be able to pass on some of the cost to the consumer through higher output prices. From a national perspective it makes economic sense to ensure that environmental costs are conveyed to the producer. There are several instruments with which this can be done, such as by regulation or taxation of polluting inputs. Some policy guidelines A sound policy is one that achieves its stated objectives in an equitable fashion at least cost. Good policies are thus effective, equitable and efficient, and such policies are preferably administratively simple, readily understood and easily enforced. Economists generally favour the polluter-pays principle, and recommend the use of market-based instrument, such as taxes and subsidies, to implement it. The over-riding principle is that the source of the pollution should be tackled as directly as possible. With non-point pollution, as in agriculture, taxes and charges may be inefficient because of the difficulties of targeting the source of the pollution accurately. If all environmental costs of farming were to be charged to the producer, it would make the conventional product more costly, thereby making the organic product more competitive. This would mean that the consumer would pay most of the production costs, instead of the taxpayer. Denmark’s present policy of taxing pesticides and fertilisers, and investigations into the possibilities of further pesticide reductions in agriculture, signal its interest in pursuing this avenue further. Another approach chosen by many governments in Europe is to subsidise the non-polluting technology, in this case the organic management system, thereby changing the taxpayers’ role from damage repair to damage prevention. Subsidising organic agriculture has happened in several different ways in Denmark. Since 1987, with the Act on Organic Agriculture, the word ’økologisk’ has been protected. The infrastructure connected with this, such as the organic standards and the compliance system, was developed with government aid. Those farmers who converted to organic management received subsidies to help them to accomplish this. At present, established organic farmers also receive subsidies. Farm subsidies are expected to reach almost DKr.500 million between 1995 and 2000, increasing from - 20 - DKr.37 million per year in 1995 to an expected DKr.116 million in 2000 (Finansministeriet 1997). On average, Danish organic farmers receive between 4 and 37 per cent more subsidies per farm than their conventional counterparts (see Section 5). For research, Denmark has set aside over DKr.100 million from 1996 to 1999, with likely additional amounts to be allocated during that period (Finansministeriet 1996). Within the existing policy structure, it is not clear whether Danish taxpayers would pay more or less with a widespread change to organic management methods. The exact effect on the public purse in Denmark would depend on the support arrangements. At present most support to agriculture, including for environmentally-friendly management, is provided by the EU budget, but at least part of the support for organic agriculture per se is paid for by national governments. Where subsidies are being provided by the EU, the Danish taxpayer does not directly contribute. In the case of subsidies related to outputs, if agricultural production decreases, as is likely to be the case with a shift to organic agriculture at least for some crops, lower payments would be due under organic than conventional management. Subsidies for crops grown on an area basis, as is the case with many crops at EU-level at present, do not differentiate between organic and conventional agriculture per se. However, when rotations differ between the two systems, there is a de facto difference in subsidies to the two systems. For these reasons, Danish organic farmers claim fewer compensatory payments from Brussels than their conventional counterparts with similar sized farms. On the other hand, organic farmers receive payments for practising organic management methods, both from the EU and from national sources. If organic agriculture becomes widespread, it is questionable whether the support level can be maintained. However, endogenous policy changes of this sort have been ignored in the quantitative analysis that follows. International policy constraints Denmark competes in the international market place for many of its agricultural products, and this must be recognised when contemplating the effects of a change in management system. Unilateral action which imposes additional costs on Denmark’s agricultural sector would change its competitive position relative to others. This would be a financial burden, particularly in the short run. However, this does not mean that those costs are unacceptable. If they are lower than the costs of pollution abatement, policies affecting the adoption of organic practices may still be desirable even in the face of declining competitiveness. In addition, Denmark’s policies are influenced by its membership of the European Union and the World Trade Organisation. Denmark could not limit imports of organic products to protect its local producers, nor could it subsidise its ex- - 21 - ports beyond the levels currently prescribed under the Uruguay Round Agreement. However, international trade provision do allow it to provide its producers with domestic (not trade-related) assistance for environmental purposes. Summary As agriculture not only effects private benefits for farmers but also off-farm costs and benefits for the society more generally, governments have a legitimate role in modifying the production process in agriculture. Up until recently, amelioration of environmental effects were carried by the taxpayer in footing the clean-up bill, and by (some) consumers who paid extra for less polluting production methods, with a contribution of the taxpayers in extra subsidies for agriculture in which such methods were used. This study should shed some light on whether there are more efficient ways of reducing externalities. Proximity to other countries, and international treaty obligations, may mean that in certain circumstances part of the taxpayers’ input, through subsidies, could be enjoyed by consumers in countries other than Denmark. - 22 - - 23 - 3. Modelling the widespread adoption of organic practices 3.1. Production and consumption relationships In agriculture inputs such as land, seeds, nutrients, pest control measures, labour, machinery and management skill are combined to produce output in the form of plant or animal production. The flowchart in Figure 3.1 illustrates these relationships. The choice of inputs will depend on various agronomic constraints and the relative availability and prices of inputs. The relationship between inputs and outputs is influenced by soil type, technology, climatic conditions and other factors that may be outside the farmer’s control. Once produced, output can then be marketed at the going price. For most products, prices cannot be influenced by individual farmers; but for the sector as a whole, increased production tends to be associated with lower prices. If prices fall sufficiently, farmers will generally respond by switching to alternative crops to the extent allowed by agronomic constraints. Quotas, set-asides and other policies may limit this response. Consumers also react to prices, generally increasing their consumption with lower prices and vice versa. Unless all prices rise and fall together, consumers will also switch between products as relative prices change. At some price level, the available supply will just equal the desired consumption. Distortions in the market may interfere with this market clearing price, leading to over or under supply. The relationships described above can be specified quantitatively in the model. Such models can vary enormously in their degree of abstraction and sophistication, depending on the available data, the questions to be addressed and resources available for model development. In this study the conventional and organic farming system have been modelled to identify the key variables and relationships and to provide a preliminary assessment of the impact of a widespread change to organic management practices in Danish agriculture. The model developed for this purpose is called DOAP (Danish Organic Agriculture Project) to reflect its orientation to organic agriculture. Modelling involves first specifying the baseline, the status quo. The second stage involves changing aspects of the model to reflect Danish agriculture when a given number of farmers (say 20, 40 or 80 per cent) change their management system. The effect on production through a change in input use, rotation and yield can be shown. Other effects, such as on prices, and subsequently on farmers’ decision to change rotations, are then calculated. DOAP is described in more detail in Section 3.2. - 24 - FIGURE 3.1. Relationships in agricultural production Inputs Marketing Production Returns to farming Soil Supply elasticities Nutrients Area Production: - crops - livestock Pest control Labour Yield Prices Demand elasticities Machinery Management Technology Policies Institutions Consumption 3.2. Model description2 The DOAP model used for simulations described later is a multi-region, multi-commodity, static, non-linear partial equilibrium model. As such, it is useful for analysing the impact of a large-scale change to a different management system on input use, total production and income and the effects of alternative assumptions on these impacts. The model is designed to calculate impacts at a sectoral level in each region. Because the number of farms is assumed constant in each region, farm level data, such as returns per farm, are also presented. The description presented below is algebraic, but otherwise complimentary to the flowchart shown in Figure 3.1. It also emphasises the commodities and regions modelled. 2 By David Vanzetti - 25 - The essential elements of DOAP are as follows: Production differs by region, and each region has its own supply characteristics for each enterprise: (1) Sij = ij Pij ij where ij = constant ij = elasticity of supply Pij. = price. Sij is annual production of enterprise i in region j of conventional and organic products. Pij is the price of conventional products and ij and ij are constant parameters determining the position and slope of the relationship between prices received by farmers and their production. indicates that the prices, Pij, for each commodity raised by their elasticity, ij, are multiplied together to determine supply of one product. This means that the production of a product depends on its own price and on the prices of substitutes and complements. The functional form implies a constant elasticity, meaning that quantity increases in proportion to price changes at all price levels. Many of the cross price elasticities are zero, implying that the price of one good does not affect the production of another. In addition, many products are used as inputs into the production of other commodities. These are specified in fixed proportions or dependent on the specific rotation chosen. For each enterprise in any region, the observed base year price and quantities and assumed elasticities can be used to calculate the constant term ij as follows: (2) ij = Sij * Pij -ij. By this method the model is calibrated so that demand equals supply at the current price. Production shocks or other exogenous changes in supply result in a change in prices. Under current policies within the European Union, farm support is provided directly through area and headage payments and product prices are equal to, or at least move with, the world price. For most products, Denmark provides a small share of world markets and has limited ability to influence world prices through variations in supply. This implies that changes in the quantities produced in Denmark have little impact on prices for most goods. - 26 - The consumption of goods is specified through the demand function: (3) Di = i Pij ij where i = constant ij = elasticity of demand. Whereas there is a different supply function for each region, there is only one demand function for each commodity. Consumers do not distinguish products by their source. Pork from Southern and Western Jutland is the same as pork from Northern Jutland. Consumption of product i is dependent on the price of the good in question plus the prices of substitutes and complements. The demand function is downward sloping, and consumers purchase less of the product as its price rises or as the prices of substitutes fall. Elasticities are discussed further in Section 4.2.6. Given observed base-year prices and quantities, and the estimated or assumed elasticities, the constant term can readily be calculated: (4) i = Di Pi i Once the relationship between prices and consumption is completely specified, the price changes that do occur are specified through an inverse demand function for each commodity: (5) Pi = (Di/i ) (-i) This equation takes advantage of the equilibrium condition, the assumption that prices adjust so that supply equals demand. The equation implies, for example, that an exogenous shift, say fall, in production leads to an increase in price as specified above. The relationship between additional supply coming onto the market and the resulting prices reflects the limited ability of Danish producers to affect prices within the European Union. Even substantial production changes in Denmark lead to very moderate price changes for most products. Once produced, commodities are not differentiated by region, and all face the same implicit demand curve. This means that all consumers respond to a price change in a similar fashion. However, all prices are not the same. There are two types of differentials, quality differ- - 27 - ences and an organic premium. For conventional products, quality differences for products grown in different regions reflect compositional changes between the different grades of the same commodity. For example, some regions grow a high proportion of the higher priced malting barley while other regions specialise in feed barley. Average prices in these regions will differ. These differences are assumed to be constant, and are represented in the model as follows: (6) where Pij = Pi1 + qij Pij = price of commodity i in region j Pi1 = price of commodity i in region 1 qij = quality differential per tonne of commodity i between region j and benchmark region 1. Organic prices, Pio, are linked to conventional prices in the same region as follows: (7) Pijo = Pij (1 + ij) where Pijo = price of organic product i in region j ij = price premium for organic product i in region j This implies that, as conventional prices vary, the prices for organic products vary in proportion. A 10 per cent increase in conventional prices leads to a 10 per cent increase in organic prices. As described earlier, the premium is not constant and varies with the proportion of farmers producing organic produce. This implies that organic products retain a premium of 20 per cent of their initial level when 80 per cent conversion has occurred. Organic prices are assumed never to be below the conventional prices. Equations 6 and 7 imply that prices for organic products in region j are linked as follows to the price for conventional products in the benchmark region 1: (8) Pijo = Pij (1 + ij) + q ij. The system of demand and supply equations is solved simultaneously. An optimisation procedure finds the set of prices at which the available supply is equated with demand. This occurs at a regional level, not at a farm level. It is not assumed that individual farmers optimise their input mix to generate the profit maximising set of outputs. Rather, farmers in - 28 - the region collectively alter their output mix in response to price changes. However, average farm estimates can be produced given the assumption that the number of farms is known, and indeed held constant in this version of the model. Once equilibrium prices for all products and output levels are determined, input use, costs, production, gross and net margins and other variables for each enterprise in each region are readily calculated. A production shift in one enterprise in one region will therefore affect prices of all products and the area planted of most crops (except where cross elasticities are zero) in all regions. Changes in area planted are reflected in changes in set-aside so that total land use remains constant. Other inputs are used in fixed proportions to land, and it is assumed that the price of these inputs remains unchanged with variations in use. Output is also proportionate to land use, notwithstanding that a switch from conventional to organic production involves a different set of input-output relationships. To simulate the widespread adoption of organic practices, given proportions of Danish farmers in each sector in each region are assumed to simultaneously adopt specified organic rotations and accept organic yields and prices. The change in production leads to a new set of equilibrium prices. This generates a new set of regional incomes and average gross and net margins. Average farm data is checked to ensure that land is fully utilised and that farmers are not producing unprofitable enterprises when superior options would be available within the constraints of the rotation. Model output is then calculated and compared with the baseline. 3.3. Some assumptions When modelling any change, it is desirable to specify clearly what is being changed and what is held constant. This is the distinction between exogenous and endogenous variables. Exogenous variables are determined outside the model and the key variable here is the rate of adoption. This is chosen to be exogenous for the purpose of this exercise, but in reality may depend on factors such as prices and subsidies. Most of the other variables reported upon here are endogenous, determined within the model. This partly reflects the static nature of the model, with no projections of production, consumption, productivity and other factors. A third group of inputs are constant, or parameters, such as yield per hectare or farm size. Many of these could be endogenous, as in reality, but have been held constant for simplicity. The choice of exogenous and endogenous variables is somewhat arbitrary and reflects data availability and objectives and understanding of the modeller. Several important assumptions are specified below. - 29 - The nature of the analysis The conversion process from conventional to organic methods is not modelled here. The first years after conversion are often the more difficult in that the farmer is still learning about the system. In that process, some financial losses may be due to inexperience with the new system, and are not incurred in later years. Furthermore, more investments may be needed due, for example, to differences in animal housing requirements, increasing livestock numbers, storage facilities for crops, fencing of fields, etc. In this study, it is assumed that a steady state has been reached and farm productivity will not improve without additional inputs. Enterprise and geographical differences When a large number of farmers are assumed to spontaneously change their management system, assumptions need to be made about the distribution of the change. For simplicity, it is assumed first that homogeneous adaptation across regions and sectors occurs; that is, the same proportion of each sector in each area changes to organic agriculture. Organic management is likely to be easier (less costly) in some areas and sectors than in others and in reality those farmers who change first are likely to be concentrated in certain regions and sectors. Returns to size and technological change Similarly, it will be less costly for some farmers to change to organic agriculture than for others, as some will already have rotations and input usage rates that are close to those used on organic farms. In other words, the average of inputs used, yields obtained etc. of the first 10 or 20 per cent of farmers to change is likely to be different from the average of the last 20 per cent of farmers. On the other hand, as more and more farmers convert and the industry matures, economies of size in the input and output sectors together with endogenous technological change are likely to result in higher profitability on organic farms ceteris paribus. However, as no data are available about such details, the basis of comparison in this study is taken as the present averages. Output substitutability When a large number of farmers adopt organic management this in itself will have an influence on input and output prices, and induce more changes in land use and output mix. The question then is whether farmers in one sector (say crops) will stay in that sector, or move to another, such as dairy or pigs. Regulations (such as milk quotas) may prevent farmers from switching to that production sector which is most advantageous to them under the new conditions. The basic assumption in this study is that farmers keep within the en- - 30 - terprise in which they are farming at present. Crop farmers do not become dairy farmers, etc., but they do switch between crops within the bounds of the sector. Farm size In order to compare the farming sector under conventional and organic management, it is assumed that area farmed is unchanged. The validity of this assumption depends on the net income per hectare in the different systems. The issue is somewhat complicated by the fact that the yield of dairy products per hectare is lower on organic farms than on conventional farms. In order for organic farms to fill the quota obtained when they were conventional farmers, a number of options are open to them. One is to keep the same kind of rotation, and expand their total farm area. The second is to change the rotation such that the whole area is under feed for cows while not much, if any, crop product is sold off the farm. A third option, recently become available in Denmark, is to sell part of the quota without selling land. This would mean that one could continue with a rotation more similar to that before conversion. Looking at the results of the SJFI survey on organic farms, it seems that a combination of the first two options is practised. That is, in general organic dairy farms are larger (see Section 5.1), yet their rotation is biased more towards roughage than on an average conventional farm. The milk yields per hectare on organic farms are approximately 17 per cent lower than on conventional farms. In this study, the second option (similar sizes of farms, and less area under crops sold off the farm) is pursued, while in this version of the model no quota is distributed towards other farmers. On pig farms the stocking rate is reduced (see Section 4). Effects of management systems on inputs and outputs The available literature provides a guide to the changes in rotations, input uses and output quantities to be expected under organic management practices (see, for example, several chapters in Lampkin and Padel (1994)). In Denmark, data are available especially for dairy farming, less so for crop and pig sectors. Assumptions about these sectors are detailed in the next section. 3.4. Aggregation One purpose of the model is to look at the consequences of a change towards organic farming for the country, region or sector and to draw implications for average farms within each sector. If the whole country was homogenous regarding input use, rotations and yields, each farm would be the same: a typical farm would also be an average farm. In such a case the average data for one farm (which are readily available via, for example, SJFI surveys), could be taken and the results of the analysis would give a true picture of what happens on each farm. Such a farm could then be adjusted to show the characteristics of an organic - 31 - farm, and differences in input use, total production and outputs could then be incorporated in the model. Variables of interest (such as output of each enterprise and the returns to farming) could then be multiplied with the total number of farmers in Denmark, and the total use of resources and production in the country could then be calculated. TABLE 3.1. Number of full-time farms in different regions and sectors (1995-96) Region and sector EASTERN ISLANDS Crop Dairy Pigs Total FUNEN AND EASTERN JUTLAND Crop Dairy Pigs Total Soil Farms Regional National type -- no. -- ---- % ---- ---- % --- 2282 1071 1455 4808 47 22 30 100 8 4 5 17 1407 2894 2476 6777 21 43 37 100 5 10 9 23 1264 5840 2345 9449 13 62 25 100 4 20 8 33 703 4851 2468 8022 9 60 31 100 2 17 8 28 loam loam mixed SOUTHERN AND WESTERN JUTLAND sand Crop Dairy Pigs Total NORTHERN JUTLAND Crop Dairy Pigs Total TOTAL Crop Dairy Pigs Total Source: SJFI data and own calculations. mixed 5656 14656 8744 29056 19 50 30 100 - 32 - However, there generally is a large difference in production process between the different sectors (crops, dairy and pigs), and also between the same sectors in different regions. Thus, representation of the agricultural sector by one (average) farm in the country would not be able to provide the possibility of a realistic change to organic management. It was therefore decided to incorporate twelve representative farms, one for each sector in four regions. In this way the farms included, which are average farms, are also close to being typical farms, and can therefore be adjusted to reflect organic practices. In Table 3.1 the four regions are shown, together with the predominant soil type and percentages of the total number of farms in each sector and region. As can be seen from the table, there are as many full-time dairy farmers as crop and pig farms together. Most of the dairy farmers are on the lighter soils of Southern and Western Jutland, and Northern Jutland. However, there is a good mix of farm types in all of the four regions identified here. Availability of data for these sectors is discussed in the next chapter. - 33 - 4. Data sources and assumptions 4.1. Available statistics 4.1.1. Conventional farms SJFI collects physical and financial data from approximately 2000 farms across Denmark each year. Raw data on structure and performance of the three farm types in the four regions are readily available for conventional farming from SJFI farm level surveys for 1995-96. The sample includes 550 part-time farmers, which are excluded from this analysis. The aggregation of the production on full-time conventional farms times the numbers of farms in the areas which they represent gives the total production of different farm enterprises in Denmark on full-time farms. Using this method, the difference between the estimated total production of grains and actual production comes within 4 per cent of the actual production (including non-food) in 1995-96 as estimated by Danmarks Statistik adjusted for part-time farms (1996, p.109). The corresponding figures for potatoes are 10 per cent, for sugar beet 3 per cent. For rapeseed the figures are similar. Thus, the data representing the baseline, where most farmers are conventional, can be considered to be reasonably accurate. The SJFI survey provides detailed input and output figures for the 12 conventional farms which were modelled in this study. Figures in this report, however, are not strictly comparable with those of the annual data published by SJFI. For simplicity, certain crops and activities have been excluded, such as green peas, seed legumes, grass for hay, fruit, vegetables, forest and ‘other’. In each area they made up less than 4 per cent of the total area involved, while in 5 of the 12 cases this figure was 1 per cent or less. These enterprises contributed in total less than DKr.10,000 to the returns per farm, and in 10 of the 12 cases less than DKr.5,000. 4.1.2. Organic farms In 1997 SJFI conducted its first full-scale representative survey on the organic farming sector. The data used in this study are for 1996-97 and are preliminary. In so far that farm data differ between years, the data from the conventional and organic farms are not strictly comparable. However, for those variables for which most variation can be expected, yields and output prices, preliminary data from the conventional sector for 1996-97 are used in order to determine ratios (see below). - 34 - The number of farmers in the different regions for which data were available, and the distribution of these farms in the different sectors, differentiated as ’in conversion’ and ’steady state’, and full-time and part-time, can be seen in Table 4.1. Table 4.1. Number of organic farms in different categories (1996-97) Farm type Crops + horticulture Dairy Pigs Total ------ In conversion -----FullParttime Time Total 7 53 1 61 10 5 2 17 17 58 3 78 ------- Steady state -----FullParttime time Total 10 38 4 52 16 8 4 28 26 46 8 80 Source: SJFI Full-time farmers who have finished the conversion stage (that is, those in the ’steady state’) were to be included (52). However, only for the dairy sector were there a sufficient number of farmers (38) to provide reliable estimates. This number is too low to differentiate by region. This means that in this study the same data are used for the organic dairy sector in each region, adjusted for factors such as total farm area and prices on the average conventional farm in the particular region. No allowance is made for differences between input needs in the different regions due to, for example, soil type. In this respect the regional disaggregation provides some spurious accuracy to the results to the extent that regional data are in fact national data. The consequences of this constraint will be pointed out where appropriate. Although ten farms were included in the SJFI crop sector, the number of hectares was rather atypical for the crop farmers in general (33 as opposed to over 100), with an average area in vegetables far exceeding that on the average conventional crop farms. These farms therefore tend more towards horticulture, and it would not have been realistic to include them for comparison with conventional farms in that category. In the pig sector (which also includes chickens), the organic farms in the sample kept mainly chickens, so that no representative pig farm could be found. Because of this lack of data, a number of assumption had to be made about input use and outputs on the organic crop and pig farms. At present, in a separate study, SJFI is in the process of developing a farm-level model of the conventional and organic dairy, pigs and crop sectors (Poulsen and Folkmann, forthcoming). These detailed models contain infor- - 35 - mation about both quantities and prices of inputs and outputs, where appropriate. Each model of a conventional farm portrays one situation, combining the type of enterprise (for example, crop) with a particular soil type (for example, sand), irrigation technology (present or absent), stocking rate and rotation. The organic farm to be compared is then adjusted from the conventional model, taking into account the physical limitations of the particular area (such as soil type and need of irrigation). These models can be seen as a series of typical farms. They are based on figures from SJFI, The Danish Agricultural Advisory Centre and Foulum Research Station. Where appropriate, data generated in that study have been used to arrive at assumptions for the crop and pig sectors in the DOAP model. These and other assumptions are discussed below. 4.2. Construction of data on organic farms Land area on the conventional farms is assumed to be the size of the actual average for the particular region in which the farm is located. The organic farm is assumed to be the same size. This means that the number of farms per region also is assumed to remain unchanged when conversion to organic practices occurs. In reality, lower output per hectare (such as litres of milk) on organic farms may encourage an increase in average farm size (due to a lower requirement of labour per hectare). 4.2.1. Variable costs Seed Costs of conventional seeds are taken from SJFI, and the cost of organic seeds are related to organic output prices. For seeds kept on the farm from the previous harvest, the output price is the opportunity cost of the seed. For those crops where seed has to be bought (such as potatoes), seed prices reflect other characteristics than what is needed in output for consumption, such as absence of disease and weed seeds. For this reason, seed prices tend to be higher than output prices for consumption. For this study, seed prices have therefore been set at output price plus 20 per cent. For the comparison of systems as it is at present, this is not strictly correct, as non-certified seed is currently allowed to be used for planting. However, in the future only organic certified seed will be permitted. For those crops for which no market-determined premiums are available (such as for roughage) relative seed prices have been taken from Poulsen and Folkmann (forthcoming), and are therefore not adjusted with changing premiums. As the cost of seed is small as compared with total input cost, this is considered not to affect results greatly. - 36 - Nutrients Nutrients used on conventional farms include synthetic fertilisers and manures. Most of the last group is produced on the farm, except in the crop sector. SJFI calculates the value of manure used according to livestock type, fodder consumption (that is, taking into account yield), opportunity costs of fertilisers/nutrients and an expected utility rate of the manure. The total quantity thus calculated (and expressed in monetary value) is distributed to crop enterprises according to parameters based on knowledge about nutrient needs of the crops. Therefore, relative differences in manure use between crops are the same on organic and conventional farms. It should be noted that the values are imputed and are not related to actual manure production on the farm, nor to imports onto the farm. This last issue is difficult to measure anyway, as many farmers need to dispose of manure in order not to exceed the amount allowed to be used on the farm and will sell it for a low price, which does not necessarily reflect the value to the buyer. In some cases manure is exchanged for other services. For the organic dairy farms, manure values as calculated by SJFI are used in this study. For the crop and pig farms the use of nutrients had to be estimated. To obtain a measure of fertiliser and manure use on organic pig farms it is assumed in this study that the use of this input relative to the use on conventional farms in their sector and region is similar to that in the dairy sector in Southern and Western Jutland. Thus, where the use of manure on spring barley on the organic dairy farm in this region was 1.1 times that on the conventional farm, the application per hectare on the conventional pig farm was multiplied by 1.1 to arrive at the expenditure on the organic pig farm. For the crop farms a similar amount per hectare as that on pig farms has been assumed, minus an (arbitrary) 20 per cent, to reflect the fact that, when manure is scarce it is likely to be used more sparingly. This has been assumed to affect yield negatively, which is discussed in Section 4.2.4. Pesticides None are used on organic farms. Energy and CO2 tax Energy use on organic farms as compared with conventional farming was taken from Poulsen and Folkmann (forthcoming), and was set at 80 per cent. Labour See under ‘fixed costs’. - 37 - Machinery and contract operations The total costs of repairs and maintenance on machinery, of fuel and of contract operations on conventional farms and organic dairy farms are obtained from the SJFI survey. The distribution over the different enterprises is carried out according to technical coefficients. Figures for organic crop and pig farms relative to the conventional farms are taken from Poulsen and Folkmann (forthcoming). Animal inputs Concentrates are purchased off the farm. If farmers keep their crop for feed, this is shown as an income in the crop enterprise, and as a cost in the livestock section. The costs of roughage is taken as bought roughage in addition to the cost of producing roughage on the farm. The price of this input on organic farms includes a premium (see below). Concentrates used on organic pig farms are adjusted for: - stocking rate, assumed to be 1 animal unit per hectare on organic farms as compared with 1.7 on conventional farms; - feeding ratio between organic and conventional pigs, see Nørgaard and Olsen (1995) and Folkmann and Nørgaard (1996); - premium for organic wheat for 80 per cent of feed costs. Although the requirement at present is that 75 per cent is to be bought as organic feed, this will change to 80 per cent in the near future, and has been anticipated here. It is assumed that the animals kept on crop farms are pigs, rather than cattle. 4.2.2. Fixed costs Labour Labour is mainly a fixed cost, as most of it is family labour. However, hired labour is included under variable costs where relevant. Expenditure on labour on the organic dairy farms is according to the survey results, and is distributed by SJFI over the different enterprises in the same way as on conventional farms. On organic pig and crop farms, labour use on crops relative to that on conventional farms is as calculated by Poulsen and Folkmann (forthcoming). In the livestock enterprise on pig farms, the ratio of labour use on conventional and organic farms is taken as the ratio of conventional intensive pig farms and conventional free-range farms. It is derived from the - 38 - hours used per animal times the number of animals per hectare. In this calculation the proportions of breeding sows and baconers is taken assuming that the baconers are bred on the farm. Although this is a somewhat restrictive assumption, on organic farms breeding of own fattening animals is encouraged. In addition, in reality about 50 per cent of conventional farms do have mixed pig breeding and rearing facilities. As the livestock enterprise on crop farms is assumed to be dominated by pigs rather than by cattle, labour ratios in that farm sector are set as for those on pig farms. Depreciation and maintenance Depreciation is a rather important item, which influences farm profitability significantly. Depreciation represents the cost of machinery and equipment, buildings and land improvements, and maintenance on buildings and land. Depreciation on organic dairy farms is obtained from the SJFI survey. For the crop enterprises on the organic crop and pig farms, the ratios are as used on dairy farms by Poulsen and Folkmann (forthcoming). For the livestock enterprise, the ratio of capital between the two systems is calculated by taking the same relative enterprise use (breeding stock – baconer) as described under ‘labour’, multiplied by the cost of investment under the two different systems. Once again, the livestock enterprise on crop farms is assumed to have the same relative values of depreciation as on the pig farms. 4.2.3. Rotation The rotation on organic dairy farms is taken from the SJFI survey. These figures are shown in Table 4.2, together with those published by Halberg and Kristensen (1997). A comparison reveals that the dairy farms surveyed by SJFI have rotations biased more towards the production of roughage, and away from cash crops, than is the case in the survey by Halberg and Kristensen (1997). Within the SJFI survey, organic farmers tend to use a high proportion of the area in cereals for silage. Especially in the regions with sandy soils, the total area in cereals on both types of farms is rather similar. The other distinctive difference between the two systems is the area in grass on organic farms, especially that in rotation, which takes up about one third of the total area on the organic farm. The area in fodder beets is very small on organic farms, possibly an indication of the problems with row crops in organic agriculture at present. - 39 - TABLE 4.2. Crop rotations on conventional and organic dairy farms Grains Other Fodder Grass Beets rotation Grass perm. Silage Setaside --------------------------------------- hectares ------------------------------------------SJFI Conventional: Eastern Islands Funen and Eastern Jutland Southern and Western Jutland Northern Jutland Organic: Ratio org/conv (S+W Jutland) Halberg and Kristensen (1997) Conventional: Organic Ratio org/conv 1995/96 1996/97 1989-93 1989/93 41 39 31 31 17 57 15 5 5 6 5 100 4 6 6 6 0,3 5 10 18 23 21 31 137 7 11 11 13 13 119 16 15 17 15 27 161 32 28 88 7 5 71 10 3 30 26 38 146 8 11 138 16 14 88 6 6 7 7 5 77 Source: SJFI surveys and Halberg and Kristensen (1997). Assumptions for rotations on pig and crop farms build on the characteristics of the rotations on the conventional farms, combined with knowledge of requirements on organic farms, and are as follows: - - - area in roughage crops and set-aside area are the same as on conventional farms, with the exception of grass rotation; 25 per cent of the farm is put under ‘grass in rotation’: this implies that the total production of pasture increases. It is assumed here that the product is sold against cost price and, if need be, exported; the rest of the area is divided over grains and ‘other’ in the same proportions as on the conventional farms in the particular area, for example 68 per cent in grains on crop farms on the Eastern Islands, and 26 per cent on ‘other’ on pig farms in Northern Jutland; the area in ‘grains’ and ‘other’ is divided along the same principle as above, that is, each individual crop is allocated an area according to the importance of the particular crop in its group on the organic dairy farm. It can be expected that the relative importance of each crop varies between regions. However, the variation is even more pronounced according to management system. It is for this reason that the rotation found on the organic dairy farms surveyed by SJFI are taken as the basis of reference, even though this does not allow the regional variation to be expressed. In practice, this means that the emphasis on organic farms is on spring barley, as opposed to winter wheat on conventional farms. In the category ‘other’ the main crops grown on conven- - 40 - tional farms are potatoes, sugar beets, peas (green and for fodder) and rapeseed. On organic farms, potatoes, peas for fodder, and rapeseed were grown. Sugar beets, and also green peas, are generally considered to be too costly to weed under present conditions of technology and input and output prices. However, this aspect of production is now being researched, and it can therefore be expected that these crops will become of more interest to organic farmers in the future. They have not been included in this study at present. A rotation based on the arguments above gives an area of potatoes of approximately 13 hectares, on crop farms. As this seems rather unrealistic, the upper limit of area in potatoes is set at 5 hectares, with the rest to spring grains. 4.2.4. Yield and output The SJFI-figures for organic dairy agriculture are national figures. They have been compared with conventional dairy farming in Southern and Western Jutland as that is where most organic dairy farmers are located. For fodder crops on conventional farms (fodder beets, grass in rotation and permanent, maize and cereals for silage) SJFI takes the yield from the Denmark Statistics Authority (DSA). Those are obtained from the farm advisory system, and SJFI then adjusts yields on individual farms for levels of manure and fertiliser used. Yields of organically grown fodder crops are adjusted by SJFI to 20 per cent less than those on conventional farms at the national level. The exception is fodder beets, where a reduction of 10 per cent is assumed by SJFI on organic farms. Organic crop and pig farms are expected to have different relative yields to those on conventional farms in their area. In the first place, rotations are different from those on dairy farms, as no roughage is needed for livestock, although some roughage is being used on organic pig farms. In addition, little or no manure is available on crop farms, although on pig farms manure is produced. It was assumed that crop and pig farms put a quarter of their area in grass, part of which can be used as green manure, with approximately 10 per cent (in 1995-96) under set-aside. Even so, yields on these farms can be expected to be lower than on dairy farms. In this study the percentage yield obtained on organic crop farms has therefore been assumed to be 80 per cent of the percentage obtained on organic dairy farms, and that on pig farms 90 per cent. For example, where organic dairy farms yield 93 per cent of spring barley on conventional farms in their particular area, organic crop farms are assumed to yield 74 per cent (93 x 80 per cent), and pig farms 84 per cent (93 times 90 per cent). - 41 - The livestock enterprise on pig and crop farms is assumed to yield 59 per cent (1/1.7) of the production on conventional farms. Total output figures are obtained by multiplying the yield with the area under production. How much area farmers decide to put under a particular crop is dependent not only on rotational requirements as described above, but also on expected input and output prices. This last topic is discussed below. 4.2.5. Output prices Although not many organic crops are traded, prices for crops were obtained via the survey on organic dairy farms, and these are also used for the crop and pig sectors. The reason for the limited organic product market in Denmark is that most organic farms are dairy farms, where crops grown (mainly grains and fodder) are used to feed cattle. Regional price differences are maintained as in conventional farming. Prices used for internal calculations such as for roughage crops (fodder beets, grass, cereals for silage) in the dairy sector are generated as for conventional agriculture, that is, prices are equated to the cost of production, which is then charged as a cost in the item ’roughage’ in the livestock enterprise. As prices change over time, it is important to take prices at the same point in time when comparing them. For this reason, the percentages of price premiums have been calculated by comparing organic prices in 1996 with those for conventionally grown products in 1996. This was done despite the fact that the returns to farming for the conventional sector in this study are based on outputs and prices received in 1995. Prices for organic dairy products are easier to ascertain. In practice at present, many organic farmers receive approximately 20 per cent as a basic premium, to which a variable amount is added which reflects the percentage of milk sold as organic milk. For example, in the second quarter of 1997, organic farmers received a premium of 22.4 per cent on what conventional farmers were expected to receive. When many farmers practise organic management, organic products will be more abundant, and prices are expected to decrease. At the same time, it is quite feasible that an outward shift in the demand curve will occur, as suggested by the increase in demand for organic products at higher prices in Denmark in the recent past, especially with dairy products. Shifts in the demand curve, due to a change in incomes or preferences, should not be confused with movements along the curve, which reflect changes in prices. Demand is assumed to match supply, although organic products will increasingly be seen as less of a luxury - 42 - item by most consumers, and the premium most people will be prepared to pay will diminish. In this study, the organic premium is set to drop one per cent of the present price for each percentage point of increase in organic production. Thus, at 80 per cent levels of adaptation, crop premiums are 20 per cent of the current levels. This is a linear relationship, and an argument could be made that the premium would erode more or less quickly. There is little empirical evidence, one way or the other. The price of organic pig meat is at present around 70 per cent higher than of conventional pig meat at the farm gate. This premium also decreases in proportion to the increase in number of organic farmers, as with crops. The livestock enterprise on crop farms is assumed to be pigs, and input, yield and price parameters used reflect this. It is important to realise that premiums received by farmers do not necessarily reflect prices paid by consumers, as the price for the raw material is a rather small percentage of the total package, which includes transport, insurance, packaging and distribution. On average in 1995, farmers received 25 per cent of prices paid by consumers, though there was a large variation in this figure in percentages for individual products, ranging from 45 per cent for butter (with milk, meat and eggs between 30 and 40 per cent) to 5 per cent for bread. In other words, a premium at the farm gate of 50 per cent translates into less than 20 per cent for the final product of milk, meat and eggs, and 2.5 per cent for bread. A 20 per cent increase in wheat prices, as proposed here, increases bread prices by 1 per cent. The considerable increase in prices for organic products at consumer level in the past has therefore not mainly been due to increased producer prices, but to higher ‘other’ costs, such as those of transport. When the majority of farmers is organic, however, a considerable part of the extra costs to the consumers should decline. This means that consumer prices are likely to drop more than the premiums in producer prices as assumed in this paper. This is important in connection with the effect on consumers’ behaviour, which in its turn will affect farmers’ production decisions, discussed in the next section. 4.2.6. Elasticities At the heart of any economic model are the elasticities, the responsiveness of quantities supplied or consumed to a change in prices. Quantities produced or consumed change not only in response to changes in their own output price, but also to a change in the prices of substitute or complementary products or goods and also the prices of inputs. Other variables, such as income levels, also affect consumption, but these factors are assumed constant in this analysis and are not considered further. Supply elasticities are discussed first. - 43 - Supply When a change in production occurs (which is what happens when many farmers change to organic agriculture), input and output prices will change. This in itself will affect the willingness of farmers to produce a particular crop rather than another crop or livestock enterprise. The response of farmers to price changes is captured in elasticities of supply. The elasticities of supply used in this study are taken from an OECD (1991) model. Estimates used for Denmark are for the European Union. These are based only on product prices, excluding area subsidies. The assumption here is that area-based subsidies do not affect production, as subsidies do not change with supply (with the exception of rapeseed). It could be argued that this is a strong assumption, and that payments to land bring forth greater production by encouraging the greater use of capital and labour within the sector, but this is ignored for the purpose of this study. Cross-price elasticities of supply are also included in the study. Where OECD figures were available only for a whole group of crops (such as for coarse grains) each individual crop in that category was allocated a proportion of the total figure equivalent to its relative importance in the rotation. This implies that the figures for each region are not exactly the same, though similar. An example of elasticities employed in the dairy sector in Southern and Western Jutland is shown in Table 4.3. These data imply, for example, that a 10 per cent increase in the price of spring grains (barley) would lead to a 3.9 per cent increase in the production of spring grains and a 1.9 per cent fall in output of winter wheat. TABLE 4.3. Elasticities of supply in dairy sector in Southern and Western Jutland Quantity Grains, spring Barley, winter Wheat, winter Rye, winter Peas, fodder Potatoes Sugarbeets Seeds, grass Rapeseed Livestock Grains spring 0.39 0.02 -0.19 -0.06 ----------------------------------------------- Prices ----------------------------------------------Barley Wheat Rye Peas Sugar Seeds RapeMilk winter winter winter fodder Potato beets grass seed 0.39 0.02 -0.19 -0.06 -0.21 -0.01 0.46 -0.02 -0.04 -0.21 0.39 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02 0.95 -1.61 0.10 -0.02 0.10 0.10 -0.09 -0.80 -0.01 -0.80 Source: Adapted from OECD (1991). -0.37 -0.80 -0.01 -0.80 -1.61 0.95 1.00 - 44 - The effects of prices on outputs are constrained by rotational requirements and limited by a number of (often institutional) aspects. These are not necessarily the same for all crops. The following limitations are the most relevant in Denmark at present, and these are used to frame assumptions in the model. Grains Within the group of cereals for grain production, the farmer does not differentiate between the crops, apart from the fact that 60 per cent of the total land area needs to be covered during the winter. It is assumed that, if the grass and winter grains areas are less than 60 per cent, the spring grains are undersown with grass. Milk production and roughage This includes grass in rotation and grown on a permanent basis, silage made of maize and cereals, and fodder beets. These crops are directly linked to the dairy enterprise, which is governed by the quota system. Any farmer delivering over-quota quantities of milk has to pay a fine proportionate to the extra quantity delivered, thereby assuring that over-production does not easily occur. Although quotas are transferable, with the establishment of a milk bourse in 1997, the total quantity of milk Denmark can deliver is fixed. At present, conditions are such that it is likely that the purchase of a quota by a farmer occurs when additional land can be bought. Where no expansion of area per farm is permitted it can be assumed that no change in the number of cows occurs once the transition to organic farming is complete. The area in roughage will therefore also not alter, even when prices change. Reflecting this assumption, the price elasticities of supply for these enterprises is zero. The strict assumptions (no expansion of area on individual farms and no change in enterprise, for example from crop to dairy farm) mean that the milk quota may not be filled. This can be modified in additional scenarios. Sugar beets The quantity of sugar beets produced is related to a quota, and any quantity produced in excess is sold at a considerably reduced price. This assures that, under present conditions, no more sugar beets are grown even when prices increase. However, if organic farmers continue to find it unrewarding to grow sugar beets at existing prices, those farmers who stay conventional when a large proportion of farmers change to organic management could grow more without delivering over-quota. However, in this version of the model the non-filled quota is not reallocated. Rapeseed and peas - 45 - Rapeseed and peas are break-crops for the grains, and as such these crops are not readily substitutable with grains, but quite substitutable with one another. For rapeseed in particular, the EU subsidy plays an important role in the total returns (product price and hectare subsidy). However, the subsidy varies with output prices, causing the gross returns to be less variable than the output price. In addition, the subsidy is announced approximately half a year after harvest so that farmers cannot take into account the actual subsidy when deciding on plantings. Although rapeseed and peas are used as an animal feed, they are sold off the farm, even when livestock is present, as they need to be processed before used as feed. Set-aside This area is treated as the residual. As the total farm area is assumed to stay the same, changes in total area in crop have been incorporated under this item. Thus, although the elasticity is set at zero, the area can still change. This assumption is somewhat unrealistic but, as it does not create much difference, it is accepted for convenience sake in this version of the model. Demand Consumers react to changes in prices of goods, and may change their consumption patterns irrespective of prices. Both these phenomena influence product prices, which in their turn influence production. Prices for agricultural products included in this study are similar throughout the European Union. Products can be moved freely from country to country. This means that changes in quantities produced in Denmark may not affect the price greatly. The extent to which prices in Denmark are affected is dependent on the export elasticity of demand faced by the European Union. At present, this is assumed to be –10 for most products and –5 for pig products3. This implies that a 10 per cent increase in production in Denmark would lead to a 1 per cent fall in price for all products except pig products, for which the same increase in price would be caused by only 5 per cent decrease in quantity sold. The question is whether the same estimates can be used for organically produced goods. In general, for those consumers who purchase organic products for dietary reasons it is likely that the demand is rather price unresponsive. As the demand curve shifts out with an increasing number of people buying organic products, as seems the case at present in Denmark, price responsiveness for organic products is likely to increase. A greater proportion 3 These parameters can readily be changed by the model user if and when better estimates become available. - 46 - of consumers will have less compelling reasons to stick with organic products when prices increase and are less reticent to buy organic products with decreasing prices. In how far this differs from conventionally grown products is not clear, as little if any work has been done on this topic. There is anecdotal evidence that, as long as premiums are below 30 per cent, demand is reasonably stable. That is, the elasticity could well be similar to that for conventionally grown products. Consumers would undoubtedly pay high prices for organic products if they have little choice. However, competition from internationally traded goods is likely to limit the size of premiums. This limits the extent to which premiums can be raised for domestically grown products. As with conventional products, the level of willingness to pay a premium will undoubtedly also depend on the nature of the good, as luxury goods have a higher elasticity than necessities. The difference in elasticities between conventional and organic products is therefore likely to be smallest in those products which are low cost (such as grain flour), and highest in high cost items such as meat and luxury fruits. However, as the industry matures, organic products as a whole will become less of a luxury good and elasticities can be expected to fall. Therefore, at increasing levels of organic management, similar price elasticities of demand are assumed to those used in this report for conventional products. It is likely that the consumption of organic produce is more responsive to changes in incomes than conventional products. To the extent that organic products are seen as luxury or high quality goods, consumption is likely to increase as incomes rise and fall more than other food products when a recession in the business cycle occurs. In this study, changes in income levels in the agricultural sector are assumed insufficient to significantly change the income levels of consumers in the market for Danish organic products. - 47 - 5. The current state of agriculture – the baseline 5.1. Land The distribution of land use is important not only in determining production, but also in estimating the amount of environmental damage, as this varies according to the intensity of input use in the different sectors. Although at the baseline (with only a negligible number of organic farmers) crop farms make up less than 20 per cent of farm numbers (see Table 3.1), 30 per cent of the total farmed area is taken up by this sector. This is illustrated in Table 5.1. The geographical distribution of the different sectors is rather distinct. The heavier the soil, the more farm management is specialised towards cash crops as opposed to roughage for animal feed. Crop farms make up almost half of the numbers, and two thirds of the area, in the Eastern Islands, with Northern Jutland showing the lowest percentages of under 10 per cent of number of crop farms, and under 15 per cent of total area. Table 5.1. Area per farm and total by region and sector (1995-96) Farm size Total area Regional National ------------- % ----------- ---- ha ---- - ’000 ha - EASTERN ISLANDS Crop Dairy Pigs Total 104 51 57 78 238 54 83 376 63 14 22 100 12 3 4 19 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs Total 103 51 67 68 145 147 167 458 32 32 36 100 7 7 8 23 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs Total 106 59 67 67 134 346 156 637 21 54 24 100 7 18 8 32 99 55 65 62 70 268 160 498 14 54 32 100 4 14 8 25 104 56 65 68 588 815 566 1969 NORTHERN JUTLAND Crop Dairy Pigs Total TOTAL Crop Dairy Pigs Total Source: SJFI data and own calculations. 30 41 29 100 - 48 - Average farm size is partly determined by the amount of land necessary to provide a suitable income for the predominantly family farms. The size of particular enterprises is rather similar in the different regions, but there is a rather large difference between the crops and the two livestock sectors. The crop farms are considerably larger than farms in the other sectors, in two of the four regions more than double the size of the dairy farms in the same regions. The pig farms are larger than the dairy farms, but are more similar to dairy than crop farms in size. Although, for the purpose of this study, the organic farms are assumed to be of the same size as the conventional farms, the survey on organic dairy farms shows that, at 76 hectares, the established organic farms are considerably larger than the average conventional farm. Compared with conventional dairy farms in Southern and Western Jutland, the organic farms are 28 per cent larger. Those in the conversion stage at present do not show a change in this characteristic. 5.2. Input costs The average variable and fixed costs per farm (organic and conventional) in Denmark, as surveyed or as calculated under assumptions discussed in Section 4, are shown in Table 5.2. They are portrayed graphically in Figure 5.1. In general, for farms of comparable size, both variable and fixed costs are lower on the organic than on the conventional farms. The exception is the variable costs on organic pig farms, which is for a large part due to premiums on organic feed concentrates. The less intensive nature of organic animal rearing, and in particular pig farming, and the husbandry requirements for organic pigs, means that a lower investment in housing results in relatively low fixed costs. Regional differences between organic and conventional farms in average farm costs are shown in the final column of Appendix Table A.1. The differences are more variable in the crop and dairy sector than in the pig sector, ranging from 78 to 89 per cent for crop farms, from 78 to 91 per cent for dairy farms, and from 93 to 95 per cent for pig farms. Variable costs on the two types of farms are more similar than fixed costs. There are no significant differences in input costs between regions. The most notable exception is the pig sector on the Eastern Islands, where average farm costs are well below costs in other regions. This reflects smaller farm size rather than greater efficiency in this region. - 49 - TABLE 5.2. Average input costs by sector at baseline Organic VARIABLE COSTS Crop Dairy Pigs Conventional Org./Conv. ----- DKr. ‘000 per farm ----- ---- pct. ---- 453 820 1381 516 946 1445 88 87 96 351 398 459 451 523 606 78 76 76 804 1218 1840 967 1469 2050 83 83 90 FIXED COSTS Crop Dairy Pigs TOTAL Crop Dairy Pigs Source: Derived from SJFI data and own calculations. FIGURE 5.1: Average input costs by sector at baseline 2500 Dkr '000 per farm 2000 1500 Fixed Variable 1000 500 0 Org Conv Org Conv Org Conv crop crop dairy dairy pigs pigs - 50 - The most reliable comparison of cost structures in this study is in the dairy sector where there are a reasonable number of organic farms in the SJFI survey. It is for this reason that a more detailed breakdown of the costs is shown for this sector in Table 5.3 with averages for the national level. The comparison between the conventional and organic farms in the four regions is shown in Appendix Table A.2. TABLE 5.3. Average input costs on dairy farms at baseline Organic Conventional Org./Conv. ----- DKr. ‘000 per farm ----- ---- pct. ---- VARIABLE COSTS Seed Fertiliser Manure Pesticides Energy Co2-tax Labour: hired Maintenance: machinery Contract operations Other: plant production Concentrates Roughage Vet. Costs Insemination Other costs: livestock Total 28 1 40 0 25 3 127 63 83 8 213 214 19 9 26 858 22 33 38 18 21 2 100 59 61 7 253 258 27 12 35 946 125 3 108 0 116 109 128 106 135 106 84 83 72 72 76 91 FIXED COSTS Depreciation Labour: family Other Total 125 222 68 416 128 327 67 523 98 68 101 80 1274 1469 87 TOTAL Source: Derived from SJFI data. As expected, the data show not only lower fertiliser and pesticide costs, but also lower expenditure on animal related inputs (such as concentrates, roughage and animal health). The methodology presently employed in the SJFI analysis of surveys (see Section 4.2.1), means that expenditure on manure on organic dairy farms is calculated to average DKr.40,000, as compared with DKr.38,000 on the conventional dairy farm. In addition to the manure, DKr.1,000 and DKr.33,000 was spent on fertiliser on the organic and conventional farms, respectively. The value of the manure produced on the conventional farm was similar to that used. On average, organic dairy farmers imported for DKr.2,000 onto their - 51 - farm, or 5 per cent of total requirement. The picture of organic dairy farmers using considerably less nutrients (calculated as expenditure on synthetic fertilisers and manures) than conventional farmers can also be seen in Plantedirektoratet (1997, Table 6.3). 95 per cent of organic (dairy) farmers used 60 per cent or less of the nitrogen norm (the amount allowed to be used). Estimates in the pig sector (based on use in the conventional pig sector and relative use on organic and conventional dairy farms, see Section 4.2.1) resulted in a similar picture. For example, in Southern and Western Jutland, both conventional and organic pig farmers spent approximately DKr.40,000 on manure. DKr.29,000 is spent on fertiliser on the conventional farm. In monetary terms, conventional pig farmers export approximately 30 per cent of their manure off the farm. This brings the remaining quantity close to what is produced on organic farms, where the stocking rate (and therefore the on-farm manure production) is just under 60 per cent of that on the conventional farm. On the crop farms, most of the nutrient requirements have to be purchased off-farm. A decrease in yield on the organic pig farm as compared with the conventional pig farm (10 per cent below the relative yield on dairy farms) and crop farms (20 per cent below the relative yield on dairy farms) was to compensate for lower nutrient availabilities (both in the form of applied nutrients and those supplied within the rotation system). Although dairy farmers do not import much manure under present conditions, and pig farmers are estimated to do the same, especially crop farmers will find it difficult to find sufficient manure when many farmers have changed to organic management. This means that, in the process of more farmers adopting organic practices, manure is likely to become scarcer, and therefore more expensive. Imports from other countries with manure excesses (such as The Netherlands) has all sorts of problems attached to it, apart from the increase in costs due to transport. Organic agriculture strives to contain the production requirements as much as possible within the farm, and a massive import of manures would certainly negate the possibility of obtaining such a goal. Other sources of nutrients, however, can be used in organic agriculture, such as ground rock dust (for example, rock phosphate), and an increase in nitrogen-fixing crops in the rotation. Nutrient sources which may well become possibilities in the future include recycled household wastes and human sewage. The possibility that crop-only farms will become scarce in an organic agriculture future should also be considered. For the purpose of this study similar expenditure on manure, and effect on yield, over the time were modelled as in the baseline. For dairy farms, there is no reason why this should not hold, as they are selfsufficient - 52 - (with yield penalties) at the baseline. For pig farms, the estimated production of manure on organic farms is more than 84 per cent from what is being used on conventional pig farms at present. It is therefore reasonable to expect that the presently assumed yield penalty at the baseline (10 per cent less than the relative yield on organic/conventional dairy farms) will not drop greatly at increasing rates of adoption of organic management. For crop farms, yield levels at the baseline are more likely to drop at higher levels of conversion. The difference between organic and conventional producers in feed costs is partly due to fewer animals per unit of land on organic farms, although the premium prices for organic feed is a cost-increasing factor. Fewer animal health problems occur on organic farms, a well-established characteristic (Lampkin 1990) leading to lower costs (see, for example, Wynen (1994)). In terms of contribution to total costs, the largest difference is in expenditure on labour. Although hired labour costs are higher on organic farms, the total labour cost (including family labour) is considerably lower on organic farms. When contract operations, which are higher on organic farms, are included, the difference between the two management system is still DKr.56,000 per farm on the national level, and DKr.35,000 per farm in Southern and Western Jutland, the most relevant comparison. This difference between the farm types could be due to a difference in demographic factors, such as age of the farmer or proximity to centres which facilitate off-farm employment. It should be noted that family labour has an imputed value which may be higher than that necessary to keep labour in the sector. If this is the case, the high values attributed to family labour may overestimate the differences between the cost structures on organic and conventional farms. In total, these differences in costs amount to lower variable and fixed costs on the organic farm, as discussed above. The differences in relative costs on the national level and in the four regions is due to the assumption that costs on organic farms per hectare are the same in all regions, as noted in Section 4.1.2. 5.3. Rotations and total land use The rotations on each farm are assumed to be unsynchronised, so that each year the region uses land as described by the average area per farm in the table. As noted earlier, although organic farmers have somewhat less flexibility within these rotational constraints than their conventional counterparts, considerable scope remains for the sector as a whole, and therefore price changes lead to changes in regional land use and output. - 53 - Table 5.4 shows the average land use on a conventional farm in the three sectors nation-wide with most farmers producing under a conventional system. As rotations are rather dependent on local circumstances, such as soil type, regional variations exist. They are shown in Appendix Table A.3. Although spring barley is important on all farm types at one fifth of the total area on average, winter wheat is of greater importance in some sectors, in particular on crop and pig farms, comprising almost one third of total area nationally. This is the case especially on the heavier soils (on Eastern Islands, Funen and Eastern Jutland). This percentage is half or less on dairy farms on clay soils, and on the lighter soils of Southern and Western Jutland and Northern Jutland winter wheat is of minor importance in that farm sector. In the dairy sector, area under roughage (fodder beet, grass, silage) is important, especially on the lighter soils (over half of the area), but also on the heavier soils. The production of roughage impinges mainly on winter grains, while the area in spring grains is rather similar in all sectors. In the crop and pig sectors almost no area is devoted to roughage and of what there is, most is in permanent grass, presumably because that land is not suitable for any other use. Around 10 per cent is in set-aside (somewhat lower in the dairy sector), although this decreases in the next year with changes in subsidy policies. The total area used for the different enterprises in Denmark is also shown in Table 5.4. Winter wheat was clearly the most important crop in 1995-96, and spring grains the second most important. Together with set-aside land, these three enterprises comprised more than half of the agricultural area. Grass, either in rotation or permanent, makes up another important category. As a different rotation is a distinctive characteristic of organic farming, a comparison of rotations in the two systems is shown in Table 5.5 for the three sectors in Southern and Western Jutland. Data for the organic sector are national figures, adjusted to the size of the conventional farm in Southern and Western Jutland. The figures for crop and pig farms are the result of calculations based on the assumptions discussed in Section 4. It can be seen that organic dairy farmers grow considerably less grain than conventional dairy farmers. If silage made from grain is included, however, the total figures are not that dissimilar. Although the conventional dairy farmers grow considerably less winter than spring grains, organic dairy farmers TABEL 5.4. Crop rotations on full-time conventional farms and total land use by enterprise at the baseline (1995) Grains Barley Wheat Rye Peas Sugar Seeds Rape- Set- Nonspring winter winter winter fodder Potato beets grass seed aside food Fod- Grass Grass der rota- perma Silage Silage beet tion nent maize cereal Total ---------------------------------------------------------------------- percentage of total hectares per farm ------------------------------ ---ha-CROP ROTATIONS Crop Dairy Pigs Total 19 20 21 20 4 3 11 5 31 9 32 20 4 2 3 2 4 2 4 3 4 1 2 2 6 1 2 2 6 0 3 2 6 1 7 4 11 7 9 8 2 0 3 1 0 6 0 3 1 20 1 11 2 12 3 7 0 3 0 2 65 55 52 172 9 4 17 30 0 50 1 51 4 167 5 175 11 95 15 121 0 27 0 27 0 13 0 6 104 56 65 68 ---------------------------------------------------------------------- ‘000 hectares ---------------------------------------------------------------------TOTAL LAND USE Crop Dairy Pigs Total 114 164 122 400 26 20 60 107 181 71 178 429 23 14 16 53 21 18 23 63 23 9 9 41 35 8 11 54 34 2 14 50 38 9 42 89 2 588 103 815 2 566 106 1969 Source: Derived from SJFI data and own calculation. TABEL 5.5. Rotations by sector and farm type in Southern and Western Jutland at baseline Grains Barley Wheat Rye Peas Sugar Seeds Rape- Set- Nonspring winter winter winter fodder Potato beets grass seed aside food Fod- Grass Grass der rota- perma Silage Silage Underbeet tion nent maize cereal sown Total --------------------------------------------------------------------------- percentage of total area per farm ---------------------------------------- ---ha-CROP Conventional Organic* 27 29 5 2 17 6 6 6 6 5 12 5 1 0 3 0 7 8 12 12 1 0 0 0 2 25 1 1 0 0 0 0 1 1 106 106 DAIRY Conventional Organic 21 11 1 1 6 3 2 3 2 1 2 2 0 0 0 0 1 2 7 5 0 0 6 0 23 31 11 13 3 1 14 26 13 16 59 59 PIGS Conventional Organic* 31 30 10 2 21 7 4 7 4 4 5 5 0 0 3 0 8 6 11 11 2 0 0 0 1 25 3 3 0 0 0 0 1 1 67 67 Source: SJFI and derived. Note: * = Assumed values. - 54 - - 55 - grow even less winter grains, reflecting relatively lower yields (see below). In addition, organic farms use spring barley as an opportunity to undersow grass. For the organic crop and pig sectors, a decrease in winter grains is also evident, though the area of spring grains is similar to that on conventional farms. The area in potatoes is also larger than on dairy farms. 5.4. Yields Yields on organic farms in general are lower than on conventional farms. The reduction in yields depends on the crop, soil type, seasonal conditions and other factors. Estimates from the SJFI survey and other sources are shown in Table 5.6. SJFI data for the conventional sector are shown for 1995, with additional data for some crops for 1996. In the dairy sector, yields on conventional farms were fairly similar for the two years, although a reduction was evident in some winter crops in 1996. Data included for the average organic dairy farm were for the year 1996. This means that yields on organic farms are likely to be underestimated for the winter grains and fodder peas, and overestimated for rapeseed in this study. On average, the yield on organic dairy farms is 3 percentage points lower as compared with conventional dairy farms than if 1996 data had been used for the conventional farms. Yields on organic crop and pig farms are taken as a percentage of the relative yields of the conventional and organic dairy farms (see Section 4.2.4). In general, winter wheat performs worst on organic farms relative to on conventional farms. Fodder peas do rather well under organic management, with higher yields, as opposed to potatoes and rapeseed, which yield approximately half or less on organic farms as compared with conventional farms. The yields on organic dairy farms (1996) as compared with those on conventional farms (1995) are depicted in Figure 5.2. Apart from SJFI survey data, other sources of yield comparisons provide an additional guide. Halberg and Kristensen (1997) measured yields on three soil types for two cash crops, spring grains and winter wheat, and two fodder crops, fodder beets and grass in rotation, for the years 1989-93. Yields on conventional farms for the cash crops are similar or higher than those of SJFI in 1995. For spring grains, their estimate of yields on organic farms are similar or lower than SJFI’s survey data. This combination of higher conventional and lower organic yields results in low relative organic yields, up to 10 percentage points lower than SJFI estimates. For winter wheat the organic yields are higher than in the SJFI survey, so that the result is higher or similar relative yields on organic farms for this crop. The lowest yields are recorded on sand, as can be expected. TABEL 5.6. Actual and estimated yields of different enterprises and management systems in Southern and Western Jutland Farm type Year DAIRY (SJFI) Conventional Conventional Organic Org./conv Org./conv. 1995 1996 1996 1995 1996 Soil type Grains Barley Wheat Rye Peas Sugar Seeds Rape- Set- NonUnit spring winter winter winter fodder Potato beets grass seed aside food t/ha t/ha t/ha % % 4.8 4.8 4.2 87 87 DAIRY (Halberg and Kristensen 1997) Conv. 1989-93 clay Organic Conv. sand Organic Conv. irr.sand Organic Org./conv clay Org./conv sand Org./conv irr.sand t/ha t/ha t/ha t/ha t/ha t/ha % % % 5.7 4.4 4.6 3.6 5.9 4.4 77 78 75 CROP (SJFI) Conventional Organic (estimated)* Organic (established) Org.(estimated)/conv Org.(established)/conv t/ha t/ha t/ha % % 4.9 3.4 3.7 69 75 5.6 4.0 t/ha t/ha t/ha % % 5.4 4.2 3.7 78 68 5.9 4.8 5.8 80 97 PIGS (SJFI) Conventional Organic (estimated)* Organic (established) Org.(estimated)/conv Org.(established)/conv 1995 1996 1995 1996 5.5 5.0 5.0 89 100 6.7 5.9 3.9 58 65 4.8 4.4 4.4 93 100 3.5 3.0 4.0 114 133 29.3 42.5 35.8 0.8 15.3 52 1.7 2.1 0.9 53 41 1.9 9.3 6.5 6.8 4.6 8.5 5.4 70 68 64 71 7.0 3.2 3.8 46 55 4.7 3.5 3.9 74 82 3.2 2.9 1.4 91 44 28.5 11.9 20.1 42 70 48.2 7.4 3.8 4.8 52 65 5.1 4.2 1.6 84 32 3.9 4.0 31.5 14.8 47.5 102 47 1.4 1.7 0.7 1.5 42 1.2 1.9 0.9 47 Source: SJFI surveys, Halberg and Kristensen (1997) and own calculations. Notes: * = author’s estimates (see text) irr.sand = irrigated sand. Data from other regions shown if no data available for Southern and Western Jutland (fodder beet and silage maize). Fod- Grass Grass der rota- perma Silage Silage beet tion nent maize cereal 13.3 6.9 4.0 8.1 6.2 10.3 77 4.8 71 3.0 76 5.5 68 5.0 80 12.2 10.5 10.2 9 11.3 9.7 86 88 86 6.9 6.1 6 5.2 7.1 5.9 88 87 83 4.1 2.5 3.0 61 72 8.5 4.6 5.5 3.5 4.7 64 4.3 2.9 2.7 68 63 7.7 4.7 12.6 7.8 62 2.1 14.8 10.3 7.0 70 47 54 61 5.8 4.2 6.1 72 104 - 56 - - 57 - FIGURE 5.2: Yields on organic farms (1996) relative to yields on conventional farms (1995) 120 Per cent 100 80 60 40 20 Rape seed Potato Peas Rye Winter wheat Winter barley Spring grain 0 Enterprise The relative yields of the fodder crops in Halberg and Kristensen (1997) are between 80 and 90 per cent. For fodder beet this is lower, and for grass higher than the 10 and 20 per cent yield reductions, respectively, assumed by SJFI (see Section 4.2.4). Part of the reason for the SJFI figures in Table 5.6 showing less than 80 per cent yield on organic farms of yields on conventional farms, is the high yields on conventional farms in Southern and Western Jutland as compared with other regions in 1995. The yields in the crop and pig sectors (for the conventional and estimated organic) are also shown in Table 5.6. Another row is included to show the actual yield data on organic farms surveyed by SJFI in the different sectors. The last two rows under each sector heading show the estimated and actual yields of established organic farms (1996) relative to actual yield on conventional farms (1995). That is, the row indicating the estimated relative yields is the figure used in this report. The actual figure (although considered not appropriate for the purposes of this report, see Section 4.2.4) is included for reference only. For the grains on crop farms, the figures for estimated and actual yields on established organic farms are fairly similar, with estimates used in this report lower than those obtained in the survey. The large disparities are, however, in those crops which are grown least. The yield of organically grown fodder peas, a low-value crop, is estimated to be relatively high in this study, and potatoes, a high-value crop, low. The comparison on the pig farm shows more mixed results. The survey data for spring grains (mainly barley) and winter rye are lower, and for winter barley and wheat higher, than those estimated in this study. - 58 - Some production data in dairy are shown in Table 5.7 for Southern and Western Jutland. The combination of 12 per cent less cows per hectare and 6 per cent less milk per cow leads to a 17 per cent reduction in milk per hectare. TABLE 5.7. Productivity and prices on dairy farms Conventional* Organic Org/conventional Year Area Total Cows Total Cows/ ha Milk/ cow Milk/ ha Price/ litre 1995 1996 - ha 60 77 - no. 47 53 - no. 0.79 0.69 litres 6675 6258 litres 5253 4348 DKr. 2.33 3.05 -------------------------------- % ---------------------------------128 113 88 94 83 131 Source: Derived from SJFI data. Note: Figures are not adjusted for breed * = Southern and Western Jutland. The yield reduction of 17 per cent per hectare seen in Southern and Western Jutland also holds for Northern Jutland. However, the approach adopted in this study of allocating the same yield figures on dairy farms for all regions means that in the Eastern Islands the relative yield only reaches 63 per cent on organic farms, and in Funen and Eastern Jutland 73 per cent. With respect to relative yields two further issues bear mentioning: relative yields on organic and conventional farms can differ greatly between years, as outside factors (such as the weather) influence the different systems in different ways. in this study yields are assumed not to increase with the rate of adoption of organic management. In reality, one could imagine that, as organic agriculture becomes more widespread, technologies would evolve to improve productivity and reduce the yield difference somewhat. 5.5. Output The combination of land use and yields, described above, determines production. The total crop production in Denmark on full-time farms in 1995 is shown in Table 5.8. TABEL 5.8. Total crop production on full-time conventional farms (1995) Grains Barley Wheat Rye Peas Sugar Seeds Rape- Fodder Grass Grass Silage Silage Underspring winter winter winter fodder Potato beets Grass Seed beet rotation perm. maize cereal sown Eastern Islands Funen and Eastern Jutland Southern and Western Jutland Northern Jutland TOTAL Source: Derived from SJFI data. Note: 1 feed unit = equivalent to 1 kg barley --------------------------------------- ‘000 tonnes ------------------------------------- ----------------- Million feed units -------------------369 124 1127 26 19 50 1881 23 49 26 40 25 32 37 5 412 241 1026 79 40 104 458 23 56 114 181 82 62 92 21 794 155 547 103 74 730 61 11 47 295 568 179 90 300 66 499 124 572 65 94 274 0 10 35 198 376 178 30 210 45 2074 645 3273 273 227 1158 2400 66 187 634 1166 464 214 639 137 - 59 - - 60 - By quantity, the production of wheat is the more important of the grains, although the winter and spring barley together reach over 80 per cent of the wheat production. Potatoes tend to be grown more on the lighter soils, and sugar beets on the heavier soil. The production of fodder crops and dairy (not shown in the table) happens predominantly on the lighter soils, that is, in Jutland. Pig production is more evenly spread over the different regions. Total national production for cash crops is shown in Figure 5.3. FIGURE 5.3: National production by crop, 1995 3500 3000 mmt 2500 2000 1500 1000 500 Rape seed Grass seed Sugar beets Potato Peas Rye Winter wheat Winter barley Spring grain 0 Enterprise 5.6. Output prices Average national output prices for cash crops on conventional and organic farms at the current level of adoption of organic management are shown for 1995 in Table 5.9. In addition, the 1996 prices for Southern and Western Jutland are shown, as they serve as comparison with the prices for organic produce to arrive at percentage premiums. The organic premiums vary by crop. Prices obtained via the 1996-97 survey (some of which are almost double the price of conventional products) are likely to reflect the difference in quality of product, although the scarcity of the product may also play a role. Organic rye and winter wheat, in particular, command considerably higher premiums than barley. This could be because organic farmers tend to grow relatively much barley for feed, or because - 61 - the other crops (wheat) are grown less in the rotation, or are used in organic products in high demand (rye bread). The organic premiums for crops are shown in Figure 5.4. TABLE 5.9. Average national output prices at baseline and as percentage of baseline (1995 and 1996) Grains Barley Wheat Rye Peas Sugar Seeds Rapespring winter winter winter fodder Potato beets grass seed Conventional Conventional Organic 1995 1996 1996 ----------------------------------- DKr. per tonne -----------------------------------1056 1003 990 861 940 870 323 4513 1343 989 974 948 868 1088 1141 319 4237 1589 1765 1771 1859 1696 1796 1608 2383 Org./Conv. 1996 ---------------------------------- percentages ------------------------------------178 182 196 195 165 141 150 Source: SJFI surveys and own calculations. Note: Conventional prices for 1996 are taken from dairy sector in Southern and Western Jutland. FIGURE 5.4: Organic price premiums for selected crops 120 100 Per cent 80 60 40 20 Peas Rye Winter wheat Winter baley Spring grain 0 Premiums in 1996 were highest for grains, with close to a 100 per cent premium for wheat. The lowest premium was recorded for rapeseed at 4 per cent, which is likely to be due to the fact that there is no demand for organic rapeseed at present. However, it is assumed that, if more farmers were to adopt organic management, an increased supply would create demand. For this reason it was decided to impute a premium of 50 per cent for this product, a value which seemed more realistic. - 62 - Prices vary by region (see Appendix Table A.4.). The main reasons for the regional differences are that farmers do not sell all produce at the same time of the year. Prices rise throughout the season to reflect the cost of storage, a reason why the EU raises intervention prices over the season. The differences between the regions are maintained in absolute values in the model. This is because it is assumed that the reasons for price differentials between regions do not alter with a change in product prices. Quality differences may also be a factor in price differences between regions. For barley, differences in proportion of production of malting and feed varieties exist between regions, and these are expressed in the average price. The same is valid for regional variations in consumption of factory potatoes. A high percentage of potatoes grown on conventional farms in Southern and Western Jutland are sold to factories, while those on organic farms are, at least at present, mainly sold as potatoes for consumption. It is for this reason that the premium for organic potatoes has been calculated on the basis of national consumption potato prices (SJFI 1997). For dairy products, the SJFI survey shows a difference in national output prices of over 30 per cent in 1996-97 (see Table 5.7). This higher average is partly due to the fact that previous contracts, some of which are still valid, allocated a considerably higher premium than is generally the case at the time of writing. Pigs were assumed to receive a 70 per cent premium. 5.7. Returns to farming Financial returns per farm at the national level for the different sectors are shown in Table 5.10. More details about returns in the different regions are shown in Appendix Table A.5. These are net returns and take account not only of inputs, outputs and prices, but also subsidies (not discussed as yet). Costs include depreciation and a return to labour (see Table 5.3), but not tax on income. A zero or negative return does not mean that the farmer is not making a living, but merely that there is no return on capital. There is no account here of appreciation of land values. There are large differences in returns per farm both between the sectors and regionally. In general, 1995 was a better year for pig than for crop farmers, while the profitability on dairy farms was considerably lower in all regions. Whereas on the Eastern Islands farming was rather profitable for all farm sectors in 1995, in the two regions in Jutland this was not the - 63 - case, with a negative margin for dairy farmers in those regions. As the majority of dairy farmers live in those two regions, the national average net financial return in this sector was also negative in 1995. TABLE 5.10. Financial net returns on full time farms at the baseline ------- Per farm ----Conv. Org. Crop Dairy Pigs ALL SECTORS ----- DKr. ‘000 ----197 212 -8 61 284 290 120 159 --------- Total ------Conv. Org.* Total ------------- DKr. Million -----------1,113 0 1,113 -116 0 -116 2,483 0 2,483 3,480 0 3,480 Source: Derived from SJFI data. *: Simulated values, as baseline is assumed to be zero per cent organic management Table 5.10 also contains the results of organic management in the three sectors, and Appendix Table A.5 in the four regions. It is clear that, at the 1995 levels of input and output prices and technical knowledge, organic crop and dairy farming can be more profitable than conventional farming, while pig production shows a more varied picture. Summing across all sectors, national per farm returns to organic agriculture are considerably higher than those to conventional farming (DKr.159,000 per farm as opposed to DKr.120,000). However, a number of conditions are likely to change if many farmers become organic managers, and aggregated returns to organic agriculture as calculated here are not realistic. The changes in conditions and the effect on the returns are the subject of the next Section. Returns in the different sectors and regions are shown in Figure 5.5. The regional differences in per farm income in the crop and pig sectors are due to a combination of factors. Analysis of the organic pig sector reveals that differences in feed used on conventional farms is an important contributor to the discrepancies. But also differences on the conventional farms in stocking rate, with a difference in need for concentrates and therefore costs due to premiums paid for organic feed, the ratio of sow – baconers and differences in yields and output contribute. As organic management seems to be more and more contemplated by dairy farmers, it may not be surprising to see the returns on organic dairy farms to be higher than on the conven- - 64 - FIGURE 5.5: Returns on conventional and organic full-time farms at baseline 300 200 Conv. 100 NJ Pigs SWJ Pigs FEJ Pigs EI Pigs NJ Dairy Dairy Dairy SWJ Dairy FEJ Dairy Crop EI Dairy NJ Crop Crop -100 SWJ Crop 0 FEJ Crop Org. EI Crop Dkr '000 per farm 400 Sector tional farms. However, to see that same picture for crop and some pig farms is less expected, although other SJFI work referred to earlier (Poulsen and Folkmann, forthcoming) also shows that, under present conditions of farming, all three organic sectors can be profitable. It may mean that, with high premiums for crops and not for dairy products, the risk for crop farmers to take on this new management system is higher. When a large component of the cost is in investments, as in pig farming, a change in management system could well be a risk considered not worth taking, especially when the returns are high anyway. It may also mean that the assumptions in this report are further from reality than is expected. Total returns for the country as a whole are also shown in Table 5.10, with some details in the different regions in Appendix Table A.5. In total, Denmark received DKr.3.5 billion from the full-time agricultural sector net of costs as indicated in Section 5.2. Most of this came from the pig sector, with Funen and Eastern Jutland the region with the highest contribution. In the light of the earlier discussion on the economic rationale for organic agriculture, with externalities and consumer preferences, it is of interest to discuss the make-up of the returns to farming. In Table 5.11 the gross returns to farming are shown on the national level, both for conventional and organic farms, and decomposed into conventional output prices, sub TABLE 5.11. Gross financial returns, subsidies and premiums per full-time farm at baseline Crop Dairy Pigs ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------927 236 1164 1358 103 1461 2166 168 2334 --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --472 275 190 79 1016 27 936 259 96 45 1336 19 1229 823 129 50 2231 37 ALL SECTORS Source: Derived from SJFI data. 1517 149 1666 -- Pct. -20 7 7 9 934 432 124 53 1543 26 Organic/ conv. Subsidy Total -- Pct. -27 11 8 --Pct.-114 137 106 11 119 - 65 - - 66 - sidies and organic premiums. A regional disaggregation can be found in Appendix Table A.6. When most producers are farming conventionally, the subsidies for conventional farming can be substantial. Indeed, across all sectors per farm subsidies (Dkr.149,000) exceed net returns (Table 5.10), implying that these farmers and tax payers would have been better off in this year had they not been required to produce before collecting the subsidy. Crop farmers topped the list with Dkr.236,000 per farm. Subsidies for dairy farmers also exceeded net returns. Apart from being relatively small in farm size, dairy farmers generally have a lower percentage of area in crops for which subsidies are available, at least compared with crop farms, hence their relatively low total subsidies. In the pig sector net returns in 1995 exceeded subsidies. However, per farm subsidies at Dkr.168,000 are higher per hectare than on crop farms. The low percentage of subsidies on pig farms relative to crop farms is due to the fact that their gross returns (but also input costs) are relatively high. Organic farmers, likewise, receive considerable subsidies, also exceeding net returns per farm in the crop and dairy sectors, but not in the pig sector. Also here it is the crop sector which receives the highest payments per farm. As can be seen in the last column in Table 5.11, total subsidies received by organic farms are on average 37 per cent higher on dairy farms, 14 per cent on crop farms and 6 per cent on pig farms than those on conventional farms. It is noteworthy that, while organic producers receive an additional subsidy because they practise organic management, they claim far less of the compensatory payments (EU subsidies) that flow to conventional farmers. This is because they have less crop and more pasture in their rotation. Regionally, the highest and lowest relative subsidies can be found in Southern and Western Jutland for dairy and pig farming, respectively. The high relative figure in the dairy sector indicates that conventional dairy farmers also have a rotation which does not allow high subsidy payments relative to the other sectors. Organic farmers receive premiums, which are considerably higher than the total subsidies. In all cases the premiums exceed the net returns (Table 5.10), illustrating their importance. In the absence of premiums many farmers would experience negative net returns. In conventional farming there is a correlation between returns to farming and age of the farmer. The average age of the organic dairy farmers was 44, and that of the conventional dairy farmers 48. The difference in returns per farm between these two age groups on conventional farms was DKr.33,000 in 1996 and similar (DKr.32,800) in 1995. As the younger group of farmers manage larger farms, and the comparison between organic and conventional farms in this study is based on farms of equal size, the difference needs to be adjusted for farm size, which yields approximately Dkr.2,000 per year, or DKr.8,000 per 4 - 67 - years age difference in 1996. Comparative figures for 1995 are DKr.2,500 or DKr.10,000 per 4 years of age difference. However, a more important issue is that it is not clear to what the difference in returns is due, which implies that attributing the difference in returns to age per se can be spurious. For example, if the increase in returns is due to the younger age group being more up to date with spraying techniques and knowledge of synthetic pesticides, then a difference in farm returns is not due to age itself, but age is a proxy for education, technology or capital. In this particular case such a difference can’t be expected within the organic farm population. There may be many other reasons why differences in age groups exist, and as long as these are not clearly understood, care should be taken with attributing the farm returns to age per se. Returns to farming are often expressed as returns to capital. Although not included in this study, it is worth pointing out that this variable would show organic agriculture in a more positive light. The reason is that on organic farms in general capital invested per hectare is often lower than on conventional farms. For example, stocking density is lower on organic farms, and investments in buildings (for example in the pig industry) can also be considerably lower. - 68 - - 69 - 6. Moving towards organic agriculture In the baseline version of the model described in the previous section there are essentially two distinct production systems, conventional and organic, each with their different rotations, yields and cost structures. Most of the farmers can be characterised by the conventional methods, and a small number by the alternative approach. Sectoral, regional and national aggregates are obtained by multiplying the costs, production, gross margins, etc. by the number of farms using the particular method. To simulate the effects of an agricultural sector where organic farming methods are widely adopted, in this section different proportions of farms are assumed to follow organic methods. These proportions, 10, 20, etc. to 80 per cent, are the same in each sector and in each region. At each step, production of each crop is aggregated at the national level and a new set of market clearing prices and output levels found. There is no attempt to model the conversion process from the status quo to predominantly organic. For each level of adoption, say 20 or 40 per cent, it is assumed that an equilibrium has been reached. There is no time dimension in the conversion process, and therefore there is no linking of periods in the model. Although variables such as output or gross revenues can be graphed so that a smooth transition appears to occur it should not be assumed that, to achieve the results shown at 80 per cent rate of adoption, the economy would necessarily progress through the previous levels as depicted. In addition, in reality the widespread adoption of organic methods would take several, if not many, years during which time changes in population, tastes and preferences, production technology and other factors would occur. Such factors would influence the model results, but for simplicity are ignored here. It should be noted at this point that the results are likely to be more reliable at the lower rates of adoption. Certain assumption, such as the absence of economies of scale, are less likely to be valid at greater rates of adoption, when larger throughput or demand for inputs would bring forth new technologies and new capital. As a result of these deficiencies, the endpoint for adoption in this study is chosen as 80 per cent. Simulations of this rate of adoption are reported first. 6.1. Inputs The input costs of the different sectors at the national level at 80 per cent adoption of organic agriculture are shown in Table 6.1, together with the percentage differences in costs - 70 - from the baseline. Figure 6.1 shows the input cost per sector graphically. Data for the four regions can be found in Appendix Table B.1. TABLE 6.1. Average input costs at 80 per cent of organic management, by sector Org. Conv. Org./conv. ------- DKr. ‘000 per farm -----VARIABLE COSTS Crop Dairy Pigs FIXED COSTS Crop Dairy Pigs TOTAL Crop Dairy Pigs Org. Conv. Org./conv. ---- percentage of baseline ---- 404 743 1143 528 978 1558 76 76 73 89 91 83 102 103 108 87 88 77 351 398 459 453 522 606 77 76 76 100 100 100 100 100 100 100 100 100 755 1141 1601 981 1500 2164 77 76 74 94 94 87 101 102 106 92 92 82 Source: Derived from SJFI data and own calculations. It is clear, both at the national and regional level, that the changes in relative costs occur mainly in the variable costs. Fixed costs are unchanged because farm size is unaffected. Expenditure on variable inputs is influenced by factors such as the area planted in different crops (each with different input costs per hectare) and costs of feed for livestock. The change in output mix from fodder peas to rapeseed (see Section 6.2) leads to a slight increase in variable costs for crop and dairy producers. The largest changes, both in the organic and conventional system, are in the pig sector. This is explained by the importance of feed in the cost structure of this sector, where animal feed is by far the most important input. With rising conventional prices (see Section 6.4), both conventional and organic pig farmers increase their variable cost. For organic farmers, this effect of a small increase in conventional grain prices is outweighed by the drop in organic premium. Livestock producers now pay lower prices for their feed so that their variable input costs decrease substantially with an increasing number of farmers adopting organic practices. - 71 - FIGURE 6.1: Average input costs by sector at 80 per cent organic management 2500 Dkr '000 per farm 2000 1500 Fixed Variable 1000 500 0 Org Conv Org Conv Org Conv crop crop dairy dairy pig pig In order to illustrate the detailed changes in input costs, Table 6.2 shows details for the dairy sector nationally. Apart from a decrease in feed costs (concentrates), also the cost of seed is affected by the decrease in organic premiums at this level of adoption of organic management. The relative use of pesticides and fertilisers stays the same as compared with the baseline, as it is at a very low level. On average, the variable costs on organic farms decrease to 88 per cent, and the total to 92 per cent of the relative level measured at the baseline. 6.2. Rotations and total land use Land use on conventional farms when 80 per cent of farmers are organic, and total land use combining areas under the different enterprises on conventional and organic farms, are shown in Table 6.3. Regional details can be seen in Appendix Table B.2. A comparison with Table 5.4 (also shown as percentage change in Table 6.3) shows that a change in national emphasis on management practice, with changes in output prices, makes - 72 - TABLE 6.2. Average input costs on dairy farms at 80 per cent of organic management Org. Conv. Org./conv. Org. Conv. Org./conv. ------- DKr. ‘000 per farm ------ ---------- percentage of baseline--------VARIABLE COSTS Seed Fertiliser Manure Pesticides Energy Co2-tax Labour: hired Maintenance: machinery Contract operations Other: plant production Concentrates Roughage Vet. Costs Insemination Other costs: livestock Total 24 1 40 0 25 3 127 63 83 8 165 184 19 9 26 777 22 33 38 18 21 2 100 59 61 7 285 258 27 12 35 978 111 3 108 0 116 109 128 106 135 106 58 71 72 72 76 79 88 100 100 100 100 100 100 100 100 100 77 86 100 100 100 91 100 100 100 100 100 100 100 100 100 100 113 100 100 100 100 103 88 100 100 100 100 100 100 100 100 100 69 86 100 100 100 88 FIXED COSTS Depreciation Labour: family Other Total 125 222 68 416 128 327 67 522 98 68 101 80 100 100 100 100 100 100 100 100 100 100 100 100 1193 1500 79 94 102 92 TOTAL Source: Derived from SJFI data. little difference to rotations on conventional farms. The largest shift, percentage-wise, is in fodder peas, the area of which decreases by 7 per cent as compared with the baseline. There are several reasons for the lack of change. First, the changes in production have little impact on prices received by farmers (see Section 6.5), reflecting the high price elasticities of demand in the model. These price changes in turn affect production only marginally. Together with the fact that prices of substitutes, such as of the main grains, change in the same direction (increase) and magnitude, this provides farmers with little incentive to change the percentage of a particular crop in the rotation. Third, in this version of the model unused milk and sugar beet quotas are not reallocated and expansions of farm area of existing dairy farmers are not permitted. Hence the area under crops grown on conventional farms is 20 per cent of the total when 80 per cent of farmers are organic managers. TABLE 6.3. Crop rotations on full-time conventional farms and total land use for different sectors at 80 per cent of organic management Grains Barley Wheat Rye Peas Sugar Seeds Rapespring winter winter winter fodder Potato beets grass seed Setaside Non- Fodder Grass Grass Silage Silage food beet rotation perm. maize cereal Total ----------------------------------------------------------- percentages of total hectares per farm ------------------------------------------------------ha-CROP ROTATIONS Crop Dairy Pigs Total Crop Dairy Pigs Total 19 20 21 20 4 3 10 5 32 9 32 21 4 2 3 2 3 2 4 3 4 1 2 2 6 1 2 2 6 0 3 2 7 1 8 4 11 7 9 8 2 0 3 1 0 6 0 3 1 20 1 11 2 12 3 7 0 3 0 2 0 13 0 6 104 56 65 68 ------------------------------------------------------------------------- percentage of baseline-----------------------------------------------------------------------98 99 103 96 93 100 100 101 103 96 100 100 100 100 100 100 100 98 99 103 96 93 100 100 101 103 105 100 100 100 100 100 100 100 99 99 103 96 93 100 100 101 103 97 100 100 100 100 100 100 100 98 99 103 96 93 100 100 101 103 99 100 100 100 100 100 100 100 ------------------------------------------------------------------------- ‘000 hectares --------------------------------------------------------------------------------- TOTAL LAND USE Crop Dairy Pigs Total Crop Dairy Pigs Total 159 107 164 430 14 9 22 46 68 32 70 170 32 19 33 84 26 11 21 58 27 12 24 64 7 2 2 11 7 0 3 10 47 16 38 101 66 47 53 167 2 1 3 6 0 12 1 13 118 238 114 471 11 106 15 132 0 15 0 15 2 188 2 191 588 815 566 1969 ------------------------------------------------------------------------- percentage of baseline ----------------------------------------------------------------------139 54 37 140 123 117 20 20 124 102 20 100 3317 100 100 100 100 65 46 46 134 61 140 20 20 170 85 20 24 143 112 55 182 100 135 37 39 206 90 262 20 20 90 103 20 100 2529 100 100 100 100 113 46 41 160 92 173 20 20 128 97 20 75 1996 104 85 127 100 Source: Derived from SJFI data and own calculations. - 73 - - 74 - At the average farm level there are substitutions from rye and fodder peas to winter wheat and rapeseed. Set-aside area stays similar on average, although it increases somewhat in the dairy sector, and decreases in the crop and pig sectors. Although the changes are marginal, they give an indication of the direction to be expected. Changes in rotations on the organic farms occur in a similar fashion to those on conventional farms. Despite the small changes in rotation on conventional farms when 80 per cent of farmers practise organic management, Table 6.3 shows a considerable change in total land use in such a situation. Not surprisingly, the shift is especially towards forage crops, such as pastures and, to a less degree, cereal for silage. Area in spring grains (mainly barley), rye, potatoes, and rapeseed would increase. The winter grains would be grown on less than half of the area used for those crops in 1995. 6.3. Yields and output To simplify the analysis, yields on both the conventional and organic farms are assumed not to change with a changing pattern of farm management. This is probably not realistic for several reasons. First, improvements in technology make it likely that yields will increase both in conventional and organic agriculture in the future. In addition, more experience in organic farming methods would make such improvement especially likely under organic management, at least in the near future. Third, changes in demand for a particular input, for example manure, will change the input price of that input. This will affect the use of that input and demand for other inputs, for example for composted kitchen waste and sewage. Those new developments will affect yields. Nonetheless, the effects on output of a substantial shift to organic agriculture are calculated under present assumptions, and are shown in Table 6.4. Of the grains, only spring barley and fodder peas are produced at approximately the baseline level (89 and 94 per cent of previous levels, respectively). The production of rye, a minor grain, is increased by almost 40 per cent. The production of winter wheat, the single most important grain grown in Denmark in 1995, will decrease to about one third of its volume with a change to organic management on 80 per cent of farms. On the other hand, more feed is produced on organic farms. Total feed units produced increases by 20 per cent as compared with the baseline. The production of grass grown as part of the rotation almost doubles, to some extent replacing permanent grass and fodder beets. The production of cereal silage increases by over 50 per cent. Together with the silage TABLE 6.4. Total crop production on full-time farms with 80 per cent of farms under organic management Grains spring Barley winter Wheat winter Rye winter Peas fodder Potato Sugar beets Seeds grass Rape- Fodder Grass seed beet rotation Grass perm. Silage maize Silage Undercereal sown Eastern Islands Funen and Eastern Jutland Southern and Western Jutland Northern Jutland TOTAL --------------------------------------------- ‘000 tonnes ----------------------------------------- ---------------------- Million feed units ---------------------437 51 308 86 49 144 381 5 33 7 303 28 11 64 9 447 79 292 98 51 193 93 5 32 29 476 75 22 171 26 554 63 198 107 59 364 12 2 28 71 777 160 40 419 64 403 50 183 86 54 233 2 22 49 586 144 24 322 49 1,841 243 981 376 213 933 486 13 116 157 2,142 407 98 975 148 Eastern Islands Funen and Eastern Jutland Southern and Western Jutland Northern Jutland TOTAL ----------------------------------------------------------------------- percentage of baseline ---------------------------------------------------------------------118 41 27 325 257 290 20 20 68 28 753 114 35 172 178 109 33 28 125 128 185 20 20 57 26 263 91 35 186 125 70 41 36 104 80 50 20 20 60 24 137 89 45 140 97 81 40 32 132 57 85 20 63 25 156 81 79 153 107 89 38 30 138 94 81 20 20 62 25 184 88 45 153 107 Source: Derived from SJFI data. Note: 1 feed unit = equivalent to 1 kg barley - 75 - - 76 - maize, this adds up to an increase of 26 per cent in feed units (one feed unit is equivalent to 1 kg of barley). Although livestock intensity is reduced in organic farming, organic farmers tend to feed their livestock more fodder (for example, to pigs). Surplus is supposed to be exported. Pig production changes with the same percentage in each region. This is because the stocking rate on crop and pig farms is taken as a percentage of that on the conventional average farm. Thus, the total production at 80 per cent organic management is 20 per cent (the conventional production) plus 59 per cent (relative stocking rate on crop and pig farms) of 80 per cent (organic production), which is 67 per cent. In the case of milk production the approach, and result, is different. Survey-based data of national organic milk production per hectare are used in each region, that is, yield per hectare on organic dairy farms is assumed to be the same in each region. As the production on conventional dairy farms differs between the regions, so does the relative milk production on organic and conventional farms. A high milk yield on the conventional dairy farm on the Eastern Islands as compared with Jutland, for example, means that the percentage of milk yield on organic farms in that region is low as compared with Jutland. When 80 per cent of farmers farm organically, the total milk production on the Eastern Island is 70 per cent as compared with the baseline. The use of this method of analysis results in an overall reduction of national production of milk by 17 per cent when 80 per cent of farmers are using organic production methods, instead of the 14 per cent observed in Southern and Western Jutland. Relative crop production data are shown in Figure 6.2, which illustrates substantial decreases in sugar beet and grass for seed. The assumption that organic farmers do not grow these crops means that, at an adoption rate of organic agriculture of 80 per cent, production is only at 20 per cent of previous levels. Sugar beet is grown under quota, which has not been reallocated from organic to the remaining conventional farmers. 6.4. Output prices Output prices change for two reasons in particular. One is the change in production affecting the price on the conventional market. Conventional product prices at 80 per cent acceptance of organic methods are shown in Table 6.5, in which also is shown the percentage change of these prices relative to the baseline. For the grains in the conventional market, changes of up to 13 per cent are recorded. Other crops, such as sugar beets and grass for seed, show larger changes, reflecting the absence of these crops in organic rotations. - 77 - FIGURE 6.2: National production relative to baseline at 80 per cent rate of adoption of organic management 100 Rape seed Grass seed beets Sugar Potato Peas Rye Winter wheat - Winter barley 50 Spring grain Per cent 150 Sector The other reason for a change in output prices, at least on organic farms, is the change in organic premium. As mentioned, the premium is assumed to decrease with an increasing number of farmers moving to organic management. With an increase from a negligible number of organic farmers to an increase to 80 per cent, the prices of organic products decrease considerably, for some crops (especially grains) to less than two thirds of the baseline. The least affected are those with the lowest premium at the baseline, such as potatoes and rapeseed. It should be noted that subsidies, both for conventional and organic agriculture, are assumed not to change in this scenario. The sensitivity of the results to a change in subsidy levels, as in conventional output prices and organic premiums, is tested in Section 7.1. TABLE 6.5. Average national output prices at 80 per cent of organic management Grains Barley Wheat Rye Peas Sugar Seeds Rapespring winter winter winter fodder Potato beets grass seed Conventional Organic Conventional Organic Source: SJFI survey and own calculations. 1995 1996 --------------------------------- DKr. per tonne ------------------------------------1069 1106 1114 834 946 882 372 5138 1406 1144 1133 1130 1034 1230 1234 1748 -------------------------------- percentage of baseline ------------------------101 110 113 97 101 101 115 114 105 65 64 61 61 68 77 73 - 78 - 6.5. Returns to farming 6.5.1. Returns at 80 per cent rate of adoption At 80 per cent of farms under organic management, net private returns to farming have changed considerably, as shown in Table 6.6 to be compared with Table 5.10. Regional details are shown in Appendix Table B.3 and can be compared with data in Appendix Table A.5. Returns to conventional crop and pig farmers increase somewhat as compared with the baseline, mainly because of the slight increase in output prices. Whereas in the baseline organic farmers receive higher incomes than their conventionally farming counterparts, at 80 per cent of adoption this is no longer the case. Indeed, average incomes on organic dairy farms are negative in all regions, and in Northern Jutland all sectors record losses. Northern Jutland is the only region where returns on the organic dairy farm are higher (or less negative) than on the conventional farm. TABLE 6.6. Financial net returns per full-time farm and total returns in agriculture at 80 per cent organic management ------- Per farm ----Conv. Org. Crop Dairy Pigs ALL SECTORS ----- DKr. ‘000 ----255 53 -19 -52 325 -18 138 -21 --------- Total ------Conv. Org. Total -------------- DKr. Million ----------289 241 530 -57 -611 -668 569 -127 442 801 -496 304 Source: Derived from SJFI data and model simulations. At 80 per cent adoption of organic management, total net financial returns to agriculture in Denmark are estimated at Dkr.304 million, dramatically down on the Dkr3.5 billion in the baseline. Of this, crops now comprise the major share, although returns are less than half of the baseline levels. The dairy sector makes a significant negative contribution. The pig sector income is decimated. The national returns from organic agriculture are severely depressed. The organic crop sector contributes less to the total returns than the conventional sector, even though it has 4 times the number of farms. Both the organic dairy and pig sectors contribute negatively to the total at that level. Overall, total returns to organic farmers are negative. On a regional - 79 - basis (Appendix Table B.3), total returns to organic agriculture across the three sectors are negative in both regions in Jutland. Gross returns to farming is composed of payments for the products, subsidies for the area under certain crops (both conventional and organic) and product premiums. At the 80 per cent level of organic management, the composition of gross returns is rather different from the baseline (see Table 6.7 as compared with Table 5.11). In Table 6.7 and Appendix Table B.4 the first column under each management heading indicates the contribution to farm returns by the product sales excluding subsidies and, for organic producers, premiums. On organic farms, the premium decreases to 20 per cent of its original level. Subsidies are based on area planted rather than on production, and therefore are not reduced with declining production, although changes in the rotation may change the overall level of subsidies received. However, neither for the conventional, nor for the organic average farm did this change the subsidies. As the total returns decrease considerably on the average organic farm with an increasing number of farms under organic management (due to a decrease in premium) the subsidies become a larger part of the total returns. With conventional farming there is almost no change in this percentage, as the total returns increase only marginally. 6.5.2. Returns at varying rates of adoption It is unlikely that farmers in all sectors and regions would convert to organic methods at similar rates, particularly if negative returns started to appear. It is therefore of interest to identify when the point of negative return may be reached. Table 6.8 and Figure 6.3 show the returns to farming for the different sectors, and the total, at different levels of adoption of organic management. At the 10 per cent rate of adoption, national returns (Dkr.3.6 billion) are actually 3 per cent greater than at the baseline (Dkr.3.48 billion). The national returns become lower only at around 25 per cent of adoption of organic management. The initial increase occurs as unprofitable conventional dairy farmers switch to profitable organic production. In fact, in each sector returns peak between 10 and 30 per cent, and are similar to pre-organic management between 10 and 20 per cent for pig farming, between 20 and 30 per cent on crop farms, and between 40 and 50 per cent on dairy farms 4. 4 Simulations are based on rate of adoption in 10 percentage point increments. Finer increments are of course possible but, given the uncertainties surrounding some of the parameters in the model, would provide spurious accuracy. TABLE 6.7. Gross financial returns, subsidies and premiums per full-time farm at 80 per cent organic management Crop Dairy Pigs ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------1000 236 1238 1378 103 1481 2321 168 2490 --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --485 54 190 79 808 7 948 52 96 45 1141 5 1325 164 129 50 1668 10 ALL SECTORS Crop Dairy Pigs 1589 1737 9 ----- percentage of baseline ----108 100 106 101 100 101 107 100 107 94 99 94 ALL SECTORS Source: Derived from SJFI data. 105 149 -- Pct. -19 7 7 100 104 96 972 14 119 ------------------------ percentage of baseline----------------103 20 100 100 80 101 20 100 100 85 108 20 100 100 75 25 23 27 126 117 134 114 136 107 25 125 100 100 53 --Pct.-114 136 107 7 20 124 -- Pct. -33 12 11 1235 104 86 Org./conv. Subsidy Total 100 80 - 80 - - 81 - TABLE 6.8. Net returns per sector at different rates of adoption of organic management Crop Baseline 10 20 30 40 50 60 70 80 Dairy Pig Total Change ------------------ DKr. ‘000 Million ---------------1,113 -116 2,483 3,480 1,132 -39 2,505 3,598 1,125 -6 2,447 3,566 1,093 -16 2,309 3,387 1,035 -67 2,094 3,062 951 -159 1,801 2,593 839 -290 1,430 1,980 699 -459 979 1,219 530 -668 442 304 -- Pct. -100 103 102 97 88 75 57 35 9 Source: Model simulation. FIGURE 6.3: National net returns at different rates of adoption of organic management 4000 Dkr million 3000 Total 2000 Crop 1000 Dairy 0 -1000 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Pigs -2000 Rate of adoption It should be noted that the age structure of farmers is assumed to be the same as in the baseline, that is, organic producers are somewhat younger than conventional producers at all levels of conversion. In reality, such age differences would level out over time. Therefore, in as far as a difference in farm returns is attributable to age per se (see Section 5.7), the figures tend to underestimate the fall in total income. The main conclusions from this section are that the widespread adoption of organic practices at the current state of technology would involve substantial losses. However, a lesser rate - 82 - of adoption would involve fewer losses, and gains in the early stages of conversion. In the crop sector, gains would be made to over 20 per cent conversion, and in the dairy sector to over 40 per cent. In the pig sector the equivalent stage would be just over 10 per cent. - 83 - 7. Sensitivity analysis and limitations 7.1. Sensitivity analysis DOAP is reasonably detailed and its level of disaggregation provides some assurance as to the robustness of the results. Nonetheless, it is dependent on several assumptions or observations based on limited data. As more data, on yields or prices for example, become available, model results may change. It is useful at this point to assess the sensitivity of the results to changes in the key assumptions. This will provide an indication of the validity of the model and its usefulness as a policy decision tool. In addition, DOAP can also be used to assess the effects of changes in certain policies, such as the use of taxes or subsidies. The results of a change in parameters or policies on net returns on organic farms in the standard are shown in Table 7.1. Impacts on gross returns and the comparative position of subsidies in the standard can be seen in Table 7.2, and the effect on sectoral returns at various rates of adoption of organic methods is shown in general in Table 7.3. These tables are comparable to Table 5.10, Table 5.11 and Table 6.8 which, for ease of comparison, are summarised at the start of the tables in this section. After the analysis, the limitations of the work are discussed. Yields In general, yields are a crucial determinant of overall profitability of farming. Differences between organic and conventional yields in the crop and pig sector are calculated as a percentage of the relative yields in the dairy sector (see Section 4.2.4). The data available in the dairy industry have been taken from two different years (1995 for the conventional data and 1996 for organic). This is not ideal. A second issue is relative yields between organic and conventional production, which are not static, but may change depending on the production circumstances in a particular growing season. For example, yields on conventional farms may be relatively high in wet years, as herbicides and fungicides can limit the damage done by increased weed and disease pressures. Thus, apart from the problem of using yields in two different years (see Section 5.4), there is the difficulty of changing relativities between the two systems in different years. In other words, in order to have a good picture of the relative yields obtained under different conditions, comparison need to be made in a number of years. Analysis of data to be gathered in the future, or even when 1996 data are available for the dairy sector, is likely to result in changes in relative yields from those used in this study. For these reasons, a sensitivity analysis is warranted, and includes a decrease or increase in organic crop yields of 10 percent of the yields in the standard simulation. This means that, where organic yields are 80 per cent of conventional in the standard scenario, - 84 - they are altered to 72 per cent and 88 per cent for this analysis. Livestock yields are unchanged. A difference in crop yields of 10 per cent is worth approximately DKr.60,000 per farm on average for all sectors over the whole of Denmark (see Table 7.1), but varies between sectors and areas (not shown in the tables). As yields of livestock have not been changed, those farms which are most dependent on crops have the biggest change in returns. For example, in crops on the Eastern Islands, the difference is on average over DKr.130,000 per farm; in the pig sector the difference is around DKr.80,000; whereas the dairy sector varies least with changes of around DKr.30,000 per farm. As yields of livestock have not been changed, those farms which are most dependent on crops have the biggest change in returns. In terms of subsidy levels, the change in returns on organic farms means subsidies, which stay the same, become (marginally) higher, or lower, percentage of the total returns (Table 7.2), though the relative subsidies to the different systems stay the same. The effect on returns to the industry as compared with the baseline is shown in Table 7.3. It shows that the total net returns are slightly below 100 per cent at the 10 per cent level of adoption, and are at 84 per cent at 30 per cent of adoption. If yields were to be 10 per cent higher, the returns would be higher for the whole industry up until about the 50 per cent level of adoption of organic management. TABLE 7.1. Financial net returns per full-time farm at baseline in three sectors under different scenarios Scenario Standard Low crop yields High crop yields Rotation Organic feed Low grain prices Low premiums No organic subsidies Low elasticity Source: Model simulations. ----- Crop ----Conv. Org. ------ Dairy ---Conv. Org. ------ Pig -----Conv. Org. -------------------------------------- DKr. ‘000 per farm 197 212 -8 61 284 197 98 -8 31 284 197 338 -8 92 284 197 262 -8 61 284 197 201 -8 40 284 111 150 31 96 440 197 212 -8 61 284 197 133 -8 17 284 197 212 -8 61 284 --- Average --Conv. Org. -------------------------------290 120 159 211 120 98 376 120 226 318 120 178 184 120 114 487 169 224 290 120 159 240 120 107 290 120 159 TABLE 7.2. Gross financial returns, subsidies and premiums per full-time farm at baseline with different scenarios ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------- --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --- -- Pct. -- Org./conv. Subsidy Total -- Pct. -- STANDARD Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 472 936 1229 934 275 259 823 432 190 96 129 124 79 45 50 53 1016 1336 2231 1543 27 19 37 26 27 11 8 11 114 137 106 119 LOW CROP YIELDS Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 399 910 1179 892 234 254 795 413 190 96 129 124 79 45 50 53 902 1305 2153 1481 26 19 37 26 30 11 8 12 114 137 106 119 HIGH CROP YIELDS Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 553 962 1285 979 321 264 854 452 190 96 129 124 79 45 50 53 1143 1366 2318 1609 28 19 37 26 24 10 8 11 114 137 106 119 ROTATION Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 473 936 1234 936 298 259 839 441 216 96 143 133 79 45 50 53 1066 1336 2266 1563 28 19 37 26 28 11 9 12 125 137 115 125 ORGANIC FEED Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 472 936 1229 934 275 259 823 432 190 96 129 124 79 45 50 53 1016 1336 2231 1543 27 19 37 26 27 11 8 11 114 137 106 119 LOW GRAIN PRICES Crop Dairy Pigs Total 819 1333 2095 1463 236 103 168 149 1056 1436 2264 1611 22 7 7 9 424 926 1196 910 236 250 795 411 190 96 129 124 79 45 50 53 929 1317 2170 1498 25 19 37 26 29 11 8 12 114 137 106 119 continued TABLE 7.2. (continued) ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------- --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --- -- Pct. -- Org./conv. Subsidy Total -- Pct. -- LOW PREMIUMS Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 472 936 1229 934 275 259 823 432 190 96 129 124 79 45 50 53 1016 1336 2231 1543 27 19 37 26 27 11 8 11 114 137 106 119 NO ORGANIC SUBSIDIES Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 472 936 1229 934 275 259 823 432 190 96 129 124 0 0 0 0 938 1291 2181 1490 29 20 38 27 20 7 6 8 81 93 77 84 LOW ELASTICITY Crop Dairy Pigs Total 927 1358 2166 1517 236 103 168 149 1164 1461 2334 1666 20 7 7 9 472 936 1229 934 275 259 823 432 190 96 129 124 79 45 50 53 1016 1336 2231 1543 27 19 37 26 27 11 8 11 114 137 106 119 Source: Model simulations. - 85 - - 86 - - 87 - TABLE 7.3. National net returns at different rates of organic management with different scenarios Adoption rate Crop Pct. Dairy Pigs Total Change --------------------- DKr. Million -------------------- -- pct. -- STANDARD 0 10 20 30 40 50 60 70 80 1113 1132 1125 1093 1035 951 839 699 530 -116 -39 -6 -16 -67 -159 -290 -459 -668 2483 2505 2447 2309 2094 1801 1430 979 442 3480 3598 3566 3387 3062 2593 1980 1219 304 100 103 102 97 88 75 57 35 9 LOW CROP YIELDS 0 10 20 30 40 50 60 70 80 1113 1072 1010 927 822 695 546 373 174 -116 -83 -92 -143 -234 -365 -534 -741 -986 2483 2439 2319 2124 1855 1512 1095 599 20 3480 3428 3236 2907 2442 1842 1107 232 -793 100 99 93 84 70 53 32 7 -23 HIGH CROP YIELDS 0 10 20 30 40 50 60 70 80 1113 1199 1253 1277 1270 1231 1161 1058 920 -116 5 80 112 100 48 -46 -178 -349 2483 2578 2588 2514 2357 2118 1797 1393 901 3480 3781 3921 3902 3727 3397 2913 2272 1471 100 109 113 112 107 98 84 65 42 ROTATION 0 10 20 30 40 50 60 70 80 1113 1158 1175 1164 1125 1058 962 836 678 -116 -39 -7 -17 -68 -159 -289 -457 -663 2483 2528 2492 2374 2177 1900 1545 1108 586 3480 3647 3659 3521 3234 2799 2217 1486 601 100 105 105 101 93 80 64 43 17 continued TABLE 7.3. (continued) - 88 - Adoption rate Crop Dairy Pigs Total Change Pct. ORGANIC FEED 0 10 20 30 40 50 60 70 80 ---------------------- DKr. million ------------------- -- pct. -- 1113 1127 1116 1080 1020 935 824 686 519 -116 -68 -59 -87 -149 -246 -375 -535 -727 2483 2420 2293 2105 1856 1549 1184 760 271 3480 3478 3350 3098 2727 2238 1633 910 64 100 100 96 89 78 64 47 26 2 628 660 670 658 624 568 488 385 256 448 525 556 541 482 378 231 41 -192 3846 3913 3891 3780 3580 3291 2911 2437 1866 4922 5098 5117 4979 4685 4236 3630 2863 1930 100 104 104 101 95 86 74 58 39 LOW PREMIUMS 0 10 20 30 40 50 60 70 80 1113 1121 1080 990 853 666 566 462 350 -116 -58 -81 -182 -357 -604 -706 -812 -924 2483 2473 2320 2031 1608 1053 733 392 19 3480 3535 3319 2840 2104 1115 594 42 -556 100 102 95 82 60 32 17 1 -16 NO ORGANIC SUBSIDIES 0 10 20 30 40 50 60 70 80 1113 1088 1037 960 857 728 572 388 174 -116 -104 -137 -212 -329 -487 -683 -919 -1192 2483 2461 2359 2178 1920 1583 1168 673 93 3480 3444 3259 2926 2447 1825 1057 143 -926 100 99 94 84 70 52 30 4 -27 LOW GRAIN PRICES 0 10 20 30 40 50 60 70 80 continued TABLE 7.3. (continued) - 89 - Adoption rate Crop Total Change Pct. LOW ELASTICITY 0 10 20 30 40 50 60 70 80 ---------------------- DKr. million ------------------- -- pct. -- 1113 1154 1168 1154 1112 1041 939 804 632 Dairy -116 -43 -19 -42 -110 -220 -372 -564 -796 Pigs 2483 2558 2540 2432 2233 1945 1565 1087 496 3480 3669 3689 3544 3236 2766 2132 1327 332 100 105 106 102 93 79 61 38 10 Source: Model simulations. Rotations Another variable related to total production is rotations. For the crop and pig farms it is assumed that 25 per cent of their arable land is under pasture in rotation. This is in addition to their area in permanent grass and in land under set-aside arrangements, and represents quite a large proportion of their area. For example, in Southern and Western Jutland, this assumption means that close to 40 per cent of total area is under grass or similar arrangements in any one year (see Table 5.5). A more intensive rotation, where only 15 per cent of the area goes into rotational grass (still leaving close to 30 per cent of the farm uncultivated) sees the average returns per farm increase by DKr.19,000 (Figure 7.1), and the total returns for the whole agricultural sector decrease more slowly than under the standard assumptions (Table 7.3). Compared with the standard scenario, national net returns increase longer, and decrease less sharply at the later stages of adoption of organic practices. With the change in rotation the total premium and (EU) subsidies for organic crop and pig farmers increase as compared with the standard (Table 7.2). Input costs Effects of changes in input costs due to a decrease in demand for those used in conventional farming, and an increase for inputs in organic agriculture were not modelled here. However, there is one input, which is likely to change in price in the not too distant future, that can impact considerably on overall costs and therefore net returns. This is the feed costs in organic agriculture. In the near future, only 80 per cent needs to be from organic sources, but it is likely that this will change to 100 per cent at some stage. The increase of costs for organic farmers in such a case, in this study, is that profitability per farm decreases, especially on pig farms (Table 7.1). On a national level this means that the returns only stay around - 90 - the same level as the standard run for 10 per cent of farmers adopting organic management (Table 7.3). The political climate in Denmark at present makes increases in inputs costs, for example through taxes on fertilisers and pesticides, on conventional farmers possible. Although the effect of such increases could be tested in this model, it would only record the worst-case scenario for conventional farmers, as the model does not allow for changes in management due to changes in input prices. For example, it can be expected that, with increases of pesticide prices, farmers will adopt other practices to cope with pest problems, such as changing their rotations. Work to incorporate such changes is carried out by SJFI at present (Oerum forthcoming). It suffices here to say that such increases would make returns in organic agriculture higher relative to those in conventional agriculture, compared with the standard. Grain prices Output prices are set to change in the EU in the future. Different price levels will influence the two management systems in different ways. A decrease in grain prices by 25 per cent, for example, means that the total returns from farming in Denmark are higher or equal to the baseline until after 30 per cent of adoption of organic management practices (Table 7.3). Note that the baseline under these conditions is considerably higher than with high prices. Nationally, the loss to crop farmers is compensated by the gain to dairy farmers (through their savings on expenses for feed), and especially by gains to pig farmers. As by far their highest cost is on feed, this is hardly surprising. Organic premiums In the standard scenario one determinant of organic output prices, organic premiums, was assumed to decrease by one per cent with every one per cent increase in adoption of organic management. However, premiums may erode at a different pace. For example, in a similar study in Australia, crops were found to receive approximately 15 per cent premium at the baseline. Because of conditions in Australia, where organic agriculture is considerably less popular than in Denmark and a small increase in number of organic farmers could flood the (export) market of certain crops, it was then assumed that the premium decreased by one percentage point for every per cent of farmers changing to organic management (Wynen 1997). Thus, no premium was received when 30 per cent of farmers had converted. In the simulation in this report, premiums are assumed to fall by two per cent for each one per cent increase in adoption, implying that the organic premium is half of the present premium when 25 per cent of farmers have adopted organic management, and zero when the rate of adoption reaches 50 per cent. The results indicate that total returns to farming would still - 91 - increase over the first 10 per cent of adoption of organic agriculture (see Table 7.3), but fall away rather rapidly later. At 30 per cent of adoption (and 40 per cent of the premiums received at present) the returns to farming would be 80 per cent of what they are in the standard situation. At 70 per cent of adoption returns would be negligible. The fall in returns slows after the 50 per cent rate of adoption is reached, illustrating the zero premium at that point. The effect on net returns for the whole industry are quite distinct from those of low yields. With low yields, organic farmers are affected at all levels of adoption. With a rapidly diminishing premium, returns fall more rapidly up until the 50 per cent adoption rate than after this point. Subsidies Although subsidies per hectare for organic production have recently increased, there may be a time when such subsidies are going to be reduced or abolished, especially if or when many farmers adopt organic practices. The abolition of subsidies for organic management per se, other things being equal, would decrease net returns per farm considerably (Table 7.1). Crop farmers suffer most, as their farms are largest. For organic farmers it means that they would receive, on average, 16 per cent less in total subsidies (compensatory payments) than conventional farmers, with dairy farmers closer to the conventional counterparts than the other two sectors (Table 7.2). Nationally, it would mean that only the dairy sector would increase its contribution (or decrease its losses) to the national returns. This would occur to between 0 and 15 per cent of adoption (Table 7.3). The other two sectors would record a loss before 10 per cent adoption. Price elasticity The price elasticities for conventional products are also open to question. Although there are plenty of empirical estimates of the elasticity of demand, they tend to vary somewhat and are subject to policy changes, in particular trade liberalisation, where more open trade generally means less ability to influence prices. The recent move towards decoupled policies (where support is unrelated to current production) is also likely to date the supply elasticities used in this study. The price elasticities of demand used here (10 for most products) tend to be rather high, resulting in a decreased impact from a given production shock (such as caused by many farmers adopting organic management techniques). Many would claim that open markets are not yet the reality, and lower elasticities would be more appropriate. To assess the impact of this assumption, all demand elasticities are reduced by half, and the model re-calibrated to generate the standard baseline prices and quantities. As production falls with the adoption of organic methods, rising prices compensate to a greater extent than in the standard scenario, holding up farm returns somewhat. Hence, adoption of organic - 92 - agriculture increases net returns to the country until over 30 per cent of adoption (see Table 7.3). 7.2. Limitations It should be emphasised that this study is a preliminary assessment of the effect on the primary agricultural sector of widespread adoption of organic farming. A major problem in the analysis is the lack of data for organic farmers in some of the sectors (crop and pigs). Organic dairy farming is practised to the extent that actual data are available, and the results in the baseline for this sector are based on survey results. However, not enough farms are available in this category to stratify on a regional basis, so that national data had to be used, which may be a source of distortion. In the crop and pig sectors, however, survey data were not available, so that a number of assumptions needed to be made, based partly on data available on the conventional farms in their sector, and partly on relativities found between the organic and conventional dairy farms. Questions can be raised about the validity of such an approach, but care has been taken to detail all assumptions, so that the reader can form an opinion about the accuracy of estimates. In the case of manure, in particular, estimates should be treated carefully. It is questionable whether, under widespread adoption of organic farming methods, sufficient manure can be produced to maintain production levels, especially in the crop sector. Due to the many different sources of nutrients this is a complicated question which has not been investigated in this analysis. Consequently, the figures on crop farms in particular should be used with caution. As more producers convert to organic farming these problems may be solved, but at present effects on input prices and production, and thus on the financial results, are not known. As better data become available over time, the accuracy will improve. Looking at the list of farmers presently in the conversion stage (Table 4.1), who are potential inclusions in future surveys, more reliable dairy farm data, especially differentiated on a regional basis, may become available before data from crop and pig farms. In the analysis it has been necessary to use data for 1995 (conventional farms) and 1996 (organic farms). This may have lead to distortions, especially in yields. Lack of data also limits accurate modelling of prices, although 1996-97 data were used to calculate the relative figures for the price premium in the crop and pig sectors. Here the organic price premium is assumed to fall in a linear fashion in proportion to the rate of - 93 - adoption, but there is little empirical basis for this assumption, which is also crucial to the results. A further simplifying assumption is that farmers cannot change their enterprise type. Pig farmers must stay pig farmers, and dairy farmers must produce predominantly milk, even though they can switch between crops within their enterprise. This constraint overstates the costs of the widespread adoption of organic methods. Another limitation concerns quotas. Dairy and sugar quotas are assumed to remain unfilled if organic producers are unable or unwilling to fill them. Ignoring the possibility of quota (and therefore not allowing farmers to carry out the most profitable enterprises) transfer overstates the costs of organic production at the national level. Capital gains and losses incurred by this limitation as well as other capital gains and losses are ignored in this study. The present DOAP does not permit a change in farm size. The average size of existing organic dairy farms presently is considerably larger than the conventional farm. The lower livestock density on organic farms does indicate that optimum-size organic farms could well be larger than conventional farms. To adjust to the requirement in this study that farm sizes be similar, the costs and returns on organic dairy farms are adjusted from the larger organic acreage to the smaller conventional unit. In reality, income per organic farm relative to on a conventional farm is therefore likely to be larger than shown in this study. The number of farms would be reduced. However, the relative farm size may have been influenced by differences in dairy quota allocation between organic and conventional farms. DOAP does not include any provision for endogenous technological change. If organic farming were to become the dominant form of agriculture, production costs would be lowered through innovation and applications of new technology specifically designed for organic methods (see Rosset and Benjamin (1994) for innovations in Cuba under conditions which forced organic management on a large part of agriculture). Constant returns to scale have been assumed both on the input and output side. With greater demand for organic inputs, costs are likely to be reduced. This is even more important on the output side, given that most of the payments by consumers accrue not to the producer but to the processor, wholesaler or retailer (including payments for transport, insurance, packaging, etc.). Organic marketing typically requires individual packaging to reduce the scope for substitution with uncertified products. Economies of size within the marketing sector may well be quite significant over time. For example, packaging is not an - 94 - intrinsic cost of marketing organic products. If marketing costs of organic products could be brought down to conventional levels, final prices for many products would be considerably lower than today. This potential for decreases in consumer prices over time without affecting the producer prices has not been included in estimates in this study. At present, part-time farmers are excluded from the analysis. Part-time farmers are likely to have higher costs of production, but are often better able to maintain their livelihood through off-farm income. Inclusion of these farmers would make the analysis more complete. No work has been carried out on either externalities to farming or the effects on the macro-economic variables. Reduction in production (at 80 per cent conversion to organic farming this is close to one third in pig production, around 15 per cent in milk production and a considerable reduction in crop sales) can be expected to have substantial up- and downstream effects. In addition, the budgetary costs of reduced export restitutions as a result of lower production have not been accounted for in this study. Although they are not a cost to Denmark, they are a cost to taxpayers somewhere, and make products of conventional agriculture cheaper compared with products grown under organic management. In spite of its limitations, there are several useful applications of DOAP that were beyond the scope of the present study. As yet no attempt has been made to find the optimal rate of adoption, nor the optimal way of implementing a given reduction of fertiliser and pesticide use. Without valuing the environmental damage, it would not be possible to calculate the optimal reduction in pollution. However, it is clear that different rates of adoption in different sectors would result in similar environmental impacts at lower costs. An iterative procedure could readily be developed to find the least-cost approach. DOAP is a market-oriented model, and would be useful for assessing the effectiveness of market-based instruments such as taxes and subsidies in different sectors or regions. For example, would an output or input-based organic subsidy be most effective? It could also show the price impacts of certain regulatory constraints such as quotas. However, at this point it lacks substitution between most of the inputs, so in most cases input use responds to shifts in area. In summary, lack of data and the need to make use of assumptions, especially regarding the crop and pig sector, means that the study needs to be seen as a preliminary assessment of the situation of a change towards organic agriculture in Denmark. On the other hand, inherent - 95 - limitations in the model may well have lead to an over-estimation of the costs of organic management. Lack of flexibility between the allocation of quotas, the use of inputs, in changing farm size or between enterprise types, and the absence of technological change are factors which, while possibly small individually, may aggregate to a significant revision of the estimated costs. - 96 - - 97 - 8. Summary and concluding comments 8.1. Summary To assess the effects of a hypothetical widespread adoption of organic practices in Denmark, a four-region, partial equilibrium model of the Danish agricultural sector, DOAP; was constructed. DOAP contains 3 farm sectors, crops, dairy and pigs, and permits farmers to have up to 16 cropping activities. Detailed costs of production are modelled in each sector and region. DOAP contains two production structures, one conventional and one organic, currently representing less than 2 per cent of Danish farms. By exogenously specifying the number of farms using each method of production, the impact of a switch to organic methods on national outputs and farm returns can be estimated. SJFI survey data indicate that conventional and organic dairy farms differ in their physical and financial structure. Most obviously, synthetic fertiliser and pesticide use is minimal on Danish organic farms. What is registered under this heading presumably falls into categories allowed by the national organic standards. The use of certain other inputs such as animal feed and labour is also lower on organic farms. Other input use, including manure and depreciation on machinery, is similar to that on conventional farms. On the output side yields on organic farms in Denmark are lower than those on conventional farms, and thus farmers require a greater land area if they are to maintain per farm production. To maintain a given livestock output, a greater area in fodder production is required. Farmers respond by reducing their production of non-feed crops, such as wheat. At present, organic producers also grow less sugar beets and grass for seed, rapeseed and green peas because of agronomic constraints in the absence of pesticides and because of an absence of organic markets. Financial data indicate that existing organic dairy farmers can outperform conventional farmers. Lower production per hectare (through changes in yields and rotation) on the one hand, and lower production costs and higher output prices (mainly through premiums) on the other, result in favourable net farm income comparisons for farms under organic management. Estimates of organic crop and pig farms suggest a similar story, although yields there are lower and prices for the livestock enterprise are higher than on dairy farms. This performance is turned around over time, as premiums are estimated to fall with increased supply of organic products. This assumes that present conditions of marketing structures (for inputs and outputs) and technology are maintained at present levels. - 98 - The main conclusion from the analysis of the model results is that primary agricultural sector income may stay the same, or rise slightly if less than 25 per cent of Danish farmers across all sectors adopted organic methods, but that considerable losses could accrue if a high percentage of farmers followed this approach. It must be stressed that this estimate is valid under present conditions of input and output prices, level of technology, and estimates in the crop and pig sector and future values. The slight initial gains occur because, according to the latest (1995 and 1996) SJFI survey data in the dairy sector and estimates in the crop and pig sector, organic producers - especially in the dairy sector which comprises half of the total number of organic farmers - are making greater profits than their conventional counterparts. This result of higher net returns per hectare does not hold as more and more farmers convert, because the organic price premiums that currently exist would be substantially or wholly eroded. Considerations of increased knowledge over time in organic management, possibilities in technological change, changes in combination of enterprises, sector and farm size, and especially increased efficiencies in the marketing of organic produce are not properly accounted for here. They are likely to enhance the financial position of organic producers to some extent. If age per se influences financial results, the difference in age between organic and conventional farmers would overestimate the relative financial position of organic farmers. The limitations of the data in the crop and pig sectors call for some caution in interpreting the results. Using the model enabled several factors to be identified as key variables determining costs, production and net returns. The rotational constraints, the yield reductions, subsidies and the existence of the price premium on organic products are main factors. Changes in input prices were not modelled, except where the inputs are outputs (for example fodder crops) used in the livestock enterprise. An exogenous drop in output prices (as can be expected in the organic market) is found to be significant in decreasing the gap between organic and conventional farms at higher rates of conversion. 8.2. Policy implications Given the environmental costs commonly associated with the use of pesticides and fertiliser, governments may conclude that the widespread adoption of organic farming practices are worth encouraging. Good policies should above all be effective, efficient and equitable, and also meet other criteria such as simplicity and transparency. The results of the analysis of the organic industry in this study provide a few guidelines as to how to formulate such a policy in agriculture. Forthcoming SJFI studies will provide further guidelines. - 99 - It should be noted that a geographically limited change, such as increased organic farming in Denmark, creates different effects than if more countries follow the same strategy. A widespread international adoption of organic farming may be expected to put pressure on food supply and prices. Given the present policies there is some merit in moving at least some way towards greater organic production in Denmark, as the first 20 per cent conversion is not likely to make a large difference in net financial returns to farming in any of the sectors. The question is: should the government have a role in stimulating organic agriculture and, if so, how? Optimal policies usually involve tackling the problems as directly as possible. Imposing taxes and charges on the use or disposal of pollutants is the most direct. Taxing inputs to reflect the full cost has the added advantage of showing the true competitiveness of the systems. However, the response to fertiliser and pesticide use to changes in prices has been limited, and farm income can be reduced substantially before the policy objectives are achieved. In the extreme case where there is no price response whatsoever by adjusting the management system, a 100 per cent tax on the cost of fertilisers and pesticides reduces farm income by Dkr.62,000 per farm on average in the model employed in this study. This is a gross over-estimate, however, as assuming no management response is rather unrealistic. What an over-simplification like this shows, though, is that such a policy increases returns to organic farming relative to conventional agriculture. While all tax revenue should be spent as efficiently as possible, regardless of source, political expediency may require that the tax raised be hypothecated to particular uses, such as cleaning up environmental damage. Hypothecated taxes can be given special names, such as ’environmental levy’, to raise awareness of the issue and to promote the objectives of the tax. The use of subsidies to promote organic production is a second best policy, but one with advantages over some regulatory methods. Subsidies encourage those farmers who can most readily convert to organic production to do so, without requiring a similar response from those farmers who would find the transition difficult and expensive. It is not surprising that in Denmark it is mostly dairy producers who have converted to date. However, the subsidies policy does not target environmental damage, so that change does not occur on farms where the most damage is done. In other words, the policy may not be particularly effective in achieving the aim of preventing pollution. The current policy to promote organic agriculture includes the payment of subsidies to farmers involved in organic production. In the 1995 base year, average subsidies per farm - 100 - for full-time organic producers in Denmark amounted to Dkr.177,000, 19 per cent greater than subsidies for conventional farmers (Table 5.11). This includes the special subsidies for organic production paid partly by the national government and partly by the EU, which amounted to Dkr.53,000 per farm in 1995, and compensatory payments (paid by the EU and due to all producers) of Dkr.124,000. Organic farmers receive fewer compensatory payments than conventional farmers (DKr.149,000 per farm) because of their different rotational structure which includes less of the crops with high subsidies. The question here is, though, whether organic farmers will continue to receive subsidies for practising organic management if widespread adoption of these methods occurs. Clearly, the adoption of organic farming methods involves different costs to different agricultural sectors or regions. Whereas the organic dairy sector achieves total returns similar to the conventional sector at over 40 per cent adoption of organic management, the pig sector is estimated to be in a similar situation up until only 15 per cent of conversion. An efficient policy is one that achieves its objectives at least cost. If considering only the differences in production costs and ease of conversion, policies should focus on converting dairy farms first. However, such a policy does not take into account the gains made in environmental terms from conversion in different sectors or regions. In other words, achieving environmental benefits is likely to be increasingly costly. The conversion of the first farms to organic practices would be relatively cheap, and may even result in private financial gains for the first 25 pert cent.. The conversion of the last 10 or 20 per cent would be much more expensive. It is likely that the first farmers to convert to organic agriculture are those who are closest to that management system in any case, with least negative externalities, so that environmental gains made from their conversion are relatively low. It seems probable that the final environmental benefits are the most difficult to achieve, and will therefore need more encouragement than the first. A policy requiring an across-the-board conversion, as modelled in this report, is likely to be inefficient. The cost of practising organic agriculture is probably directly related to the environmental benefits from such a change. If subsidies are to be given, differentiation between the different farm sectors, and probably regions, is likely to be warranted. While sectoral differences are significant, the nature of the data employed here does not allow analysis of regional differences within sectors. Therefore, at this stage of data availability it is difficult to say whether policies encouraging organic agriculture could be applied nationally without undue concern for the differential effects on regional income or employment. - 101 - Funds earmarked for supporting organic agriculture could perhaps more usefully be spent on subsidising research and development (for research needs in organic agriculture, see Wynen (1996) and Krell (1997)). This would have the effect of reducing the productivity losses associated with organic methods at present. Furthermore, Denmark may be able to sell such technology abroad, or at least retain the first mover advantages from being one of the global leaders in organic production methods. Cuba, forced to adopt organic practices in large parts of its agriculture with the change in political winds in the early 1990s, is a good example of developing exportable skills in the area of advanced technology associated with organic agriculture, which can also be exported (Rosset and Benjamin 1994). Another area where governments could play a role is marketing margins. The difference between prices paid by consumers and received by producers is often much higher for organic than conventional produce. Much of this can be attributed to the absence of economies of scale. If the marketing process of organic products can increase its efficiencies, which increased supplies would facilitate, the price premium consumers pay could drop without affecting producer prices. Governments could facilitate such efficiencies by assisting the development of information networks, removing impediments to trade and the like. Perhaps the main area for further work should be the organic price premiums. Little is known about how organic prices will respond as supply increases, yet this is a key variable determining the results. Further research in this area is of prime importance. Where policy changes are contemplated, equity considerations are important: who gains and who loses? With falling organic product prices, and reasonably stable conventional prices in the absence of any real ability to raise prices as production falls in Denmark, present organic producers and suppliers of inputs in conventional agriculture would find themselves bearing the brunt of the burden of the change. Producers who remain conventional growers will gain from the slight increase in prices and possible decrease in prices of fertilisers and pesticides, to the disappointment of the polluter-pays enthusiasts. Present consumers of organic products would benefit from the lower prices, though present consumers of conventional products would lose in financial terms – they would presumably gain in non-financial terms if they decided to change towards purchasing organic products. To the extent that organic farming provides environmental benefits at least cost, it provides an argument for financing through taxes. In summary, an effective, efficient and equitable policy would aim to reduce output of the most damaging pollution in a way that involves least cost. Taxing polluting inputs, with all its problems, is one way to handle pollution from conventional agriculture. Subsidising or- - 102 - ganic production is a second best instrument that nonetheless retains elements of efficiency. Adoption of organic practices occurs especially in the dairy sector at present, where it is safe to assume that costs are least. However, the policy is not particularly effective because the benefits from changes in the dairy sector are likely not to be as great as similar changes in the crop and pig sector. A closer relationship between policy instruments (subsidies) and targets (reduced emissions) would be desirable. The environmental benefits from a move to organic agriculture are likely to be paid for by those farmers who convert, consumers who pay premiums, and taxpayers who provide the necessary support through subsidies. Suppliers of fertiliser and pesticides would find their markets severely reduced. Some degree of adoption of organic agricultural methods presents the possibility of a double dividend – lower environmental costs and lower budgetary costs. Further analysis along the lines outlined in this report, as well as in the area of environmental valuation, will provide the basis for sound policy-making in this controversial area. - 103 - References Danmarks Statistik (1996), Landbrugsstatistik 1995, Copenhagen. EC (1991), Council Regulation (EEC) No 2092/91. Egmont-Florian, D. van (1997), ‘Unsafe drinking water leads to government organic conversion, France’, Ecology and Farming (14), p.25. FAO (1996), ‘Environment, sustainability and trade linkages for basic foodstuffs’, Rome. Finansministeriet (1996), Finanslov 1996, Copenhagen Finansministeriet (1997), Finanslov 1997, §24.23.25.10, Copenhagen. Folkmann, P. and Nørgaard N. (1996), ‘Økonomien ved økologisk svineproduktion – en modelanalyse’, Notat 1996-7, SJFI, Copenhagen. Halberg and Kristensen (1997), ‘Expected crop yield loss when converting to organic dairy farming in Denmark’, Biological Agriculture and Horticulture, 14 (1), February. Heid, P. (1997), ‘Organic farming protects drinking water around Munich, Germany’, Ecology and Farming, (14), p.24. IFOAM (1996), ‘IFOAM Standards’, Tholey-Theley. Krell, R. (ed.) (1997), Biological Farming Research in Europe, REU Technical series No. 54, Proceedings of an Expert Roundtable held in Braunschweig, Germany, 28 June 1997, Food and Agriculture Organization of the United Nations, Rome. Lampkin, N. (1990), Organic Farming, Farming Press, Ipswick, UK. Lampkin, N. and Padel, S. (1994), The Economics of Organic Farming - An International Perspective, CAB International, Wallingford, UK. Nørgaard, N. and Olsen P. (1995), Nye produktionssystemer til svin, report no. 83, SJFI, Copenhagen. OECD (1991), ‘The OECD Ministerial Trade Mandate Model for Policy Analysis: Documentation’, GD (91) 159, Paris. - 104 - Pimentel, D., Acquay, H., Biltonen, M., Rice, P., Silva, M., Nelson, J., Lipner, V., Giordano, S., Horowitz, A. and D'Amore, M. (1993), ‘Assessment of environmental and economic impacts of pesticide use’. In D. Pimentel and H. Lehman (eds.), The Pesticide Question: Environment, Economics and Ethics, Chapman and Hall, New York, pp. 47-84. Plantedirektoratet (1997), ‘Saedskifte- og goedningsplaner Statistik 1995/96’, Ministeriet for Foedevarer, Landbrug og Fiskeri, September, Copenhagen. Poulsen and Folkmann (forthcoming), ‘Produktionsmuligheder og økonomi på økologiske jordbrugsbedrifter – en modelanalyse’, SJFI, Copenhagen. Redman, M. (1996), Industrial agriculture: counting the costs, Soil Association UK. Rosset, P. and Benjamin, M. (eds.) (1994), The Greening of the Revolution – Cuba’s Experiment with Organic Agriculture, Ocean Press, Melbourne. SJFI (1997), Agricultural Price Statistics, Copenhagen, Denmark. SJFI (1997), Landbrugsregnskabsstatistik 1996-1997, Series A, No. 81, Copenhagen, Denmark. SJFI (1998), Regnskabsstatistik for økologisk jordbrug 1996/97, Series G nr. 1, Copenhagen, Denmark. US Department of Agriculture (1980), Report and Recommendations on Organic Farming, US Government Printing Office, Washington D.C. Wynen, E. (1994), 'Bio-dynamic and conventional dairy farming in Victoria: a financial comparison'. Appendix 6 in: D. Small, J. McDonald and B. Wales, Alternative farming practices applicable to the dairy industry, Victorian Department of Agriculture (Kyabram) and the Dairy Research and Development Corporation (Melbourne). Wynen, E. (1996), 'Research Implications of a Paradigm Shift in Agriculture: The Case of Organic Farming', Resource and Environmental Studies, No. 12, Centre for Resource and Environmental Studies, Australian National University, May. Wynen, E. (1997), 'Impact on Australian Broadacre Agriculture of Widespread Adoption of Organic Farming', Resource and Environmental Studies, No. 14, Centre for Resource and Environmental Studies, Australian National University, April. Wynen, E. and Fritz, S. (1987), Sustainable Agriculture: A Viable Alternative. Discussion Paper No. 1, National Association for Sustainable Agriculture, Australia, Sydney. - 105 - Appendix A TABLE A.1. Average input costs under different management systems at baseline, by region and sector ------ Variable costs --Org./ Org. Conv. conv. ------- Fixed costs -----Org./ Org. Conv. conv. ’000 DKr. ---------- Total ----------Org./ Org. Conv. conv. ’000 - Pct. -DKr. -- per farm -- ’000 - Pct. -DKr. -- per farm -- - Pct. -- per farm -- EASTERN ISLANDS Crop Dairy Pigs 460 782 1142 540 971 1139 85 80 100 366 379 446 469 515 576 78 74 77 827 1161 1588 1009 1486 1715 82 78 93 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 434 781 1492 473 909 1457 92 86 102 366 379 446 443 496 585 83 76 76 800 1160 1938 916 1405 2042 87 83 95 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs 451 915 1599 540 957 1557 83 96 103 316 444 492 440 541 645 72 82 76 767 1359 2091 979 1498 2202 78 91 95 NORTHERN JUTLAND Crop Dairy Pigs 473 852 1542 477 951 1506 99 90 102 336 413 467 431 518 607 78 80 77 809 1265 2010 909 1468 2113 89 86 95 Source: Derived from SJFI data and model simulations. . TABLE A.2. Input costs on dairy farms in different regions at baseline -------------- Organic --------------EI FEJ SWJ NJ ----------- Conventional ----------EI FEJ SWJ NJ ----- Organic/conventional -----EI FEJ SWJ NJ ------- DKr. ’000 per farm ------- ------- DKr. ’000 per farm ------- ------------------ Pct. ---------------- VARIABLE COSTS Seed Fertiliser Manure Pesticides Energy Co2-tax Labour: hired Maintenance:machinery Contract operations Other: plant production Concentrates Roughage Vet. Costs Insemination Other costs: livestock Total 25 1 37 25 1 37 29 1 43 27 1 40 25 21 32 20 27 35 24 40 40 21 32 37 99 4 113 126 3 104 125 2 108 132 3 108 23 2 116 57 76 7 194 195 18 8 24 782 23 2 116 57 76 7 194 194 18 8 24 781 26 3 136 67 89 8 227 228 21 9 28 915 25 3 126 62 82 8 212 212 19 8 26 852 22 2 143 78 58 7 235 220 31 18 54 971 19 2 104 61 56 8 251 232 28 13 36 909 23 3 87 58 68 8 238 282 27 12 32 957 21 2 103 57 58 7 277 253 25 10 33 951 101 97 81 73 130 110 83 89 57 43 44 80 117 112 111 94 136 93 77 84 63 61 66 86 115 104 156 116 130 107 96 81 76 77 89 96 119 116 123 110 143 113 77 84 77 83 78 90 FIXED COSTS Depreciation Labour: family Other Total 114 203 62 379 114 203 62 379 134 237 73 444 125 221 68 413 132 297 86 515 122 310 64 496 134 342 65 541 123 327 68 518 86 68 73 74 94 65 97 76 100 69 112 82 101 68 99 80 1161 1160 1359 1265 1486 1405 1498 1468 78 83 91 86 TOTAL Source: Derived from SJFI and model simulations. EI = Eastern Islands FEJ = Funen and Eastern Jutland SWJ = Southern and Western Jutland NJ = Northern Jutland TABLE A.3. Crop rotations and total area per farm at baseline, by region and sector Grains Barley Wheat Rye Peas Sugar Seeds Rapespring winter winter winter fodder Potato Beets grass Seed Non- Fodder Grass Grass Silage Silage Under Food beet rotation perm. maize cereal sown Total --------------------------------------------------------------------------- percentage ------------------------------------------------------------------------------------ - ha - EASTERN ISLANDS Crop Dairy Pigs Setaside 17 18 15 3 3 12 39 20 41 1 0 1 1 1 2 1 0 0 12 11 8 6 1 3 6 2 6 10 6 8 2 0 3 0 4 0 0 10 1 1 7 1 0 7 0 0 9 0 0 6 0 104 51 57 FUNEN AND EASTERN JUTLAND Crop 16 Dairy 17 Pigs 17 6 6 13 33 14 37 5 2 3 3 1 3 1 1 1 3 1 2 9 0 3 7 1 8 12 6 9 2 1 4 0 6 0 0 18 0 2 11 2 0 6 0 0 9 0 1 9 0 103 51 67 SOUTHERN AND WESTERN JUTLAND Crop 27 5 Dairy 21 1 Pigs 31 10 17 6 21 6 2 4 6 2 4 12 2 2 1 0 0 3 0 3 7 1 8 12 7 11 1 0 2 0 6 0 2 23 1 1 11 3 0 3 0 0 14 0 1 13 1 106 59 67 NORTHERN JUTLAND Crop Dairy Pigs 26 6 31 5 2 3 9 3 7 4 1 3 0 0 0 4 0 2 7 1 6 12 7 9 1 1 4 0 6 0 1 21 1 7 13 4 0 1 0 1 14 0 1 11 1 99 55 65 Source: Derived from SJFI data. 20 21 21 3 2 9 - 106 - - 107 - - 108 - TABLE A.4. Regional crop prices at baseline (1995) Grains spring Barley winter Wheat winter Rye winter Peas fodder Potato Sugar beets Seeds grass Rapeseed ------------------------------------------ DKr. per tonne ---------------------------------------EASTERN ISLANDS Crop Dairy Pigs 1203 1075 1120 978 985 1028 987 928 1000 851 781 830 920 1050 857 1319 1319 1293 380 373 367 4752 5135 3647 1422 1301 1232 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 1158 1060 1063 999 989 987 1028 970 1004 914 850 841 947 922 930 718 702 701 367 342 364 3982 4119 4183 1386 1316 1378 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs 1040 1010 1051 1021 1003 1015 1018 971 1018 942 826 890 963 920 985 828 574 682 294 283 334 3923 3612 5215 1375 1302 1295 NORTHERN JUTLAND Crop Dairy Pigs 1085 1011 1011 1076 995 1028 1013 994 988 921 865 909 1018 965 906 1186 1155 709 294 294 294 4909 6056 4249 1440 1354 1398 Source: SJFI surveys. - 109 - TABEL A.5. Financial net returns per farm and total returns in agriculture at the baseline, by region and sector Conventional Organic - DKr. ’000 per farm - Conventional Organic Total -------------- DKr. million -------------- EASTERN ISLANDS Crop Dairy Pigs Total 273 54 264 280 66 347 624 58 384 1066 0 0 0 0 624 58 384 1066 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs Total 178 11 337 200 53 357 251 31 836 1117 0 0 0 0 251 31 836 1117 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs Total 160 0 325 180 62 294 202 -1 762 963 0 0 0 0 202 -1 762 963 NORTHERN JUTLAND Crop Dairy Pigs Total 53 -42 203 72 65 184 37 -204 500 334 0 0 0 0 37 -204 500 334 Source: Derived from SJFI data and model simulations. *= Simulated values, as baseline is assumed to be zero organic management TABLE A.6. Gross financial returns, subsidies and premiums per full-time farm at the baseline, by region and sector ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------- --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --- -- Pct. -- Org./conv. Subsidy Total -- Pct. -- EASTERN ISLANDS Crop Dairy Pigs 1056 1439 1834 227 101 145 1283 1540 1979 18 7 7 524 867 1064 315 232 711 188 87 115 80 41 45 1107 1227 1935 28 19 37 24 10 8 118 127 110 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 844 1322 2205 250 94 174 1094 1416 2379 23 7 7 462 852 1263 268 233 848 193 87 132 77 41 52 1001 1213 2296 27 19 37 27 11 8 108 136 106 SOUTHERN AND WESTERN JUTLAND Crop 903 Dairy 1389 Pigs 2348 236 108 180 1139 1498 2527 21 7 7 423 987 1317 244 284 880 199 102 137 80 48 51 947 1421 2385 26 20 37 29 11 8 118 139 104 NORTHERN JUTLAND Crop Dairy Pigs 241 102 166 962 1426 2316 25 7 7 413 940 1210 217 251 807 176 95 127 74 44 50 881 1330 2194 25 19 37 28 11 8 104 136 107 721 1324 2150 Source: Derived from SJFI data and model simulations. - 110 - - 111 - Appendix B TABLE B.1. Average input costs under different management systems at baseline, by region and sector ------ Variable costs --Org./ Org. Conv. conv. ------- Fixed costs -----Org./ Org. Conv. conv. ’000 DKr. ’000 - Pct. -DKr. -- per farm -EASTERN ISLANDS Crop Dairy Pigs ---------- Total ----------Org./ Org. Conv. conv. ’000 - Pct. -DKr. -- per farm -- - Pct. -- per farm -- 408 709 945 556 1003 1227 73 71 77 366 379 446 472 515 577 78 74 77 774 1088 1391 1027 1518 1803 75 72 77 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 388 707 1234 486 941 1572 80 75 79 366 379 445 445 496 586 82 76 76 753 1086 1680 931 1437 2158 81 76 78 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs 400 829 1322 550 987 1678 73 84 79 315 444 492 439 540 645 72 82 76 715 1272 1814 989 1527 2324 72 83 78 NORTHERN JUTLAND Crop Dairy Pigs 433 771 1279 486 985 1625 89 78 79 335 413 467 432 517 607 78 80 77 768 1184 1746 918 1502 2232 84 79 78 --------------------------------------------- percentage of baseline----------------------------EASTERN ISLANDS Crop Dairy Pigs 89 91 83 103 103 108 86 88 77 100 100 100 101 100 100 99 100 100 94 94 88 102 102 105 92 92 83 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 89 91 83 103 104 108 87 87 77 100 100 100 100 100 100 99 100 100 94 94 87 102 102 106 93 92 82 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs 89 91 83 102 103 108 87 88 77 100 100 100 100 100 100 100 100 100 93 94 87 101 102 106 92 92 82 NORTHERN JUTLAND Crop Dairy Pigs 91 90 83 102 104 108 90 87 77 100 100 100 100 100 100 100 100 100 95 94 87 101 102 106 94 92 82 Source: Model simulations. TABLE B.2. Crop rotations and total area per farm at 80 per cent organic management, by region and sector Grains Barley Wheat Rye Peas Sugar Seeds Rapespring winter winter winter fodder Potato Beets grass Seed Non- Fodder Grass Grass Silage Silage Under Food beet rotation perm. maize cereal sown Total --------------------------------------------------------------------------- percentage ------------------------------------------------------------------------------------ - ha - EASTERN ISLANDS Crop Dairy Pigs Setaside 16 18 14 3 3 11 40 20 42 1 0 1 1 1 2 1 0 0 12 11 8 6 1 3 6 2 6 9 6 7 2 0 3 0 4 0 0 10 1 1 7 1 0 7 0 0 9 0 0 6 0 104 51 57 FUNEN AND EASTERN JUTLAND Crop 16 Dairy 17 Pigs 16 6 6 12 34 15 38 5 2 2 3 1 3 1 1 1 4 1 2 9 0 3 7 1 9 11 6 8 2 1 4 0 6 0 0 18 0 2 11 2 0 6 0 0 9 0 1 9 0 103 51 67 SOUTHERN AND WESTERN JUTLAND Crop 27 5 Dairy 21 1 Pigs 30 10 17 6 22 6 2 4 5 2 3 12 2 2 1 0 0 3 0 3 8 1 9 12 7 11 1 0 2 0 6 0 2 23 1 1 11 3 0 3 0 0 14 0 1 13 1 106 59 67 NORTHERN JUTLAND Crop Dairy Pigs 27 7 32 5 2 3 8 3 7 4 1 3 0 0 0 4 0 2 7 1 6 12 8 9 1 1 4 0 6 0 1 21 1 7 13 4 0 1 0 1 14 0 1 11 1 99 55 65 Source: Derived from SJFI data. 19 20 21 3 2 9 - 112 - - 113 - TABEL B.3. Financial net returns per full-time farm and total returns in agriculture at 80 per cent of organic management, by region and sector Conventional Organic - DKr. ’000 per farm - Conventional Organic Total -------------- DKr. million -------------- EASTERN ISLANDS Crop Dairy Pigs Total 357 61 325 95 -35 54 163 13 95 270 173 -30 63 206 336 -17 157 476 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs Total 236 3 391 45 -48 35 66 2 194 262 50 -112 70 8 117 -111 264 270 SOUTHERN AND WESTERN JUTLAND Crop Dairy Pigs Total 190 -12 354 48 -65 -31 48 -14 166 200 49 -305 -58 -314 97 -319 108 -115 NORTHERN JUTLAND Crop Dairy Pigs Total 81 -59 232 -55 -42 -102 11 -57 115 69 -31 -164 -201 -396 -20 -221 -87 -327 Source: Derived from SJFI data and model simulations. TABLE B.4. Gross financial returns, subsidies and premiums per full-time farm at 80 per cent organic management, by region and sector ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total -------- DKr. ‘000 per farm -------- --------------------- DKr. ‘000 per farm ----------------------- -- Pct. --- -- Pct. -- Org./conv. Subsidy Total -- Pct. -- EASTERN ISLANDS Crop Dairy Pigs 1158 1478 1984 226 101 145 1384 1579 2128 16 6 7 538 878 1143 62 46 142 188 87 115 80 41 45 868 1053 1445 7 4 10 31 12 11 119 127 111 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 917 1346 2375 250 94 174 1167 1440 2549 21 7 7 475 863 1362 53 46 169 193 87 132 77 41 52 798 1038 1715 7 4 10 34 12 11 108 136 106 SOUTHERN AND WESTERN JUTLAND Crop 943 Dairy 1407 Pigs 2497 236 108 180 1179 1515 2677 20 7 7 435 1000 1420 48 57 175 199 102 137 80 48 51 763 1207 1783 6 5 10 37 12 11 118 138 104 NOTHERN JUTLAND Crop Dairy Pigs 240 102 166 999 1443 2464 24 7 7 421 952 1306 42 50 161 176 95 127 74 44 50 713 1141 1644 6 4 10 35 12 11 104 136 107 continued 758 1340 2299 TABLE B.4. (continued) ------------------- Conventional -----------------Subsidy/ Enterprise Subsidy Total Total ------------------------------------------ Organic --------------------------------------------Subsidy Subsidy Premium/ Subsidy/ Enterprise Premium Conv. Organic Total Total Total Org./conv. Subsidy Total ------------------------------------------------------------------------ Percentage of baseline --------------------------------------------------------------------EASTERN ISLANDS Crop Dairy Pigs 110 103 108 100 100 100 108 103 108 93 98 93 103 101 107 20 20 20 100 100 100 100 100 100 78 86 75 25 23 27 255 233 268 200 200 200 FUNEN AND EASTERN JUTLAND Crop Dairy Pigs 109 102 108 100 100 100 107 102 107 94 98 93 103 101 108 20 20 20 100 100 100 100 100 100 80 86 75 25 23 27 251 234 268 200 200 200 SOUTHERN AND WESTERN JUTLAND Crop 104 Dairy 101 Pigs 106 100 100 100 103 101 106 97 99 94 103 101 108 20 20 20 100 100 100 100 100 100 81 85 75 25 24 27 248 235 268 200 200 200 NOTHERN JUTLAND Crop Dairy Pigs 100 100 100 104 101 106 96 99 94 102 101 108 19 20 20 100 100 100 100 100 100 81 86 75 24 23 27 247 233 267 200 200 200 105 101 107 Source: Derived from SJFI data and model simulations. - 114 - - 115 - - 116 -
