Financial Planning Tools for Farmers
by Matt Leavitt Organic Lead / Agronomist Albert Lea Seed
The decision to transition to organic production can be a complicated one. The steady price premiums are attractive, especially to those operations staring down another year of declining net farm income. However, transition is a 36-month process, a wide moat by design to ensure the longevity of certified operations, lessen the impact of carryover chemistry, and help protect the stability of the organic market. There are new tools to purchase and learn, new methods and principles to incorporate, new crops to grow, a separate marketing system to untangle, and new places to go for inputs.
Convincing long-term data sets from Iowa State show that certified organic operations can be more profitable, have lower input costs, and produce comparable yields to the average conventional farm. But every producer in the process needs to answer the question: does the transition to certified organic pencil out for my farm?
The Allure of Organic Commodity Prices
The premium has varied over time, but it is relatively stable in comparison to the conventional agricultural commodities market, which has more pronounced boom-and-bust cycles.
While those prices are appealing, the transition process is not easy, and growers making the transition need to budget for two to three crop seasons where they’re following organic practices, fighting weeds without chemistry, potentially garnering lower yields, and not being paid organic prices. Corn and soybeans are the biggest moneymakers but most certifiers require at least a three-crop rotation where you’ll have to market less lucrative crops like oats, small grains or forages.
Take time to run the numbers before you dive in. Below are just a few considerations.
Minimizing Financial Impacts During Three-Year Transition Period
A farm is eligible for certification 36 months after the last application of a prohibited substance under the National Organic Standards, which includes fungicides, insecticides, herbicides, synthetic fertility, non-approved seed treatments, and genetically modified seed. The farm must then be inspected by a third-party accredited certification agency that ensures the systems in place conform to the Organic regulations under the National Organic Program (NOP). That 36 months can start in the middle of the growing season, so a crop planted in transition can be harvested as certified organic if enacted at the right time; amounting to two planting seasons in transition.
It’s never too early to contact a certifier if you’re thinking about transitioning. Make sure you’re keeping the right records and following the right practices to keep you eligible and in compliance.
It’s also a good idea to think through crop rotations and start contacting marketers when transitioning. If it’s feasible, avoiding transitional corn can be a benefit. Growers have had success with non-GMO soybeans in year one, rotating to small grains with an underseeding of plowdown legumes in year two to set-up corn planting/harvest as certified organic in year three; though the optimal crop rotation for your farm will vary.
Check out our list of potential buyers of organic & non-GMO corn, soybeans, and cereal grains here:
Some buyers are offering small premiums for non-GMO and transitional grain to help offset the potential financial impact of the transition period. For example, see Anheuser-Busch’s Contract for Change for transitioning barley farmers.
If you can make it financially viable, planting hay is a great way to transition while keeping costs low. University of Wisconsin-Madison Center for Integrated Agricultural Systems (CIAS) and Organic Grain Resource and Information Network (OGRAIN) have some numbers on those scenarios.
Cost of the Learning Curve
To become (and remain) a certified organic farm, it won’t be “business as usual”; there is no easy button in organic and no co-op to call. Farmers new to organic production will have to consider alternative options for weed and pest management, including potential machinery costs and the cost of labor in a more time-intensive system.
Cost of Organic Inputs
Transitioning to certified organic production is more than just substituting conventional inputs for organically approved ones. To be successful, there needs to be a mindset shift away from inputs to one that considers the whole of a farm system. You might hear it said elsewhere: you cannot input your way to success in organic production.
You’ll need to find alternate sources of feed, seed, and fertilizer as well. All inputs used on the farm must either be certified organic or approved for use in organic. Farmers can expect to pay upwards of 30 to 60 percent more for organic-certified seed compared to conventional, non-GMO seed – but, it’s important to note that organic seed is cheaper than genetically modified seed.
Cost of Organic Certification
The annual price tag of maintaining certification paperwork and the cost of inspection range between $750 and $1,500 per certification category; however, some of these costs may be offset by a federal Organic Certification Cost Share Program (OCCSP), which may cover up to 75% of the annual cost, to a maximum of $750 or ¾ the costs of certification.
Before You Transition to Organic: Enterprise Budget Tools for Organic Crops
When it comes to number-crunching for year-end planning, spreadsheet templates are incredibly handy. We’ve identified several free spreadsheet tools that will help you determine your costs and returns from a transition year one to organic certification.
- The Organic Grain Resource and Information Network (OGRAIN) also has developed a free, robust financial planning spreadsheet called the OGRAIN Compass to help farmers forecast the payback from a multi-year transition to organic production.
- Michigan State University Extension offers the free Organic Grain Crop Enterprise Budgets spreadsheet
- Penn State Extension’s Organic Grain Crop Enterprise Budgets is a free tool that estimates income and costs within a single year of organic grain production and over a three-year rotation of organic grain crops (including cover crops).
- Iowa State University Extension and Outreach (ISU) has many Crop Decision Tools, including four specifically geared to organic crop production: Organic Corn, Organic Soybeans, Organic Oats, and Organic Alfalfa.
We also highly recommend the online document Turning Grain Into Dough: Farm Financial Management for Organic Grain and Crop Rotation from UW-Madison CIAS & OGRAIN for an overarching perspective on the decision to transition.
Paul Dietmann, Senior Lending Officer for Compeer Financial, the author of Turning Grain Into Dough, is a wealth of knowledge on the financials of transition and enterprise budgeting.
University of Minnesota & SARE put together an excellent business planning guide to assist those in transition as well as a spotlight on 10 operations that made the switch.
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