Conversion to Organic Farm Management: A Dynamic Programming
Approach
Timothy A. Delbridge1 and Robert P. King
1
1Department of Applied Economics, University of Minnesota, St. Paul, Minnesota, USA.
Selected Poster prepared for presentation at the Agricultural & Applied Economics
Association’s 2012 AAEA Annual Meeting,
Seattle, Washington, August 12-14, 2012.
Copyright 2012 by Delbridge and King. All rights reserved. Readers may make verbatim copies of
this document for non-commercial purposes by any means, provided this copyright notice appears on
all such copies.
Introduction
Conversion to Organic Farm Management:
A Dynamic Programming Approach
Timothy A. Delbridge* and Robert P. King
Department of Applied Economics, University of Minnesota
*Email: [email protected]
Results: Transition Thresholds
In general, organic transition is more attractive when conventional returns are low.
There is also a range of conventional returns which results in both organic and
conventional farms maintaining their current system. Then, at higher levels of
conventional returns, it becomes profitable to farm conventionally even if the farm is
already certified organic (i.e. reverse transition). For farm size scenario #1, organic
transition will be started at higher levels of conventional returns than the other farm
size scenarios, and reverse transition will occur only at very high levels of
conventional returns. A $50 per acre subsidy received only during transition years
results in a narrowing of the band of inaction for all farm sizes while a $50 per acre
subsidy on organically managed land (including transition years) shifts the band of
inaction to higher levels of conventional returns (i.e. encourages transition). When
receipt of both the transition and organic subsidies is possible, the band of inaction
widens and shifts right. That is, in this scenario, there is only a small range of very
high conventional returns that will result in reverse transition.
Methods (cont.)
Based on updated results from Delbridge et al. (2011b) we consider
three farm size scenarios (See table right). These scenarios reflect
differences in organic and conventional farm size due to the differing
labor and management requirements of the two systems. Constant
absolute risk aversion is assumed with a coefficient of 0.000005, which
represents a risk premium of approximately 25% for the mid-sized farm
scenario. Overhead costs for both systems are averages from similar
organic and conventional farms in Minnesota (FINBIN, 2011).
Previous studies have found that organic cropping
systems have greater per-acre returns than conventional
rotations in the Midwest (Lockeretz et al. 1978; Delate et
al. 2003; Chavas, Posner, and Hedtcke 2009; Delbridge
et al. 2011a). Noting that relatively few conventional crop
farms have adopted organic management despite these
higher net returns, other studies have attempted to
model the decision to undertake farm conversion (Acs et
al. 2009; Wossink and Kuminoff 2010). This study
advances this literature by using long term trial data on
organic and conventional crop rotations and recent
results on the differing management requirements for
these two systems (Delbridge et al. 2011b), to more
realistically model the decision to convert to organic crop
production in the Midwestern U.S.
This study uses 18 years of agricultural trial data along
with empirical whole-farm cost data to model the
relationship between organic, conventional, and
transitional returns to crop management and investigate
the degree to which policy and farm size affect the rate
of organic conversion. Specifically, our objectives are:
1. Determine the steady state probability of organic
transition for various farm sizes.
2. Investigate how the likelihood of transition might be
affected by incentives for transitioning farmers or fully
organic farmers.
3. Compare steady state outcomes with short-run
transition probabilities for different “starting points”
Conclusions Even though the 4 year organic rotation has a higher average net return than the conventional 2 year system, the costly transition period and the
uncertainty of future returns lessen the probability of a farm transitioning to the more profitable organic system. When conventional returns are
high, as they have been in recent years, not only does the probability of organic transition decrease, but the optimal decision can be to abandon
organic management. Potential subsidy policies to encourage organic transition are shown to be effective, though simply subsidizing farms during
the 3-yr transition has much less impact than a subsidy on all organically managed acres.
1. Acs, S., P. Berensten, R. Huirne, and M. van Asseldonk. 2009. Effect of yield and price risk on conversion from conventional to organic farming. Australian Journal of Agricultural and Resource Economics. 53:
393-411.
2. Chavas, J-P., J.L. Posner, and J.L. Hedtcke. 2009. Organic and conventional production systems in the Wisconsin integrated cropping systems trial: II. Economic and risk analysis 1993-2006. Agron. J. 101:288-
295.
3. Delate, K., M. Duffy, C. Chase, A. Holste, H. Friedrich, and N. Wantate. 2003. An economic comparison of organic and conventional grain crops in a long-term agroecological research (LTAR) site in Iowa. Am. J.
of Altern. Agric. 18:59-69.
4. Delbridge, T.A., J.A. Coulter, R.P. King, C.C. Sheaffer, and D.L. Wyse. 2011a. Economic Performance of Long-Term Organic and Conventional Cropping Systems in Minnesota. Agron. J. 103:1372-1382.
5. Delbridge, T.A., C. Fernholz, R.P. King, and W. Lazarus. 2011b. A Whole-Farm Profitability Analysis of Organic and Conventional Cropping Systems. Available at:
http://ageconsearch.umn.edu/bitstream/103790/2/Delbridge%20AAEA%202011%20v2.pdf.
6. Kuminoff, N.V., and A. Wossink. 2010. Why isn’t more U.S. farmland organic? Journal of Agricultural Economics. 61(2):240-258.
7. Lockeretz, W., G. Shearer, and D.H. Kohl. 1981. Organic Farming in the Corn Belt. Science. 211:540-547.
8. Miranda M.J., and P. Fackler. Applied Computational Economics and Finance. The MIT Press, 2002.
Results: Steady State Transition
Under all three subsidy scenarios, farm size #1 (in which the organic and conventional farms are both 320
acres) has a higher probability of transition than the other farm size scenarios. Farm size scenarios #2 and
#3 have nearly equal transition probabilities. The net effect of the transition subsidy in the steady state is to
encourage transition, though the effect is small compared to that of a subsidy on all organically managed
acres. Including both of the subsidies at the same time, which is equivalent to a $100 per acre subsidy during
transition years and a $50 per acre subsidy thereafter, has an effect substantially larger than the sum of the
individual subsidy effects.
Results: Short-term Transition
Unlike the probability of organic transition in the steady state, the probability of transition in the short-run (10 years) is affected by the initial
value of the conventional system’s returns. Because higher conventional returns make organic transition less attractive, the transition
probabilities decrease as the model’s initial conventional return value increases. Just as in the long-run, short-run transition probabilities
increase with the transition and organic subsidies, though the impact of each depends on the initial value of conventional returns. For all farm
sizes, the higher the initial value, the smaller the impact of the subsidy. For example, for farm size #2, the organic subsidy increases the
probability of transition by 0.18 when the initial return level is $450 but by only 0.09 when the initial level is $750. As in the steady state we see
that for all three farm size scenarios, the transition subsidy has a much stronger effect in conjunction with the organic subsidy than alone.
Objectives
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1993 1998 2003 2008
Org
ani
c : C
onv
ent
iona
l Ra
tio
Gross Returns to Organic and Conventional Rotations
2006 Prices
2007 Prices
2008 Prices
2009 Prices
2010 Prices
Crop rotation Total Crop Acres
Size #1 Size #2 Size #3
Organic 4-yr 320 560 800
Conventional 2-yr 320 880 1,360
Methods Net returns to management are calculated for a four-
year organic crop rotation (corn-soybean-oat/alfalfa-
alfalfa) and a two-year conventional rotation (corn-
soybean) using yield and management data from a side-
by-side cropping systems trial and 5 years of recent
commodity prices. Trial yields of organic corn and
soybean are reduced by 25% to more closely reflect
state average yields. We use these data series to model
the stochastic processes underlying net returns to
conventional and organic crop management.
Conventional returns are modeled as a mean reverting
stochastic process while organic and transitional returns
are modeled as linear functions of conventional returns.
We frame the transition decision as a dynamic programming problem that identifies an optimal conversion policy that is
sensitive to current cropping returns. The model is solved using dynamic programming software developed by Miranda and
Fackler (2002). In contrast to the comparison of each system’s net present value, this method allows for the role of
uncertainty and sunk costs (i.e. low transitional returns) in the decision of whether or not to convert. The model also allows
for two-way conversion to account for the fact that organic farmers can, and do, revert to conventional crop management
under some market conditions.
$450 $600 $750
Starting value of the conventional system return ($/acre)
Probability of transition within 10 years without
subsidies
0%10%20%30%40%50%60%70%80%90%
100%
$450 $600 $750
Farm Size 1
Farm Size 2
Farm Size 3
Starting value of the conventional
system return ($/acre)
$450 $600 $750
Starting value of the conventional system return ($/acre)
Probability of transition within 10 years given a
$50 organic subsidy
0%10%20%30%40%50%60%70%80%90%
100%
$450 $600 $750
Starting value of the conventional system return ($/acre)
Probability of transition within 10 years given both
subsidies
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
No subsidy Transition subsidy Organic subsidy Both subsidies
Probability of Transition to Organic System (steady state)
Farm Size 1
Farm Size 2
Farm Size 3
Probability of transition
within 10 years given a
$50 transition subsidy
Both subsidiesOrganic subsidyTransition subsidyNo subsidy
Both subsidiesOrganic subsidyTransition subsidyNo subsidy
Both subsidiesOrganic subsidyTransition subsidyNo subsidy
$300 $400 $500 $600 $700 $800
Farm Size1
Farm Size2
Farm Size3
Critical Values of Conventional Net Returns
Organic management Continue with current system Conventional management
We consider four policy scenarios which represent different levels of support for
organic and transitioning farmers. In addition to the baseline scenario in which no
subsidies are received by either system, there is a transition subsidy of $50 per acre.
This roughly mimics programs such as USDA’s EQIP program, which helps offset the
costs of conservation investments. The organic subsidy scenario, which is $50 per
acre for all land managed organically (including transition acres) is roughly similar to
conservation programs like CSP which provides an ongoing payment for eco-system
services. Finally, we consider a scenario in which both subsidies are received.