The financial performance including input and output costs were analysed for two commercial Scottish farms converting to organic production. A comparative analysis for a five year period is provided using data from the Scottish Farm Accounts scheme, and demonstrates that both conversions had positive financial outcomes. Both farms applied strategic changes to their businesses

Daniel, C

Edwards, I E

Robertson, J F

English

Organic Eprints

Aspects of Applied Biology 79, 2006What will organic farming deliver? COR 2006145Five-year ﬁ  nancial analysis of two commercial farms converting to organic: 2000-2005J F ROBERTSON1, C DANIEL2 & I E EDWARDS11School of Biological Science, University of Aberdeen, AB24 3RY, Scotland2North Lodge, Ardo, Whitecairns, Aberdeen AB23 8XN, ScotlandSummary  The ﬁ  nancial performance including input and output costs were analysed for two commercial Scottish farms converting to organic production.  A comparative analysis for a ﬁ  ve year period is provided using data from the Scottish Farm Accounts scheme, and demonstrates that both conversions had positive ﬁ  nancial outcomes.  Both farms applied strategic changes to their businesses.  Key words: Organic conversion, ﬁ  nance, dairy, general croppingIntroduction There was substantial enthusiasm for organic production in the UK in the late 1990’s, supported by a new regime of organic aid payments as subsidies, retailer pressure for supplies to ﬁ  ll a growing niche market, and concern in the conventional production sector about the small margins in commodity products. Market analysts were predicting signiﬁ  cant growth per annum in sales of organic products, and the various UK organic quality assurance schemes were keen to recruit new farmer members. The number of registered UK organic producers rose from 2,322 in 1999 to 4,057 in 2002 (Lampkin et al., 2004).  Farmers were encouraged to convert to organic production methods, and the retailers and the supporters of organic foods, particularly the Soil Association, were involved in promoting organic food consumption. However, a positive ﬁ  nancial outcome for producers was always at risk. There had been no planning to match supply and demand in the UK organic sector, and the production sector was seldom involved in coordinated marketing strategies. Conversion to organic production routinely takes two years, with signiﬁ  cant impact on cash ﬂ  ows at farm level before returns improve once organic produce are available for sale with organic premiums. The maintenance of premiums was essential to justify the changes required at farm level, but it was not long before some of the premiums disappeared as the inﬂ  ux of producers who entered the organic aid scheme became producers of certiﬁ  ed organic products. The 9 p per litre premium for organic milk disappeared in 2003 when supply caught up and passed demand.The University of Aberdeen collaborated from 2000 to 2005 with two commercial farms in Scotland that were converting to organic production. The projects covered a range of scientiﬁ  c, technical and production issues, and the ﬁ  nancial aspects of the farm conversions were monitored.   Edwards & Robertson (2003) reported ﬁ  nancial information from the conversion periods of both farms, and highlighted the need for the OAS to maintain income during the conversion period.   146There was also the need to consider the mix of enterprises on farm and the structure of the business, with possible restructuring helping to release capital and/or reduce ﬁ  xed costs. The following paper gives detail on speciﬁ  c aspects of the ﬁ  nancial performance of the farms over 5 years from the start of conversion, and compares the ﬁ  nancial performances with standardised farm management data from the same period.Materials and MethodsFarm 1 is a mixed unit on Grade 3 land (Bibby et al., 1991) near Dundee in east Scotland, with cereals, seed potatoes, beef and sheep. The farm has used a seven year rotation of 4 years grass, potatoes, vegetables, and undersown barley. Farm 2 is a dairy unit also on Grade 3 land, near Dumfries in southwest Scotland, all in grass or whole crop cereals. Farm cash book records, balance sheet information and records from the tax accounts from both farms were compiled to produce management accounts according to the procedures of the Scottish Executive Farm Accounts Scheme (FAS). The FAS allows comparison of individual farm accounts with a range of average accounts, grouped by farm scale and type. Accounts are adjusted to take out the inﬂ  uence of the individual family labour, land ownership or tenancy, and capital situations.  The assumptions are that all land is tenanted, with rental charged on owned land, that all family labour is charged at manual wage rates on hours worked, and that all interest charges are excluded. Data from farm 1 has been compared with the FAS data for each relevant year for general cropping farms – Scotland, as published in the Farm Management Handbook series (SAC, 2005).  Data from farm 2 has been compared with the FAS data for dairy farms – Scotland.ResultsTable 1.  Summary of physical data from the project farmsFarm 1 Farm 2Year 1999 2004 2000 2004CropsBarley 29.6 3.6 - -Potatoes 31.9 32.4 - -Other cash crops - 32.0* - -Set aside/fallow 25.9 0 - -Roots & arable fodder 3.8 5.7 - -Arable silage - - 14.5 29.0Grass - silage 20.5 33.8 80.2 71.6Grass - grazing 32.2 44.8 85.5 79.1Total cropping 143.9 152.3 180.2 179.7Total adj. ha 144.2 152.6 180.2 179.7LivestockAdults cows 64 52 298 216Cattle > 2 yrs 13 4 28 46Cattle 1–2 yrs 37 55 156 41Cattle < 1yr 59 40 171 67Ewes 198 200 - -Other sheep 205 259 - -Total grazing livestock units 140 134 479.9 301.5GLU’s/forage ha 2.46 1.6 2.66 1.68* including rented ground147The physical data from both farms is in Table 1, showing the change in the crop and livestock resources from the time of entry into the conversion period until 2004, when both farms were fully organic. The major changes in farm 1 were a move out of set-aside (which had been part of the planning for conversion) into other cash crops (mostly organic vegetables), and a change from cereals to more grass.  Both farms needed a signiﬁ  cant reduction in livestock numbers to meet organic standards, with grazing livestock units (GLU’s) per forage hectare reduced from 2.46 to 1.60 on farm 1, and 2.66 to 1.68 on farm 2. Farm 2 increased arable silage area from 14.5 ha to 29.0 ha, reﬂ  ecting the need to produce more feed and especially protein on farm.The average physical data from the other units in the FAS scheme, which were all conventional units is summarised in Table 2. Farm 1 was classiﬁ  ed as a general cropping farm because more than two thirds of the total standard gross margin came from all crops, reﬂ  ecting the higher than average area of potatoes. However farm 1 carried substantially more livestock than the average general cropping farm although farm size was very similar. Farm 2 was signiﬁ  cantly larger in area than the average Scottish dairy farm in the FAS data, with more cows producing higher yields.   Tables 3 and 4 show summary data from the management accounts of farms 1 and 2 respectively, and comparison with relevant FAS data.Table 2.  Summary of physical data from conventional farms in FAS scheme, 2000 & 2004Scotland – general cropping farmsScotland – dairy farmsYear 1999 2004 2000 2004No. of farms in sample 77 41 75 63Average farm size: adjusted ha 141 150 96 113Cereals 79 81 - -Potatoes 13 15 - -No of ewes per farm 32 47 - -No. of breeding/dairy cows 10 16 92 107Average milk yield/cow (litres) - - 5884 7068No. of other cattle, incl. calves 27 45 148 168(from SAC, 2005)Table 3. Summary management account data (£/adj.ha) for farm 1 and FAS general cropping farms, Scotland.Farm 1 FAS  Farm 1 FAS  Farm 1 FAS  Farm 1 FAS  Farm 1 FAS 1999/00 2000/01 2001/02 2002/03 2003/04Total variable costs 509 307 532 302 526 313 325 312 412 330Farm gross margin 860 716 922 766 1101 737 1414 713 1424 909Fixed costsTotal farm labour 173 222 190 214 231 200 325 223 299 228Fuel oil & electricity 20 40 38 54 44 50 51 46 81 49Crop contract work 175 86 250 94 300 92 226 103 299 89Total ﬁ  xed costs 757 786 953 798 1048 765 1030 823 1137 835Net farm income 195 25 67 50 147 46 480 -9 368 183148Table 4. Summary management account data (£/adj.ha) for farm 2 and FAS dairy farms, ScotlandFarm  2 FAS Farm  2 FAS Farm  2 FAS Farm  2 FAS Farm  2 FAS 2000/01 2001/02 2002/03 2003/04 2004/05Fertiliser & lime 110 87 78 88 26 78 0 84 20 -Total variable costs 1050 621 1053 662 775 637 943 667 774 -Farm gross margin 1547 976 1670 1156 1233 843 1290 1028 1623 -Fixed costsTotal farm labour 483 460 465 426 394 382 409 413 425 -Crop contract work 115 53 118 61 109 55 94 57 94 -Total machinery & power 422 277 403 271 389 273 399 290 389 -Total ﬁ  xed costs 1182 1057 1219 1039 1154 953 1146 1022 1156 -Net farm income 410 145 496 327 128 71 192 208 513 -The relatively high variable costs of farm 1 reﬂ  ect higher concentrate costs than the conventional farms, higher roughage and keep taken costs, and higher sundry livestock expenses. Lower variable costs were seen with fertiliser and lime (5 year average £39.4/ha  yr-1 vs £73.4/ha yr-1), and crop protection (5 year average £28/ha yr-1 vs £128/ha yr-1), although other crop expenses including casual labour were considerably higher, peaking at £208 ha-1 in the second year of conversion. Fixed costs increased from the second year of conversion, with labour and other crop contract work making up most of the annual differences. The crop contract costs involve the grading and storage on the farm of seed potatoes for other producers. Net farm income has been signiﬁ  cantly higher than the conventional general cropping farms reported in the FAS apart from year 2 of the conversion.The summary for farm 2 shows the ﬂ  uctuating annual variable costs, associated with initially high fertiliser costs, high and variable concentrate costs, and increasing seed costs as the organic rotation takes effect. Veterinary, medicine, and sundry livestock costs were approximately double the FAS average through the whole period, with the reduction in medicine costs being offset by a high level of herd monitoring for health and quality parameters. Higher ﬁ  xed costs were associated with higher crop contract costs (all grass/silage establishment and harvesting operations) and above average machinery depreciation costs. Labour costs were high until the business was restructured and one less person employed. Net farm income has remained positive compared with conventional Scottish dairy farms in the FAS scheme, although income was greatly reduced when the organic milk price was cut in 2002/2003.DiscussionThe comparison between the project farms and FAS data provides a measure of the validity of the decision to move to organic production in the ﬁ  rst instance. It also provides an indication of the impact of the changes on the ﬁ  nancial performance during and after the conversion, albeit confounded by changes in output prices. Net farm income for farm 1 were depressed in 2000/01, reﬂ  ecting an increase in the costs of the contract potato grading and storage operation that was one of the structural changes of the business. The farm has consistently shown good overall performance and in spite of high labour and power costs, the maintenance of steady property costs and other overheads has contributed to healthy gross margins. Farm 2 also carried out structural changes to meet the challenge of converting to organic. The two diary herds were merged, allowing the release of capital, redundancy of one member of staff, investment in the parlour and reduction in stocking density. The changes allowed the farm to manage the expected drop in yield per cow and per hectare that occurs during conversion, and the gross margin ﬁ  gures compare very favourably 149with the data presented by Lampkin et al. (2004), where whole farm gross margins for organic dairying are £1421 ha-1, £1038 ha-1 and £973 ha-1 for 2001, 2002 and 2004 respectively.AcknowledgmentsThe authors wish to thank the participating farmers for their kind collaboration with this study, and the Kintail Land Research Foundation who provided ﬁ  nancial support to the organic programme at the University of Aberdeen. The Farm Accounts Scheme is funded by the Scottish Executive’s Environment and Rural Affairs Department and conducted on their behalf by the Scottish Agricultural College.ReferencesBibby J S, Douglas H M, Thomasson A J, Robertson J S. 1991. Land capability classiﬁ  cation for agriculture.  Macaulay Land Research Institute, Aberdeen Scotland. ISBN 0 7084 0508 8.Edwards I E and Robertson J F 2003. The proﬁ  tability of conversion to organic farming systems. In Proceedings of the 14th International Farm Management Congress. Perth, Australia.Lampkin N, Measures M, Padel S 2004.  2004 Organic Farm Management handbook. 226 pp. University of Wales. Aberystwyth, SY23 3AL. ISBN 1 872064 38 8.SAC. 2005. The Farm Management Handbook 2005/6.  Ed. Linda Chadwick. 552 pp.  Scottish Agricultural College, Edinburgh, EH9 3JG.  ISBN 1 85482 845 2.

Five-year financial analysis of two commercial farms converting to organic: 2000-2005

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