Barriers to convert to organic farming and the role of risk : an empirical application on Swedish data

Abstract: To understand the motives, and perhaps more importantly the barriers, for farmers to convert from conventional to organic farming is of great interest for policy makers as well as for academics. In Sweden and in other EU countries, proposed targets of the area in organic farmland have failed to be reached in spite of different kinds of policy measures. Most studies agree that the average profitability seems to be comparable to or better in organic than in conventional farming. This would indicate that there must be other factors of importance which can explain the low particiapation rate. A higher perceived risk in organic farming with respect to yield and price is frequently brought up as a potential explanation within a qualitative framework. If farm income risk is higher in organic farming than conventional, a rational risk-averse individual would only convert if compensated by a sufficient risk premium. Therfefore, the observed hesitation of farmers to convert would be rational if income from organic farming is more risky and the risk premium is insufficient in compensating for this risk. The aim of this study is to explore the impact of yield and price risks in organic farming by analyzing risk- adjusted net returns. This is carried out through performing Excel based and mathematical programming analyses, using data that describe a typical organic crop farm and a conventional crop farm in southern Sweden. Farm characteristics are characterized based on previous studies while crop characteristics are taken from official statistics. The specific objective is to analyse two questions: •Based on historical data, is organic farming more risky than conventional farming? •Based on historical risk adjusted returns, should a rational profit maximizing farmer convert to organic farming? The conclusion from the analysis is that, based on the empirical results, the organic crop farm has a lower risk and a higher income than the conventional one. The higher risk-adjusted net returns suggest that an organic risk premium is not motivated and that a rational farmer should convert from conventional crop farming to organic crop farming. However, the results show that when crop net returns are disaggregated into yield and price, the risk is higher for the organic crop farm. The generally lower risk in net returns for the organic crops could depend on the stronger negative correlation between yield and price for the organic crops than the conventional ones. The common perception of a generally higher risk in organic crop farming could then be explained by a disproportionate focus on price and yield exaggerating the perceived risk leading to non-rational behaviour. An underestimated risk factor in the analysis could be the conversion period having a substantial negative impact on the farm risk as well as income. However, the empirical results suggest that the organic support payments compensates adequately with regard to the income level as well as the income risk. Other risk factors that may explain the higher risk associated with organic faming and not included in the study are the learning curve when adapting organic practices, regulations and political risk.