Is the profitability plunge in U.S. organic actually worse than corrections happening in conventional?
A recent report from Argus Media caught my eye. It decried the declining profitability of organic feed crops (corn, soy, and wheat). The report sounded the alarm that the decline could push organic farmers to exit back to conventional. They reported that organic corn, soy, and wheat growers could face their first-ever negative average net returns of -$213 per acre, based on August 2024 prices and assuming constant marketing year costs hold constant. If costs continue their 5-year upward trend, net returns could worsen to -$277 per acre averaged across the three crops.
But, to me, this was not the right question or data comparison to truly assess this risk: does this organic profitability erosion truly post a conversion erosion risk? Is the picture bleaker for organic growers than conventional ones? If so, why?
This data clearly presented some concerning trends around organic prices and U.S. organic production costs, but what they did not do was present a comparative case study. For this trend to actually drive producers back to conventional, this trend has to be WORSE for organic growers than conventional ones in the U.S. To answer this question, and also explore why the bottom lines of both organic and conventional corn, soy, and wheat growers have gotten worse this year, I turned to the USDA commodity cost and returns data, recent WASDEs, as well as some USDA-FAS-GATS data on imports of these crops.
The concerning September 2024 report from Argus Media highlighted a significant decline in the profitability of organic farming due mostly to plummeting organic prices (organic soy prices are down 42% from their 21/22 peak, corn is down 38% from its 22/23 peak, and wheat is also down 38% from its 21/22 peak) This price plummet has been further exacerbated by rising production costs. They posited that profitability tailspin is discouraging U.S. grain farmers from transitioning to organic farming and poses a risk of already certified organic farmers leaving certification. Argus reported there has already been a 5% decrease in the number of organic farmers in 2024 compared to the previous year.
Booming supply bolstered by cheap imports (or global competition) is causing prices to collapse from historic highs
U.S. corn, soy, and wheat producers, both organic and conventional, are facing a daunting future due to a perfect storm of challenges. Soaring costs for operations, equipment, labor, and inputs, combined with intensified global competition, are squeezing profit margins. The situation is particularly dire for U.S. organic producers. As organic acreage expanded rapidly in lower labor-cost regions like Argentina, West Africa, and India, global prices for organic commodities have taken a big nosedive (38-42% down in just 2-3 years), further eroding profitability for U.S. organic farmers. The challenge is particularly acute for U.S. organic soy producers who have seen cheap West African “organic” soy flood the U.S. market - increasing from less than 3% of U.S. organic soymeal to more than 40% in just 2 years.
Conventional producers are also contending with increased competition from other production regions, as well as record high domestic production. In other words, supply has increased faster than demand for these crops. Meanwhile, demand is not increasing for American corn, soy, and wheat, which primarily go to energy and export markets. Improvements in fuel efficiency and electrification have weakened the demand for corn for ethanol. Pinched consumers (and the elimination of $20B in food spending power associated with SNAP) are no longer buying so much meat. And, Brazil has increased their production and exports, particularly of soy, by 400-1000%, which China has found as a suitable replacement for U.S. soy.
Higher capital costs are amplifying the impact of organic farms’ higher operating costs via inflated operating loans
Graph by Grow Well, organic data from FINBIN via Argus Media, conventional data from USDA-ERS
Production costs for U.S. growers of corn, soybeans, and wheat, organic and conventional alike, have skyrocketed in recent years. Over the last 8 years, organic growers’ production costs on a per acre basis have been higher for these crops than conventional farmers due to higher on-farm fuel, labor, equipment, and fuel costs. Some of these costs, particularly fuel, have and continue to decline. Others, like labor, are unlikely to reverse since production is already highly mechanized, so the cost of wages is the primary driver and wages are unlikely to reverse. The biggest driver of increases, for organic and conventional growers has been the cost of capital, which spiked with increasing interest rates. While the Fed has started to walk these back, they have signaled this will be very slow and is unlikely to reverse this trend quickly. To the extent that these higher capital costs amplify organic producers’ higher operating costs, this factor may weigh heavier on some organic farmers’ bottom lines.
Prices have cooled for all producers, but net change in profitability is worse for organic growers than conventional ones because of greater price erosion.
Conventional prices and costs have moved in tandem, with prices not yet eroding below their record highs. In contrast, Organic corn prices in particular have fallen below their historic baselines, while production costs have increased.
Resumed trade with China, the war in Ukraine, booming bioenergy demand – particularly for conventional soybeans for renewable diesel – COVID-related disturbances… all of these once-in-a-lifetime world events have contributed to some record high prices for 2021-2022. Now that all markets are returning to earth this year, the question emerges: is the price rationalization worse than the production cost increase?
For conventional growers, prices still exceed cost increases when comparing the 2023-2024 model year to the 5-year pre-disruption period of 2016-2017 to 2020-2021. Their prices may be down relative to the super high prices of 21/22 and 22/23, but they are still almost 40% above baseline prices. Their costs are also up, but not quite as much, ~30%, meaning conventional corn and soy growers’ net position is worse relative to the last 2 years, but better relative to the pre-disruption baseline period.
For organic growers, they’re being hit with a double whammy. Their costs are still way up above baseline period prices AND now their prices are well below baseline period. Organic corn prices have fallen over 14%, and organic soybean prices have barely budged above the 5-year baseline, showing that organic corn and soy producers’ profitability decreased markedly. Meanwhile, costs of organic production are up 20% for both corn and soy. This means profitability is not just down relative to the record highs of the last 2 years, but down relative to the baseline period too.
But, what about the baseline?
Good news for organic corn and soy growers: Net returns have been $12 to $485 per acre better than conventional returns for those crops over the last 8 years. However, if these trends continue, that will no longer be the case, further bolstering Argus’ call to action related to American organic production.
While there has been erosion for organic and conventional producers alike, organic corn and soy has long outperformed conventional corn and soy and still did in 23/24, though conventional returns have improved strongly in recent years.
Why negative net returns in U.S. organic farming matter
As someone who lives in the U.S. and would like to see the water quality and soil health benefits of organic farming impact the very water I drink, these trends are concerning. Crop rotation is crucial for soil health, but current trends, as highlighted by Argus, are pushing organic farmers towards a financial precipice, a serious threat to the future of organic farming, acreage, and management practices.
