T.J. Shambaugh standing in field. Mike Wilson
TJ Shambaugh farms near Cerro Gordo, Ill. He's in his second year of transitioning 1,100 acres to organic, after making the business decision to capitalize on a market with upside potential.

Missing the train on organic

Demand for organic is red-hot, but U.S. farmers are slow to convert acres.

Despite explosive consumer demand for non-GMO and organic feed and food, many Midwest farmers remain wedded to conventional commodity production.

TJ Shambaugh is not one of them. Shambaugh, who farms 2,100 acres near Cerro Gordo, Ill. — with his 32-year-old son, Quint, and his 80-year-old father, Ted — made the business decision in 2016 to begin the conversion of 1,100 acres into organics.

“I don’t believe this would have been a good business move 10 years ago, but this millennial generation will keep feeding organic demand for years to come,” he says.

The transition years make it difficult without reaping the benefits of higher organic prices, but Shambaugh says some of that is offset with lower input costs. Non-GMO markets also offer a small premium, but still much less than the full organic premiums.

He’s got one year under his belt. In 2016 he sold all of his soybeans into the non-GMO market; however, on the corn side, he ended up having to sell some at the conventional price. Some of his corn was a non-GMO white variety. His wheat acres in the rotation offer no premium during transition years.

“Going through the transition period can be economically challenging for the first few years, but then after that, hopefully, we’ll be able to get that back fairly quickly,” says Shambaugh, who notes that organic corn has been selling for about twice as much as conventional corn.

And even with expected yields at 75% to 80% of trend yields, those prices make the organic math pretty easy to figure, no matter what you might think about organic as a feed or food product.

“I don’t believe organic is better than conventional, but the expected returns certainly are,” says Shambaugh. “I want to grow what customers want.”

Burgeoning imports

Organic corn imports more than doubled from 2015 to 2016 and accounted for nearly one-half of the U.S. organic corn supply. The domestic shortfall for organic soybeans was even greater, with roughly 80% of soybeans supplying the U.S. organic market imported in 2016.

Nate Lewis, farm policy director at the Organic Trade Association (OTA), explains domestic users are buying imports, but not because they’re cheaper. They just need to feed their chickens and cows something organic.

“There is a strong interest in sourcing domestically, because these organic producers want to see their backyard prosper,” he says.

They are also concerned about fraudulent organic imports. Reports in May unveiled an estimated 7% of organic corn imports and 4% of organic soybean imports may have been conventionally raised, despite paperwork stating otherwise.

Such disturbing news has fueled an even deeper interest in developing a sound domestic supply base.

Imports of organic grains, particularly corn, from countries such as India, Ukraine, Romania and Turkey surged in 2016 to meet the burgeoning U.S. demand for organic food products. But Turkey especially has come under fire recently for fraudulently changing certificates.

Animal feed for organically raised dairy, beef, pork and poultry products, and ingredients used in organic consumer packaged goods are the two principal markets for organically produced grains.

Sales of organic protein-rich meat and poultry shot up by more than 17% in 2016 to $991 million, for the category’s biggest-ever yearly gain. Continued strong growth in that category should push sales across the $1 billion mark for the first time in 2017, according to OTA.

For U.S. farmers to satisfy the growing appetite for organic foods, analysts estimate between 1 million and 5 million U.S. acres would have to be transitioned to organic production in the next few years.

“We’re expecting double-digit growth year over year as far out as we can accurately forecast. There are no dynamics that trend is going away,” shares Laura Batcha, OTA CEO and executive director.

Risks vs. rewards

Clearly, U.S. corn and soybean growers are not converting acreage fast enough to satisfy this burgeoning demand for organic feed. Why not?

“Transitioning to organic production is a multiyear, risk-reward calculation that’s likely holding some U.S. growers back from taking advantage of the market opportunity,” says Dan Kowalski, director of the Knowledge Exchange Division at CoBank.

In shifting to organic production, growers are required to apply organic farming methods to their fields during a three-year transition period before their crops can be certified as organic — and they won’t be eligible to get the full organic price premium until then.

“Apprehension among growers is likely fueled by the three-year transition period before their crops can be certified as organic,” says Kowalski. “Remaining profitability during that period is often a struggle, and coupled with the volatility of organic price premiums in 2016, grower uncertainty about the sustainability of financial rewards for transitioning to organic is warranted.”

Surprisingly, CoBank found more seasoned and experienced farmers are often more open to converting their land to non-GMO or organic crops than are younger farmers. Those that farmed before the advent of GMO seeds in the mid-1990s have experience with more traditional farming methods. And more of them are willing to return to those farming methods for the right price.

In contrast, most young farmers have been trained to use the latest technology to maximize yields and have no experience farming any other way. Plus, many younger growers are reluctant to switch to organic or non-GMO farming methods because they view them as “going backward.”

Making a profit

In 2015, there were reports that domestic supplies of non-GMO corn and soybeans were extremely low, according to CoBank. But this imbalance changed in 2016, as low crop returns incentivized more growers to plant cheaper non-GMO seeds and reap premium prices for their crops. Non-GMO corn and soybean prices have reflected this increase in output, with premiums slipping in the closing months of 2016.

In fall 2015, organic soybeans traded at 200% more than GMO soybeans, and organic corn commanded twice the price of commodity corn. Subsequently, during the first half of 2016, both the level of organic premiums and the price gap between soybeans and corn fell dramatically. Domestic production had not changed much — only 262,000 acres are currently transitioning to organic. However, imports surged, especially for corn.

George Siemon, Organic Valley CEO, says he’s worried about the integrity of the organic label with the growing amount of imported feed. The last five to eight years has brought a tremendous amount of variation within the price of organic corn. After markets crashed in 2008-09, organic corn dropped to conventional price levels. Demand flattened out for organic, along with the big premiums.

Siemon says he encourages producers within his organic cooperative to develop relationships with domestic grain producers and set up a contract system that allows each producer to remain profitable. “We advocate for our farmers to find grain-feed partners to bring in stable prices,” Siemon says.

He notes if a contract is set on 50% of a set price and 50% on a market base, on a three-year contract, it smooths out some of the volatility while still maintaining profitability. “We believe corn should be around $10 per bushel, which would be at a level a livestock producer can afford and still be profitable for a grain farmer to cover their off-year crop,” he says.

Transition improvements

A new transitional certification has the potential to allow growers and food manufacturers to market their products for a price somewhere between that of organic and non-organic. The program is currently on hold at USDA, undergoing further review, but OTA is hopeful that the department will roll out the program officially this summer.

OTA has developed the partnership with USDA to help guide farmers transitioning into certified organic agricultural production. Lewis explains the transitional certification programs will provide an “on-ramp” to producers. Farmers will need to prove their land has been free of prohibited substances (synthetic pesticides and fertilizers) for a minimum of 12 months and must follow all other organic productions standards to achieve transitional certification, including crop rotation, the fostering and conserving of biodiversity, and the avoidance of using genetically engineered seeds.

Batcha says the transitional certification allows farmers to approach potential buyers and facilitate market development. By working with a certifier through the transition period and engaging in inspections, it “helps facilitate good organic farming faster and reduces the likelihood of making mistakes.”

Shambaugh says he’s in the process of going through the transitional certification process to get all the ducks in a row and make sure he doesn’t experience any hiccups when he does get the go-ahead at the end of the 36-month organic certification period.

He knows the numbers won’t show organic farming is for everyone. But it may be right for farmers willing to risk some short-term losses for long-term gains, and take on some extra management.

“I know organic farmers who say they feel they are now price-makers, not price-takers because of the demand,” he concludes. “That’s got to be a pretty good feeling for a farmer.”

Coming tomorrow: Manage these 5 risks for successful organic farming conversion

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