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Sterte, Åsa, 2011. Barriers to convert to organic farming and the role of risk : an empirical application on Swedish data. Second cycle, A2E. Uppsala: SLU, Dept. of Economics

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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.


Flertalet studier tyder på att ekologiskt lantbruk verkar mer lönsamt än ekologiskt vilket väcker frågan varför inte fler väljer att ställa om från konventionell til ekologiskt lantbruk.
Högre risk till följd av förbud mot konstgödsel och bekämpningsmedel samt en liten outvecklad marknad för ekologiska produkter är argument som lyfts fram som möjliga förklaringar vilket därmed skulle motivera en riskpremie. Syftet med studien är att undersöka riskens roll i det ekologiska lantbruket genom att analysera två frågor:

•Baserat på historiska data, är ett ekologiskt lantbruk mer riskfyllt än ett konventionellt lantbruk?
•Baserat på den historiska risk-justerade nettoinkomsten, borde en rationell lantbrukare ställa om från konventionellt till ekologiskt lantbruk?

Analysen baseras på Excel-baserade beräkningar och optimeringar som tillämpas på svenska data. Dessa data karaktäriserar ett ”typiskt” ekologiskt respektive konventionellt växtlantbruk i södra Sverige
Resultaten tyder på att nettoinkomsten för ett ekologiskt växtlantbruk har lägre risk och bättre lönsamhet. En rationell lantbrukare borde därmed ställa om till ekologiskt. Däremot visar resultaten att den enskilda risken i avkastning och pris är högre för ekologiska grödor än för konventionella. Detta kan dels förklaras av förhållandet mellan pris och avkastning för ekologiska grödor som är mer negativt korrelerade än för de konventionella och därmed dämpar inkomstrisken. En annan möjlig förklarande faktor kan vara produktionskostnaden per hektar. Lantbrukarens fokus på avkastning, som i viss mån är påverkbar, och priser, kan därmed överdriva den uppfattade risken och leda till ett icke rationellt beslut.
Riskfaktorer som underskattas i studien kan dock vara omställningsperioden med ekologisk avkastning och konventionella priser samt inlärningskurvan för att lära sig nya metoder. Andra faktorer kan vara regelverk och politisk risk.

Main title:Barriers to convert to organic farming and the role of risk
Subtitle:an empirical application on Swedish data
Authors:Sterte, Åsa
Supervisor:Collentine, Dennis
Examiner:Surry, Yves
Series:Examensarbete / SLU, Institutionen för ekonomi
Volume/Sequential designation:685
Year of Publication:2011
Level and depth descriptor:Second cycle, A2E
Student's programme affiliation:Other
Supervising department:(NL, NJ) > Dept. of Economics
Keywords:Organic farming, profitability, income risk, price risk, yield risk, barriers
Permanent URL:
Subjects:Agricultural economics and policies
Deposited On:23 Aug 2011 11:06
Metadata Last Modified:05 Oct 2012 19:27

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