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How to Manage Risks During Transition to Organic Farming

Date: 
Author: 
Paul Dietmann
Educational Opportunities: 
Articles
Interests: 
Grain, Emerging AgriBusiness, Specialty Industries
Home > Education & Events > January 2018 > How to Manage Risks During Transition to Organic Farming
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In October 2017, the farm gate price of organic corn was approximately $9 per bushel while the price of conventional corn was slightly above $3. Is it any wonder that some farmers are looking at what it takes to transition to certified organic production?

While prices for organic commodities look very attractive to farmers who are facing their fourth straight year of declining net farm income, the transition to organic needs to be entered with eyes wide open. It is neither simple nor without costs.

The transition to organic production is much more than an economic decision. A farmer has to be willing to commit to a significant shift in production philosophy—not just a change in practices—or the transition will fail. Here are some things to consider as you contemplate a switch to organic production:

1. Start planning at least a year before beginning the transition.
Attend conferences, introduce yourself to experienced organic growers, and build a network that can provide support as you begin farming organically. Spend time with experienced organic growers at different times of the growing season to learn how they manage production challenges.

Figure out where you can buy organic seed, fertilizer, and any specialized equipment you might need. For the most part, you can use the same equipment in non-organic and organic fields, but you will need to clean equipment before entering organic fields. Also, look ahead to how you will transport and store your organic harvest to prevent co-mingling and loss of organic status.

2. Discuss your plans with your lender early in the transition process.
Explain your plans and get your lender’s thoughts. Your cash flow may change a lot during the transition. Crunch the numbers on your balance sheet. You’ll want to make sure you have enough operating capital to carry you through.

If you need new equipment or grain storage, you’ll want to be ready to finance those purchases. You may need to restructure some existing debt to free up borrowing capacity.

Fortunately, a farmer transitioning now to organic production is much more likely to find an ag lender who has some experience with organic farms than farmers who switched 30 years ago. If your lender doesn’t have experience with organic production or isn’t supportive of your decision, you may need to find a new lender.

3. Plan a gradual transition of acres.
The learning curve for organic production can be steep as a farmer learns how to grow crops without the use of herbicides or standard commercial fertilizer. It often takes more time, labor, and trips across the field to grow a crop organically. Start with a small enough acreage that it won’t present the farm with a financial hardship if crop performance is down in the first year or two.

4. Prepare for a long-term investment.
In organic operations, the net cash flow could very well be negative on transitioning acres during the first two or three years of the switch. As with any other long-term investment, cash is invested upfront with the expectation of a positive return in future years. Cash returns on organic production typically turn positive in the third or fourth year. Don’t lose sight of the potential future returns during the initial years of negative cash flow.

It’s a great idea to create annual cash flow projections for five or six years beginning in the first year of transition, and calculate the Internal Rate of Return (IRR) resulting from the change in production. (There is an explanation of how to calculate IRR in Chapter 14 of the book Fearless Farm Finances, available at mosesorganic.net.)

5. Keep variable costs low on transitioning acres.
Variable costs are those you wouldn’t have if you weren’t growing any crops. They include seed, soil amendments, fuel, crop insurance, operating interest, and the costs of harvesting, hauling, and drying crops. These are all cash costs that have to be paid during the year, as opposed to an overhead cost such as depreciation that doesn’t require the farmer to write a check. Consider ways in which those cash costs can be minimized on transitioning acres. For example, the variable costs to grow hay are roughly two-thirds of the variable costs of growing corn in the first year of the transition. Many transitioning farmers find the cash flow is easier to handle if they grow a crop like hay that requires lower out-of-pocket costs.

6. Timeliness is critical in organic production.
Organic crop production is weather-dependent to the extreme. A grower may find that only one or two days in the season are fit for rotary hoeing or cultivating, and every acre of organic ground must be covered within that narrow window. Organics won’t be a good fit for someone with an off-farm job and an inflexible schedule. It may require investment in larger equipment that can cover more acres in a shorter timeframe. It may be difficult to hire custom operators familiar with organic production to help with planting or harvest, which might also lead to more machinery investment for your farm.

7. Seek help from expert advisors.
You may not be able to anticipate or overcome every hurdle that will appear on your path to organic certification. That’s why it’s important to have a network you can turn to for help.

The Midwest Organic and Sustainable Education Service (MOSES), for example, has organic experts on staff that are available to answer questions from growers. MOSES partners with the University of Wisconsin-Madison on the Organic Grain Resource and Information Network (OGRAIN). This resource was created in 2015 specifically to help conventional grain growers transition to organic. (See uworganic.wisc.edu/ograin.)

Additionally, there are many experienced growers in the Midwest who have successfully transitioned and are willing to help others make the switch. Make it a point to connect with these growers.

As always, leveraging your tax professional is a must. You need to position yourself throughout the transition and ensure you’re adhering to the constantly changing federal and state tax laws that govern farm taxes.

8. Consider cost-sharing.
The USDA Natural Resources Conservation Service (NRCS) offers organic transition cost-sharing for a variety of practices through its Environmental Quality Incentives Program (EQIP) grants. Talk to your local NRCS staff and get on their list of farmers to contact when an EQIP signup is announced.

Up to 75 percent of the cost of organic certification can be reimbursed through the USDA Farm Service Agency’s cost-share program. Some states offer assistance with organic transition through their departments of agriculture. It’s worth a call to your state department to see if they have an organic assistance program.

The transition to organic grain production takes time, and cash flow may be negative for a few years. Get your lender on board with your plans early in the process. Keep variable costs low and take advantage of cost-sharing opportunities. There will be some ups and downs on the road to certification, but growers who start the process thinking of it as a long-term investment will likely see their perseverance rewarded over time.

Paul Dietmann is a Senior Lending Officer with Compeer Financial. For additional insights from Paul and the rest of the Compeer Financial team, visit Compeer.com/Home/Educational-Opportunities.
 
From production agriculture to organic producers to non-traditional growers, Compeer Financial supports and is passionate about a wide range of farming operations. Paul Dietmann, a Senior Lending Officer, works with our team of relationship managers, underwriting professionals and others to serve businesses like urban farms, food processing, beekeeping for pollination and honey, berry crops, tree nuts and more to provide access to credit and other financial services.
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