Organic Vegetables/Grains Production, Market, and Expected Return December 2008 copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Overview Climate : Adaptable to Center and Western Kentucky Organic crop production began to develop as an industry in the 1970’s Regulated by the Organic Foods Production Act of 1990 and the National Organic Program (NOP) Certification requirements are mandatory as of 2002 copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Market Opportunities Direct Marketing -Roadside stands -Farmers markets Wholesale Marketing -to local grocery stores -produce wholesalers -produce auctions Opportunities may exist through restaurants and health food stores copyright eStudy.us 2008 michael.roberson@eStudy.us

Market Opportunities (continued) Price Premium Opportunities -Comparison of conventional to organic prices from 1999-2004 Note: Limited availability of price data means the above premiums cannot be generalized to all organic goods. Conventional Organic Unit Wholesale Broccoli $8-12 $18-38 Carton (14-18 count bunches) Wholesale carrots $10-13 $19-34 Sack (24 count-2 Lb. bags) Wholesale Mesclun mix (lettuce) $6-9 $6-10 3Lb. Carton copyright eStudy.us 2008 michael.roberson@eStudy.us

Market Opportunities (continued) Marketing in Kentucky -In Kentucky, “the majority of certified organic mixed vegetables and fruits are grown near larger urban areas, where there are established direct markets at local farmers’ markets, restaurants, and local grocery stores.” (Southern Organic Resource Guide website) copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Certification Requirements -must comply with NOP regulations (www.ams.usda.gov/nop/) -growers are required to develop and follow an Organic System Plan (OSP). OSP must contain: -Details on current production, harvesting, and storage methods -Details on all inputs that will be used -Must be updated and approved annually. -Record keeping is essential (maintain records on all transactions for 5 years) copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Planning -Land must be free of synthetic pesticides and artificial fertilizers for 3 years before production can begin -Conversion from conventional to full organic production can take from 3 to 5 years depending upon the crop, soil fertility and approach -Selecting a site that is well-suited to the crop is essential to successful organic production -Timing of fertilizer & seed will vary depending on the crop. However, perennial crops must be grown organically for 12 months before they can be sold as “certified”. copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Production Methods (good farming practice w/o synthetic chemicals) -Planned crop rotations are required -Perennial cropping systems rely on alternative methods such as: intercropping, alley cropping, and hedgerows -Mulching materials can be natural (e.g. wood chips), certain allowable synthetics (e.g. newspapers), or plastic mulch if it is removed at the end of the harvest season. -Healthy soil is key: Soil fertility is increased through cover crops, nitrogen fixing legumes, manure and approved natural fertilizers -Must be protected from contamination by adjoining conventional farms copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Pest Management -May be the greatest challenge in organic farming Strategies include: -crop rotations that disrupt the pest life cycle, improving soil quality, good sanitation, optimum planting densities, growing resistant varieties, transplanting operations to avoid high pest popluations -NOP-approved pesticides can be used, but are seen as a last resort -Frequent inspections and accurate identification are essential copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Harvest and Storage -Products grown organically during the transition period can be marketed as organic. But only those crops that have met NOP standards, including the 3-year transition period, can be marketed as certified organic goods. -Yield in full production are usually 90-95% of conventional yield, however, studies have shown organic yields can actually be higher than conventional yields during drought years. -Equipment, storage areas & packaging must meet NOP standards -Growers with split operations must use separate equipment and facilities or follow decontamination protocol. copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Characteristics Labor Requirements -More labor intensive than conventional production -Increased labor attributed to monitoring and managing pests -Labor hours per acre can be as much as 11% higher for agronomic crops; increase can be much greater for horticultural crops copyright eStudy.us 2008 michael.roberson@eStudy.us

Production Opportunities Capital Requirements -Land acreage, equipment, and storage facility requirements will vary depending upon the crop and scale of operations -Equipment generally required will include: -tractor, plow, pickup truck or larger truck, sprayer, proper storage facility Labor Requirements (minimal labor training) costs are market rates for agriculture labor (2008 labor rate: $9.00). Land Opportunity Cost (lease value for class A: $100) -land costs increase with proximity to more rural areas (where more market opportunities exist) copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Revenue Revenue sources Revenue will vary depending upon the type of crop, price premiums received for the organic crop, and yield. Secondary sources : None Production incentives from the government The U.S. Government has largely taken a free-market approach to the organic sector, and policy is aimed at facilitating market development. The NOP has a cost-share program, however, Kentucky is currently not eligible for the program. copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Product Cost Overview Full Production Year Variable Costs Soil amendments (compost) Fertilizer Irrigation Variable Machinery Costs (e.g., feul) Marketing Costs Refrigeration/Storage Hired Labor Fixed Machinery Costs Fixed Irrigation System Costs Fixed Refrigeration Cost Fixed Land Costs copyright eStudy.us 2008 michael.roberson@eStudy.us

Expected Return Report Example: Organic Corn Assumes 1 acre yields 75 bushels Production (bushels) 75 375 750 1,500 Acres required 1 5 10 20 Revenue ($6 per bushel) $450.00 $2,250 $4,500 $9,000 Operating/Cultivating Costs $192.66 $963.30 $1,926.60 $3,853.20 Labor Cost excluding Principle $19.40 $97 $194 $388 Other Variable $30.00 $150 $300 $600 Capital Cost excluding Interest $95.90 $479.50 $959 $1,918 Production Return $112.04 $560.20 $1,120.40 $2,240.80 Source for assumptions: http://www.organicgrains.ncsu.edu/production/cropbudgets.htm copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Risk Market Risk: prices can be significantly variable depending on the type of crop and market demand Production Risks: -pest management -maintaining NOP standards -yields tend to be 5-10% less than conventional methods Financial Risk: significant initial investment is needed during 3 year transition period when returns are expected to be much less than in full production -cash and other requirements during each production year copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Basic Summary Market Opportunity: -Organic crops are in increasing demand -often receive price premiums -Opportunities in Kentucky through direct and wholesale markets Advantages of Western and Center Kentucky Normal endowed resources (Building / Land) adaptable to organic production Existence of rural markets in the region copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Bibliography Market Opportunities - http://www.uky.edu/Ag/NewCrops/intro.html#organic -Southern Organic Resource Guide: http://attra.ncat.org/sorg/ky Production Characteristics - http://www.kyagr.com/marketing/plantmktg/organic/index.htm Certification Requirements -National Organic Program http://www.ams.usda.gov/nop copyright eStudy.us 2008 michael.roberson@eStudy.us

copyright eStudy.us 2008 michael.roberson@eStudy.us Bibliography Budgeting/Risk Assessment - http://attra.ncat.org/new_pubs/attra-pub/fieldcorn.html General - http://www.ces.purdue.edu/extmedia/ID/ID_316.pdf copyright eStudy.us 2008 michael.roberson@eStudy.us