Wednesday, May 26, 2010
What Is The Price Relationship Between Organic And Conventional Grains, Or Is There One?
Without the market volatility of 2007 and 2008 that pushed corn and soybeans into extremely profitable price levels, those local elevator bids look pretty bleak with ample carryover from the old crop and a large new crop beginning its reign. You think to yourself, “If these are the prices I can expect for the next 20 years, I should give specialty and organic crops a longer look, after all organic corn and beans are always twice the price of conventional corn and beans.” That phrase “always twice the price,” may be questionable.The organic corn and soybean industry can only claim less than half of one percent of the US cropland. Although it consumes such a small share of acreage, it has grown significantly in recent years. Central Illinois specialty grain merchant Lynn Clarkson casts a long shadow in the organic grain market, and told a Congressional committee a couple years ago, “consumers pay higher prices to get foods […] raised without synthetic chemicals...” and further adds that “whatever their reasons, these buyers are not seeking the cheapest agricultural products. They seek preferred qualities.” They are willing to pay higher prices, Clarkson says, but what is the relationship between those prices and commodity corn and bean prices?
That question is what Iowa State economist Ariel Singerman attempted to answer with her research focused on the price differences between organic and non organic grains. While many producers would say there is a likely a premium for organic grain, they believe that the premium will usually be related to the market price for the conventional grain. Singerman says not so.
True organic grains will receive a premium price because of the additional risk and cost in raising a crop that may have an even lesser yield. However, a 2008 study about organic soybeans confirmed the higher costs of production, but confirmed that organic production is more profitable than conventional beans due to the significant price premiums, rather than lower costs or higher yields. Singerman also reports several studies that indicate organic corn yields were 8 to 10% lower than conventional corn, and organic soybean yields were anywhere from 1% to 19% lower than conventional beans.
But while yields will fluctuate, Singerman says price dynamics for organic corn and soybeans are not the same as for conventional grain because the markets are less liquid. He says it is sometimes difficult for organic producers to find spot markets for their production unless they have contracts, and in many cases brokers of organic grain recruit producers. Another challenge is the fact that crop insurance premiums are 5% higher for organic crops, yet indemnity payments are computed on conventional grain prices.
Prices for conventional corn and soybeans are keyed off the Chicago Board of Trade, but prices for organic corn are discovered in Dallas, Fargo, Minneapolis, and Omaha. Prices for organic soybeans are developed in Fargo, Minneapolis and Omaha. Prices were also established for organic corn in Detroit and San Francisco, and for organic soybeans in Detroit and Dallas. Singerman says organic prices do not follow the same distribution as conventional prices and will be level for some period of time before a jump to a different price level. He says that is determined by the “relative thinness of the organic markets and the impact of contracting on them. According to the market data, the average price levels for organic corn were more than twice that of conventional corn; however soybeans were more closely aligned with a doubling of the price.
Volatility was significantly less in the organic market as well, with organic corn prices only changing 12% of the time and soybeans only changing 20% of the time. The average size of the price change was 22 cents for corn and 31 cents for beans. Singerman says one can argue that organic crop prices reflect the additional production cost, therefore receive a premium price and can still be substituted for conventional corn and beans. He says while there could be some substitution, but not all, since conventional grain cannot be fed to organic livestock. Therefore organic and conventional crops are not substitutes for each other and the prices of organic corn and soybeans are not related to that of conventional corn and beans. In one example dating to July of 2007, the price of organic corn in Minneapolis rose from $6.75 to $10 per bushel, and at the same time the price of conventional corn declined 13%.
Looking at the growth of the organic livestock industry, Singerman says from 2001 to 2007 the acreage devoted to organic corn grew 84% and 42% for organic soybean acreage. But at the same time, the size of the organic beef industry grew 325%, and 241% for organic dairy. Since organic livestock must be fed organic corn, the reason for the price jump in July 2007 organic corn is easier to understand. Subsequently, he says there is volatility in both organic and conventional markets and anyone considering a jump to the organic market should beware that price premiums have been volatile as well. Additionally, the use of existing futures and options markets would be of little use to cross hedge the risks related to organic corn and beans.
Summary:
While price premiums for organic corn and soybeans may seem to be twice that of the prices of conventional crops, that relationship may be more coincidental than normal. Prices for both organic and conventional crops can be volatile, but they are set in different markets, they do not move in lock step with each other, and conventional crops cannot be substituted for organic crops meaning they are separate commodities.
Posted by Stu Ellis on 05/26 at 01:45 AM | Permalink
Comments
Posted by: Peggy at May 26, 2010 7:07AM
Allow me to sincerely, and publicly, apologize to Senor Ariel Singerman of Argentina, whom I improperly mistook for a lady, based on the popularity of the name “Ariel” in the US. He certainly was gracious in letting me know the error of my ways, and I salute him, albeit, a bit red faced!
~Stu
Posted by: Stu Ellis at May 26, 2010 11:11PM
This by far is one of the best written article about this topic. Incredibly accurate! Good job!
Posted by: Erin at May 27, 2010 2:02PM
Personally, I don’t feel compelled to compare prices when dealing with my produce. If it’s a good product, tastes great, I’m willing to shell out a few extra dollars for that product. And I’m pretty sure a large percentage of the population is as well… allowing the organic markets to thrive regardless.