Economics of Organic Fruit Production

In June 1998 HDRA began a one year study into the Economics of Organic Fruit Production.

The study aimed to provide information on:

• the size of the organic fruit market and potential for future growth
• returns and costs of growing organic top and soft fruit

Methodology

Information for this study was been obtained through contact and visits to marketing organisations, fruit processors and growers. For information on the market major buyers of organic fruit have been contacted to ascertain quantities bought and market trends. In consultation with the ADAS Fruit Team and the Welsh Institute of Rural Studies, data collection forms were devised to enable full costing techniques (all costs allocated to different cost centres) to arrive at net margins and costs of producing organic fruit per hectare (acre), and per kg (lb). In determining the financial returns, average yields over a number of years (5-10) were used rather than those related to a specific year and where necessary costs were related to those yields.

Presently there are a very small number of specialised organic fruit growers, therefore the sample was small: dessert apples (5), culinary apples (3) pear growers (3), strawberry growers (5). It was not possible to find any commercial data from growers of other organic fruit. Case study data from these growers of apples, pears and strawberries were used to provide 'best possible estimates' for the physical and financial performance of these organic fruit enterprises.

Results

The Organic Fruit Market

Organic fruit, at an 18% share, is the second largest sector of the organic food market in terms of retail value. The market has grown by 18% per annum for much of this decade, however, according to respondents to the HDRA study, the organic fruit market has on average increased of 95% in 1998. This is in line with the recent rapid growth of the rest of the organic market. The market is expected to continued to grow at 70% per annum over the next 5 years. This growth is from all market outlets ranging from multiples, wholesale, direct marketing and processing. On other hand, at 2,800 tonnes, UK production is extremely small and only growing by approximately 11% per annum in terms of area of fruit grown. Approximately 90% of the organic fruit consumed in the UK market is imported. In the UK the market is very buoyant with a large number of buyers chasing limited supplies, thus driving up prices which are generally 50-100% higher than conventional ones. Buyers have a definite preference for UK supplies.

Production economics for organic fruit

Summary of results 1

1 The figures presented here can be regarded as 'best possible estimates'. They are based on case study data provided by the various growers, however, it is important that they are treated with caution, as the sample was small.

The general conclusions are that despite low (lower than conventional) and sometimes variable yields most organic fruit growers are currently able to generate economic returns. Profitability is related to current high prices (premiums of 60-100% over conventional) for fruit and the ability to sell the whole crop to various outlets. Although individual costs differ the overall costs of production are similar between conventional and organic fruit. The profitability of organic fruit appears to be similar or greater than average conventional production. Break-even budgets indicate that even if prices fell by approximately 20% then organic fruit production could still be profitable. Price premiums of approximately 40% are still required to enable organic fruit production to be profitable at current yields.

Conversion to organic top fruit production

So the question remains, if it is possible to generate economic returns from organic production, why are more fruit growers not converting? The conversion process, taking 3 years for top fruit, is an obstacle as are the high costs of establishing fruit with returns not being generated for some years, especially for top fruit. There are two options for conversion to top fruit; converting an existing orchard or establishing a new one.

1. Converting an existing orchard
This may seem in the short-term to be the simplest, cheapest option but in practice conventional orchards often do not lend themselves to organic management. Evidence collected shows that total yields may fall by as much as 50% and gradeout 2 (quantity of yield in Class I) will decrease from 85% (conventional average) to 50% during the conversion period. Yields and grade-out will vary greatly between varieties. In a case study of a grower, income fell by £5850/hectare during the three year conversion period. However, following conversion, the grower's income level rose to above pre-conversion levels. Additional costs of conversion may involve the purchase of appropriate mowing and cultivation equipment. The total costs of conversion are £6,000/ha, spread over 3 years. Some growers have experienced less dramatic reductions in yields and others have developed their own processing facilities to juice the out-grades, thus ensuring a market for the whole of their crop during conversion.

2 The UK top fruit industry uses gradeout to denote the % marketable yield in Class I, rather than the % failing to reach this level.

2. Establishing a new orchard
This method of conversion is in many ways more preferable, enabling the establishment of an orchard more suitable for organic production. The costs of establishment depend very much on the growing system, and according to the results of this study vary from £3,700-£13,500/ha, break-even will be achieved approximately 5-6 years after planting. The cost of establishing a new orchard is approximately twice the cost of converting an existing orchard, however, the new orchard will in the long term offer higher returns. The advantage in converting an existing orchard lies in obtaining organic fruit quicker and maybe the only option for a grower wishing to convert all their orchards at once.

Conversion to strawberry production

In order to minimise pests and diseases, soft fruit such as strawberries must be grown in a rotation with other crops. This will require an organic farm 5 times larger than the strawberry area. Strawberries fit well into a rotation with arable crops and livestock but are also grown on vegetable farms. Conversion to such systems takes two years and usually involves growing fertility building crops (Grass/clover leys) for the first two years. The conversion period may involve a reduction in income, although it can be offset if the farm has livestock to graze the leys or set aside can be claimed on it (if eligible for arable area payments). The establishment of soft fruit also involves a capital cost, usually between £5,500-£9,500/hectare.

Organic aid

This is available to growers converting at a rate of £450/hectare spread over 5 years. When establishing a new orchard this represents approximately 2-3% of total costs during the first 5 years, and 8% of the costs of converting an established orchard. This rate is unlikely to offer a great incentive to growers wishing to convert to top fruit production. This compares unfavourably with many other European countries which pay higher rates for land undergoing conversion of fruit trees relative to cereals and grassland. Most other European countries also pay continued maintenance payments to organic growers.

Comparison with other European Union (EU) Countries Overall the information obtained confirms that organic fruit growing can be profitable and in many cases is more profitable than conventional production. Commonly EU countries have intensive systems of production with resulting high yields and also higher costs of production. Prices received for organic fruit in EU countries tend to be some 30-50% lower compared with the UK.

Recommendations

The number of UK organic fruit growers is currently small. Current price premiums offer potential economically profitable returns, however, conventional growers are reluctant to convert. In order to give growers confidence to take up the challenge of organic fruit production they need encouragement from government and industry in terms of continued aid to assist conversion, more money for research to improve the quantity and quality of economic data available, to improve production techniques and finally money to disseminate this information to growers. This report suggests that continued economic monitoring of converting and existing organic fruit farms should be undertaken. Fruit buyers should also encourage UK growers by offering them market incentives. Unless the UK organic fruit growers receive this encouragement, the majority of organic fruit may continue to be imported.

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