Commentator

Dr. John E. Ikerd

Professor Emeritus of Agricultural Economics 

University of Missouri Columbia 

College of Agriculture, Food and Natural Resources 

Email: Dr. John Ikerd

Website: www.web.missouri.edu/~ikerdj 

What’s It All About?

The Economics of Sustainable Organic Farming[i]

When the economics of sustainable or organic farming is mentioned, most people probably think of the phenomenal growth in sales of organic foods over the past 20 years. Sales of organic foods grew at a rate of more than 20% per year throughout the decade of the 1990s and well into the 2000s, doubling every three to four years. The organic food market continues to grow, in spite of the current economic recession with the Organic Trade Association recently reporting that sales of organic foods in 2008 were more than 15% higher than in 2007. Sales figures for 2009 are not yet available, but a recent Harris survey conducted for Whole Foods indicated that nearly 80% of consumers were very reluctant to compromise on food quality and 70% were still buying as much or more organic food than before the economic downturn.

The recent growth rate is somewhat below those of recent years, but organic foods continue to be a rapidly growing segment of the U.S. food market. While core buyers of organic foods account for less than 20% of American consumers, close to 60% have become occasional buyers. Organics still account for less than 4% of total food sales, but there is no doubt that organic foods are making significant inroads into the diets of mainstream America.

However, the critics downplay the economic importance of organic foods. They claim that organics is destined to remain a small, niche market because “organic agriculture simply cannot feed the world.” With a growing global population, they claim that we have to continue to rely on conventional industrial agriculture to meet the food needs of global society. They conveniently ignore the fact that today’s industrial agriculture uses almost 20% of the total fossil energy used in the U.S. and contributes an even larger percentage to total greenhouse gas emissions. Agriculture also has become the number one source of nonpoint source pollution in the U.S., as exemplified by large dead zones in the Gulf of Mexico and Chesapeake Bay.

Most energy experts agree that we are at or near a peak in global petroleum production and economically recoverable petroleum will be largely depleted by 2050. Energy from coal, the only abundant source of fossil energy, cannot be used to offset petroleum without intensifying the problems of global climate change. All energy alternatives are less plentiful and will be more costly. Sooner or later we must face the fact that we simply cannot continue to deplete fossil energy and pollute the natural environment without threatening the future of human society.

In terms of economics, food production and distribution can be described as value-adding processes. Hunters and gatherers took their food directly from nature; there were no intermediate processes of food production and distribution. With the creation of agriculture, came the various production processes associated with crop cultivation and animal domestication. These processes added value through cultural practices that nurtured the natural plants and animals that best served human needs for food and fiber and discouraged their natural competitors. This kind of primitive agriculture was effective, but not very efficient.  It did the right things, but didn’t do them very well.

When improved agricultural practices resulted in food production surpluses, markets added further economic value and efficiency by facilitating specialization and trade. As producers and consumers became more separated geographically, additional economic value was added through specialized distribution systems. Today’s global food system is a product of the natural evolution of this simple process of continually adding value. The economic simplicity of the process has been obscured by its technical complexity.

 All economic value, including all value added to food, is created through one or more of the four basic economic processes that change the form, place, time, or possession of things taken from nature. We create economic value through processing and manufacturing, which changes the form of things; through transportation, which changes their location; through storage, which changes the time of sale; and finally through trade or exchange, which gets products into the hands of those individuals who value them most. There is no way to determine the economic value of anything unless we know what it is, form; where it is; place; when it’s available; time; and finally, who has it and who wants it, individuality.

The industrial approach to food production and distribution has focused on adding value by changing the places, times, and forms in which food products are offered for sale. Industrial production gains its economic efficiency through specialization, standardization, and consolidation of control. By specializing, each specialized function can be performed more efficiently; by standardizing, specialized processes can be fit together to create valuable end products; and by consolidating control, systems can be managed so as to remove the economic redundancies and inefficiencies inherent in market-driven systems.

To achieve these economic efficiencies, food producers and distributors first specialized in producing products from a few highly efficient plants and animals, then standardized and routinized production and distribution processes, and now are consolidating the food system under the control of a handful of giant global food corporations. However, in the process of achieving greater economic efficiency, they have been forced to treat consumers as if we all wanted pretty much the same basic food items.

That’s why so much of our plant based products come from corn and soybeans – in so many different forms, everywhere, all of the time. That’s why the meat, milk, and eggs in our supermarkets come from a few select species of cattle, hogs, and chickens produced in large animal factories. That’s why even fresh fruit and vegetable markets are dominated by a few major global suppliers. And that’s why national and international organic standards have facilitated the “industrialization of organics.” To achieve economic efficiency, the food corporations had to convince at least a large proportion of us to accept the “same basic stuff.” However, people are unique; we don’t all have the same tastes and preferences. The same things have different values to any two different people, even at the same place and time.

The strategies required to maximize the economic efficiency of industrial food production are in direct conflict with the strategies required to maximize economic effectiveness –meaning to ensure that individuals get the things they value most. It does things right, but has lost its ability to do the right things.

The food corporations are not ignorant of this basic economic reality. That’s why they are constantly changing the physical forms of food products through innovative processing, manufacturing, packaging, and pre-preparation. However, the differentiation is largely superficial or cosmetic. It would be inefficient to produce and process as many different food items as there are differences in individual tastes and preferences. That’s why food processors and retailers focus on offering virtually every product in the store every day of the year, regardless of the seasonality of crop and livestock production. That’s why corporate retailers focus on convenient locations and saturating profitable markets with large numbers of stores. They don’t want food shoppers to think about what they not getting. They don’t want their customers to realize they are being forced to settle for things they don’t actually need or even want.

The more recent market trend has been toward “mass customization.” Some processors are trying to actually produce a lot of fundamentally different things, but do it more efficiently. However, achieving true diversity in highly efficient systems leads to increasing complexity, connectivity, internal dependencies, all of which increase the vulnerability of the food system to chaotic disruption and even potential collapse. In fact, the current global food system can be characterized quite accurately by the “Panarchy theory” of ecological systems dynamics.[1] According to the theory, the same ecological principles apply to social and economic systems as well as natural ecosystems. The theory purports to explain the natural evolution of all types of complex systems, including why some systems remain resilient and adaptive while others become vulnerable to catastrophic collapse.

As natural ecosystems develop, they evolve toward increasing “complexity,” meaning an increasing number of more highly specialized functions. As systems become more complex, the internal dependencies among the specialized functions increase, which the theory refers to as increasing “connectivity.” Increasing complexity and connectivity increase the efficiency of systems by removing redundancies both within and among the various systems functions. However, as the redundancies are removed, systems lose their versatility and adaptability and become more vulnerable to outside shocks. They also become less able to respond to fundamental changes in their physical environment. A failure of any function within the system can ripple through the entire system, causing the whole system to collapse.

Natural ecosystems are self-making and self-regulating and evolve naturally toward complexity and connectivity. Social and economic systems, on the other hand, are created and regulated by people. In the purposeful pursuit of greater economic efficiency, economic systems become increasingly dependent on highly complex and interconnected functions supported by highly specialized and interrelated technologies and methodologies. As systems increase in complexity and connectivity they also resort to increasingly comprehensive regulatory controls to remove any remaining inter-functional redundancies. As with natural ecosystems, economic systems become less resilient and less adaptive as they become more efficient. The more economically efficient the system, the more vulnerable it is to collapse.

The global food system today has all of the basic characteristics of complexity, connectivity, regulatory control described in Panarchy theory. The Panarchic evolution of the food industry is widely understood within the industry and has been extensively documented in recent books such as The End of Food[2] and America’s Food.[3] For example, the increasingly popularity of “just in time” delivery has resulted in only three-to-five days supply of many food items in the food supply pipeline at any point in time. Any major disruption of the global food distribution system could have catastrophic short run consequences. The dramatic rise in food prices in 2008 was indicative of the potential impact a significant shortfall in any major crop can have on the food system as a whole. In 2008, the trigger was the diversion of corn to ethanol production. The next disruption could be almost anything related to food, and it could be catastrophic.

Historically, open markets at various functional levels gave food industry participants a degree of versatility and flexibility in marketing their products. Most of these markets have been replaced with a variety of contractual arrangements.[4]  The arrangements allow the large global food retailers and processors to exert extensive regulation and control over the food system by simply exerting their economic and political power. The food system appears to be in the final stages of both efficiency and vulnerability, as described by Panarchy theory. The various systems functions – production, processing, distribution, and retailing -- have become increasingly complex, connected, regulated, and dependent.

This is the situation confronted by the global society today: held hostage by a food system that fails to meet the real needs and wants of people while it edges ever closer to global economic collapse. Industrial agriculture is an integral part of a food system that is not ecologically, socially, or economically sustainable.

The real economic advantage of organic farming is not its growing popularity but instead is its economic sustainability. Sustainable organic farming is not about creating another cheap illusion of differentiation to turn a quick profit. To be sustainable, organic farming must produce foods that have true ecological, social, and economic integrity – foods that are wholesome and nutritious, that don’t degrade the earth or diminish opportunities for the future of humanity. Sustainable organic farms also yield a fair economic return to farmers and other food systems workers, and produce foods that are affordable or otherwise available to all. Fortunately, a true organic farm meets these standards by the very nature of its operation.

Sustainable organic farms are managed as living organisms, rather than inanimate mechanisms. Mechanisms function according to physical laws, expressed as mathematical formulas. Living systems function according to general principles. When we apply a specific production practice or management strategy to a particular plant, animal, or person we never know for sure how they will react. We know “in principle” how living things will respond, but not how a particular plant, animal, or person will respond in a particular situation.

In principle, living systems are holistic. The whole of a sustainable farm is something more than the sum of its parts. The living system of a farm is composed of soil organisms, insects, plants, animals, and people – including the farm operator and farm family. The whole farm has properties that emerge from the whole, that are not contained in individual farm enterprises. The wastes from one enterprise provide energy needed to feed or fuel another. The various farm enterprises have properties that disappear or are lost when specialized enterprises are separated from the whole.

In principle, sustainable farms are diverse. Diversity is necessary to maintain the resistance and resilience needed to survive shocks and adjust to adversity. Diversity among crop and livestock enterprises also allow agroecosystems to capture, store, and recycle the solar energy needed for renewal and regeneration, reducing their reliance on fossil energy. Diversity also creates opportunities to meet the needs and wants of consumers with diverse tastes and preferences, thus add economic value by respecting economic individuality.

The payoff from holism and diversity is realized through the principle of interdependence or mutuality. To achieve sustainability, relationships among the diverse aspects of sustainable farms must be mutually beneficial rather than mutually dependent. Interdependence is fundamentally different from the connectedness or mutually-dependent complexity of highly efficient systems. Interdependence implies a degree of redundancy because those in mutually beneficial relationships must have an unused capacity that would allow them to dissolve the relationships, if necessary. Interdependent relationships among diverse components make it possible to create sustainable whole farm systems out of enterprises that individually would be unsustainable.

Relationships among people within sustainable food systems must be built upon the social principle of trust rather than laws and contracts. People must be honest, fair, and responsible in their dealings with each other. In addition, humans are fallible beings; at times, we all need mercy rather than justice. Those in sustainable organic food systems must value caring and kindness. People must be empathetic, respectful, and compassionate toward each other. Finally, people must find the courage to be trusting and caring. It takes “moral courage” to sustain economic relationships in a world where trusting and caring are seen as naïve or idealistic.

  People on sustainable organic farms and within sustainable food systems also must respect the basic principles of economics. The most basic economic principles reflect the fundamental nature of individual human behavior. We value things individually that are scarce, not necessarily things like air and water, which are necessary but also abundant. We want to get as much usefulness as we can from whatever we have; we want to use our time, money, and energy efficiently. We also need to be able to make independent decisions; we value our sovereignty.

Finally, a sustainable organic food system must have ecological, social, and economic integrity – all three. The same basic principles must permeate all aspects of food production and distribution systems. The principles of holism, diversity, and interdependence must be reflected both within and among economic organizations, including the farms, processors, and distributors that make up the global food system. The principles of trust, kindness, and courage must also be reflected in the economic relationships within and among the farms and firms that make up the food system. Sustainability requires new ways of thinking about economics and a renewed commitment to economic integrity.

This is the real economics of sustainable organic farming. It’s about relying on diverse, living, biological systems to regenerate and renew the productivity of the land, rather than depending on fossil energy. It’s about economic resilience – the ability to withstand unexpected economic shocks and to continually evolve as needed to meet the real needs and wants of food consumers and the long run food needs of humanity. It’s about treating people as real, living beings with unique needs and wants that deserve to be respected and addressed. It’s about farming, working, and living in harmony with the fundamental principles of nature – ecological, social, and economic – rather than trying to bend and twist nature to serve the economic whims of corporate investors.

No other approach to farming, even “certified” organic farming, is capable of maintaining the productivity and economic value of agriculture for the benefit of farmers, consumers, or the future of humanity. No other kind of food system is capable of meeting the food needs of a growing global population in a chaotic world that is running out of fossil energy. That’s what the real economics of sustainable organic farming is about – it’s about sustainable economic value.

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