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Economics of the Organic Farming Industry

In: Business and Management

Submitted By andrea6284
Words 2427
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There are several factors that may influence a conventional farmer’s decision to get into organic farming. A farmer may decide to get into organic farming for personal health related reasons. For example, if the farmer is on a strict organic diet, he or she may prefer to enter the organic market in order to share the benefits with their consumers. An economic reason why a farmer may choose to enter the organic farming market is for the supplier surplus. Organic farmers tend to follow a differentiation market strategy rather than a cost leadership strategy. Therefore, their products usually warrant a higher price point. Consumers tend to pay more for a good that they perceive is higher in quality. Although the higher price point is an incentive to enter the organic market, higher profits are not guaranteed. The cost of transitioning from conventional farming to organic farming could be rough for a smaller firm.

When a farmer leaves the conventional market to enter the organic market he gives up the opportunity to sell a higher volume of products at a lower price point. The trade-off is whether to sell a higher volume at a lower price or to sell to a specific market for a higher price. Organic farmers also spend more time on hand weeding crops than non-organic farmers; this time could be spent elsewhere in the firm’s value chain. Production cost—including the cost of the organic certification fee—is slightly higher compared to non-organic farms. Therefore, profit margins may take a hit in the short-term.

Organic farmers can combine resources to create wealth is two ways. One way is through community supported agriculture (CSA). Through CSA, members pay for their share of the harvest at the beginning of the year. CSA creates wealth for the farmers because this strategy allows farmers to stabilize income throughout the year. Income stability is important in any…...

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