Although we find ourselves in the depths of winter here in New Hope, PA, we have been busy with conferences and trade shows. In this newsletter, I wanted to take the opportunity to write about a subject I just spoke about during a presentation at the NJ Plant show, The Economics of Going Green.
When considering a conventional to organic approach, many studies have relied upon the top-line revenue increase based on selling organic produce as a primary reason to make the economic switch. I have been looking at the bottom-line implications of natural or organic methods.
Top line v. Bottom Line
By top-line economic results I am referring to an increase in revenues. This occurs, for example, when a grower is able to sell an organic product for a premium or a landscaper is able to add an organic or natural product at an increased expense. Generally, this results in less price sensitivity from organic consumers as well as some increased costs in smaller scale production.
By bottom line I am actually referring to the possibility of lowering costs versus traditional methods. The fundamental principle is allowing biology to work for the plants rather than creating plants that are dependent on chemical feeding.
Soil biology refers to the ecosystem surrounding the roots of plants and includes mycorrhizae, beneficial bacteria, beneficial nematodes, earthworms, protozoa, anthropods and many more. All these organisms work together to break down organic matter and create nutrients for plants. This is completely opposite from chemical regimes which inject plants with the nutrients they need. Utilizing soil biology makes the plants much stronger as they are able to fend for themselves and will continue to enhance the surrounding soil.
The stronger plants are similar to the analogy of preventative medicine for humans. It avoids the medications that can cause other problems and helps to prevent symptoms that need to be treated. It also reduces the costs of these medications, since there are less of them.
At the core of improving the bottom line results is saving costs on inputs. Typical inputs for growers are water, fertilizer, pesticide, and maintenance. Increased soil biology, particularly mycorrhizal activity, greatly reduces the need for water. In many states, this has become a very high input cost and a reduction can equate to dramatic cost savings. Synthetic fertilizer costs have also risen dramatically as the price of petroleum (from which most are derived) has inflated. The same is true of pesticides.
Maintenance is a different input cost. For some growers this may increase under an organic or natural conversion for others there may be a reduction.
It is also important to mention some other ancillary expenditures which will decrease. There are social costs, such as the expenses associated with drinking water nitrate and other contamination that will be reduced.
The amount of cost benefits will vary by grower and by situation. Each individual plan will differ buy have the same basis in soil biology. The focus is healthy soil to hold water, create diversity and suppress pests. Practical issues will include:
- Patience: unlike a current synthetic regime, results will not happen overnight
- Variability: results will always vary based on the biology and situational factors
- Interaction of natural v. synthetic: many growers may find they need to continue some form of synthetic which can work so long as the interaction does not negate the biology
In my lecture I outlined a formula to measure the value from a conversion. It is a basic financial formula which many CFOs rely upon when they are tasked with making decisions on projects. It is called the New Present Value (NPV) formula:
It basically measures the amount of future cash flows against the upfront investment in a project. If the Net Present Value is positive, the project should be pursued. In the above formula Rt is the cash flow for each particular year, discounted back to the present (1+i)t at the particular interest rate (i). Below is an example for demonstration purposes:
Upfront Cost: $90
Annual reduction in water: $10
Annual reduction in fertilizer: $10
Annual reduction in pesticide: $5
Annual reduction in maintenance: Even
In this example, the NPV is positive so economically the project should be pursued. Again, this is just an example. All individual situations will vary but hopefully this helps in framing decisions about implementing organic or more natural practices.