Effect of yield and price risk on conversion from conventional to organic farming, Australian Journal of Agricultural and Resource Economics

and Marcel van Asseldonk† Although the benefits of organic farming are already well known, the conversion to organic farming does not proceed as the Dutch government expected. In order to investigate the conversion decisions of Dutch arable farms, a discrete stochastic dynamic utility-efficient programming (DUEP) model is developed with special atten-tion for yield and price risk of conventional, conversion and organic crops. The model maximizes the expected utility of the farmer depending on the farmer’s risk attitude. The DUEP model is an extension of a dynamic linear programming model that maxi-mized the labour income of conversion from conventional to organic farming over a 10 year planning horizon. The DUEP model was used to model a typical farm for the central clay region in the Netherlands. The results show that for a risk-neutral farmer it is optimal to convert to organic farming. However, for a more risk-averse farmer it is only optimal to fully convert if policy incentives are applied such as taxes on pesti-cides or subsidies on conversion, or if the market for the organic products becomes more stable. Key words: arable farming, conversion process, dynamic utility-efficient programming model, organic farming, risk aversion. 1