Where are organic grain prices headed?

I was asked an impossible question last week by someone doing a budget to rent some additional land . "What will the organic feed wheat price will be in 2012?"  As I don't know what it will be in Nov 2011 this was a tall order.


We have a guide as to what the conventional wheat market will be from the wheat futures prices which are available for Nov 2012 so can we work something based on this?  Below is my reply to the email.  

Historically the organic value has been roughly twice the conventional market but I don't feel that is a trend that will be continued given the strength of conventional grain prices and so perhaps we need a new rule of thumb to work on.  I believe there is significant demand side price in-elasticity at the moment and high prices could significantly reduce demand.  Given this can we continue to expect a premium of twice the organic price?  No. 

If we assume organic yields are 60% of conventional yields the market should pay the conventional price divided  by 0.6.  According to the futures market Nov 2012 wheat is £153.50.  Knock of the transaction charge for the futures of about £5 and we have a delivered price of £148.50 divide this by 0.6 and we have a price of £247.50.  From this point we have to then look at pricing the fertility building phase of the rotation.  This would indicate a figure higher than £247.50.  However ....  Now comes the less positive bit. 

A reasonably accurately calculated Cost of Production figure comes out at just under £200 and so it could be argued that you could sell below £247.50 and be profitable and some will I'm sure. 
Where is organic demand heading?  The Soil Association Market Report 2011 which was published recently suggests continued pressure in the market; only Waitrose and M&S anticipating growth and others multiples seeing the market as static.  The bakery and breakfast cereal segments (sorry horrid marketing jargon) saw significant falls in sales.  The livestock producers I speak to are suggesting that prices above £250 are difficult to live with.

Looking at it from both the production and the demand side there seems to be a convergence at a figure £240 - £250.

Perhaps the question should be reversed.  With conventional wheat at £148.50 and organic wheat at £247.50 which would you grow?  Looking at the sensitivity of this price how much would each have to move to get you to reverse that decision?

Do you agree?   I'd welcome your comments.