Organic farming is recognized as one source for innovation helping agriculture to develop sustainably. However, the understanding of innovation in agriculture is characterized by technical optimism, relying mainly on new inputs and technologies originating from research. The paper uses the alternative framework of innovation systems describing innovation as the outcome of stakeholder interaction and examples from the SOLID (Sustainable Organic Low-Input Dairying) project to discuss the role of farmers, researchers and knowledge exchange for innovation. We used a farmer-led participatory approach to identify problems of organic and low-input dairy farming in Europe and develop and evaluate innovative practices. Experience so far shows that improvements of sustainability can be made through better exploitation of knowledge. For example, it is recognized that optimal utilization of good quality forage is vitally important, but farmers showed a lack of confidence in the reliability of forage production both in quantity and quality. We conclude that the systems framework improves the understanding of innovation processes in organic agriculture. Farmer-led research is an effective way to bring together the scientific approach with the farmers’ practical and context knowledge in finding solutions to problems experienced by farmers and to develop sustainability.