Balancing act

It’s basic economics. Supply and demand are interrelated and prices fluctuate in response to market conditions. But it is not always easy to apply these rules to today’s organic food industry. Forces such as varying growing conditions and the economic downturn are at work, leaving growers and manufacturers feeling the pinch.

On a primary level, the continuous growth of the organic industry is undoubtedly having an effect on the supply of organic products and ingredients. According to the Greenfield, Mass.-based Organic Trade As­soc­iation (OTA), U.S. sales of organic food and beverages grew from $1 billion in 1990 to an estimated $20 billion in 2007, and are projected to reach nearly $23.6 billion in 2008.

“We’re continuing to see double-digit growth in organics,” says Robert An­der­son, president and founder of Boalsburg, Pa.-based Sustainable Strategies-Advisors in Food and Agriculture. “While it’s not 20% to 25% growth, double-digit growth in the food industry is pretty extraordinary.”

But while most conventional manufacturers would welcome such rapid growth, the players in the organic sector are finding it to be a double-edged sword. Due to the complex and timely nature of the organic production process, supply is simply not keeping up with demand.

“Organic agriculture spans all types of products and all types of commodity ingredients around the world,” says Holly Givens, public affairs advisor for the OTA. “Supply challenges in one or two sectors and then that can ripple out to affect all of the different products that may use those ingredients.”

Industry insiders say that the in­creased use of corn and soybeans for biofuels has been a factor. Over the past few years a large number of conventional and organic farmers have been lured by financial incentives to grow grains for biofuels, resulting in a lack of raw materials for food products and animal feed.

“Not only are those farms switching to non-food production, but their crops may have been key to both human and animal feed, and that puts pressure on the remaining types of crops,” explains Katherine DiMatteo, senior associate of New Castle, Va.-based Wolf, DiMatteo Associates. “It really points out how our food economy revolves around soy and corn.”

Insiders say that while the popularity of biofuels has resulted in farmers getting paid good rates for their grains, it has also reduced the incentive for producers to convert to their crop to organic. “Organic is a pretty big commitment, and obviously the ones that have been in it for years are going to continue to be in it, but it’s not attracting a lot of new people who want to venture in to the industry,” says Craig Bair, president of Greensboro, N.C.-based Food Solutions, Inc.

Observers note that in addition to products such as cereals and nutritional bars that rely on grains, organic meat and dairy offerings are feeling the biggest impact of the constrained supply of corn and soy, which are the primary source of animal feed. Couple this with the timely process of converting a cattle herd to organic and the high repeat purchase rate of organic dairy goods, and the result is a supply that is stretched incredibly thin.
Furthermore, insiders say that complicated international relationships within the organic industry have limited the pool from which organic producers can pull their ingredients.  Although organic ingredients coming into the U.S. from other countries must be certified by the National Organic Program, there are no universal standards to which countries must adhere.

“There are no international equivalency agreements regarding organic standards, so every country has their own little rules and nuances,” says Anderson. “In a lot of ways there are technical barriers to trade that have prevented the free flow of ingredients from other countries.”  

STEADY SUPPLY OF PRODUCE
On the flipside of the organic supply conundrum is the produce industry, which seems to be experiencing a steady and healthy supply of goods. Insiders say that as more efficiencies are reached in terms of organic farming methods, the price of the products has come down which, in turn, has boosted the items’ appeal.

“In apples this year, we’re going to see about 7 millon to 7.5 million boxes of organic apples out of Washington state, which is almost double what we did last year,” says Gene Loudon, director of marketing for Wenatchee, Wash.-based Dovex. “Supply wise, it seems like we have sufficient amounts for the industry.”

James Bullock, director of quality assurance and purchasing for Chelsea, Mass.-based Olivia’s Organics says that despite a consistent increase in demand for his company’s products, it has not ran into any issues with supply. He says that Olivia’s Organics has been able to keep things in check on the processing side by over sourcing its organic ingredients.

“If you were a retailer, and you were 50% organic and 50% conventional on sales, we’d probably want to source 70% organic and 30% conventional because you can always put the organic in the conventional blends, but you can’t go the other way,” he says.

Of course, a discussion about supply and demand would be incomplete without the mention of price and how it is reacting to such a volatile market. Primarily, the industry has experienced price stabilization relative to the food market. While there is still a price premium on organic, it’s generally in a 10% to 20% range.

However, in the industries that are feeling the most heat, such as the organic meat and dairy sectors, rising price points exist as proof of suppliers’ struggles. “Part of this domino effect is that the price has to go up for milk and meat producers because they’re paying higher prices because of supply shortages,” says DiMatteo. “The question then is will demand slow down because the price reaches a threshold level that is no longer attractive to the consumer?”

So what are organic producers to do? Observers note that while tactics of forecasting out 18 months to two years should be considered a must, more proactive approaches must be applied.

“There has been a movement to work directly with and develop agreements with producers, producer groups and international cooperatives,” explains Anderson. “Companies are developing not only their own supply chain links but also their own agricultural connections to communities nationally and internationally.”

Additionally, insiders say that recent revisions to the farm bill have the potential to provide incentive for farmers to convert to organic. In the meantime, the USDA is reportedly offering a cost share incentive for producers and suppliers who opt to get certified. 

Looking forward, the future of the organic supply remains uncertain, especially as analysts work to predict just how much more the industry can grow. The pressing economy, and the demand it is putting on shoppers’ wallets, is expected to play a role in determining the extent to which organic profits can expand.

“We’ve had these double-digit growth years for a long period of time, and I think it’s starting to wane a little a bit at this stage,” says Bair. “I still think it’s strong. I don’t think it’s fading away, but we’re not going to see as much growth in the area as we have in the past.”