True lovers of organic food have always been willing to pay more for it: They spend $3.99 on a half gallon of organic milk when a whole gallon of conventional milk costs $1 less. But that devotion may soon be tested. The forces that have driven grocery prices up sharply over the past year – growing demand for food in China and a global biofuels boom – have had an impact on the organic food market as well. Meanwhile, U.S. farmers haven’t kept pace with demand for organic food, sales of which shot up 21 percent in 2006, and that has also sent prices soaring.
And supplies of organic soybeans and grains are squeezed – not only are they needed for human consumption, they serve as feed for the animals that will be sent to market as certified organic beef, chicken, eggs and pork.
“The organic community has suffered, and enjoyed, a wonderful explosion in demand of 20 percent per year for basic raw materials, but when you look at supply in the U.S., we’re lucky if it’s growing at 1 percent per year,” said Lynn Clarkson, president of Clarkson Grain Co., a grain-handling business based in Cerro Gordo, Ill.
The organic market makes up nearly 3 percent of the overall food market, a share that has increased every year for the past decade. It’s a small but fast-growing segment of an otherwise sluggish food industry.
But while the farmland dedicated to organic crops has expanded, it still makes up just a sliver of the nation’s total: a half
percent each of all cropland and pastureland in 2005, according to the latest statistics from the U.S. Department of Agriculture. “We know we are not meeting demand with domestic supply,” said Caren Wilcox, head of the Organic Trade Association.
One reason for the lagging supply is the fact that it takes a minimum of three years to transition cropland farmed conventionally to an organic operation.
“We’re working with biological realities and economic forces that work on very different timetables,” said Klaas Martens, who runs a 1,400-acre organic farm with his wife, Mary-Howell Martens, in Penn Yan in upstate New York.
The Martenses say their farm supplies about three-quarters of the state’s organic dairy farmers with soybeans and corn. They’ve witnessed the supply crunch firsthand: An influx of livestock farmers into the market has helped push prices up sharply – a blessing for grain farmers like them, but a curse for the meat and dairy producers, particularly those small dairy farmers who sell to major organic milk brands under long-term contract.
Organic corn that sold for about $200 a ton last fall now commands about $500 a ton – where it can be found, said Mary-Howell.
As a result, “more marginal livestock farms are going to get out of organic,” she said. She knows of several buckling under old debt and high grain prices. Others will source their grains from outside the U.S., from Canada, China or South America.
Paul de la Bruere recently converted his Vermont dairy farm to an organic one. But he made the choice before grain costs ran sharply higher, and he’s had to hunt for cheaper corn. Now he’s found a cheaper supply across the border, in Canada.
“The price is going to be quite a bit more reasonable,” de la Bruere said, about $400 per ton versus more than $500.
There has been talk of some leading brands switching products out of organics and into the conventional market because corn and soybean supplies are so tight and prices keep rising, said Peter Golbitz, president of Soyatech, an information and consulting company.
Some companies run a hybrid operation, producing some certified organic products and others conventionally. The maker of Silk, a popular brand of organic soymilk, has recently started selling new products that aren’t certified organic.
A spokeswoman for Silk’s parent company WhiteWave Foods, which is a unit of publicly held Dean Foods Co., said 60 percent of the Silk soymilk product line carries the USDA organic seal. New products Silk Live and Silk Yogurt are made with some organic soybeans, but not enough to qualify them for “made with” status. She declined to say why the company has chosen not to produce 100 percent organic and forgo the coveted organic label on some of its products.
“A very high percentage of our members say that if they could get more organic ingredients, they would be able to market more organic products,” said Wilcox of the organic trade group.
Historically high prices for conventional corn and soybeans may have pressured some would-be organic farmers to stay in the conventional market, said Allan Routh, president of the grains and foods group of SunOpta Inc., a publicly traded processor of organic grains and producer of private-label organic soymilk.
The three-year transition to an organic farm “is rarely done strictly as a matter of economics,” Routh saod. It’s often as much a philosophical move, an acceptance of a particular belief system. Still, some farmers who considered going organic two or three years ago may have been tempted by promise of record prices to keep their farms conventional.
Demand for ethanol in the U.S. and biodiesel abroad has helped send prices of corn and soybeans to record highs. At the same time, the rapid expansion of China, India and other developing nations has multiplied demand for agricultural products for both food and fuel in those countries.
The key question for organic food makers remains, how much are shoppers willing to pay? Organic grocery prices are in many cases already well above those in the regular grocery aisles. Just how much is the “certified organic” label worth to a paying consumer?
The Natural Marketing Institute conducts an annual survey of 26,000 consumers nationwide. Five years ago, when asked whether organic food and drinks are worth paying an extra 20 percent for, 17 percent of respondents completely agreed or somewhat agreed. In 2006, that number rose to 26 percent – a significant increase in the general population shoppers who are willing to pay more, said Maryellen Molyneaux, NMI president.
But what’s really important is what she dubs the “devoted” segment of the market, the “core organic user.”
“They have almost double the spending of any other segment,” and account for roughly 75 percent of all organic spending, Molyneaux said. “They have integrated organic into their lifestyles.”
“I wouldn’t say they don’t have a price limit,” she said. “But I would say they are significantly less price conscious. They’re willing to sacrifice in other areas to buy organic.”