Posted by: Mahdi Ebrahimi | February 8, 2008

Demand, Prices Raise Organic Food Stakes — Popularity Just Can’t Keep Pace With Costs

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 20percent 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.

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.

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 there.



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