by Charles Moore, President, Premier Products
In 1997, U.S. sales of organic food and beverages totaled less than $4 billion, according to the Organic Trade Association. Fast forward to 2014, and the OTA reports organic sales surpassed $35 billion, with demand projected to grow to over $100 billion by 2025. While U.S. growth in total food and beverage consumption is relatively flat, organic demand has fueled growth in both total consumption and dollar sales.
But organic food supply continues to be limited. Farmers in the U.S. have by far the highest per acre yield — thanks to technology and advanced scientific methods — on average producing five times more per acreage than the average worldwide per acreage yield for the top 10 food commodities. Despite demand and technological advantages, non-organic farmers are hesitating to convert because of big revenue impacts.
REQUIREMENTS SHYING FARMERS AWAY FROM ORGANIC
One of the requirements to become organic certified is that the land must be synthetic pesticide- and fertilizer-free for three consecutive years. The USDA also requires buffer zones of surrounding land to combat synthetic pesticide and fertilizer drift, which in many cases total more acreage than the growing area itself. These buffer zones essentially become dead space, contributing no revenue to operations. Many farmers have attempted to make the transition to organic just to find they cannot forego the loss of revenue from drift zones. On top of that, by converting, farmers lose government subsidies, which aren’t available to organic farmers. And even after following the USDA’s stringent requirements for certification, the possibility of disapproval remains as approval is often in the hands of a lower-level organic certifying agent who has full discretion on the interpretation of those requirements. If organic farming does not pick up, the U.S. might be forced to look to other countries for supply, becoming foreign-dependent on commodities that we are known to be a leader in. Potential countries include China and India because of their vast undeveloped and organic soil land mass. While the USDA does have certifying agent offices in these and other countries, they are grossly understaffed compared to the U.S., causing wait times for foreign approval to be much longer as well as potential oversight and possible certifying agent abuses (such as accepting monetary or other gifts to influence decisions). These requirements, coupled with the current supply-versus-demand scenario, make organic farming more expensive. As a result, the price gap between organic and non-organic continues to widen, and soon organic may be only affordable to the wealthiest consumers.
THE EFFECTS ON RETAILERS
Larger manufacturers and retailers are struggling to find supplies that can be offered at more affordable prices. Last year, Wal-Mart agreed to sell the Wild Oats brand in an effort to sell cheaper organic offerings, they claim 25 percent less. Based on data by my company, Premier Products, Inc., every week, on average, Wal-Mart has an over 40 percent out-of-stock-rate on these items. And it’s not just short-term out-of-stocks. Many are categorized as long term, which is defined as not being on shelf for 15 days or more. Long-standing research, including data reported by the Harvard Business Review, shows that consumers will take their entire shopping experience to another retailer if they cannot find products on shelf. Retailers like Wal-Mart may be hurting themselves by at tempting to get into this segment without the needed supply.
WHAT ARE THE SOLUTIONS?
One possible solution to spur more supply would be to relax certain organic standards in the U.S. Buffer zones could be reduced or taken away altogether. Would it be better to have crops that may be exposed to minor dustings of synthetic fertilizer or pesticides? Or should the U.S. rely on foreign-produced organic supply with very little monitoring? Along this same line, the U.S. might look at increasing foreign USDA certifying agents, in addition to the supervisory management personnel needed to maintain integrity. Given current budget concerns, this solution is not viable. But a worldwide agency, funded by each participating country, composed of each country’s own certifying agency, could be formed to adjudicate organic certification. Instead of USDA agents in other countries, U.S. agents could spot-check organic products that arrive in the U.S. through chemical testing. Stipulations could be placed such as a three-strike rule: If contaminants are found entering the U.S. three times, the supplying country would not be allowed to provide product to the U.S. In addition, fines could be implemented against the agency responsible for the certification in that country. This solution offers some level of maintenance and accountability for foreign organic products coming into the U.S. market.
An obvious solution is to shift some of the current farm subsidies from non-organic farming to organic. In 2014, non-organic farmers received more than $15 billion in commodity crops subsidies. Although the number has decreased from 17 percent to 10 percent of total revenue in the last 10 years, current subsidies are outdated and not evolving with consumer preferences.
In a time where organic demand is outrunning supply, organic farmers can’t receive subsidies for producing healthier alternatives. Add in the higher cost of required certifications and inspections, and the extremely high insurance premiums in comparison to non-organic farms (which are normally subsidized for up to 100 percent of their insurance premiums), and it seems
unconscionable. What non-organic farmer would want to switch when they are receiving, on average, 25 percent of their bot tom-line profit for just collecting subsidies?
Please note: This article contains the sole views and opinions of Charles Moore and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security.