Organic crop production: Achieving critical mass
It is well known the market for certified organic raw materials is tight, but few markets may be as tight as the one for organic grains and oilseeds. They are challenging categories, some of which currently are supported by imports, that may become more challenging as additional food manufacturers try to establish a foothold in the market.
Investments by such companies as General Mills and WhiteWave Foods into expanding the production and availability of certified organic consumer packaged goods are dramatic examples of the interest in the segment. But both companies, with General Mills’ acquisition of Annie’s in 2014 and WhiteWave’s efforts to expand its Horizon Organic brand into snacks and such packaged goods as macaroni and cheese, have done so at a time when the supply of certified organic raw material needed to manufacture the products is incredibly tight.
General Mills has high expectations for its organic brands. In a July 1 conference call to discuss its fiscal 2015 financial results, Ken Powell, chairman and chief executive officer, said growing the company’s natural and organic brands, which comprise a business unit within the Minneapolis-based company, is a priority.
“Our natural and organic portfolio of brands ended 2015 on a strong note with net sales nearly doubling to $200 million in the fourth quarter,” he said. “Even excluding the Annie’s business, net sales for our heritage natural and organic brands were up approximately 25% led by our Cascadian Farm, Larabar and Food Should Taste Good brands. Pro forma sales for our U.S. natural and organic brands are now approaching $700 million, and we remain on track to grow this business to $1 billion by 2020.
“We have a strong growth plan for natural and organic in 2016, which we expect will deliver double-digit sales growth. We will use General Mills’ sales strength in traditional channels and Annie’s strength in the natural channel to grow distribution across our natural and organic portfolio.”
The expectations and investments make sense. Demand for products positioned as clean label, natural and organic is high and food processors are responding. As the U.S. economy has recovered, for example, so has the introduction of new food and beverage products featuring a certified organic claim. In 2014, the number of new products introduced in the United States with an organic claim stood at 10.7%, equal to what it was in 2008, according to data provided by Mintel International, Chicago, from its Global New Products Database.
Industry interest in organic products also comes at a time when food and beverage companies are shying away from placing a natural claim on products due to legal issues. In addition, more traditional retailers are beginning to expand the space on store shelves devoted to organic products.
But the amount of land in the United States devoted to the production of certified organic crops is only 1% of total crop production, said Nathaniel Lewis, senior crops and livestock specialist for the Organic Trade Association (O.T.A.), Washington.
“Demand is there, but supply isn’t,” he said. “Existing organic suppliers are finding it hard to expand, because traditional growers are not getting into organic.”
He added that such tight supply creates a level of uncertainty that may be hurting the growth of the organic category.
“What we don’t know is how many companies have decided not to go into organic or to shelve projects due to the situation,” he said.
Understanding the barriers
It may seem counterintuitive for there to be a category like certified organic where there appears to be significant demand and producers are paid a premium compared to their traditional counterparts, and yet the market remains underserved.
“The trend of rising consumer demand continues, and U.S. production of organic grains and oilseeds has not kept pace,” said Todd Jones, member relations associate with Mercaris, Chicago, a subscription-based information and on-line trading company that serves the markets for organic and non-G.M.O. ingredients. “However, there are some important efforts under way to support U.S. organic grain production. They range from financial assistance for certification costs for growers, the rise of investment funds that are converting conventional
farmland to organic, vertical integration of the supply chain, and, of course, Mercaris.”
General Mills, for example, has invested $50,000 to support the Canada-based Prairie Organic Grain Initiative (POGI). The effort is a $2.2 million, four-year program targeted at achieving growth and stability in the prairie organic sector. According to General Mills, the organic food market has grown rapidly, which has made sourcing certified organic ingredients difficult. The POGI’s primary focus is to address the shortage of organic grain growers by initiating several programs that will entice conventional growers to make the transition to organic farming.
Yet even with the efforts and investment like the one General Mills is participating in Mr. Lewis of the O.T.A. said significant barriers remain to growing domestic production.
“For starters, there are the policy issues,” he said. “They can range from crop insurance to support for transition (to organic) to outreach. Organic farmers are not getting the same level of support from U.S.D.A. as conventional farmers.
“Organic food represents 5% of the U.S. food system, but the public investment for research is not commensurate. Without that investment organic lacks the funding needed for land grant universities to tackle the issues many farmers are facing.”
Beyond policy, Mr. Lewis said an even greater barrier may be a lack of infrastructure. Certified organic raw materials must be segregated from their traditional counterparts. That means an entire supply chain of storage, handling, transportation and even processing must be established.
“It’s economies of scale organic producers don’t have access to,” Mr. Lewis said. “At every step along the supply chain costs are greater, because the infrastructure isn’t as complete.”
Imports relieve some pressure
The United States’ demand for certified organic ingredients has expanded well beyond North America. Year to date, total imports of organic corn, for example, have reached 2.8 million bus, which is an increase of 878% versus last year, said Mr. Jones of Mercaris. The leading countries were Romania, Turkey, The Netherlands and Canada. They accounted for 91.7% of total organic corn imports for the last 12 months.
Kellee James, chief executive officer of Mercaris, clarified that inclusion of The Netherlands on the list of leading exporters of organic grains to the United States does not reflect the level of production in the country.
“This has more to do with the way ships are tracked via last ports, rather than the origin of the grain,” he said.
Organic soybeans have seen a less dramatic increase, Mr. Jones said. Year-to-date, total imports of organic soybeans have reached 3.2 million bus, which is an increase of 160% versus last year. He said if the current pace continues throughout the year, total organic soybean imports could reach 25.2 million bus. India is by far the biggest supplier with 43.9% of total imports for the last 12 months.
“We foresee solid growth continuing on the demand side, which will help give supply the right incentives to continue to grow, sustainably,” Mr. Jones said. “As I mentioned, there are a mix of initiatives under way, some that give immediate support to organic production, and others that will take some time.”
Mr. Lewis of the O.T.A. said imports will remain a source of supply for many organic commodities for the foreseeable future.
“Imports are on everyone’s mind,” he said. “At this point, we are seeing imports from countries where their labor costs are cheaper. But some of these countries are also doing more research into organic crop production and looking at things like weed control. That is one reason they may have more supply.
“We want organic to be an opportunity for farmers in the U.S., but we also want to see the industry grow. We don’t see imports as an evil. The supply needs to come from somewhere.”