Organic supply lines stretched thin

Huge demand is overwhelming the producers and distributors, causing numerous shortages in organics, but overall most people in the industry agree that the problem is a good one, Shane Starling reports

Grapefruit. Maple-sugar crystals. Spearmint extracts. Witch hazel. Guarana seed extract. Green tea leaf extract. Rice protein. At the time of writing, these were just some of the ingredients listed on the 'ingredients wanted' webpage of the Organic Trade Association (OTA). Others listed on the Massachusetts-based industry body's website included lemon-juice powder, xylitol, myrrh powder, cassava leaves and dry marine algae.

While in some instances these 'shortage' situations may be due to the fact the ingredient may not be available in organic form due to processing practicalities or that the quantity demanded is insufficient to spur any supplier into the segment (as one observer notes: "not every ingredient is available organically"), there are also cases where the reality is more mundane: quite simply, the cupboard is bare.

As Neil Sorenson, communications manager at international organic movement representative, German-based IFOAM, tells Functional Foods & Nutraceuticals: "For the past year there have been shortages of many organic raw ingredients, including dairy, produce and meat, which is to some degree stunting the exponential growth of the organic sector.

"I think we would see higher growth rates if the supply were sufficient. Of course, there has always been a shortage of minor ingredients, which is an increasingly common problem for the production of processed organic goods."

The OTA, in conjunction with Nutrition Business Journal, recorded US sales of organic products at $14.7 billion and growing at 17 per cent annually (UK Soil Association noted 30 per cent growth in a market worth more than $3 billion in 2005). The OTA surveyed its members and found more than half reported "a lack of dependable supply of organic raw materials" that directly impeded sales.

Numerous factors involved
In any market where demand has been as hot as it has in organics in North America, Europe and Oceania, there are bound to be supply issues. This is especially so in organics where it usually takes about three years, sometimes more, for a raw-ingredients producer such as a farmer or herb grower to attain their organic credentials.

Add to the equation inclement weather, such as 2005's hurricanes that devastated many organic crops in the US, and an extremely dry European summer this year, and if you are a producer of organic foods, beverages or supplements, you may well find yourself in a position where you simply cannot get the ingredients you need to fulfil your product portfolio.

Milk powder, milk, pectin and low-calorie sweeteners are just some of the more common shortages, and stories of companies suspending or discontinuing organic lines from orange juice to bread have become common. In many instances, planned line extensions have been canned or put on ice.

Some suppliers have taken up policies of favouring those foods and supplements makers willing to engage in long-term contractual arrangements, sometimes for periods as long as 5-10 years. Those that have not been willing to commit so far into the future risk being left short or ostracised by their suppliers.

Wisconsin-based Kerry Ingredients Proteins & Nutritionals business development director Terry Gieseke says of his company's policy: "Food manufacturers and brand owners who are currently in the organics market, or expect to launch entries near-term, will find their supply of organic ingredients much more secure if they contract in advance."?

This situation may favour bigger organics players but even some of the world's major food makers that are involved in organics such as Kraft, Unilever, General Mills and Nestlé have reported bottlenecks in certain ingredients, be they for dairy, baked or other goods.

By way of example, Neil Burchill of major UK-based organic dairy products manufacturer, Rachel's Organic, highlights the shortages in organic milk that have been occurring in the UK, not to mention other European nations, the US, Australia and elsewhere.

"There is a massive shortage in organic milk," he says. "The UK market could absorb a good couple of million litres per week at the moment. We are producing as much as we can but if there were more raw material then we would produce more. People are holding back on marketing and promotion of organic goods simply because there is a lack of supply. There is no spare organic milk in Germany, Austria, Switzerland, France, Belgium and only a little spare in Holland and Denmark. The reason why it is so short in continental Europe is that Aldi and Lidl — the two big discount retailers — have begun to sell organic milk."

This situation is mirrored in the US where Wal-Mart has leapt into the organics arena upsetting many organics purists and even organics pragmatists who see the retail giant's presence as overstimulating an already highly stimulated sector. Wal-Mart has not stopped at the US, and is moving into organics through its UK retailer, ASDA — a move that doesn't concern Burchill.

"ASDA has taken a very responsible position in the UK by ensuring the right price is paid to the farmers. We are very supportive of that action. At the same time I know the price of organic milk has gone up in the US because of the increased demand created by Wal-Mart."

The Wal-Mart factor
In the US Wal-Mart has come in for a lot of criticism for forcing prices up and for, in essence, entering the market at an inappropriate time. While some in the organics industry see Wal-Mart's presence as denigrating the organics ethos because profits are not ploughed back into the industry and its presence is leading to greater imports and therefore greater food miles, others note a mass retailer presenting organic products to a mainstream consumer group can only be good for the organics movement.

Joe Stern, the president and founder of California-based Organic Ingredients and vice president of the fruit group at its parent, SunOpta, supports Wal-Mart's US entry but notes the incredible strain it has placed on the supply chain. Organic Ingredients sources from more than 40 countries in an attempt to beat the situation but notes shortages in organic strawberries, orange juice, blueberries, lime juice, grapefruit, pomegranate and cranberry, some of which are so severe only 'contra-seasonal' orders of three or more years are being accepted.

Rachel Organic's Burchill notes the precariousness of the current supply situation and how it may affect the organic industry long-term. "In the near-term we have to make sure farmers are paid a fair price to encourage them to increase their output and get more conventional farmers to convert into the sector. At the same time we don't want every farmer to go organic because if that happens the market will be saturated again as it happened a few years back when farmers couldn't find markets and so converted back to conventional. There needs to be a balanced approach and groups like the Soil Association (UK organic trade group and certifier) are facilitating that process."

A role for government
More of this responsibility should be shouldered by the government according to Prescott Burgh, director of sales and marketing at Wisconsin-based organic ingredients supplier, Ciranda. "The lack of government support is probably not a bad thing at the moment while the market is so hot, but it is needed in the medium to long-term to guide the macro-economic transition to organics production and consumption," he says.

"At the moment it is primarily done by non-profit groups like trade organisations and academic bodies and maybe that is not enough given where the market is heading, which is clearly to the mainstream. You could say the US government remains in a state of denial about the organics industry but then the mainstream food industry is a lot more powerful than the organic food industry so you can see why that might be the case." The ingredients sector is seeing a new age emerge as major suppliers develop organic ingredients suites. As UK-based organics market researcher, Amarjit Sahota of Organic Monitor, observes: "We have seen a number of large ingredients companies come into the organics market in North America in the last 1-2 years, less so in Europe."

One such company is New Jersey-based National Starch, which has been developing a range of organic ingredients for some time, and has been one of the first mainstream ingredients companies to venture into organic lines.

"Large retailers are starting to take commitments into having organic lines, and manufacturers will respond to that demand by reformulating products," the company says. "When this happens they will all need functional ingredients in order to make that transition. That's the need we're trying to satisfy." National Starch's organics offerings include dietary fibres, functional flours, stabilisers and starches.

While some see this as the solution to the shortage, it is a process that is in its infancy and the offerings from these ingredients giants are coming more in a trickle than a flood. The common response from such suppliers is that the organics sector is one they "are keeping an eye on" rather than leaping into. For instance a major supplier like ADM has only one organics offering — an organic whole-bean powder. It will launch an organic soy milk later this year.

As Burgh notes: "The major suppliers are looking at it to see if it is a viable market but their output is on a very small scale right now. But there is no doubt the premiums organic ingredients can attract is appealing to them."

However Kerry's Gieseke is enthused by organic prospects. "We have seen an increase in organic projects that will drive output as they launch," he says.

Similarly an Orafti spokesperson says the Belgian supplier, which launched a clear, liquefied organic sweetener last year, is developing other organic versions of some of its ingredients such as inulin.

Changing priorities
In other cases, movement is occurring at breakneck speed. Grace Marroquin, owner and president of California-based organic ingredients specialist, Marroquin International, notes increased volumes as one consequence of the nascent presence of major suppliers.

"Batch sizes are much higher than we have experienced in the past," she says. "We have also seen that organic projects are being given high priority and are moving faster than they have traditionally moved. We have a customer that stated in all his years in a very big food company he has never seen a project move so fast."

Among organics specialists, supply is being ramped up, but the process is crimped
Among organics specialists, supply is being ramped up, but the process is crimped for the above reasons. New organic-producing regions as well as expanded supply from major organics markets like the US and Europe are starting to swell and diversify the supply chain. "Organics producers in Latin American countries, China, India, and north and east Africa in particular are taking advantage of this increase in demand," IFOAM's Sorenson says.

The presence of larger food makers has also boosted organic ingredients standards according to Burgh. "Your Krafts and your Nestlés — they have much more rigorous quality-approval protocols. This can mean more paper work but standards have undoubtedly improved. Smaller organics suppliers and processors are being forced to up their game."

One thing is for sure — while the boom has presented some challenges the global organics industry is still grappling with, these bode well for the industry long-term. They should ensure robustness and diversity are added to the supply channel and bring benefits further down the track.

Case-in-point: beer
The organics market has been altered by the presence of major food and beverage manufacturers as well as retailers. Neil Sorenson, communications director of the German-based representative body of the international organics movement, IFOAM, had this to say on the matter.

"As some of the big players like Wal-Mart, Anheuser-Busch and others are getting involved in organics and developing product lines we are seeing increased shortages for various products throughout the world," Sorenson observes.

"In the case of Anheuser-Busch and its line of organic beers, for example, it is now purchasing much of the world's organic hop production, the result being smaller breweries are both having trouble sourcing organic hops, and when they do, they are paying exorbitant prices. A crop like hops isn't something just any farmer can grow on a whim. It requires a lot of knowledge and investment in infrastructure.

"While this drastic increase in demand will likely increase the supply of organic products in the long run, it will take years for the production to catch up with the market. Suppliers are responding to the increased demand by increasing supply, but it takes at least three years for a farm to transition to organic, so the increase in supply lags behind the demand."

— S.S.

Planning is key to ensure supply

Grace Marroquin, California-based owner and president of ingredients supplier Marroquin International, has been in the organic ingredients supply game longer than most. She's a little concerned but mostly very excited by the organics market right now.

FF&N: How has supply been affected by the boom in organics demand?

GM: "The explosion in organics demand is causing shortages in certain categories. Not only is it because of increased demand but Mother Nature has played a significant role causing loss of crops around the world. For instance, Europe's corn and potato harvest this year will definitely fall short."

FF&N: What is the US situation?

GM: "We are seeing increases in pricing as a result of shortages due to climatic forces, increased demand for ingredients, weakness in the dollar against the euro and other currencies, and the high price of fuel affecting all aspects of shipping and transportation and manufacturing. All these factors and more have certainly caused an increase in pricing."

FF&N: How can food makers improve the consistency of supply?

GM: "More than ever planning is key in order to weather through this period of tight supply. Many companies forget that most of the ingredients are agriculturally based and that means a growing season, harvest and post harvest. Depending when the customer comes into cycle will determine whether enough product is available. Contracting is essential to ensure consistent quality and pricing. What makes this even more challenging is that there are many players within the supply chain. We often are supplying a co-packer and not the end company. The co-packer often finds itself not able to confirm volumes, contract etc. because its customer has not confirmed the contract. What we often find is that when the co-packer's customer is ready to pull the trigger on the project they may find themselves between growing cycles. Everyone is afraid to commit unless their customer commits. This has a rippling effect all the way to the farmer.

FF&N: What is the effect of larger ingredients suppliers developing organics lines?

GM: "Because the larger players are now moving into the industry, the volumes are much higher than we have experienced in the past. This is a challenge for all the reasons listed above. It is an exciting challenge we have on our hands. Everyone is growing and moving at such an increased pace. We hear this from all our colleagues. I think expectations need to be adjusted to get through this tight period in supply and that everyone needs to plan.

— S.S.

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