Natural Foods Merchandiser

Rising prices hit the organic supply chain

You don't have to look too far to see the evidence of rising food prices. Wheat prices have jumped to record levels, and flour prices are doubling. In livestock operations, feed is going through the roof.

And then there's corn, which has jumped so far that it led to riots over tortilla prices in Mexico City. While food prices are beginning to make headlines in the U.S., there will be more attention as prices trend higher along with sky-high oil.

Prices are rising because demand is outstripping supply, especially as farm acres are converted to biofuels. In addition, a rising middle class in China and India has pushed up demand for meat, milk and eggs — all of which take corn and soybeans to produce.

Wheat has shot up because farmers had earlier switched to corn to ride the ethanol boom. Bad weather didn't help. The result was fewer wheat acres and a dramatic rise in flour — so much so that artisan bakers are planning a march on Washington this month.

So what does this mean for organic food, that niche that commands 3 percent of food sales?

Rising commodity prices are undermining the premium that was a key incentive for going organic in the first place. With conventional prices going through the roof, why undertake the arduous three-year transition to organic farming?

As a result, organic acreage is stalling out, after increasing four-fold from 1995-2005 to 4 million acres. Some actually worry about a decline in acres as farmers leave the organic fold.

Organic grains and soybeans, already in short supply, are coming from overseas. Indeed, American farmers are concerned about the origin — and quality — of the imported organic grains they're buying to feed their animals.

At the same time, the economics are getting tougher for organic producers whose costs are rising faster than the price they receive for their goods.

Take organic dairy farming. For years, organic was a refuge for dairy farmers fleeing the low prices in the conventional milk world. Organic held a premium — at times, nearly double the conventional price — with the added benefit that costs were lower as well, because organic dairy farmers must avoid expensive regimes of antibiotics and synthetic hormones like rBGH.

If a farmer had enough land to pasture his dairy herd, the economics worked out. Sure, they would still have to purchase organic feed in the winter months, but the higher costs of this feed were more than offset by the organic premium they received.

But now that model is being undone by rising prices. Feed prices went through the roof this winter — so much so that some organic dairy farmers who grew their own organic corn said they would make more money by selling it than feeding it to their cows.

For those who had to purchase feed, the economics were brutal. Indeed, the Northeast Organic Dairy Farmers Alliance, in a recent press release, noted that 10 farms in the region have left organic farming. This was by no means a stampede, but it's a sign of the difficult times these farmers are facing.

To deal with the rising costs of grain, not to mention fuel and health insurance, organic dairy farmers led by NODPA are now pushing for a price hike.

But the processors who buy the milk and put it into cartons are concerned that they cannot pass on a significant price hike to consumers at a time when recession is on everyone's minds. If they try, they fear consumers will return to conventional milk, even though these prices have risen as well.

In short, the dairy farmers are trying to win higher prices to insure the economic sustainability of their farms. The processors are trying to hold onto customers in the face of competition. And consumers are trying to stick with organic even as they face more pressure on their pocketbooks.

In this dynamic, something will give, someone will lose, or perhaps all sides will — until prices and costs stabilize once again.

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