Tracking The Organic Supply Chain

In the second of our series on organic ingredients, Lynette Thwaites investigates how the latest regulatory developments are impacting processors and suppliers in the U.S.

Release of final National Organic Standards last December by the U.S. Department of Agriculture marked a milestone for the U.S. organic food industry. It also marked the beginning of a period of intense activity behind the scenes as the organic industry prepares to come into compliance with the Organic Foods Production Act (OFPA) of 1990 — seeking new supplies, new product formulations and even new processes.

Final implementation of the decade-old OFPA also gives the organic industry the regulatory certainty that business craves, signaling opportunity up and down the organic value chain to growers, processors and manufacturers.

Interest is understandable, given the maturity and competitiveness of the conventional food business in contrast to the lively growth rates for organic food.

According to Nutrition Business Journal, the organic food industry racked up sales of $4.86 billion in 1999, slightly more than one per cent of total retail food sales of $474 billion, and rose 19 per cent to $5.8 billion in 2000 ­ or 6.6 per cent of the $14.2 billion gain in US food sales that year. The conventional food industry grew just three per cent in 2000.

Processing is a critical part of the organic infrastructure. Fresh organic produce affords farmers their best prices and remains the largest organic food category with sales of $2.2 billion. But consumers can't be expected to eat only fresh fruits and vegetables. According to NBJ, organic packaged and prepared foods grew 22 per cent in 2000 to $710 million, second in growth only to organic condiments, and ahead of fresh produce. Many of these food product manufacturers have buoyant growth expectations and rely on processors to supply millions of pounds of ingredients yearly.

Who Are The Processors?
Located between farmers and manufacturers, organic processors supply pureed, frozen, chopped, concentrated, juiced, flaked and milled ingredients that end up in organic prepared foods and beverages.

As an "unbranded" part of the organic value chain, organic ingredient processing is understandably the least visible; brokers like to keep their sources quiet, and manufacturers prefer to leave the impression that their products are whipped up entirely on grandma's kitchen table.

A number of dedicated organic processors, some of the larger organic farms, and several branded organic manufacturers supply industrial ingredients.

Multinational food corporations that have acquired organic subsidiaries or divisions may also do their own processing. For example, General Mills processes for Cascadian Farm, and Smucker processes for its natural and organic beverage brands, Knudsen and Santa Cruz Organics.

Interestingly, however, most organic raw materials are handled by conventional food processors, which have obtained organic certification for a portion of their facility. In the words of one leading organic certifier, "Get out at Newark airport, throw a stone, and you'll hit a factory processing organic food."

Despite the greater availability of organic raw materials, the price and availability of farm gate foods and processed ingredients is still prone to peaks and troughs. According to Joseph Stern, president of the organic ingredients division of Spectrum Organic Products, a leading branded manufacturer and ingredients supplier, both global and US ingredients markets are characterized by steep supply and demand swings. For example, 2000 saw an overabundance of potatoes following shortages in 1999. Organic apples were in oversupply in late 2000 due to an abundant crop and the entry of conventional apple growers—leading some farmers to pull out of the business.

The entry of large food manufacturers has the potential to destabilize organic supply. Multinationals testing the waters in organic may boost demand for one commodity for a year or two, then abandon its source and leave growers with surpluses. In 1999-2000 there was a glut of organic sugar; it only took one large company coming into the market with a new sweetened product to reverse the trend and kick-start prices, according to Stern. A large baby food manufacturer turned to direct sourcing of pear puree rather than using established suppliers, leaving many growers without a home for their organic pears.

Having final organic standards will foster competition in organic processing, which like organic farming has already become more competitive. According to Sue Ten Eyck, processor certification director for California Certified Organic Farms, many would-be organic processors are waiting in the wings. How many actually leap on stage will depend upon how regulatory details are interpreted. For example, there is continuing debate over whether boiler chemicals will be prohibited, which could make the prospect of converting a facility to organic production less attractive. Similarly, potassium hydroxides, anti-foaming agents, and other processing aids are under review.

For now, processing capacity seems to be sufficient, though it will likely wax and wane along with demand as it takes only a couple of months to certify a processor.

A potential threat to organic processing capacity is consolidation in conventional processing, as one leading organic frozen food manufacturer discovered. The company, which purchases 10 million pounds of organic commodities annually, excluding flour and grain, noted that its processor pool was shrinking and as a result was having to court as many new processors as it could.

Although the U.S. organic industry has not negotiated all of the twists and turns of the regulatory maze, organic processing, like other parts of the organic value chain is an exciting growth area given the prospects for the U.S. organic food market.

In the European Union, studies forecast five-10 per cent+ penetration of total food sales by organic food by 2005. NBJ does not have such bullish forecasts for the United States, where consumer awareness, consumer demand, farm conversion and government support are measurably behind Europe. However, NBJ forecasts high growth and penetration growing from one percent in 1999 to 2.5 percent in 2005 and 3.7 percent in 2010.

The U.S. may not get the "big bang" talked about in European circles, but it is expecting strong growth for the next few years.

A full list of organic processors appears in Nutrition Business Journal's 400-page report, The US Organic Food Industry 2001 which is now available, in addition to market research reports on Functional Foods, Dietary Supplements, Sports Nutrition, and M&As in the Nutrition Industry. See www.nutritionbusiness.com for more information. NBJ is based in San Diego, Calif.

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