Emerging Issues in the U.S. Organic Industry
by
Catherine Greene, Carolyn Dimitri,
Biing-Hwan Lin,
William McBride, Lydia Oberholtzer, and Travis A. Smith
Economic Information Bulletin No. (EIB-55) 36 pp, June 2009
Consumer demand for organic food has risen quickly over the past
decade, triggered in part by the development and success of USDA's
organic regulatory program and label. This rapid growth highlights
challenges still to be overcome in the organic sector. As consumer
demand for organic products has widened, organic retail sales have
spread far beyond the "natural products" market niche in urban
areas and college towns and into big-box stores across the country.
The 2008 Farm Act includes many new provisions to help domestic
producers meet the challenges of organic agriculture and facilitate
consumer access to organic food.
What Is the Issue?
Since the late 1990s, U.S. organic production has more than
doubled, but the consumer market has grown even faster. Organic
food sales have more than quintupled, increasing from $3.6 billion
in 1997 to $18.9 billion in 2007. More than two-thirds of U.S.
consumers buy organic products at least occasionally, and 28
percent buy organic products weekly, according to the Organic Trade
Association. This fast-paced growth has led to input and product
shortages in organic supply chains, and several new issues-concern
about premium-priced product sales in a tight U.S. economy, as well
as competition from new environmental labels-are emerging in the
organic industry.
What Did the Study Find?
Significant price premiums, fast-paced growth in demand, and
fluctuating market conditions have characterized the U.S. organic
sector since the beginning of the decade. Early in the decade,
demand for organic products outpaced supply, and market
participants reported that a supply squeeze was limiting growth in
the overall sector. For example, 44 percent of organic handlers
reported short supplies of needed ingredients or products in 2004,
according to an ERS nationwide survey, and 13 percent were unable
to meet market demand for at least one of their organic products
that year.
More recently, U.S. organic producers and manufacturers have had
to contend with the impact of a weaker U.S. economy on organic food
sales. Surveys suggest that many organic consumers may not be
particularly sensitive to the price premium paid for organic
products. While frequent buyers of organic products may not change
their organic purchasing habits even with the current economic
slowdown, infrequent buyers may limit their purchases of organic
products, and the rate of gain for new organic consumers may
decline.
The low organic adoption rate for grain crops continues to be a
bottleneck for expansion of the U.S. organic livestock sector, as
organic livestock producers struggle to find reliable sources of
affordable feed grains. Only 0.2 percent of U.S. corn and soybean
crops were grown under certifi ed organic farming systems in 2005,
according to ERS estimates.
Organic imports have increased as U.S. demand for organic
products has exceeded domestic supply. USDA-accredited groups
certifi ed 27,000 producers and handlers worldwide to the U.S.
organic standard in 2007, with approximately 16,000 in the United
States and 11,000 in over 100 foreign countries. Organic handlers
reported relying primarily on domestic suppliers in 2004, although
38 percent imported some or all of their organic products.
At the retail level, organic produce and milk, the two top
organic food sales categories, receive significant price premiums
over conventionally grown products. ERS analyzed organic prices for
18 fruits and 19 vegetables using 2005 data on produce purchases,
and found that the organic premium as a share of the corresponding
conventional price was less than 30 percent for over two-thirds of
the items. The premium for only one item-blueberries-exceeded 100
percent. In contrast, organic price premiums for a half-gallon
container of milk ranged from 60 percent for private-label organic
milk above branded conventional milk in 2006 to 109 percent for
branded organic milk above private-label conventional milk.
Organic food costs more to produce and also commands significant
price premiums at the farm level. According to recent ERS analysis
of national dairy and soybean survey data, total economic costs
were significantly higher for organic dairy and soybean operations
than for conventional operations. With an average price premium of
$6.69 per hundredweight for organic milk, organic milk producers
covered most of the additional costs of organic production in 2005.
In 2006, organic soybeans were more profitable than conventional
soybeans, mainly because the price premiums paid for organic
soybeans compensated for their higher cost of production.
Organic producers also face competition from new labels like the
"locally grown" label. USDA organic regulations define organic
production as an ecological production system that fosters cycling
of resources, promotes ecological balance, and conserves
biodiversity, but the regulations do not address where organic
farmers market their products. According to an ERS survey of
organic handlers, 24 percent of organic sales in 2004 were made
locally (within an hour's drive of the handlers' facilities) and
another 30 percent were made regionally. Partly in response to
organic supply shortages, Congress in 2008 boosted funding for
organic research and for a certification cost-share program in the
Food, Conservation, and Energy Act. Congress also made conservation
practices related to organic production and transition eligible for
payments of up to a $20,000 annual limit, with an $80,000 cap over
a 6-year period, under the Environmental Quality Incentives Program
(EQIP).
How Was the Study
Conducted?
The study drew on a range of ERS studies and surveys on organic
production and handling, and conducted an extensive literature
review to better characterize the U.S. organic sector. One set of
studies has analyzed data from certification groups for over a
decade to track adoption patterns within the U.S. organic sector.
In recent years, ERS has surveyed organic soybean producers and
organic dairy producers in USDA's annual Agricultural Resource
Management Survey. ERS has also tracked the characteristics and
purchasing patterns of U.S. organic consumers for two major organic
food sectors-produce and dairy-using retail food purchase data,
which are scanned at home by a nationally representative panel of
consumers. Findings are also presented from ERS's first nationwide
survey of practices in the U.S. organic handling sector (organic
manufacturers, processors, distributors, and other organic
intermediaries), conducted in 2004.