The organic food and beverage supply chain: Stretching to meet demandThe organic food and beverage supply chain: Stretching to meet demand
Comprising more than 5% of total U.S. retail food sales, organic is on a continued growth trajectory, putting pressure on farmers and suppliers to increase organic ingredient availability to better meet rising demands.
April 25, 2018
In 2016, U.S. organic food sales represented 5.3% of total retail food sales—the highest penetration ever, according to the Organic Trade Association (OTA). The organization’s 2016 Organic Industry Survey also revealed 13.6% of all fruits and vegetables and 8% of all dairy products purchased by U.S. consumers were organic.
“The first sales estimates for organic products go back only to 1990, when U.S. sales of organic food and beverages were approximately $1 billion a year,” said Laura Batcha, OTA’s executive director and CEO. “Sales have grown substantially since that time, reaching approximately $47 billion for total organic product sales in 2016, with food and beverage sales totaling $43 billion.
“The range of organic food and beverage offerings has also expanded substantially, from simple commodities (fruits and vegetables, organic milk, coffee, nuts, grains sold in bulk) to prepared foods (salads and prepared meals, condiments, and all kinds of meats in many forms)—a complex and sophisticated range of products that keep up with mainstream offerings of conventionally produced products,” she added.
New Hope Network’s NEXT Trend Database supports the rising popularity of organic. At Expo West 2017, 44% of all products carrying a certification held an organic one.
Looking back at all products exhibited at Natural Products Expos from 2013 to 2017, New Hope’s NEXT Data & Insights team noted the organic certification is the 2nd most common behind kosher. Approximately 22,700 products exhibited through those years were certified organic.
Agropur Ingredients’ Custom Solutions team has been working with organic products for more than a decade. Emily Ross, technical beverage sales, reported the company has seen organic grow in every area, from supplements to frozen pizza to ice cream, with the impact of the increased demand particularly evident in recent years.
“Five years ago, companies only requested organic if that was the story their company was focused on, where their entire marketing plan and product mix were focused on the niche of organic,” Ross shared.
“Today however, in addition to these loyal organic brands, we’ve been interacting with a good deal of mainstream companies who are adding organic SKUs on top of their conventional offerings. This demonstrates how the tide has turned in regards to consumers demanding options and ‘conventional companies’ stepping up to deliver them.”
Some categories are feeling the growing pains more than others. Despite a measure of growth in organic acreage the past few years, U.S. organic grain supply falls short of demand and must also compete against global commodity markets, noted Elizabeth Reaves, senior program director, agriculture and environment, Sustainable Food Lab.
Food production also plays a role. “Because organically produced livestock must be fed only organic feed (organic grain and certified organic forage such as grass and hay), it is important to have enough feedstock supplies to keep up with the demand for feeding the animals,” Batcha stated. “Grains are also crucial in the overall supply chain not only for animals but for food for consumers. Many of the products in the center of the store include ingredients based on grains, pulses and cereals.”
David Sheluga, consumer insights director at Ardent Mills, quantified the growth. “U.S. sales of organic grain-based food approached $1 billion in 2016, according to Nielsen Scantrack Retail Sales for the 52 weeks ending November 2016,” he reported. “U.S. retail sales are growing at an average annual rate of more than 11% per year since 2012.”
Another busy category is beverages. Laura Dembitzer, marketing director at Imbibe, confirmed juice and juice-based beverages currently have the largest organic offering in the drink world. However, “Health-conscious consumers who are looking for high-quality products seek out organic certification, therefore the better-for-you beverages like kombucha, plant waters and probiotic beverages are also going to more commonly have organic certification since organic is an important value for that consumer group,” she noted. “We do receive a wide range of requests to develop organic products such as CSDs [carbonated soft drinks], cocktail mixers, coffee beverages, teas, juices and flavored sparkling waters, so organic is certainly spreading to other beverage categories as well.”
Dembitzer said her company has received more requests for non-dairy, plant-derived organic proteins—the supply of which doesn’t always meet demand. Organic botanical extracts can also be challenging to source, and an ingredient such as organic vanilla extract can be cost-prohibitive due to vanilla supply shortages and the resulting surge in prices.
Companies looking to offer organic products may face unique challenges, particularly if a formulation requires an ingredient that doesn’t have an organic alternative. “A finished product must contain at least 95% organic-certified ingredients by weight in order to obtain the USDA organic seal,” explained Guy Affolaby, Imbibe’s manager of regulatory affairs. “The remaining 5% of the ingredients have to be organic-compliant or fall within the allowable synthetic ingredients listed by the National Organic Program (NOP). There are several guidelines an ingredient must align with to be considered organic-compliant. Common ingredients like citric acid, vitamins, minerals, juice concentrates, purees and botanical extracts are technically allowed to be part of the 5 percent non-organic portion, but their usage level affects the organic calculations.”
Additionally, Affolaby cautioned products making a 100% organic claim must not only contain ingredients certified 100% organic, but also be processed with equipment that meets the organic requirements.
Carolina Innovative Food Ingredients (CIFI) encountered the latter challenge firsthand. In mid-2016, the company received NOP certification for its organic range of sweet potato ingredients. According to Paul Verderber, vice president of sales, two of the biggest adjustments his team faced were “the amount of upfront planning required and the need for more segregation within our processing facility.”
He elaborated, “If the processing facility also produces conventional ingredients, there need to be measures in place to ensure that none of the conventional product intermingles with the organic product. Organizations like Oregon Tilth, a leading third-party nonprofit organization that certifies organic products, can provide certifications to ensure these strict procedures are followed correctly.”
Organic integrity is a point of contention, particularly when it comes to foreign suppliers. Patrick Hart, specialty grain merchant, Ardent Mills, pointed out, “As demand for organic products outpaces supply, the difference is often supplemented by foreign imports, which can increase the chance of fraud in making organic claims.”
However, Saumil Maheshvari, business development manager, Orgenetics Inc., noted not all American brand holders can keep things close to home. “I understand and empathize with the local farming/sourcing movement, but some crops that are common in the markets can only be grown organically and efficiently in certain climates of the world.”
Affolaby concurred, offering advice for imports. “You might be able to find the organic ingredient you’re looking for from non-domestic sources, but some countries have a different standard for what constitutes organic. Therefore, non-domestic ingredients need to be fully vetted with proper documentation to ensure that they are organic-compliant in the United States,” he said.
Supply & demand
Currently no challenge is greater to organic than ensuring adequate supply. “There is general agreement that we need more organic farmers to meet growing organic demand,” Batcha surmised. “The market continues to experience double-digit growth, and has for most of the past two decades. We are currently at 5.3% of U.S. food sales, yet less than 1 percent of farmland. Major retailers continue to expand their organic offerings to meet increasing consumer demand. This dynamic creates opportunity for U.S. farmers to take on more organic production.”
If only it were that easy. “It takes three years to get new farmland USDA Organic Certified,” Maheshvari advised. “It is a time- and capital-intensive process. A farm that is undergoing organic certification cannot sell plants as organic, even if they are adhering to the NOP rules and regulations during that timeframe. This creates a challenge for farmers and suppliers, as they must deal with organic farming costs, but conventional/non-organic selling price points. One of the results of this squeeze is going to manifest with higher ingredient pricing.”
He recommended a food and beverage “numbers team” adjust its financials accordingly and work with the product development team to allow for higher raw material costs. So long as an imbalance in supply exists, he pointed out it will “skew price points higher in the short-term, at least while more USDA Organic farms pop up.”
Maheshvari maintained many people understand “the general differences between synthetic ingredients vs. organic ingredients,” and that “USDA Organic supply chains are monitored, audited and regulated more tightly than their synthetic counterparts,” suggesting this contributes to general consumer acceptance of premium price points for certified organic products. Where the disconnect comes in, he stated, is in educating people about supply chain issues, particularly those faced by farmers. “Consumers would better be able to justify spending at premium price points once they understand these challenges,” he noted.
An education gap also exists regarding certified transitional organic crops. According to Mark Stavro, senior director of marketing, Bunge North America, “Farmers transitioning their land from conventional to organic now have the opportunity to sell their produce as Certified Transitional through the Certified Transitional program.” He said Bunge supports farmers who are transitioning to organic “by helping connect them with customers who would like to market Certified Transitional foods.”
Ardent Mills goes a step further with its Transitional Certification Assistance Program (TCAP), which supports farmers both financially and via education. Shrene White, general manager, specialty product, Ardent Mills, explained “there is not an official Certified Transitional program that is being monitored by NOP/OTA/USDA,” but that some companies set up their own certification programs. For example, Bunge’s certification is through QAI. In January 2017, OTA announced it was working on a national oversight program in partnership with USDA; however, it is still in development.
Producers in Ardent Mills’ program need to supply a letter from their organic certifier that states which acres are in transition. “All farmers wishing to move from conventional to organic must go through the transitional period,” White reminded. “During this period most of those farmers are having to sell their transitional crops into the conventional market. Farmers that fit into our program are being paid a premium for their transitional wheat vs. selling into the conventional market.”
She added, “We also offer education on what to expect while transitioning to organic, provide partners who can assist with best agriculture and growing practices, and ultimately grant membership in the Ardent Mills organic supplier program upon completion.”
Regarding education, White said the company has heard a variety of concerns from growers. “Dryland farmers worry about lack of water and not having as much control over their soil’s fertility without fertilizer,” she reported, adding others are concerned about weed control. “Overall, we saw concerns about organic education, changing farm practices, disease and pest control, rotational crops and cover crops. We all need to be aware that the transition is not going to happen overnight.”
In light of the time-intensive process of transitioning more farms, Ardent Mills also took an aggressive approach to work with growers in the upper Midwest and West to increase organic wheat production. In late 2015, the company announced its Organic Initiative 2019, which is on track to meet its goal of doubling U.S. organic wheat acreage by 2019.
The U.S. Organic Grain Collaboration has also made major strides supporting organic efforts. A pre-competitive industry effort stewarded by OTA and the Sustainable Food Lab, the organization was formed in 2014 to assist farms of all sizes and starting places. “It started as an inquiry into why organic grain farmers were dropping out of organic farming, or not expanding acres,” Sustainable Food Labs’ Reaves explained. “We also examined the barriers to entry for new farmers or transition farmers to organic. At the time, domestic supply of organic grain was tight and serving as a bottleneck for growth in the sector.”
With farmers facing challenges such as productivity of organic crops, inexperience navigating the market and cultural resistance within their own communities, Reaves maintained a collective effort was the best way to influence change. The U.S. Organic Grain Collaboration “adopted a strategy of working collaboratively to address those issues in key sourcing regions and then feed the learning back into a national platform for the whole sector to learn from, and for the organic sector to support its mission to grow public and private support for organic farming that matched the size of the industry,” she stated.
The grain collaboration includes Clif, Stonyfield, Organic Valley, Annie’s, General Mills, Ardent Mills, King Arthur Flour and Pipeline Foods, as well as the OTA Farmer’s Advisory Council. Together they fund the work and share in the strategic decision-making, advising, advocating and using their influence and leverage when needed.
Key project goals include increasing the number of acres and the domestic supply of organic grain in the United States; improving the productivity, profitability and market access of the organic grain farmer in the United States; and aiding the resiliency of organic grain production. With the first few years firmly focused on increasing capacity, Reaves said more attention in 2018 can go into developing knowledge products in a few key areas related to advocacy and supply chain.
The long haul
When asked if the United States has the capacity to “catch up” to the growing demand for organic ingredients, Batcha’s response was “Absolutely.” However, she noted, “We need to focus on ensuring organic farmers are given the same level of support to succeed as their conventional counterparts.”
In late 2016-early 2017, OTA asked thousands of organic stakeholders across the country their priorities for Farm Bill 2018. More than 500 respondents across 45 states weighed in, and the association used the findings to build a farm bill platform reflecting those needs. OTA’s platform calls for full support and adequate funding for the NOP to “keep pace with industry growth, set uniform standards and carry out compliance and enforcement actions in the United States and abroad,” Batcha shared. “It advocates for organic-focused research, risk-management tools, data collection and direct dialogue between industry and USDA that are critical to organic farmers’ success. It calls for improved access to land and capital, investment in distribution systems and infrastructure, and targeted technical assistance through the utilization of existing USDA conservation, rural development and other programs to encourage orderly transition to organic.”
According to Batcha, OTA is “actively advocating for policies that promote a healthy marketplace, ensure that organic farmers continue to be successful and expand organic production.”
In addition to the collective efforts of companies and organizations to help support the organic supply chain, brands can take their own proactive steps—particularly if they plan to gradually expand their organic ranges. “A recommended solution would be to work with a supplier long-term to allow for the supplier to invest in organic farms and capacity to keep up the pace of their forecasted demand,” Maheshvari suggested. “This will help reduce ingredient pricing volatility, and will also instill mutual trust between the supplier and manufacturer (and also brand owner) that the capital and resource-intensive project/product will span several years at least.”
Affolaby concurred companies wanting to launch quickly into organic may face issues. “Although organic products are increasingly popular, the demand is still not yet high enough for many manufacturers to produce substantial amounts for many of these ingredients,” he explained. “Instead, they are made-to-order, which causes longer than usual lead times.”
When available, a vertically integrated supplier can also be beneficial, particularly in ensuring consistency from batch to batch. Maheshvari said this entails organic farms that are under the supplier’s watch, “where crop growth and harvests can be monitored daily.”
Although awareness is on the rise and various measures are in motion, the organic supply chain is still volatile, particularly as more consumers get on board and brands expand their organic ranges.
“The organic sector needs the necessary tools to grow and compete on a level playing field,” Batcha emphasized. “That means federal, state and local programs that help support organic research and provide the organic farmer with a fully equipped tool kit to be successful.”
Despite the needs, White was optimistic. “We like to remind farmers and suppliers that organic production is viable for both big and small farmers. I think we will see success with the smaller producers first. It takes a huge change to transition to organic, but bigger farmers are expressing more interest,” she concluded. “It’s a good time to come into organic.”
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