Organic foods and beverages more available, but supply hurdles remain

Sales in the overall food and beverage industry have stayed consistent with an increase of only 0.6% in 2016 compared to 2015, according to the Organic Trade Association (OTA). In contrast, the organic market has experienced unbelievable growth. According to the OTA, 2016 U.S. organic sales reached approximately US$46 billion, up $3.3 billion (8.4%) year-over-year, making up more than 5% of food sales. The organic sector is expected to keep gaining market share for several reasons: consumers are becoming increasingly aware of their overall health and wellness; the leading demographic purchasing organic products (Millennials) is starting to have families; and, as with most food and beverage trends, clean label—few, free from and minimally processed ingredients—has contributed to the increase in demand.

Organic has been seen by consumers as a healthier, safer alternative to conventional products for decades now; USDA reported consumer demand has increased by double digits every year since the 1990s.

The clean label trend has helped propel the image of organic as a healthier, safer option. Though the concept of clean label has evolved, organic products still address its themes. For example, clean label is not just about the ingredient and number of ingredients anymore, but is also about where the ingredient is from and how it is produced. It is not just about consumer wellness, but also the wellness of animals, the environment and those involved in the supply chain. These are the essences of organic. Organic foods are not only free from antibiotics, artificial ingredients, genetically modified organisms (GMOs) and pesticides, but consumers know how they are grown and produced. Organic not only refers to the ingredients themselves, but also the way they are produced, processed and handled. Organic labels give consumers a guarantee that otherwise might be lost in the nutrition label and packaging. For instance, organic-certified products assure consumers that a product does not contain GMO ingredients. This is especially relevant given the lack of mandatory GMO labeling regulations, despite consumer demand for it.

As food and beverage sales remain flat, the growth in the organic segment has not been lost on finished goods manufacturers and retailers. Large corporations are establishing organic initiatives and strategies, such as General Mills’ acquisition of the organic food brand Annie’s. Mainstream retailers are dedicating whole sections of an aisle to organic food products. What’s more, organic’s reach is no longer limited to produce and dairy; it extends across all aisles, from beverages to baked goods to frozen foods, with biggest growth potential in baby and children’s foods. This comes as no surprise since parents are more concerned with what they feed their developing children.

This has not been lost on farmers either; organic ingredients fetch a higher price. For instance, organic soybeans sell for double the conventional counterpart. According to “The World of Organic Agriculture,” the United States was second among “countries with the highest increase of organic land,” increasing by 1,173,281 hectares in 2015 (Australia was first). And according to USDA, more than 2,000 farms transitioned almost 175,000 acres of their conventional land to organic in 2016. However, demand is still far outpacing supply. Although these numbers may be an improvement, they are miniscule in the big picture—organic land only makes up 1% of the farmland in the United States, according to USDA. Even with the potential benefits of converting to organic, the deterrence is far greater for farmers. It is difficult, both technically and financially, to get USDA organic certified. The biggest deterrence is the amount of time it takes: three years. Those three years typically consist of growing pains of learning how to manage the land without the convenience of conventional fertilizers, pest control, weed control, etc. Not only are the farmer’s yields going to be lower due to the lack of conventional methods, but they are still going to receive the same price as conventional material. Because they are not certified yet, these farmers do not get the price point of organic certified crop. It is not uncommon for farmers to start the process, but stop before making the transition.

Given the shortage of domestic organic ingredients, manufacturers in the United States are forced to source from other countries. According to OTA, the market share of imports was higher at 16% than that of organic exports at 8.3%, and the United States imports organic products from at least 111 different countries, with Mexico as the leading supplier. Although the United States has multilateral recognition with several countries such as Canada, the European Union and most recently Mexico, it does not have it for all, which means consumers may not be getting the organic standard they expect.

To meet consumer demand, both industry and government need to incentivize farmers to make the transition to organic—and we have started to see this in recent years. On the industry side, we have seen both finished goods manufacturers and retailers fund and work with organic farmers, such as Ardent Mills working with organic farmers or Whole Foods Market setting up a $10 million loan program. On the government side, USDA is working with OTA on the Certified Transitional Program. This will let farms converting to organic be certified and allow finished goods to be marketed with organic certification. The goal of this certification is to soften the financial burden of transitioning by establishing a fair market price, somewhere in between conventional and organic certified, and ultimately, increase the organic land in the United States.

As president and CEO of BI Nutraceuticals (botanicals.com), George Pontiakos oversees all aspects of operations for BI Nutraceuticals' and the Zuellig Group Nutrition and Ingredients division in China. Pontiakos has held senior leadership positions at several leading consulting, medical services, and technology companies. He has wide-ranging experience in scaling geographically dispersed global companies to maximize their ability to successfully compete in the marketplace. Pontiakos holds a bachelor's degree in business management from Farleigh Dickinson University.