Organic faces growing pains as demand outpaces supply

When Andrew and Melissa Dunham took over a 150-year-old corn, soybean and cattle farm from a relative in 2006, the 80-acre spread northeast of Des Moines couldn't support a full-time farmer.

So the young couple decided to overhaul the operation by embracing what was then a small but growing niche in agriculture — organic farming, now one of the hottest sectors in the multi-billion-dollar food industry.

Organic food sales have risen by double digits annually as the public consumes more fruits, vegetables, pastas, dairy and meats raised and grown without pesticides, genetic modification or antibiotics, among other stringent requirements. Over the past decade, organic food revenue has tripled, reaching a record $36 billion last year.

"Organic is much more mainstream now. More people are seeking it out," said Andrew Dunham, who sells beef along with carrots, kale, cabbage and almost 60 other crops to Whole Foods, co-ops and farmers markets in Iowa. "We actually do end up saying 'No' quite a bit. We're pretty much selling everything we grow now."

Dunham said embracing organic has made it easier to get his produce and meats into grocery stores and attract customers seeking organic goods at farmers markets. The decision also has been a boon to the farm's bottom line. The operation posted sales of around $400,000 last year, up 20 percent from two years earlier.

Their success has allowed the Dunhams to focus full-time on farming. Melissa quit her job in Minneapolis-St. Paul to work on the family operation.

"Demand (for organic) just keeps going up and up and up," Andrew Dunham said.

A rising market

Despite organic farming's booming growth, it remains less than 6 percent of the $630 billion in total supermarket sales in 2014 reported by Progressive Grocer Magazine.

But the industry's growth isn't expected to subside anytime soon, according to the Organic Trade Association. It predicts sales will increase 12 percent to 15 percent annually for the next three years.

That rapid growth has brought its own challenges to the industry — chief among them demand, which organic producers are struggling to meet.

Shortages have led to sky-high prices for some organic products. And more livestock producers, hungry for organic feeds, are importing them from overseas because they can't find enough in the United States.

"There is not a major retailer in the country that doesn't have appealing to the organic shopper in their strategy right now," said Laura Batcha, executive director of the Organic Trade Association. "But what happens if the industry can't fulfill that opportunity, and people walk away?"

It's difficult to know how many new acres of organic crops will come into production, the industry concedes, because of incomplete data, competition for land in some areas and the three years it takes to earn certification as an organic farm.

Encouraging switch

Batcha said some private-sector food makers and retailers are buying land to produce their own organic produce, or are enticing producers with long-term contracts that offer to pay them extra while they transition to organic — a period that can be costly for the producer who is dealing with lower yields and higher input costs but is not yet able to attract premium prices.

The Agriculture Department said in its Census of Agriculture report released in 2014 that 512 farms in Iowa were certified organic in 2012, out of 88,637 farms throughout the state. Those organic farmers oversaw 122,479 acres out of more than 30.6 million acres statewide.

The Organic Trade Association is evaluating options to help growers in Iowa and across the United States transition to organic.

One possibility would be to offer farmers to participate in a program that would make sure they follow necessary requirements while completing the 36-month transition period. It also would help food companies plan by giving them a sense of how much new land is in the organic pipeline.

"The momentum is not going to dissipate for organic," Batcha said.

Increasing the supply

Grocery stores, restaurants and other users that are struggling to find organic products have turned to creative strategies for wooing prospective farmers and ranchers.

Elevation Burger, which sells organic, grass-fed, free-range beef at 55 stores mostly in the United States, shares its sales growth figures and projections of store openings with suppliers to give them a glimpse into the company's long-term needs.

Elevation Burger also sometimes pays for producers to obtain certificates signifying they're organic — which can cost up to $4,000 — in exchange for a slice of future supply. In addition, the burger chain has hired consultants to help farmers convert their operations to organic.

"It's all about supply. Every farm we bring on supports our growth," said Michael Berger, a founding partner of Elevation Burger. "If you want to be in the business like we are of having a consistent organic protein supply, your only option is to control and grow the supply chain to your customized needs, and that is to go directly to the growers."

Berger said one of his meat processors abroad was decimated by a cyclone seven months ago and couldn't deliver a promised 50,000 pounds of beef. The burger chain had to scramble to procure enough meat from other suppliers at a higher cost.

"We were stuck biting our nails, down to the wire," said Berger, who estimated Elevation will buy 4 million pounds of beef and 500,000 pounds of chicken during the next 12 months. "You can't just call a regular distributor and say, 'Hey, sell me that.' "

Wal-Mart Stores, the world's largest retailer, carries more than 1,600 organic items ranging from dairy and produce to peanut butter and macaroni and cheese at many of its more than 4,500 U.S. stores.

John Forrest Ales, a spokesman for Wal-Mart, said the company works with farmers and other suppliers to outline its organic needs three to five years out, so farmers can plan and invest.

"If you're going to supply organic to a grocer as large as Wal-Mart, that is not always a fast turnaround time," Ales said.

Colin Johnson, a corn and soybean farmer in southern Iowa, said the lower yields associated with organic farming, coupled with higher labor and input costs, have discouraged him from switching his 700 acres.

"For us, we're at a pretty sustainable system now with our crop rotation," he said.

But the fourth-generation farmer said if he were approached by a grain processor or supermarket with a lucrative deal to make the change, he "would definitely consider it."

'Ever-faster growth'

Bob Quinn of Big Sandy, Mont., started raising organic crops in 1986 on a few acres, before converting all of his farm during the next five years.

Initially, he had a hard time finding a market for his organic grains. The prices he received were higher than for nonorganic crops, an average of 30 percent to 50 percent, but not as much as he wanted.

Today, it's a much different story.

Because of "extreme competition" and short supply, the 67-year old farmer said he's getting paid four to five times more than conventional farmers for wheat — and several times more for the peas, alfalfa, hay and barley he grows on 3,400 acres.

Currently, a bushel of hard red winter wheat — used to make bread — is about $5 a bushel, compared with more than $22 for organic wheat, he said.

"It's really too much to be sustainable," said Quinn, whose grain customers include an organic dairy and bread makers. "You can't price your customers out of business where they can't sell their products.

"We can see ever-faster growth if the supply was greater and the price was a little lower so that the final (cost) wasn't such a shock."

Contact Christopher Doering at cdoering@gannett.com or reach him at Twitter: @cdoering

Popular organic foods

Sales for some of the biggest-selling organic food categories and products in the United States in 2014.

• Fresh organic produce: $11.8 billion in sales, up 12 percent from 2013.

• Organic milk: $3.1 billion, up 10 percent.

• Organic frozen prepared foods: $1.6 billion, up 14 percent.

• Organic bread: $1.25 billion, up 12 percent.

• Organic dry breakfast food (cereals, breakfast bars, etc.): $1.3 billion, up 3 percent.

• Organic yogurt: $1.1 billion, up 7 percent.

Source: Organic Trade Association's 2015 Organic Industry Survey

U.S. organic sales on rise

Organic food sales in the United States has risen every year from 2004-14.

*Millions of dollars

Source: Organic Trade Association's 2015 Organic Industry Survey conducted 2/10/2015 – 4/3/2015

Organic frequently asked questions

Q: What is organic?

A: Organic, which is governed by strict government standards, requires that products bearing the organic label are made without the use of toxic and persistent pesticides, synthetic nitrogen fertilizers, antibiotics, synthetic hormones, genetic engineering or other excluded practices, sewage sludge or irradiation.

Q: So what can organic farmers use instead?

A: Organic farmers rely on hand weeding, mechanical control, mulches, cover crops, crop rotation and dense planting.

Q: Who sets the organic standards?

A: Certified organic foods are produced according to standards set by the U.S. Agriculture Department's National Organic Program. These regulations outline what the grower must do to use the word "organic" or the USDA organic seal.

Q: How long does it take to transition from conventional to organic?

A: A farmer must go through a three-year transition period of compliance with organic requirements. During this time, growers generally face lower yields and increased input costs but do not benefit from higher prices given to organic producers. Livestock producers also need to transition their animals and land before they can be certified.

Source:Organic Trade Association