USDA: Report on tight supply in the organic market

Handlers were not able to provide as much of their final product as demand required and needed ingredients were in short supply. This is what the report of the Economic Research Service “Using Vertically Coordinated Relationships to Overcome Tight Supply in the Organic Market” has revealed after evaluating collected information on intermediaries’ marketing and procurement practices for 2004. Data showed that handlers used contracts as a means to not only procure needed ingredients, but also to develop and maintain strong working relationships with their suppliers.

The impact of shortages and marketplace changes has been the subject of many discussions. At the 2007 Organic Summit, speakers addressed the challenges of supplying the rapidly growing organic market. In a congressional hearing on organic agriculture, organic industry members testified that US farmers were unable to keep pace with market demand and urged lawmakers to make increases in funding for organic agriculture.

Critical supply shortages of organic milk and meat have occurred due to various factors, like the scarcity of feed and grains, for example. Securing an adequate supply of organic ingredients has been a problem for a long time. A lack of reliable supplies of organic raw material has constrained some companies’ growth, high transportation and distribution costs have limited growth throughout the sector. Companies still have difficulty procuring large enough quantities of organic products to distribute to retailers, locating organic producers to buy from and gaining access to shelf space in supermarkets. 
(Photo: Farmers market in California)
 

Traditional stores for natural and organic food are facing competition from retailers like conventional food stores - Safeway, Wal-Mart, Target and Costo, for example. Organic manufacturers are doing business along conventional food manufacturers like General Mills, Kellogg’s and Dean Foods. Conventional companies have accessed the market by acquiring organic companies and have introduced organic versions of well-known products. Consumer interest was intensified, which is revealed in the figure for USA retail sales, which increased from $ 3.6 billion in 1997 to $ 18.9 billion in 2007.
 

According to definition, handlers are companies producing, processing and distributing organic food. The report relies on data from an ERS survey of the 2004 population of certified organic handlers, representing the most recent available information. The results of the survey confirmed shortages in the sector, with 13 % of all handlers unable to meet market demand (a critical shortage of at least one of their organic products) at some time during that year. Another 16 % experienced minor shortages. The data also showed significant problems in some specific organic sectors: 26 % of milk handlers, 22 % of feed and grain suppliers and 16 % of fruit and vegetable handlers experienced critical shortages of their products for sale.

Data indicated that organic handlers primarily relied on domestic suppliers in 2004, with 38 % of handlers importing some or all of their organic products. By volume, the average share of organic products purchased internationally was 20 %, with 22 % being procured locally (within a one hour drive of the facility), 27 % nationally, and 31 % regionally. The categories imported most often were coffee, tea, cocoa, greenhouse, seeds, mushrooms, herbs and extracts, while dairy, poultry and eggs were rarely imported. (Table: Where organic handlers buy specific product categories. Source: USDA)
 

Results have shown that the organic sector uses contracts at a much higher rate than the conventional sector. 46 % of the volume of organic products bought by organic handlers was executed with written, negotiated contracts. Another 24 % was procured through verbal agreements or ongoing relationships between the suppliers and handlers. The remaining 27 % of ingredient volume was acquired through spot markets (wholesale market, for example), or anonymous transactions. Coffee, soybeans, wheat, corn and milk were the main products obtained through contracts. The reasons for using contracts were constant across the different types of handlers and suggested that most contracts were used to reduce the transaction costs of finding enough products rather than sharing risk. When asked to rate the importance of specific reasons for using contracts, over 80 % of handlers reported that contracts were an important way to secure products essentials to their business. About 70 % of handlers reported that contracts were a very important risk management tool for securing products or ingredients that were in limited supply and to ensure consistent quality of suppliers.

Feed and grain handlers were the most likely to report using contracts for securing products that were in limited supply. Handlers reported using contracts to reduce their own price volatility (53 %) more often than to reduce a supplier’s risk from changing prices (39 %). Of the four product categories – milk, fruits and vegetables, feeds and grains and soybeans - milk handlers were the least likely to use contracts to stabilize their own prices or their supplier’s prices. (Table: Risk Avoidance affects handlers' contract use. Source: USDA)

In 2004, about 40 % of handlers recruited suppliers with milk handlers the least likely to do so. Handlers willing to work with suppliers new to the organic industry gained access to a wider range of supply, with approx. 30 % of handlers willing to work with less experienced suppliers. Feed and grain handlers were the least likely ot provide assistance to their suppliers, while milk handlers were the least likely. The report concluded that retail sales of organic foods were expected to continue their rapid increase and as long as the supply of organic products remained tight, handlers who developed close relationships with their suppliers might be better positioned to obtain the products they needed.

www.ers.usda.gov