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Why America’s Love Affair With Organic Is Over

Justin Rohrlich March 22, 2010 8:10 AM|

       The economics don’t work for manufacturers or consumers.

A few years ago, the word “organic” was thought to be synonymous with the word “profit” for big corporations like Walmart (WMT), General Mills (GIS), Kellogg (K), and Heinz (HNZ) that wanted to capture a slice of the then-$31-billion market.

But, while supermarket sales of organic packaged foods and non-alcoholic beverages grew 29.1% in 2007, that growth slowed to 24.5% in 2008, to 11.7% in 2009, and to just 1.9% in 2010. At that point, the value of the organics market had dropped to $4.4 billion, according to Nielsen data.

For many companies, the economics of organic don’t add up.

PepsiCo’s (PEP) so-called “good-for-you-products” like Tropicana, Aquafina, and Naked Juice make up less than a quarter of the beverage maker’s total sales.

The organic segment, which makes up less than 2% of the beef market, is "always going to be a niche," Forrest Roberts, CEO of the National Cattlemen's Beef Association told Reuters.

"The problem…is every grocery store sells such a very small amount of [natural products]," says Joe Sanderson, CEO of poultry producer Sanderson Farms (SAFM).

The economics don’t add up for consumers, either.

Michael Swanson, an analyst at Wells Fargo, points out that people “don’t need to go up to true organic to get most of the perceived benefit in their food dollar," meaning they feel just as good about buying slightly more expensive hormone-free “natural” milk, which they still see as healthier than traditional milk without paying as high a premium.

Shawn Hackett, president of Hackett Financial Advisors, Inc., a money-management firm with a focus on agricultural commodities, says that as long as unemployment is high, he can’t imagine the organic sector will thrive.

“Food producers have to spend a tremendous amount of money to become -- and maintain -- their organic certification,” he says. “A lot of people aren’t willing to pay those higher costs when they also have a credit card to pay down.”

The first obstacle to price parity is the issue of government subsidies. Conventional crops are heavily subsidized, artificially pushing down prices.

The second issue is yield-per-acre.

Stephen Wilson, CEO of fertilizer manufacturer CF Industries Holdings (CF) said at the Reuters Food and Agriculture Summit in Chicago last week, “If we aim to feed the world through organic agriculture, we would have millions of starving people because those kinds of farming techniques don't provide the yields necessary to create the abundance we have today.”

This is a view shared by Nobel laureate Norman Borlaug, who's said organic agriculture yields could never match those of conventional yields.

However, research from the Rodale Institute’s Farming Systems Trial, conducted with the USDA’s Agricultural Research Service, paints a different picture -- if only conventional farmers could afford the luxury of time, which most cannot.

Hilary Sawyer, for one, who runs High Maple Farms in Warwick, Maryland, tells Minyanville he would simply lose too much money while waiting for his tillable soil to become certified organic--a process that involves using no chemical fertilizers or pesticides for three full years.

Once a farmer's soil is certifiably organic, things start to improve. During the first few years, conventional corn yield was superior to organic yield. Then, once the soil built up its natural biological activity, organic yield matched conventional yield. After that, over the next eleven years, organic yield surpassed conventional yield, averaging 119 bushels per acre compared with 110 bushels per acre—which included severe drought years and a record wet summer.

High Maple's Sawyer says he'd love to be able to sell his corn at the premium that organic commands, which is almost double the per-bushel price. It's getting to that point that is not feasible.

In the end, the entire organic issue continues to become less of one.

Gary Hirshberg, chairman and CEO of the organic yogurt maker Stonyfield Farm says, “It would be great to get all of our food within a 10-mile radius of our house. But once you're in organic, you have to source globally,” as there simply aren’t enough organic cows, enough organic feed, enough organic sugar, or enough organic fruit in the United States to meet demand for Stonyfield’s products.

Of course, struggling farmers can always do what Michael John Fenter did recently. In order to make ends meet, Fenter, an organic farmer in Tacoma, Washington, robbed three banks in two states, making off with $86,000 before getting caught.

He will be sentenced on June 14 -- just in time for the organic heirloom tomato harvest.

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