Scaling Up Organic Production to Lower Costs: Will Quality Suffer?
April 24, 2014
An April 19, 2014 blog post by NPR correspondent Dan Charles discusses Wal-Mart’s plans to develop a substantial new line of organic food products that will be sold at a 25% lower price than other organic brands. The story quotes individuals who question whether Wal-Mart will be able to deliver on the idea without hurting farmers or cutting corners and sacrificing organic integrity, but they may be underestimating the benefits of Wal-Mart’s economy of scale.
As I explained to Dan Charles in an email exchange, Wal-Mart should be able to realize 15-25% cost savings on most products just via the scale and efficiency of their distribution system, and there is no reason to think that they won’t be able to bring the power of that distribution system to bear in handling organic foods.
And significant additional savings can be realized in streamlining supply chains. Most organic food is still processed at processing and manufacturing plants that typically handle mostly conventional products. Organic producers and distributors contract time from these plants, which have to shut down and clean out their lines before running organic product, and segregate incoming and outgoing products. All of this costs money. A Wal-Mart-scale jump in demand will surely accelerate the trend toward processing facilities dedicated 100% to organic product, cutting 15% to 20% from processing costs, especially when such plants are running at or near full capacity. Cost savings will often be even larger for animal products, where organic producers are at a huge disadvantage because of the lack of organic slaughtering and processing facilities, and inefficient, spread out production and distribution channels for meat, eggs, and dairy products.
You can see this already in cases where significant organic supply chains have already developed. Cost savings have been significant. Witness the Pacific Northwest tree-fruit industry. And in the packaged leafy greens industry, organic brands have about a 40% market share, sell for just 5% to15% over conventional brands, and still pay farmers a substantial farm-gate price premium.
As production costs drop and more sophisticated growers and supply chains are established in the organic space, I would bet the farm that the top organic growers for many crops and commodities will have production costs per unit no higher than, and in many years, below conventional. This will especially be true for corn, soybeans, and grain crops, where the conventional grower price structure is out of control because of resistant weeds, high priced seeds, and energy costs.
With cost savings on the scale outlined above and growing demand for organic products across the board, Wal-Mart should have no trouble generating demand for their organic line. Their difficulty will be in obtaining reliable supply, especially in the near-term. It will take time to grow the organic foods and establish long-term contracts with established growers, many of whom will need time to transition more ground from conventional to organic production. And while some products such as coffee, bananas, and mangoes will out of necessity be imported, Wal-Mart is aware that meeting their pledge primarily through a big jump in imports will go over like a lead balloon.
Some are suggesting that a substantial increase in the organic supply of row crops can’t be met at lower prices, pointing to stagnating production of organic corn and soybeans. It is often alleged that farmers don’t want to be burdened with the additional crop rotations, more difficult weed control, and other aspects of organic production. Instead, economic opportunities are the dominant driving force behind interest in conversion to organic systems. Conventional corn and soybeans have commanded unprecedented, very high prices since 2007, eroding somewhere around one-half of the typical organic price premium relative to conventional crops from 2006-2013. Other growers are shifting to the production of non-GE crops, where modest changes in management can garner price premiums about one-third those offered for organic crops. But economic forces never rest. The cost of conventional production continues to rise as crop prices fall from peak levels, placing a growing share of conventional growers in financial trouble. On the organic side of the fence, demand for organic corn and soybean animal feeds is soaring, pushing prices higher, and new systems, equipment, and economies of scale at the farm level are bringing down organic corn and soybean production costs and helping to stabilize yields.
The top 25% of organic corn and soybean growers are matching or exceeding nearby conventional yields except in years of perfect weather, during which the extra nitrogen applied by conventional growers pushes yields higher than those obtainable by organic farmers. But in dry years, organic producers often do better than conventional because organically managed soil holds more moisture.
Weed management cost differentials are decreasing as well. During the Roundup Ready era, weed management was a piece of cake for conventional growers, and an ongoing pain for organic growers. But as pests and weeds adapt to GE crops, it is getting tougher and costlier for the conventional growers to keep a step ahead of weeds.
Don’t forget that nearly the entire backbone (i.e., infrastructure) of agricultural production is currently geared toward conventional production systems and technology. As organic production grows, equipment producers will develop better and cheaper equipment geared to suit organic needs. This is already happening. So much of what goes on down on the farm is shaped and driven by investments in infrastructure, research and technology, and policy decisions made many years before. Organic has broken through in a couple of sectors, and is poised now to break through in new ones, and as this happens, investment capital will follow and the pace of progress will accelerate. But of course, problems will arise and hurdles remain for all growers, and the prize will go to those who avoid the former and rise above the later through creative management and wise investing.
As organic supply chain efficiency grows, organic food products will be increasingly price competitive with conventional products. This reality will inevitably trigger a response by conventional growers and food companies. This response will include creating and/or expanding their own organic brands, and efforts to convince consumers that their conventional brands offer quality, safety, and environmental attributes similar to those associated with organic production.
Especially for fruits and vegetables, solid, replicated science shows that organic production delivers concrete and meaningful food quality and environmental benefits (pesticide residues levels on foods you eat are publicly available via M2M’s Dietary Risk tools). Organic milk has beneficial nutritional differences from conventional milk, as shown in M2M’s journal article in PLOS One. It is a shame these benefits are now restricted to such a small share of the population and such a tiny slice of the American landscape. Wal-Mart’s renewed interest in expanding the supply of moderately priced organic foods could help attract fresh capital and talent to growing the scale of the organic food industry, a goal that hopefully most everyone can support.