Scaling Up Organic Production to Lower Costs: Will Quality Suffer?

April 24, 2014
By Chuck Benbrook

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.

Fresh apples (photo: T. Gill)

Can organic production keep up with demand? (photo: T. Gill)

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.

Earthbound farms 100% organic leafy greens plant in San Juan Baptiste, CA (photo: C. Benbrook)

Earthbound farms 100% organic leafy greens plant in San Juan Baptiste, CA (photo: C. Benbrook)

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.

Top organic producers are meeting or exceeding convention soybean production, particularly in dry years. (photo: M. LaBar)

Top organic producers are meeting or exceeding convention soybean production, particularly in dry years. (photo: M. LaBar)

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.

 

 

8 comments on “Scaling Up Organic Production to Lower Costs: Will Quality Suffer?”

  1. Lila said on April 24, 2014:

    I read an article on how Walmart works. They will make a deal with a supplier to buy so much of their product they will become the suppliers main buyer, and the supplier then turns away contracts with other customers, being so busy with Walmart. When Walmart later wants to renegotiate the price the supplier is left with no choice but to accept their lower offer or go risk losing all that business.This is based on an article I read about Vlassic Pickles. Not sure about the accuracy, but if this kind of practice is how they really do business, I don’t see how it will help farmers.

    • Charles Benbrook said on April 25, 2014:

      Any grower or supplier is wise to not be too dependent on any one buyer, since dependence can erode clout in ongoing business relationships. I too have heard horror stories re Wal-Mart coming into and then leaving markets, especially for locally grown produce. But I also hear more success stories, mostly via “The Packer,” the main weekly newspaper of the produce industry. Also, major national organic brands have had greater success in recent years in sustaining acceptable terms in ongoing contracts. Wal-Mart no doubt understands there are other retailers eager to attract market share by expanding supply of organic products.

  2. Rebecca Thistlethwaite said on April 24, 2014:

    I am having some issues with this article. Are you suggesting that it is inefficient to have small to mid-scale organic farmers spread all over the country and that instead we should centralize as much as possible so that Walmart can have cheaper prices? It’s ironic you mention both the PNW tree fruit industry and salad greens from California as a model for cost-efficient organics. Both have some serious sustainability flaws. The PNW organic tree fruit industry is dominated by a couple huge grower/shippers. They grow their organic blocks within a sea of conventional fruit to keep the bugs down. They rotate blocks out of organic as soon as the pest pressure gets too high. Trees are often started off conventionally with soil fumigation, then transitioned to organic before they start producing. The whole area is a desert and relies on dwindling rivers like the Yakima for irrigation.

    California organic leafy greens are dominated by Earthbound, which we all know is know owned by the publically-traded food corp White Wave. They grow vast monocultures in the desert of CA, AZ, and Mexico, using unsustainable groundwater, tear out wildlife habitat in the name of food safety, and have numerous labor violations in their plant (sexual harassment, fun stuff like that). So this is an an improvement for organic agriculture and consumers?
    Also, you don’t mention in your article about how cheap organics are increasingly reliant on cheaper imported ingredients like soybeans, garlic, apples, etc. What will that do for US organic agriculture?

    • Charles Benbrook said on April 25, 2014:

      Rebecca, on the efficiency of distribution — yes, more small or medium size farms in an area will lower costs, as would a cluster of larger farms. Today, e.g., OV and Horizon trucks often have to visit several farms spread over two or three counties to get a truckload; milk trucks serving the same area are full after picking up milk from one or two conventional farms. This impacts prices for final product, and farmer pay prices.
      On other issues, you make a number of serious allegations. I hope you are confident in the information that supports them. I know some are not correct, or are at a minimum, overstated. Earthbound Farm leafy green growers definitely rotate their crops, your “vast monocultures” comment would be fair in reference to conventional corn in the Midwest, and wheat in some areas, but not organic leafy greens. Almost all fields grow 1-2 other veg crops each year, and produce the same leafy green crop no more than once in a 3-4 crop rotation. I know quite a bit about EBF, since I have served for years on their science advisory committee. By lots of measures, their labor force is stable, pleased to be associated with the company, and I am aware of no abuses. Are you? I fully understand concern over the White Wave buyout, and the $64,000 question is how much of the Dean Foods’s way of doing business remains in the WW genome, versus how much of the old White Wave’s business ethics and approach? Time will tell, but what a huge mistake it would be for WW to undermine consumer confidence in the EBF brand. Re your comments on the organic tree-fruit industry, the fact remains that for small, medium and large-scale growers, farm-level profits will go up as packing house costs go down. In fact, small to mid-size growers will actually gain more than today’s larger growers, who already have attained some measure of economies of scale. And last, you raise the important concern over water use in the west. Huge issue/challenge. There is a certain amount of water that is going to support ag production in western states, and I hope the share used to produce organic crops increases. That will not solve western water problems, but neither will opposing actions by Wal-Mart and other mainstream retailers to expand organic choice in their stores.

    • Kevin Stennes said on April 28, 2014:

      Rebecca, regarding your thoughts about efficiencies for WalMart and lower their costs: Because WalMart is so huge, they can operate on lower margins than smaller companies. Hence, because they have lower prices in-store, doesn’t necessarily mean they pay the growers less. They just sell it at a lower margin. I’m not playing defense for WalMart, just stating the obvious for economies of scale and their lower margin business model. Secondly, I’m sure many of the agricultural commodities/industries have “serious” sustainability flaws. The world isn’t perfect, but the growers/shippers are doing the best they can. Most things are dictated by economics and the rest of the decisions/details are reactive or proactive to the economics at hand. Of course, as in any industry, there are small players and large players. The WA tree fruit industry (organic) does have several large players, but the state also has many very small growers with 5-50 acres of organic tree fruit. If you would prefer the larger growers getting out of organics because they are “dominating” then you will see the supply of organics drop exponentially. The big growers got big by making good business decisions (based on being reactive and proactive to the economics). Yes, some orchards are started out conventional and transitioned to organics after the tree has grown into moderately full production. If you have any information from your personal orchard on growing an orchard organically from the start, I would certainly welcome the information. It would be very helpful! What are your suggestions for irrigation orchard ground besides using water from rivers? Using the Yakima river as an example using a very narrow paintbrush to try to paint the whole picture. I can’t speak for the California topic, as I certainly am not an expert. However, your comment about tearing out wildlife habitat in the name of food safety is interesting–I’m sure the growers aren’t self-imposing such regulations, they’re coming from the government and retailers. I appreciate your advocacy for Washington organic growers, because I am one and I’m a fairly small grower. We are all in this together and cordial dialogue is the only way to understand and improve!

  3. Rebecca Thistlethwaite said on April 25, 2014:

    Tanimura & Antle, who used to be part owners of Earthbound, did have at least one sexual harassment suit that went through the court systems. Here is the link: http://articles.latimes.com/keyword/tanimura-antle-company
    It appears it happened right before they bought into Earthbound, so perhaps Earthbound is flawless & wonderful to their employees. They do have quite a few OSHA violations, but I guess that is standard in produce packing houses (you can look this up on Dept. of Labor website).
    As for small, medium scale farmers doing better as the packing houses get bigger, I don’t really understand your logic. As an economist, I’m sure you have studied what happens under monopolies and monopsonies. Just as happened in the meat packing industry where 4 firms now dominate 80% of all meat sales, having 1 or 2 packing houses that will buy your fruit does not provide better returns to small growers. It takes away their options. They have nowhere else to get their fruit washed, graded, sorted. Organic growers I know in the Columbia River Gorge have not a single packhouse in the Gorge. They have to take their fruit all the way to Yakima. That’s not only inefficient, it’s costly in transport. They have to accept whatever price the packhouse offers. Sometimes they don’t even hardly get paid after paying for transport, packing, cold storage, boxes, etc. Great system for the packhouses, not for the farmers.
    I would rather have models like Organic Valley that support thousands of small to mid scale family farms than have a food system dominated by publically traded enormous corporations who have no other values other than maximizing returns to shareholders. Pretty sure most organic farmers would agree with me.
    Walmart can do whatever they want, I just don’t think you (as a public employee entrusted with supporting Washington’s farmers) should be their cheerleader.

    • Kevin Stennes said on April 28, 2014:

      Rebecca, thanks for the input. A couple of corrections/comments on your analysis.

      First, packinghouses don’t typically “buy” the growers fruit. They handle the fruit with predetermined charges, based on packout, etc. and return the grower the remainder after costs are deducted. Not a situation where the packing company buys the fruit, however, it does happen occasionally. Second, several of the packing companies are grower-owned cooperatives, so the farmers have ownership and leadership positions of boards of directors. Not quite your picture of the packing house harming the grower (good for the packing house, bad for the grower).

      Since you brought up Organic Valley, my family once dealt with Organic Valley on some organic fruit. They returned us extremely dismal returns that hurt us financially. I believe the final check of the year was $1 and a few cents on many thousands of pounds. We went back to one of the local packing houses with that crop the next year and did much better. This is too complex of an issue with many moving parts to just assume that packing houses (very generic description) are bad.

      While WalMart is certainly not perfect, they have, in my opinion, strengthened the fruit market for conventional and organic, due to their demand and (usually) fair pricing structure.

      The growers you mentioned in CRG have every right to develop their own co-op and handle their own fruit in their own back yard. Typically, economics and economies-of-scale come into play, which brings us back full-circle!

      Your comments are appreciated

  4. Anthony Zolezzi said on April 26, 2014:

    Chuck first thanks for all you do for the organic industry and thanks for your insight and support of growing organic agriculture. Remember in mid 2000 when we made it our goal to get Organic to 10% of food — feel like the thought process of focusing on how to get efficiency’s in the supply chain from the ground through to the consumer is the right conversation. If the consumers lead this we will surpass 10%. It is astounding to me the impact Organic Ag can have on the planet — even at just 10% Thanks much onward and upward -Anthony

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