March 6, 2015

Organic output has failed to keep pace with demand on the market because of the significant costs and risks associated with converting traditional farmland to organic production. This is creating supply constraints that are stifling growth in one of the most dynamic segments of the U.S. food industry, the grain industry.

Over the past ten years, U.S. retail sales of organic foods more than tripled to $43.3 billion, according to the Organic Trade Association, and although organic acreage tripled over the same time period, production of some organic products such as soybeans is so low that food companies are forced to import supplies from overseas. This, in turn, creates problems surrounding U.S. certified organic labeling, which guarantees that crops and livestock are grown and raised according to certain established standards.

To counter these difficulties, U.S. food companies are finding they need to take independent measures to ensure adequate organic supplies.

After dealing with severe gaps in supply beginning early in the millennia, in 2014 Canada-based Nature’s Path decided to buy more than 2,800 acres in Montana for more than $2 million to ensure a supply of organic wheat, oats and other ingredients for its products. The company plans to continue to allocate $2 million per year for the purchase of additional traditional farmland that it can convert to organic production, with the goal of fulfilling 25% of its grain needs itself within 10 years. Under its system, the company contracts with farmers to operate the land and grow the crops, then the company takes 33% of the crop at no cost, and buys the remaining 66% at market price.

Similarly, in 2010, Oregon-based organic soup company, Pacific Foods built its own organic chicken raising operation near its headquarters in order to better ensure supply of organic chicken broth, and recruited additional farmers willing to run organic chicken raising operations, even going so far as offering to pay for all feed and equipment, and assume any losses if production targets were not met.

Pacific Foods of Oregon Inc. and other food companies, including Chipotle Mexican Grill Inc., are reaching down the supply chain, offering financing to growers to help them manage through the one to three year transition period of land conversion from conventional to organic. These companies are also offering technical advice to organic growers and hiring headhunters to recruit organic farmers. In addition, other companies, such as Hain Celestial, have begun offering organic farmers guaranteed purchasing contracts lasting between three to five years for their crops, such as organic blue and yellow corn.

Organic food companies believe that any large food producer looking to expand into the organic space will be met with the same challenges, and Arran Stephens, founder of Nature’s Path believes that the practice of companies buying their own organic cropland will become a trend in the future.

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