During the Natural Products Expo West trade show earlier this month in Anaheim, Calif., there was much discussion about the future of certified organic products and the organic marketplace in general. The market segment’s growth has been significant during the past decade, but future success will require major efforts to expand scale and achieve greater market penetration. Yet it is the prospect of scale that may create the largest challenge for the category.
The Organic Trade Association estimates sales of certified organic food and beverage products reached $39.7 billion in 2015, the latest figures available, an increase of 11% compared with 2014. Organic fruits and vegetables lead the category with sales of $14.4 billion in 2015, followed by dairy with $6 billion in sales. Impressive growth also may be seen in organic snacks, which achieved sales of $2.3 billion in 2015, up 14% compared to 2014 and three times greater than a decade earlier.
The greatest issue facing the organic category is the adequacy of certified raw material supply. It is estimated that less than 1% of U.S. cropland is devoted to organic production, far short of what would constitute significant scale in the marketplace.
Several companies have initiated novel approaches to addressing the issue. General Mills, for example, has pledged to double the organic acreage from which it sources ingredients and expects to reach its goal of 250,000 acres by 2019. Ardent Mills has made a similar pledge, saying it will assist U.S. wheat growers to double organic wheat acreage by 2019.
The Kellogg Co., in conjunction with such suppliers as Healthy Food Ingredients, has worked to create a “certified transitional” program to assist conventional producers to make the three-year transition required to achieve organic certification. The goal of the program is to allow the producers to recoup some of the extra costs associated with making the transition by giving producers the ability to market their products with a logo that indicates they are making the shift toward organic certification.
The organic industry also is in the process of deciding on a proposal for a checkoff program that is making its way through the U.S. Department of Agriculture’s rulemaking process. If approved, some of the funds generated by the Gro Organic program would be used to recruit additional producers to make the transition to organic certification.
In the short term, there appears to be little chance that interest in the impressively growing organic category will slow. One need only consider the multiples such companies as General Mills paid to acquire Annie’s, Hormel Foods paid to acquire Applegate Farms, and Danone paid to acquire WhiteWave Foods to see how eager established brands are to gain a foothold in the marketplace. In addition, if this year’s Natural Products Expo West is any kind of a barometer, it may be said interest in the organic market has never been higher.
Yet it is this success that may prove a bigger challenge for organic food and beverage manufacturers over time. The attractiveness of the category for many producers is the premium they receive for producing certified raw materials. As the scale of the segment increases, that premium may fall. A question category leaders must address is whether the incentive for additional producers to enter the category will be adequate. The answer to that question may very well dictate the future of organic.