The State of the US Organic Industry

Organic Growth

The US Department of Agriculture’s (USDA) National Organic Program (NOP) unveiled its new organic certification program in December 2000, a full decade after the USDA’s original directive to ratify a set of standards. These standards provide a common set of rules and regulations for producers seeking to label their products as “USDA-certified organic,” and are meant to ensure that producers “are protecting natural resources, conserving biodiversity, and using only approved substances.”

Since the adoption of these standards, the US organic industry has seen swift change. While organic production is diverse in size and scope, many people associate it with small to mid-scale farms, often family-owned, that turned to organic farming both because it was viewed as more sustainable, and because the distinction as “organic” offered smaller producers a way to compete against larger-scale industrial farming operations. This advantage came via the price premiums for organic produce, which can range from on par or slightly above to several times those of conventional. Producers were able to obtain these premiums because consumers, who preferred organic foods for reasons including concerns about their health, the environment, and animal welfare, were willing to pay these prices.

Several decades ago, organic foods were niche products often marketed directly to consumers via on-farm sales, farmers markets, community-supported agriculture (CSA) programs, or at specialty health food retailers. In 1991, 68 percent of organic sales were made in specialty retailers, compared to only seven percent in traditional grocery stores.

Since the passage of the NOP standards in 2000, retail sales of organic products in the US have exploded by 900 percent, reaching $39 billion in 2014. US producers have been scrambling to meet this surge in demand.

The amount of organic agricultural land tripled between 2000 and 2011, while the number of organic operators (producers and handlers) doubled over the same period. As of last year, over 14,000 US organic producers received in total about $5.5 billion for their organic agricultural product—a 72 percent increase in sales since 2008.

While the organics scene was dominated by specialty retailers in the early 1990s, the market for such products grew to the point that, by 2000, traditional supermarkets sold more organic products than specialty retailers and direct-to-consumer venues. And these conventional retailers never looked back; as of 2015, grocery giants including Kroger, Giant Food, Shaw’s, and Publix all offer organic and natural products alongside their conventional grocery items. Meanwhile, organic sales at Costco, another major American retail player, reached an estimated $3 billion in 2014.

Not to be left behind, retail giant WalMart—the largest grocery retailer in the US as of 2014, with sales surpassing $160 billion—announced in April of that year that it would expand the company’s organic product selection. The company hoped that its new line of about 100 organic products would increase access to organic options that “elude too many families.” A company representative later noted that WalMart aimed to lower the price of organic pantry staples to be on par with their conventional counterparts.

By May 2015, the company had separate organic produce sections in about 2,300 of its stores (of the more than 5,000 it operates in the US). In August of this year, the company was carrying over 1,600 organic items in more than 4,500 stores in the country. Similarly, company data indicates WalMart subsidiary Sam’s Club doubled its organic portfolio in 2014.

WalMart’s announcement of its organic intentions was a major moment. The entry of America’s largest grocery retailer was bound to have a transformative impact on the organic industry.

Walmart Organics

Reactions to Walmart’s organic announcement were mixed. One US News & World Report article praised the move, saying that the entry of large-scale players would set an example wherein skeptics could, “No longer … say that sustainability is not economically viable, that it’s just a niche business.” An opinion piece in The Guardian also lauded the move, saying it would make organic food more affordable and accessible. One Forbes author suggested that wealthy consumers might lose interest in organics when they became more widely available and that Walmart’s entry “could be sounding the death knell of the industry.” And finally, NPR cited an industry participant who claimed that WalMart’s plan to slash organic prices was a “fantasy.”

In theory, the mega-retailer’s entry into the organic space presents an opportunity to increase supply chain efficiency in the organic sector. Walmart has been described as a “supply chain management master” given its logistical prowess and effective leveraging of economies of scale. So if the company were to apply this expertise to organics, there could be a significant efficiency increase that could in turn lower prices for end consumers. Lower prices would mean that more people could afford organics, and that the broader benefits of organic production—especially the potential for sounder environmental practices—could become more widespread.

On the other hand, WalMart’s entry into organics sales could have negative impacts on the industry. In the process of lowering prices, efforts to cut costs could lead to a deterioration of organic standards. Farmers, for example, may feel compelled to cut corners and costs by following the bare minimum of acceptable standards, or even neglecting to follow them at all. Corporations or producers could lobby Congress to weaken organic standards and keep prices low. If this were to happen, consumers would grapple with deteriorating quality while small-scale organic farmers could find it harder to compete.

In reality, these theoretical pros and cons are already playing out in the industry, WalMart aside. Constant growing demand for organics has meant that the sector has already seen industrial-scale growth over the past decade, leading to many sector changes–some arguably good and some bad. Resistance from organic “purists” to many of these large-scale changes has led to a divide in the industry between those who subscribe to the original tenets of organic production, and those supporting “newer” methods of production.

WalMart’s entry and expansion into organics has not caused major new change, but rather has highlighted and put further pressure on an already fractured and bifurcated industry with two very different visions of the organic future. Can they be reconciled? Do they need to be?

Two Views on Organics

“There’s not just one version of organic anymore”, according to Dawn Thilmany, Professor at the Department of Agricultural and Resource Economics at the Colorado State University. Mark Kastel, co-Founder of the Cornucopia Institute, a Wisconsin-based organic industry watchdog group echoed this sentiment, making a distinction between two primary organic groups, which can be broadly summarized as “new” vs. “original” organic.

“New” organics is in large part possible thanks to the intensification of organic production systems, which are increasingly looking like industrial, conventional farms. Additionally, the persistent supply gap in US organics has meant that foreign imports have become necessary to meet demand. Organizations producing “new” organic products are often owned by large agribusiness corporations such as Kraft and General Mills. According to industry watch dogs, such companies may be more likely to advocate relaxed organic standards to better facilitate the scaling of production.

On the retail side, “new” organic products are often found in major national stores such as WalMart, Target, and Costco. These retailers often rely on private label brands, or brands only sold at their outlets (at Costco, for example, that would be “Kirkland Signature”). Such branding can help keep the costs of organic products low, as it gives retailers flexibility and bargaining power in sourcing their products—customer loyalty is to the brand, and not the farm. While this practice has obvious benefits for pricing, it may enable retailers to be opaque about where they are sourcing their products.

By contrast, “original” organic supply and retail systems are largely consistent with the founding tenets of the organic movement and are typically produced at a small or mid-sized scale by family farmers. These products are often marketed directly to consumers via farmers markets or CSA’s, as well as to a handful of specialty retailers like co-ops and “mom-and-pop” shops. These retailers may also provide additional assurances about their products to consumers regarding the humane treatment of animals, fair labor standards, or others, described by Professor Thilmany as “organic+.” Oftentimes, members of the “original” organic movement are more likely to advocate the maintenance of strict standards in order to uphold the movement’s integrity.

Opinions differ over the cause of this organic industry split. The scale of the demand surge made it impossible for traditional, small-scale organic growers to keep up. Some industry participants claim that the allowance of loopholes, exemptions, and lack of general oversight of organic standards for industrial farms allowed corporations to sink their hands in and manipulate the nature of the industry.

Where is Walmart in this split? The company’s procurement and retail model would place it in the “new” organic model. And due to its size, Walmart’s expansion in organics can be expected to “further entrench...that fragmentation” in the organic industry, according to Professor Thilmany.

Evaluating Organics

Fragmentation within the organic industry leads to concerns regarding the integrity of “organic” as a meaningful label, as well as concerns about whether the needs of farmers and consumers are being met.

When it comes to evaluating industrial scale organics, there are some skeptics. Mark Kastel, co-founder of the Cornucopia Institute, notes that while the operations of medium- to large-scale organic companies can be compatible with good management and some creativity, he believes that the organic standards are “size limiting” when properly applied. While there is no operation size limit set by the USDA, the requirements make it very difficult to operate at an industrial scale while still fully meeting those rules. As such, he’s skeptical that some of the major industrial operations are truly compliant with USDA regulations.

In addition, Mr. Kastel notes that while not all industrial-scale operations are necessarily inconsistent with USDA regulations, some provide very little transparency about their products–such as the use of private labels that mask supplier information. Finally, loopholes in organic regulations, such as the use of screened porches as a substitute for true outdoor access for poultry, has allowed some producers to skirt the lines of organic production.

Another concern regards the welfare of small organic farmers. When it comes to the increase in demand for organic products, some farmers have seen an associated increase in prices for their goods, which has been a boon to their business. Other farmers, however, have found that a large share of growing demand is being met by industrial-scale farms or via cheap imports, against which smaller farmers have trouble competing. In addition, Professor Thilmany explains that the expansion of major retailers has assured some farmers that there will be demand for organic products, and may encourage more farmers to invest in the transition to organic production. On the other hand, she notes that the negotiating power of major retailers such as WalMart may also be discouraging for some small-scale farmers, who saw organics as a market they could compete in when they could no longer stand up to the conventional agriculture system.

And finally, there’s the question of how these changes impact consumers. Are consumers, who are often unaware of industry changes within their food systems, still receiving the same organic product as before? There is some evidence to suggest that the integrity of organic products has occasionally slipped. The Cornucopia Institute, for example, filed lawsuits against 14 organic producers alleging they failed to comply with USDA organic standards. These producers supplied retailers including WalMart, Target, and Costco. The USDA recently declined to investigate these allegations, citing insufficient evidence. Similar lawsuits have also hit major retailers accused of selling merchandise that was not truly organic, resulting in at least one instance in a multi-million dollar settlement by an organic milk producer. The Cornucopia Institute has also made allegations against WalMart for inaccurately labeling non-organic products as organic within their stores, while the retailer maintains these were just isolated instances.

But do consumers really care about the integrity of their organic products? Professor Thilmany, whose research has included investigations on consumer behavior, says: “If there’s one thing we know it’s that consumers are very diverse.” She notes that while some consumers may want organic products that have all the bells and whistles, or what she earlier characterized as “organic+”, other consumers may find that industrial-style organics meet their needs. She explains: “If there are truly consumers out there that want it to be organic at its base level because there are some key things not being used, there’s a good product line for them. If there’s other people who believe organic also means support for family farms, support for humane treatment of animals and so forth, it’s not bad if they have their own [organic] segment.” If consumer needs and organic products vary, perhaps it’s simply a question of matching consumers to the right “organic” products for them.

Going Forward

It’s clear to industry participants that the US organic sector is divided. And given the expansion of major and influential retailers such as WalMart into the organic space, it’s unlikely that division is going to change. Both Kastel and Professor Thilmany agree that the role of responsible businesses should be to accurately market their products to consumers, so that buyers can make the best choices about whether products meet their expectations.

And what can consumers do? For those who find a basic application of the USDA standards, or even just some vague notion of “organic” sufficient, then the current changes in the industry shouldn’t be troubling. Consumers who seek broader or more detailed assurances about the nature of their food production, however, might need to do a bit more research. For these consumers, there will likely continue to be available organic products that meet their needs at venues such as farmers markets, CSAs, specialty stores, or even through particular brands that distinguish themselves through the application of “organic+” standards. As Kastel explains, the original aim of the USDA organic label was to provide a “CliffsNotes version” of doing your homework to consumers. While the sweeping changes have made this field broader, he notes that “consumers have to do some extra homework, but we hope that they will.” To aid in this effort, Cornucopia Institute provides scorecards of various organic food brands for consumers to compare. Going forward, Professor Thilmany envisions a world in which organic serves as a baseline standard for all food products, with additional assurances about food origin being provided for consumers who seek them.