Organic Food Industry Analysis Essay

The organic products industry has shown consistent growth over the last 25 years, growing 3,400% (Flynn, 2014). The organic industry earned $35 billion in 2014 up from $1 billion in 1990 (Flynn, 2014). Credited with being the primary market force drivers, food safety and health concerns have been driving the industry since the end of the 2009 recession. This research paper examines the organic products industry and identifies how supply and demand affects future prices of organic products. ORGANIC INDUSTRY ANALYSIS 3 Organic Industry Analysis This paper provides a succinct market analysis of the organic food and product industry. The paper provides background and description of the organic product market. The paper examines U. S. and global market trends of the organic food and product industry by examining demand and supply for organic products. This paper identifies key box store retailers and describes their roles in driving the organic food industry. Analyzing various studies from the USDA and its Economic Research Section (ERS) identified the driving market forces behind the popularity of the organic foods and products, which are the improvement of health and reduction of pesticides from individual diets. The purpose of this paper is to identify market trends and the driving forces behind the global organic food and product market. The driving forces behind the organic food market are health conscious millennials and new mothers who want to reduce chemicals from their diet. Background and Description The term organic has been the topic of controversy for academics and business leaders since the 1940s. The controversy involves several sub-topics such as lack of international standards for organics, cross contamination of organic products during transport, genetically modified organisms (GMO), chemicals and pesticides, and costs to produce organic goods. The definition of organic is: made or grown without the use of artificial chemicals (Organic, 2015). The premise of organic food is not new; however, the creation of national standards has objectively standardized what may be considered an organic product. As the global population grows, the demand for food has caused farmers to increase efficacy and reduce crop waste; however, the methodology utilized to preserve crops may be more of a detriment to human health resulting in the higher demand for uncontaminated food sources and products. ORGANIC INDUSTRY ANALYSIS 4 Demand The organic food market was supply driven for many years; however, demand now drives the organic market (Dimitri & Oberholtzer, 2009, p. 10). The demand for organic products is increasing every year as people use marginal analysis to justify the higher expense for organic products: Do the benefits out weight the costs? Consumer mistrust in conventional food producers, who add harmful dyes, trans-fats, and high fructose corn syrups to products, is another variable driving the organics market. Environmentalists are also another market force mechanism contributing to the demand for organic products because organic farming reduces environmental pollution. The emergence of organic food is directly linked to an amalgam of food safety and health concerns, which directly relate to ingestion of chemicals used to grow, treat, and preserve foods. The organic food industry has shown consistent global growth over the last two decades and is projected to continue to grow until 2018 (Research and markets adds report: ‘United States organic food market report 2013-2018, 2014). The organic food market has grown 3,400 % in the last 25 years (Flynn, 2014). Organics are divided into several categories such as, fruits and vegetables, dairy, meat, and packaged organic products. In 2014 annual organic food sales, mainly fruits and vegetables, reached $35 billion, $290 billion if packaged products are included, up from $1 billion in 1990s (Flynn, 2014). The United States and Europe have the highest demand for organic products compared to other nations (Lohr, n. d. p. 68). Identifying potential organic product consumers is a challenge, but some market research has shown consumers who choose to purchase organic products are generally well educated, millennials, higher income families, and households with children (Dimitri & Oberholtzer, 2009, ORGANIC INDUSTRY ANALYSIS 5 p. 4-5). The United States consumes approximately 44% of the global organics market followed by Europe at 41% (Aggarwal, 2014 p. 3). The remaining countries that contribute to the consumption and export of organic foods may have difficulty in exporting goods due to individual national standards and export acts (Aggarwal, 2014 p. 3). Demand for organic products is not central to one part of the world; many countries and cultures realize the importance of consuming foods free of harmful chemicals. Supply Demand has grown for organic products; however, there is a shortage of organic farming land, which may negatively impact supply. The organic industry is constrained by its supply chain; there are only so many farms to produce organic goods and organic goods can only be shipped so far. According to the 2012 U. S. Census of Agriculture, there are now around 17,000 organic farms in the U. S. out of an estimated 2. 1 million total farms; acreage used for organic agriculture accounts for just 0. 6 percent of all U. S. farmland, while organic food sales make up over 4 percent of the total annual food sales. (Young, 2014) The organic farm shortage is an important variable to the organic industry because consumers who tend to purchase organic products generally want to support local farmers in a grass roots type of movement; excluding climate specific food such as, bananas, coffee, limes, and pineapples (Greene, 2013). Contributing to the supply shortage in the United States are strict national standards set in place by the USDA and strict requirements for potential farmers looking to transition into the organic industry. Also contributing to the shortage in organic food and ORGANIC INDUSTRY ANALYSIS 6 products are large box retail stores, such as Whole Food Markets, Wal-Mart, Tesco, and Target. Wal-Mart is the United States’ largest grocer and is competing for organic goods to remain competitive against its competitors, such as Target, which has made agreements with organic producers to supply products for its stores (Hopkinson, 2014). Partnering with organic companies, large retail box stores have created their own brands of organic products to reduce costs associated with providing customers a wide range of product choice. Price Changes Due to Supply and Demand: Historically, organic food is more expensive than conventional food (Dimitri & Oberholtzer, 2009, p. 5). Organic food prices come with a premium due to costs involved in growing and harvesting crops. Prices are set through the suppliers because the organic standards restrict the certification of potential farmers. The certification process slows down potential farmers entering the industry, which reduces the number of producers available to farm the produce and make products. The reduction in organic products available reduces supply and increases demand. Market shelf placements of organic foods are fetching premiums and farmers are realizing the advantages of entering the market. As demand rises for organic products, the current producers are not able to sustain sufficient crop production compared to industry growth. In any competitive market, when demand rises so does opportunity. Due to the premium prices associated with producing products in the organic industry, many farmers may potentially conform to industry standards and convert their farms. The potential for commercial organic farms may also increase due to the undeniable growth of the industry. As more competition enters the organic industry, prices will drop. Large retail box stores, such as Whole Food Markets, Wal-Mart, Tesco, and Target may also have a significant effect on the price of organic ORGANIC INDUSTRY ANALYSIS 7 foods and products. Wal-Mart’s expansion into the organic market has the capability to reduce organic food prices alone due to the numbers of stores across the nation. In conclusion, the undeniable growth in the organic industry is a product of consumer mistrust of conventional growers, mainly due to toxic chemicals used in the production of food. The growth of the organic food industry is directly related to food safety and health conscious consumers who do not mind spending more money to consume uncontaminated products. Consumer demand has been the driving force of much of the organic industry since the end of the recession in 2009. The high consumer demand for organic food is part of an initiative from well-educated people, millennials, higher income families, and households with children, resulting in a 3,400% in the last 25 years creating a $35 billion industry (Flynn, 2014). With the high demand for organic goods, suppliers are unable to maintain sustainable level operations due to lack of organic farmland. Many of the problems associated with the organic food industry are centered on strict certifications that are necessary to maintain product integrity; the stringent certifications are creating supply shortages. The strict organic standards hinder potential farmers from entering into the organic industry. For example, farmers must be pesticide free for at least three years before being certified to produce organic food. Large retail box stores are recognizing the growth of the organic food industry and are currently adding more products annually, but even so, demand exceeds supplies. As the organic food industry continues to grow, prices for organic goods should reduce due to the increased competition in the market. ORGANIC INDUSTRY ANALYSIS 8. References Aggarwal, P. (2014). Supply chain management of locally grown organic food: A leap toward sustainable development. Retrieved from http://www. cognizant. com/InsightsWhitepapers/Supply-Chain-Management-of-Locally- grown-Organic-Food-A-Leap-Toward-Sustainable-Development-codex928. pd Dimitri, C. , & Oberholtzer, L. (2009). Marketing U. S. organic foods recent trends from farms to consumers. USDA, Economic Research Service, (58). Retrieved from http://www. ers. usda.gov/media/185272/eib58_1_. pdf Flynn, D. (2014). Report: Organic industry achieved 25 years of fast growth through fear and deception, Food Safety News. Retrieved from, http://www. foodsafetynews. com/2014/04/report-fast-growing-organics-industry-is- intentionally-deceptive/#. VL0ILWd0xjo Greene, C. (2013). Growth patterns in the U. S. organic industry. Retrieved from http://search. proquest. com/docview/1518534011? accountid=35796 Hopkinson, J. (2014). Will Wal-Mart gobble up organic food supply? Retrieved from http://www. politico. com/story/2014/04/walmart-organic-food-105631. html Lohr, L. (n.d. ). Factors affecting international demand and trade in organic food products. USDA, Economic Research Service. Retrieved from http://www. ers. usda. gov/media/293617/wrs011j_1_. pdf ORGANIC INDUSTRY ANALYSIS 9 Organic. (2015). In Merriam-Webster. com. Retrieved from http://www. merriam-webster. com/dictionary/organic Research and markets adds report: ‘United States organic food market report 2013-2018’. (2014). Manufacturing Close – Up, Retrieved from http://search. proquest. com/docview/1498350288? accountid=35796 Young, T. (2014). Organic check-off. Retrieved from https://ota. com/organic-check.