Will Wal-Mart eat up organic supply?

By Jenny Hopkinson

 

Recent announced moves by big retailers could make matters worse. | AP Photo

Big box retailers are attempting to bring organic foods to the masses, but there might not be enough to go around.

Wal-Mart — the country’s largest grocer — announced Thursday that over the next few months, about half of its more than 4,000 U.S. stores will start carrying almost 100 new products from natural food distributor Wild Oats at prices about 25 percent less, on average, than other national brands.

The news from Bentonville, Ark., comes just a day after Target announced it is partnering with 17 natural, organic and sustainable brands, including Annie’s Homegrown, Burt’s Bees, Clif Bar & Co. and Horizon Organic, to make available more than 120 products exclusive to the retailer under its new “Made to Matter – Handpicked by Target” program.

Now the question is, how will organic production keep up with all of this new demand?

The expansion of organic offerings by both companies are “a validation of what we know, which is that organic foods are attractive to consumers and they are attractive to young consumers and consumers from all walks of life,” said Laura Batcha, CEO and executive director of the Organic Trade Association, the industry’s leading lobbying organization.

However, “there are issues with supply currently in the U.S. — we see it particularly in the livestock and dairy production” side, though there also are problems in other commodities as well, she said.

“The growth in the demand is outpacing the acreage.”

If that’s a problem now, the recent announced moves by Wal-Mart and Target look to make matters worse.

Sales of organic food and beverages totaled more than $28 billion in 2012, the most recent year available, accounting for 4 percent of total grocery food sales, OTA reports. In October 2013, the Department of Agriculture estimated that the organic sector would total more than $35 billion in sales in 2014 and grow about 10 percent.

However, production acreage and facilities are growing at a much slower rate. Between 2008 and 2011, organic pasture and croplands grew 12 percent, USDA reports. The total number of certified organic livestock only grew about 3 percent during the same period.

One of the problems is the high barrier that needs to be surmounted to gain USDA organic certification. Under the program, any land used to produce organic commodities must not be treated with non-organic substances for three years before it can be certified. Livestock must be treated organically from before birth.

Farming without chemicals and other synthetic materials is expensive, which is why organic products are sold at a premium, but producers in transition cannot take advantage of that higher price tag at market. The industry has taken steps to address this problem, working with suppliers and producers to ease the burden and gaining a provision in the just-passed farm bill that sets up a cost-share program for transitioning farmers, Batcha noted.

Meanwhile, from Wal-Mart’s perspective, the proposition of adding more organic products to its existing offerings and at a lower price than other stores is hard to resist. The company reports that internal research found 91 percent of its consumers would consider purchasing affordable organic products.

“We know our customers are interested in purchasing organic products and, traditionally, those customers have had to pay more,” Jack Sinclair, executive vice president of grocery at Wal-Mart U.S., said in a statement. “We are changing that and creating a new price position for organic groceries that increases access. This is part of our ongoing effort to use our scale to deliver quality, affordable groceries to our customers.”

Wal-Mart insists that it can keep prices low by using its large scale and supply chain. It’s a theory that a number of organic industry experts believe could work.

“My hope is that this will encourage and increase [organic] acreage in the United States because that’s been the weak link,” said Bill Wolf, president of Wolf DiMatteo & Associates, a consulting firm that specializes in serving the organic industry.

“Their approach to the rollout, with taking a few products, a few more easily produced items that are available, like canned beans and others and limiting how many stores they can go with,” is probably manageable by the sector in the short term, he added.

“Price points can be achieved in a number of ways, and one of the main ways is through efficiency in the supply chain that is not necessarily the same things as paid price to farmers,” Batcha said. “The actual cost of a raw ingredient is just a small percentage” of the price on the shelf.

However, she added, maintaining a good price for organic commodities is key for the survival of the industry.

“Organic farming is difficult to do and there are increased costs going in for production, and it’s important for the long-term viability for farming that at the production level there be sustainable incomes.”

But even if the industry can keep Wal-Mart’s shelves stocked, it’s unclear whether they can do it in the long run at the low prices the company is calling for.

“It depends on the individual brands and how they partner with Wild Oats, but if its private label that usually drives down prices for everyone in the supply chain,” said Mark Kastel, co-founder of the Cornucopia Institute, an organic policy research group. “That premium is what enables people to do organic farming. Farmers can’t produce commodities at the same price as conventional. They can’t do it.”