Organic Farmer October/November 2019

Organic Price Premiums
Under Pressure
By ROLAND FUMASI | Senior Horticulture Analyst, Rabo AgriFinance
THE ORGANIC PRODUCE
market has had tremendous
growth over the last five years. But
could the sector’s rapid expansion be
damaging its own prices?
A few years ago demand for organic
produce was expanding faster than the
industry was growing supply. The telltale
signs were rising prices alongside rising
volumes. Between 2013 and 2015, retail
prices for the top seven organic produce
items rose by an unweighted average of
1.3 percent per year. Recently however,
there are indications that growth in
organic movement has changed as
retail prices have declined by an annual
unweighted average of 0.4 percent in
2016-2018.
In spite of softer prices, retail volume
growth has slowed for these top-selling
organic products. In 2013-2015, retail
volume rose by an unweighted annual
average of 13.8 percent. In 2016-2018,
retail volume growth slowed to 8.9
percent per year. Growth in organic berry
volumes is a notable exception, as volume
growth was higher in 2016-2018, but
the rate of growth ticked lower in 2017
and 2018.
At Rabo AgriFinance, we dove into analysis
mode to make sense of the numbers.
The data suggest that things have changed
and will continue to change. It is likely
that for some fresh produce crops,
short-run demand by consumers who
strictly buy organic has been satisfied
by increasing supplies. The value-chain
must now move additional supplies to
consumers with a different demand
profile. This second group—the majority
of U.S. consumers—are willing to buy
organic produce some of the time but
are much more price sensitive than strict
organic consumers. As organic supplies
have increased, this price sensitivity has
resulted in weaker organic prices.
Shipping-Point Volumes
Continue Higher, But Prices Have
Declined
Reported organic shipping-point volumes
were higher for most crops in 2018,
and annual increases in shipping-point
volume have accelerated for some fresh
produce items. Organic apple, orange,
strawberry and bell pepper movement
have all shown continued acceleration
in growth. In 2010-2012, average annual
growth in volume for apples, strawberries
and bell peppers were 6 percent, 14
percent, and 145 percent, respectively.
From 2016 to 2018, average annual
reported volume growth was 14 percent,
26 percent, and 185 percent, respectively.
Annual growth in organic blueberry,
cantaloupe, and grape tomato volumes
continues, but growth rates have moderated
in recent years (Figure 1, see
page 13).
The continued growth in organic volumes
has now begun to weigh negatively
on shipping-point prices. During the
2016-2018 period, seven of the eight
organic produce items we compared had
declines in average annual price. Table
grapes were the exception, but they were
also the only crop that had a reduction
in average annual volume. However,
percentage volume gains have been much
higher than the percentage price declines,
resulting in increased revenues for shippers,
and indicating a high level of price
elasticity for organic produce. We also
note that the price declines in 2016-2018
followed sharp price increases during the
2010-2015 period (Figure 2, see page 13).
Due to the increased yield risk and
labor costs of organic produce production,
relative to conventionally-grown
produce, growers/shippers expect to
receive a premium price. The premium
level needed varies depending on the
specific crop, location and grower.
Without an adequate premium to offset
the increased risk and cost, producers
will find it challenging to justify organic
production. Retailers are demanding
increased organic volumes, but retail
prices are being lowered—in some
cases—to adequately move the higher
volumes. As organic produce continues
to become more mainstream and supplies
continue to increase, the organic market
will continue to more closely resemble
the conventionally-grown market.
Over-supply will cause immediate—and
sometimes extreme—declines in price.
These changes are already leading to
decreased organic premiums.
Of the crops in which adequate data
allowed comparison, half showed
clear reductions in organic premiums.
Premiums for organic apples, blueberries,
pears, strawberries and bell peppers
have come under pressure, while organic
premiums are holding up better for cantaloupe,
table grapes, oranges and grape
tomatoes (Figure 3, see page 13).
Note: Prices used were volume-weighted
weekly averages in each year, and were
only compared for weeks in which both
prices and volumes were reported for both
organic and conventional options.
Reported shipping-point movement and
prices for many organic crops have only
become significant since 2016. Organic
premiums for this group of crops are
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Organic Farmer October/November 2019