Organic Farmer October/November 2019

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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

12

Organic Farmer October/November 2019

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