The consumer market for organic products—fruit, vegetables, eggs, animal products, broth, and so forth—continues to expand at an amazing rate. Between 2000 and 2013, consumption of organic products tripled in the United States, as consumers, worried about their health and food quality, actively seek more supply chains that are willing to guarantee that the food they eat does not contain adulterants, such as synthetic hormones, genetically modified organisms, or pesticides. But these supply chains are struggling to meet this demand, even as it continues to grow.
For organic brands, that creates a problem: If they cannot source enough organic raw materials to make their products, they cannot get their products to consumers. For example, Garden of Eatin’ brand underwent nearly constant stockouts on store shelves when it could not procure enough organic blue corn to make its popular tortilla chips. To find organic sources, some companies look to farms overseas, but such purchases increase costs and logistics concerns, and they do not align with the company’s fresh images.
In response to this challenge, manufacturers are reimagining their supply chains in several ways. The most dramatic response is by manufacturers that literally “buy the farm.” Nature’s Path recently purchased 2,800 acres of farmland in Montana, for $2 million, so that it could control the cultivation of organic wheat and oats for its cereal products. It also plans to dedicate an additional $2 million each year to the purchase of cropland, so that it can ensure the continued supply of organic resources to its supply chain.
Similarly, Pacific Foods decided to build its own henhouses to be able to source organic chicken to make into broth. Its organic chicken broth accounts for about half of the manufacturer’s sales. However, its own production was insufficient, so Pacific Foods also offered incentives to local chicken farmers who agreed to adopt organic practices. Specifically, Pacific Foods pays for the feed and supplies, and then it guarantees that it will cover any losses if the production fails.
For Chipotle, buying a lot of farmland seemed too far beyond its core competencies, so it instead has entered into beneficial agreements with farmers that agree to transform their conventional farms into organic ones. For example, for a black bean farmer that was undergoing the transition to organic methods, Chipotle paid a 10 percent premium for the beans, even though it could not market those beans as fully organic. Instead, its goal was to encourage this farm to continue its organic efforts, which should ensure a more stable supply in the future. In a similar trend, egg farmers can charge more for their organic eggs, and the brand Pete and Gerry’s promises to provide them with blueprints and guarantees for bank loans if they agree to build organic-friendly chicken coops.
Such forms of assistance appear especially necessary for the organic food supply chain, because unlike conventional agriculture, the crops and products are not traded on futures markets. In addition, bank loans continue to be more difficult for organic farmers to obtain, because of their substantially higher production costs, compared with conventional farmers. But if demand continues to grow as it has—and it shows few signs of stopping—these financial players might find that they have some catching up to do. If organic brands can control their entire supply chains, why would they need outsiders?
- What are organic food brands doing to shore up their supply chains?
- What type of vertical marketing system does the purchase of farms by organic brands represent?
SOURCE: Ilan Brat, “Hunger for Organic Foods Stretches the Supply Chain,” The Wall Street Journal, April 3, 2015