Cost in Translation

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Seriously, now—why aren’t organics getting affordable?
By Christy Harrison
25 Aug 2005

So you like whole-grain bread, pesticide-free plums, and low-fat meat? Better ask for a raise.

A recent study by researchers at the University of California-Davis reported that U.S. shoppers who consistently choose healthy foods spend nearly 20 percent more on groceries. The study also said the higher price of these healthier choices can consume 35 to 40 percent of a low-income family’s grocery budget. That’s bad news for public health. It’s also bad news for the organic-food market, since organics usually carry the highest price tag of all the healthy stuff out there.

Eventually, analysts keep telling us, demand for organics will set the wheels in motion that will drive prices down. But eventually never seems to come. Even though organics sales are growing by about 20 percent a year—almost 10 times the rate of increase in total U.S. food sales, according to the Nutrition Business Journal—these cleaner, greener products still carry a hefty premium.

How many shoppers have to jump on the organic bandwagon before we actually see prices fall? How long will that take? And what’s the government’s role in all this? It depends who you ask.

Be Fruitful and Multiply
The organic market we know today began evolving in the 1960s and ’70s, when rising environmental awareness led to a backlash against pesticides and increased demand for "green" products. Over the last 20 years, the market has flourished, gaining enough stature to merit the introduction of nationwide U.S. Department of Agriculture certification standards in 2002. (Those guidelines have been attacked by some for being too weak; some producers also cause confusion by claiming to be "natural" or "sustainable" without being certified.)

Today, roughly three-quarters of conventional grocery stores carry natural and/or organic food, according to a 2002 Food Marketing Institute study. Restaurants across the country, from the high end to the greasy spoon, are plunking organic ingredients onto their menus. Still, organics represent only about 2 percent of the agriculture industry, both in the U.S. and worldwide. And less than 10 percent of U.S. consumers buy organic items regularly, according to survey data from Nutrition Business Journal and the Hartman Group, a research firm specializing in the natural-products market. The $10.8 billion industry may be booming, but it’s not even close to overtaking conventional sales.

This is in part because of plain old economics. According to basic economic principles, in the short term, as demand grows, prices climb along with it; this small supply and growing demand is what’s now getting us, say, $4 quarts of milk. But in the long term, if the market continues to expand, consumption of organics should reach a higher plane where the cost per unit of processing, marketing, and distributing products is much lower. In other words, organic producers will build economies of scale. That price break, in turn, "could bring many more consumers into the market," says Thomas Dobbs, a sustainable-agriculture economist at South Dakota State University. Trouble is, no one seems to know for sure when that will happen.

That’s because there are still so many exceptions to the rules, says Steven Blank, an agricultural economist at UC-Davis. Most organic farms in the U.S., for instance, are still small, often family-run operations that don’t necessarily fit the economy-of-scale model, because they don’t usually have high distribution costs that could be cut as demand rises. Many rely on farmers’ markets, community-supported agriculture, and other small-scale distribution channels. "We’re too local and hands-on for high distribution to change our costs significantly," confirms Sarah Coddington, co-owner of Frog Hollow Farms in northern California.

And when the little guys grow delicate crops like peaches and plums that have to be handpicked, Blank says, they can’t reach the same economies of scale as farmers who harvest mechanically— their labor costs are too high. "If we have a bumper crop, everything costs more to do," says Coddington.

Frog Hollow’s tree-ripened fruits have developed a nationwide reputation, and a single, succulent peach can run more than $3. But generally, "it" fruits from small farms are not the ones causing a strain on the bank account. Most organic fruits and vegetables—the largest sector of the organics market—are only 10 to 30 percent more expensive than their conventionally grown counterparts, and Dobbs says many people are willing to pay that kind of markup for better produce. Where economies of scale could really make a difference is in the world of frozen produce, processed foods, and animal products.

Those items typically cost 50 to more than 100 percent more than their conventional counterparts, according to a 2002 USDA study. In a survey conducted by Colorado-based Walnut Acres— which bills itself as America’s first organic-food company—price was a major barrier for nearly 70 percent of shoppers who didn’t usually buy organic items.

So to win these folks over, do organic producers have to start offering cheap cheese and budget bonbons? Dobbs makes a surprising estimate: if just one-third of American shoppers bought organic foods on a regular basis, most prices would come down to that 10 to 30 percent markup we’re seeing on produce today.

Still seems expensive, but Dobbs says a third of U.S. consumers could afford to buy at today’s prices if we chose to. The reason we can afford more than we think? We’re already paying that much—and more—for supposedly cheap food.

More than Meats the Eye
Conventional crops are heavily subsidized by the federal government in the United States, making them artificially inexpensive. Couple those subsidies—which have been in place since the New Deal—with the cost of cleaning up pollution and treating health problems created by conventional farming, and we’re paying a lot in taxes in order to pay a pittance at the grocery store.

"When we make the argument that low-income people can’t afford organics, we’re assuming that the prices of conventionals are the prices we should be paying," says a USDA economic researcher who asked to remain anonymous. "But those prices externalize a lot of costs, like pollution and higher energy inputs."

A study last year by Iowa State University economists showed that the annual external costs of U.S. agriculture—accounting for impacts such as erosion, water pollution, and damage to wildlife —fall between $5 billion and $16 billion. (For context, that’s as much as twice the EPA’s 2005 budget.) And Michael Duffy, a coauthor of the Iowa paper, says his team’s estimate is conservative.

So will this drive frustrated consumers to the o-side? Hardly. If anything, the taxes consumers already pay to support conventional farming are a disincentive to paying "double" for organics. To encourage a shopping shift, as European agricultural researchers Stephan Dabbert, Anna Maria Haring, and Raffaele Zanoli write in Organic Farming, government has to throw farmers a bone.

"In Western Europe, most countries have decided that organic agriculture needs special support to bring production [and consumption] up to a significantly higher level," Dobbs notes. In countries including Denmark, Sweden, Germany, Austria, and Switzerland, and also at the European Union level, governments contribute to organic markets. In fact, many European policy makers treat organic farming as an instrument to help mitigate environmental problems, manage marginal lands, and address falling farmer incomes, according to Dabbert, et al.

Meanwhile, in the U.S., scant federal money is set aside strictly for organic farmers. The industry doesn’t even have access to the type of pricing data and guarantees available to conventional farmers, says University of Georgia agricultural economist Luanne Lohr. "In order to induce producers to get into the [organics] market, they need to know what kind of prices and revenue they’re looking at," she says. Without that information, "the producers are flying blind," at the mercy of large distributors who can set unfair prices. "A lot of people would be willing to go into organic, but they don’t want to just throw away their investment [in their conventional farms] to get into a system in which they don’t have price guarantees," says Lohr.

The success of the USDA’s Natural Resources Conservation Service, which dispenses grants that help conventional farmers implement more sustainable practices, suggests subsidies are a key part of encouraging such changes. Deputy Chief Tom Christensen reports that so many farmers are interested in the $3.9 billion program that only one in four applicants is given funding.

Loaves and Wishes
Subsidies are a useful way to increase supplies, experts say, but they’re only effective in conjunction with a well-run market. "Regulations that promote organic agriculture by encouraging supply are not … sufficient to ensure the continuous growth of the organic sector," wrote Nadia Scialabba, a senior officer of environment and sustainable development for the U.N., in 2001.

Scialabba cited the case of Austria, which was the leading organic producer in the E.U. in the mid-1990s. About 10 percent of farmers in the country decided to go organic because of subsidies offered by the government, but this increase in supply was met with inadequate information, distribution, and marketing channels; as a result, many threw in the trowel. They had the money— they just needed a market.

Some other policies that would effectively increase supply have been contentious. For instance, the USDA has been criticized for allowing dairy farmers to be certified while still in the process of converting conventional cows to organic status. (Such status depends on the grain fed to the cows.) Somewhat ironically, a ruling this January that reversed that provision could hurt the market, at least temporarily. Some of the companies making "organic" products under the weaker standards might jump ship due to the higher production costs under the stricter guidelines, says Lohr. This could slow progress "as the industry reorients itself" around the new rules, she says.

Such dilutions and confusion can cause consumers to lose trust in the organic label and stop buying, according to a 2002 report presented by German researchers to the U.N. Environment Program. Lohr predicts that the rules will continue to be challenged in years to come, "because if there’s demand for organic, people want to make it easy for farmers to become certified."

One thing is clear: though organics have been around for a half-century, unknowns still rule. Long-range studies are few and far between, says UC-Davis’ Blank. And most economists don’t wager a guess on when pricing will change. For now, in the absence of federal support, they put their money on consumer education driving the market.

"It’s a matter of the public really knowing what they get when they buy organic," Blank says. The necessary increase in demand, he adds, is likely to happen only if shoppers develop a pro-organic philosophy before they ever set foot in the store.

Christy Harrison is a senior editor at Plenty magazine. She lives in New York City.