Demand and Supply of Organic Foods

WASHINGTON — In general, demand for organic commodities exceeds supply and is growing rapidly, which contributes to much higher prices paid for organic ingredients and finished products than items that are conventionally grown and processed. As a result, many livestock and milk producers as well as food processors depend on imports for at least part of their organic raw materials, of which authenticity often is difficult and which has fallen prey to fraud in some cases.

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The latest industry survey from the Organic Trade Association (O.T.A.) indicated organic food sales were a record $45.2 billion in 2017, up 6% from 2016 and well above overall food sales growth of 1.1%. But the pace of growth slowed from 9% in 2016 due to slow growth in the organic dairy and egg category, the O.T.A. said. Globally, organic sales exceed $90 billion.
“Organic continued to increase its penetration into the total food market, and now accounts for 5.5% of the food sold in retail channels in the U.S.,” the O.T.A. said.
Organic food-grade prices for wheat, corn and soybeans typically are two to three (or more) times higher than conventionally-grown crops. In September, Silver Spring, Md.-based Mercaris, Inc., the organic and non-G.M.O. trading platform and market information company, estimated the national average price during the July-August period for food-grade organic corn at $11.36 per bu, soybeans at $21.96 per bu, hard red spring wheat at $15.58 per bu, hard red winter at $12.40 per bu, soft red winter at $9.66 per bu and durum at $16.78 per bu. In contrast, prices for conventionally-grown grains last week were around $3.15 per bu (Omaha) for corn, $7.87 per bu for soybeans (central Illinois), $5.60 per bu for hard red spring wheat (Minneapolis), $5.29 per bu for hard red winter (Kansas City), $4.87 for soft red winter (St. Louis) and $7.75 per bu for durum (Minneapolis), according to the U.S. Department of Agriculture and Sosland Publishing Co.
Prices often are equally high for other organic products. For example, the U.S.D.A. quoted organic green beans at $2.99 per lb and conventional green beans at $1.06 per lb as of Sept. 21, organic fuji apples at $2.74 per lb versus 99c per lb conventional, and organic white seedless grapes at $2.71 per lb versus $1.37 per lb for conventional. For milk, the U.S.D.A. said the average advertised price for a half gallon of organic was $3.61 as of Sept. 21, a premium of $1.75, or 94%, over a half gallon of conventional milk.
The bulk of organic grain goes as livestock feed, especially for dairy cattle required to produce organic milk. Because demand for organic grain (both feed and food) exceeds supply, food manufacturers typically contract well ahead of delivery to ensure supply, with the shortfall coming from imports. For example, Mercaris, in its September Market Update, noted “Ships from Romania routinely deliver more organic corn to the U.S. than actually originate from Romania.”
Because of the high prices paid for organic products, the market has enticed some fraudulent activity, which is especially troublesome for imports. U.S. organic imports were $2.1 billion in 2017, up about 25% from 2016, the O.T.A. said.
“Investigations (in the past year) have revealed imported products fraudulently labeled as organic and gaps in the complex organic supply chain,” the O.T.A. noted.
The demand for organic commodities or primary goods in the US, is exceeding the domestic supply. This excess in demand or shortage, represented by the difference between the quantity demanded and the quantity supplied, has increased the prices of organic food, to a new market equilibrium, illustrated in the diagram 1 below.

As consumers in 2017 bought more organic food because of some non-price determinants of demand such as, tastes and preferences or change in income, the demand curve shifted to the right from D1 to D2. This is reflected in the organic food sales, that were $45.2 billion in 2017 an increase of 6% compared to 2016.
At the initial market equilibrium price P1, the demand moved from Q1 to Q3, from point A to point B. This created an excess demand equal to the difference between Q3 and Q1. Since the quantity demanded Q3 is greater than the quantity supplied Q1, the price of organic food has increased along the supply curve until quantity supplied was equal to the quantity demanded. This happens at price P2 and quantity Q2 at point C the new market equilibrium.
The new market equilibrium price was a signal to producers that a shortage has emerged in the organic market, and they have an incentive to increase their production, as it would be more profitable. Therefore, producers moved along the supply curve from point A to C, increasing quantity supplied from Q1 to Q2, but some producers needed more time to either have the quantities required or obtain their organic certification, they had recourse to imports to compensate for the shortage. As well, this new price was a signal and incentive for consumers to buy less organic because the price has gone up, hence they moved along the new demand curve D2 from B to C buying less organic since Q2 is less Q3 at a higher price. This is explained by the fact that, the price elasticity of demand PED, for organic commodities considered as primary goods tends to be inelastic.
To overcome the US domestic market shortage, the producers are using imports to compensate. This lucrative demand is signaling to producers, that the consumers are seeing organically grown food as a healthy and nutritious option to conventionally grown products. Therefore, for this market to be efficient, the supply must meet the demand by providing authentic organic products. Unlike other eco-labels, the organic label in the US, is backed by a set of rigorous federal production and processing standards. While these standards set high barriers for farmers to enter the market, they protect the consumers from fraud, which is one of the biggest threats to the organic industry. The organic consumption is built on trust between the consumers and the producers, the consumer will not know if the product is organic unless told. Therefore, if the consumers lose trust in the organic labels, they will not be willing to pay the premium for the products, and the industry could collapse.
This USDA certification in the short term will create shortage in domestic supply, and will drive up the prices of organic food, see Diagram 2. As the new market equilibrium moves from A to B, the social surplus (CS + PS) at point B, is less than the social surplus at point A.

In the short term, following a rigorous process such as the USDA certification might be lengthy and discourage some of the farmers to transition to organic farming, but it will eliminate the fraudulent produces and ensure the efficiency/sustainability of the market in the long term.
For the consumers, the use of certified organic produces, in the short term ensures that they are getting what they are paying for, while ingesting less pesticide and harmful chemicals. In the short term the community benefit will not be maximized, however it will safeguard the US organic market for the long term.
Hence, in the long term this certification will offer the producers advantages such as premium prices for their products, access fast-growing local, regional, and international markets, access additional funding and technical assistance and finally recognizable and trustworthy label to market their products to consumers. All these advantages allow them to grow their supply to cater to the consumers demand, while creating jobs locally and supporting local communities.
As to the consumers, in the long term this certification, will reduce the incidence of diseases associated with exposure to toxic chemicals in industrialized societies, hence cutting medical costs and allowing the people to have a better living condition.

In the long term, at the new market equilibrium E, where MB=MC, see Diagram 3, the social surplus is maximized, and the resources are allocated efficiently.
Therefore, use of high organic standards of certification will protect both consumers and producers and will promote an agriculture that can produce enough nutritious food to feed the world without destroying the environment, while being more resilient to climate change and improving the livelihoods of farmers.
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