Organic acreage increasing dramatically
Will premiums fall as production increases?
Demand for organic fruit has been so strong over the past four years that f.o.b. prices for organic apples have increased even while production has been increasing. But that might change.
"That's not a normal situation," reflected David Granatstein, sustainable agriculture specialist with Washington State University. Normally, increased supplies of a product result in downward pressure on prices.
Organic apple supplies will continue to increase dramatically, judging by the amount of acreage in transition to organic. The question is whether consumers will continue to pay the same kind of premiums for organic apples during the economic recession, Granatstein said. The Neilsen Company reports that the growth in sales of organic products has slowed considerably over the past year.
"Will consumers be willing to pay more, even if it means putting aside some other expenditure?" he wondered. "We need to be aware of what the market growth looks like relative to our ability to grow supply. It's not that demand is going to go away. It's that we can increase supplies so much faster than demand grows."
Washington State had 12,936 certified organic acres of apples in 2008, which was a 60 percent jump from 2007. About 8 percent of the 2008 crop was certified organic. Another 4,256 acres were in transition, meaning the state will have more than 17,000 acres of organic apples by 2010. "Are we going to see a price shift?" Granatstein asked.
Gala and Fuji are the top varieties grown organically in Washington, and are the top varieties in transition. Acreage of specialty apples, such as Braeburn, Pink Lady, Cameo, and Cripps Pink, has been growing at a slower rate.
During the 2007-2008 season, Washington apple growers received a nice premium on all organic varieties, he reported, though there was a little downward pressure on prices at the start of the 2008-2009 season.
"I think there are a lot of positive signs," he said. "Obviously, the economic downturn is a challenge, but there's more and more research saying consumers really want to stick with the good food choices they have begun to make and they're willing to pay more even if it means putting aside some other kind of expenditure of money."
Sales to foodservice have been increasing, and as more restaurants feature organic foods, it's possible that that sector will absorb some of the increasing apple production, Granatstein said.
Agricultural economist Dr. Desmond O'Rourke said the organic and conventional markets are closely tied, and organic prices tend to follow the same trends as conventional prices. Generally, a product's price is influenced by supply. Washington's record apple crop of over 110 million packed boxes this season is likely to affect prices for organic fruit as well as conventional.
O'Rourke forecast, based on a 110-million-box-crop, that the average f.o.b. price for Washington apples (all grades and sizes) for the current season would be $19.54 (plus or minus $1), almost 9 percent less than the average price of $21.40 for the 2007-2008 season. He expects that organic apples will command a 30 percent premium over conventional prices, which would be substantially less than over the past four years. That would put the average f.o.b. for organic apples this season at $25.36, compared with $32.36 last year.
The premium for organic apples will decline as organic production increases as a percentage of the crop. It is currently between 6 and 7 percent. In theory, as organic production approaches 12 percent, there will be no premium, he said, and organic growers need to ask themselves if they can break even at conventional prices.
"As the volume of organic increases, you're going to have to make major changes in your cost structure in order to get a pay-off from organic," he said.
Promotions that encourage people to eat more organic apples could help increase demand, he suggested, but that will require more funding.
"Down the road, you're going to have to find some way to move the returns up for the organic apples," he said. "I think it's going to be an uphill battle, particularly in the present economic environment. Consumers are definitely cutting back across the board on all kinds of upscale products.
"Expanding demand at profitable prices will be difficult. Just like any product, whether you're Proctor and Gamble selling soap or whether you're trying to sell organic apples, you're going to have to find ways to bring the unit cost down, find ways to boost demand, and you're going to have to find ways for the industry as a whole—growers, packers, and marketers—to come together and tackle the challenge."