Supply Chain Challenges: Organic and Non-GMO Ingredients

April 9, 2018–The Protein Trends & Technologies Seminars consists of a one-day Pre-conference Program: Business Strategies and a one-day Technical Program: Formulating with Proteins. Attendees can register for either one alone or for both for a cost savings. The Pre-conference Program: Business Strategies’ goal was to provide information for upper-level managers to help them identify opportunities and threats in the protein ingredient marketplace. Speaker highlights into consumer and product trends, market volatility, global regulations and emerging market opportunities, among other topics, were offered.

This year’s conference took place on May 23-24, in Itasca, Illinois. The “2017 Protein Trends & Technologies Seminar Summary-Business Strategies” provides presentation highpoints and is available for download by clicking here.

Steady growth in demand, combined with raw material-production bottlenecks, translate into increased price volatility for raw organic ingredients and finished goods. This increases market risks for organic food and beverage producers, manufacturers and retailers. [For larger PDF version of chart, click on image.]

Supply Chain Challenges: Organic and Non-GMO Ingredients

Nathan Clark, MSc, former Director of Business Development at Mercaris (Silver Spring, Maryland), flagged the growing supply-chain challenges facing the organic food, beverage and ingredient categories, with particular reference to animal proteins. Mercaris, a company committed to supporting sustainable agriculture practices, supplies market data along with an electronic trading platform for North American organic, non-GMO and other certified-sustainable food ingredients.

“In 2016, the U.S. organic foods market was valued between $45-47 billion, according to best estimates,” said Clark (up-from $30 billion in 2012). Fresh organic fruits and vegetables remain the strongest pillars of this category (about 35% of sales), followed by dairy and packaged/prepared foods (each at 15% of sales). The fastest growth organic food categories between 2005- 2013 were snack foods and packaged/prepared
foods (+14%). Organic breads and grain sales grew 11%, while organic meat, fish and poultry sales grew 12% during the same period. Although a well-established category, the dairy products sector showed a bit lower growth at 10%—still a healthy, double-digit level.

Such continued growth momentum has put special strains on the supply of organic-certified ingredients, creating supply-chain bottlenecks. This is especially challenging as organic certification expands into more animal protein categories, such as meat, poultry, fish and dairy…and by association, dairy protein ingredients, explained Clark. “Nearly half (48%) of all organic grains and feed production is channeled into the dairy category,” Clark stated.

Farmers desiring to engage in organic production to meet this growing demand face significant hurdles. Foremost, organic certification requires a three-year transition period in production. This means farmers must invest in new agricultural production practices and contend with lower yields for three seasons, before they can recoup their costs via organic price premiums. Given that farming represents a high-risk endeavor, this is especially onerous for farmers operating on already-thin margins.

In addition, longer geographical distances between organic producers and users can further put the price of organic crops at a disadvantage, not just in transportation costs, but also by the added complexity of organic-certified storage, transportation, warehousing and distribution. Combined, these hurdles work against/negatively impact market supply and demand flexibility.

“Much organic production occurs in non-traditional growing areas,” said Clark. He displayed a map identifying New York state as the second-largest organic corn-producer. This is a good location for up-state New York yogurt manufacturers—but not for organic milk and beef producers situated 2,000 miles (3,220 km) away in the West.

Organic milk production has more than doubled in the last 10 years, said Clark, expanding from 2 billion lbs (0.9 billion kg) to more than 4 billion. (1.8 billion kg) per annum. “About half of U.S. organic milk production is channeled into value-added dairy products. With conventional milk sales declining, the market share for organic fluid milk reached 5% of total fluid milk sales in 2016.”

Within the organic dairy category, the fastest growth categories ($-sales) are cheese (+24%), followed by butter (+16%) and yogurt (+9%). For now, organic cheeses enjoy only a 6% slice of market share in organic dairy products. Should consumer demand for these products and protein powders surge, expect a surge of pressure on organic fluid milk and, therefore, animal feed supplies. Growing numbers of large and small, food and beverage manufacturing and retail companies (General Mills, Nestlé, Clif Bar, Danone, Stoneyfield Farms, Walmart, Costco) have publicly committed to expanding their own organic and other sustainable product portfolios.

For large-volume manufacturing companies, the supply-chain demands serve to further accentuate price volatility at the raw materials and retail levels. Thus, corporate ingredient buyers have been forced to try new ways to secure reliable access to organic raw materials, from vertically integrating themselves farm-to-factory, to extended contracting with growers through complete crop-rotation cycles.

To summarize: “For the foreseeable future, organic ingredient demand will continue to outpace supply,” warned Clark. This challenges organic food, beverage and—more specifically—protein ingredient manufacturers to aggressively anticipate and address tightening supply-chain bottlenecks.

“Supply Chain Challenges: Organic and Non-GMO Ingredients,” Nathan Clark, former Director of Business Development, Mercaris, [Note: Please contact Kellee James, Founder & CEO, Mercaris, kellee.james@mercaris.com, mercaris@mercaris.com]

Posted on:April 9, 2018

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