Market evolution

VegetablesMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

It used to be that when you wanted to quantify something that you called it “a tale of the tape”, meaning you could get out the tape measure and measure it. It was most often used in the context of a boxing match where two boxers where compared by height, weight, and reach. This blog will be a tale of the tape addressing the ongoing boxing match between organic and conventional produce and fruits. Everyone has their favorite in this matchup.

Some consumers believe that organics represent the best approach, and other consumers won’t touch organics with a borrowed pole. Most consumers can take organics or leave them, based on any number of factors including price and all the other intangibles. This free-for-all of supply and demand represents the best of the American food system. As long as you are not making false claims about your or your competitors’ products, you are free to bring it to market. So, what do we know, and how do we know it?

One thing that can be tracked is the pricing differential between organic and conventional. The USDA Agricultural Marketing Service has an extensive public database of produce pricing that covers both domestically produced and imported produce. Like all databases, it has its limitations and concerns. As a researcher or consumer of research, one should always ask who is in and who was left out of the database? Luckily for us, the U.S. government can compel reporting unlike the scanner data from Nielsen where important participants opt out. As a down side though, the government doesn’t include quantities with all transactions. We can see the prices and the differential, but we cannot see weight by volume which could make us think differently.

What we know is that the price premium between organic and conventional produce and fruits continues to shrink. I think this shrinking premium makes economic sense as organics grow in volume. Organic producers need to capture not just the true believers, but also the price-sensitive shoppers. Additionally, U.S. agricultural producers compete aggressively. They learn rapidly, and they always go where the profits are best. And, organic produce and fruits represent a profit opportunity with a price premium, if the agricultural producers can manage the costs.

Speaking of costs, the question “What does it cost to produce X?” remains one of my all-time favorites. Does it cost more to produce organic? The answer depends on the yield differential between organic and conventional, and the inputs. The yield differential continues to shrink as producers get the knack of producing organic, and the inputs vary widely based on change in labor and crop chemicals. Ultimately, it continues to become less expensive to produce organic relative to conventional as smart producers attack these opportunities.

So let’s go to the tape. Starting with blueberries in OR/WA, there has been a 30% or greater reduction in the price premium of organic blueberries. As with all things produce, seasonality is a big deal. In some weeks or months, the premiums are very large, and other months there appears to be little if any price premium. It would be best to have the volumes shipped in order to weight the price differentials, but it is clear that both organic and conventional pricing continues to be pressured by the strong growth in blueberry production.

Chart showing WA/OR Blueberry Pricing per Lb.
Chart showing WA/OR Blueberry Organic Premium $ per lb.

Next, let’s move down to California and check on strawberry pricing. Just like blueberries, organic strawberries have lost price premium. 2018 represents the last complete season. It saw a 40% premium compression relative to 2016 and 2017. Once again, we would like to weight these prices by volume to get a better picture of revenues. However, each year’s peak organic price declines from the previous year, and then the price premium decays even faster. In August 2018, there was no price premium for organic versus conventional. California strawberry growers have done an amazing job of increasing yields and dealing with labor shortages. At the same time, they face continued increases from Mexican and Chilean producers who don’t face these restrictions and costs. Only the best of the best can adapt quickly enough to these types of challenges.

Chart showing CA Strawberry Pricing 8 lb. flats
Chart showing Organic Price Premium 8 lb. flats

Lastly, we can check the apple market of Washington State. The most consistent data series would be between Gala organic and conventional. The last two years have seen about a 60% compression in the price premium of organic to conventional, and this compression is on top of the overall decline in Gala pricing. The dilemma facing the apple growers is that it takes years to shift production, but once those shifts are made, they stay in place for years. Since larger growers have a portfolio of orchards, they can replace one orchard and use the revenues from the others to balance out the cash flow as the new orchard gets up to speed. Smaller producers take bigger chances when they shift varieties. The declining price premium for organics should discourage many producers from switching.

Chart showing Yakima Valley Price Comparison Tray Pack
Chart showing Yakima Valley Price Comparison Tray Pack premium differential

There are always exceptions to the trends. I imagine there might be some products where the organic to conventional price premium is widening, but I don’t think those exceptions will last too long. Between the aggressive producers chasing profit opportunity and market share pricing tensions, organic produce, fruits, and nuts become the “conventional” products they claim they are replacing. All products and services tend to commodify with time, where they compete on price and cost of production. No doubt, the nimble producers are already introducing new concepts for differentiation. However, the price premium for organic will continue to shrink until it really represents the cost of production differential. As they say, that’s a feature and not a flaw of our competitive agricultural markets.