OM in the News: Hunger for Organic Foods Stretches Supply Chains

Last year, organic cereal maker Nature’s Path Foods grew so frustrated with organic-grain shortfalls that it took a radical step: It bought a farm. In this example of backward integration, the Canadian company plunked down $2 million for 2,800 acres of Montana cropland. Its goal was to seize greater control of its supplies of wheat, oats and other ingredients. Nature’s Path is among a number of organic-food purveyors taking steps to tackle supply constraints that are hampering the growth of one of the hottest food categories, reports The Wall Street Journal (April 3, 2015). Companies including soup maker Pacific Foods and burrito chain Chipotle are digging deeper into the supply chain with such moves as financing farmers, offering technical training and hiring headhunters to recruit organic growers.

The efforts are aimed at ramping up organic-food output that has failed to keep pace with surging consumer demand, due in part to the significant costs and risks that farmers face in converting from conventional to organic farming.  High land costs, for example, make starting an organic farm expensive, and switching to one is onerous. Conventional cropland and dairies can become certified as organic after a 1-3-year transition period in which farmers eschew pesticides, genetically modified seeds, and synthetic fertilizers and hormones. Organic farmers also have greater trouble securing bank loans, and organic crops don’t have forward or options markets, which ease the risks of wide swings in prices for many conventional farmers.

Nature’s Path began wrestling with acute supply shortages in the late 2000s that forced it to import some ingredients on short notice from Sweden, driving up its costs. It plans to dedicate at least $2 million each year to purchase additional conventional farmland that it can then convert to organic production in order to fill 1/4 of its grain needs over the next decade. Two years ago, Chipotle, which said it seeks to purchase as many organic ingredients as practical, began providing financial incentives to help farmers of black beans transition from conventional to organic production. Pacific Foods, worried its organic chicken supply could run short, started building its own chicken-raising sheds.

Classroom discussion questions:

1. What is backward integration– give other examples of it in industry.

2. Why is the organic food industry more complex than conventional production?