Friday, August 27, 2010

The cost of going organic

A recent study publicized at Arizona State University really hit home the pros and cons of the organic food movement.

This research revealed that most stores, grocery stores at least, now carry some form of organic foods for their customers. The number of organic offerings has been steadily increasing, and prices are slowly, ever so slowly, coming down.

Why are the prices so high? I had always assumed that it was because of a reduction in the amount of product on the market. I am drawing here on my old Econ 101 course, which is rusty, at best. But, supply and demand theory dictates that if there is less supply, demand will go up, and prices will increase. I like that Economics works just about like Ecology, just with money instead of animals. Competition is competition. When resources are scarce, they become more valuable, competition becomes more intense. In fact, the mathematical concepts we teach students about population growth were developed by a banker interested in the nature of compounding interest on investments. But, I digress…

Demand. Without fertilizers, the crops might yield less. Without pesticides, the crops might yield less. Less product, more demand. Demand is there in the first place because of public perception. People perceive that eating organic is better for them, and better for the environment. However, in this case, demand is out-pacing supply, and driving prices way up (think of gasoline as another example; people will typically pay whatever the price is at the pump, and frequently that price has nothing to do with the current price of a barrel of crude, and everything to do with the location of the gas station and if it is summer and people are going on driving vacations).

Now, it IS more expensive to produce organic products, produce in particular was the focus of this research. Taking a traditional farm and re-fitting it, and its day-to-day practices, to organic standards is not easy, or cheap. So, naturally, the wholesale price of produce is higher. But, these researchers found that the profit margin did not come from the markup from wholesale to retail. Grocers typically make around a 75% profit on conventionally grown produce. They make only a 7% profit on organic produce. Yet, the grocers still sell the products because of the demand.

This realization that the profit may lie in the hands of the producers is enticing more people to grow organic, despite the costs. This is actually a good thing, that the growers/suppliers should actually possess the market power. And, as this happens, and more product hits the market, good ol’ Econ 101 predicts that prices should fall. This means such produce will be more readily accessible.

The real cost to you and I may come in the form of the foreign markets. Already, there have been suits brought against bargain grocery chains that claim to sell organic, when the product was not. The foreign growers are anxious to get in on a market where the power favors the growers. Indeed, cruising through most local stores these days reveals that much of the organic foods are not local, or American, in origin. There is a great debate among food purists about getting local, versus getting organic. The benefit of choosing local sources is that it keep your money local. The risk of foreign sources is that the foods may not be grown to the same standards.

The old adage, you get what you pay for, still applies here, and if it seems to be too good to be true, it probably is.