The (Still) High Cost of Organic Food

A recent study by researchers at the University of California-Davis reported that U.S. shoppers who consistently choose healthy foods spend nearly 20 percent more on groceries. The study also said the higher price of these healthier choices can consume 35 to 40 percent of a low-income family's grocery budget. That's bad news for public health. It's also bad news for the organic-food market, since organics usually carry the highest price tag of all the healthy stuff out there.

Eventually, analysts keep telling us, demand for organics will set the wheels in motion that will drive prices down. But eventually never seems to come. Even though organics sales are growing by about 20 percent a year -- almost 10 times the rate of increase in total U.S. food sales, according to the Nutrition Business Journal -- these cleaner, greener products still carry a hefty premium.

How many shoppers have to jump on the organic bandwagon before we actually see prices fall? How long will that take? And what's the government's role in all this? It depends who you ask.

Be Fruitful and Multiply

The organic market we know today began evolving in the 1960s and '70s, when rising environmental awareness led to a backlash against pesticides and increased demand for "green" products. Over the last 20 years, the market has flourished, gaining enough stature to merit the introduction of nationwide U.S. Department of Agriculture certification standards in 2002. (Those guidelines have been attacked by some for being too weak; some producers also cause confusion by claiming to be "natural" or "sustainable" without being certified.)

Today, roughly three-quarters of conventional grocery stores carry natural and/or organic food, according to a 2002 Food Marketing Institute study. Restaurants across the country, from the high end to the greasy spoon, are plunking organic ingredients onto their menus. Still, organics represent only about 2 percent of the food industry, both in the U.S. and worldwide. And less than 10 percent of U.S. consumers buy organic items regularly, according to survey data from Nutrition Business Journal and the Hartman Group, a research firm specializing in the natural-products market. The $10.8 billion industry may be booming, but it's not even close to overtaking conventional sales.

This is in part because of plain old economics. According to basic economic principles, in the short term, as demand grows, prices climb along with it; this small supply and growing demand is what's now getting us, say, $4 quarts of milk. But in the long term, if the market continues to expand, consumption of organics should reach a higher plane where the cost per unit of processing, marketing, and distributing products is much lower. In other words, organic producers will build economies of scale. That price break, in turn, "could bring many more consumers into the market," says Thomas Dobbs, a sustainable-agriculture economist at South Dakota State University. Trouble is, no one seems to know for sure when that will happen.

That's because there are still so many exceptions to the rules, says Steven Blank, an agricultural economist at UC-Davis. Most organic farms in the U.S., for instance, are still small, often family-run operations that don't necessarily fit the economy-of-scale model, because they don't usually have high distribution costs that could be cut as demand rises. Many rely on farmers' markets, community-supported agriculture, and other small-scale distribution channels. "We're too local and hands-on for high distribution to change our costs significantly," confirms Sarah Coddington, co-owner of Frog Hollow Farms in northern California.

And when the little guys grow delicate crops like peaches and plums that have to be handpicked, Blank says, they can't reach the same economies of scale as farmers who harvest mechanically -- their labor costs are too high. "If we have a bumper crop, everything costs more to do," says Coddington.