Challenges of Maintaining Organic Supply Chains

Rising consumer demand for organic products makes growing, trading, and selling organic crops and ingredients attractive for many farms, brokers, and brands around the country. Americans spent over 43 billion on Organic products in 2016, with the vast majority of this spending being on Organic food.

These consumers are happy to pay more for certified organic products for a variety of reasons, like: supporting organic farmers, avoiding genetically engineered food, avoiding the pesticides used on conventional food and avoiding the environmental impact of industrial agriculture.

Overall, demand exceeds supply for Organic food. This is both an opportunity and a challenge, for building and maintaining a consistent supply chain for Organic crops. Many of the regulations that guarantee/maintain the integrity of organic food and make Organic food so appealing to consumers, present logistical challenges to farmers, traders and Organic food brands.

Supply Chain Challenges from Organic Cultivation

One end of the Organic supply chain is certified Organic farms, and the regulations and logistical challenges faced by these farms can echo throughout the supply chain.

Every farm must adhere to USDA Organic standards for 3 transitional years before their crops can be certified as organic, presenting a significant barrier-to entry that has strained the supply of Organic food.

USDA standards stipulate that operations must maintain or enhance soil and water quality, which means using a full rotation of crops to preserve soil quality. Unlike conventional farms which tend to produce one or two cash crops, Organic farms may only produce a single crop of the commodity that a buyer needs on a consistent basis while growing less commercially ‘in demand’ crops during certain years.

Organic cultivation practices can result in shortages of specific organic commodities generally, seasonally, in specific regions or for brokers who source the Organic commodity from a farm or region with seasonal shortages. It also means that the farmer must work hard to market other crops grown in rotation.

Organic Crop Storage & Handling Challenges

The next major roadblock in a successful Organic supply chain is the storage, handling and processing challenges that Organic crops face.

There are few facilities equipped to store, clean, and process Organic crops separately from conventional crops and fewer that exclusively handle organic crops. This can force Organic farmers to invest in on farm storage, or ship crops to far-off handling facilities and these storage and transportation costs factor into price negotiations throughout the supply chain.

Establishing Long-Term Supply

Establishing a consistent supply chain for an Organic commodity or commodities is challenging, but there are tools and techniques that many companies use to stabilize their supply chains and mitigate threats from scarcity.

Supplier Relationships

Given the scarcity of Organic food in relation to demand and the relatively few number of organic farms compared to conventional farms, many companies rely on supplier relationships to maintain a consistent supply chain. Whether these relationships are with brokers or directly with growers, strong relationships throughout their supply chain help Organic brands to:

  • Avoid unexpected shortages from regular suppliers.
  • Avoid unexpected price jumps from regular suppliers.
  • Avoid losing regular suppliers to competitors.
  • Learn estimates of upcoming supply

Supplier relationships are sometimes facilitated through long-term forward contracts with suppliers of Organic crops. These contracts are sometimes set for 3 years in advance (to compensate for the 3-year organic certification process) and are often on a rolling basis, with deliveries from suppliers and contract renewal taking place on a yearly basis.

However, there are difficulties and risks associated with this model. These include:

  • Determining a fair price in advance. Contracts must be often be renegotiated or cancelled when market conditions change and price changes disadvantage one party.
  • Lack of diversification. Contracting with a single entity can increase risk if that party encounters any number of difficulties.

Organic Data Insights

One key challenge in establishing long-term supply, is understanding market fundamentals and information related to the organic supply chain. Historically, it has been difficult to fully understand the conditions impacting the organic and non-GMO supply chains, due to a lack of basic data. Traditional sources like the USDA, commodity exchanges, or other private sector analytics services have not been as accurate for organic, non-GMO or other identity-preserved crops and commodities.

Companies (from family owned farms to large, multinational food companies) need data on Organic crops, commodities, acreage, infrastructure and imports to help maintain their supply chains or manage their operations. Other useful data includes information on grain handling facilities, price data, and foreign grain import price & volume data.

Vertical Integration

Some Organic brands have started using vertical integration to secure a steady supply chain. A few CPG companies own farmland that they are using for or transitioning to organic crop production. While the number of acres owned do not generally produce enough to meet the full demand for inputs by these companies, investing in organic farmland demonstrates a commitment to organic farming, and sources part of their need for a particular crop or commodity.

Whole Crop Rotation Contracting

Organic farms must use a complex rotation of crops, so some companies have started using this to their advantage, contracting farms for all commodities grown on a given farm in their crop rotation. This won’t work for every Organic buyer, but brands and brokers who trade in a variety of Organic crops can use Whole Crop Rotation Contracting to build a network of consistent Organic suppliers.

Mercaris Solutions

Mercaris offers important tools to help manage supplier relationships and access objective, accurate, timely information on organic and non-GMO crops, regardless of which strategies companies and farms employ to market their crops, manage their procurement or supply chains, or broker customer orders.

Mercaris provides pricing data on organic and non-GMO cash grain and oilseeds markets, data on certified Organic commodities like Corn, Wheat, and Soybeans, including: total organic farms by state, national and regional pricing data from our Organic Survey, estimates for Organic grain production, trends in US Grain Planting 1997-present, grain acreage by state and other information.

By using insights from data on Mercaris Organic & Non-GMO reports, companies can forecast upcoming surpluses and shortages of Organic crops and take appropriate measures to ensure supply chain stability. Farmers can contract crops at a true market price, and handlers and processors can monitor margins and track both supply and demand in the marketplace. Mercaris prices can be used to track spot prices as well as forward grain prices.

The Mercaris trading platform matches buyers and sellers, enables companies to find new suppliers or buyers, ensures the best market price is achieved, assures fast, secure payment, and reduces transaction costs including time spent marketing (or procuring) organic and non-GMO grain.