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October 7, 2008

Organic Ouch!
Commodities Index Prices

image courtesy bloomberg.com


Well, the sky may be falling, but at least commodities prices are, too. Granted it's because we're spiraling into a worldwide recession, but a guy can look on the bright side, can't he? Unfortunately, according to the UN, we're still going to see systemically high food prices for the foreseeable future thanks to competition for arable land between biofuels and food crops. I'll be talking about biofuels more soon, but at the moment what has my attention is one of the many unintended consequences of the "miracle" of ethanol - organic dairy, meat and poultry prices are through the roof. The NYT had a rundown on the problem back in the spring. Here's the essence:

Ken Cook, president of the Environmental Working Group, an environmental research organization, said conventional dairy and grain prices were so high that they were nearly rivaling prices that organic farmers receive. Organic farmers normally earn a hefty premium for raising livestock and crops without chemical fertilizer, pesticides or antibiotics.

"We may be seeing over the next few years a turnaround, where organic agriculture contracts in this country," he said. The price of organic grain has also jumped because hundreds of dairy farmers rushed to complete their transition to organic production last year, before more stringent government regulations took effect. The influx created a temporary glut of organic milk, which suppressed prices last year, but also added to the demand - and the price - for organic animal feed. In addition, a drought last year in the Upper Midwest caused relatively poor yields for some organic crops.

And so, once again, the magical Invisible Hand of capitalism gives us the Invisible Finger. Basically, the attempt to "rationalize" organic meat and dairy production is breaking down in the face of high commodities prices, probably an inevitable consequence of creating the USDA Organic certification. By encouraging large-scale farms to go organic without some attempt to ensure an adequate supply of organic grain (presumably the Invisible Hand was asleep at the Invisible Switch), we've managed to send supply and demand totally out of whack. And with the organic price premium gone, farmers have lost the incentive to make the costly, difficult and time-consuming switch to organic grain production.

Grain supply has always been the Achilles Heel of organic meat and poultry. There has never been much of it around - I remember talking to a poultry supplier from Lancaster County (who sells the best local PA chicken I've run across). He was organic until the USDA certification came along - he felt it was too onerous on grain producers and made it too hard for him to get adequate supplies of grain. He became "all-natural" (which in his case means organic practices except without a guarantee of 100% organic feed) purely because he didn't think he could find enough organic grain to keep his prices reasonable. This was back in 2002.

In fact, I find myself torn as far as meat, poultry and milk goes. I have been buying mostly "all-natural" meat, milk and poultry for the last few years. The meat is local and grass-fed (maybe some grain finishing but not in huge feedlots) and the poultry is Bell & Evans (which is local for us, but I'd prefer something smaller-scale). As for milk, I buy from another local non-organic but all-natural producer, Merrymead Farms. Their BST and antibiotic-free milk is considered some of the highest quality milk in the country.

Of course, none of this doesn't really addresses the issue of organic fruits and vegetables. My experience this season has been that trying to buy organic out of season has been very expensive - $3/lb for organic cucumbers and $7/lb for peppers earlier this year and the California organic cherries first came in this spring at $8/lb. And as a result I did find myself buying more conventional produce this winter and spring. But once summer rolled around, my source of produce switched almost exclusively to local farms - more and more the Weavers Way Farm, which is located about 2 miles from my house. It's not certified, but it's organically grown.

On all fronts, it certainly seems like we're closing in on prices that even an upscale market won't bear (perhaps that's why Whole Foods' stock price is down 68% in the last year). At some point you have to believe that organic food will become price competitive again given the reliance of convention food production on petroleum products (although collapsing oil prices probably won't help any). But either way, I sure wish the Invisible Hand would stop twiddling its Invisible Thumb...

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