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Organic Foods Industry:
“Organic farmers face growing pains as demand outpaces supply”
Ryan Adden
Econ 102: 002, F15
Project Paper
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Introduction:
In the farming industry, organic produce has become such an appetite for consumers to
the point where the demand cannot be met due to a huge shortage of growers. The Organic Trade
Association, or OTA, has predicted that sales will continue to increase about 12-15 percent for
the next three years. However for farmers, the primary economic elements circulating them such
as meeting consumer and retailer demands, dealing with lower crop yields, and the overall cost
of becoming a certified organic producer has crippled the supply creating a shortage in the
market for organically grown and raised products. Through further analyzing this market, we can
distinguish which determinants of supply and demand are directly related to this shortage.
Primary Economic Elements:
For grocery stores and restaurants, it's all about supply and the main issue at hand is that
the demand is too strong for the amount of organic producers that are out there. The main
determinants of this shortage and increase in demand consist of the following: consumer income,
consumer preference, and high barriers for farmers to enter the market. These factors are the
main reason retailers and restaurants are struggling to find an adequate supply of organic
products they wish to stock in their stores.
One determinant of demand here is income. Since organic food is considered a luxury
good, any change in consumer income directly affects the percent change in demand, which will
constitute how much consumers are willing and able to spend. If the amount of disposable
income increases within consumers, they will feel more confident and compelled to spend those
extra dollars towards better quality luxury goods, in this case organic foods. Conversely, the
same transpires when there is a decrease in income where consumers will choose the less costly
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normal good as opposed to purchasing the luxury good. According to the U.S. department of
commerce, disposable income for the month of August 2015 increased by $49.5 billion or 0.4
percent. This rise in income is certainly a factor of why the demand for organic foods has been
so consistent.
Another determinant of demand is preference. Over a certain period of time, consumer
preferences always change due to the amount of utility or satisfaction they derive from them.
Since society has been adopting health-conscious eating habits, the demand for organic food has
only been steadily growing. In result, the organic food revenue has tripled over the last ten years,
ultimately hitting a record of $36 billion. In the minds of consumers, this trend of “eat good, feel
good, look good” is convincing and rapidly growing as it has greatly contributed to why the
majority of consumers are choosing organic.
Since the amount of farmers in this industry is small enough, prices have been forced to
increase substantially to eliminate the shortage caused by the increasing demand.
With a market with such high demand you would think that some growers would take advantage
of this by converting to organic to satisfy this huge demand in the market, but conversely, less
have been willing and able to enter the market. This determinant of supply, where barriers to
enter the market are very high and risky for farmers, has also contributed to this shortage in the
market since there is a small amount of suppliers. These barriers for entry consist of hightransition costs to be labeled a certified organic producer. In order to be titled a certified organic
grower, one must follow and go through a three-year transition period in compliance with
organic restrictions and requirements. During this time period farmers experience much lower
crop yields making their costs surge; a primary element for which growers won’t go organic.
Also, the benefits that come with organic growing such as receiving higher and premium prices
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for those organic products are not included in this 36-month process, yet another hindrance for
farmers to transition to become certified organic producers.
Graphical Analysis:
In this graphical analysis, we can see a rightward shift of the demand curve and upward
movement along the supply curve. We see this rightward shift of the demand curve because of
the determinants of demand discussed above. Consequently, this causes the price and quantity to
increase simultaneously, as the market strives toward its new equilibrium in the market. This
shortage is visible from the price on the D1 curve to the price on the D2 curve and causes the
price to rise. As long as the price keeps rising, the shortage becomes smaller and smaller until the
price reaches its equilibrium where the shortage is then eliminated.
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Conclusion:
This strong shortage in the organic foods market has caused many problems for major
grocers and restaurants that thrive off of the sale of these highly demanded products. The source
of this shortage lies in the amount of organic farmers who are willing and able to produce
organically grown products and also because of the large increase in demand. Since there has
been such a large demand for organic foods throughout the past years with a sluggish amount of
suppliers, the demand curve has shifted to the right causing movement along the supply curve
that ultimately creates a new equilibrium price. This means that as the price continues to rise and
the quantity increases, the shortage in the market will fall with each increase in P and Q.
This problem in the market has caused many obstacles for retailers known for their wide
organic selection of foods and restaurants that only use organic ingredients. Since organic food is
considered a luxury good for consumers, when a change in income causes a bigger percent
change in demand, it provides that the demand for organic food is highly income elastic. To
predict what the future of the organic food market will be depends on the income of consumers
who will then purchase them from major distributors. Therefore to conclude, as consumer
income fluctuates, so will the demand for luxury goods like organic foods; where only in the
short term can future predictions be made about the organic foods market.
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Bibliopgraphy:
Doering, C. (2015, August 5). Organic farmers face growing pains as demand outpaces
supply. Retrieved November 7, 2015. http://www.usatoday.com/story/money/2015/
08/05/organic-farmers-face-growing-pain-demand-outpaces-supply/31116235/
http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm