Organic manufacturers victims of their own success

Organic manufacturers victims of their own success

Rising demand for the products you manufacture is a good thing, right? Not necessarily - as the results of US natural and organic food manufacturer Annie's demonstrated yesterday (29 May).

Annie's booked a jump in sales of 19% for the 12 months ended 31 March - boosted by rising demand for natural and organic products from US consumers.

According to recent data from the Organic Trade Association (OTA), the organic market saw its fastest growth rate in five years in 2013, jumping 11.5% to US$35.1bn compared to $31.5bn in 2012. Food sales totalled $32.3bn in the period, accounting for around 92% of the total.

Organic sales now accounts for more than 4% of the $760bn of food sold in the US each year and the sector is growing its share of the market. Since 2010, organic sales have on average seen an annual growth rate of around 10%. This compares favourably to the wider food industry, which saw sales grow by a little over 3% during that same period.

Demand is being supported by a leap in consumer awareness of what goes into food - as demonstrated by the mainstream national discourse surrounding GMOs.

According to Laura Batcha, CEO of the OTA, organic sales are also benefiting from growing awareness around health and wellness issues. "Consumers are making the correlation between what we eat and our health, and that knowledge is spurring heightened consumer interest in organic products," she says.

As one of the US's strongest organic brands, Annie's has been able to grow its share of the market as well as benefiting from incremental category growth. The group expects its stellar top-line performance to continue into fiscal 2015 and is forecasting sales growth of 18-20% in the 12 month period.

However, profit growth is trailing at the natural and organic food maker. Speaking yesterday as the company unveiled its full-year results, CEO John Foraker said he was "disappointed that our bottom line results fell short of expectations."

The company reported a 410 basis point decline in gross margin, which fell to 34.6%, and the group said it hopes to maintain this level of margin in the year to come. According to Foraker, the decline was "primarily due to higher-than-expected input costs", in particular he flagged the rising price of organic wheat.

Annie's is falling foul of an issue that is damaging the entire US organic sector: an increasingly chronic under-supply of organic agricultural products is resulting in higher input costs for processors and, in some instances, and inability to meet requirements.

American farmers are not producing enough organic products to keep up with demand and, at an OTA policy conference in Washington DC last week, farming representatives honed in on the subject.

Doug Crabtree, an organic farmer from Montana, explains that through a constructive dialogue between stakeholders from across the supply chain the OTA hopes to find ways to tackle this issue. "The goal is to increase the acreage, production, and number of farmers producing organic crops," he says.

In particular, delegates at the summit began assessing options for entering long-term risk-sharing contracts.

"If farmers can shift the risks through contracts or other relationships, it's very helpful because if we can shift our risks, we can expand," Crabtree says.

The logic behind risk-sharing is obvious - it would give US farmers the confidence to invest in switching to organic production. In the long term, it would also be good news for organic manufacturers as it would facilitate the development of a sustainable supply base and abate rising ingredient prices.

However, with supply already falling short, the sector needs to act quickly if it is to ride the wave of booming consumer interest in organic.