The What and Why of Organic Produce Prices

The What and Why of Organic Produce Prices

Organic-vs-conventional-prices
Organic product sales in the U.S. show few signs of slowing down. Total U.S. organic sales grew by more than $20 billion between 2007 and 2016, according to the Organic Trade Association (OTA). Notably, the size of the organic sector in the U.S. has grown to approximately $47 billion in 2016, which is $3.7 billion higher than the previous year (and 135% more than sales in 2007).

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According to the USDA’s Economic Research Service, fruits and vegetables account for approximately 43% of total U.S. organic food sales and rank as the top-selling category of the organic food market. As of 2015, certified organic sales for vegetables and fruits continue to account for the largest portion of the organic food category based on Certified Organic Survey by USDA.

Increasing demand for organic food is associated with consumer beliefs that organic food is healthier, more nutritious, and flavorful. In this regard, organic consumers recognize organic food as measurably different to conventional food.

Worth Switching to Organic?

Understanding why organic prices fluctuate when compared to conventional methods matters. If you can understand why prices rise or fall, you can better plan your operation’s future growing methods.

One factor often overlooked is the increasing demand for organic food directly impacts the supply of conventional food. For instance, the price margin between organic and conventional food provides a positive or negative price signal to growers like you. The higher organic produce climbs in comparison to conventional produce, the more likely you are to switch your production from conventional to organic production.

And the reverse is true, as well. If organic prices soften, the production method holds less appeal.

A team of us from the University of Kentucky took a deeper look into this topic through a research project using Nielsen Retail Scanner Data that contains weekly pricing, volume, and store information based on a point-of-sale system with data from more than 90 participating retail chains across the U.S. The study, “Price Relationship between Organic and Non-Organic Vegetables in the U.S.; Evidence from Nielsen Retail Scanner Data,” reviewed three vegetables that play a key role in organic sales: tomatoes, lettuce, and carrots.

These three comprise a large share of organic food sales in the U.S. food system, according to our analysis of USDA’s 2015 Certified Organic Survey. Here’s each crop’s percentage of total certified organic vegetable sales:

  • Lettuce: 19.24%
  • Tomatoes: 6.39%
  • Carrots: 6.09%

Intriguingly, these vegetables are about as different as you can get in form and function. Carrots are root vegetables, lettuce is a leafy vegetable, and tomatoes are a culinary vegetable. That means different pest and herbicide application methods are used, and post-harvest residues are different.

In addition, the production system for each of these crops directly impacts their profitability. For example, field-grown lettuce is reported to be 43% more profitable than tunnel-grown lettuce; on the other hand, the profitability of field-grown tomatoes is one-third of tunnel-grown tomatoes.

In this regard, you can expect the price relationship between organic and conventional vegetables could differ for each vegetable due to the different characteristics.

3 Factors Impacting Organic Prices

During the research project, our team identified three key factors that have the biggest impact on organic pricing: shelf life; substitute-ability, and price volatility.

1. Shelf Life

Shelf life varies from three to five days for lettuce, one to two weeks for tomatoes, and four to five weeks for carrots. Variations in shelf life for each vegetable are dependent on how they are stored.

Short shelf lives represent counter storage, while long shelf lives represent refrigerator storage.

It also shows that vegetables with shorter shelf life — lettuce in this study — do not tend to have a long-run price relationship between organic and conventional prices. Therefore, employing a price discount strategy is necessary for vegetables with a short shelf life to prevent spoilage. Additionally, the ability and design of the U.S. supply chain to deal with perishable products has been a focal point for the food industry, and it drives investment decisions for producer, wholesalers, and store managers.

2. Can It Be Easily Swapped?

The second factor we identified as important to organic prices is “substitutability.” In economist circles, the term refers to the ability of goods to be replaced by another good. For example, when the price of organic apples is high, consumption of conventional apples will go up if two goods (organic and conventional apples) have a high substitutability.

In our case, however, we found there is limited substitutability for lettuce and tomato between organic and conventional. This finding indicates that consumption of conventional lettuce and tomatoes are not significantly affected by price change of the organic lettuce and tomatoes and vice versa.

One potential explanation for this is that consumers are concerned about pesticides and other chemical use. With the limited substitutability, U.S. consumers recognize organic and conventional carrots and tomatoes are not completely substitutable products. That means growers, wholesalers, and store managers could take advantage of this situation by setting higher price margins on lettuce and carrots between organic and conventional products.

The study also found that there is a positive long-run relationship between organic and conventional prices of carrots and tomatoes. This finding implies that a 1% increase in organic prices leads to more than 1% increase in conventional prices.

3. Price Volatility

The charts shown below display the monthly price movements of each product from 2006 to 2015. As you would expect, organic vegetable prices are higher than conventional, and the two prices move together.

These figures also display the volatility in the price premiums. The price premium is determined by the price difference between organic and conventional. On average, the premium is $0.61, $1.33, and $1.05 for carrots, lettuce, and tomatoes, respectively.

Although the price gap between organic and conventional tomatoes is the second largest, tomatoes show relatively more volatility (i.e., larger movements in price creating a higher price range) compared to carrots and lettuce.

The coefficient of variation (CV) is a common way to measure the volatility. The higher the CV, the more volatility there is.

Based on the price premium, CVs for carrots, lettuce, and tomatoes are 15.66, 11.56, and 43.11, respectively, which shows tomato’s higher volatility.

This helps explain market performance, since high volatility is associated with a higher risk of price swings. For example, tomato prices are three times more volatile compared to lettuce and two-and-a-half times for carrots.

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In summary, findings suggest the price relationship between organic and conventional vegetables varies by characteristics, such as shelf life, volatility in the price premium, and substitutability.

For additional information, please reference the paper “Price Relationship between Organic and Non-Organic Vegetables in the U.S.; Evidence from Nielsen Retail Scanner Data.” Applied Economics, due out later this year.