Organic Milk: It Does A Farmer Bad

The New York Times has a "Living With Less" package featured on their front page this morning. One way to do that? Cut out that expensive organic food you started buying when the economy was good. That idea prompted an article on organic dairy farmers -- it isn't pretty. This led me to wonder what the current deep recession could mean for the future of the organic food market.

The article from the NY Times about organic dairy's plight contains the following chart:

The chart makes sense. When the economy was doing well, you see a pretty linear increase. When things started going badly, in early 2008 so did organic milk sales. A brief uptick occurs after the 2008 stimulus, and then it plummets again to levels not seen since 2007.

I like to think I did my small part to make the Times' article possible. Late last year, I switched my daily yogurt from being organic to non-organic. I figured 30% cheaper yogurt was probably worth the trade-off. I must not have been alone.

I wonder, however, if the grim news for organic dairy is somewhat isolated to dairy. The dairy industry on a whole has been gripped by some pretty tough times. I first noted this in March due to an article from USA Today. It explains that milk prices (all types) declined by about 50% from historic highs during the summer of 2008.

One way to determine if it's just milk might be if we had an indicator of overall organic food demand. I don't know of any such indicator, but it might be helpful to consider organic food superstore Whole Foods. Earlier this month their earnings came out for the first quarter. That first quarter profit year-over-year declined by about 12%.

Now you could argue that net profit suffering could be due to a variety of factors like poor management. But the Bloomberg article describing this explained that (presumably organic) wholesale vegetable and meat prices also declined. This leads me to believe that demand was a major driver.

The organic dairy article I began with concludes that this will likely force many organic farmers out of the market. They simply aren't getting contracts and probably won't for some time -- unless the economy surprises everyone and suddenly improves dramatically.

This could have a really interesting effect on the organic foods market. Opening an organic farm probably has a pretty high entry cost. You need land, animals, machinery, etc., and then it takes time before you have a product you can sell. So if enough organic farmers exit the market, once demand returns in a year or two, prices could skyrocket due to a lack of supply. Since entry is expensive and time intensive, prices could stay high for a while, killing off some of that new demand.

In short, I think this means that the next few years for the organic farm industry don't look good, even if the economy does improve more quickly than anticipated. That is, unless they get a bailout too.