Dean's Organic Dilemma

What's in a name? Specifically, when the subject is the food industry and the name is "organic," what do you think of? Do you think of healthy, green crops basking in the sun, and cows happily grazing in the pasture? Or do you think of mass-produced foods and cows lined up in feedlots?

That's the dilemma facing Dean Foods' (NYSE: DF  ) Horizon brand, which is being accused of riding the organic bandwagon but acting like a factory farm. The Organic Consumers Association, which has organized a boycott of Horizon, says the company is threatening to put small family farms out of business by operating organic dairies so massive in scale that traditional mom-and-pop farms can't hope to compete.

The association charges that what Horizon calls "organic" is really just a typical factory-farm setup in which cows are given organic feed but have little chance to graze. No, the cows aren't being stuffed full of antibiotics and growth hormones, as they would be on typical large-scale dairy farms, but to many small-scale farmers, "organic" is more than what you feed your animals. It's a lifestyle and an ethic. That's why many small farms and organic-farming advocates are appealing to the U.S. Department of Agriculture to tighten its standards for what foods can bear an "organic" label. In response, the USDA is planning on introducing a requirement that organic cows be given at least 120 days' worth of access to pasture grazing per year.

Is the organic trend becoming a victim of its own success? Whole Foods Market (Nasdaq: WFMI  ) and its emphasis on healthy, natural fare has helped push organics into the mainstream and has made consumers more demanding about the quality of foods they put into their bodies. That's good. But it may also be causing demand to outpace supply. Horizon, the nation's largest producer of organic dairy, says it has to rely on farms of all sizes -- including massive ones such as its 4,000-cow farm in Idaho -- just to keep up with what consumers want.

Consumers may thus find themselves on the horns of a dilemma: Exactly what are they supporting when they buy organic foods -- small farms or huge conglomerates? And can small farms by themselves even meet the growing demand for organic goods? Members of Organic Valley, the nation's largest cooperative of organic family farms, would be quick to tell you that the dairy farmers among them already meet the grazing requirements that the USDA is considering.

But is that enough? Whole Foods apparently thinks so, given its recent commitment to redouble its efforts to support small, local, organic family farmers.

Whole Foods is smart to think that way. In truth, small-scale farmers may not be able to satiate the current demand for organic fare on their own, but the typical Whole Foods shopper is a socially and environmentally conscious sort who will actively seek out products that support the type of sustainable, organic way of life that a small-scale farm can deliver. For this type of person, "organic" is as much about the lifestyle as the label, and he or she knows that Whole Foods views organics as a way of doing business, not just a way to make quick money on a fad.

Meanwhile, for consumers mainly interested in the health benefits of organics, mainstream supermarkets such as Wal-Mart (NYSE: WMT  ) are meeting that need quite nicely. The "organic" label need not necessarily encompass a way of life for this type of shopper, and that's where large-scale operations such as Horizon's can take care of growing demands. (For what it's worth, even Horizon supports the USDA's proposed grazing requirements.)

Yes, there's a risk of commoditizing and diluting the organic ideal here. But the astronomical growth in the popularity of organic foods leaves few alternatives. The good news is that different companies can serve different needs and desires. Consumers, by and large, will know the difference and will know where to find what they want. Family farms, meanwhile, can rely on Whole Foods' support. And investors win no matter where they turn. Thanks to the popularity of organics, they can get healthier right along with their portfolios.

Whole Foods is aMotley Fool Stock Advisorrecommendation, and Wal-Mart is anInside Valuepick. Try out any of our investing newsletters free for 30 days.

Fool online editor Adrian Rush is partial to Dean's Silk soy milk and is a Whole Foods shopper and shareholder. The Fool's disclosure policy will never leave you feeling hungry.

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