Supply, Demand, and Organic Industry Risk

The number of consumers shopping for organic foods is burgeoning. This is a tremendous opportunity for some of the companies that have a competitive edge in this market, but it's also a double-edged sword. It's clear that a slew of companies want in on the game, but pursuing growth in the organic space is far more complex than it seems. These companies are poised to harvest the growth in the sector; the problem is, our food supply remains mostly conventional. 

I feel positive about the business missions and investment opportunities inherent in the following stocks. Still, it's unwise to ignore some risky ingredients when it comes to growth.

A cartful of questions investors should ask
The good news? The changing consumer attitude is ringing up more transactions at the register. The difficult part: Organic food supply is big on avoidance of agricultural practices like genetic modification. GMOs are incredibly prevalent in the American food supply as it stands now.

This issue is relayed in many risk factors in such companies' SEC filings.

Chipotle Mexican Grill (NYSE: CMG  ) : The fast-draw burrito slinger is shifting toward more ingredients-related food philosophies such as local produce and naturally grown meat. Food With Integrity rocks. On the other hand, it represents risk to the growth area. According to the company's most recent 10-K:

Crops grown organically or using other responsible practices can take longer to grow and crop yields can be lower. It can take longer to identify and secure relationships with suppliers that are able to meet our criteria for meat, dairy and produce ingredients. Given the costs associated with what we believe are more responsible farming practices, and in some years due to decreased demand as a result of the weak economic environment, many large suppliers have not found it economical to pursue business in this area.

Annie's (NYSE: BNNY  ) : The kid-centric packaged food company with the cute bunny brand has quite a few challenges right now, which makes it the riskiest stock on this list, but one particular challenge has been dogging it in fiscal 2014: supply. From its most recent 10-K:

...in fiscal 2014, organic wheat prices did not moderate as we anticipated, due to increased demand and limited supply... Cost increases for organic and non-GMO raw materials that exceed cost increases for their conventional counterparts may exacerbate these risks... We compete with other food producers in the procurement of organic ingredients, which are often less plentiful in the open market than conventional ingredients. This competition may increase in the future if consumer demand for organic or non-GMO products increases, if the number of producers of organic or non-GMO products increases or if existing producers expand competition for organic and non-GMO ingredients.

Hain Celestial (NASDAQ: HAIN  ) : Everybody knows Celestial Seasonings' array of venerated tea, but the parent company owns a slew of organic and natural products, too. From its 10-K:

Our ability to ensure a continuing supply of organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops ... [and] forecasting adequate need of seasonal ingredients. ... We also compete with other manufacturers in the procurement of organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for organic products increases. This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell.

Whole Foods Market (NASDAQ: WFM  ) : Much has been made of Whole Foods' goal to drop prices. The bright spot is a strategy that will grow mainstream demand for organic and natural foods even more. However, given supply issues, translation to higher costs could give Whole Foods a much more serious hurdle in this strategy. However, many investors perceive last quarter as a disastrous sign, and management's comments in the conference call underlined the climate:

We source our products from a variety of local, regional, national and international suppliers, and we rely on them to meet our quality standards and supply products in a timely and efficient manner. There is, however, no assurance that quality natural and organic products will be available to meet our needs. If other competitors significantly increase their natural and organic product offerings, if new laws require the reformulation of certain products to meet tougher standards, or if natural disasters or other catastrophic events occur, the supply of these products may be constrained..

Defined dichotomy
Supply and demand is a common risk in many companies. However, this particular factor is a truly mixed bag. Risk/opportunity is fraught with challenges in evolving markets.

Supply growing with demand is a simple economic concept, though, and we can't discount it knowing the changes in consumer tastes. As long as consumers keep showing an appetite for organics, more agricultural companies and food suppliers will provide the goods.There's absolutely no reason to believe these companies are guaranteed to underperform as the area evolves.

For example, Annie's 10-K disclosed an interesting caveat within the organic risk disclosure: Wal-Mart's increased demand for such products could be one of the drivers of increased production, and Wal-Mart's scale drives significant change in the marketplace.

Investors have currently lost their appetite for these heavily organic plays, with the exception of Chipotle. Still, in keeping with buying when the herd's fleeing, I see more opportunity than doom in these stocks. When it comes to the social responsibility factors I try to insert in the DNA of my portfolio, I believe these companies are blazing the path to a better, more positive world in many of their business practices.

That said, this area requires a watchful eye and a long-term view. Positive change is afoot; still, many companies could stand or fall.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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  • Report this Comment On July 15, 2014, at 5:17 PM, SkepikI wrote:

    <GMOs are incredibly prevalent in the American food supply as it stands now.>

    OK Alyce, this is just too tempting. Support your declaration with evidence. I am far from an expert here, but my admittedly casual interest in GMO information has suggested that there are really only TWO GMO crops in production, soybeans and corn.

    Does your research find that correct? and if not EXACTLY what GMO are you referring to in the (generic description) "Food Supply"?

  • Report this Comment On July 15, 2014, at 9:26 PM, LittleBluestem wrote:

    SkepikI,

    I know you asked Alyce, but I'll answer your challenge very briefly and very generally with just a few links on the basis of only the two crops you named. Of course, I won't hazard a guess as to whether you will accept my citations...

    <i>"More than 85 percent of soybeans grown in the United States are transgenic, GM cotton is grown on more than 70 percent of cotton fields, and GM corn is grown on about 50 percent of corn acreage."</i>

    http://www.organicconsumers.org/ge/GMonMarketUS.pdf

    According to the following report, the projected 2014 U.S. soybean production is projected to be 3800 million bushels:

    http://www.agweb.com/article/wasde_soybean_production_projec...

    Soy, of course, is used for oil and protein directly used in human consumption as well as in feed for our livestock.

    Only 10 percent of the U.S. corn crop is used for direct human consumption according to recent Ceres data. Umm, that's 10 percent of 14 <b>billion</b> bushels. But corn finds its way into our food chain plenty of other ways too. Here's the Ceres link:

    http://www.ceres.org/issues/water/agriculture/the-cost-of-co...

    LittleBluestem

  • Report this Comment On July 16, 2014, at 11:22 AM, damilkman wrote:

    I agree with the authors statement. Because CORN and SOYBEANS are the base ingredients of either direct foods or indirectly as a feed for animals we consume for all practical purposes we can use the adjective prevalent.

    More troubling to me is we consume meat of animals that evolved eating grass and bugs with grain. Whether you argue it is for better or worse, the chemical composition of the meat is different.

  • Report this Comment On July 16, 2014, at 1:50 PM, SkepikI wrote:

    LittleBluestem- of course I will accept your citations. That does not mean, however that you addressed the point OR the rather caviler and generalized statement of "incredibly prevalent"... I have no more idea than before if this is 50% of the food supply or 1%... just that soy and corn is used in lots of food products and animal feed...which I rather suspected was the case ;-)

    AND, damilkman I do not agree unless you have some vetted data rather than arm-waving.

    Not that I am skeptical at all of course....

    While I see plenty of "nondescript" generic food in grocers shelves that likely contains or subsists on Corn and soy derivatives when I venture east of the Mississippi I don't see near the percentage out west. AND I don't see GMO fruit, veg, oats, olive oil, barley wine etc etc etc Not to mention grass fed beef, ocean fish, buffalo which have become quite common in the non-east segments of the country. SO...I am really interested in can you back up your insinuations with hard data, because my observations and "arm-waving" analysis suggests otherwise. I really am interested..... not because I fear GMO, but because I wonder if the hype has led the facts.

    An interesting little morality play was on exhibit out this way a week ago: Some guy was advertising "GMO-free" hay on Craigs list. For $750/ton, when the going rate was $250/ton. In case you dont know there is NO SUCH THING as GMO hay, and some other hay farmer outed him on Craigs list to many a farmer's amusement. Nobody knows if the entrepreneurial bandit sold any "GMO free hay"

  • Report this Comment On July 16, 2014, at 1:51 PM, SkepikI wrote:

    LittleBluestem- of course I will accept your citations. That does not mean, however that you addressed the point OR the rather caviler and generalized statement of "incredibly prevalent"... I have no more idea than before if this is 50% of the food supply or 1%... just that soy and corn is used in lots of food products and animal feed...which I rather suspected was the case ;-)

    AND, damilkman I do not agree unless you have some vetted data rather than arm-waving.

    Not that I am skeptical at all of course....

    While I see plenty of "nondescript" generic food in grocers shelves that likely contains or subsists on Corn and soy derivatives when I venture east of the Mississippi I don't see near the percentage out west. AND I don't see GMO fruit, veg, oats, olive oil, barley wine etc etc etc Not to mention grass fed beef, ocean fish, buffalo which have become quite common in the non-east segments of the country. SO...I am really interested in can you back up your insinuations with hard data, because my observations and "arm-waving" analysis suggests otherwise. I really am interested..... not because I fear GMO, but because I wonder if the hype has led the facts.

    An interesting little morality play was on exhibit out this way a week ago: Some guy was advertising "GMO-free" hay on Craigs list. For $750/ton, when the going rate was $250/ton. In case you dont know there is NO SUCH THING as GMO hay, and some other hay farmer outed him on Craigs list to many a farmer's amusement. Nobody knows if the entrepreneurial bandit sold any "GMO free hay"

  • Report this Comment On July 16, 2014, at 1:54 PM, TMFBlacknGold wrote:

    "As long as consumers keep showing an appetite for organics, more agricultural companies and food suppliers will provide the goods.There's absolutely no reason to believe these companies are guaranteed to underperform as the area evolves."

    I'm curious if this will really happen or not. If it becomes too uneconomical to produce organic foods, then I question whether or not we'll see the growth in organic farmland continue. It's also at such a low acreage now that double digit growth for decades would be necessary for it to gain much of the market.

    Thoughts?

    As you have stated, this is complex stuff!

    Maxxwell

  • Report this Comment On July 16, 2014, at 3:06 PM, watson14 wrote:

    GMO alfalfa (hay) was approved in 2011. Roundup can be used on it to kill unwanted plants growing with it.

  • Report this Comment On July 16, 2014, at 9:42 PM, LittleBluestem wrote:

    SkepikI,

    More than 3.2 billion bushels of transgenic soybeans and 7 billion bushels of GM corn per year are the starting point. Soybean oil is 65% of the edible oil consumed in the United states according to the USDA National Agricultural Statistics Service. Also from them, "Over 30 million tons of soybean meal is consumed as livestock feed in a year." From Ceres again, 38% goes to animal feed and 10% to food ingredients.

    Alyce didn't differentiate between any particular regions of the country, nor did she say she was referring to two base ingredients or two hundred. Why not? How about because it doesn't matter. Unless you are explicitly trying to avoid them, probably you won't. Unless you are specifically seeking out products that are clearly identified as not being sourced from GM raw materials, chances are you're getting them into your pantry.

    Maybe you personally can manage to dodge some of that, maybe not. Believe what you will, but I think those numbers all add up to "incredibly prevalent" with nothing cavalier about it. But I guess that I knew when I started this exercise in futility that you would disagree.

    Over and out,

    LittleBluestem

  • Report this Comment On July 16, 2014, at 9:44 PM, LittleBluestem wrote:

    Sorry, edit error: "38% goes to animal feed and 10% to food ingredients."

    These Ceres stats refer to U.S. corn production destinations.

  • Report this Comment On July 18, 2014, at 12:13 PM, SkepikI wrote:

    Alimentary, dear watson: I should have been more specific. The generic noun "Hay" in this neck of the woods generally means grass hay, which I think has no gmo. There is also Timothy Hay, Vetch Hay and Alfalfa Hay. But most often when people mean Alfalfa they use "ALFALFA" or ALFALFA Hay because it is worth more than just "hay". Somewhere north of $290/ton in these parts.

    Please forgive me for being generic, non specific AND ARMWAVING as seen so many times here

  • Report this Comment On July 18, 2014, at 12:16 PM, SkepikI wrote:

    <More than 3.2 billion bushels of transgenic soybeans and 7 billion bushels of GM corn per year are the starting point. Soybean oil is 65% of the edible oil consumed in the United states according to the USDA National Agricultural Statistics Service. Also from them, "Over 30 million tons of soybean meal is consumed as livestock feed in a year." From Ceres again, 38% goes to animal feed and 10% to food ingredients.>

    (sigh) this says nothing about what percentage or how many million bushels is GMO, let alone what % of the total US food supply. More Armwaving. Does ANYBODY) KNOW ANYTHING about just what fraction of the food supply is ACTUALLY GMO? Factually? Concisely? Truthfully?

  • Report this Comment On July 18, 2014, at 1:33 PM, LittleBluestem wrote:

    <(sigh) this says nothing about what percentage or how many million bushels is GMO, let alone what % of the total US food supply.>

    (sigh) this was not your original challenge either, which seems to be in flux as answers are issued. Your original challenge was that Alyce support with evidence the statement she made that "GMOs are incredibly prevalent in the American food supply as it stands now."

    I feel that I have more than supported that statement in her behalf. But I will cite one more source regarding prevalence - not regarding your additional alterations and conditionals.

    "70-80% of the foods we eat in the United States, both at home and away from home, contain ingredients that have been genetically modified. If the ingredient label on any food or beverage product contains corn or soy, they most likely contain genetically modified ingredients, as a very high percentage of those crops grown in the U.S. use GM technology. In addition, a high percentage of other ingredients in the U.S., such as sugar beets, are grown with the use of GM technology as well."

    http://factsaboutgmos.org which is presented by the Grocery Manufacturers Association and is pro-GMO.

    I end my participation in this discussion with a declaration of my own position on GMOs. I am pro-choice. That means keeping transgenic crops like soybeans from cross-contaminating non-transgenic plantings - as has apparently been happening in cases such as those documented in the film "Food Inc." It also means appropriate tracking and labeling so that you and I can know what we are buying and consuming.

    Many organizations including the FDA, USDA, AMA and WHO have studied GMO usage and given it stamps such as the rather generic "generally regarded as safe." However the practice is only about 20 years old and has expanded at a very high rate to reach that 70-80% reach into the US food supply. I remind you that tetra ethyl lead was also considered a good thing to put into gasoline and DDT was considered wonderful for spraying in neighborhoods to knock down mosquitos - until they weren't considered such a good thing anymore.

    I choose the right to choose for myself.

    LittlBluestem

  • Report this Comment On July 19, 2014, at 1:28 AM, SkepikI wrote:

    <the ingredient label on any food or beverage product contains corn or soy, they most likely contain genetically modified ingredients>

    "most likely" more armwaving. And of course the reference to sugar beets. Are they GMO? or not? or is it just Soy and Corn? Which will it be? Facts or opinions? It would surprise me not at all to find out that most of the GMO corn goes to ethanol production another idiot social engineering idea subsidized by government and pushed by corporatist beneficiaries.... What will it be? Facts or armwaving?

  • Report this Comment On July 19, 2014, at 1:36 AM, SkepikI wrote:

    So, lets review. The only two crops of GMO in the US food supply are soy and corn? yes or no.

    Those two crops provide X% of the total US supply of corn and soy. X is yet to be determined.

    Of the corn and Soy production Y% goes to the US food supply. Y is "yet to be determined"

    Of the total US food supply, Z% has ingredients that come from the Y, yet to be determined above.

    OF the total food consumed by people, Z times U%, the actual content of the food that has GMO is the GMO input... U is yet to be determined.

    Soooo, we know sort of the GMO crops. After that we know...well, nothing....AND you choose the right to be a know nothing for yourself... seems curiously appropriate.

  • Report this Comment On July 19, 2014, at 1:37 AM, SkepikI wrote:

    Yes my 67 barracuda ran just great on tetraethyl lead.

  • Report this Comment On July 19, 2014, at 1:50 AM, SkepikI wrote:

    <If it becomes too uneconomical to produce organic foods, then I question whether or not we'll see the growth in organic farmland continue. It's also at such a low acreage now that double digit growth for decades would be necessary for it to gain much of the market.>

    Maxx: since I have seen nothing above to elucidate your query, I will suggest the following:

    As you suggest the questions of economics and production are complex...sort of. I recently had a very interesting conversation with an organic apple farmer and jack of all trades Ive known for more than 40 years. He started an Organic apple orchard in the late 70's and for years produced organic apples on contract with small organic grocers and the beginnings of the larger organic stores. Did this quite successfully till about 2005, when larger corporatist interests squeezed him out of his contracts, including one with the predecessors of WFM.

    He then shifted to U-pick and found it quite rewarding. he made less money for less work as he had no more polishing, sorting boxing, etc. etc.

    So. The economics of organic is very complex and yet very simple. Not all of it is recorded by your "friendly government bureaucrats". USDA now defines "organic" when they did not before. The cartel rules. In my neck of the woods, not everyone conforms. Some rebel. One known by his customers advertises "NO spray. Zilch. Nada." but avoids the term Organic so as not to bow to the cartel.

    Just a few thoughts to let you know that not all are bamboozled by the bureaucracy, and economic are squishy.

  • Report this Comment On July 19, 2014, at 1:52 AM, SkepikI wrote:

    And please excuse the frequent posts. In some weird random way it allows me to get them on the board without multiple copys of the same thing. Some strange glitch in my computer, the ether, the MF servers....or just magic. Dang Microsoft anyway....

  • Report this Comment On July 21, 2014, at 10:33 AM, damilkman wrote:

    I will go on the record that I believe the GMO concern is overblown. However, since no one has to disclose whether a food ingredient is GMO or not or whether livestock was fed on GMO means it is impossible to generate the exacting statistics that Skepikl demands.

    Considering that Corn and Soy are two of the popular farm crops and are a base ingredient for food or as a livestock feed then the authors statement of prevalent is reasonable.

    As LittleBlueStem pointed out we can only guess since no one is required to put on a label. My wife and son have food sensitivities. Even at the organic food level it is impossible to get anyone to admit to what they are putting into their food when they prepare it be it an eating establishment or a farm processing something. Unfortunately they have a choice of experimenting on themselves or only purchasing food where they know the exact ingredients.

    Regarding glitches I have observed the same thing. Sometimes I am just unable to post.

  • Report this Comment On July 31, 2014, at 8:47 AM, KBecks wrote:

    Hi Alyce, I am not sure how to contact you, but I wanted to suggest that you take a look at Tupperware (TUP) as a potential candidate for your Prosocial portfolio. I am not yet invested in this company but on their corporate page, they have info about sustainability and empowering women worldwide. Might be interesting to take a look.

  • Report this Comment On August 04, 2014, at 3:06 PM, Montereyjackson wrote:

    On the issues surrounding GMOs, a good background read is the Economist,s special section on the future of ag, feb. 2011. Here is a link to the introduction to the section, which provides a good overview.

    The 9 billion-people question | The Economist

    www.economist.com/node/18200618

    The Economist

    Two other interesting reads:

    The recent Fortune cover story on Monsanto, and Ramez Naam's book the Infinite Resource

    A point made in all of these is that prudent use of GMOs may be needed meet the demands of increasing global population, a changing climate, or both together.

    A perspective from Naam's book:

    "Of all the things we've done, it's farming, and not C02 emissions of pollutants, that has changed the land surface of the earth the most. Our planet has half as much forest now as it did prior to the advent of agriculture. The only thing that's kept the that remaining half of the world's original forest intact has been our ten-thousand year process of boosting yields per acre."

    And, he goes on to argue, GMOs can keep that increase in yield-per-acre going.

    So I would argue that use of GMOs, per se, is much less harmful than factory meat-farming, the use of certain harmful chemicals on ag pests, and over-use of nitrogen-based fertilizers, and so on.

    It is also arguably much less harmful than the traditional methods of raising beef, which require very high fossil fuel inputs.

    That's not to say that GMOs can't have bad side effects. For instance, our part of the Midwest, the heavy reliance on Roundup-resistant seeds has greatly reduced the milkweed populations in and near crop fields. This has probably likely caused the decline in one strain of monarch butterfly, which depends on milkweed for reproduction.

    The decline is a tragedy and we have done our bits to counter it by planting milkweed on our property etc. But it does not mean that all possible uses of GMOs are evil.

    ****

    Alyce's quotes regarding pricing issues within the organic foods industry I found useful. From a purely financial perspective, most companies' shares are good buys at a certain price. To stay in the game of ethical investing for a long time, we have to be sure that the price we pay for our shares reflects all the risks, including commodity price risks. Better yet are prices that reflect more risk than there actually is.

    Even in a food revolution, some old-fashioned value investing standards still apply.

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