It’s time for the organic and non-GMO industry to invest in infrastructure to straighten the current “crooked” supply chain, said Eric Jackson, chief executive of Pipeline Foods.

“We think it’s time to grow up as an industry and get after the elephant in the room, which is invest, put money into the infrastructure,” Jackson said in his presentation Nov. 6-7 at the Organic & Non-GMO Forum in St. Louis, Missouri, U.S.

While it’s not the same size as conventional commodity markets, there is an opportunity to invest $300 million to $500 million in the organic and non-GMO space over the next three to five years, he said.

“I think we can straighten out a pretty crooked road right now and there’s money to be shared all along the way,” Jackson said. “Rather than talk about premiums, we talk about margins.”

Infrastructure needs

Pipeline estimates there are less than 200 facilities that are certified for organic grain and oilseeds. Only about 50% of those are on rail and only 50% are of commercial scale.

“The entire industry is supported by 50 or less relevant facilities in the country. That speaks to the opportunity, but it also speaks to the issue,” Jackson said, adding that many of those relevant facilities are challenged to meet the new Food Safety Modernization Act requirements for food and feed.

With so few facilities, truckloads are being bought and sold, and margins are being extracted without a lot of value being added. There are many trade strings between the farm and the consumer company, Jackson said, and everybody is going to make their dollar – sometimes literally – per bushel.

“You end up moving a lot of product around by paper to facilitate an industry that simply doesn’t have enough infrastructure to operate as a professionally run supply chain,” he said.

With the organic and non-GMO market there’s an opportunity to create a shared value approach, which is a new concept in commodities, Jackson said.

“We’re taking a very transparent and open means by which to communicate values up and down the supply chain,” he said. “This is much more about working together than working under a black box and hiding what the margin opportunities are and not sharing the data associated with the grower practices as well.”

Jackson shared an example of a facility in South America that needed its grain processed in a particular way for consumption in North America. Because the particular machine for processing wasn’t available in the United States, the raw material had to be shipped via container to Europe first, and then shipped back to the United States. Overall, that crooked supply chain added a cost of 59¢ per pound, not including the price of the grain.

With an investment of $6 million in the machine, it would be possible to earn $2.28 million per year, for a 38% return on investment. Cost to move the product would drop down to 21¢ per pound.

A hub supply chain, similar to the conventional marketplace, would allow for traceability and lower operating expense.

“It’s going to take real money and the capital expense is going to go up,” Jackson said. “The tradeoff is a high degree of traceability and much lower operating expense.

“It’s these efficiencies that can be shared appropriately through the margin structure at the various nodes on the chain that are adding value. It is exciting to think about how we can change the economics so that the grower can make more and the consumer can pay less.”

Import challenge

Infrastructure improvements aren’t just needed for moving domestic product but also to handle imports. The United States doesn’t produce enough organic and non-GMO grain and oilseeds to meet current demand, so imports are needed. Jackson said about 75% of organic products consumed in the United States are imported.

The U.S. organic feed industry has become dangerously dependent on imports, putting their operations at risk and removing the incentive for producers to increase domestic organic acreage, said Peter Golbitz, president of Agromeris.

“We need to decrease reliance on imports that can be grown easily and in abundance in the U.S.,” he said during his presentation at the forum. “We need to increase domestic production to help create healthier soils and greater farmer returns.”

Imports of soybeans and corn grew 50% between 2015 and 2016 to reach 926,000 tonnes, or nearly 50,000 full container loads, Golbitz said. Virtually all of this grain is going into the feed stream.

“Imports are growing more quickly than U.S. production,” he said.

Imports are priced at or below U.S. production, which is discouraging domestic production and processing. The organic poultry market is at the greatest risk for constrained growth due to limited feed supply, Golbitz said.

He said there is a role for imports, particularly to balance supply and demand. But imports are not a long-term solution.

“I think it’s important that domestic supply get built out as quickly as possible,” he said. “U.S. buyers of organic feedstuffs need to make investments in U.S. production; we need logistics and infrastructure. There seems to be a concerted effort to build out that production domestically.”

There are opportunities for U.S. producers: The value of the imported grain last year was about $410 million and equivalent to 600,000 acres.

U.S. acres have been increasing at an average of 12.7% per year the past three years, but the need has increased 34.6%. At the current rate of growth of acres for soy and corn, it would take to 2025 to produce what is needed for 2016, Golbitz said.

That means millions of acres domestically need to be converted to organic acres to meet the projected 15% annual growth rate in the next 10 years.

“We think there is a great opportunity to convert a lot of conventional acres,” Jackson said. “It’s a good diversification strategy and a great economics story for the growers who are participating.”

During a panel discussion at the forum, Nathaniel Lewis, farm policy director, Organic Trade Association, said it’s difficult to get statistics on acreage that is in the process of transitioning into organic or non-GMO acres. Acreage must go through a three-year period free of prohibited substances such as pesticides and fertilizers before it can be certified organic.

A 2015 survey showed that 150,000 acres, of which 141,000 acres are cropland, are in transition. Those acres are spread over about 1,500 farms.

“There’s not going to be one policy, or one new input or one new genetic trait in a seed that is going to make organic farming easy to get on board with,” Lewis said, adding that organic farmers face myriad barriers, including market access and an information gap. “This is a whole new system of farming that folks need to learn. They need a coach or a mentor out in the field who has made the mistakes that they don’t need to make themselves.”

To help, the Organic Trade Association is working to tweak existing policies and programs to address the unique needs of organic farmers, he said.

Farmers considering the switch to organic production need to view the 36-month transition period as an investment, according to a panel discussion featuring three organic producers. Ideally, they should prepare ahead of time, attending seminars and workshops and talking to farmers who already have been through the process, said Dave Bishop, farmer, PrairiErth Farm.

It is a long process, he said, and profitability will depend on where a farmer starts from – are they willing to add livestock, do they have experience with cover crops?

“You’re not automatically going to lose a lot of money,” Bishop said. “You lose money when you don’t plan well.”

Integrity problems

Imports also present an integrity problem, Golbitz said. For example, Turkey’s organic imports into the United States exceeded the nation’s overall soybean production.

“This raises suspicion over origin and authenticity,” he said. “Where did that grain come from? How many hands did it pass through to get here?”

A Washington Post article from May 2017 identified several shipments of grain that somehow transformed from conventional to organic during their travel to the United States. The article set off a chain reaction of response from the organic sector, including task forces, reports and a call for improved oversight and control procedures by the U.S. Department of Agriculture’s Agricultural Marketing Service (AMS).

Specifically, AMS said it would conduct additional audits of certifiers in Turkey and Eastern Europe; request those certifiers implement added control measures for monitoring; increased training and oversight of complex supply chains with certified handlers; work with the USDA Animal and Plant Health Inspection Service (APHIS) to identify better ways to oversee organic products at the port of entry; and work with U.S. Customs and Border Protection to find technology solutions to better track organic products as they cross the border.

Jackson said the industry needs to better self-police itself. Those who are found to not be following the rules need to be banned from the industry, he said. Although there are only a handful of “bad actors,” they have made an impact on the industry.

“We don’t need to reinvent anything; we just need to enact the policies that are in place,” Jackson said. “Until the rules are being followed it reduces the incentive to invest. If we don’t do this right, we can cause damage to the food company brands and consumer trust.”

Golbitz said the importers of organic or non-GMO products need to go the extra mile to ensure the integrity of the products they bring in.

“Get boots on the ground in the country of origin, and make sure you have all your ‘t’s’ crossed and your ‘i’s’ dotted,” he said. “You have to make sure that your program exceeds what the market expects; it needs to be bulletproof. You need to be able to stand behind all of your organic production.”