Exploring the Economic Viability of Switching to Organic Ingredients in Manufacturing
Why switch to organic ingredients? Unprocessed food is a fast-growing US food segment. Reaching USD 82.7 billion in 2023, the market is predicted to increase to USD 158.2 billion by 2032 – a compound annual growth rate (CAGR) of 7.5%1.
Prioritizing organically farmed genetically modified organisms (GMO)-, antibiotic-, pesticide- and hormone-free, sustainable production practices delivers many benefits addressing various intersecting goals. These include transforming your sustainability credentials with ingredients that:
- Help reduce pollution and waste
- Use less energy and water
- Are biodegradable
- Free of harmful chemicals
- Offer better-tasting, healthier products
- Enable farmers and ranchers to build resilience
Consumers seek healthier, more natural, sustainable products with less processed, cleaner labels. Consequently, fresh organic produce, ready-to-use, and packaged products with an organic USP (Unique Selling Proposition) are increasingly in demand. Still, how viable is switching to organic ingredients? What are the associated economic costs?
The Benefits of Embracing Organic Ingredients
Switching to organic ingredients allows businesses to harness the many consumer-centric and future-forward advantages of a more ethical and less contaminated formulation, including products that:
- Retain improved nutritional value
- Contribute to a healthier environment and improved animal welfare
- Supporting and promoting smaller producers, seasonal crops, and the local economy
- Taste better, according to consumers
- Promote a more reliable supply chain
- Warrant a premium
In addition, manufacturers incorporating organic elements enjoy a measure of government support and incentives. These grants are part of the USDA Agricultural Marketing Service’s Organic Market Development Grant (OMDG) program. Eligibility includes efforts to increase organic consumption, expand or develop a new market using rotational grains, or invest in infrastructure2.
At the same time, sourcing and using organic ingredients incurs increased costs relative to conventional produce. It warrants a higher price to the consumer, representing increased manufacturer risk. What are these costs? Are there any cost savings, and does the cost-benefit ratio make enough sense to encourage embracing organic ingredients?
Cost Considerations When Transitioning to Organic Ingredients
Purchasing organic components for your products costs more due to the more significant expenses associated with organic farming practices. Despite substantial organic-related government subsidies for farmers and ranchers, increased costs are incurred.
These include USDA certification fees, longer production cycles, and lower yields. More stringent standards, including the higher cost of natural fertilizers and increased labor costs associated with traditional tilling, sowing, and harvesting, also contribute. Distribution and scale are also more limited.
The end product, too, requires a USDA organic certification, ensuring that a minimum of 95% of its ingredients are of high quality and certified. Accreditation also tells the consumer that the product excludes chemicals, processed additives, and preservatives. The consumers know that they’re getting what they paid for, sometimes paying twice the cost of a conventional version of the product.
Higher prices could mean expanding your middle- to upper-income segment’s footprint and revenue. At the same time, depending on the product, it may mean losing out on lower-income users. The debate for and against organic will depend on strategy and long-term direction. Currently, the growth of organic products suggests long-term equity and growth potential. Additionally, cost savings will increase as production scales.
Several global brands have transitioned core products or developed organic line extensions. These include Hellmann’s Mayonnaise, Hunt’s tomato products, and Heinz Ketchup. Others have shown commitment through acquisitions, such as General Mills’ Annie’s Homegrown, Homel’s Applegate Farms, Unilever’s Talenti Gelato & Sorbetto, and Hershey Co’s Krave.
Relying on raw organic products is often appropriate. At other times, manufacturers can add, enhance, or change taste and odor profiles using organic flavor and aroma ingredients, such as from Advanced Biotech.
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1 https://www.imarcgroup.com/united-states-organic-food-market
2 https://www.usda.gov/media/press-releases/2023/05/10/usda-announces-new-steps-enhance-organic-markets-and-support