Health Food

What’s Eating The Health Food Supply Chain?

Healthful food—organic, vegan, non-GMO, local, sustainably or humanely raised, and allergen free, or any other variety—has whet consumers’ appetites. Satisfying that growing demand, however, poses unique supply chain challenges.

In 2003, Julie Tilt and her husband purchased Hummingbird Wholesale, an organic bulk foods distributor based in Eugene, Ore. Since then, revenue has grown 20 to 30 percent annually, as organic foods take up more room in more consumer shopping carts. “The organic market is growing, well, organically,” Tilt says. “It will continue to grow as people learn more about health and nutrition.”

At the same time, ensuring a viable organic food supply chain can be a challenge. The organic food market now tops $43 billion and accounts for nearly 5 percent of total food sales, yet just 1 percent of U.S. cropland is geared to organic agriculture, according to the Organic Trade Association. Moreover, farmers who want to convert from conventional to organic farming practices face a 3-year investment of time, energy, and money. Any land used to produce raw organic commodities can’t have had prohibited substances, such as many pesticides, applied to it during these 36 months, and the farmers can’t sell their products as organic. That means they’re unable to capture the premium prices most organic foods command.

To respond to these challenges, Hummingbird contracts with farmers who grow organic grains, seeds, nuts, and other products, ensuring a steady market. The company started with a few hundred acres of organic production under contract, and now has about 10,000. “Farmers are savvy, and tuned in to what’s happening in the market,” Tilt says, adding they’re willing to do what they can to meet demand.

Hummingbird also works with farmers making the shift to organic. It offers its products as “transitional,” and tries to set prices that fall between conventional and organic.

Hummingbird’s experience shows both the promise and the peril of the health food supply chain. Demand is rising, but meeting it requires managing a new, evolving supply chain.

Until about 2000, organic and health foods were sold mostly in small independent food stores and cooperatives. That was the year the final rule establishing the National Organic Program under the U.S. Department of Agriculture (USDA) was published. The program facilitates the marketing of organically produced food and assures consumers the products featuring the “USDA Organic” seal meet consistent, uniform standards. “Consumers look for the seal,” notes Cathy Calfo, executive director and chief executive officer with California Certified Organic Farmers, a Santa Cruz, Calif.-based nonprofit.

Meeting consumers’ desire for organic, local, and other types of healthful fare comes with challenges. Among the top challenges for organic farmers: finding new ways to manage the health of their soil and control weeds, and inaccessibility to commercial markets, according to Brise Tencer, executive director of The Organic Farming Research Foundation, a nonprofit based in Santa Cruz.

ORGANIC PRODUCTION PRACTICES

Organic producers face the same challenges all farmers do, including unpredictable and uncontrollable weather, fickle consumer preferences, and a scarcity of labor in many rural areas. They also must follow organic production practices. They can’t use any inputs that aren’t approved for use in organic farming, including most insecticides, synthetic fertilizers, and most GMOs, says Catherine Greene, senior agricultural economist with the USDA.

Instead, many organic producers need to adopt different agronomy practices, such as crop rotation to reduce soil erosion and improve pest control. Conventional farming practices tend to be better known and require less labor and managerial expertise, says Atish Babu, principal with Agriculture Capital Management, San Francisco-based investors in sustainable farmland.

Even the distributors and processors for organic farmers can differ from those who work with conventionally grown products. A farmer using conventional practices to grow grain in Illinois may travel, say, 20 miles to find a processor, says Kellee James, chief executive officer with Mercaris, a market data service and trading platform for organic and non-GMO agricultural commodities based in Silver Spring, Md. The trip for a farmer of organic grain, on the other hand, may last several hundred miles.

Food manufacturers face a similar calculation. Doon Wintz, president of Wholly Wholesome, a producer of mostly organic and allergen-free products based in Chester, N.J., provides an example: His firm makes a dairy-free pumpkin pie, using soy puree in place of milk and eggs. He has to source the puree from the other side of the country, in Oregon. That means balancing the need to meet a minimum order quantity against the risk that ordering and producing more than the company needs, just to meet the minimum, can lead to products that expire unsold. “Do I support sales at a loss, or let products go dry on the shelf?” he asks.

Many organic farmers also lose some economies of scale, Babu says. Conventionally produced corn, for instance, typically will be shipped as part of a freight train of, say, 100 cars heading to a market. That’s rarely the case with organic products. Not only are the quantities lower, but their crops also need to be segregated. That can make it even more difficult and costly to secure transportation.

Indeed, all members of the organic supply chain—including growers, truckers, processors, food manufacturers, and retailers—need to keep organic foods from co-mingling with conventionally processed foods.

“You have to ensure that what started as organic remains organic,” says John Lischefka, director of business development with LINKFRESH Software Limited, a UK-based provider of supply chain solutions. The same machinery can be used, but only if it’s properly cleaned.

Whether companies use the same machines for both organic and conventionally grown foods, and clean them before processing organic foods, or invest in separate equipment for their organic lines, they need to document their practices. “It adds a layer of administration in being able to track the products, and make sure there’s no danger of co-mingling,” Wintz says.

Just as organic farmers need to adhere to certain practices, so do distributors and others in the supply chain. For instance, rather than turn to pesticides to control pests, they’ll use “structural pest management” to prevent as many problems as they can, says Harriet Behar, senior organic specialist with Midwest Organic & Sustainable Education Service. This can include tuckpointing and caulking joints, and placing fine screens over ventilation fans to keep insects from flying into them.

GOING LOCAL

Organic foods aren’t the only health foods enjoying greater demand. More consumers are looking for sustainable local foods. “People want to re-establish a connection with their food, whether it’s urban farming or rooftop gardening,” says William Powers, executive director with the Nebraska Sustainable Agricultural Society.

Retailers that want to source locally grown produce also face challenges. For instance, those sourcing lettuce, cabbage, and other spring greens within New Jersey are limited to about four or five weeks of supply each year. “Seasonality impacts supply at the local level,” notes Richard VanVranken, professor with the Rutgers Cooperative Extension of Atlantic County.

Moreover, these producers are facing off against an entrenched, powerful system. Large suppliers from areas with longer growing seasons, who can ensure steady deliveries of produce year-round, may tell retailers who want their goods in February, that they also need to make room for the items in June and July—exactly when local producers are ready to offer their wares.

Demand for healthful foods, while growing, remains volatile, says Vishy Visweswaran, chief technology officer with SCA Technologies LLC, which provides solutions to supply chain challenges in the food sector and consumer products manufacturing. The boundaries between restaurants, ready-to-eat, and food delivery companies are blurring, making it difficult to predict how any one product will perform, or how sustained a new trend will be.

In addition, many grocery chains and restaurants currently have tactical, arms-length relationships with their suppliers. “Now they have to go back to the farm, and understand the logistics, the costs, and what can be grown organically, and what can’t,” Visweswaran says.

While growth is, of course, desirable for everyone in the organic and health food sectors, it creates its own challenges. For instance, an organic producer that lands a contract to supply a large retailer often has limited time to fill the resulting influx of purchase orders. “They have a massive ramp-up,” says Tim Bass, sales director with AFN Logistics, Niles, Ill. Newer producers with limited experience may struggle to manage the spike.

DOWN ON THE FARM

While the obstacles are real, it has become clear that the market for organic and healthful foods is experiencing sustained growth. Companies that can tackle the challenges can gain a competitive edge.

A few solutions start on the farm. Some farmers are working to expand their growing seasons in ways that still meet the criteria for organic. For instance, they’re starting plants indoors and then placing larger, typically heartier plants outside earlier in season, VanVranken says. They might build “low-tunnels,” using plastic film stretched over a series of wire hoops extending from the ground to create mini-greenhouses that protect seeds and small plants from the elements.

A “high tunnel” is similar, but can cover several rows, and is tall enough to allow some farm equipment underneath. However, farmers typically need to add insulation to the covers, VanVranken says.

While the tunnels can protect the crops, they aren’t a panacea. In addition to the colder weather, crops placed outside in spring also don’t gain access to the longer days of sunlight. As a result, the tunnels tend to work better with cool season crops, such as lettuce and other greens, VanVranken adds.

Technology also plays a critical role in helping companies overcome the challenges inherent in the health food sector. The volatility in supply and demand requires more rigorous planning, Visweswaran notes.

For instance, if a company can’t obtain an organic ingredient from one supplier, it needs to know whether it will switch to another supplier, reformulate the product, or take some other step, taking into account costs and capacity. While most companies need to think through these “what-if” analyses, developing solutions can be tougher for those dealing in organic goods, given the limited supply and often higher transportation costs.

Tools that help companies manage information and provide visibility are key. Companies hoping to successfully manage this evolving supply chain need flexible, efficient, and real-time supply sourcing, planning, and logistics, and that requires tremendous collaboration among suppliers, farmers, and logistics providers. “Companies that are better at supply chain and logistics planning also are better at using technology to gain visibility,” Visweswaran notes. “You can’t do it with spreadsheets and phone conversations.”

GOOD THINGS, SMALL PACKAGES

Even advances in printing technology can aid the health food supply chain. Shorter printing runs, which may be appropriate for the typically smaller orders of health foods, often have been more expensive. That’s changing, as new packaging equipment is more automated and can handle smaller runs more cost effectively. They also often require less lead time than is needed for larger runs, Wintz notes.

Technology also is helping organic food producers find new ways to ensure safety. One example is high pressure processing (HPP), a pasteurization method that kills most pathogens and extends food shelf life without the use of chemicals. “I hail this as the future of food processing,” says Marwan Moheyeldien, founder of Maryland Packaging, a co-packer based in Elkridge, Md.

Advances in DNA sequencing mean companies can more cost-effectively test foods for pathogens, GMOs, gluten, allergens, and other substances than was possible in the past, says Mahni Ghorashi, co-founder of Clear Labs, a food technology and analytics company based in Menlo Park, Calif. In contrast to current tests, which typically require researchers to know what they’re looking for—say, the presence of e.coli 0157 in beef—the new tests can screen for numerous items. “It’s a bulletproof way of guaranteeing the claims,” Ghorashi says. In some cases, the tests can be less expensive than legacy tests, he adds.

GETTING INVOLVED

While technology will be key to increasing and stabilizing the health food supply chain, many experts say companies, trade associations, and the government also have a role to play. CCOF, for instance, offers a program that works with farmers transitioning to organics, to make sure they remain in compliance, Calfo says.

As Hummingbird has done, some consumer brands are working with farmers to ensure a steady and growing supply and market for organic foods. In May 2016, Kashi introduced an initiative to purchase “transitional” crops grown by farmers shifting from conventional to organic farming practices. Kashi, based in Solano Beach, Calif., produces plant-based cereals, entrees and snacks.

Also in 2016, General Mills announced it would double the organic acreage from which it sources ingredients. “We’re building strategic relationships directly with farmers for our products and are dedicated to working with growers to optimize production and quality, adopt standard practices, and accelerate supply,” said John Church, executive vice president, in a statement.

The U.S. government is getting involved as well. The 2014 Farm Act includes $57.5 million to help organic producers and handlers cover the cost of organic certification, and $5 million to improve economic data on the organic sector, according to the USDA’s Economic Research Service.

Crop insurance also is changing. Traditionally, organic producers could only insure their crops through the USDA for the prices, typically lower, that conventionally grown food would command. They now can insure many crops for organic prices. “The Risk Management Agency has tailored crop insurance to better fit the needs of organic producers,” Greene says.

While much work remains to ensure the viability of the organic and health food supply chain, Tencer remains positive about the future. Consumers are demanding more organic options, and organic production offers environmental, economic, and health benefits. “Organic farming,” she says, “is a real bright spot in the agricultural sector.”

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