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Organic's prices may not be high enough: Report

Organic's prices may not be high enough: Report

"Our thought is some of those middle-of-the-road guys, as they see the premium widen considerably — and if they pay more than three times for shell eggs than conventional — they will be less likely to buy the organic," said Heather Jones, senior equity research analyst in BB&T Capital's Food & Agribusiness Group and one of the authors of the new report.

For organic eggs, there was a 114 percent price premium to conventional at the end of the fourth quarter of 2015 but that premium widened considerably in early 2016 and for the last week of January the number was above 200 percent, or higher than the historical average. The report, which uses data from the U.S. Department of Agriculture, points out that the conventional egg prices soared last year, reflecting national supply issues associated with the avian flu outbreak.

Whole Foods was one of the chains experiencing organic egg shortages in early 2014 due to national demand exceeding supply. The supply crunch for organic eggs appears to have eased for now but the Austin, Texas-based company has other headaches as it scrambles to reverse an earnings slump and get a more affordable image.

"The big thing for Whole Foods on the margin front is more competitors carrying organic and specialty foods and carrying it at a competitive price," said Wedbush Securities analyst Phil Terpolilli, who covers Whole Foods. "They have to sort of reset some of their categories to get more competitive on that side of things."

Whole Foods declined interview requests for this story.

In its report, BB&T Capital looked at organic and conventional pricing for nearly a dozen categories and found a wide range of differences — from organic lettuce trading at just a 20 percent premium to nonorganic and organic beef trading at a 173 percent premium, both through the fourth quarter of 2015.

Much of the organic-to-conventional price gap cited by BB&T Capital was found to have increased in the fourth quarter of 2015 as opposed to the third quarter, indicating that "seasonality of the holiday may be affecting this," said Rafi Mohammed, a Boston-based pricing consultant and author of "The 1% Windfall."

"It may very well be that demand is so high, that there is a temporary disequilibrium resulting in high prices and profits for organic producers," said Mohammed, who argues that it's wrong to take the price premium as merely a sign that something is costly to produce organically. "Over time, new suppliers will enter the field."

Meanwhile, one big issue on the organic livestock side is sourcing organic feed, which can be challenging and costly. The situation has been even tougher in California — the nation's leading dairy state — due to the ongoing drought, which has caused some dairies and cattle ranchers to spend good sums to truck in supplemental organic feed.

"The feed grain shortage has been a notable issue in terms of organic dairy producers not being able to keep up with demand," said Cathy Greene, an agricultural economist and organic foods specialist at USDA. "A lot of them actually grow their own (feed grain) and they are required by law to have a certain amount of pasture in the diet of the animals."

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