The Organic Price Premium

We’ve all seen it at the grocery store—organic food can be shockingly expensive! Price premiums vary by product, ranging from a mere 7% premium above conventional prices for organic spinach to an 82% premium for organic eggs.

The organic price premium debate has gone on for over a decade now. Some experts claim that the costs outweigh the benefits, while others say that the premium is the only way organic farmers can receive a fair wage.

Why is Organic Food So Expensive?

There are many reasons that organic food costs more to produce than conventional food, which in turn raises the price. Some factors include:

  • The three-year transition period for converting conventional farmland to organic.
  • Smaller size of most organic operations, which has a negative effect on economies of scale.
  • Greater labor inputs.
  • Higher stewardship standards, which require expensive practices such as erosion control and rotational cover-cropping.
  • Lower yields.
  • Limited supply compared to demand.
  • Larger cut typically reserved to the farmer for his living.

The three-year transition process, in particular, is tricky for producers seeking organic certification. They have to use organic practices while accepting commodity prices that entire time, investing in new equipment and learning new farming methods at the same time. The good news is that this dilemma has led to the creation of certified transitional programs.

Is There Truly a Premium?

With this mind, do organic products actually receive a premium, or are the higher prices merely reflective of higher costs? There probably is a premium in many cases. The FAO notes that, in developing countries, food that is produced organically but that is not certified organic is often sold locally at the same price as conventional food. Prices for organic food in developing countries, the FAO states, tend to depend on “the specific consumer willingness to pay.”

Reasons some consumers have demonstrated a willingness to pay more for organic include:

  • Food safety.
  • Enhanced nutrition.
  • Better flavor.
  • Environmental benefits.

It is interesting to note that farmers’ market managers observe a different attitude toward price premiums among the participating farmers than is seen at grocery and health-food stores (see page 10 of this USDA report). At markets offering both organic and conventional produce, many organic farmers do not routinely charge a premium. Premiums are typically charged for something out of the ordinary:

  • Exceptional quality.
  • A rare type of produce.
  • Food sold at an upscale market.

The Downside of the Premium

That price premium can be a deterrent to shoppers, particularly during times of economic hardship. Expense is one of the top reasons organic buyers return to conventional food. Also, low-income families frequently cannot afford whole grains or fresh fruits, vegetables, and meats—let alone organic equivalents.

Trends in Organic Food Pricing

Currently, the high demand fostered by improving economic conditions is keeping the premium in place. While organic food was once decidedly a niche product, about two thirds of American shoppers now buy organic products at least occasionally. The demand is evidently strong enough that in 2016 Costco determined that it was worthwhile to offer organic farmers loans and financing for land and equipment in exchange for the first pick of all produce grown on the farm.

As organic food becomes more mainstream and the supply increases, however, the prices will likely start to decrease. The USDA notes that already 56% of the organic food sold in the United States comes from traditional grocery stores, supercenters, and club stores. As evidenced by Costco’s move, stores are increasingly seeking out greater supplies to meet their demand. If organic truly becomes commonplace, the premium may become a thing of the past.