- Demand for organics is strong; supply is not.
- Organic stocks should be unspectacular but steady performers
- Long-term investors will realize biggest profits from organic field
As more than two-thirds of Americans tip the scales by qualifying as either overweight or obese, healthy food is on the menu.  Organic products have become the fastest-growing segment of the U.S. food industry, with a record total of $43 billion spent on organic products last year.  According to the U.S. Department of Agriculture, there are more than 14,000 farms growing organic products on 3.6 million acres – an area the size of the entire state of Connecticut.  Sales have grown 3,400 percent over the last two decades. 
In a perfect world, this would be a seller’s market. Studies have shown that consumers are willing to pay premiums of 100 percent – yes, that’s double — for organic food.  A pair of former Costco (COST) have launched the nation’s first organic fast-food chain in the Bay Area, and plan on expanding the Organic Coup concept to two dozen more locations.  Mainstream giants like McDonald’s (MCD), the world’s largest restaurant chain, are touting organic concepts like an end to the use of human antibiotics in chickens.  The Vermont Legislature forced food companies to begin labeling products with genetically modified organisms (GMOs) in 2014. Even though the law was effectively overturned by President Barack Obama’s signature of a 2016 federal bill that watered down the requirements, many companies decided to apply the Vermont standard to all products sold nationwide. 
Finally, from an investment standpoint, the best thing about organic products is that food is an elastic product; you need it to survive, and that makes it a good long-term investment. But here’s the catch: Organic food is an inelastic product. That means it’s nice if you can afford it or find it, but organic groceries aren’t essential to your continued existence. During the Great Recession, for example, sales of organic products in the United Kingdom plunged 12 percent in 2009, a break from 16 years of constant growth. 
Supply and Demand
Given the improving economy, organic stocks should be yielding a proverbial bumper crop on Wall Street. Yet they’re not; in fact, organic stocks have been a mixed bag over the last year and may underperform during the near term as the result of two words: Supply and demand. As in, too much demand and not enough supply.
The supply problem starts with land. As the saying goes, they’re not making any more of it. Advocates touted a 2014 Organic Survey finding that showed 3.7 million acres of land is used for organic farming, but don’t mention that it’s a 10 percent drop from 2008.  Some of that loss may be meaningless in terms of production, but it still represents a decline in the amount of land that could be used to narrow the gap between supply and demand. Indeed, some companies, such as the privately held Nature’s Path Foods, have hedged against the difficult environment by purchasing their own land, spending $2 million for 2,800 acres of Montana farmland. 
There are also issues obtaining organic grains used to feed animals that provide eggs, milk, cheese and meat. Most domestic corn and soybeans are grown using genetically modified seeds and use chemicals to repel insects and disease. The shortage of organic grains has prompted the industry to triple imports of feed corn, with most coming from Romania and Turkey.
Finally, there are the farmers themselves. Becoming certified as an organic farmer is a time-consuming, expensive process that offers no guarantee of profits. The difficulties faced by farmers trying to shift their farms to organic production spurred Chipotle Mexican Grill (CMG) to provide financial help to farmers growing black beans in Oregon and Washington by paying higher-than-normal prices.
Even with those stout headwinds, a number of pure organic stocks are established enough to weather obstacles to rapid growth. Whole Foods Market Inc. (WFM), the grandfather of organic groceries, has overcome a quarterly same-store sales slump of 2 percent; news that it overcharged customers for packaged foods; and competition from traditional grocers such as Wal Mart (WMT) and Kroger (KR).   While investors have generally battered the stock for lackluster growth, the company has a plan: It’s making progress in cutting $300 million from annual costs, and it’s begun rolling out “365″ markets, a smaller version of the grocery that will carry roughly one-third of the flagship’s inventory. 
Like Whole Foods, Hain Celestial (HAIN) is an industry leader that’s well-positioned to weather increased competition. Like Whole Foods, it’s been criticized by analysts for weaker-than-expected growth. Even so, the company is positioned for growth with sales via Amazon (AMZN) and brick-and-mortar stores like Target (TGT) and Publix, the largest employee-owned company in the world. Hain also has benefitted from a rally since a major competitor, WhiteWave Foods (WWAV), was taken over in July, spurring conjecture that Hain may be the next takeover target. 
Like Whole Foods and Hain, another much-criticized stock is ready for a rebound. Cal-Maine Foods Inc. (CALM), the nation’s largest egg producer, signed a deal last year with privately held Rose Acre Farms Inc. to build a massive complex in Texas for cage-free egg layers, whose product can demand prices as much as double standard eggs.   The company’s stock has fallen because of slow demand and excessive supply in a cyclical commodity market. 
It’s not likely that organic stocks will continue to display the explosive growth rates that investors have seen over the last two decades. Investments are also complicated by the fact that the organic market is a commodity-based business and subject to the fluctuations and cycles that all agricultural products must weather. But for patient people who understand that the road to profitability isn’t always a straight path, organic stocks may be a more reliable investment than most.
Sources:  National Center for Health Statistics. “Obesity and Overweight,” June 13, 2016.
 Organic Trade Association, “Organic Industry Infographic 2016,” 2016.
 U.S. Department of Agriculture, “2014 Organic Survey, Table 1: Farms, Land, and Value of Sales of Organic Agricultural Products – Certified and Exempt Organic Farms: 2014,” April 21, 2016.
 Kramer, Hilary, “How Healthy Are Organic Food Stocks?” Kramer Capital Research, February 4, 2016.
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 Tuder, Stefanie. “How Costco Execs Plan to Overthrow Fast Food With The Organic Coup,” Eater, April 29, 2016.
 McDonald’s Corp. “Statement on Antibiotic Use,” 2015.
 Charles, Dan, and Aubrey, Allison. “How Little Vermont Got Big Food Companies To Label GMOs,” National Public Radio, March 27, 2016.
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 U.S. Department of Agriculture, “2008 Organic Survey, Table 1: Farms, Land Use, and Sales of Organically Produced Commodities on Certified and Exempt Organic Farms: 2008,” March 6, 2015.
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 Halzack, Sarah, “The problem with Whole Foods’ plans for a new grocery chain,” Washington Post, February 11, 2016.
 Eule, Alex. “Whole Foods Is Cutting Costs, So Stock Jumps,” Barron’s Next, November 3, 2016.
 Aldrich, Rachel. “Hain Celestial (HAIN) Stock Up on Takeover Speculation,” The Street, July 7, 2016.
 Cal-Maine Foods Inc. “About Cal-Maine Foods,” 2016.
 Dulaney, Chelsey. “Cal-Maine Joins With Rose Acre to Build Texas Egg Facility,” Wall Street Journal, April 9, 2015.
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