In November, The New Yorker profiled Randy Constant, a seed company salesman convicted of selling, between 2010 and 2017, at least $142 million of conventional US grains fraudulently labeled as organic. The 10,000-word piece described administrative and cultural gaps surrounding the US Department of Agriculture’s National Organic Program that facilitated crimes attributed to Constant, whose suicide in 2019 came before what would have been a 10-year prison sentence.

By the end of 2021, growing focus on fraud was among several factors complicating the outlook for organic ag. Lingering effects of pandemic-related disruptions had altered supply and demand in ways that made projections especially uncertain. A surge in imports from India had surfaced, alongside a shift in the market’s focus from the corn that had traditionally determined producers’ fortunes, to soybeans supporting rapidly growing domestic production of organic poultry.

The push for shorter food supply chains following covid-19 had started to raise questions about whether organic producers would come to face more competition from controlled-environment production of certain crops. An October Rabobank report described challenges to “the traditional organic paradigm,” which included a broader acceptance of healthy eating that had previously helped organic producers define their role in the market.
An analyst for the Dutch bank told Agri Investor that US organic producers needed to redefine their market in the eyes of consumers.

AMERRA-backed Pipeline Foods was founded in 2017 with plans to collect and build dedicated transportation, storage and logistics assets necessary to scale an organic supply chain that had traditionally been more homespun and informal. The company’s July 2021 bankruptcy cited pandemic-related delays to logistics, certification and product development, though opinions vary as to whether the company’s fate was determined more by its circumstances or strategy.

Failure of an early effort by an agribusiness-focused manager to help foster the market’s growth reflected what one Agri Investor source labels as systemic challenges facing the organic market.

Surge in demand

Such churn threatened to overshadow the growth of organic food demand and production in the US. Organic acreage has continued to expand in the country and, perhaps most importantly to investors, consumer demand continues to grow strongly. The total organic food market was valued at more than $52 billion in 2020, according to one market research firm that expected continued annual growth of more than 8 percent through 2027.

Whether covid-19-related disruptions have irrevocably changed organic markets and investors’ role within them is likely to remain impossible to know. There is evidence of both continuity and change in investors’ efforts to help build the US organic ag market.

“Investors are more attracted than ever to these more ecological farming systems”

Paul McMahon, SLM Partners

One consistency, according to SLM Partners’ Paul McMahon, has been institutional investor demand for exposure. McMahon tells Agri Investor that demand for his London-headquartered firm’s organic farming strategy has increased incrementally for each of the past five years, along with interest in sustainability, the environment and climate change.

While organic ag is categorized by some LPs as part of their own net-zero targets, McMahon says alignment with such emissions considerations is increasingly a requirement rather than a selling point.

“We’ve seen a lot more attention for our story around what we are trying to deliver, which is not just about return, but also positive impacts on soil health, biodiversity and carbon storage,” he says.

“That resonates a lot more now than three years ago, for sure, and has been a factor in us being able to raise capital through separate accounts and other vehicles. Investors are more attracted than ever to these more ecological farming systems.”

SLM manages a $75 million separate account for an unnamed institutional investor focused on acquisition and conversion of conventional Midwest farmland into organic production. In addition, McMahon says, the first investment from its €250 million ag and forestry fund is a 300-hectare property devoted to organic almonds, pistachios and olives.

“The consumer side in the US, which has been working in the organic space for a while, understands how the system works”

Ryan Koory, Mercaris

Although organic production can be challenging for conventional farmers, he adds, the market is scaling up and has professionalized considerably. Steps have been taken to improve administration of certifications used in the NOP, according to Ryan Koory, vice-president of economics for organic data and analytics provider Mercaris.

Koory tells Agri Investor that tightened import screening has been a factor offering support to organic soybean prices recently and that it is widely acknowledged the NOP has historically been underfunded relative to its task of regulating the certification process Constant was convicted of abusing.

In addition, recent supply-chain disruptions, Koory says, have helped forge new supply relationships that are evolving into financing partnerships designed to support farmers during their three-year transition to organic.

“We definitely have seen an increase in organic livestock producers trying to find partners both in the ag financing space and in the producer space to transition and convert land into organic to produce their corn and soybeans domestically so they can protect themselves from these disruptions in trade,” he says.

“The consumer side in the US, which has been working in the organic space for a while, understands how the system works. They are large enough that they can go out to these financial institutions and say, ‘I need capital for this conversion, I am a Purdue; you can trust me. That helps move things along.’”

McMahon says given the relatively small size of the overall market, investors focused on US organic agriculture still tend to be pure-play, boutique managers.

“We’ve seen some of the bigger guys dabble or look at it, but often they don’t go so far, maybe because they have big machines and trying to change direction is not easy. Maybe it’s just too small for them and they just can’t justify the time. We’ve heard that from investors, too. We think the boutique, smaller managers are going to have more success in this space, for the time being.”

Koory says he has seen a change since the closing years of the last decade, when some of the market’s early entrants focused too narrowly on price premiums on offer for organic offerings over conventional in any specific crop category as the key determinant of their own return on investment.

“The industry has matured away from that, there’s been a greater understanding that this is not a premium-based market,” he says. “It’s a specialty market in some respects, but it is a uniquely functioning commodities industry that does not operate on the same fundamental economics as conventional.”

McMahon suggests the most fertile ground for investors looking for opportunities related to organic agriculture in the near-term may be in mechanical methods of weeding that reduce labor and chemical use.