With demand outpacing supply of organic food, big producers like General Mills and Organic Valley get creative

LA FARGE, Wis. – Wild prairie grasses and wooden signs advertising handwoven rugs dot the roadside leading to the home of the nation's largest organic cooperative.

The barn-style headquarters of Organic Valley, off a serpentine byway and tucked in the hills of southwest Wisconsin, feels far away. But the coop is in the center of the change reshaping every part of the food industry: the rise of organic foods and ingredients.

A little more than 200 miles northwest, on the manicured lawns of a suburban corporate campus, executives at General Mills' headquarters recently made a deal with Organic Valley to boost organic products in its vast array of foods.

The U.S. has a shortage of organic milk, and General Mills — in the midst of expanding its organic yogurt business through its Annie's and Liberte brands — is relying on Organic Valley for help.

General Mills signed a multiyear agreement that ensures it access to milk from Organic Valley farmers. As part of the arrangement, General Mills will help build the supply with financial support to farmers transitioning from conventional to organic methods. This will add 3,000 acres of organic production to General Mills' source pool over the next three years.

The deal is one step in a broader effort by the Golden Valley-based food maker to reach a goal of $1 billion in organic and natural food sales by 2019. Over the next three years, General Mills also plans to more than double, to 250,000, the number of organic acres from which it sources ingredients.

Nearly 4.4 million acres of U.S. land were dedicated to organic production last year, up 20 percent from 2014. And 1,500 farms had acres in transition to organic last year, up from 1,200 farms in transition the year before, the U.S. Department of Agriculture recently announced.

Still, less than 1 percent of U.S. agriculture land is certified organic. That should be somewhere between 3 and 6 percent to match current demand, said Steve Young, General Mills' head of natural and organic strategy and vice president of its Annie's brand.

The Annie's unit of General Mills has not been able to make an organic yogurt that customers have sought for years.

"We had to have the Organic Valley deal in place before we could move forward with Annie's yogurt," Young said. "If you don't have that deal in place to ensure milk supply in a really good, transparent way — where you know the supply chain has really good integrity — you can't even go into this space."

Over the last year, General Mills has publicly disclosed the businesses it believes have more growth potential, like natural and organic cereals, snacks and yogurt, and is focusing more of its resources on those products. A stable dairy supply is needed if the company's big push into organic yogurt is to succeed.

"Large food companies like to have a steady, assured supply. They can certainly manage price risk, but mostly they are concerned about having access to enough of it," said Rob King, a University of Minnesota economist in agriculture and food security. "Because if they invest all the money into building up brand recognition and brand loyalty but can't deliver the product then they are in trouble."

Organic Valley was started in 1988 by seven farmers near La Crosse looking to save their family farms, and use sustainable practices, in an age of agribusiness takeovers. They set organic standards that influenced the USDA's standard. There are now 1,800 farms in the co-op; 1,400 are dairy producers, spanning 36 states and four countries.

"Our job is not to increase our own profits, it's to do organics right," said George Siemon, CEO of Organic Valley. "General Mills' job is to grow demand."

But even with that expansion of its own farmer network — with 200 new families brought into the co-op over the last year and another 250 scheduled to join by 2018 — Organic Valley and other organic producers still can't keep up with demand that's growing 5 to 8 ­percent a year.

The biggest barrier to more supply is the high cost farmers incur during the three-year transition period required to become a certified organic farm. The USDA requires two years for land (which grows the crops that become the animal feed) and another year of the cows eating that organic feed before they are certified organic. During this time, the farmer faces higher costs but can't yet charge higher prices for its milk.

Organic Valley fills in the gap by paying farmers in transition the difference between what conventional and organic markets would pay for the milk they produce. General Mills, in the supply deal, agreed to pay the difference for 20 large farms that are in the transition period.

When organic supplies rise to match demand, General Mills' Young said, the price of buying organic foods will fall and become affordable for more people.

"There's only so much small companies can do to move the needle," Young said. "We are just now starting to plot out what could be possible in leveraging our scale as a force for good. Frankly, if it's not addressed, it will be a problem."

King, of the U, said Organic Valley has been "remarkably successful" in matching its supply with demand so that it never takes on too much risk, which could harm its farmer-owners. General Mills is now giving Organic Valley two-year projections, which helps the supplier plan out its 15-month cycle, and it gives General Mills peace of mind that it will have enough dairy to make its products.

Last year, Organic Valley surpassed $1 billion in sales, becoming the first all-organic U.S. food firm to do so. Siemon said the co-op never expected to grow so large, but he is pleased Big Food companies are coming to them to bring more organic foods to consumers.

Organic purists have told him they fear Organic Valley will be corrupted by dealing with a giant food company. He said as long as its small-scale family farmers are still making a good living and the integrity of organic remains, then he sees it as a net gain.

"What [General Mills is] saying is, 'We don't want you to be like us, we want to be more like you,' which is really encouraging," said Siemon, who stresses that the coop will always remain independent and committed to its farmers making a good, steady living. "They are not asking us to change anything at all."

General Mills is now among the top five organic ingredient purchasers in the North American packaged food sector. To ramp up its organic offerings, General Mills also has invested in its Yoplait plant in Reed City, Mich., equipping it to meet federal organic processing standards.

Wheat, grains, dairy and fruit are ingredients General Mills relies on and will be looking for organic opportunities, Young said.

"When you look across our portfolio and forecast demand, we hope to have more deals in place like the Organic Valley deal," he said. "You can't have a growth company without a robust natural and organic portfolio."

Kristen Leigh Painter • 612-673-4767