Lovely organic vegetables, but will anybody be buying them in a period of falling real incomes?
It seems we like our organic food, but only when incomes are rising.
During the period of strong economic growth in the mid naughties, sales of organic food grew by up to 30% a year. However, last year demand fell by 9%. The main reason is primarily economic. The fall in demand for organic food occurred during a period of falling real incomes. This suggests that the demand for organic food is highly income elastic. (Independent Rise of Organic food curtailed by recession)
A definition of a luxury good is a good with an income elasticity of demand of greater than one. – i.e. a change in income causes a bigger % change in demand.
In the west, when incomes are falling we don’t tend to cut back on buying food. But, we can switch from expensive organic food to cheaper alternatives. This makes an easy way to reduce our weekly food bill.
Implications for Organic Farmers
Unfortunately, this makes it difficult for farmers. To gain an organic certificate requires a significant time period to prove you haven’t used chemicals. The mid naughties created an incentive for farmers to increase production of organic food because of the rising demand. However, by the time supply has increased, the demand has now fallen. This could lead to a surplus of organic food. Therefore organic farmers could face falling demand and falling prices which means they can’t justify the extra cost of farming organically.
You could make a case for government subsidising organic farming because of the positive externalities associated with using less chemicals in the production of food. But, with a government cutting spending, this is unlikely to occur.