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Organic's Crunch: Once High-Flying Firms Face Three Big Threats to Growth

After posting 22 percent growth on record sales last year, Organic Valley Family of Farms entered 2009 with a thud.

The recession played a part. It trimmed demand for premium-priced food. The organic milk market turned from dearth to glut. The LaForge, Wis., company that bills itself as America's largest cooperative of organic farmers, had to cut its dairy farmers' output by 7 percent to avoid dropping some farmers or reducing the payments they receive.

But something else is weighing down Organic Valley and the rest of the once high-flying organic-food industry. They face new competition as cheaper "natural" foods gain market share. They're also battling a blow to their reputation from a British government report disputing the claim that organic products are more nutritious and offer more health benefits than conventionally produced food.

The threats are "the biggest challenges the industry has ever seen," says Phil Howard, a food-system expert at Michigan State University in East Lansing.

Far from withering on the vine, however, the industry is cutting costs, rolling out new offerings, sending out coupons, and at times reducing prices by selling smaller-sized packages. Those who weather the storm could prosper if they create ever more appealing and healthy foods that can attract a wider audience.

YoBaby Meals, which debuted this year, is one example of the new push. The yogurt includes both fruit and a vegetable purée. It's "a complete meal in a cup" and enables the company to "reach into the realm of baby food," says a spokeswoman for Stonyfield Farm.