Consumer demand for organic foods has helped Uncle Matt’s Organic Inc. grow from 5 acres of oranges in 1999 to become Florida’s biggest organic-citrus producer. Further expansion is being hampered by the federal crop insurance program designed to help farmers, says the company’s founder, Matt McLean.

Organic producers pay a surcharge on many of those policies, and payouts often don’t reflect their higher costs, which may inhibit farm development and contribute to shortages of some naturally grown products, producers and industry analysts say.

That reduced subsidy diminishes the incentive to meet surging market demands, said McLean, 40, who sells tangerines, grapefruit and other citrus crops grown on 1,110 acres owned by his family and 25 fellow farmers to retailers including Whole Foods Market Inc. and Kroger Co. (KR)

“We just want the same tools as conventional farmers to protect our assets,” said McLean, a fourth-generation grower who returned to the business in Clermont, Florida, 25 miles west of Orlando, years after a 1983 frost wiped out his grandfather’s trees. “It costs us more to grow.”

Nationally, organic sales of food and beverages jumped to $26.7 billion in 2010, from $6.1 billion in 2000, according to the Organic Trade Association. Organic farming now accounts for 11 percent of U.S. fruit and vegetable sales and 4 percent of total food and beverage revenue, up from 1.2 percent a decade ago.

Tight Supplies

Surging consumer demand is leading to tight supplies of popular items. Organic milk may face shortages this year because there isn’t enough grain meeting the standard to feed dairy cows, according to the Cornucopia Institute, a natural-foods advocacy group.

The government spent $2.6 billion on more than 2 million farmer policies in 2010, sharing profits, absorbing losses and covering overhead costs for companies, according to the Environmental Working Group, a Washington-based advocacy organization that tracks farm subsidies.

Growth in organic-farm acreage is being held back by government programs that haven’t kept up with the shift in agriculture, including crop-insurance policies that aren’t tailored to organic producers the way they are for large Iowa corn farmers, said Representative Chellie Pingree, a Maine Democrat who serves on the House Agriculture Committee.

‘Fundamental Issue’

“It’s just a huge, fundamental issue,” said Pingree, an organic farmer in the 1970s who’s hoping the next farm bill, which sets government farm policy for a five-year period, will include a measure she introduced last year to encourage alternative agriculture. “You need to encourage the supply, and to get bigger you have to be able to manage your risk.”

The farm bill Congress will debate this year will need to help keep production costs for organic food down while encouraging increased acreage, said Pingree. Additional funds to cover surcharges or sweeten payouts may be doable because of the popularity of environmentally friendly crops, said Chad Hart, an agricultural economist at Iowa State University in Ames.

Still, with Congress under pressure to reduce the federal deficit, all programs are vulnerable to budget reductions. Agriculture Secretary Tom Vilsack last week said he expects the legislation to include at least $23 billion in reductions to U.S. Department of Agriculture spending over 10 years, with most of the savings coming from farm subsidies, which last year came to about $10.6 billion.

Higher Subsidies ‘Indefensible’

Any new funds will face tough opposition, said Josh Sewell, a policy analyst with Taxpayers for Common Sense, a Washington- based organization.

“I don’t see anyone getting increased subsidies,” Sewell said in a telephone interview. “It’s indefensible, including for crop insurance.”

Some insurers started offering payouts based on organic- price calculations last year on corn, soybeans, cotton and some tomatoes, said Tom Zacharias, the president of National Crop Insurance Services, the Overland Park, Kansas-based industry lobbying group. Farmers pay a higher premium in return for greater loss coverage.

“Of course, producers are getting much more income protection for the higher premium they now pay,” Zacharias said. Bigger government reimbursements may also raise subsidies, though the ultimate expense to the taxpayer is hard to estimate as better data will result in increased costs for some crops and lower expenses for others, he said.

Organic Certification

Organic foods are certified to national standards that usually require that they be raised or processed without synthetic fertilizers or pesticides, genetically modified organisms or chemical food additives.

Meeting standards can be costly. Farmers must remove weeds by hand or with labor-intensive machines, instead of simply spraying plants, said McLean of Uncle Matt’s Organic. Natural fertilizers include more-costly components than synthetic varieties. Total production costs for his oranges are probably 50 percent more than if he raised them conventionally, he said.

Farmers manage their weather risk by purchasing crop insurance, a coverage subsidized by the government and administered by companies including Wells Fargo and Co. and Ace Ltd. (ACE) Policies in 2010 insured 256 million acres of cropland, about 63 percent of all land under cultivation, according to U.S. Department of Agriculture data.

Insurance Surcharge

Only about 21 percent of the nation’s 2.66 million acres of organic cropland was insured in 2010, according to USDA data. Payouts on claims for those acres were bigger than those for conventional products grown nearby: $1.05 for every dollar of organic, versus 59 cents for conventional, according to the USDA’s Risk Management Agency, based on data from 2004 to 2010.

Policies for many organic crops also carry a 5 percent surcharge because there’s not enough actuarial data to determine risk, a fee the government is gradually lifting as better information becomes available.

Three years of weather-related losses in the Flint Hills of Kansas drove Donn Teske away from growing organic milo, soybeans and wheat. He’s using chemicals now to grow them.

“There’s a tremendous price for organic, but I can’t take the risk,” Teske said.

Back in Florida, McLean is seeking more farmers to help meet retailers’ needs. Easier access to insurance would help him survive the next inevitable incident of crop-destroying frost.

“If you can show them that one cold night won’t devastate them, you can help the industry grow,” he said.