Demand for Organics Wilting : Food: Consumers worry about chemicals but won’t pay an arm and a leg for organically grown produce. Supermarkets respond by scaling back their offerings.

Supermarkets that cashed in on organic produce after the food-safety scares of 1989 are drastically reducing their organic displays this spring because the specialty fruits and vegetables are in short supply, and consumers won’t pay high prices for blemished food.

This is the first real test of organic farming’s staying power, coming one year and one growing season after Chilean grapes and Alar-treated apples shocked the public into greater food-safety awareness. So far, organic is failing that test.

“What retailers are telling us now is that the product is not holding its own,” said Don Beaver, president of the California Grocers Assn. “Most of the chains in California have already cut back . . . and are further cutting back as they have to throw more out the back door.”

Although recent studies show that food safety is paramount in the mind of the American consumer, grocery buyers have not been putting their money where their mouths are. In addition, farmers have been unable to ensure large and consistent supplies to supermarkets around the country.

As a result, chains such as Sacramento-based Raley’s supermarkets, Vons Cos. of Arcadia, Giant Food Inc. in Landover, Md., and Stop & Shop Supermarkets of Braintree, Mass. are drastically curtailing organic offerings. Safeway’s eastern division has done away with its organic sections entirely.

“We experimented with 14 stores, and it did not go well,” said Jim Roberts, public relations manager for Safeway’s eastern division in Landover, Md. “The demand just was not there as we thought it might be. People talk about wanting it, but when they see the price, they say maybe it really isn’t that important to eat organic.”

Even Mrs. Gooch’s Natural Food Markets has found that there is a definite threshold for what its dedicated natural-foods customers will spend. Sandy Gooch, owner of the Southern California chain, said that customers balk at prices 15% to 20% higher than conventionally grown fruits and vegetables.

Retailers say it is difficult to peg how much more expensive organic produce is because price differences depend on factors such as seasonal availability, the geographic area of the market chain and just how small a profit margin a store is willing to endure.

Judith Decker, a spokeswoman for Dublin, Calif.-based Lucky Stores, said organic produce averages about 40 cents to 50 cents more per item at her market chain. At a Lucky store in Culver City, for example, a bunch of organic spinach is running 79 cents, while conventionally grown spinach is 49 cents. Red leaf and green leaf lettuce are both 99 cents a head if organically grown, but only 29 cents otherwise.

The organic produce market grew slowly but steadily in the 1980s, but it was not prepared for 1989, when food-fearing Americans began clamoring for produce grown without pesticides, herbicides and other chemical additives.

First came the scare over Alar--a growth regulator used on apples that allegedly posed possible health risks to children. The Alar controversy was prompted by a report in February, 1989, from the Natural Resources Defense Council. It caused apples to be pulled temporarily from grocery bins and school lunches, and pushed farmers to discontinue its use.

Just weeks later, inspectors said they found two cyanide-laced grapes in a shipment from Chile. The United States instituted a five-day embargo on Chilean fruit, in part because of telephone threats that additional fruit had been poisoned.

Sales of organic produce began to boom. Such sales in natural food stores were up 68% in 1989, jumping to $131 million from $78 million in 1988. Total sales of organic produce in 1989 reached an estimated $250 million, according to Organic Times, a trade magazine.

But the post-Alar boom didn’t last, and by late 1989, supermarkets were starting to see flagging consumer interest and alarm over high prices, said Frank Lampe, managing editor of Organic Times.

“This may have been a false start for organic,” Lampe said. “We look at it as organic returning to its roots--the natural foods store. . . . If the supers are going to cut back on their offerings, that can only benefit stores in the natural foods industry. Ultimately, as peoples’ true commitment to the environment increases, organic will become mainstream.”

But that has yet to happen, as the following examples indicate:

Raley’s was one of the first to get into the mainstream sale of organic produce about four years ago. It also was one of the first market chains to turn its back on organic produce when it slashed its offerings by 50% late last fall.

“Organic picked up steam a year ago in February with the Alar and grape problems,” said Chuck Collings, Raley’s president. “About the same time some of the organic growers saw the demand pick up and the price went out of sight. The customer reacted to the price by just not buying.”

* In the past three years, Vons has put separate organic produce sections into 118 of its 328 Southern California stores. Today, the company is “re-evaluating” its organic program, trying to figure out how many of those sections it will shut down for good. Supply is the major problem.

“We have a very, very difficult time with regular supplies,” said spokeswoman Vickie Sanders. “When you have 118 stores and very few suppliers, it’s very difficult to keep up the quality and quantity. And it’s frustrating for our customers when they want organic produce and we can’t get it.”

* Giant test-marketed organic produce in eight Washington area stores. The test started in October and ended in January, when the 150-store chain realized that its shoppers were not jumping at fruits and vegetables that cost about 30% more than conventionally grown produce.

* Stop & Shop has been offering organic produce for the past four years in its 117 markets n New York, Connecticut, Rhode Island and Massachusetts. But around March, the chain cut organic offerings by a third, slashing variety and hoping to cut losses.

What does this mean for the organic farmer, who has been dealing with a market that demands all he is able to grow and paid him accordingly--an unusual kind of carte blanche after decades of struggling?

Mark Lipson, assistant executive director of California Certified Organic Farmers, said that growers are not hurting yet. They are, however, bracing for potential price problems.

“Everyone expects it to be a more competitive environment this year than it has been before,” Lipson said. “As a grower myself, it’s never a question of selling everything; it’s a question of what price you get. People expect a downward pressure on prices.”