CHICAGO (Reuters) - The wave of organic packaged foods may have crested at mainstream retailers.

Tomatoes are on display at an organic fruit and vegetable stall at a market in Montalivet, southwestern France, August 13, 2009. REUTERS/Regis Duvignau

Organic foods and beverages are pulling back from startling growth levels in recent years and settling into a small niche space at mainstream retailers, food industry executives and analysts said this week.

The recession put a halt to the double-digit sales growth organic foods saw earlier last decade. But even when the economy improves, organics are not likely to rebound to such lofty heights as consumers and retailers now have other priorities for spending and shelf space.

"It's hard if you are a big company to do things that move the needle in that space," said Greg Pearlman, managing director and head of the U.S. food and consumer group for BMO Capital Markets BMO.TO. While Pearlman expects 2010 to be an active year for deals in the food industry, he did not see a big play for manufacturers in the organic space.

Health and wellness is still expected to be a big trend in the food industry, analysts and executives said at the Reuters Food and Agriculture Summit in Chicago. But that interest will be spread across items like those with lower sodium, reduced calories and even a focus on removing allergens from food.

"Retailers are looking for the best assets for the limited amounts of space" they have, said Ken Harris, CEO of consulting firm Kantar Retail US, part of Britain's WPP WPP.L.

Some organics and their less-regulated cousins, natural foods, may be losing out in that battle for shelf space.

Organic sales are still growing, but the pace has slowed sharply.

During the 52 weeks ending February 20, supermarket sales of packaged foods and nonalcoholic beverages with “organic” claims rose 1.9 percent to $4.4 billion, according to Nielsen data. That compares with an 11.7 percent increase the prior year, and increases of 24.5 percent in the period ending in 2008 and 29.1 percent in the period ending in 2007.

Organic food was a hot topic in the grocery industry in the middle of the last decade, with even Wal-Mart Stores Inc WMT.N saying in 2006 that it would double its organic offerings. Mainstream manufacturers jumped on the bandwagon, coming out with organic versions of products like pasta sauce and ketchup.

To qualify as “organic” in the United States, food must be farmed without the use of pesticides, antibiotics or genetically altered organisms, while “natural” foods refer to those that are minimally processed.

ORGANIC BY ANOTHER NAME

Mainstream consumers are finding benefits similar to those they seek in foods that fall short of U.S. government standards for the “organic” label.

“We’re seeing a lot of conventional companies fighting back with ‘organic light,’” said Michael Swanson, analyst at Wells Fargo.

He noted milk that is free of artificial hormones is one product that consumers will buy that is less expensive than organic milk, but which still gives a benefit sought by consumers.

“They don’t need to go up to true organic to get most of the perceived benefit in their food dollar,” Swanson said.

For some mainstream food producers, the economics of organic foods, naturally raised chickens and other such products have not made sense.

"The problem with that is every grocery store sells such a very small amount of it," said Joe Sanderson, CEO of poultry producer Sanderson Farms SAFM.O, referring to "naturally raised" chicken, which he called a "niche" market.

“They get a premium price for it, but ... most of the people that buy that product want boneless breast. And what do you do with the rest of the chicken?” he said.

Bob Goldin, executive vice president of food and restaurant consulting firm Technomic, said that manufacturers and retailers may have put more organic products on store shelves when the marketing buzz was highest. Now they are pulling some of it back as consumer demand did not meet those expectations.

“I suspect there has been some rationalization,” he said. “I don’t think it was wholesale rationalization.”

The Organic Trade Association expects that more growth will be seen in 2010 as the economy recovers.

“This is not a passing fad,” said Barbara Haumann, senior writer and editor for the trade group.

Still, the natural/organic segment is “always going to be a niche,” said Forrest Roberts, CEO of the National Cattlemen’s Beef Association, an industry trade group. He said organic and natural beef sales make up less than 2 percent of the market.