One of the main objectives of standardization is usually that everybody adheres to the same standards, i.e. the same procedures or product specifications. This may ease logistical procedures, facilitate trade, prevent consumer deception and improve quality. It is easy to see how standardization facilitates trade and other logistical procedures, if only by looking at the complications that different weight measurement systems can cause. However, increase in quality is not an automatic result of standardization. This will only be achieved when the advocated standard is a "high" standard, i.e. the requirements are an improvement in relation to common practice.
Standards are defined by ISO as
... documented agreements containing technical specifications or other precise criteria to be used consistently as rules, guidelines or definitions, to ensure that materials, products, processes and services are fit for their purpose[7].
From this definition it becomes clear that standards are not only used for standardization, but also as "guidelines", i.e. for capacity building.
Product standards are specifications and criteria for the characteristics of products. Process standards are criteria for the way the products are made. Social and environmental standards in agriculture are essentially process standards. These process criteria might or might not influence the characteristics of the end products.
Process standards can be further divided into management system standards and performance standards. Management systems standards set criteria for management procedures, for example for documentation or for monitoring and evaluation procedures. They do not set criteria for the performance of the management system in terms of what actually happens in the field or the packing station. Performance standards, in contrast, set verifiable requirements for factors such as the non-use of certain pesticides, or the availability of sanitary services.
Setting international standards has proven to be very difficult due to the variety of circumstances that exist around the world. This is especially true for agricultural practices, which have to respond to differences in climate, soils and ecosystems, and are an integral part of cultural diversity. In response to this diversity, international environmental and social standards are often normative standards, i.e. generic standards or guidelines to be used as a framework by local standard-setting or certification bodies to formulate more specific standards. It has to be noted that environmental and social standards in agriculture usually do not have the purpose of standardization per se, but are developed to improve environmental and social sustainability in the variety of existing farming and agro-trade systems.
Certification is a procedure by which a third party gives written assurance that a product, process or service is in conformity with certain standards[8]. Certification can be seen as a form of communication along the supply chain. The certificate demonstrates to the buyer that the supplier complies with certain standards, which might be more convincing than if the supplier itself provided the assurance.
The organization performing the certification is called a certification body or certifier. The certification body might do the actual inspection, or contract the inspection out to an inspector or inspection body. The certification decision, i.e. the granting of the written assurance or "certificate", is based on the inspection report, possibly complemented by other information sources.
Certification is always done by a third party. The verification is done and the assurance is provided by a party without direct interest in the economic relationship between the supplier and buyer. An internal control is a first-party verification. When a buyer verifies if the supplier adheres to a standard, it is a second-party verification.
It is important to note that third-party verification does not automatically guarantee impartiality or absence of conflicts of interest. First, the standard-setting can be done by any party. The producer (first party) can set the standard, in which case the producers' interests are likely to be reflected in the standard. Also the buyer (second party) can set the standard, in which case business interests will be reflected in the standard. Second, if the standard-setting and certification body are one and the same body, this can also cause conflicts of interest. The standard-setting body would like to see high implementation rates of its standard, or have a bias against certain types of producers for ideological reasons, which can influence certification decisions. Third, a conflict of interest might arise depending on who pays for the certification costs. Commercial certification bodies face competition from other bodies and they might lose clients if they are too strict.
The system of rules, procedures and management for carrying out certification, including the standards against which it is being certified, is called the certification programme. One certification body may execute several different certification programmes. To ensure that the certification bodies have the capacity to carry out certification programmes, they are evaluated and accredited by an authoritative body. Certification bodies may have to be accredited by a governmental or parastatal institute, which evaluates compliance with guidelines set by ISO, the European Union or some other entity for the operation of certification and inspection bodies. In addition, standard-setting bodies might accredit certification bodies for the scope of their particular standard. When the standard-setting body has developed normative standards, they will evaluate whether the specific standard used by the certification body is in line with the generic standard and whether they are satisfied with the method of verification.
Certification and accreditation comes at a cost. The implementation of standards usually requires investments, but sometimes results in a reduction in production costs in the longer term. The possible effects of standard implementation and certification costs on production costs, revenues and farm economics will be discussed in more detail in Chapter 6.
A certification label is a label or symbol indicating that compliance with standards has been verified. Use of the label is usually controlled by the standard-setting body. Where certification bodies certify against their own specific standards, the label can be owned by the certification body.
While the certificate is a form of communication between seller and buyer, the label is a form of communication with the end consumer. For this communication to be effective, the label must be meaningful. For the Consumers' Union in the United States of America, a meaningful label is not only backed up by a good certification system without conflicts of interest, but the system must also be transparent, information on the content and the organization behind the label must be accessible and there should be opportunities for public comment. The Consumers' Union also advocates that the meaning of the label must be consistent across the range of products that carry that label[9].
Labelling has the opportunity to create niche markets in which higher prices may be obtained. The underlying economic theory for labelling products can be traced back to Stigler's[11] work on the economics of information. In Stigler's work, information is portrayed as a valuable resource, and in particular, information on prices. Determining the prices demanded by each seller for a product is a time-consuming task. Nelson[12] contends that the problem of determining quality levels is even greater than that of determining price levels. In addition, as quality might not be visible at the moment of purchase, there is an incentive for sellers to promise high quality products but market poor quality products, as pointed out by Akerlof[13]. Thus, in some markets, the consumer faces more uncertainty with respect to quality than with respect to prices[14].
Economists distinguish between search, experience and credence attributes of products. Search attributes are those characteristics that consumers can examine before purchasing the product, such as price, size and colour. Experience attributes are those that can be evaluated after purchasing the product, such as taste[15]. Product attributes that consumers cannot evaluate even in use are called credence attributes[16]. Environmental impact of production methods and labour conditions along the supply chain are credence attributes.
Suppliers may make claims for the experience and credence attributes of their products in the form of advertising, but suppliers will only undertake advertising as long as they see this as a means to increase market share, and will only disclose information that is advantageous to them. Aldrich argues that this results in explicit claims for all positive aspects of goods and causes consumers to be suspicious of goods without claims[17]. Consumers are likely to be more sceptical about a supplier claim regarding credence attributes, because they know they are not in a position to control its validity even after purchase. Labelling on the basis of third-party verification can transform credence attributes into search attributes, i.e. those attributes that can be checked by consumers at the moment of purchase[18].
If information on the quality per unit of food is evenly distributed between producers and consumers, then the market equilibrium will be efficient[19]. Consumers are able to purchase the goods that best match their preferences and society's resources are used efficiently. If, however, information is asymmetric, then this market equilibrium will not be efficient. An example might be when producers cheat on quality standards. Asymmetric information in particular may be a problem in markets for foods with negative credence attributes (e.g. pesticide residues, or use of child labour in the production process). In these cases, firms may have no incentive to disclose information and consumers may end up purchasing goods that do not match their preferences. In this case, the market does not work efficiently: goods that would be profitable with full disclosure may go unproduced while those of lesser value to consumers are produced instead[20]. This is where certification (= third-party verification) and labelling can create an efficient market by removing asymmetry of information, provided that the labels used are meaningful.
Several studies have tried to model the effects of labelling on demand, prices and production levels[21]. Inevitably, several assumptions have to be made for modelling purposes, and some of those assumptions are discussed below of in the light of some of the characteristics of organic labelling, with the purpose of gaining better insight into the variables determining the effects of labelling programmes. The discussion will focus on organic labelling as this is currently the most important "environmental" market segment for tropical and horticultural products. Organic certification and agriculture will be more fully introduced in the next chapter, together with other standards and labelling programmes.
The first assumption many models make is that before the introduction of labelling the product was not differentiated. For organic products, differentiated markets already existed before organic labels were introduced. Organic farming originated from concerned farmers who developed alternative marketing channels within their communities, through farmers markets and box schemes. In box schemes the producer or natural food store assembles (organic) food baskets that may be delivered at home or collected by the consumers, typically once a week. Also, price premiums already existed, as documented by the US Department of Agriculture (USDA) for several crop sectors in the 1970s[22]. Such a pre-labelling market segmentation could have balanced supply and demand to some extent and reduce the chance of over- or undersupply at the moment of introduction of the label.
The second assumption is that there is a homogeneous product that can be produced as either environmentally friendly or environmentally unfriendly. For organic agriculture, it has proven to be quite difficult to "define" organic and there is a whole continuum from high external input 'industrial' agriculture, through all kinds of "integrated methods", to organic agriculture and beyond. The availability of other environmental claims on products, whether backed by third-party verification or not, might also have impacts on consumer response to the organic label and to price premiums.
Some models assume that concerned consumers only purchase labelled products, but acknowledge that this assumption is somewhat rigid. In the organic market reality, even the so called "heavy users" do not buy 100 percent organic or fair-trade. Consumers are likely to buy both labelled and unlabelled versions of a product, as a function of changing availability and price over time and place. Thus, consumers might go occasionally to specialized shops where there is a wide range of organic products available, but normally buy in supermarkets where there is only a narrow range available.
Furthermore, models may assume that the numbers of concerned and unconcerned consumers are fixed. Some consider the influence of the label on willingness to pay a premium for the consumer that already is concerned. Others acknowledge that willingness to pay may vary among concerned consumers, i.e. if price premiums decrease, more consumers are willing to buy the labelled product. However, the presence of labels may in itself increase consumer awareness and create more concerned consumers. Indeed, many consumers only learned about the existence of organic farming methods and the difference from conventional methods through the label and the associated publicity.
One of the most important assumptions is that all products from all environmentally friendly production units will be automatically labelled. However, when the supply from certified units is larger than the demand, part of those products will be sold on the conventional/unlabelled market. Experience in the organic market shows that this happens before organic prices fall to conventional price levels. In this case, there will be no incentive for more producers to convert to organic as they would probably not be able to sell in the organic market segment. However, existing certified producers would in general not exit certification and they would continue to receive a price premium for part of their production. Due to the nature of organic production systems, there is not only a certain inflexibility on the part of conventional producers to switch to organic production methods, but also an inflexibility to move back to conventional methods.
Furthermore, demand for food products such as coffee and bananas is quite inelastic in the markets under consideration. Concerned consumers might be willing to pay more for labelled products, but this does not mean that if the price premium declines, they will buy more of the labelled product. However, price declines are likely to persuade marginally concerned consumers to shift from unlabelled to labelled products. In addition, if one organic labelled product has a much higher premium than another organic product in the same category, concerned consumers might substitute the more expensive product for a cheaper one. Thus, in the organic market segment, some "traditional vegetables" have a larger share than in conventional markets because they are hardier and therefore easier to grow using organic production methods. Especially due to the potential of expansion of the consumer base with marginally concerned consumers, demand for organic products may well be more price elastic than demand for conventional food. Indeed higher price elasticities were found in Denmark for organic dairy produce compared with conventional food[23].
A final consideration concerns price transmissions along the chain. It is known that, in general, price transmissions are imperfect. Organic consumer price premiums may be lower or higher than organic premiums for primary producers. Many observers of organic markets believe premiums are usually higher at retail level than at producer level. The effects of labelling on prices is even more difficult to analyse taking into consideration the existence of various prices for the same conventional product that depend mainly on branding. Organic consumer prices are often within the range of the most expensive conventional brands.
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[7] ISO, 1996. [8] ISO, 1996. [9] Rangan, 2002. [10] This section draws on FAO, 2001. [11] Stigler, 1961. [12] Nelson, 1970 and 1974. [13] Akerlof, 1970. [14] Andrews, 1992. [15] Nelson, 1970. [16] Darby and Karni, 1973. [17] Aldrich, 1999. [18] Caswell, 1998. [19] FAO, 2001. [20] Golan, Kuchler and Mitchell, 2000. [21] Inter alia, Mattoo and Singh, 1994, and Sedjo and Swallow, 1999, studied eco-labelling in a partial equilibrium model. Marette, Crespi and Schiavana, 1999, use cartel theory, and Mason, 2002, models certification as a noisy test. [22] USDA, 1980. [23] Wier, Hansen and Smed, 2001. |
