|CCP: ME 02/4 |
COMMITTEE ON COMMODITY PROBLEMS
INTERGOVERNMENTAL GROUP ON MEAT AND DAIRY PRODUCTS
Rome, 27-29 August 2002
MARKET DEVELOPMENTS FOR ORGANIC MEAT AND DAIRY PRODUCTS: IMPLICATIONS FOR DEVELOPING COUNTRIES1
1. The past decade has seen substantial growth in the market for organic products because of changing consumer preferences. In terms of both its market and supply, the organic sector is principally located in the developed countries. The European Union and the United States represent the main markets;2 however, even in countries where the organic segment of the market is expanding rapidly, its share of total food sales is still small, most commonly ranging between one and three percent.
2. In the context of growing demand, marketing opportunities may exist for developing countries despite, in some cases, consumers' preference for locally or regionally produced organic products. There are, however, some developing country producers of meat and dairy products that have been successful in producing and exporting organic livestock products, though meeting the certification requirements and the quality standards of external markets can be extremely demanding. Therefore, careful research and analysis is strongly recommended to any countries considering developing production of organic meat and dairy products for export.
3. Products labelled as "organic" are those certified as having been produced through clearly defined organic production methods.3 In other words, "organic" is a claim regarding the production process rather than a claim about the product itself. Organic agriculture is best known as a farming method where no synthetic fertilizers and pesticides are used. The Codex Alimentarius Commission defines organic agriculture as follows:
"organic agriculture is a holistic production management system which promotes and enhances agro-ecosystem health, including biodiversity, biological cycles and soil biological activity. It emphasizes the use of management practices in preference to the use of off-farm inputs, taking into account that regional conditions require locally adapted systems. This is accomplished by using, where possible, agronomic, biological and mechanical methods, as opposed to using synthetic materials, to fulfil any specific function within the system."4
4. One of the essential elements distinguishing organic farming from other types of farming systems is the existence of production standards and certification procedures; however, these have yet to gain universal acceptance. Initially, organic standards were developed by private associations, entitling members to use the respective associations' organic brands and labels when marketing their products. The International Federation of Organic Agriculture Movements (IFOAM), a non-governmental organization promoting organic agriculture internationally, has established guidelines that have been widely adopted for organic production and processing. These guidelines are commonly considered as "minimum standards", leaving room for more detailed requirements, depending on regional or local situations.
5. As organic agriculture has become more widespread, many developed countries have defined their own organic standards. For example, EU countries have endorsed a common organic standard for livestock.5 Also, Canada, Japan and the United States have adopted organic standards and regulations. A number of developing countries, for example Argentina, Brazil, China and Thailand have established national standards and regulations for organic products. In some instances, for example in the case of Argentina, standards and regulations have been developed to meet or exceed those required by the main import markets.
6. Demand for organic products has grown the fastest in developed countries. For example, in the countries of the European Union, almost 3 percent of farm land was classified as organic in 2001 - representing 3.7 million hectares and 129 000 farms. As a sign that organic agriculture is moving into the economic mainstream, many large meat and dairy companies are developing organic products as an element of their business. For organic dairy products, large conventional dairies are already the main suppliers of organic dairy products in Scandinavia, France and the Netherlands and this trend is likely to spread to other European countries and elsewhere.
7. Among developing countries, the largest and most advanced organic livestock sectors are reported in Argentina and Brazil. Elsewhere, only limited data are available; however, it is reported that interest in organic livestock products is on the rise in response to not only strong demand for organic products in national markets and export markets, but also to the potential it can offer for maintaining soil fertility.
8. Producers and exporters wishing to export organic meat and dairy products need to obtain organic certification. Currently, certification for export in developing countries is often carried out by the certification bodies of the importing countries, even though there are some notable exceptions, for example, Argentina. The advantage for the exporter is that the logos of these bodies are well known and trusted by consumers in importing countries, thus giving the product a better visibility and commercial advantage. The major drawback is that this type of certification can be very expensive, especially when inspectors need to travel from the country of the certification body. Many international certification bodies, such as Ecocert, OCIA or BCS-Öko, have established local branches in developing countries. Where no local branch exists, a regional branch in a nearby country could be used to carry out inspections and certification.
9. Even within a group of countries, such as the European Union, where a common standard of organic certification has been agreed, there still remain differences between national certification bodies. For example, the United Kingdom's main certifying body refused to allow its logo to be used by Danish organic pig meat producers, because its standards did not allow the practice of nose-ringing pigs to prevent them from rooting heavily. In another instance, in Germany, an organic farming group has more stringent organic standards than those specified under European Union regulations, leading some to fear that two levels of organic food, and associated costs of production, may emerge. Conversely, producers in Sweden have found that European Union regulations do not suit local conditions for keeping organic poultry and that, consequently, they are unable to produce organic chicken economically.
10. Data on organic products traded between countries is, by necessity, based on unofficial estimates, as customs and other regulatory authorities do not distinguish between organic and conventional food products. Consequently, organic products do not appear as a specific item in published trade data6. This, once again, serves to emphasize the need to carefully research potential markets before beginning export-oriented production of organic meat and dairy products.
11. In many countries, phenomenally strong growth, in percentage terms, has been reported for sales of organic products. For example, one estimate gives a growth of 26 percent for organic dairy products in the European market in 2001.7 However, it should be stressed that, as the market is growing from a small base, such growth rates are unlikely to be sustained in the longer-term. As a result of higher production and handling costs, organic produce generally sells at a premium over conventional produce. The size of the price difference varies between countries, level of market development and product, however, a premium of 20 to 30 percent is common and, depending on supply and demand, can be considerably greater.
12. As it has grown over the past decade, the market for organic foods has moved increasingly into mainstream marketing and distribution channels. The development of stores specialising in organic produce and the growth of organic sections in supermarkets have been advantageous for livestock products, as outlets which had previously traditionally sold organic products - health food stores and farm markets - frequently do not have adequate refrigeration and storage capacity to handle and present meat and dairy products. Furthermore, a segment of health food shop customers do not consume animal protein. Within Western Europe as a whole, supermarkets accounted for 63 percent of revenues from the sale of organic dairy products in 2001. The highest share of supermarket sales, over 90 per cent, of organic dairy products was in Scandinavia. For meat, a similar situation prevails. For example, in Ireland and the UK three-quarters of sales of organic meat are made via supermarkets; however, not all countries have followed this trend. For example, in Germany, the Netherlands, the United States and Canada, the principal retail outlets for organic food are specialised food shops - many of which may resemble supermarkets in terms of presentation and display facilities.
13. Looking to the future, the movement of organic food into mainstream retailing, in particular supermarkets, could be the most important factor in increasing market size, by providing access to organic food to a wider public. One element favouring the spread of organic food into the general retail sector is that purchasers of organic food tend to be in the higher income brackets. Consequently, supermarkets seek to attract such customers by providing a wide range of food, including organic products. The increased involvement of supermarkets, with their centralised systems of purchasing and distribution, may result in pressure to reduce the current price differential between organic and conventional products. As an extension of this trend, some supermarkets have introduced "own brand" organic meat and milk products, with such products being priced below those of competing brands.
14. Internationally, the growth in the importance of supermarkets in distributing organic products could assist the development of domestic demand in countries where organic products are still a novelty. Thus, a supermarket chain operating in Europe would have the necessary experience of handling organic foods to promote them in other markets, such as Asia or Latin America, where the organics market is little developed. Also, as many of the larger supermarkets are direct importers, they constitute a potential market contact for exporters.
15. While many countries report strong growth in demand for organic meat and dairy products, a number of instances can be cited where supply has exceeded demand. This has resulted in either a severe reduction in the price difference between organic and conventional products or organic products being sold as conventional products. This could call into question the achievability of some Western European countries' goals to increase the proportion of organic products in their domestic food consumption during this decade, as excess supply, and an associated fall in price could result in organic production becoming unprofitable. For example, prior to 2001, when export markets grew, Danish organic pork was in oversupply on the domestic market and prices were weak. Elsewhere, an estimated 20-30 percent of organic meat produced in Ireland is sold as conventional meat while, in Switzerland, it is reported that a number of organically produced animals - especially pigs - are sold as conventionally-reared animals. For milk, in Austria, Denmark and the UK, only one-third of organic milk is reported to be sold as such and the rest is sold as conventional milk. Consequently, some farmers' organisations in the European Union have recently cautioned against the rapid conversion of farms to organic production, fearing that it could be out of step with the growth in demand.
16. Common characteristics of a person who purchases organic products would include those who are concerned about health and the environment and are willing to pay a higher price, or take the trouble to make purchases in specific outlets, in order to obtain food that meets their expectations. For example, a survey of French consumers of organic food found that concern over personal health and better taste were each mentioned by approximately 30 percent of respondents, while conformity with personal beliefs and concern about the environment were each mentioned by approximately 20 percent of those interviewed. In the United Kingdom, a survey found that the top six concerns of organic shoppers were: pesticides on crops; food additives; antibiotics in meat; listeria or salmonella; E-coli; and BSE/CJD. Within this list, some of the concerns are met by organic production, for example the absence of antibiotics; however, others, such as listeria, salmonella and E-coli, are more general public health issues and, if an item is not stored and handled correctly, could equally well apply to organic products. In the longer-term, as consumers become more aware of what organic products are, a perception that they are produced with appropriate regard for the environment and animal welfare and according to agreed national and international standards may gain prominence.
17. As the market becomes broader, distributors of organic products must use a wider variety of marketing and promotional techniques because the consumers that they are reaching are more diverse. In this regard, in some countries with more developed markets for organic products, it appears that a core group of shoppers, which is highly disposed to buy organic products, has been almost fully supplied and may have little potential for further expansion.8 Consequently, future growth in the sector could be slower, as organic products seek to establish a market amongst mainstream consumers. Within a family, consumption of organic foods may not be uniform. For example, children may be given organic foods, while their parents eat non-organic products. As an illustration, the share of sales of organic baby food in British supermarkets ranges from between 25 and 60 percent of total sales, while the share of organic produce in terms of total food turnover is only about 3 percent.
18. Livestock products have a particular advantage in the organic markets as, along with fresh fruit and vegetables, they are often characterised by little or no processing and are therefore attractive to consumers seeking a "natural" product. While meat is most commonly sold and consumed in a relatively unprocessed state, this is not the case for some dairy products. Therefore, perhaps as a reflection of the degree of processing, within Europe sales of organic milk and yogurt account for around 85 percent of the value of sales of organic dairy products, while organic cheese sales are only in the region of 10 percent. From the manufacture's point of view, as a separate processing chain must be maintained for organic foods, there are advantages in producing foods that require relatively little processing. In the case of cheese, because of the problem of separating organic and conventional milk, production tends to take place in small plants. On the positive side, producing an organic processed product such as sausages, farm-branded organic milk and meat or an organic cheese, could serve as an effective way for a small producer to establish an identity and market niche, and present possibilities for supplying national and international markets. Obstacles to be faced the further one moves down the processing chain include whether or not ingredients, such as flavourings and sweeteners, for example in a flavoured yogurt or ice-cream, have to be produced according to organic standards in order for a processed product to be classified as "organic". At the same time, the development of other processed foods may, in itself, create a demand for organic products, such as milk powder or butter, as ingredients in biscuits and confectionary.
19. Expansion of organic livestock production is hampered by high start-up costs, conversion requirements, the high cost of organic feed supplies and difficulties in obtaining organic certification. The unique conditions of livestock rearing that include a longer biological cycle than crops, the requirements for organic breeding stock, and the high cost of obtaining and using organic inputs, increase the costs and risks in converting from conventional to organic livestock production. Requirements that organic animal production operate without the routine use of drugs, synthetic feed additives and growth promoters highlight the importance of good management and animal nutrition, appropriate stocking density and selected genetics to ensure disease control. Meeting organic certification requirements usually implies higher production costs. For example, it is reported that the cost of producing organic beef in the United Kingdom is 20 percent higher than under conventional methods. In some cases, the high cost of converting to organic meat and dairy production has led to subsidies being paid to the farmer; for example, in the European Union. In general, such premia are not available to producers in developing countries, although some instances can be cited, for example Brazil, where European Union development assistance has been used to establish organic livestock production.
20. As conventional livestock production practices are frequently examined and criticised in the context of recent animal disease outbreaks and increasing food safety concerns, there is growing consumer and political pressure to apply higher "hoof to platter" safety standards. Often, such policies imply a move away from the widespread use of antibiotics and feed additives, and a strengthening of animal welfare standards. Adoption of such standards by conventional livestock producers may limit overall demand for organic products. Such products could be seen as a "half-way house" between organic and conventional agriculture.
21. Producers should recognise the considerable uncertainty surrounding future price differentials between organic livestock products vis-à-vis conventional products, as neither the ultimate size of the market nor the extent of potential competition is known. However, given that organic meat and dairy production tends to be more labour intensive than conventional production methods, there may be some longer-term comparative advantage among developing countries.
22. The development of organic meat production in Argentina can be cited as an example of a developing country supplying external markets. While the origins of the organic industry in Argentina are relatively recent, the first organic association was formed in 1985. Climatic suitability and high soil fertility make it well-suited to organic production. The Argentine government has established national standards for organic products. These are at least as stringent as those of IFOAM and the European Union. There is no government assistance to organic producers; however, some producers have benefited under European Union project assistance to promote organic production.
23. The organics industry in Argentina is mainly export oriented, 85 percent by value is exported (estimated value in 2001 - US$ 32 million); however, a domestic market has developed in Buenos Aires. In 2000, out of a total production of 40 000 tons of organic produce, meat and livestock products represented 3 200 tons or 8 percent. Of this total, 35 000 tons were exported, of which meat and animal products accounted for 3 percent. This would imply that a substantial proportion of organically produced meat was consumed in the domestic market. It is not known what proportion was sold as organic meat and what proportion went into conventional sales. The European Union, the principal destination of Argentina's organic beef exports, purchased just over 500 tons in 2000. In 2001, exports of organic meat from Argentina fell substantially as a result of a ban on imports in the main markets following an outbreak of foot and mouth disease. In terms of milk, Argentina's organic production is currently only consumed on the domestic market and is not exported.
24. Elsewhere, both Brazil and Uruguay9 are seeking to develop exports of organically produced meat. In the case of Brazil, under a Europe Union funded project, organic beef production has been developed in the Pantanal Wetlands of Mato Grasso do Sul state, in the centre of the country. This is the first time that fully certified organic beef has been produced in Brazil, and an annual production of 15 000 tons of meat is projected. The main market for the project's production is anticipated to be the European Union; however, a domestic market would have to be sought for meat cuts and offal. The authorities in Brazil see the project as a way of boosting local cattle producers' income, while at the same time reducing the environmental damage that traditional methods of cattle raising have caused. While 90 percent of Brazil's overall organic production is exported, Brazil's internal market for organic foods is growing at around 25 percent a year. As with Argentina, organic milk is only produced for sale on the domestic market.
25. Both because of its recent origins and the failure of official trade data and other statistical sources to distinguish between organic and conventional products, much analysis of the market for organic products has to rely on unofficial and ad hoc reports. In this context, the aim of this paper has been to draw together some key aspects of the market for organic products, including those coming from the livestock sector, in order to serve as a basis for discussion during the IGG on Meat and Dairy Products and to serve as a background paper for the symposium on organic products which will follow on immediately after the IGG meeting.
26. In summary, the key points arising out of the information presented in this paper are:
27. In conclusion, marketing opportunities may exist for developing countries to export organic meat and dairy products, especially in those countries where climatic and ecological conditions favour the development of extensive production systems for livestock. However, meeting the certification requirements and the quality standards of an external market can be extremely demanding. Also, there is no guarantee that the strong growth in demand seen in recent years will continue at the same level in future years.
28. Therefore, careful research and analysis is strongly recommended to any country considering developing production of organic meat and dairy products for external markets.
1 Note: In conjunction with the IGG on Meat and Dairy Products, a half-day symposium on organic markets for meat and dairy products will be held 28 August (for further information see: CCP:ME 02/1 - Provisional Agenda, Agenda Notes and Timetable). During the symposium, many of the areas touched on in this paper will be dealt with in more detail.
2 One estimate gives the size of the world market for organic food as being US$ 26 billion in 2001, estimating that the market had grown by 23 percent over the previous year. Of this the European Union represents US$12 billion and the United States US$ 10 billion. Japan is also an important market. Source: Organic Monitor, quoted in World Organics News, 15.11.01.
3 This section is based on World Markets for Organic Fruit and Vegetables - CTA, ITC and FAO - Rome, 2001
4 See: http://www.codexalimentarius.net/STANDARD/standard.htm
5 Council Regulation (EU) 1804/1999
6 FAO has developed a pilot questionnaire which seeks to gather data on organic production and trade. This is currently being tested.
7 Organic Monitor, quoted in World Organic News, 9.5.02
8 In the UK, 57 percent of organic food is purchased by 7 percent of the population.
9 The case of Uruguay will be presented during the IGG on Meat and Dairy Product symposium on 28 August 2002.