Select Committee on Agriculture Appendices to the Minutes of Evidence


APPENDIX 13

Memorandum submitted by Brookes West (F 17)

INTRODUCTION

  This evidence is submitted by Brookes West to the House of Commons Agricultural Committee investigation into organic farming.

  It covers the following issues:

    —  an overview of global developments in the organic food market;

    —  discussion of factors influencing the growth in demand for organic food;

    —  developments on the supply side of the market;

    —  future developments, key factors likely to influence market development; and

    —  some constraint factors to future market development and for potential entrants to the market.

MARKET SIZE

  The market for organic produce is not well documented in any country. Nevertheless, Table 1 presents an estimate of the size of the global organic food market (at retail level) over the last three years. The most distinct features are its rapid recent growth and its current size of about $20 billion.

Table 1

KEY WORLD MARKETS FOR ORGANIC FOOD AND DRINK (US $ MILLIONS)

Country
1997
1999(1)
2000(2)
US
4,200
6,000
8,000
Japan
1,000
2,000
2,500
Germany
1,800
2,500
2,500
France
720
1,000
1,250
UK
450
650-700
900
Netherlands
350
400
700
Switzerland
350
N/a
600
Denmark
300
N/a
600
Sweden
110
140
400
Italy
750
N/a
1,100
Austria
225
300
400
Other EU
200
N/a
500

Notes
1.  Estimate
2.  Forecast
3.  N/a=not available
Source: ITC, USDA, Economist

  Whilst the market has experienced rapid growth it is important to place the market size within the context of the total food and drink market (Table 2). When placed in this context, the organic market in all countries is a small part of the overall market. In the UK the organic market accounts for less than 1 per cent of the total market, although this share varies across sectors (tending to be highest in fruit and vegetables and lowest in livestock/meat products).

Table 2

SHARE OF FOOD AND DRINK MARKETS ACCOUNTED FOR BY ORGANICS: 1999

US
1.5%
Japan
0.7%
EU 15
1.8%
Germany
1.3%-1.4%
Austria, Denmark, Switzerland
2%-3%
UK, France
0.5%-0.7%

Sources: ITC, Economist, USDA.

FACTORS INFLUENCING DEMAND FOR ORGANICS

  Drawing on basic economics, the following key variables influence demand:

    —  price of a product;

    —  price of substitutes/alternatives;

    —  income;

    —  tastes and preferences.

  The key variable of relevance to organics is tastes and preferences, allied to income (ie relatively high levels of disposable income). Tastes and preferences are the most important element driving the upward surge in demand for organics and these can effectively be distilled out into a mix of ethics, consumer health and safety and environmental influences. More specifically:

    —  general concern about the application of new technology to food production (eg genetic modification (GM), use of antibiotics in feed);

    —  ethical objections to some technologies (notably GM) and production systems (eg, intensive livestock systems such as battery hen systems and veal crates);

    —  concern for the environment: organic production being perceived to be better for the environment than conventional production systems;

    —  concern about own health and food safety (eg, pesticide residues, BSE): organic production systems are perceived to provide healthier food;

    —  perceptions that organic products are tastier;

    —  opposition to GM technology;

    —  a sentimental attachment to the land and to some it is a social "way of life" (especially so in parts of Continental Europe).

PROFILING THE ORGANIC CONSUMER

  In attempting to profile the organic consumer the task is made difficult by the lack of data. However, it is likely that the following are key profile features:

    —  there is a strong link to high GDP levels (ie the highest consumption is in developed countries where GDP per capita is highest);

    —  countries with a tradition (current or recent past) of having relatively high levels of protection and support for their domestic agricultural sector and hence familiarity amongst consumers with "high" food prices. Countries that come to mind here include Switzerland and Japan plus Austria; the latter of which used to have higher levels of protection and food prices than those prevailing in the EU until it joined the EU in 1995. Thus, in Austria the organic market began to rapidly develop at about the same time Austria joined the EU. This was a period when general good prices tended to fall post accession and organic produce came onto the market at prices similar to those prevailing pre-accession. The net effect was that organic produce was sold at prices that many consumers were used to paying in the past for conventional food. This meant that the purchasing decision for many consumers between organic and conventional involved a decision to forego a cheaper alternative (conventional) than they had been used to paying rather than a rather more positive or pro-active decision to be taken in other countries where the consumer was faced with actively choosing to pay more than they were used to if they chose to buy organic produce;

    —  within countries: high disposable income groups notably socio-economic groups A and B;

    —  possibly higher concentrations in the under 30s and over 50s[23].

  Against the background of developments on the consumer (demand) side, the market for organic produce in Europe, has in recent years seen demand consistently ahead of supply (there are, of course examples of some cases of over supply for products by country or season; eg, dairy produce in Denmark in 1999 or for some vegetables in the UK). However, in general, demand has tended to outstrip supply. As a result many organic products have traded at significant price premia relative to conventional alternatives (eg, in 1999 organic cereals were reported to be trading at premia in excess of 100 per cent relative to conventional cereals) and these price premia have been the main factor influencing new entrants (producers and those further down the supply chain) into the sector. The level of price premia has often been significantly greater than any additional costs involved in growing and supplying organic produce and this has also been re-enforced by the general low real level of prices for many conventional agricultural commodities such as milk, pigmeat, cereals and oilseeds. For example in 1999, wheat has been trading at prices of £65 to £70 per tonne compared with longer run averages closer to £100 per tonne.

  Given these price signals, there has been a rapid expansion in the area of land devoted to organic production (and in conversion) in most EU countries (eg, about 10 per cent of agricultural land in Austria is now classified as organic). Other factors influencing the increase in area devoted to organic production systems include a greater willingness of mainstream retailers and those in the post farm-gate supply chain to service the market and the provision of government support to the sector. This latter aspect does, however vary across EU member states with, for example the UK providing some assistance for conversion whilst in Austria and Denmark assistance is provided both for conversion and via the provision of annual payments.


FUTURE MARKET PROSPECTS

  There is a fairly broad consensus that the market for organics will continue to grow in the next few years. Forecasts of growth vary according to assumptions made, by sector and by country. At the EU 15 level, the organic food market is predicted to account for between 5 per cent and 10 per cent of the total retail food market by 2005. Within this, strongest growth is expected to continue in Germany, Austria and Scandinavia and slowest growth in Mediterranean countries.

  However, in looking forward at market developments it is important to consider a number of factors of influence that will effectively determine the nature and development of the market for organic produce both in the UK and globally. These are summarised in Table 3.

Table 3

FACTORS TO CONSIDER FOR THE FUTURE MARKET DEVELOPMENT

Issues
Niche market: the current position
Mainstream market: the future if predicted growth rates are to materialise
Income
High disposable income
Increasing purchasing by lower income groups
Socio-economic groups
A, B
A, B, C1, C2
Attitudes/views
      Ethics
      Health/safety
      Environment

Strong
Strong
Strong

Milder
Milder
Milder
Price premia
High (50% plus)
Smaller (0-20%)
Producer incentive
Good
Less attractive

UNCERTAINTIES OR CONSTRAINT FACTORS TO MARKET DEVELOPMENT

  Whilst the market for organic produce has experienced rapid growth and this is forecast to continue in the next few years, there are, nevertheless, a number of uncertainties or constraints that could threaten this market development. These include the following:

(a)  Product authenticity

  Buying organic is largely a function of trust and faith in the regulatory approval system and the monitoring activities performed by those charged with policing schemes. Also, currently a large proportion of organic produce sold (eg, about 70 per cent in the UK) comes from imports. This latter point means that tracking and tracing the origin of organic produce IS inherently more difficult than if supplies come from a local base. Inevitably this, together with the level of price premia in the market, provides an economic incentive for some unscrupulous traders to cheat on the supply side of the market, passing off (cheaper) conventionally produced food as organic in order to capture the premia. Also, in most countries, including the UK there are several bodies providing certification services to their own schemes or standards. As some of these differ it may contribute to consumer confusion and diminished trust and faith in the regulatory approval systems.

(b)  High dependency on consumer benefit perceptions

  These are crucial to the future development of the market. However:

    —  there is little hard evidence that organic products are healthier than conventional alternatives;

    —  the perception that organic produce might be "safer" than conventional alternatives is not only challengeable but may rapidly subside if we have an organic "food scare" (eg, what possibilities of an E-Coli in organic salad scare?). Also, evidence is beginning to suggest (in the US) that, for example GM Maize has lower levels of mycotoxins than both conventionally produced and organic maize;

    —  organic production system are perceived to be better for the environment than conventional agriculture. However, few consumers are aware (currently) that some currently allowable pest control products (eg, use of sulphur based products) in organics are actually more residual and damaging to the environment than some of the more commonly used conventional chemical treatments;

    —  it is debatable as to how much of the recent increase in demand for organic produce has been driven by anti-GM sentiment. If so, a legitimate question to pose is how intense and for how long will this sentiment remain especially when GM quality traits begin to come to the marketplace offering positive health benefits (eg, cholesterol reducing foods, foods rich in vital minerals and vitamins).

  Lastly, to become a mainstream market segment, the organic market will inevitably be faced with a reduction in the levels of prices and price premia relative to conventionally produced foodstuffs. The drive for reduced margins has already begun to occur in the UK with, for example recent public pronouncements by one or two UK supermarket chains that they wish to push down organic retail prices to levels comparable with conventional foodstuffs. Given that most organic produce is currently, on average more expensive to produce than conventional food, this points to a cost and price squeeze being pushed back down the supply chain from the retail end. Whilst the burden of any such squeeze will affect all parts of the upstream supply chain relative to retailers, it is likely that most of this will end up residing at the production end. In such circumstances, those producing organic produce will be faced with tighter margins than they may currently enjoy and as in conventional agriculture only the most efficient and competitive will survive. Those perhaps currently thinking of entering the organic production sector, attracted by margins in excess of 50 per cent should probably re-assess their interest based on significantly reduced margins (eg, 5 to 10 per cent) prevailing in the market.

12 June 2000


23   Based on limited data for the UK: source USDA. Back


 
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