Get the answer: Are Organic Products Profitable?
It is clear that in many cases organic products sell in consumer markets for a higher value, but it is less clear the extent to which farmers share in this benefit. In some cases (Maharashtra, Karnataka) where a beneficent NGO intercedes on behalf of the producers, they tend to receive a reasonable share that is well above 50% of the final price.
However, where their power of negotiation is limited by ‘heir capacity to associate, it is likely that they would receive a lower relative portion. Some of the case studies noted that there was little price transparency for farmers and few were aware of the selling prices beyond the farm gate.
In some cases, it appears that other market players realised disproportionate rents although it is not always clear what their additional costs and risks actually were. In some cases (three China cases) farmers have been known to receive as little as 5% of the final (FOB) price, although this was more than they had previously received by selling their crops as conventional.
Of course, the intermediaries have some processing, packaging, and marketing costs but these are estimated to be a relatively modest proportion of their share. Accordingly, where organised farmers participated in the processing and even the marketing of their products (Anhui tea), they were able to earn from 43% to 100% of the retail price for a competitive commodity such as tea where farmer margins can typically be 10% or less.
Nearly all of the case studies cited a significant growth in farmer income following organic conversion. Farmer profits tend to be somewhat better protected when they are organised either as an association or by a civic association (NGO or charity). This profitability is likely to diminish as competition inevitably increases.
Farmers receive a substantial portion of the price for sugar and rice. However, over the course of the last four years their share has declined by 20% for sugar and 15% for rice. Their declining share is indicative of two developments that accurately reflect the general market situation.
First, retailers — especially those distributing organics — are becoming increasingly powerful. Their share of the total price increased 170% and 130% respectively. Second, increasing availability, especially of such staple commodities puts downward pressure on producer prices.
In this case, the intermediary’s share appears substantial and that is because this intermediary provides a number of services that include training, grading and processing, transportation, and marketing. Market forces are clearly very important in this price dynamic.
As evidence, situation in a high- value crop with strong global demand. In this case, vanilla farmers are earning an increasing share that is commensurate with the increasing demand for their products. Their organisational capacity in this case helps them to understand market prices and negotiate accordingly.
Conversely, farmers growing another high-demand product Pu-er tea from ancient groves in Yunnan — have been less successful in organising allegedly due, in part, to local government intervention and receive less than 10% of the retail price in the domestic market and 5% of the FOB price.
Price Premiums and their Trends:
Almost without exception, the cases studied expressed a strong belief in the potential of organic production as an income enhancing option for farmers, particularly when seen in light of the price differentials obtained on the world market. The studies illustrated that some of the premiums were extraordinary.
In some cases, these reached as much as 300% – 400% (Jianxi, Yunnan tea). There are indications however that, such premiums will diminish as global competition in the organic field escalates. This has already occurred for several commodities. Most of the case studies suggest that premium levels range from 10% to 50% with 20%-30% as an approximate average. An independent study in 2003 (Garibay and Jyoti) surveyed organic exporters and found that their premiums ranged from 25% to 53%.
While export markets typically offered the highest prices and premiums, in some cases the emergence of domestic markets has also stimulated premiums. Although many producers find these premiums to be small and those market channels difficult to access, others have enjoyed considerable success.
The Karnataka case study indicates that for products sold on the domestic market i.e. sugarcane, rice, and banana, the premiums have actually increased over the last four years whereas the organic premium for a high-value export (vanilla) has actually declined even if it’s total price has not.
As consumers have become more familiar with organics, local manufacturers and retailers are beginning to fill this profitable niche. The same Karnataka case noted that two food manufacturers and a dairy have begun paying a premium for organic ingredients and supplying the final products to the urban markets.
In many domestic markets, premiums are also paid for products in transition although this is less common for export products. There are modest premiums for other related certifications as well. For example, in China the Green Food producers can earn a premium for AA quality that is perceived as being similar to organic.
The much more popular A grade of Green Food typically no longer earns farmers a significant premium, but is perceived as having a competitive advantage in the retail marketplace. China’s quingzhen (literally “pure and clean”) classification is important to the Islamic segment of the population and earns a modest premium among the Hui, China’s largest national minority.
In India, a number of food production and preparation methods with religious and cultural overtones also command modest premiums in the marketplace. These foods can be classed under the heading of Krishi, and where recognised, also can have a competitive distinction that makes them preferable to conventional produce.
Premiums are modest, and typically farmers might benefit economically primarily if they sell directly to consumers. Typically, every link in the value chain for organic produce enjoys improved earnings. Nevertheless, farmers may not enjoy the full benefit of organic premiums, particularly when they have no control or ownership over their certification and little or no collective bargaining.
Factory Farming Vs. Organic Farming:
In the organic farming systems, cow dung is a source of fertility in the farm and not of pollution. Intensive production is not integrated, and the animal waste turns into pollutant. For example, factory farming of cattle for beef leads to concentration of organic waste from livestock in one place.
Nitrogen from cattle waste is converted into Ammonia and Nitrates which leach into and pollute the surface and ground water. For example, a feedlot of 10000 cattle produces as much waste as a city of 110,000 people and this waste are often untreated. Since intensive factory farming of cattle goes hand in hand with intensive feeding and feed production which in turn can require heavy use of fertilizers and pesticides, the cattle waste from factory farms can also be contaminated with chemicals.
It is because it is unable to reintegrate this toxic animal waste into its own agricultural systems that the Netherlands has exported its intensive production cow dung to India (Shiva 1996). Cow dung is a fertilizer only in small-scale integrated farm-dung systems.
A comparative energy audit of inputs and outputs between USA and Indian cattle shows that Indian cattle are more efficient than their counterparts in the industrial economy when it comes to using energy.
They use 22% of the energy value fed to them while the intensive cattle industry in the USA uses only 7%. Similarly Indian cows use 29% of organic matter provided to them and in contrast USA cows use about 9%. In intensive systems such as that used in the USA, six times as much edible food is fed to the cattle as is obtained from them. Organic systems strive to avoid such considerable waste of energy and resources.
Supermarkets:
The supermarket revolution has arrived in China and is spreading faster than anywhere in the world. From its start in the early 1990s, today this modern Chinese food retail sector has over USD 55 billion in sales and commands more than a third of the urban food market. Supermarkets already sell to domestic consumers twice as much fresh fruits and vegetables as are exported from China.
This development has been driven by factors shared by other developing countries (urbanisation, income growth, and liberalisation of foreign direct investment in retailing) as well as China-specific policies (government investment in the sector, and policies promoting conversion of wetmarkets to supermarkets).
There are signs that supermarket procurement systems have begun to shift away from the traditional wholesale system toward use of large, centralised distribution centres, specialised/dedicated wholesalers operating preferred supplier systems, and private standards for quality and food safety.
The spread of supermarkets presents opportunities for Chinese agricultural producers to diversify into activities with higher income prospects. For procurement systems to mature and spread over larger regions of China and move into dealing directly with farmers, however, supermarket managers face several unique challenges.
The average farm size in China is small. Farmers are not well organised, since historically cooperatives and associations have not been encouraged. Hence, the typical farm family faces significant challenges in meeting demanding product and transaction attributes required by supermarkets.
Thus the whole supply chain must be upgraded. Government agricultural policy and rural development programmes have an important role in this, by helping small farmers gain access to the modern procurement systems that supermarket chains will use to dominate urban food markets of China.
Standards and Certification Developments in China:
Three relevant milestones for organic regulations have occurred recently. In 2001, the State Environmental Protection Agency issued Organic Food Certification and Management Measures (based on the standards developed by OFDC using IFOAM’s basic standards). In 2003, China National Certification and Administration (CNCA) issued Guidelines of Accreditation for Organic Products Certification Agents.
The current organic standard (Organic Product Production and Processing Certification Rule #CNAB-SI21) was issued in 2003 by the China National Accreditation Board (CNAB). A Ministerial level edict is being developed by CNCA and CNAB to serve as China’s organic agriculture standard (expected to be effective in 2005). In 2004, the management of organic certification and accreditation migrated from SEPA to the control of CNCA; and the Ministry of Agriculture is taking over a more active role in organic farming.
The Government intends to gradually rationalise the four current standards. The basic (non-poisonous) standard will be the de facto basis of all Chinese agriculture. Green Foods “A” standard will continue as a recognised assurance of enhanced environmental and health safety. Green Foods AA will be phased out in favour of organic certification that will continue to be harmonised with international standards to improve its domestic and worldwide acceptance.
The standards being used by local certifiers and their field application and verification are not recognised as equivalent by EU, IFOAM, Japan and American organic regulations and are therefore not useful for export to most countries and regions. Local certification is conducted by domestic certifiers such as – the Organic Food Development Centre (OFDC) accredited by IFOAM in 2002; the Organic Food Certification Centre (OFCC), and the Organic Tea Research and Development Centre.
There are about 20 certification bodies set up within a number of provincial environment protection bureaus. Certification for export products (and for some domestic supermarkets) is conducted by internationally accredited companies like IMO (Switzerland), ECOCERT, BCS (Germany), Soil Association, JONA and OCIA, some of which have set up representative offices employing local inspectors.
The Role and Development of Internal Control Systems (ICS):
Internationally accredited or recognised certification systems facilitate market access. The increased demand for this type of services has led to a “certification industry”, with its own economic interests that can make certification expensive for small farmers. Achieving the international standards and procedures — mostly established by institutions in the more developed countries — can require institutional and economic capacities beyond the reach of small scale farmers in the developing world.
Developing countries are increasingly looking for ways to reduce certification costs and procedures in order to make certification more feasible for small farmers. Alternative certification schemes might offer new possibilities by reducing the costs and burdens of inspections. Standardised quality control procedures are important for all certification systems to ensure that systems, policies and procedures are in place.
The ICS is one such alternative that can help groups of small farmers to reduce costs and simplify procedures of internal inspection and certification. Certification bodies can delegate the annual inspection of individual group members to an identified unit/person within a contracting organisation.
This can be a legally recognised farmers’ association, co-operative, NGO, or exporter. The certification bodies then only need to inspect the workings of the method and a sample farmer group in order to evaluate the ICS’s effectiveness and the reliability of its process and its procedures in the case of noncompliance.
Many follow the IFOAM Accreditation Criteria for grower group certification. IFOAM is studying how to further develop “Participatory guarantee systems” (reserving the word certification for third party inspection and certification, not to confuse the discussion) in order to reduce unnecessary costs and bureaucracy.
Besides the obvious economic benefits, preliminary assessments of ICS schemes have shown that participating farmers have become more organised, meet regularly and are engaged in a learning process that contributes to better farm planning (SASA 2003).
However, farmers participating in such schemes have felt that the record keeping involved demanded a lot of work, with little immediate benefit. Furthermore, the substantial documentation burden imposed by an ICS may deter smallholder farmers, many of whom might be semi-literate, from participating.
A variety of alternative schemes have been proposed since the beginning of the organic movement for local and national verification systems. These have included the community supported agriculture schemes (CSAs) of the USA and Australia, the Teikei system in Japan, Coolméia.
Ecological Fairs in Brazil and, more recently, NOGAMU in Uganda and Alter Vida in Paraguay. All of them involve the interactive participation of small farmers, enterprises, traders and consumers. Co-responsibility, participation, learning process, transparency, and flexibility are key aspects of these schemes.
The most important differences between their verification systems are whether the quality assurance systems rely on first- party, third-party or participatory network assessment. Domestic regulations in the EU and the USA do not recognise participatory certification whereas Brazil’s organic legislation has put “participatory certification” on the same level as third party certification.
Although lack of harmonisation and the many public standards and private certification systems may hinder international recognition, the acceptance of some of these schemes can enable smallholder farmers around the world to access these international markets. A considerable portion of this information is adapted primarily from a contribution by Pilar Santacoloma, FAO (AGS).