11:38 AM Aug 9, 1996
NICHE NATURE OF ORGANIC MARKET, AN IMPEDIMENTGeneva 9 Aug (Chakravarthi Raghavan) -- Organic production has an undeniable edge over conventional farming in terms of the beneficial impact on the environment and human health, but the niche nature of the market is a major impediment to the attainment of economic profitability and thus a constraint to its further proliferation, according to a report by the UN Conference on Trade and Development. The report (UNCTAD/COMN/88), 'Organic Production in Developing Countries: Potential for Trade, Environmental Improvement and Social Development', says that though organic products would continue to be a niche market in the short- to medium-term, a gradual shift towards mainstream could be achieved in the longer-run. But it would need commitments by the industrialized countries in terms of a move towards sustainable or organic practices to help foster acceptance of these products. From a technical point of view, organic farming among other things is characterized by lower intensity of reliance on synthetic and other external inputs, a higher biological intensity of production which enhances the long-term fertility of the soil, uses natural methods for weed, disease and pest control, and an extensive livestock management that pays due regard to animal needs. While the production phase, where the overwhelming majority of positive environmental externalities occur is crucial for organic products in terms of the impact on environment, the upstream phase of the lifecycle (processing, consumption and disposal of products) is also important for minimizing adverse environmental impacts. The processing has to be preferably based on mechanical, physical and enzymatic methods or use of micro-organisms -- with chemical processing allowed only in exceptional cases. But being chemicals free, organic products do not pose environmental or health problems at consumption stage and, being biodegradable, nor do their disposal raise environmental concerns. While organic agriculture is thus environmental friendly, there are concerns about its economic viability in terms of withstanding competition from other, less environment-friendly production systems. Hence, in order to make concept of organic agriculture work in the longer-term and considered as superior to conventional systems, the economic results of organic agriculture have also to be satisfactory. Only an environmentally sustainable system can persist over the long run and be economically and socially viable. It has also to be profitable or it cannot be sustained economically however sound environmentally and beneficial socially. The evidence of record of organic agriculture under all these three criteria, the report says, is relatively abundant in developed countries, but much less in developing countries where comprehensive studies are needed. While consumers often perceive product-related health benefits, occurring at consumption stage, as decisive, most environmental benefits of organic production are associated with the production phase -- as supplier of resources, assimilator of waste and provider of services. In terms of supplier of resources function, organic farming, as compared to high-input agriculture, has the advantage of better capacity for soil conservation and improvement, and lower usage of energy. There are significant opportunities to reduce fossil fuel consumption -- as much as 50% in some estimates -- stemming from the fact that synthetic fertilizers that need large quantities of energy are not used. Cultural practices of use of human force and animal traction use less energy than machinery. There is enhanced capacity of water retention, drainage and aeration -- and less leakage of nutrients and thus lower levels of water pollution. Pollution due to toxic pesticides is also inexistent and emphasis on recycling largely eliminates waste disposal problems. There are also positive socio-cultural effects due to the social acceptability of suggested production practices and its contribution to mitigation of poverty through increased producer incomes and employment generation. In the developing country context, it can also draw on indigenous practices and modern knowledge relating to environmentally-friendly production techniques. Of importance for alleviation of rural poverty is the potential impact of higher prices or environmental premia for organic products and the higher share of producers in the benefits when these products are traded under 'fair trade' conditions. In recent years, there has been considerable effort by NGOs to incorporate social criteria into the previous rather technically-oriented organic agriculture standards. However, notes UNCTAD, such social criteria are reflected only in voluntary, mostly NGO standards - not in the mandatory norms adopted by governments and stipulating the conditions that have to be complied with for a product to be entitled to an organic label. But organic culture can be sustained in the long run, and provide the environmental and social benefits, only if it is economically viable. In this regard, a distinction has to be made between its economic performance from the viewpoint of society as a whole, and a purely financial assessment of the viability of a particular business operation. For an assessment of economic viability on a society-wide basis, the remuneration of organic farming for its positive environmental services has to be fully reflected in the calculation -- internalization of positive environmental externalities or environmental benefits. At the same time, environmentally less friendly practices should be discouraged -- by the internalization of the negative environmental externalities or the environmental costs. If such internalization of environmental and social costs and benefits take place, says UNCTAD, organic farming would appear to be economically justified. According to a Dutch study, for example, if environmental costs are internalized, the conventional product prices would rise by 19%, thus making them 5% higher than those of organic products. While crop yields in organic agriculture are lower than under conventional systems, such a comparison depends on level of yields in conventional agriculture. The relative yield differences are greatest in countries using intensive systems of production and much less in conventional production systems. Organic farms yields sometimes maintain or even increase over conventional systems. Labour costs may be higher for organic production, but much less so in developing countries. Most organic products are sold in developed countries -- with Europe as the leading market and with a retail market value of 2500 million ECUs. Within Europe, Germany accounts for 52 percent of the organic sales in EU. France, UK and Netherlands follow behind with 13, 11 and 8 percent respectively. The current share of organic products is about one percent of the food market in industrialized countries. But consumer demand has been increasing rapidly in Europe and North America and could climb to as much as 5-10 percent in some countries by the turn of the century. In Germany, baby food is a sector where organic products have breached the frontier between a niche and mainstream market. In many such cases, like jarred foods, the value is added locally in the producing countries (such as for banana paste). While the share for such products in the markets of developing countries is still at an early stage, a Gallup poll survey has found consumers in India, South Korea, Chile and Mexico as aware of the benefits and willing to accept higher prices. But the consumers willingness to pay for environmental attributes of organic products depends on their economic situation. If household incomes are limited, as in developing countries, the price/nutrition value ratio plays a crucial role. A major problem for organic product sales lie in certification. Since consumers often choose to buy organic products and pay a premium on the grounds of positive health effects and other attributes, they legitimately expect to get in exchange a product of guaranteed organic origin. But as yet there is no system that is recognized worldwide and which would provide a guarantee of the organic quality of the product. Some countries have instituted mandatory certification requirements. This is particularly the case in the European Union where there are standards for plant products and others are being set for animal products. But third countries wishing to export to the EU market have to apply to the EU Commission to have their certification systems statutorily recognized as equivalent to that of the EU. This, comments UNCTAD, "is a rather time-consuming procedure" and no country has to date received a full recognition of this kind on a permanent basis. But several countries (Argentina, Australia, Hungary, Israel, Switzerland the US) have been included in the preliminary list and their products admitted into the EU market on the basis of their 'country-of-origin' certifications. For products of producers from other countries, a certification is required from an EU-accredited body on a case-by-case basis. And since, with the exception of Argentina, developing country inspection agencies are not those accredited by the EU, their exporters have to resort to the services of developed country organizations. This has a considerable adverse impact on the final costs of their products. Similar is the case in the United States. Thus certification costs represent a serious burden for organic farmers in developing countries when they have to rely on expatriate certifiers -- the costs of one day's work by a Western expert can equal an year's wage of an agricultural worker in a developing country. UNCTAD suggests use of various options to reduce the costs, improve efficiency of certification and gain in credibility. Assistance could be sought from donor countries or there could be cost-sharing from developed country partners in the framework of fair-trade projects. Local inspectors could be trained who would work for a Western certification body. Such cooperation, practised by some agencies (like Naturland or KRAV) could evolve into a form of co-certification. And on the basis of experience accumulated and capacity built up in the country, an effort could be made towards establishing a national certification system. A country could also apply for inclusion in the provisional list of countries whose systems are equivalent to that of the EU. Another measure could be creation of a regional or even an international organic seal, especially for countries whose limited resources don't allow them to obtain acceptance of their own seal in international markets. But the current niche character of most organic products has had negative implications on their competitiveness and sales. It is therefore important that these products move from niche market to the mainstream, thereby obtaining economies of scale advantage. Lower costs in such an event could result in more acceptable prices. These, in combination with better availability of organic products in a greater number of shops, would help expand both supply and demand.