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Export - Study Chapter 8: Final Conclusions - Organic Trade Association
Organic Trade Association
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Export - Study Chapter 8: Final Conclusions

 

From the data presented in this study, it can be clearly derived that organic agriculture, the organic industry, and the organic trade are vibrant endeavors poised for further growth. The efforts of several countries to give the organic trade a legal framework in which to operate show that the organic endeavor is being taken seriously, and that its future role is expected to expand. In the end these regulations will help advance the industry, albeit some of them appear to stifle rather than to improve the trade environment. On a positive note, it is worth mentioning the emergence of small domestic organic markets in Asia and Eastern Europe.


The issues that currently dominate the international organic marketplace appear to be the following:

  • Food safety
  • Increased involvement of the conventional food sector in organics
  • Changes in the supply chains
  • The change in the customer base for organic food
  • The increased assortment of organic food
  • The rise of processed food
  • Private labeling
  • Organic branding
  • Compatibility of National Organic Standards and certification schemes worldwide

Concerns about food safety are a major driving factor for the organic industry in Europe. As an almost unlimited range of food available, it has become a product "without face". Several so-called food scares have created a psychological environment where customers want to know more about where their food originates. Thus, traceability and transparency are issues to be addressed. This concern is presently being recognized by the industry. Two very recent developments highlight this: Under the headline "The anonymous egg is past", two systems to trace the origin of eggs were launched in July 2000 in Germany. One by the company Orgainvent, a second one by the industry association "Gütegemeinschaft Ei" (German association for the quality assurance of eggs). A central part of both systems is a number on each egg carton, in which country of origin, farm of origin, livestock condition etc. is coded and easily intelligible for the consumer. In this case, the concern is not only the aspect of food safety, but also for the conditions under which chickens are raised. Most probably, this system will lead to a decreased market share of eggs from hens kept under caging conditions.


Another, perhaps even more dramatic example of traceability of food is the system presently being tested by the Dutch company HAK, which is mainly involved in the preserved fruits and vegetables business. HAK has initiated a project, in which with the help of a tracking number total traceability of its products via the Internet is envisioned, including growing conditions for product ingredients. Consumer concern about food safety is not limited to Europe, as especially Japanese customers associate organic food with safe food. Organic agriculture and the organic industry with its elaborate certification schemes are in an ideal position to play a pioneering role in effort to render food and its origins more transparent and intelligible to the consumer on a worldwide scale.


The second aspect in this matter is the genetic engineering of foodstuffs. If not exactly one of food safety, so it is at least one of traceability and transparency. In this context the importance of the discussions or rather the public outcry on the undeclared utilization of genetically modified Organisms (GMO’s) in foodstuff should not be underestimated. The consequences of this outcry were particularly significant in the German-speaking countries Austria, Germany, and Switzerland as well as in the UK. In October 1999 even the German discounter Aldi, not particularly known for quality but rather for lowest possible prices could not avoid announcing its willingness to cease the production of food with GMO’s for its own private labels, a measure most competing supermarket chains had promised some months ago. The GMO issue and the relating pending legislation at the EU level has the potential to create substantial logistical problems for the conventional food supply chains, and especially for the soy and corn industry in the United States. Meanwhile there are several European countries with legislation for the labeling food originating from GMO-free sources, among them Austria, Germany, and Switzerland. On the other hand, despite the considerable public outcry on the issue and declarations of major food retailers in Europe to pull out of bioengineered foodstuffs the promised legislation on the EU level has not yet taken place. It is expected that it will take at least another one to two years to be accomplished. The current European national legislation differ substantially and is very complex with the consequence – apart from the substantial logistical problems of creating a segregated market for biotech and nonbiotech commodities - that there is no established market for commodities from GMO-free sources. It remains to be seen if this market will emerge at all, and if not, organic food will remain the only valid alternative for food from GMO-free sources at all. Also, it is not clear at this point if the GMO-issue will have any impact with regard to Asia. However, as especially the Japanese culture is known to be extraordinarily trend-sensitive, there is certainly a chance that this issue will receive more attention in the end. What is evident at this point is that for customers concerned with the GMO-issue, organically grown and produced foods represent the only safe of choice if they want to avoid food from sources that are not GMO-free.


The increased involvement of the conventional food sector has already had its impact, which will certainly become even more pronounced in the years to come. This impact will be felt on the level of production, as bigger, more uniform consignments will be sought, and contract production as opposed to on-the-spot sales will most likely increase. The to date most dramatic example of this development is the British supermarket chain Iceland’s recent major investment in organic vegetable contracts. On the level of distribution, there are also increasingly conventional large distributors entering the field, as for example the large Dutch vegetable distributor The Greenery ventured into organics. Most probably, this will have its impact in the same way: larger consignments of uniform quality, possibly under contract production.


On the retail level it has become more and more apparent that in parallel with the changes in the customer base for organic products the involvement of the large supermarket chains is in most countries crucial for the further growth of the industry. This involvement so far has not been without problems, however, as the seriousness of the conventional food retail sector’s commitment to the organic industry has been questionable in several cases, using organic products as a green fig-leaf, with the main purpose of exploiting them for marketing and image purposes. In addition to this, in some cases there appears to be a serious misunderstanding of how organic products need to be treated in supermarkets so as to become a successful market segment. A striking example for this is some of the supermarket chains in Germany. Lured by the substantial growth forecast and the image gain possible by carrying organic products, many of them created their own organic label, most of them with very mixed success. The major reason for this lack of success is the way the supermarkets treat their private organic label, that is, comparable to their other mainly low-price conventional private labels. Neither product presentation nor product information is appropriate to a high-value good, and the education of the sales force is negligible. Especially in Germany, with its high number of organic food shops with dedicated salespersons, oftentimes owners themselves, this strategy did not do well with customers. The consequence is limited success with organic products. There are examples of success with organic products under German conditions within supermarkets. For instance, in the early nineties Kaufmarkt, a multiple that otherwise made its main business with low-priced mass products, created an organic department that was largely independent from the rest of its operations. The manager in charge and the sales clerks were well educated about organic agriculture and able to generate high sales in the organic department. Few years later, Kaufmarkt was bought by Metro, the biggest German multiple, and they could not tolerate such a successfully and independently run department. Therefore, they resolved to close it. The department manager decided to buy the department himself and to this date runs it successfully and independently within the Kaufmarkt supermarkets. This example shows what is possible with a clear commitment within the existing retail structure. Generally speaking, British supermarket chains appear to do a relatively good job with respect presenting organic products. Waitrose, for example, has created its own blue organic label and presents organics in a specially designed area of its shops.


However, the strategy of major British supermarkets like Tesco and Iceland to cut the price premium for organics gives rise to concern among producers and distributors alike as to their ability to receive an appropriate price for organic production. There is no question among customers of organic products that organic production delivers additional tangible and intangible value, and this value needs to be honored so as to enable organic agriculture to survive. On the other hand, increasingly effective production and distribution systems certainly allow for reasonable, but limited price cuts, and it remains to be seen how far price premiums can be cut without jeopardizing the industry as a whole.

With respect to Japan, one of the determining questions for the future growth of the organic retail sales: will multiples understand and appreciate the difference between certified organic and low-level chemical input products? During the next years, several the consequences of this change in terms of organic retail sales will become apparent. There seems room for an additional organic boom if this difference becomes sufficiently clear to customers and retailers alike, as presently a very substantial part of retail products currently labeled organic are in fact grown simply with low input of agricultural chemicals. For Taiwan, there is not enough data available to reasonably assess the future growth and the driving factors for the market, except for the fact that there is substantial growth from a small basis and that organic products appear to be "trendy".


One of the major changes Europe has seen in the last five years is the change in the customer base for organic food. Organic food has become attractive not only to a very dedicated but small segment of the population, but for a larger part of the mainstream population. However, it has become more and more difficult to clearly determine the new customer profiles. This is partially due to the limited scope of surveys that are short-term and solely geared to answer immediate marketing question rather than those of the general lifestyle and the customers’ deeper values. Generally used descriptions like high income, highly educated, and health-conscious appear to hold true only partially, depending on the studies cited. There is clearly a tendency that organic food is becoming more attractive for more mainstream customers with less pronounced preferences and a much more "blurry" customer profile, comparable to the so-called LOHAS (Lifestyle of Health and Sustainability) consumers in the United States. The decision of more mainstream customers to buy organics make it even more important to have a wide range of organic products available at their main point of purchase, which are generally supermarkets. In parallel with the change of the customer base goes an increased desire to be able to buy in organic food the whole product range already available in conventionally grown food. Consequently, increased international trade of organic goods is enhanced despite the still existing wish to buy more locally grown food. So it is a two-pronged desire: on the one hand the desire for locally grown food and on the other hand traceable, certified organic food in the full range customers are commonly used to.


The growth of the industry as well as increased involvement of the conventional food sector causes changes in the supply chains. In practical terms this means that processors are starting to import directly, major retailers are starting to purchase and even import, and new distributors are entering the organic market providing additional options for supply, and specifically exports. One example is the increased tendency of multiples to buy directly and distribute through their own distribution systems. The large retail chains’ goal to cut organic premiums will foster direct distribution, as it may cut as much as 15% of the retail price.


Nation-wide branding, which except for some cases is not very well developed within the foreign organic markets, will become more common, especially with the entry of major conventional players that have the financial clout and savvy to do this. Because of the substantial expenses required for establishing and marketing brands, the extent of branding will largely depend on the market share the organic market is able to capture on the overall food market. The more prevalent trend, however, is toward private labeling, as private labels enable the specialist food shops as well as the major retailers to tailor products to their specific needs and cut costs at the same time.


Although there are predictions of the imminent "Big Bang" of the organic market, predicting not only a boom but an explosion in organic production and sales, in our view the "Big Organic Bang" has yet to occur. Also, forecasts that organic sales will account for 5-10% of overall food sales worldwide by the year 2005 [22] would require an average worldwide growth rate of 35-40% in the next five years. Except for the UK and possibly Japan, we don’t see any substantial organic market that expands at this pace and therefore we assume that it is a somewhat overoptimistic prediction. Before worldwide growth of this magnitude can happen, considerable infrastructural improvements will have to take place, the international regulatory and legal environment needs to be harmonized, the commitment of the conventional retail sector has to be taken to another level, and general organic market information deficiencies need to be overcome. Nevertheless, even with an estimated worldwide growth rate of 15-20% the organic industry is the most vibrant and fastest-growing sector of the food industry on an international scale.


What does this mean for organic exporters in the US? First of all, the growth, the changes in supply chains, the expansion of the product range, the introduction of new products, and new players entering the marketplace always provide new opportunities. This is especially true for a market that is still dominated by small and medium-sized companies, and where market transparency is not specifically high, which is all true for the European organic market in general. Despite the sustained substantial growth, entering the export business especially for smaller companies is not simply a sure bet, but needs appropriate preparation and precautions. This is even truer in the light of existing trade barriers, which are not likely to ease substantially in the short term. According to the USDA’s Foreign Agricultural Service there is presently no intention to achieve the status of a so-called article 11 country with the EU, meaning that imports of US organic products will need an individual import license for the short term. Most probably, negotiations to this effect will take place only after the US National Organic Standards have been enacted. There is only two months experience with the new Japanese National Organic Standards, and especially as it is not yet enforced it will take at least one more year to get a clear picture of the actual impact of the Japanese regulations on organic imports to Japan. However, the overwhelming majority of the interview partners expressed their expectation that once the three largest organic markets worldwide, the US, the EU, and Japan have their National Organic Standards enacted as law, this would lead to mutual equivalency agreements and thereby alleviate existing trade barriers and foster organic trade on an international level.


Companies with specific strength in the ingredients business, substantial private label experience, products that are specific American, or suppliers of frozen food and frozen food ingredients will see additional opportunities in the future. The same is most probably true for soybean and soy product suppliers, as efforts to increase soybean production in Europe, especially Spain, have not been as successful as anticipated. [46] Competition in the grains sector will grow, due to increased domestic production within the EU and competition from Canada and Eastern Europe. Production costs for dairy products, although a considerably growing sector in the US, are at this point to high to allow US companies to compete with offers from Europe, which is even taking over dairy exports to Japan. Although the relatively splintered distribution and processing infrastructure in Europe can be seen as partially hampering the organic trade, it is precisely this structure that offers opportunities for smaller and mid-sized companies that are willing to take the pains and the effort to overcome the initial trade barriers. Also, in a very general sense we assume that the change in customer profiles for organic products does positively influence the overall willingness to buy US organic products if they are found to be appropriate and fulfill a perceived need, rather than opposed for ideological reasons.


Companies contemplating their involvement in foreign organic markets are well advised to think not only in terms of products, but also in terms of the knowledge and expertise acquired in the US. In practical terms, this might mean for a food processor to search for a European company able to process its products there and hence avoid custom tariffs as high as 25%, while at the same time gaining a partner savvy in the domestic distribution structure. Another form of doing business in a similar way is licensing. For Japan and Taiwan, custom processing in the US can be a feasible option.

We estimate the total annual organic export volume as less than $300 million, most probably in the area of $250 million, accounting for less than 5% of the overall US organic retail trade volume. As we have shown for France, there are substantial organic markets, which are hardly targeted at all by the US organic industry, and there is room to expand in different directions. Although some industry members interviewed expressed the understandable wish for full-fledged export offices for US exports to Europe and Asia, the present trade volume obviously does not support the realization of this wish. However, we recommend considering the following next steps so as to improve the market access to foreign organic markets for US companies:

  1. Addition of a second step to the present study, which should include additional information on major organic markets in Europe, specifically Sweden and Italy, and potentially Austria, Belgium, and Switzerland. It should also include an overview of the just emerging Asian markets like Singapore, India, the Philippines, and others, as well as an outline of the state of the organic markets on the Pacific Rim and in South and Central America. In addition, we the possibility that the addition of a second step to the survey started for this study could result in a much clearer picture on current US organic exports on a commodity and product for sale basis. Given the necessary time frame and drawing on the experience gained, a response rate of 50% or more of the actually exporting companies seems achievable, although, because of the difficulties described in the chapter on trade barriers, complete statistics are not obtainable on the basis of voluntary industry information.
  2. A practical guide as to how best access the markets described, including basic general export information, rules and regulations regarding packaging, labeling and other requirements of the major foreign organic markets as well as a comprehensive overview of domestic export support for the organic trade. This could be realized in the form of web site solely dedicated to this purpose. An example for such a web site is the Government-sponsored Danish web site organic-export.dk.
 
 
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