Overview of markets and marketing
In most Asian countries, the trade in organic agriculture has not been well tracked or measured. Many countries don't have tracking codes for organic trade since it represents a relatively small portion of agricultural trade. Although Japan has separate codes for some organic products, there is no international trade classification for organics in either the Standard International Trade Classification to or the Harmonized Commodity Coding Systems. Estimates in the region typically put certified organic sales at less than one percent of a nation's agricultural sales. Of course, many organically grown but uncertified products enter local market channels without organic labeling and identification and these volumes or values, although likely to be considerably greater, are much more difficult to estimate.
Being certified as organic is often a very useful distinction that helps to differentiate an organic farmers products from the conventional competition. Markets that recognize this and will pay a premium for organics are often not readily available, especially to remote small farmers. Nearly all of the case studies mentioned this. Marketing is often a constraint for any kind of farmers and it can be especially difficult for organic farmers. Of course, organic products can be marketed as conventional products, and often are. But frequently, opportunities exist to capture higher value for the organic process. As organic products increasingly find their way into the most common market channels, including supermarkets, the discovery process becomes easier while the demands become more difficult. In Uttaranchal, the attempt of a loose conglomeration of farmers to deal directly with an urban retailer ended poorly because neither they nor the government agents facilitating the transaction were familiar with the business requirements of this trade. A number of the cases learned to use traders to facilitate such transactions since small farmers are typically constrained in three distinct areas of marketing.
First, farmers should assess their specific market orientation by honestly evaluating what they have to offer. For example, the types of products, quality levels, presentation or processing capabilities, and the quantities available. They must also evaluate the level of risk they are prepared to tolerate since, for example, exporting can be intrinsically riskier than dealing with a known local company. That assessment helps them to segment the market analysis to determine whether to focus on export or domestic markets and then select the appropriate market channel(s) within those markets in order to develop a marketing plan that leads to productive contacts with potential buyers. The Yunnan tea study showed that experience was first gained in the domestic markets and, recognizing the challenges of export, the local organization decided to use the fair trade network to facilitate exports. While this particular alternative will certainly have only limited applications, it served to give the organization some assurance of having reasonably safe and fair foreign transactions.
Second, farmers must learn the requirements needed to access their targeted organic markets. By mapping out market channels, they can better understand purchasing patterns and behavior so as to ascertain the current and future market potential and its attractiveness. As with a conventional marketing effort, they must determine whether they can meet the prices required, arrange the contracts, meet certifications, fulfill the required quantities, ensure the agreed-upon quality, and deliver at the right time and in the right packaging. Producers in Uttaranchal and Karnataka are beginning to develop this understanding through their own retail outlets. Case experience suggests that local markets ought to be developed first, where possible, and that international orientation and certification should be pursued only when sufficient capacity, export crops, and interested buyers have been identified. Faced with a product that requires significant processing (Inner Mongolia livestock, Anhui tea) it can be difficult for the producers to acquire the necessary infrastructure and training to access the certified organic market. In Anhui, a donor co-financed a local processing setup with village families and this was then linked to an existing organic tea company for their packaging, labeling and marketing expertise. In Inner Mongolia, the contracting company handled every step of the process leading local producers only the rearing component. An often underestimated part of this process is determining whether farmers can wait for payment (sometimes months) or undertake methods of guaranteeing it (e.g. Letter of Credit).
Third, farmers must recognize that these processes require dedicated attention and some training. This is especially true in situations like rural China where the government has had a dominant role in the marketing process. Getting beyond a local market is more than an occasional task that a few of the farmers can undertake in their spare time and that is especially true for export marketing. Can farmers hire a trained person in this field or, at the very least, assign one of their members with aptitude for this area to do the work? Can they afford to offer some remuneration, acknowledging that such a job would clearly conflict with time spent farming? Time and dedication are important because organic markets are not very deep. With relatively few buyers scattered in different countries and regions, the demand can be unsteady and finding a new buyer can take time. Even selling on the domestic market can be difficult. One Uttaranchal producers group learned this lesson painfully as their crops languished in the field unsold after high expectations from the first transaction. Most of the projects have experienced this difficulty. In Anhui, one of the models studied (A) noted that the necessary steps to ensure the required quality and standards for organics can take much more time and skill; not surprisingly, many producers would prefer having a dedicated specialist handle the post harvest and marketing. Establishing a market orientation can be difficult and contracting with a dedicated professional i.e. trader or private company can often be necessary, especially as producers are occupied learning new requirements for organic standards or for quality levels. In any case, consistent and experienced staffing is vital in order to sustain long-term marketing efforts that gradually move farm products up the value chain, progressing from simple raw materials toward value-added products.
Demand in the domestic markets
In recent years, the local demand for organic products has grown along with consumers incomes and their increased concern for food safety. The domestic markets in India, China, and neighboring developing countries offer considerable opportunities given the significant size of the population with significant disposable income.
Both markets are, however, still modest in size. India's domestic market is small and mostly informal with only a few shops dedicated to organic products. Much of the organic produce reaches consumers without being subject to organic identification or specific labeling. Even formal distribution channels primarily through traders to individual retailers are difficult to monitor and measure. Therefore there are no credible or complete estimates for the size of the domestic market. One survey notes that more organic products in India are sold through the supermarket channels (31%) and to the processing industry (30%) than through any other (Garibay and Jyoti 2003). The same document cites a recent Mumbai survey noting that organic products sold at retail were about twice the cost of conventional products (Garibay and Jyoti 2003 p. 17). There have been several attempts to establish chains of shops in India specializing in organic products (i.e. Green Foundation, AME, Yardi and Soree) but none have succeeded.
China similarly has only a few dedicated organic food stores but there is growth through conventional distribution channels. According to the Ministry of Agriculture, Li (2004) and the China National Green Food Development Center (CNGFDC) the domestic market in China is valued at approximately USD 107 million at wholesale or USD 150 million retail3 . According to China's Ministry of Commerce, organic produce is estimated to be less than 0.1% of the total food in the domestic market. In urban areas this market share is estimated to be considerably higher but still not more than 1%.
One of the more dynamic sources of business and food standards are large multiple-store retailers, particularly supermarkets, whose unprecedented rates of growth are quickly giving them dominant positions in many developing countries, and especially China (Hu et al. 2004). By intrinsically incorporating some of the more important aspects of the dominant food standards that are in demand, organic products have a unique advantage. While meeting standards is an important step, many organic products and producers are still in the learning stages of how to integrate smoothly into these new global-scale distribution channels. For more on supermarkets see Chapter III, the section on "Market Channels for Organics".
Most of the organic food retailers in China and India are located in urban areas where food availability and sales have outpaced the growth of rural food supplies. See Table 2.1. These more affluent consumers have the disposable income to afford the higher price of organic products but sales volumes are still quite modest. This is in part due to:
Food expenditures (USD per capita)
Source: China National Bureau of Statistics.*Although it is not clear whether the CNBS figures are adjusted for exchange rate fluctuations, they would nevertheless reasonably represent the differences between rural and urban.
In parts of India, traditional markets provide outlets for products produced in an ecological manner. These markets operate on trust enforced by local familiarity and none are certified per se, but they can require significant standards that are comparable, and in some cases more demanding than organics. These kinds of products have many different names depending on the regions, culture, and even religious application. To facilitate discussion, they have recently come to be classed under one term: Krishi".
China's Green Food phenomenon
In China, several thousand different products are sold nationally under the Green Food label. This government certification applies to products that are grown in a safe and ecologically sound manner. This market, because of its rate of growth in the past decade, its similarities to organics, and its sheer size, is well worth understanding since it sets a precedent for organics. The retail sales of certified Green Foods make it one of the largest such sectors in any country of the world, approximating the retail value of the United States' USD 12 billion organic market. See Figure 2.1 using wholesale/farm gate values4. The total turnover of 2003 reached approximately USD 11.9 billion5 or USD 8.7 billion (wholesale) for the domestic market. Of this, about 12% or USD 1.1 billion was exported to Japan and Europe (See Figure 2.2).
Chinas 1980s policies of opening to the outside world and economic reform led to an unprecedented growth in the varieties of food available. However, food safety and quality problems also increased, in part due to misuse of chemical inputs in food production, and in 1990 the Ministry of Agriculture (MoA) initiated the Green Food Program.
36. In 1991, the Green Food label was successfully registered as the first such certification in China. The CNGFDC, affiliated to the MoA, owns the registered label and is the certifier. Its popularity has soared and by the end of 2003, there are 2 047 certified Green Food enterprises producing more than 4 000 products that are available in many parts of the country, especially in urban areas. Most are significant enterprises rather than small farmers. Certified land covers 5.14 million hectares and the total annual output is 32.6 million metric tons. Companies in Australia and France are among the first to be recently Green Food certified to export barley and dairy whey to China.
Insert figure 2.1
Source: China National Green Food Development Center
Note: domestic company sales, not retail
AA-Grade Green Food products are somewhat comparable to organic products but there are distinct differences. Green Foods use product standards rather than process standards as organic products do. See Table 2.2. For example, the Green Food Program makes extensive use of modern test methodologies to ensure that the production environment and the characteristics of the final products meet its benchmarks. Green Food production is dominated by larger companies and farms that can more readily manage the standards of environment and food quality. Organic products rather than testing a product or soil/water sample require the management of the production and post harvest processes that assume many of the same parameters, plus a number of others. Organics do not regularly require environmental or sample tests unless problems are suspected. Green Foods have an end-product orientation born of consumer and government concern for safe foods whereas organic farming historically developed more to meet farmers needs. In this sense, rather than simply refraining from polluting the crops or environment, organic farmers employ active measures to seek to improve their soils and ecological environment. In this sense, organic production internalizes public benefits such as biodiversity and natural resource conservation by bundling both a product and an environmental service that are paid for by consumers whenever organic products are sold at a premium. This creates an undistorted market incentive for farmers to conserve public goods even if consumers might be less willing to pay for the public services independently.
Insert figure 2.2
Source: China National Green Food Development Center
With more emphasis on initial field test and then only laboratory test of products, the field inspection of Green Food is not as traceable as organic which follows the whole production process of each crop down to individual farmers. The inspection of standard A Grade Green Food relies more on the production and control records of Green Food enterprises while the inspection of AA Grade Green Food products is reportedly similar to organic agriculture. As Table 2.2 indicates, organic does not require tests of the environment and final residue (although these can be done when indications warrant). Organic production relies more on the verification of processes at each stage to indicate whether an environment or product might be contaminated.
The credibility of CNGFDCs certification procedures for Green Food has been called into question (Smith 2002; Xu 2001) primarily on the basis that it manifests conflicts of interest stemming from the fact that it certifies the products, draws its income from their sale, and inspects their compliance. Organic products are likely to remain more recognized on the international market because of their independent inspection system and considerable presence as a legally defined global brand in many nations.
Insert table 2.2
Source: Daniele Giovannucci
The Green Food certification process includes tests and field inspections of growing and processing environment, food quality, and processing procedures. To bear the Green Food label, raw materials should be cultivated in a pollution-free environment and manner:
Samples of the final products are tested, not only for content and hygiene, but also for banned residues and substances. About 80 Environmental Monitoring Stations and Food Quality Monitoring Stations across China are designated to conduct such tests.
CNGFDC receives a fee for the certification and its Green Food certificate is valid for a period of three years. During the certified period, annual scheduled inspection is conducted by the CNGFDC and local Green Food Management Offices, where products are reportedly sampled.
In response to domestic and international market needs, CNGFDC introduced a more rigorous grading in the late 1990s called AA-Grade Green Food that is comparable but not the same as organics. This is now distinguished from the standard A-Grade Green Food by requiring traceability and the absence of any synthetic agro-chemicals. There are more than one hundred firms now certified.
Researched by Daniele Giovannucci
Green Food is strongly promoted by the Chinese government and is of great significance in improving overall food quality in China. However, when exported it is usually as conventional and does not necessarily receive a premium price as is the case for organic products. There is a demand for Green Food in countries like Japan, primarily because Green Food is more likely to meet the basic import requirements of such developed markets in ways that China's non-certified exports may not.
Asia and international organic agriculture and trade
Worldwide, nearly 130 countries produce certified organic products in commercial quantities, including more than 90 developing countries (Kortbech-Olesen 2000). Yet almost all of the certified organic production is sold in the Organization for Economic Cooperation and Development (OECD) countries with approximately 46% of these sales in Europe, 37% in North America and about 16% in Asia (Yussefi and Willer 2002). According to the United Nations Economic and Social Commission for Asia and Pacific-UNESCAP (2003), the demand for a wide range of Asias traditional and non-traditional organic products has been expanding rapidly since the late 1980s. In addition to European and North American demand, markets in the region are also growing, particularly in Japan, Australia, Singapore, South Korea, Taiwan and Hong Kong. According to Janz et al. (2003) in India and mainland China, domestic markets for organic products whether certified or not, are small but emerging and this is supported by the example of China's enormous success with the domestic markets for their Green Foods that experienced a 25% average annual growth rate through the 1990s. These developments align with growing demand for safe foods and point not only to the continued potential for exports, but also to new opportunities in intra-Asian trade and to potential for increased domestic markets. The lack of harmonization of standards between countries adds to the burden for farmers and traders who must select and sometimes use multiple certifiers, and naturally, it hinders their access to the international markets.
Global sales of organic food and drink increased by 10.1 percent to USD 23 billion in 2002 (Organic Monitor 2003) clearly confirming a slowdown from the stronger double-digit growth rates of the previous decade6. Strong European Union (EU) sales growth has slowed somewhat in several countries and totaled USD 10.5 billion in 2003 while the North American market, according to the Organic Trade Association (2004), continued strong 20% expansion to USD 10.4 billion in 2003. Based on conservative growth estimates, global markets should reach near to USD 30 billion in 2005. Although organics represent less than 2% of food business, there are countries and sectors that have proven to be much more successful. In Munich, Germany for example, organic baby food has an 80% market share and organic bread has a 30% share.
Past history is not necessarily a good indicator of future trends but based on this recent experience and data, organics growth is a safe bet. Although it is difficult to generalize about all organic products, it is useful to characterize them in terms of product lifecycles theory (Giovannucci 2003). Organic market characteristics in Europe and the United States indicate that these products have gained considerable consumer awareness and have already moved out of the introductory stage and into the growth stage. The growth stage is typically characterized by increasing product variations and competition that begins to stress competitive differences. The tendency of this stage is to dramatically increase distribution, expand market channels, and begin to shift the pricing strategy away from price skimming to more competitive pricing in order to gain market share. The experience of some leading organic products in today's marketplace (i.e. coffee and soy beverages) would support this observation.
From the first organic tea product certified for export in 1990, more than 200 kinds of organic agricultural products have been certified in China. Most certified products are export-oriented with primary markets in North America, Japan, and Europe. Most middle income and upper-middle income countries in the Asia region have also received organic exports but these are still very modest. The value of exports has skyrocketed from less than USD 1 million in the mid-1990s to about USD 142 million in 2003 (See Figure 2.3). Estimates for 2004 approach USD 200 million. Approximately USD 40 million of this is also certified as Green AA Foods indicating the progressive merging of these under one organic label.
Insert figure 2.3
Source: OFCC Directorate
For India, 31 organic products are currently exported and the organic value for 2003 is estimated at USD 15.5 million (710 million Indian Rupees) with strong double-digit growth projected in 2004 [Agricultural and Processed Food Products Export Development Authority (APEDA)]. Its primary destination markets are the USA, Switzerland, Germany, Japan, Denmark, France, the Netherlands, and the UK.
Certified land area for organics
There are statistics for the amount of certified farms and acreage in many Asian countries but there is little data available on non-certified farms that are likely to be far more numerous. According to estimates gathered by Willer and Yussefi (2002, 2004) there are more than 24 million hectares of certified organic land today. The countries with the largest areas of organic land (most is grazing land) are: Australia, Argentina, Italy, Canada, and the USA. Some countries have reached a substantial proportion (close to or more than 10%) of certified organic land; these include Sweden, Austria, Switzerland, Finland and Italy.
According to Willer and Yussefi (2004), Asia has a surprisingly small proportion of the world's certified organic land (approximately 3.7%) or about 880 000 hectares and more than 61 000 farms are under organic management. Most of these farms (40 000 plus) are in Indonesia and about 80% of the land area sits in three countries: China, Ukraine, and Bangladesh. Bangladesh may be the only one with more than one percent of its agricultural land certified as organic.
The evaluation teams estimates, from official sources in mid 2004, are very much higher. In China, there are 600 000 - 700 000 hectares of certified organic land in 2004 according to the Organic Food Certification Center (OFCC). This includes natural harvesting areas, aquaculture, croplands, and pasturelands that are certified or in conversion. For perspective, China has 130 million hectares of arable land, 227 million hectares of forest and 226 million hectares of grassland (UN 2003). It is estimated that 1 100 companies and farms have been certified or are in process of certification and about half are locally certified. India's APEDA that tracks organic data from some of the certifying agencies notes that 332 certifications have been issued in the past year and the area certified under organic farming totals 2 508 826 ha in early 2004. This is a dramatic rate of growth from the earlier data of 37 000 ha collected for 2001-2002 by the Foundation of Ecology and Agriculture (SOEL) shown in the Figure 2.4 below. The new figure can be misleading because it includes 2 432 500 ha (confirmed with certifiers SGS and IITA) that are mostly forest area used for collecting wild herbs and medicinal plants and so it may not be considered as part of Indias 180 million hectares of agricultural land. Most of this certified area (2.3 million) is in Madhya Pradesh and Uttar Pradesh also has a considerable amount: nearly 100 000 ha. These are two of Indias poorest states. Excluding the considerable area in Madhya Pradesh and Uttar Pradesh, the remaining 76 000 certified hectares would still easily double the area estimated in 2001-02.
Source: SOEL-Survey (February 2004) of 1998-2002 data; Graph: M. Yussefi, SOEL
4/ Officials of the China National Green Food Development Center do not track retail statistics. They use the farm gate price for unprocessed products and the wholesale price for processed products and these two combined form the "turnover" or wholesale value of Green Foods.
6/ Earlier figures, based on less exact estimates are likely to have skewed previous growth rates. For example, the re-estimation of Japan's market from approximately USD 3 billion to USD 350 million after stricter application of organic labeling guidelines.