Organic Agriculture and Food Industry: Trends, Challenges and Opportunities

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1 Organic griculture and Food Industry: Trends, Challenges and Opportunities K. Muthukumaran* Production Estimating area under organic agriculture in India is a difficult task as there is no central agency that collects and compiles this information. However, according to National Program for Organic Production (NPOP), PED, the total area under certified organic cultivation in India is around ha, which includes wild herbs collection from forest area of Madhya Pradesh (MP) and Uttar Pradesh (UP) of ha. The current production of organic crops is around 14,000 tons (Garibay S V and Jyoti K, 2003). Out of this production, tea and rice contribute around 24% each, and fruits and vegetables combine makes 17%. Organic griculture in India Organic cultivation is particularly suitable for a country like India with a huge population of small farmers who still use traditional methods of farming with few agricultural inputs. It is estimated that 65% of the country s cropped area is organic by default, as the small farmers have no choice but to farm without chemical fertilizers and pesticides as they cannot afford. This default status coupled with India s inherent advantages, such as, its varied agro-climatic regions, local self-sustaining agri-systems, sizeable number of progressive farmers and ready availability of inexpensive manpower translate into the potential to cultivate a vast basket of products organically. Type of Product Commodity Spices Pulses Fruits Vegetables Oil seeds Others Table: Major products produced in India by organic farming Products Tea, Coffee, Rice, Wheat Cardamom, Black pepper, White pepper, Ginger, Turmeric, Vanilla, Tamarind, Clove, Cinnamon, Nutmeg, Mace, Chili Red gram, Black gram Mango, Banana, Pineapple, Passion fruit, Sugarcane, Orange, Cashew nut, Walnut Okra, Brinjal, Garlic, Onion, Tomato, Potato Mustard, Sesame, Castor, Sunflower Cotton, Herbal extracts Source: Org-Marg, 2002 (Field Survey & Publication Organic and Biodynamic farming, Govt. of India, Planning Commission) *Chief General Manager, EXIM Bank, Chennai 13

2 Export Market Percentage share of organic products in India Organic agricultural export market is one of the major drivers of organic agriculture in India. India exports 31 organic products. It is estimated that more than 85% of total organic production, excluding wild herbs from UP and MP, is exported. India is best known as an exporter of organic tea and also has great export potential for many other products. Other organic products for which India has a niche market are spices and fruits. There is also good response for organic rice, vegetable, coffee, cashew, oil seed, wheat and pulses. mong the fruit crops bananas, mangos and oranges are the most preferred organic products. India s organic export products include, tea, honey, cashew, cotton, processed fruits, coffee, basmati rice, sesame, spices, walnuts, pulses and wheat. Key organic items of export importance are fruits and vegetables, sesame, basmati rice, fruit pulp, fruit juices, spices, cashew, tea, coffee, cotton and wheat. India has production advantages in most of these products. Source: PED 2003 India s products and production areas 14

3 Domestic Demand The domestic market is nascent but has huge growth potential. Presently the domestic market for organic products are estimated at 1,200 tonnes and there are around 2-3 million potential customers for organic agricultural produce and is growing. Constraints and Challenges Though there is rising interest for organic agriculture in India it is not growing at a pace to enhance its market attractiveness so as to motivate larger section of farming community to opt for organic agriculture. The flowchart below provides some of the key factors limiting organic agriculture in India in a nutshell. Low levels of Market information about organic produces No designated agency at Central State & local levels which reaches farmers with information No Quality Monitoring Control Systems in place Low Quality of bio-inputs Existence of spurious & low quality brands in market Conventional gri-inputs considered more effective than Bio-inputs Non-availability of bio-inputs Disincentive for traders given the low penetration of bioinputs market Limited Shelf life of bio-inputs Time lag & high costs of conversion of Conventional to organic farming Relatively longtime period needed for bio inputs to be effective Subsistence farming by large number of small & marginal farmers Limited R & D efforts & investments on Bio inputs Limited Penetration of Organic griculture in India Limited positive government interventions & high negative subsidies Under developed infrastructure & marketing channels for green outputs High Costs involved certification & limited no. of certifying agencies Price premiums reach more for Intermediaries than producers No & limited Storage facilities No easy quality assurance mechanisms Lack of adequate transportation facilities Subsidies to commercial inputs disincentiviaing bio-inputs Limited financial outlays for bio-inputs by government No strategic attention for greening agriculture & No coordinated effort at Centre & State Level Small farm holdings Low levels of networking among farmers and other stakeholders Formal associations of traders, farmers & others are not paying adequate attention Mostly geographically dispersed organic farmers; Small numbers with organic produces mong the constraints listed above, current high levels of transaction costs for getting farms certified as organic is a major deterrent for enhancing organic production in the country. The certification process is very lengthy and complex and the cost of certification (refer Table in the next page) is also unaffordable for small farmer. 15

4 Table: Cost of inspection and certification Category Details Fees (Rs) Small farmers and Travel and inspection report 12,000/day cooperatives preparationcertification 5,000 flat fee 5,000/certificate Estate manufactures and Travel and inspection report 19,200/day exporters preparation Certification 5,000 flat fee 5,000/certificate Large and medium sized Travel and inspection report 16,800/day processors preparation Certification 5,000 flat fee 5,000/certificate Source: Org-Marg, 2002 Markets of Organic Food The organic food industry has been growing remarkably for the past several years. gainst the 2-3% growth in the conventional food industry, the organic food industry has been experiencing an annual growth between 17% and 22% over the past several years. Global retail organic food sales, valued at USD 25 billion in 2003, are currently worth USD 31 billion and growing at over 20% per annum. The same is estimated to increase to USD 102 billion by Organic agriculture is now practiced in approximately 110 countries and its share of agricultural land and farm continues to grow. The major markets for organic food products are in the United States, the European Union (Germany, France, Italy, Belgium and the United Kingdom), and Japan. The annual market size of natural and organic products in the US is estimated to be anywhere between USD billion. In 2005, retail sales of organic food and beverages were approximately USD 12.8 billion. Growth rate estimates up to 2010 range between 9% and 16% per annum. part of the US demand is met from imports. In 2002, the import of organic foods into the US was about USD 1.5 billion. The EU organic market grew rapidly through 1990s by a range 20% and 40% per annum, but currently the growth has slowed down because the number of regular organic consumers has stabilized. Retails sales grew from USD 10.5 billion in 2002 to USD 12 billion in 2004, at a growth rate of 5% per annum. Germany is the second largest market for organic food and drink in the EU, which accounts for almost 30% of total organic sales valued at USD 3.7 billion in 2003, followed by the UK, which achieved estimated retail sales of USD 1.6 billion. Italy and France organic markets, each valued at approximately USD 1.5 billion. The French and the UK markets have grown on an average of more than 40% annually since mong the more significant countries producing organic products in sia are China, Ukraine, India, Indonesia and Israel (mainly dried and fresh fruits and vegetables and nuts). Japan is the largest consumer of organic products in sia. The market was estimated at USD million in 2003 and is growing at 20% per annum. The Japanese organic market is characterized as one with high demand, strong purchasing power, and low domestic supply of organic products. On the supply side, the value of Chinese exports grew from less than USD 1 million in 1990s to about USD 142 million in By 2003, more than 1,000 Chinese companies and farms were certified organic. Challenges and Opportunities Markets in developed countries are evolving to demand highly processed organic products as well as raw commodities. Supply competition is inevitable. s production is widespread, most of the raw commodities are now available 16

5 in organic form. In Europe, markets are increasing for readyto-eat meals, frozen foods, baby food, snacks and beverages. Ingredients needed for organic food processing include juices, fruit powders, dried fruit, meat, flavourings, essential oils, herbs and spices and nuts. In Japan, organic consumer goods, which are in growing demand, include fresh produce, frozen foods, juice, baked goods, baby food, chicken, sauces and ready meals. New Zealand has emerged as a significant supplier of organic foods lately. Organic Meat: Key Emerging Markets Market research reports reveal high market growth for the organic meat sector as consumers fear for food safety raises demand for organic meats. The BSE scare caused the Canadian market for organic meat products to expand by 35% in Similar growth was expected for the US market from 2004 as organic meat production steps up and as more volume goes into the retail trade. Organic poultry was the most widely available organic meat in 2003 with organic beef and pork rarely found in retailers. Currently the organic meat is less than 1% of the overall USD 175 billion US beef market. However, interests on organic meat are high among the consumers in US with the Organic Trade ssociation, in Greenfield, Massachusetts, projected a 175 % annual growth rate for organic meat by The organic poultry segment dominates the North merican organic meat products market. Relatively short production cycle, integrated production system, and low price premium are responsible for the trend. Organic beef in comparison is rarely found in retailers because of small-scale production, inadequate distribution infrastructure, and the success of competing products like natural beef. The European organic meat products market has been growing at over 20% a year since late 1990s and has lately slowed down to 10%. The market is becoming increasingly competitive as many countries are suffering from oversupplies. Organic meats are mostly marketed under supermarket private labels, which account for over 80% of fresh cut sales. Brands are more evident on organic processed meats. Organic Citrus and Citrus Juices: World Market Review Citrus products labelled as organic are those certified as having been produced through clearly defined organic production methods. Fresh Organic Citrus Production : World production of certified organic citrus in approximately 30 countries was about 600,000 metric tons in 2001 accounting for 0.6% of total citrus production. Organic citrus is produced in a majority of citrus producing countries in the mericas, the Caribbean, the Mediterranean rim, frica and sia. The largest producing countries are, by decreasing order of importance: Italy, the United States, Brazil, Costa Rica, Greece and Spain. Markets : The European Union (EU) market for both certified organic fruit and vegetables was estimated at US$ 1.7 billion in 2002, with fresh organic citrus representing 5-7% of all fresh fruit and vegetables sales and 37% of all organic fruit sold. However, consumption of fresh organic citrus in the EU is still relatively low compared with overall fresh fruit use. Some of the constraints responsible for this trend and need to be addressed are poor fruit quality, packaging, short shelf life of organic citrus and inefficiencies in the marketing chain. Survey of main markets within the EU reveals that selected EU countries imported approximately 48-50,000 tonnes of fresh organic citrus in with Germany, France, the UK and ustria being major importers. ustria and Denmark have the highest per capita consumption of organic products in general. The fresh citrus import market in the Netherlands is unique because this country is a key entry point, reexporting imported citrus to other EU countries, partially due to less complicated organic import procedures than other EU countries. 17

6 Table - Estimated net imports of fresh organic citrus in selected EU countries ( ) Importing Exporting Metric Country Country tonnes ustria Spain, Greece, Israel 7-8,000 Belgium Denmark Spain, Italy 2,000 France Italy, Spain, Israel, South rica 9,000 Germany Italy, Spain 13,000 Netherlands - 7,000 Sweden Spain, Italy 500-1,000 UK Italy, Spain 8,000 Finland Spain, Italy 500 Ireland Luxembourg Total 48-50,000 Fresh fruit and vegetables are the leading organic food category in the United States retail food market. Organic oranges are among the most consumed organic fruit, together with apples and bananas. The US is a major citrus producer. Production in was 14.7 million tonnes, however, a very small share of the citrus harvest is grown organically. The US imports small quantities of organic citrus mainly from Mexico (oranges and limes), Honduras (lemons), Guatemala, Brazil (oranges) and South frica (oranges and grapefruit). In general sale of fresh organic fruit and vegetables is very small in Japanese markets. Japan produces small quantities of organic mandarins. The lack of domestic supply of organic citrus is compounded by tough Japanese organic gricultural Standard (JS), phytosanitary restrictions and high ad valorem tariffs on imports of fresh citrus, currently about % of the total citrus market. Prices : Fresh organic citrus prices in EU vary with seasonal availability of fruit, market location and type of retail outlet. Prices of imported citrus are generally higher during the off-season for EU citrus production. On an average, fresh organic citrus sells for 65% higher than conventionally grown citrus, however, premiums range from 17% in Greece to 144% in Finland. Organic citrus is also cheaper in countries where a substantial share of organic produce is sold in supermarkets rather than smaller health food stores. In the US, the premium for organic versus conventional fresh produce generally ranges from 11% to 121% in the conventional stores and from 50 to 167% in the natural food market. Organic Citrus Juice The bulk of organic citrus juice consists of orange juice. Juice volumes of other organic citrus products such as organic grapefruit juice (e.g. in Cuba, Israel and the United States) and lemon juice (rgentina, Spain) have been very low so far. Orange juice is marketed in two main forms: frozen concentrated (FCOJ) and not-from-concentrate (NFC), with recent sales for NFC increasing more than that of FCOJ. Markets : The main markets for all organic fruit and vegetable juices combined are the UK, Germany, Italy, France and Scandinavian countries with retail sales increasing more than 20% per year since The present EU market for organic juice in general is only 0.57% of the total EU juice market. Organic citrus juice accounts for only 0.3% of total citrus juice consumption. Brazil is the largest supplier of FCOJ for the EU, followed by the US, Cuba, Israel and Costa Rica. Highly competitive in the conventionally produced FCOJ market, Brazil is expected to maintain this lead in the organic FCOJ market. The US is the largest market for orange juice in the world. The bulk of US orange juice is produced in Florida, where production is split almost equally between FCOJ and NFC juice. In addition to its domestic supply, the US imports organic citrus juices, mainly from Mexico and Brazil. The tariff on concentrated citrus juice imports ranges between 34 and 38% in ad valorem equivalent. The tariff on non-concentrated citrus juice is much lower (below 5% in ad valorem equivalent). Japan is the third largest market for citrus juices after the US and the EU. Japan consumed over 635,000 18

7 tonnes of citrus juices in 2000, 70% of which was imported. Japan imports organic FCOJ from Brazil and organic NFC juice from the US. Market Prospects Fresh Organic Citrus The EU market for fresh organic oranges, tangerines and lemons is dominated by Italy and Spain. However, with the two countries remaining the main supplier of organic citrus in the EU, other marketing opportunities will fall to those with preferential trade agreements with the EU, with fruit available from May to September when EU local production is low or absent. There are also opportunities for exporting organic grapefruit and limes which are short in supply. There are more opportunities for fresh citrus exports to the US and Japan. lthough the US produces organic citrus, demand may exceed supply and its import tariffs on fresh citrus are very low. The Japanese market for fresh organic citrus also offers interesting prospects if exporters can meet the new JS organic regulations and the tough phytosanitary requirements. Given its large population with a relatively high per capita income and focus on health concerns, conservative estimates predict Japan s organic market for fresh organic citrus fruit could grow to mature market potential of 3-5% of the total citrus market by Organic Citrus Juice The market for organic citrus juices is presently extremely small. FO has projected the volume of organic citrus juice consumption in the world until 2010 using 2 different growth scenarios. Based on the observation of past growth for other organic product categories, the first scenario assumes the market for organic orange to grow up to 40% and then gradually decreases to 10% in In the second scenario consumption grows at 20% annually until Then, annual growth decreases gradually to reach 10% in Brazil is the largest supplier of fresh citrus organic juices (FCOJ) and is expected to retain its lead in the organic FCOJ market. For other developing countries located near the main markets, producing citrus juices and exporting organic NFC juice, may be a better option. Distance to markets matters more for NFC juice than for FCOJ due to the higher transportation costs of NFC. Due to the relatively high tariffs on orange juice, countries, which enjoy preferential trade agreements with the major markets, will have a comparative advantage. However, for exporters seeking to supply organic citrus and citrus juices to the developed countries major considerations should include (i) ability to meet specific requirements of the target market (phytosanitory requirements, quantity and quality, packaging, consistency, and scheduling deliveries), (ii) profit margins in terms of production costs and various price premium scenarios, (iii) targeted market tariffs and preferential market access agreements, and (iv) target market acceptance of organic certification. Key Developments and New Opportunities Organic farming has been identified as a major spearhead in the Tenth Five Year Plan ( ) and is expected to be one of the focus areas to boost agricultural growth in the Eleventh Five-Year Plan ( ) of the Indian government. In a recent development, Indian organic certifying bodies will be soon receiving European Commission (EC) equivalence status exempting Indian organic products from further certification by European agencies, which likely to bring down the cost of organic exports and will also result in savings of Rs.500-1,000 per hectare for certification. Indian government has designated six organizations to accredit certifying agencies (international or domestic) undertaking inspection and certification of organic products. These are PED, the Tea Board, the Spices Board, the Coffee Board, the Coconut Development Board, and the Directorate of Cashew and Cocoa. National organic standards have been established under NPOP. Currently, 11 accredited certifying agencies are functional in India. IMO (Switzerland), ECOCERT (Germany), SKL (The Netherlands), SGS (Switzerland), and Lacon (Germany) are some of the International ones. Indocert, based in Kerala, is among the accredited domestic agencies. The burgeoning European and US organic markets provide enormous scope for Indian exporters. US retail sale for organic product has grown 20-24% per year for the past 12 years and the same growth trends are expected to continue for future. Europe is the second largest market of organic produces in the world and consumes around half of the world organic produce. European market for organic food is estimated to be around US$ 9 billion and expected annual growth rate is of around 20%, depending on the markets. Japan is the largest organic food market in sia. Retail sales of organic food and beverage is around US$ billion (2003). Of this, imports are estimated to be to the tune of around US$ 360 million. Though the organic food market is not more than 0.5% of total food market of Japan but according to the Japanese Integrated Market Institute, import 19

8 of organic products is likely to grow by 40%. Other global markets for organic products are Saudi rabia, UE and South frica. The matrix below reveals that India has demonstrated capabilities of exporting some key agricultural commodities to most of the major global markets, where there is a considerable demand for organically produced commodities attracting price premiums ranging from %. The matrix thus, showcases window of opportunities in these markets for Indian exporters and producers of organic agricultural commodities, which are yet to be exploited to maximum potential. Conventional agricultural products & their export market and prospective market for Indian organic products Existing conventional export market for Indian producers for particular product Prospective market for Indian organic products. Organic - Primer -Continued from page 12 The IFOM Basic Standards are a set of standards for standards. They are established through a democratic and international process and reflect the current state of the art for organic production and processing. They are best seen as a work in progress to lead the continued development of organic practices worldwide. They provide a framework for national and regional standard-setting and certification bodies to develop detailed certification standards that are responsive to local conditions. Legislated standards are established at the national level, and vary from country to country. In recent years, many countries have legislated organic production, including the EU nations (1990s), Japan (2001), and the US (2002). Nongovernmental national and international associations also have their own production standards. In countries where production is regulated, these agencies must be accredited by the government. Since 1993 when EU Council Regulation 2092/91 became effective, organic food production has been strictly regulated in the UK. In India, standards for organic agriculture were announced in May 2001, and the National Programme on Organic Production (NPOP) is administered under the Ministry of Commerce. ( In 2002, the United States Department of griculture (USD) established production standards, under the National Organic Program (NOP), which regulate the commercial use of the term organic. Farmers and food processors must comply with the NOP in order to use the word. Organic Certification Organic certification is a certification process for producers of organic food and other organic agricultural products. In general, any business directly involved in food production can be certified, including seed suppliers, farmers, food processors, retailers and restaurants. Requirements vary from country to country, and generally involve a set of production standards for growing, storage, processing, packaging and shipping that include: avoidance of synthetic chemical inputs (e.g. fertilizer, pesticides, antibiotics, food additives, etc) and genetically modified organisms; use of farmland that has been free from chemicals for a number of years (often, three or more); keeping detailed written production and sales records (audit trail); maintaining strict physical separation of organic products from non-certified products; undergoing periodic on-site inspections. Certified organic producers are also subject to the same agricultural, food safety and other government regulations that apply to non-certified producers. Continued on Page 41 20