1.3 Past and Current Trends in the Market for Organic Products

The aim of this section is to assess potential future market conditions for both organic and low-input production and to gauge opportunities, domestically and internationally. An assessment is also made of the impact of increasing supply on international markets on New Zealand organic producers. A more detailed review is given in Appendix A.3 a summary of which is presented here.

The organic market in most of the countries reviewed in this report is still relatively small and characterised by niche markets with the main distribution historically being through specialist channels. However, there are indications that this is changing with the development of the industry and greater targeting of main stream distribution channels reaching potentially larger markets. A particular problem with assessing the extent and potential of the organic sector is the lack of data. Much of the information available is the result of piecemeal studies which makes it difficult to do cross-section or time series comparisons. The analysis below should be seen in this context.

The organic sector is, on average, under half a percent of the total agricultural sector in most of the countries reviewed in Appendix 3, the exceptions being Germany and Austria which have between two and three per cent of their agricultural area under organic production (Lampkin and Padel, 1994).

In 1992 the world market for organic produce was estimated to be US$3 to 4 billion per year, with the European market estimated to account for half of this (Verschur 1993). However, in 1994 Tradenz estimated that the worldwide market potential for organic produce to be in excess of NZ$ 6.2 billion by the year 2000 (Inder 1995).

1.3.1 The New Zealand Market for Organic Products and Produce

As previously mentioned the organic industry in New Zealand can be classified into two sectors, one primarily targeting the export sector and the more traditional sector which supplies much of the domestic market.

It is the rapid rise in the export sector over the last few years which differentiates the New Zealand market from many other countries. In 1991 estimated output from the organic industry was NZ$1.1 million, of which a small proportion was exported. In 1994 exports alone were NZ$6 million; growing to NZ$12 million in 1995; and NZ$23.5 million in 1996, (OPEG 1997). Adding estimates of domestic output of around $10 million this gives total output of $33.5 million in 1996.

Organic farming for the export market is concentrated geographically with a small number of processors and sectors. The main two processors are WFF and the NZKMB which accounted for most of the output, 80 per cent of exports in 1994, although their share of exports is declining.

The level of exports are predicted to rise but actual estimates differ. In 1994 MAF estimated that New Zealand organic exports in the year 2000 would be between NZ$8m and NZ$125m (MAF 1994). Tradenz estimates that exports will reach $125 million by 2000. These Tradenz estimates may be optimistic as they depend largely on the growth of WFF and NZKMB markets which those companies themselves argue will only grow by half this amount at the most (Inder, 1995). OPEG estimate that exports will grow to NZ$65 million by 2002 (OPEG 1997).

It is certainly evident that some companies and marketing boards (e.g. WFF, ENZA, NZKMB) consider the market for organic products to be a valuable niche market. However, as will be seen in the review of other countries markets there are constraints to further development including; lack of information, market access constraints, supply difficulties, institutional attitudes, technological and conversion constraints as well as policy developments elsewhere. These factors will be illustrated in the market review of other countries below.

New Zealand Domestic Market

While estimates of the export sector in NZ exist the size of the domestic market is somewhat harder to estimate. Data are available from case studies which suggest a per capita expenditure per year of over $3, which if extrapolated to the whole of NZ would imply retail consumption of $10.7 million, (Campbell 1996).

There are indications that the organic sector in New Zealand may continue to grow from surveys of consumer preferences It is suggested that this could rise to $20 million if the New Zealand per capita consumption matches that in Australia over the next few years.

1.3.2 The Australian Market for Organic Products and Produce

The organic sector in Australia is important to NZ for two reasons. Firstly the sector is often seen as a model showing the potential growth for the NZ domestic market sector. In addition the development of the Australian export sector may have an impact as a potential competitor to NZ.

The organic sector in Australia is still small. In 1995 the organic sector accounted for about 0.02 per cent of total retail sales (Keskula, 1995). The domestic sector was estimated to be valued at $A90 million in 1996 with an additional $A30 million including the export sector, (Monk 1997) a doubling from 1990. It is argued that the potential market, including exports could reach $A200 million (RIRDC, 1996).

In 1995 it was estimated between one and two per cent of all Australian primary producers are either certified organic producers, or are seeking certification by one of the main certification agencies (Monk, 1996). In 1994 there were over 1,400 certified producers, out of a total of just under 138,000 producers in Australia (Hassell, 1995).

The Australian export market is concentrated in cereals, fruit and vegetables. The export market is roughly a third of the size of their domestic market, a level of export development that is lagging behind New Zealand. Therefore, whilst overall the sector is bigger than NZ it does not seem to have targeted export markets as aggressively as NZ and, therefore, not realised its potential for organic exports.

In the domestic market consumption has grown and, as stated above, is higher than that in NZ. In 1996 the market was estimated to be A$90 million, an annual consumption per head of A$5 (Monk 1997). If these consumption figures applied to NZ it would suggest consumption in NZ growing to NZ$20 million, a doubling of current estimates of domestic consumption.

1.3.3 The Japanese Market for Organic Products & Produce

The Japanese market for organic produce is a key market for NZ exporters. The Japanese market for organic foods was estimated to be US$500 million in 1994. This has grown considerably with the demand for organic produce estimated to have increased at an annual rate of 20 per cent since the mid 1980s. This growth shows signs of continuing with many commentators arguing that demand continues to be greater than supply.

Ahmed (1994) estimates that between three and five million Japanese now regularly buy organic produce for health reasons. Moreover, industry sources estimate that over 300 organic products, including fresh organic fruit and vegetables are distributed in the Japanese market, as detailed in Naka (1996).

Domestic organic production is still a small proportion of the total, for example in 1995 the Japanese government estimated domestic production of organic vegetables to be about one per cent of total vegetable production (Foodnet, 1997).

However, what is significant about the Japanese markets, compared to more traditional NZ markets, is the consumer interest in the source of supply. Thus producer/consumer co-operatives are responsible for significant proportion of the retail food trade in organic foods with some consumers requiring to know the source of their food and even visiting the farm (Furusawa, 1992). Thus, some Japanese consumers are reported to be very concerned about the safety and quality of foreign food (Foodnet, 1997).

Imports were still a small proportion of the total market at about US$5 million in 1994, or one per cent of the total market (Foodnet, 1997), the major supplier being the US. However, New Zealand based companies such as WFF and NZKMB have overcome these barriers holding preferred supplier status with numerous customers (McErlich, 1994). For example, the NZKMB has been successful targeting the Japanese market with sales rising from 6,000 trays in 1993 to 443,000 in 1996.

Premiums in the Japanese markets are estimated to range from 10 to 30 per cent over conventional products, as detailed in Naka (1996).

As the market expands other distributional channels are becoming important thus up to 70 per cent of large department stores and supermarkets, 85 per cent of Co-ops, and 37 per cent of agricultural co-operatives currently deal with organic produce (Yoneyama, 1996). Another study estimated that about 90 per cent of retailers stock organic produce (Foodnet, 1997).

Therefore the growth in the Japanese market seems set to continue. New Zealand suppliers have had considerable success in targeting niches in this market. In doing so they have developed important contacts and information regarding distribution and marketing in Japan. It is the necessity for this infrastructural knowledge which acts as a potential barrier to new entrants into the organic market. However, problems do exist in obtaining access for some products with dilemmas such as import requirements demanding fruit should be sprayed which means it can not be sold as organic.

1.3.4 The European Market for Organic Products & Produce

The European market has traditionally been New Zealand's main market for agricultural exports. However, over the last few decades it has also been New Zealand's main competitor in international markets. This has the potential to apply to organic produce as well. As the world's largest consumer of organic produce, a considerable amount of which is imported, Europe should be a potential market for New Zealand organic exports (Lampkin and Padel 1994).

Current estimates of the present and forecasted size of the European organic industry are difficult to obtain. Lampkin and Padel (1994) estimated that in 1990 the market was approximately ,900m. This figure was predicted to grow to ,2700m by 1995 and ,8200m by the year 2000. Growth is predicted to be especially strong for meat and dairy products. The organic meat market is estimated to be $400 million in 1996, this, including the market for dairy products, and the meat market is estimated to grow by 190 per cent between 1996-2002 to $1 billion. The main reasons given for this are the BSE scare and loss of confidence in hygiene standards. It is perhaps this which will offer the most potential for New Zealand exports, as the market for organic meat and dairy products develop. However, there is important competition from within Europe as outlined below.

The size of the EU organic production sector is estimated at 1.25 million hectares, 1.2 per cent of the agricultural area, with 55,000 producers (Lampkin and Padel 1994).

Europe is radically different to New Zealand because the development of organic farming, and the agricultural sector in general, is not necessarily driven by the market but by policy.

The 1992 reforms switched the bulk of agricultural support from market based to direct payments with no restrictions on farming practice attached. As these direct payments are likely to be banned after the next round of trade negotiations some other justification for supporting agriculture and continuing direct payments will have to be found. These new direct payments are most likely to require compliance with environmental criteria and could lead to the general adoption of low-input farming.

Measures/policies to encourage low input (including organic) farming have been developed in member states since 1987. These measures are specific to member states and generally relate to designated areas. The level of EU expenditure on these schemes however is relatively small as a percentage of its budget at four per cent in 1995, proposed rise to 4.4 per cent in 1997, and 5.3 per cent in 1998 (Agra Europe 1996).

In addition to the above there are general policy measures being implemented, both at the EU level and by member state, encouraging low-input farming such as the nitrate directive which limits the amount of nitrate run-off. Other measures adopted by countries include reductions in pesticide use, for example the Netherlands and Denmark have undertaken to reduce pesticides use by 50 per cent.

Given the changes outlined above, this implies that the current agricultural budget on market support and area/headage payments of around 40 plus billion ecus (European Currency Units) could be diverted into headage/area payments for low-input environmentally sensitive farming, which is a radical change when compared to the two billion ecus expenditure on current subsidies for low- input farming in the EU (Agra Europe 1997).

Therefore, in the EU the potential expansion in low-input farming is enormous. Whilst this will not necessarily be organic in the traditional sense it may meet the requirements of many potential organic purchasers and affect the market. Given the EU is a major exporter then this also has the potential to affect New Zealand export markets. However, the switch to low-input farming methods may well reduce EU agricultural output and thus reduce competition on overseas markets.

Moreover it is this possible change in policy which may lead to further restrictions being placed on New Zealand traditional exports of conventional produce to Europe. The environmental criteria applying to European production methods may well be used as a barrier to imports thus necessitating a review of production methods in New Zealand.

In the Appendix A.3 a review is given of each of the European countries which are considered to be important to New Zealand. These reviews are summarised here.

The UK is of course still an extremely important market for New Zealand exports, much under preferential access arrangements. In the United Kingdom the organic market is small. It is estimated that the size of the organic market for organic produce was ,140 million in 1995, rising from ,60 million in 1990 most of which was in fresh produce. In the late 1980's major supermarket chains were beginning to distribute organic produce. This interest subsided, it is argued, due to lack of continuity of supply and quality. However, the potential is there for New Zealand to target major retail outlets and meet the requirements of the mass market.

In addition the UK has been one of the European countries most enthusiastic about the uptake of low-input farming methods and this, with the recent food scares, may mean the restrictions on conventional production methods for access to this market become more important.

The Netherlands has a small organic sector but the Netherlands' potential as an exporter may affect niche markets that New Zealand may wish to target.

In 1995 the area covered by organic farming in the Netherlands was around 0.5 per cent of the agricultural area. The domestic market was estimated at one per cent of total agricultural output but the total export volume is estimated at between 60 to 80 per cent of organic production. Thus 60 per cent of organically produced carrots are exported as are 52 per cent of organically produced dairy products.

Denmark has experienced the most rapid growth in the organic sector especially in dairy products, which is of interest to New Zealand both as a potential competitor but also as a model. Whilst growth occurred from 1988 to 1992 in organic agriculture, from 0.2 per cent to 0.6 per cent of the total agricultural area in Denmark (Dubgaard, 1993), it was from 1993 that the main change occurred. This growth from 1993 was mainly due to a change in marketing policy with conventional supermarkets offering organic food products. The sales of organic produce and the conversion rate from traditional to organic farming has since markedly increased (Michelsen, 1995).

As stated above Denmark has expanded the output of organic milk. Organic milk was produced for first time in 1988 and by 1990 there were 532 farmers. Organically produced milk prices were 10 to 40 per cent higher than for conventional. In 1990 organic milk consumption was estimated at two per cent of the milk market (Lundby 1990). By 1995 the output of organically produced milk was 48 million litres and was expected to rise to 125 from 1996 onwards. Organic dairy products accounted for 5 per cent of the dairy products market and one per cent of the cheese market with supermarkets predicting this could rise to between eight and nine per cent (Alvensleben 1995).

It is predicted by 2000 that organic milk production will account for 40 per cent of the market and organic potatoes, carrots and onions will account for 50 per cent of the market, much of which will be exported to the UK and Germany (BIOFAIR, 1997).

Denmark has introduced a number of action plans relating to agriculture and farming practice. In 1987 the plan on the aquatic environment set targets of reductions in discharges of nitrogen by 50 per cent and phosphorous by 80 per cent. This was reiterated in the action plan for agriculture in 1991 which aims to reduce use of nitrogen by 50 per cent and at reducing pesticides use by 50 per cent by 1997. Moreover, the Danish government has an organic action plan which aims to have seven per cent of the land farmed organically by 2000.

Therefore Denmark is in a strong position to capture the market for organic milk market domestically and in the rest of Europe.

Germany has one of the highest proportion of organic farms in the world, with two per cent of the land managed organically (Padel and Zerger, 1993). Germany also has one of the largest markets for organic products. Organic produce was estimated, in 1994, to be 1.5 to 2 percent of the country's NZ$300 billion total turnover of food trade. Moreover, the industry is estimated to be growing at nine per cent per annum (Alvensleben et al., 1995).

Traditionally, German organic farms preferred direct selling and/or specialised organic outlets (such as wholefood shops) to supermarkets. However, this situation is changing with potential for expansion in more conventional outlets.

Other European countries have significant organic sectors, which may not have a direct impact on New Zealand markets, but are of interest in showing how sectors can develop. In particular, Sweden there is a policy of achieving a sustainable agriculture, which includes aiming for ten per cent of the agricultural area to be organic by 2000. However, experience in Sweden does show how price premiums for produce can fall when supply increases. A trebling of the hectarage of organic land resulting from an official conversion scheme led to a swamping of the organic cereal market, and disappearance of the organic premium.

1.3.5 The US Market for Organic Products & Produce

As with Japan the US market has great potential for New Zealand exporters. The size of the organic market over the last few years is estimated to have grown by 20 per cent per year. Tradenz estimates that the market was $2.8 billion in 1995 and estimates it will grow to $4.8 billion by 1998 and $5.8 billion by 2000 (Tradenz 1996).

The US is also a potential competitor in export markets with exports of $203 million in 1994, a 80 per cent rise from 1993, mainly due to increased demand in Europe and Japan (NFM, 1995). The number of certified organic producers grew 23 per cent from 1993 to 1994 to over 4,000 farms. Thus in 1994 over a million hectares were estimated to be organic, or 0.1 per cent of total agricultural land.

The growth in the US market has been due to rising consumer awareness of food safety and quality issues as well as improved distribution channels. A 1994 survey found that one in every three respondents reported changing their eating habits over the past year, which included eating organically grown produce. A 1993 survey found that 83 per cent of American families would prefer to buy organic produce (PVFH, 1993). The Food Marketing Group showed that nearly a quarter of all shoppers buy natural or organic foods weekly. Moreover, consumers are willing to pay a 23 per cent average premium (ranges from 10-30 per cent) for food that is certified organic (Colorado State University, 1994).

Highly publicised events (such as, the controversial bovine somatotrophin (BST - recombinant bovine growth hormone) triggered unprecedented demand for organic dairy products, with sales leaping 125 per cent from an estimated $11 million in 1993 to nearly $24 million in 1994 (Mergentime and Emerich, 1995).

Currently, the natural/health food store channel has a wide range of store formats (Tradenz, 1996). However, the organic retail sales environment is changing. The market is polarising with smaller stores successfully focusing on organic as a niche market while larger stores are expanding to attain economies of scale and breadth of product lines (Tradenz, 1996). This trend indicates the majority of organic foods will be sold in large natural/health food stores by the year 2000.

More than 50 per cent of wholesalers charge a premium over and above a comparable non-organic products, depending on various parameters such as the product itself, season, supply and demand. Data from retailers indicate that premiums range from 15-100 per cent with an average of approximately 20 per cent (Tradenz, 1996).

1.3.6 Conclusion

The organic sector in most countries is still small and typically a niche market. However, whilst these sectors are small relative to the size of their markets, they are large in relation to NZ export output. In addition many of these are growing, giving opportunities for NZ exports. In fact NZ is in an unique position in the world markets with established marketing channels for organic produce in a number of countries and the expertise and experience of targeting these markets with produce which is consistent in quality. Few, if any, countries seem to be challenging this position although exports from the US and EU have the potential to affect this.

Price premiums for organic products range from 10 to 100 per cent although 20 per cent seems more typical. However, these can disappear when supply increases especially in those countries with policies to encourage organic farming.

The main markets for NZ are Japan and the US and these are still growing. There are also potential markets in Europe. However, the main threat from Europe is the development of low-input farming which, whilst not affecting organic markets directly, may well affect the export market in general as the demand for produce produced under less intensive methods increases.

As stated in the introduction to this section the lack of data is a serious problem in the analysis of market size and trends especially when compared to the data available for the conventional sector in most countries. Obviously there is a limit to how far NZ can address this and organisation such as Tradenz and OPEG do provide information. However, this is still a factor in the development of the industry and targeting of potential markets.

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