Organic Articles: International Food Ingredients, September 2006

The Organic Consultancy

Organic Food and Drink 2006: Current Markets, Future Prospects

Simon Wright
Founder, O&F Consulting (www.organicandfair.com)
September 2006

Introduction

Since IFI last reviewed the organic sector in 2002 the world market for organic food and drink has continued to enjoy strong and sustained growth. The increased sales of organic food throughout Europe and North America has created a sustained demand for more organic produce which is being met in part by farmers and processors in the new EU Eastern countries. Companies seeking to benefit from the organic sector should seek to understand both the drivers behind consumer purchases and the challenges to future growth.

The International Organic Market (1)

The global market for organic food & drink was valued at USD 27.8 billion in 2004. Global sales surpassed the USD 30 billion mark in 2005 with the highest growth occurring in North America. Organic food and drink sales in US and Canada are expanding by over USD 1.5 billion a year. Although organic farming is practiced throughout the world, the most important markets are in North America and Europe, which together comprise 96% of global revenues.

The proportions of organic farmland are more evenly split across the globe. About 31.5 million hectares of farmland were certified organic in 2005. Australasia leads with 12.2 million hectares followed by Latin America (6.4 million hectares) and Europe (6.3 million hectares). Important consuming countries with large areas of organic farmland are Italy, USA, Germany and the UK. Countries like China, Brazil and Uruguay are important producers of organic crops, however the majority of production is for export markets.

The European market for organic food & drink was the largest in the world until it was overtaken by North America in 2005. The European market was worth USD 13.7 billion in 2004 and sales are estimated to have reached USD 14.4 billion in 2005. Sales of organic products increased by about 5% in 2005, however some countries reported higher growth rates.

Germany has the largest market for organic foods in Europe, valued at about USD 4.5 billion in 2005. Sales are growing by 10-12% a year as the number of channels offering organic products expands. A growing number of conventional supermarkets are offering organic products and the number of organic supermarkets continues to increase with 40 new organic supermarkets opening in 2004 alone. The UK market is next largest , followed by the Italian and French markets, however growth rates have slowed in these two countries. Other important markets are in Switzerland, Austria, Sweden and the Netherlands.

There is a small market for organic foods in Central & Eastern Europe (CEE) with the region comprising less than 3% of European revenues. Although the amount of organic farmland in CEE countries is rising, mostly primary products like grains, seeds and herbs are grown. There is a lack of organic food processing in the region with high volume of the organic crops exported to Western Europe, although this is beginning to be addressed via joint ventures.

Expanding the Supply Chain

A good example of how Eastern Europe is entering the organic sector is provided by Golden Falcon, a new joint venture between Tradin Organic Agriculture BV – one of worlds largest International suppliers of organic raw materials for the food industry – and their Serbian partners Golden Falcon. Golden Falcon is one of the only HACCP-certified Organic IQF freezing plants in Serbia; it officially opened in November 2004 and buys organic fruit from approximately 1000 local Serbian farmers who are fully certified by Control Union, the sole organic certifier accredited by the Dutch Government. The IQF freezing plant uses two different methods to freeze organic fruit. A blast freezing system can freeze products within 5 – 6 hours. However most of the organic fruit is frozen on a fluidised bed freezer, capable of freezing the individual fruits within 3 – 4 minutes. This system is relatively simple and ideal for small fruits which need to maintain an undamaged appearance such as raspberries, strawberries, blueberries, sour cherries and blackberries. Such partnerships between Eastern and Western companies combine a low-cost production base with well established supply-chains (for more information see www.tradinorganic.com).

Understanding Consumer Demand

The UK represents the most dynamic market for organic food and drink at present, with the result that current UK sales trends are being carefully monitored in the USA and throughout Northern Europe as an indicator of future trends. Retail sales of organic products in the UK were worth approximately 1.6 billion for the calendar year 2005, an increase of 30% on the previous year (2). This means that throughout 2005 organic sales grew by around 7 million every week. Supermarkets took the majority of organic sales, accounting for 1.2 billion of sales (around 75%). Retail sales made through producer-owned outlets, such as box schemes, mail order, shops and farmers markets, increased by approximately 11% to 125 million in 2005. Approximately 66% of the organic primary produce sold in multiple retailers was sourced in the UK.

The numbers and range of people buying organic food have also risen, with two out of three consumers now knowingly buying organic food (65.4 %) and over half of people in the most disadvantaged social groups (C2, D and E) now buying organic food and drink challenging the stereotype of organic being only for the well-to-do. Whilst people who have been buying organic food for some time cite Taste and Health as the main reasons for their organic purchases, new research done by Harris International for Seeds of Change (Masterfoods) across a number of countries indicates that new entrants to organics appear more likely to cite environmental reasons such as combating climate change as their key driver (3).

2005 was also notable in the UK as the first year in which scientific proof of health benefits from organic food had a direct impact on the market. After widely-publicised Danish research showed higher levels of several key nutrients in organic milk, sales rose immediately by 10%.

Challenges Facing The Organic Sector

In December 2005 the European Commission published proposals for a revision to current EU Organic Regulation 2092/91. If accepted this would permit GM in organics at up to 0.9%, further restrict organic advertising claims and restrict the use of private certification symbols (such as the Soil Association, Naturland or Nature et Progres). The timescale given to respond to these proposals was very short and stakeholder involvement was minimal
Extensive lobbying (especially by IFOAM EU Group) has delayed by at least 6 months the Commissions decision, although the Finnish Presidency aims to reach agreement during November 2006 (4). It seems unlikely that the Proposal will be withdrawn how much is accepted will depend on effective lobbying by the organic sector.

Spectacular organic market growth in the USA has prompted the entry of major manufacturers such as Nestle and major multiples such as Walmart
There have been attempts to dilute American organic standards some commentators say this is due to big company pressure. Feedlot farming (organic dairy cows that see no or little pasture) is currently permitted in the US but unpopular with consumer groups. Critics say that Walmarts aggressive price-reduction policy will destabilise the organic supply chain.

Another concern has been whether the rapid increase in global organic sales will cause problems with the supply side. Certainly in the USA organic processing companies have reported that they are unable to source sufficient organic dairy ingredients certified to the National Organic Programme (NOP). UK consumer interest in reducing food miles and in supporting local producers has lead to a shortage in UK-produced organic milk. More non-organic farmers converting to organic production and the certification of further land as organic is likely to correct these localized supply problems, but the time taken to convert to organic (2-3 years) means that there tends to be a cycle of undersupply followed by oversupply. Bridging this gap by sourcing organic ingredients from further afield means relying increasingly on unfamiliar organic certification. In order to address this issue, before an organic product can enter the EU from elsewhere the importer must demonstrate compliance to EU Organic Regulation 2092/91 or an equivalent standard.

In the UK recent hostile media attention has focussed on the fraudulent sale of organic meat at farmers markets and by small butchers. So far the organic sector has been resilient to such attacks but if repeated they could lead to consumers losing their trust in food labeled as organic. In contrast a UK daily paper ran a life swap feature where a family went fully organic and reported that they felt healthier, their food tasted better and they spent less money! Further positive media coverage such as this will drive organic sales even further.

References

1. The International Market for Organic and Fair Trade Food & Drink by Amarjit Sahota, taken from forthcoming Handbook of Organic and Fair Trade Food Marketing, edited by Simon Wright and Diane McCrea
to be published by Blackie Academic in 2007

2. Organic Market Report 2006, published by The Soil Association, July 2006

3. Research carried out for Masterfoods by Harris International, 2005

4. Revision of the Organic Regulation 2092/91, IFOAM EU Group Newsletter No 12, July 2006


The Handbook of Organic and Fair Trade Food Marketing

Published by Blackie Academic
Edited by Simon Wright and Diane McCrea

Provides a practical guide to successful marketing in these two dynamic sectors, underpinned by case-histories and lessons from companies such as Green & Black’s, Yeo Valley and Duchy Originals. The Handbook also includes a review of the international markets for organic and fair trade food and drink; an analysis of organic and fair trade consumers; a review of successful retailing practice and a section on organic and fair trade divergence and convergence. Other chapters feature perspectives from the USA, Germany and Italy. The book is written by industry experts, offering for the first time the practical marketing advice required by companies in this sector.

For more information or to pre-order the Handbook please visit www.blackwellpublishing.com/1405150580


About the Author

Simon Wright is founder of O&F Consulting (www.organicandfair.com). Since 1986 Simon has specialised in the manufacturing, retailing, legislation and marketing of organic and Fairtrade food and drink, working with companies throughout Europe and in the USA. Clients range from small manufacturers of natural foods through to one of the UKs largest multiple retailers. He has a degree in Food Science & Nutrition and is a Fellow of the Institute of Food Science and Technology and a Member of the Guild of Food Writers. Simon is a Council Member of the Soil Association and a Board Member of Twin Trading, the fair trade company behind Divine chocolate and cafedirect coffee.