Values Chains, Organic Certification, and Organic Markets

Douglas H. ConstanceSam Houston State University

20th Anniversary of SAREKansas City, Missouri

March 25th. 2008

Four Parts

• Values Chains• Organics: The Origins• Organics: The Change• Organics: What to do?

– Some evidence from Texas

Commodity/Value Chains • “Commodity Chains in the World Economy Prior

to 1800” , Hopkins and Wallerstein (1986)• “Commodity System Analysis: An Approach to

the Sociology of Agriculture”, Friedland (1984). • “Commodity Chains and Global Capitalism”,

Gereffi and Korzeniewicz (1994)• “The Governance of Global Value Chains”, Gereffi

et al. (2004)

Commodity Chains to Value Chains:

• Commodity Chains focus on tracing the network of labor and production processes whose end result is a finished commodity.

• Value Chains focus on the location along the chain where value is extracted.

• Where is the value extracted? • Who makes the money? • Are chains “seller” or “buyer” driven?

Organics: The Origins• Lady Balfour and Sir Albert Howard in UK• Rodale in the US• Hippies in California – 1960s/70s• Decentralized: scale specific • Philosophical: agro-ecological• Holistic: crops/livestock cycle• “Deep Organics”• Characteristics of the value chain??? • Who drives the chain?

Organics: The Change - California• California Certified Organic Farmers: 1973• California Organic Foods Act: 1990• The “list” - acceptable materials • Third party certifiers • Model for other states/national programs• Entry by California agribusiness• Characteristics of the value chain??• Who drives the chain?

Organics: The Change - US• Organic Standards Protection Act: 1990• National Organic Standards Board• Proposed Rule: The BIG 3 – 1997• Allowable inputs versus agro-ecology• 2001 USDA National Organic Program• No government transition subsidies • Final Rule: 2002

– purposefully framed “certified organic” as a market label based on consumer preference with no claims to health benefits or environmental superiority

Organics: The Change • Certified organic land doubles between 1990

and 2002, then again by 2005. • Rate of certified organic land up rapidly, but

rate of new certified operations slows. • Markets grow at average of 20% through the

1990s and early 2000s. • Entry by national/global agribusiness. • Characteristic of the value chain?• Who drives the chain?

Table 1: U.S. Certified Organic Crop Acreage, Livestock Numbers, and Farm Operations:1992 – 2005 (in thousands)

Item 1992 1997 2002 2005 92-97% change

97-02% change

02-05% change

Farmland

Total 935.5 1,346.6 1,925.5 4,054.4 45 43 111

Pasture/rangeland 532.1 496.4 625.9 2,331.2 (7) 26 272

Cropland 403.4 850.1 1,299.6 1,723.3 111 53 33

Animals

Livestock 11.6 18.5 108.4 196.6 59 485 81

Poultry 61.4 798.3 6,270.2 13,757.3 1,201 685 119

Operations* 3,587 5,021 7,323 8,493 40 46 16

*number does not include subcontracted organic farm operations. Source: USDA/ ERS (2007), Table 2: based on information from USDA-accredited State and private organic certifiers.

Organics: Global Market Info: • Market grew 13.6% in 2006 to $36.7B• Forecast to grow to $67.1B in 2011

– Up 83% since 2006• Fruits/Veges most lucrative sector

– Account for 38.5% of market value• Largest consumer market is the Americas

– Accounts for 49.7% of market value• Major food retailers entering the sales

market: Kroger, WalMart, Tesco, Carrefor• Characteristics of the value chain?

Organics: Global Info.

• In North, demand often > than supply.• North American companies “scouring the

globe” for organic ingredients. • Beans/seeds/nuts – China/Turkey/Brazil• Herbs/spices – India/Paraguay/ Pakistan. • Fruits/vegetables - Africa/Asia• Meats - Latin America/Australasia

Organics: Global Info.

• Demand mostly in the North• Supply growing fastest in South – exports• Triple digit growth of organic land in South

from 2000-06 versus double digit in North• Organic acres up > 700% in China 02-06. • Most organic acres in Australia/Argentina –

grazing land (de facto organic). • Government supported/subsidized • Who is “driving” the value chain?

Some Agri-Sociology• With organic standards/certification you get

entry to capture the organic price premium. – Early adopters capture the premium

• Conventionalization – Appropriationism: agricultural processes move off

the farm- upstream/ downstream– Substitutionism: post-production activities – value

added, processing, retailing • Bifurcation

– Certified: indirect markets (Organic Lite?)– Non- Certified: direct markets (Deep Organic?)

Some More Agri-Sociology

• Entry pushes up supply, down costs, and lowers prices (and price premium).

• Transaction Costs– more efficient to deal with fewer large firms than

lots of smaller firms.

• Global Sourcing– obtain factors of production globally.

• Characteristics of the value chain?• Who drives the chain? Buyer or seller?

Organics: What to do?

• What kind of operation competes/survives in this environment?

• Indirect markets? • Direct markets? • Which are more /less sustainable? • Which are more/less risky? • What about certification?

A Study from Texas: Certified and Non-Certified Organic Producers

• Joint project: 2004-2005– Sam Houston State University– Texas Organic Farmers and Gardeners Assoc.– Texas Department of Agriculture– Texas A&M University

• List from TDA (152) and TOFGA (210) • Compare 53 certified to 32 non-certified• Southern SARE funded

General Hypotheses• Certified and Non-Certified producers will be

different– Demographically– Structurally– Attitudinally

• Certified will be more like “conventional producers” – “organic lite”

• Non-Certified will be more like “alternative producers” – “deep organic”

Demographics

• Age• Education*• Race/Ethnicity• Gender

Age

0%

5%

10%

15%

20%

25%

30%

35%

40%

30 and less 31-40 41-50 51 to 60 61 +

CERT

NON-CERT

Gender

0

10

20

30

40

50

60

70

80

Male Female

CERT

NON-CERT

Education*

0

10

20

30

40

50

High Sc hool Some College College Degree Graduate

Degree

CERT

NON-CERT

Summary

• The only significant variable was education.

Structural

• Direct or indirect markets. • Size; sales; household dependence• Years farming; years farming organically• Tenure: own/lease• Farm operation: full/part time• Hired labor: full/part time• Organic origins: begin/transition? • Plans for the future? • Problems with distance to organic markets?

Table 2. Markets of Organic Products :

*p<.1; **: p<.05; ***: p<.01

Types of Markets Certified Non-certified

Direct markets *

Yes 56.0 76.5

No 44.0 23.5

Indirect Markets **

Yes 64.0 41.2

No 36.0 58.8

Natural Food Store ***

Yes 36.0 8.8 No 64.0 91.2

Size of Operation in Acres – 2003

0

5

10

15

20

25

30

35

40

45

50

20 or less 21 to 100 101 to

500

500 +

CERT

NON-CERT

Gross Organic Farming Income in Thousands – 2003*~

0

10

20

30

40

50

60

$4,999

and less

$5,000 to

$29999

$30,000

to

$99,999

$100,000

and

above

CERT

NON-CERT

Percentage of Household Income from Organic Sales – 2003*~

0

10

20

30

40

50

60

70

80

1-25% 26-50% 51-75% 76-100%

CERT

NON-CERT

Years Farming *~

0

10

20

30

40

50

1-5

years

6-10

years

11-20

years

21 +

years

CERT

NON-CERT

Years Farming Organically *~

0

10

20

30

40

50

60

1-5

years

6-10

years

11-20

years

21 +

years

Own or Lease Organic Farming Land

0

10

20

30

40

50

60

70

80

Own Lease Both

CERT

NON-CERT

Full or Part-Time Farming*

0

10

20

30

40

50

60

70

80

Full Part

CERT

NON-CERT

Non-Family Member Working Full Time

0

10

20

30

40

50

60

70

80

Yes No

CERT

NON-CERT

Non-Family Member Working Part Time

0

10

20

30

40

50

60

70

Yes No

CERT

NON-CERT

“Transition to” or “Began as” Organic

0

10

20

30

40

50

60

Trans Began

CERT

NON-CERT

Distance to Available Organic Markets~

0

5

10

15

20

25

30

35

not a

problem

moderate

problem

severe

problem

CERT

NON-CERT

The Future: Expand, Same, Decrease, or Close

0

10

20

30

40

50

60

70

80

90

Exp Same Dec Close

CERT

NON-CERT

Summary: Structural Issues • Cert > indirect; NonCert>direct markets*• Gross organic farming income – Cert>NonCert*• Percentage of household income –

Cert>NonCert*• Years farming – Cert>NonCert*• Years farming organically – Cert>NonCert*• Certs more likely to be full time. *• Distance to markets problem- NonCert>Cert*• Hired labor – no sig. diff. • Organic origins. – no sig. diff. • Future plans – no sig. diff.

Attitudinal: Reasons for Farming Organically

• Organic Price Premiums*• Growing Consumer Demand*• To Reduce Inputs Costs• Maintain Farm Economic Sustainability • Quality of Organic Products Grown• Chemical Avoidance for Environment• Chemical Avoidance for Personal Health

Attitudinal: Reasons for Farming Organically (cont)

• Land Stewardship; Ecological Sustainability• Response to Chemical Regulation*• Philosophical; Spiritual; Ethical• Community Values; Tradition; Quality of Life• Challenging; Interesting; Intellectually Appealing • Animal Welfare* • Economic Support on Fewer Acres*

Organic Price Premiums *~

0

10

20

30

40

50

Not

important

Important Very

Important

CERT

NON-CERT

Growing Consumer Demand *

0

10

20

30

40

50

Not

Important

Important Very

Important

CERT

NON-CERT

Provides Economic Support on Fewer Acres*~

0

5

10

15

20

25

30

35

Not

important

Important Very

important

CERT

NON-CERT

To Reduce Input Costs

0

5

10

15

20

25

30

Not

Important

Important Very

Important

CERT

NON-CERT

Maintain Farm Economic Sustainability

0

10

20

30

40

50

Not

Important

Important Very

Important

CERT

NON-CERT

Quality of Organically Grown Products

0

10

20

30

40

50

60

70

Not

Important

Important Very

Important

CERT

NON-CERT

Land Stewardship; Ecological Sustainability

0

10

20

30

40

50

60

70

80

Not

Important

Important Very

Important

CERT

NON-CERT

Chemical Avoidance for Environmental Health

0

10

20

30

40

50

60

70

Not

Important

Important Very

Important

CERT

NON-CERT

Chemical Avoidance for Family/Worker Health

0

10

20

30

40

50

60

70

Not

Important

Important Very

Important

CERT

NON-CERT

Philosophical; Spiritual; Ethical Reasons

0

10

20

30

40

50

60

70

Not

Important

Important Very

Important

CERT

NON-CERT

Community Values; Tradition; Quality of Life

0

10

20

30

40

50

60

70

Not

Important

Important Very

Important

CERT

NON-CERT

Challenging; Interesting; Intellectually Appealing

0

10

20

30

40

50

Not

Important

Important Very

Important

CERT

NON-CERT

Response to Farm Chemical Regulation *~

0

10

20

30

40

50

60

70

Not

important

Important Very

important

CERT

NON-CERT

Animal Welfare Issues*

0

10

20

30

40

50

Not

important

Important Very

important

CERT

NON-CERT

Summary• Economic based attitudinals were significant

with a positive relationship to certified farmers-price premiums, consumer demand, regulation response, fewer acres.

• No differences on other philosophical variables.

Attitudes Regarding Organic Certification

With NOP Standards, Organic Certification is Simpler and Easier

0

10

20

30

40

50

DS D NO A SA

CERT

NON-CERT

Organic Certification Helps Me Make a Better Living*

0

10

20

30

40

50

60

DS D NO A SA

CERT

NON-CERT

Customers Expect Me to Be Certified*

0

10

20

30

40

50

60

DS D NO A SA

CERT

NON-CERT

Organic Certification Not Needed for Small Scale Direct Sales*

0

5

10

15

20

25

30

35

40

DS D NO A SA

CERT

NON-CERT

Don’t Need Certification Because My Customers Trust Me*

0

5

10

15

20

25

30

35

DS D NO A SA

CERT

NON-CERT

Am Not Certified Because it is too Expensive for My Small Operation*

0

10

20

30

40

50

DS D NO A SA

CERT

NON-CERT

Am Certified Because Have to Be to Sell as Organic*

0

10

20

30

40

50

DS D NO A SA

CERT

NON-CERT

Am Certified Because Most of My Product is Sold in Indirect Markets

0

10

20

30

40

50

60

DS D NO A SA

CERT

NON-CERT

Conclusions:

• Demographics: As expected? • Structurally: As expected? • Attitudinally: As expected?

• Several significant differences between certified and non-certified organic producers.

• Some support for “conventionalization” and “bifurcation.”

Back to the Value Chain

• What are the trends in value chain governance? – Who drives the chain?

• Which system is more sustainable? – Indirect markets– Direct markets

• Which system is more risky for the producer? – Indirect markets– Direct markets

• To Certify or Not Certify?