Values Chains, Organic Certification, and Organic Markets

1
Values Chains, Organic Certification, and Organic
Markets

• Douglas H. Constance
• Sam Houston State University
• 20th Anniversary of SARE
• Kansas City, Missouri
• March 25th. 2008

2
Four Parts

• Values Chains
• Organics The Origins
• Organics The Change
• Organics What to do?
• Some evidence from Texas

3
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)

4
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?

5
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?

6
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?

7
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

8
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?

9
Table 1 U.S. Certified Organic Crop Acreage,
Livestock Numbers, and Farm Operations1992
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.
10
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11
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?

12
Organics Global Info.

• In North, demand often gt 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

13
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 gt 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?

14
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?)

15
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?

16
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?

17
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 AM University
• List from TDA (152) and TOFGA (210)
• Compare 53 certified to 32 non-certified
• Southern SARE funded

18
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

19
Demographics

• Age
• Education
• Race/Ethnicity
• Gender

20
Age
21
Gender
22
Education
23
Summary

• The only significant variable was education.

24
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?

25
Table 2. Markets of Organic Products
plt.1 plt.05 plt.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
26
Size of Operation in Acres 2003
27
Gross Organic Farming Income in Thousands 2003
28
Percentage of Household Income from Organic Sales
2003
29
Years Farming
30
Years Farming Organically
31
Own or Lease Organic Farming Land
32
Full or Part-Time Farming
33
Non-Family Member Working Full Time
34
Non-Family Member Working Part Time
35
Transition to or Began as Organic
36
Distance to Available Organic Markets
37
The Future Expand, Same, Decrease, or Close
38
Summary Structural Issues

• Cert gt indirect NonCertgtdirect markets
• Gross organic farming income CertgtNonCert
• Percentage of household income CertgtNonCert
• Years farming CertgtNonCert
• Years farming organically CertgtNonCert
• Certs more likely to be full time.
• Distance to markets problem- NonCertgtCert
• Hired labor no sig. diff.
• Organic origins. no sig. diff.
• Future plans no sig. diff.

39
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

40
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

41
Organic Price Premiums
42
Growing Consumer Demand
43
Provides Economic Support on Fewer Acres
44
To Reduce Input Costs
45
Maintain Farm Economic Sustainability
46
Quality of Organically Grown Products
47
Land Stewardship Ecological Sustainability
48
Chemical Avoidance for Environmental Health
49
Chemical Avoidance for Family/Worker Health
50
Philosophical Spiritual Ethical Reasons
51
Community Values Tradition Quality of Life
52
Challenging Interesting Intellectually
Appealing
53
Response to Farm Chemical Regulation
54
Animal Welfare Issues
55
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.

56
Attitudes Regarding Organic Certification
57
With NOP Standards, Organic Certification is
Simpler and Easier
58
Organic Certification Helps Me Make a Better
Living
59
Customers Expect Me to Be Certified
60
Organic Certification Not Needed for Small Scale
Direct Sales
61
Dont Need Certification Because My Customers
Trust Me
62
Am Not Certified Because it is too Expensive for
My Small Operation
63
Am Certified Because Have to Be to Sell as
Organic
64
Am Certified Because Most of My Product is Sold
in Indirect Markets
65
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.

66
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?