Prices and premia
27. The high quality image of organic food is
generally supported by high prices, offering producers a significant
premium over conventional equivalents. The level of premium varies
from sector to sector. For cereals and vegetables, it is around
50 to 60 per cent; for meat and dairy products, around 15 to 20
per cent.[56]
The NFU attributed this difference to the balance between supply
and demand for the product;[57]
and it is certainly arguable that the premia have often been above
the level needed to recover the additional costs involved in organic
production and marketing.[58]
We understand that premia are much lower (10 to 30 per cent) in
more mature organic markets overseas[59]
and recently we have also seen significant decreases here in supermarket
prices. For example, ASDA has "an aspiration of [prices for
organics] being no more than 30 per cent higher than the non-organic
equivalents",[60]
while Iceland has gone one better by announcing the wholesale
conversion of its own-brand vegetables to organic without charging
a premium. In order to do so, it has bought up 40 per cent of
world supplies of organic vegetables, a further move away from
the notion of organic farming as localised production.
28. These moves by the supermarkets have caused some
concern among organic farmers who are anxious that the power of
the multiple retailers could push producer prices down below sustainable
levels. The fear is that the actual price received for
organic produce will fall rapidly in line with the increase in
supply and that the supermarkets will fail to keep their promise
of paying for consumer reductions through economies of scale or
out of their own profits rather than those of their suppliers.
The difference between price and premium is a vital one. Organic
farmers receive a price which may represent a premium over conventional
products, but what they get is a price, not a guaranteed premium.
For example, the ex-farm price of organic milk (c. 29.5 ppl) is
significantly above the current ex-farm price for conventional
milk (c. 18ppl) but not so much higher, particularly when the
additional costs of production are taken into account, than that
obtained by conventional producers in 1995 (c. 24.9 ppl). Mr Tucker
of Yeo Valley Organic Company told us that the company had "been
trying to get that message through to the farmers that it is not
a premium, if the conventional price does start to rise again
it will not push up the organic price".[61]
The farmers we met recognised this fact and were seeking stability
in contracts and pricing, rather than a guaranteed premium over
conventional producers.
29. It is likely that over time, even without pressure
from the supermarkets, organic prices will fall. Mr Finney of
Eastbrook Farm Organic Meats reminded us that at the moment "we
have virtually no effective economies of scale to play with in
a business of this size, in terms of transport, feed, packaging".[62]
As the market grows and supplies grow, such economies of scale
will be possible throughout the industry, a point made strongly
by Iceland.[63]
This might not affect farmers directly: Dr Lampkin was not convinced
that "there will be a significant reduction in prices to
farmers in the short to medium term", ie. three years, because
increased production was likely to replace imports rather than
add to the total supply, the market was continuing to expand and
"there is a lot of potential for significant economies of
scale in the processing and distribution system".[64]
He also believed that farmers could afford to see their profits
for organic produce cut,[65]
although we tend to agree with the Minister, Mr Morley, that it
is justified for those who wish to support organic farming to
pay a premium to cover its extra costs.[66]
We believe that as the market develops there will be some erosion
of the current advantage over conventional prices paid to producers
(not least because conventional prices may themselves recover
as we have seen, albeit hesitantly, in milk) and that any farmer
going into the business now would be wise to plan for prices lower
than those that organics have commanded in the past.
Constraints on expansion
30. We have already referred to some of the
constraints on expansion of UK organic production within individual
sectors, such as conversion times or technical difficulties in
organic practices. There are, however, some constraints which
are common to the whole organic farming industry. An obvious example
is that Government funding for organic conversion is limited both
in the overall budget and in the need for land to be IACS-registered
before it can receive OFS assistance, an additional layer of bureaucracy
for those sectors which would not otherwise be concerned with
IACS. In addition, for nearly a year, Government funding has not
been available at all (although we note that early organic producers,
like Mr Watson, did not require this incentive). Other problems
could be defined as gaps in the infrastructure, such as shortages
in animal feed or organic seed; the declining number of small
abattoirs (essential to the organic livestock industry); the shortage
of processing capacity in general; or insufficient training.[67]
There is also a need for more technical research to help farmers
and growers address the consumer demand for a wide variety of
choice in each food type, together with cosmetically attractive
produce and year-round availability. This is again closely linked
to the requirement for better marketing in order to meet or educate
customers' expectations.[68]
Finally, there is the impact of regional clusters on the development
of organic farming. Where these emerge or are encouraged, they
may create a dynamic towards even greater growth; where they are
absent, expansion may be constrained in those geographical areas.
31. The constraints outlined above can be addressed
by the industry and Government and we will discuss later in this
Report strategies for doing so. However, there is another set
of constraints which are less amenable to practical solutions.
The organic boom is highly dependent upon consumer perceptions
and is equally vulnerable to changes in those perceptions. There
are two main threats here. The first is that the rapid growth
of the market might encourage standards to be eroded, whether
of imported produce where controls are inevitably more difficult
to enforce or of domestic produce. If this happens and becomes
a public issue, then consumer faith in the organic industry will
be shaken and there could be a rapid fall in its fortunes. Even
worse would be a major food scare involving organic foods. This
underlines the importance of the regulatory approval and inspection
systems in ensuring food safety, product authenticity and reassuring
consumers that they are getting what they are paying for.[69]
32. The second threat, however, is that consumers
will cease to be prepared to pay for organic foods. The impact
of food scares may fall away; the general public might come to
doubt the claims made for organic in the context of food safety
or quality; or difficulties might arise over the popular perception
of organic as chemical-free or environmentally benign. Public
attitudes towards GM foods might also alter over time, with a
potential impact upon the market for organic and conventional
products.[70]
It is therefore vital that the organic industry develops its
ability to market its products effectively so that they appeal
not to sentiment but to proven benefits. The industry may need
to be less messianic and more marketing-orientated in its public
presentations. The hard core which has always purchased organic
food is very small; to appeal to the majority market beyond that
in order to ensure a viable volume sector into the future, the
organic movement must demonstrate the qualities which differentiate
its products from conventional ones and must continue to respond
to the market in offering the service and range demanded by consumers.
46 Ev. p. 177. Back
47 Ev.
p. 18, para 6. Back
48 Ev.
pp. 175-6, table 1. Back
49 Ev.
p. 179. Back
50 Ibid. Back
51 Ibid. Back
52 Ev.
P. 170, para 3.4. Back
53 Q
249. Back
54 Q
344. Back
55 Ibid. Back
56 Ev.
p. 31. Back
57 Ev.
p. 31. Back
58 Ev.
p. 179. Back
59 Ev.
p. 185, para 16. Back
60 Ev.
p. 233. Back
61 Q
344. Back
62 Ev.
p. 152. Back
63 Ev.
p. 78, para 5.4. Back
64 Q
125. Back
65 Ibid.
Back
66 Q
597. Back
67 Ev.
pp. 174-5, 4.1; Ev. p. 163, section 6. Back
68 Ev.
p. 32. Back
69 Ev.
p. 180. Back
70 Ibid. Back
