Implications of organic certification for market structure and trade.

Certification of organic products serves three functions. First, it assures consumers that a product that is not observably different from nonorganic food was grown, processed, and packaged according to rules that limit or ban synthetic inputs and that protect the environment. Second, it assures

To fulfill these functions, certification must be a credible process. Michaud, Redman, and Dalby described the process as setting standards, verifying that standards are followed by inspecting the facility and operating records, and approving the producer or processor. Approval confers the license to display the certifier's label on the product. The label conveys information about the production process to intermediaries and consumers. Organic price premiums will be paid only when label confidence exists.

With expansion of markets, distance and time increase information asymmetry about products. The evolution of multiple labels with differing certification requirements gave rise to accreditation schemes. Whereas certifiers verify that the producers and processors meet their standards, accreditors check that minimum requirements are incorporated in the standards that certifiers use. Accreditors need legal authority or broad market recognition to harmonize and enforce minimum standards. For this reason, most accreditors are national or transnational (EU) government entities.

Formal acceptance of a certifier's standards by an accreditor permits free entry into markets overseen by the accreditor. Lack of equivalence of standards across accreditors hinders market access and substantially increases transactions costs. Harmonization of U.S. standards with those in major markets would improve trade.

Scope of International Markets

The United States is the largest single-country market for organic foods, with $4.2 billion in sales for 1997 (Scott). Table 1 shows the extent of selected organic markets outside the United States. The list is necessarily incomplete because few governments keep statistics on sales of organic foods. Even with industry and USDA Foreign Agricultural Service estimates, it is difficult to develop an exact picture of the entire world situation.

Markets for U.S. exports include direct consumption and re-export of raw commodities. In addition, because set percentages of organic ingredients are required for certified processed foods, U.S. commodities can be components for goods processed in foreign countries that are then consumed domestically or exported elsewhere.

The main markets for U.S. organics include high-income countries in northern Europe, Canada, Australia, Japan, and China, which have an elite group of high-income consumers who favor organics. Many developed and developing countries that produce and consume organic foods were excluded from table 1 because of their small size, low income, or emphasis on value-added export and tourism markets.

The 1997 organic food market in the EU is estimated to be worth $4.5 billion (Segger). In Europe, Germany ($1.6 billion), France ($508 million), and the United Kingdom ($445 million) have the largest organic retail sales. Consumer commitment to organics is strong throughout the EU, with 20% to 38% [TABULAR DATA FOR TABLE 1 OMITTED] regularly or occasionally purchasing organic foods. Retail price premiums in Europe average from 10% to 50% above conventional products. Import shares are highest in Germany and the United Kingdom, which are major food processors, and in the Netherlands, which is a primary re-exporter.

Retail sales are lower in Canada ($68 million) and Australia ($60 million), although both countries are active in exporting organics - Australia to Asia and Canada to the United States and Europe. Price premiums in Canada average 30%, but a range from 12% to 65% is found across the states of Australia. Import share is very high in Canada, purchased mostly from the United States, and very low in Australia, consistent with the organic share of total food sales in each country.

Japan ($1.7 billion) and China ($1.2 billion) offer large retail markets, with negligible quantity currently supplied by imports. Price premiums in these countries are similar to those in the EU, averaging 15% to 30%. Market participation rates are also similar, between 27% and 36%. Two factors affect interpretation of these statistics. First, Japan and China have successive categories of organic or ecological food, some of which permit chemical use on certified food. Second, domestic organic distribution in Asia is heavily dependent on direct farm to consumer sales, typically through memberships. Thus, the extent of the organic market open to import competition relies on expansion of retailer participation.

Projecting market growth is risky because so little is known about demand elasticity and price response to increased supply. Annual growth rates of 25% to 30% have been experienced in the EU, the United States, and Japan for over five years, but growth is already slowing in some product categories (PSC, Scott). Most projections are straight-line extrapolations of current sales and growth rates. Segger projects that the EU market will reach $58 billion and the U.S. market $47 billion by 2006. Ahmed suggests that the Australian market could grow to $571 million by 2000, whereas LaFond projects that the value of Canadian organics will reach $145 million by 2006. Mergentime forecasts that the Japanese market will reach $2.6 billion by 2000. These figures highlight the importance of obtaining equivalence to access organic markets.

Equivalence and Market Access

The structure of certification and accreditation is evocative of market development. Most organic certification programs began as farmer-based groups to transfer information and certify members and were local or regional in scope. Governments were motivated to adopt national standards and became accreditors when domestic or international commerce in organics became extensive enough to justify regulation for consumer and producer protection. Government standards are hierarchical. States, provinces, or prefectures often adopt strict standards that are consistent with growers' rules, usually preceding the development of broader national minimum standards that accommodate regional differences in production practices.

It can be uneconomic for governments to set domestic controls if only a few crops are grown organically and volume traded is small. In these cases, private accrediting and certifying bodies have filled the void. Farmer-based and for-profit certifying groups coexist on international, national, regional, and local levels with government standards and are subject to any prevailing regulations for marketing purposes. For example, in Germany, fifty independent control bodies and eight farmers' associations certify organic production (Bio-Fair). Each German Lander (state) has authority to grant import licenses and accredit certifiers (Vaupel and Commins). Each certifier sets its own standards and label, subject to the EU requirements designated by Council Rule 2092/91 and amendments and to state regulations. Whereas government regulations control a legally defined area, private standards can overlap multiple jurisdictions.

A certifier need not have its own standards but can simply check on the adherence to existing rules. As the market expands, such private certification has become sufficiently profitable to induce entry by groups, such as the for-profit Independent Organic Inspectors Association and the Nutriclean/SCS organic program. For-profit certification and government standards typically focus strictly on production techniques, while farmer-based certifiers, such as the Organic Crop Improvement Association (OCIA) and Demeter, embody philosophical principles and emphasize participation of members.

Harmonization of multiple standards, operating within and across government jurisdictions, is difficult. Accreditation programs improve trade flows by recognizing equivalence of foreign accreditation and certification programs, thus reducing information verification costs to importers and domestic consumers. At the highest level is the World Trade Organization (WTO), which settles disputes related to trade barriers in accordance with the GATT. Disagreements over equivalence would be settled by the WTO with reference to the Codex Alimentarius and to the International Organization of Standardization. Concern has been expressed that national organic standards will be weakened if the WTO disallows social and animal welfare criteria in a strictly technical interpretation of organic production rules (Vaupel and Commins).

The International Federation of Organic Agriculture Movements (IFOAM) is a private entity representing over 500 farming organizations in more than 100 countries, including 140 certification entities (UNCTAD, Vaupel and Commins). All members agree to follow the basic IFOAM principles in setting their organic standards. The size and geographical extent of membership has enabled IFOAM to influence development of national standards in Brazil, China, Egypt, and Argentina (UNCTAD). Recently, IFOAM launched the International Organic Accreditation Service (IOAS) to accredit private certification groups that are seeking international market access. Accreditation through IFOAM does not automatically confer equivalence with national standards for import purposes. However, several EU national authorities use IFOAM standards for granting import licenses (Vaupel and Commins).

Other transnational private certifiers that have extensive market presence are farmer based. Both Demeter and OCIA operate with local or regional chapters in which farmers handle certification. The standards are the same for all chapters, so market recognition is based on the international standards directly rather than on accreditation of chapters. Both are internationally recognized and credible certifiers.

At the national level, regulation varies in the levels of equivalence granted. The EU has the most extensive import requirements. Whether the exporter is from an approved or a nonapproved country, an EU-based certified importer must be used, and a certificate stipulating the type of equivalence must be filed (Michaud, Redman, and Dalby). Permanent statutory approval can be granted to countries and certifiers who are approved by the EU Commission. As of March 1997, five countries had been approved in the process, which takes up to three years to complete (Vaupel and Commins).

EU member states independently authorize imports from nonapproved countries. The EU-based importer verifies the certification system used for the product and documents consistency in its application, and the importer's national control authority determines equivalence on a case-by-case basis (Michaud, Redman, and Dalby). Private certification of a final product containing or composed of imported ingredients can entail additional requirements for which equivalence must be proven (Vaupel and Commins).

Because the determination is subject to national standards and the transaction does not permit direct negotiation by the exporter, costs of importation can vary widely, and exporters need to be selective in choosing a point of entry. The Netherlands, which accounted for 28% of the 459 organic import authorizations issued in 1995, is a gateway country to organic markets in the EU (Harst-Collaris and Scandurra).

Vaupel and Commins report that, more recently, emphasis has shifted away from the specific product's equivalence and toward the certifier's equivalence. This will improve the competitive situation for private accreditors and certifiers as familiarity from repeated transactions will reduce the need for strict scrutiny and thus reduce costs. In countries such as Australia, the United States (proposed), and Canada (proposed), equivalence approval of certifiers or their standards without requiring that a national standard be in place in the exporting country will facilitate harmonization of national and private standards and broaden international market participation by privately certified producers.

Confusion over the organic definition in China and Japan has hindered import standards (Ahmed, CCICED). Many private and most national certifications are accepted, subject to national import sanitation laws. As these import markets expand, some degree of harmonization with international organic principles is expected.

Issues for the United States

Harmonization is a critical issue for the United States because consumers form strong loyalty to labels that they perceive as credible organic indicators. Consumers tend to choose a single label that signifies the attributes they are purchasing when they "buy organic" (Michaud, Redman and Dalby; Vaupel and Commins). Accreditation could increase confidence in multiple labels and reduce information-seeking costs to consumers.

The United States withdrew proposed national standards in June 1998, following over 280,000 responses objecting to portions that are incompatible with existing international standards. Conflicts over confined animal feeding and exemptions could cost equivalence. Lack of equivalence implies a quality differential, where stricter standards would be perceived as better. Consumers will trade off quality and price, with those who can afford higher quality organics buying them. Those who cannot afford best quality will buy inferior organics, buy intermediate-priced ecolabeled products that are not organic, or revert to conventional foods.

This raises the question of how standards can evolve to take account of new innovations. Because standards arise from consumers and producers, changes necessarily must involve public input about what is acceptable. Scientists and the public have different criteria for organic, and scientific developments that are technically organic might violate the spirit of organic rules. Technology inappropriate to the public's criteria for organic weakens standards further by increasing distrust of certification.

If U.S. standards are perceived as weaker than other international standards, the U.S. organic industry could lose out. We might expect lower or zero demand for exports accredited by the USDA and might see domestic production displaced by higher-quality imports. Certification costs to producers might increase as more farmers and processors opt for private or foreign certification, leaving the fixed cost of U.S. accreditation spread over fewer certifiers. Benefits to consumers of such a USDA program would be minimal because the weaker standard would not expand quantity or improve the credibility of domestically produced organics.

Care should be taken during the drafting of the national organic standards that U.S. products are not disadvantaged by lower requirements. Inconsistencies with the standards of major trading partners should be eliminated from the final rules. Certifier input should be obtained for agricultural research projects so that the outputs will be accepted by the organic market. Label recognition and confidence should be promoted, perhaps through export enhancement. Market data should be collected and disseminated to improve price signals. In the global market for organics, the United States must ensure that its products are competitive with the highest quality available to win market share.

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Luanne Lohr is assistant professor, Department of Agricultural and Applied Economics, University of Georgia, Athens.