The development of organic markets is characterised by a more or less parallel development in demand, retailing, wholesaling, processing, and farming. The development is characterised by an over- or undersupply of organic products and associated price fluctuations because the markets are limited and it is difficult to form rational expectations of the future market development. Another important aspect in explaining the functioning of organic markets is the development of the character of the organic system and the associated cost of running the organic farming, processing, and distribution system. For instance, the Danish organic system has developed from an emergent industry position or a market niche situation
0 1 2 3 4 5 6 7
C o nsum er dedicatio n to o rganics
Organic share o f fo o d m arket
A sso rtm ent co m pared to co nventio nal fo o d asso rtm ent
D istributio n
P ro cessing
Farm ing
Ownership Farm ing gro wth
D em and gro wth Supply/dem and balance
FF I
R elative prices fo r o rganic pro ducts
P IE UK I D K 0 1 2 3 4 5 6 7
C o nsum er dedicatio n to o rganics
Organic share o f fo o d m arket
A sso rtm ent co m pared to co nventio nal fo o d asso rtm ent
D istributio n
P ro cessing
Farm ing
Ownership Farm ing gro wth
D em and gro wth Supply/dem and balance
FF I
R elative prices fo r o rganic pro ducts
P IE UK I D K 0 1 2 3 4 5 6 7
C o nsum er dedicatio n to o rganics
Organic share o f fo o d m arket
A sso rtm ent co m pared to co nventio nal fo o d asso rtm ent
D istributio n
P ro cessing
Farm ing
Ownership Farm ing gro wth
D em and gro wth Supply/dem and balance
FF I
R elative prices fo r o rganic pro ducts
P IE UK I D K 0 1 2 3 4 5 6 7
C o nsum er dedicatio n to o rganics
Organic share o f fo o d m arket
A sso rtm ent co m pared to co nventio nal fo o d asso rtm ent
D istributio n
P ro cessing
Farm ing
Ownership Farm ing gro wth
D em and gro wth Supply/dem and balance
FF I
R elative prices fo r o rganic pro ducts
P IE UK I D K
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to a position with similar scale and scope to the conventional food industry and broad market coverage (Vestergaard & Linneberg 2003). During this development the character of the organic food system has changed. The changes do not necessarily follow a uniform pattern in all parts of the organic industry – it varies with the developments in demand going from uncertain to more certain situations, the competitive pressure experienced from the conventional sector, and the policy choices of dominant actors within the organic and conventional sector. These policy choices are made in situations where the potential scale and scope of the organic industry changes and offer different potential possibilities to establish cost effective behaviour in the different elements of the organic food system. An empirical investigation into these aspects is not intended here, but an analytical approach is presented which sheds light on the dimension of the development process and the potential cost aspects.
Table 1 presents an overview of some important elements in the organic food system, important dimensions within the individual element, possible choices within the dimensions, and the potential cost effect of the different choices.
Table 1: Organic food systems: Activity, dimensions, choices, and relative cost effects
System activity Important dimensions Possible choices Relative cost associated
with the choice Primary production of raw
material
Scale of production and joint production
Small scale Optimal scale and scope
High unit cost Low unit cost
Transportation and storage Size and place Small scale
Optimal scale and scope
High unit cost Low unit cost
Processing Technology No processing
Craft processing Industrial processing
No cost High cost Low cost
Distribution Technology Direct
Speciality stores Conventional food stores
Typical high cost carried by consumers
Medium cost Low cost
Service Readiness for use Low
High
Small unit cost High unit cost
Market position of the product category
Knowledge/confidence High Low
Small unit cost High unit cost
Market position of the marketer
Knowledge/confidence High Low
Small unit cost High unit cost Source: Vestergaard, & Linneberg. (2003)
The primary factor behind the actual configuration of an organic food system within the elements illustrated in figure 1 is the scale and scope and the stability of demand. Given their evaluation of the situation, the actors and potential actors in the food system make their commitments and try out the potential. Thus, the system develops gradually from a low scale/high cost system into a high scale/low cost system. It is important to note that the system development has to be gradual due to the inherent uncertainties in the development path.
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Proceedings of the 1st EISfOM Seminar, Berlin April 2004Two extremes can illustrate the potential outcome:
Situation 1 – The low demand/low turnover/high cost case
In this case the primary production will typically be small scale as will transportation and storage. Processing will be handicraft, distribution is direct or through speciality stores, and knowledge of the product category and the marketer is low. All these features point to a system with high unit costs for the product units involved.
Situation 2 – The high demand/high turnover/low cost case
Contrary to situation 1, this situation results in low product unit cost due to scale and harmony in production, optimal scale and scope in transportation and storage, industrial technology in processing, low cost distribution, and low cost marketing due to the established position of the product group and the marketer.
In the real world, for given organic products in given markets the actual situation with respect to system elements, their character, and their cost can be far from the two extreme situations. Nonetheless, the summary presented in table 3 is an important tool for understanding the potential organic food systems and their cost structure.
In a case similar to the Danish situation, where several product groups have reached the development stage described in situation 2, the effectiveness and efficiency of the organic system for these products are important elements in promoting and stabilizing the organic market.
It is a fact that organic products in most cases are more expensive per product unit than products from conventional farming, but given that farm costs typically account for only one third of the final product cost this does not need to influence final organic product prices significantly. Inefficiencies in other elements of the organic food system can be far more important in creating high cost organic products. The closer the organic food system approaches to situation 2, the low cost case, the more it is possible to start a self enforcing movement towards bigger organic markets. The organic markets have reportedly high price elasticity – let us assume it is 2 in a given market. A lowering of the organic system cost (and prices) of say 10% should then result in a demand increase of 20%. By going from a situation 1 case to a situation 2 case, cost reductions of this size or more are easily realized even without tampering with farm prices. This effect can be called the “maturity gains” as it unfolds when the organic industry within a product group moves from being in an emergent situation (situation 1) to a mature situation (situation 2). The above reasoning for maturity gains is based on a simplified theoretical argument, and the Danish experience in several organic product groups, naturally, is transferable to other EU markets. The basic core of the argument lies in the fact that the majority of the maturity gains originate from the logistic, processing, distribution, and marketing elements of the organic food system. If the market participants are alert to these maturity gains and use this potential, they have considerable impact on the development of the organic food markets and can damp the influence of higher farming product cost and increase turnover considerably by making the system more effective and efficient.
Proceedings of the 1st EISfOM Seminar, Berlin April 2004