Organic Vs Sustainable: The Price Premium
Published on Jul 30 2010 11:30 AM in Supply Chain
Nick Peksa, Commercial Director, Mintec Ltd, examines the differences between organic and sustainable crops, and tracks the pricing system for two of the most common.
Statements about organic origin, fair trade, free range, food miles and sustainable sources are regularly bandied around in the food industry and the national press. In Western Europe, retailers and food manufacturers (from countries such as the UK, Switzerland and the Netherlands) are leading the way in developing a more organic and sustainable food offering for their consumers. But from a buyer’s perspective, what are the limitations and how will selective buying affect the buyer and the consumer? Let’s start by summarising key differences between organic and sustainable food products, although even this is difficult as the definition varies depending on the country of delivery. Organic: • The avoidance of most synthetic chemical inputs (e.g. fertilizer, pesticides, antibiotics, food additives etc) • No genetically modified organisms (GMOS) used in farming • Detailed ongoing written production and sales records (audit trail) • The use of farmland that has been free from synthetic chemicals for several years (three or more) • Recycling organic matter and planting crops that improve soil fertility • Keeping physical separation of organic products and non-certified products Sustainable: • Detailed ongoing written production and sales records (audit trail) • Sustaining the resources available for growing food and supplying other public benefits over time • Ensuring a safe and hygienic working environment for all people involved in the supply chain • Operating responsibly within biological limits of natural resources. • Achieving consistently high standards of animal health and welfare • A commitment to long-term economic and financial viability • Reducing energy consumption, minimising resource inputs, and using renewable energy when possible. As presented, the two definitions are close. The crucial differences, however, are that no chemicals are used in production of organic food and that a high level of welfare for people, animals and environment is required for sustainability production. Both methods will incur costs to the buyer for these same reasons. Organic Wheat In comparison to standard wheat, the yield for organically grown wheat can be as much as 50 per cent less. In the EU, if a farmer wants to convert to a more organic way of farming, he requires accreditation, incurring a risk converting from non-organic to organic crops. The farmer isn’t able to obtain organic prices in the first couple of years and with lower yields there is a strong potential to lose income. The switching to Organic crops takes 3 years. Year 1: No benefit. Must select a crop that adds nutrients to the soil. Year 2: Crop referred to as the “conversion year crop”. Year 3: Accreditation. The premium of organic wheat over standard milling wheat can vary widely, but a ratio of two to three times the price is normal. This ratio, although mainly driven by the weather, will also alter depending on current factors in the market place and will increase to a level closer to three times when the markets are very tight. In the 2006/2007 season it was 2.7 times the price. Sustainable Palm Oil Price fluctuation has also been seen in a sustainable market like palm oil, but for different reasons, as premium price erosion has mainly been as a result of successful co-operation within the industry to support sustainable production. In the last five years, we have seen the production of certified, sustainable palm oil grow from 1 per cent of the world crop to around 8 per cent of the world crop. The result has been a 50 per cent oversupply. The premium for palm oil can be closely linked to spot and traded palm oil markets. We are currently looking at a price premium of 2-5 per cent. Around half of all of the major plantations in Malaysia and Indonesia have signed up to the RSPO (Roundtable on Sustainable Palm Oil) scheme, with more expected to enrol in the future. Full compliance may be difficult to achieve due to the large number of small holding production oil in these nations. Palm oil is a success story of sustainability supply, thanks to the retailer, manufacturer and processor all working together. If the production of sustainable oil carries on growing, price premiums will carry on decreasing and this may lead to market dominance in the future. (16 July) © 2010 - ESM: European Supermarket Magazine