EU and U.S. Organic Markets Face Strong Demand
Under Different Policies
Carolyn
Dimitri
Lydia
Oberholtzer
David Sparer; courtesy of My Organic Market
Organic markets in the European
Union member states and the U.S. are nearly the
same size in terms of retail sales. At the same
time, their farm sectors differ significantly, with
the EU-15 member states having more organic farmland
and more organic operations than the U.S. (see “EU
and U.S. Organic Sectors”). The U.S. and
EU Governments have also adopted markedly different
policy approaches to the organic sector. The EU
actively promotes the growth of the organic sector
with a wide variety of policies designed to increase
the amount of land farmed organically, including
government standards and certification, conversion
and support payments for organic farmers, targets
for land under organic management, and policies
supporting research, education, and marketing. The
U.S. largely takes a free-market approach: its policies
aim to facilitate market development through national
standards and certification and federally funded
grants that support research, education, and marketing
for organic agriculture.
The policy approaches adopted by
the two regions are the result of the inherently
dissimilar perspectives and histories that the EU
and U.S. governments have concerning agriculture,
the environment, and by extension, organic agriculture.
From the perspective of many EU countries, organic
agriculture delivers environmental and social benefits
to society, and is regarded as an infant industry
requiring support until it is able to compete in
established markets. This view of organic farming
as a provider of public goods affords an economic
rationale for government intervention in the market.
The U.S. Government’s approach, while acknowledging
organic agriculture’s positive impact on environmental
quality, treats the organic sector primarily as
an expanding market opportunity for producers and
regards organic food as a differentiated product
available to consumers. In such cases, government-devised
standards and labels facilitate market transactions
and allay consumer concerns about product identity.
EU
and U.S. Organic Sectors
The EU-15 countries (the countries that
made up the EU prior to entry of 10 new
countries in May 2004) are the focus of
this article because much of the data on
organic agriculture is on these countries.
All references to the EU in this article
refer to the EU-15: Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom.
The EU and the U.S. together accounted for
95 percent of the $25 billion in world retail
sales of organic food products in 2003.
In 2003, retail organic sales in the EU,
at almost $13 billion (€10 billion),
exceeded the $10.4 billion (€8 billion)
of U.S. sales. However, per capita retail
sales were nearly equal, approximately $34
in the EU and $36 in the U.S.
The European organic markets are more mature
than the U.S. market. The EU’s organic
sector—particularly Western Europe—had
the fastest worldwide growth in the 1990s.
Growth in organic retail sales, however,
has slowed in some countries, with recent
growth rates across the EU averaging 7.8
percent per year. Forecasts of annual growth
for organic sales in the next few years
range from 1.5 percent for Denmark to 11
percent for the United Kingdom. U.S. organic
retail sales increased equally rapidly in
the 1990s, averaging 20 percent per year,
continued that pace well into 2005, and
are predicted to grow 9-16 percent per year
through 2010.
Certified organic land in the EU rose from
2.1 million hectares (5.2 million acres;
0.405 hectares = 1 acre) in 1997 to 5.1
million hectares in 2003, about 4 percent
of total agricultural area. U.S. organic
lands increased from 549,406 hectares in
1997 to 889,734 hectares in 2003—or
0.24 percent of all agricultural lands.
Thus, in 2003, the EU had over five times
the amount of organic farmland as the U.S.,
while the U.S. had three times as much total
agricultural land.
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EU and U.S. Adopt Organic Agriculture Standards
and Certification
Both the EU and U.S. have established
organic food standards, as well as systems that
certify operations as organic. Such standards reduce
transaction costs by ensuring that attributes of
organic food do not have to be specified for each
transaction. They also resolve an information problem
since a product’s “organic” status
is unobservable to buyers, whereas the producer
has knowledge of the production and handling methods.
Certification is a process providing third-party
assurance that a product was raised, processed,
and distributed appropriately, and meets the official
organic standards. Thus, standards and certification
work in tandem. Certification also reduces opportunistic
behavior (such as falsely claiming a product is
organic) by creating a specific enforcement system.
In the U.S., penalties are clearly outlined for
firms that use the organic label inappropriately,
while the EU leaves enforcement up to individual
member states.
In the EU, labeling of organic plant products is
governed by EU Regulation 2092/91 (enacted in 1993);
organically managed livestock is governed by EU
Regulation 1804/99 (enacted in 2000). The regulations
set minimum rules for production, labeling, and
marketing for the whole of Europe, but each member
state is responsible for interpreting and implementing
the rules, as well as enforcement, monitoring, and
inspection. EU labeling of organic products is complex
because some member states have public labels, while
private certifiers in other member states have their
own labels, some well known to the public (e.g.,
KRAV in Sweden, Skal in the Netherlands, or the
Soil Association in the UK). In addition, the EU
introduced a voluntary logo in 2000 for organic
products that could be used throughout the EU by
those meeting the regulation. So far, few companies
are using the logo. Most recently, in December 2005,
the European Commission made compulsory the use
of either the EU logo or the words “EU-organic”
on products with at least 95 percent organic ingredients.
In the U.S., the 1990 Organic
Foods Production Act (OFPA) required that USDA establish
national standards for U.S. organic products. The
three goals of OFPA were to (1) establish standards
for marketing organically produced products, (2)
assure consumers that organic products meet a consistent
standard, and (3) facilitate interstate commerce.
The legislation targeted environmental quality by
requiring that an organic production plan pay attention
to soil fertility and regulate manure application
to prevent water contamination. It also included
environmental and human health criteria to evaluate
materials used in organic production. Along with
the USDA organic logo, the USDA National Organic
Standards (NOS) were implemented on October 21,
2002, replacing the prior patchwork system of State
organic standards.
Both the EU and U.S. rely on accredited agents to
certify organic farmers and handlers. The EU system
is more complicated, largely because member states
have some latitude as to how they approve and supervise
certifying entities, resulting in a great deal of
diversity among the states. A national authority
from each member state certifies that organic products
comply with EU law. These bodies, in turn, approve
other entities that are allowed to certify organic
production and handling processes. Most member states
have government-approved private certification bodies,
but some have public member state certification.
In addition, some member states and certifiers have
additional public or private standards, as well
as standards for products not covered under the
EU Regulation, such as fish and nonfood agricultural
products. Some certifiers require stricter standards
than those of the EU legislation. As a result, not
all EU certificates are acceptable to each certification
body. In contrast, in the U.S., agents are accredited
by USDA to carry out organic certification, and
the certification process is well defined so that
all farmers and handlers are certified according
to the same standard.
EU and U.S. organic sectors, 2003 |
Country |
Retail sales |
Organic operations |
Organic land |
Farmland under organic production |
|
Million euros |
Number |
Hectares |
Percent |
Austria |
400 |
19,056 |
328,803 |
9.7 |
Belgium |
300 |
688 |
24,000 |
1.7 |
Denmark |
339 |
3,510 |
165,146 |
6.1 |
Finland |
212 |
5,074 |
159,987 |
7.2 |
France |
1,578 |
11,377 |
550,000 |
1.9 |
Germany |
3,100 |
16,476 |
734,027 |
4.3 |
Greece |
21 |
6,028 |
244,455 |
6.2 |
Ireland |
40-50 |
889 |
28,514 |
0.7 |
Italy |
1,400 |
44,039 |
1,052,002 |
6.9 |
Luxembourg |
NA |
59 |
3,002 |
2.4 |
Netherlands |
395 |
1,522 |
41,865 |
2.2 |
Portugal |
NA |
1,507 |
120,729 |
3.2 |
Spain |
144 |
17,028 |
725,254 |
2.8 |
Sweden |
420 |
3,562 |
225,776 |
7.4 |
United Kingdom |
1,607 |
4,017 |
695,619 |
4.4 |
European Union1 |
9,966 |
134,434 |
5,099,179 |
3.9 |
U.S.2 |
8,047 |
8,035 |
889,734 |
0.2 |
NA = Not available.
Note: U.S. retail sales dollars were converted
to euros using an exchange rate of $1.29 =
€1.00, May 2005.
1Some EU land numbers are provisional.
All EU hectares and farms are for certified
organic and in-conversion land. Numbers for
Sweden do not reflect the substantial hectares
that are managed organically but not certified.
In Sweden, these lands are given governmental
support payments as recognition by Sweden
and increasingly other Scandinavian countries
that financially supporting organic land management
for environmental gain does not necessarily
need to be linked to the marketing of organic
food, for which certification is a legal requirement.
In Sweden, these lands accounted for another
180,000 hectares and an estimated 12,500 farms
in 2003.
2The U.S. reports certified organic
acreage, which has been converted to hectares
(1 acre = 0.405 hectares). The U.S. does not
report farms or acreage in transition to organic
production, as does the EU, and does not report
subcontracted organic growers.
Sources: Various sources, cited in Market-Led
Versus Government-Facilitated Growth: Development
of the U.S. and EU Organic Agricultural Sectors,
by Carolyn Dimitri and Lydia Oberholtzer,WRS-05-05,USDA,
Economic Research Service, August 2005, available
at: www.ers.usda.gov/publications/wrs0505/.
U.S. operation and land numbers for 2003 are
available at: www.ers.usda.gov/data/organic/
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The EU, Unlike the U.S., Subsidizes Organic Production
European governments (including
countries not in the EU, such as Switzerland) support
organic agriculture through green payments (payments
to farmers for providing environmental services)
for converting to and continuing organic farming.
The economic rationale for these subsidies is that
organic production provides benefits that accrue
to society and that farmers lack incentives to consider
social benefits when making production decisions.
In such cases, payments can more closely align each
farmer’s private costs and benefits with societal
costs and benefits. EU green payments partly compensate
new or transitioning organic farmers for any increase
in costs or decline in yields in moving from conventional
to organic production, which takes 3 years to complete.
EU support for organic agriculture falls under the
EU’s general agri-environment program that
is part of the Common Agricultural Policy (CAP).
The EU commission establishes the general framework
and co-financing, and each member state chooses
a set of policies from this menu of measures. The
1992 CAP reform (EC Regulation 2078/92) provided
the policy framework for EU member states to support
organic farming, and many of the payments currently
granted were implemented under this reform, dating
back to 1994. More recently, under Agenda 2000,
these measures were included in the rural development
program (Rural Development Regulation No. 1257-99),
a CAP reform carried out from 1999 to 2001. In 2001,
the EU-15 spent almost €500 million ($559 million;
the average annual exchange rate for 2001 was $1
= €0.895) on organic lands under the two measures,
with organic farms receiving average payments of
€183-€186 ($204-$208) per hectare, compared
with €89 ($99) per hectare paid to conventional
farms.
EU agri-environmental
support and organic farming, 2001 |
|
Organic
land supported under agri-environmental programs1 |
|
|
Average
support premium for organic land |
Country |
1992 CAP
reform |
Agenda 2000
|
Share of organic land
in policy support programs |
Public support of organic
land under 1992 CAP reform |
1992 CAP
reform |
Agenda 2000
|
|
Hectares |
Percent
|
Thousand
euros |
Euros/hectare |
Austria
|
36,193
|
210,833 |
89 |
67,905
|
211 |
286 |
Belgium
|
13,032
|
3,616 |
74 |
3,416
|
187 |
269 |
Denmark
|
79,731
|
78,347 |
94 |
16,377
|
137 |
199 |
Finland
|
23,948
|
113,631 |
93 |
3,402 |
141 |
117 |
France
|
54,727
|
82,508 |
33 |
23,951 |
196 |
188 |
Germany
|
278,884
|
254,715 |
84 |
84,477 |
154 |
163 |
Greece
|
4,928
|
10,614 |
50 |
17,505 |
401 |
445 |
Ireland |
13,691
|
NA |
46 |
1,848
|
135 |
NA |
Italy |
351,113
|
101,134
|
37 |
158,898 |
361 |
318 |
Luxembourg
|
736 |
1,224 |
98 |
328 |
158 |
173 |
Netherlands |
8,140
|
14,593 |
63 |
4,446
|
266 |
156 |
Portugal |
26,970
|
90 |
38 |
3,779 |
137 |
111 |
Spain |
142,591
|
112,554 |
53 |
14,544 |
69 |
195 |
Sweden2 |
81,067
|
349,562 |
113 |
69,018 |
153 |
162 |
UK |
285,633
|
122,330
|
60 |
27,591 |
42 |
45 |
European
Union |
285,633
|
122,330 |
60 |
27,591 |
42 |
45 |
NA = Not available.
1Organic support falls under EC
Regulation 2078/92, the agri-environmental
program of the 1992 Common Agricultural Policy
reform. After 1999, organic farming support
was part of Rural Development Regulation 1257/97,
under Agenda 2000.
2Sweden’s 113 percent signifies
that there is more policy-supported organic
land than certified area, reflecting the country’s
policy of supporting uncertified organically
managed lands (see note to table: EU and U.S.
organic sectors, 2003, on page 15).
Sources: Various sources, cited in Market-Led
Versus Government-Facilitated Growth: Development
of the U.S. and EU Organic Agricultural Sectors,
by Carolyn Dimitri and Lydia Oberholtzer,
WRS-05-05, USDA, Economic Research Service,
August 2005 |
Many EU Member States Set Targets
for Organic Land . . .
Many EU member states have established
targets for the share of farmland under organic
production in their organic farming action plans.
The EU governments use targets to convey their level
of commitment to growth in the organic sector. Some
countries have selected relatively attainable targets,
while others have chosen more ambitious ones. For
example, in 1995, Denmark announced a target of
7 percent of farmland certified as organic by 2000
and nearly reached this goal with 6 percent. Denmark’s
goal of having 12 percent of farmland certified
as organic by 2003, however, fell short. In response
to the 2000 Bovine Spongiform Encephalopathy (BSE)
crisis, Germany set a target of certifying 20 percent
of farmland as organic by 2010, a number that may
be hard to reach since only 4 percent of land was
in organic production in 2003.
. . . and Higher Funding for Research
Public funding of organic-related
research and programs is increasing in both the
EU and U.S., although European governments are financing
more programs with a broader range. European funding
supports innovation in production techniques, food
processing, food marketing, and food retailing,
and is estimated at €70-€80 million annually
from 2003 to 2005. Germany, the Netherlands, Switzerland,
and Denmark accounted for 60 percent of this. In
fiscal year 2005, the U.S. Government made approximately
$7 million available exclusively for organic programs,
including a certification cost-share program and
$4.7 million for a research grant program. This
amount is supplemented by other programs that benefit
organic producers, including funding for organic
research and technical assistance by Federal, State,
and local agencies that focus on organic agriculture.
Consumers in Both Regions Drive
Market Growth
In many ways, development of the
EU and U.S. organic markets has followed a similar
path. In the early days, the organic sectors were
supply driven and organic products were introduced
by farmers. More recently, consumers have been the
driving market force in both regions. Studies indicate
that most European consumers have shifted from buying
organic food for altruistic reasons to more self-interested
reasons, such as food safety and health. Ranking
behind these are taste, nature conservation, and
animal welfare. Similarly, U.S. consumers 20 or
more years ago bought organic food because of their
concern for the environment. In 2002, according
to national surveys, two-thirds of U.S. consumers
cited health and nutrition as a reason for buying
organic, followed by taste, food safety, and the
environment.
Consumers in both regions offer similar reasons
for why they do not purchase organic food. In Europe,
the main factors include high prices, poor product
distribution, little obvious difference in quality,
lack of information on the nature of organic products,
and doubts about the organic integrity of the items.
In the U.S., according to consumer surveys, price
leads the list of barriers to purchasing organic
products, followed by availability of organic products.
Despite these factors, retail sales are growing
rapidly in both regions.
In 2003, U.S. organic food sales were distributed
almost evenly between natural product/health food
stores (47 percent) and conventional retail stores
(44 percent), with direct sales and exports accounting
for 9 percent. This is a significant shift from
1998, when corresponding sales were 63 percent,
31 percent, and 6 percent. As in the U.S., mainstream
European supermarkets in some countries stock a
wide range of organic products. However, the main
type of retail channel for organic food varies across
countries. Over 85 percent of organic products are
sold through general food shops in Denmark; in Luxembourg
and Greece, organic foods are primarily sold through
other stores (e.g., organic/health food stores,
bakers, and butchers). In a number of countries,
including Ireland, Italy, France, Belgium, the Netherlands,
and Germany, sales are more evenly divided between
supermarkets and other stores.
Although the organic market is growing in both the
EU and the U.S., there are some problems with the
flow of products to market. In Europe, the organic
dairy and livestock industries, in particular, have
grown rapidly over the last decade, and in some
cases have outpaced the capacity of the market and
distribution channels. Organic milk supplies in
some regions were large enough to reduce organic
prices, causing some producers to exit the sector
because they were unable to turn a profit. The milk
glut, however, appeared to be giving way to shortages
in the UK, as demand continues to grow and supply
has declined. The U.S. organic food market was formerly
supply constrained, but now seems better able to
meet consumer demand, especially for fresh produce.
In the dairy market, however, with demand increasing
rapidly, suppliers are struggling to provide enough
organic milk to satisfy demand at current prices.
EU CAP Reform Renews Support for
Organic Farming
In June 2004, the European Commission
adopted an Action Plan for Organic Food and Farming,
with 21 policy actions aimed at facilitating ongoing
developments in the organic sector. The actions
are focused on three main areas: information development
e.g., increasing consumer awareness, improving statistics
on organic production and demand); encouraging member
states to apply a more coherent approach and to
make better use of the different rural development
measures; and improving/reinforcing the EU’s
organic farming standards and import/inspection
requirements.
The 2003-04 CAP reforms partially
shift agricultural policy toward a market-driven
policy and convert the current system of direct
payments to a single-farm payment independent of
the volume of production. The single-farm payments
began in 2005, with member states having discretion
in implementing them. The farm payment will require
cross-compliance with a wide range of standards,
including environmental, food safety, animal welfare,
and occupational health/safety. While the impact
on organic agriculture is still unknown, the overall
changes are expected to favor an expansion of organic
farming.
Market-Led Versus
Government-Facilitated Growth: Development of the
U.S. and EU Organic Agricultural Sectors, by
Carolyn Dimitri and Lydia Oberholtzer, WRS-05-05,
USDA, Economic Research Service, August 2005.
The ERS Briefing Room
on Organic Farming and Marketing.
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