Organic Business Guide/Starting from the market

Starting from the market

In the past there have been too many supply driven organic production initiatives. Many times production has taken place, only to find there is not yet a market, or that there is strong competition from cheaper suppliers. It is important that any new venture is demand driven. This chapter is an introduction to that demand, the market.

What is the organic market?

The main organic markets are in the US and the European Union; the Japanese market is much smaller. Emerging economies like India and China are big exporters, but as yet are small consumers of organic products. Brazil and South Africa have better developed local markets for organic products, especially in their cities. However, these countries import very little; the consumption is mainly based on local production. Whereas the US and European Union are big producers, they are also big importers of organic products. Some of these products need to come from tropical countries, like coffee, tea and tropical fruits. But most organic imports are due to the fact that increase in national production is not sufficient to match market growth. In most European countries and in the US, the number of organic farms is presently not growing very much. Especially European farmers find it difficult to compete with imports. This is a chance for developing country producers.

Market trends
In 2007, approximately 1.2 m organic farms cultivated 32.2 m ha organically managed land worldwide. The global market volume for organic food & drink sales that year is estimated at 46 billion US$. The market has tripled in value over eight years. In 2009 there is only a limited slowing down of growth due to the global recession. Some companies have suffered but structural long-term growth is expected to continue spurred on by the interest in more sustainable production. The volume of organic imports from developing countries is growing steadily. This is true for the big commodities like coffee, cocoa, cotton, tea and cereals, but also for fruits and fruit juices, vegetables, oil seeds and aromatic plants. With large retailers expanding their organic product lines, another important tendency is the demand for larger volumes per supplier (see box).

Meeting the big demand
One year, a number of aspiring fruit drying operators from two African countries came back from Biofach excited about the high demand they had encountered for dried pineapple. They all tried to keep to themselves where the buyer came from but after a while it turned out to be one single German importer. Each individual drier produced only a fraction of the 10 tons per month that the German buyer wanted. Nevertheless, all of them wanted to be the supplier for this client, and they all wanted to buy the product from the others at a low price. This went on for two years without resolution. In the third year, a food processing company from another country announced that they are going to switch from canned pineapple to dried pineapple because they had found a solid buyer for a good quantity. It turned out that they too had spoken with the same German importer whose demand had still not been filled. If the fruit drying operators had pooled their output together, they might have been able to reach the required volume.

Market demand for products in conversion to organic production is rather limited. Most clients clearly prefer organic products to in-conversion products. In-conversion fresh produce is more marketable than storable products or ingredients destined for the processing industry. Products which are in short supply in full organic quality are sometimes sourced in in-conversion quality, albeit with a lower price-premium.

Market channels
Organic products are sold in various types of outlets: in supermarkets, in specialised shops, in open markets, in direct deliveries to clients, and on farms. The market is supplied by a myriad of importers, wholesalers, processors, packers and distributors. The tendency is that an increasing share of organic food is marketed through supermarkets. You can make a distinction between organic retailers who only work with organic products, and companies that have organic products alongside conventional products.

There are now organic versions of most food products. A supermarket like Tesco in the UK has above 1,000 organic product items; Coop in Switzerland has around 2,000, including textiles. The most popular of these amongst consumers are the fresh foods, like fruits and vegetables, bread and dairy. There is also a wide variety of processed foods. Processing is almost always done where the market is. The food processing industry may therefore be another interesting market channel for your business. When you start in organics, you will start at the bottom of the market. You will probably do business with companies that buy all kinds of products. They in their turn sell to wholesalers or processors. In time you might be able to move up into the supply chain, selling directly to processors or retailers. Also a processor is usually interested in cutting out the importer, but only when convinced that you are a reliable supplier of good, consistent quality produce in the required quantities.

What price can you expect?
When prospecting for markets, most businesses are looking for attractive prices. However, doing business is much more than achieving the best possible price. In the organic sector, and certainly in the Fair Trade sector, you need to have a wider perspective (see chapter "Building on your competitive advantages"). What the market means for you depends to a large extent on who your buyer is. Looking for a market means finding the buyer(s) that fit you, and the other way around. Buyer and seller should fit together.

Generally speaking, prices for organic products relate to world market prices. Market prices for organic products fluctuate with the change in supply and demand. There is no fixed organic premium in the market. On average, you can expect a 5-15% organic premium for storable produce, and 10-25% organic premium for fresh produce. At times of oversupply it can come close to zero, while at times of shortage or for speciality products it can be as high as 50%. On the other hand, price setting for value added, or semi-manufactured products is not affected very much by international prices; it is dominated by the specific organic market. The general tendency is for the organic premiums to go down. Remember, the organic premium often includes the quality premium. This is what you get when selling the product - what you pay to the farmer is a different issue (see chapter "Handling pricing, premiums and payments for farmers").

Relevance of the Fair Trade market
With a turnover of 2.9 billion Euro in 2008, the market for Fair Trade products is approx. 10 times smaller than for organic products. However, growth of this market segment has been faster than in organics. Only a limited number of products are currently available as Fair Trade, whereas nearly every food product nowadays has an organic version. About 30-40 % of all Fair Trade products are also certified organic. The Fair Trade organic market is a subset of the organic one, i.e. the Fair Trade certification is usually added to an existing organic product. The big difference is the guaranteed minimum price in Fair Trade. While Fair Trade certification usually improves your market position, the minimum price may also limit your market, as the product becomes more expensive.

Usually, only a part of the production from Fair Trade certified producers can be sold under Fair Trade conditions. The remaining is sold in the conventional market. If your production is certified organic, you are normally able to sell most of your product as organic, as long as the quality is fine.

As an organic supplier you have to realise that most of your consumers expect you to be also somewhat Fair Trade. As a result many of the buyers of organic products also want them to be certified Fair Trade. If your organic buyers indicate that they want Fair Trade, make sure that they know what it means (see chapter "What is Fair Trade?"), and that they are ready to pay the minimum price plus a Fair Trade premium. In general it is advisable to follow Fair Trade principles within your business, and use that in your negotiations with your buyers, whether you get formally certified or not. Working towards Fair Trade already makes your business more attractive to farmers as well as to clients.

Clients first!

There are two types of clients: your buyers and the final consumers. In your discussions with your buyers you will talk about the consumers and about what they want. It is thus important that you know some basics about the people that are going to buy your product, or a processed product that contains your ingredient.

In the business, the buyers represent the consumers. They are supposed to know their markets, the consumers, and they will claim to do so. It is very difficult to argue with buyers whether or not they have their facts right. It is best to accept that demand dictates the market. So when your buyer says that the market wants a different variety or different packaging, don’t argue. When they say that consumers want lighter coloured dried pineapple, don’t argue. It is different for products that are blended. The market for coffee does not change that much, and there is little to change from your side as long as the quality is good. In the field of processed and retail packed products it is prudent to expect changes in demand about every year.

Knowing your market
There are various sources of information on organic markets that will provide you with an overview (see Annex "Markets and marketing"). It is also a good idea to visit online supermarket stores that sell organic products, and screen newspaper pages in target markets for articles on organic consumption. Despite all this publicly available information you may still find it quite difficult to understand what is in it for you. The overall organic market for dried fruits may be growing for example, but does it mean that you, with your specific product, quality, volumes and the price you can offer, are able to capture a share of this growing market? By carefully considering the products and services you can deliver, you can get a feeling for your potential in the market. It is very difficult to find good, real information without having a product and being in the market.

From markets to products

Figure 5: Steps to identify the right product portfolio for your business.

Maybe you do not yet have a clearly defined product, or you are thinking of ways to diversify your product portfolio. You may have a range of options that you theoretically could produce, but you are not sure what would be the best option. In this situation you should start by checking which organic products are in demand, and then consider technical feasibility, profitability and competitiveness (Figure 5).

Out of the products which you could produce from a technical point of view (climatic conditions, farming system, know-how), for which of these does an organic market exist that offers both interesting prices and has good future prospects? Even if a demand exists for certain products, can you meet the market requirements for quality, volumes, timing of the supply (especially for fresh produce) and packaging (in case of processed or retail packed products)?

Once you have identified products that fulfil all these criteria, check whether their production would be profitable for you and for the involved farmers, considering realistic production costs and prices (see chapter "Financial planning and management"). In order to be able to sell your product in the end, you need to be able to compete with others who offer the same product. Can you compete on price, on quality, or on another type of added value (see chapter "Building on your competitive advantages")? Are you ready to offer discount prices or other contract terms that are attractive for buyers? Suitable methods to systematically conduct value chain and market feasibility studies before engaging in production are the Rapid Market Appraisal. and the Participatory Market Chain Approach This approach is particularly suited in situations where local and regional markets are targeted, or produce is sold to local exporters.

From markets to products - Nepal organic coffee
The organic and Fair Trade coffee market is highly competitive, with the coffee on offer exceeding the actual demand. Nepali producers, with their comparatively high production costs and small volumes are not able to compete in the general organic or Fair Trade coffee market. However, there is an increasing demand for single-origin speciality coffees. Buyers have already indicated interest in high-altitude shade grown Arabica coffee from Nepal, and small volumes have been sold to Europe and Japan.

With the image of a beautiful country and pristine environment, particularly well-known for its famous Himalaya mountain ranges, Nepal offers interesting options from a promotional perspective. The organic coffee producer organisations in Nepal therefore decided to focus on the speciality coffee market, with adequate quality management and branding. As it will take some time to increase production volumes to a level where they will be of interest to the larger brands offering speciality coffees, the initial focus is on specialized organic or Fair Trade shops. The producer organisations make sure that only coffee of top quality is exported, while the second grade is marketed in Nepali supermarkets, targeting upper-class consumers and expatriates.

As the rising awareness of the health benefits of organic food has induced momentum in organic vegetable production in Nepal, the coffee producer organisation could make use of a new market opportunity: they are planning to promote organic fertiliser based on coffee husks - a by-product of their coffee processing activities. In this way, the producer organisation hopes to be able to gain additional revenue. This would enable them to cover part of the overhead costs through the sales of the fertiliser, so that they are more flexible in coffee price negotiations.

Matching supply and demand

Too many projects have been set up where it was not at all clear that there would be a demand for the products. It is, however, very difficult to be sure of demand when you do not have much to show. Nevertheless it is important to get a feel of the potential market, for example, by interviewing a number of traders during a trade show. At this stage it is very important to be realistic about your predictions of when and what quantity of production will become available. You should maintain those contacts, for example by sending them half yearly updates on your progress, or samples before the certified product becomes available. You can send a conventional sample as long as it is of the quality that you expect to be produced in the future in the organic project. Your questions in that situation could be: "What do you think of the quality of the sample, what would you be willing to pay for this kind of product and what kind of volumes are you thinking about?"

At the same time it is important that you have realistic data on your own production, in terms of farmers who are willing to participate, the acreage they have, the normal yield, and their sales in the last few years. In many cases, farmers, extension agents, authorities and everybody else tends to be over optimistic. If there is one thing potential buyers are very tired of, it is wrong estimates. The recommendation is that you start small (but still big enough to fill a container), plan conservatively, and take limited risks. Once this is successful and you know the market better, then expand (see chapter "Developing the business step by step").

Adapting to the demand
While you may not be too sure about your offer, demand is not stable either. Organic markets are as prone to the typical "pig cycles" of mismatching supply and demand, as markets for conventional agricultural commodities are. Forget about one market for all your produce, in which you sell the same volume of the same product every year. It is better to be prepared for demand that could stagnate but could also increase. You may want to do a certain volume on fixed contracts and another part ‘as the market develops’. For this you will need different type of buyers, and different products you can rely on. You may have long term relationships with some buyers, with fixed purchase and sales contracts. For the remaining part of the production you can try to find new clients, or sell in the open market. Of the first part you need to be certain, with the second part you can speculate to some extent.

In many internationally traded commodities demand never seems to match supply (see box in chapter "Scaling up organic cotton production in West-Africa"). It is obvious that when supply is low, prices are high, and vice versa. Particularly in smaller but growing markets, the relation of supply and demand may change rapidly. Prices may be high one year, but when another major producing country starts to harvest, then the prices drop sharply. There are a number of ways to build up a buffer:

• Build strong relationships with different types of buyers that cater to different retail markets and processing industries
• Sell your product in different countries on two different continents
• Sell part of your product right after harvest but have the facility to store part for six months
• Always have a fall back market for your products in local and regional markets
• Grade your products and use the different qualities for different market channels (e.g. first grade fruits for fresh export, second grade for drying, remaining for juice)
• Find a market for by-products (e.g. for cotton seeds, cactus leaves)
• Diversify your production (see chapter "Developing the business step by step")

Relevance of local and regional markets

Figure 6: Characteristics of local, regional and global markets for organic products.

There are differences between local rural markets, regional urban markets (in the same or in neighbouring countries) and global markets for organic products (Figure 6). In the rural markets of most developing countries, organic products do not fetch a price premium, but quality sells. These markets are especially relevant to organic farmers who sell part of their rotation crops locally. Urban regional markets in some countries offer the potential of good prices for organic products, particularly for fresh produce of high quality. For many developing countries, export markets still provide the most promising opportunity for obtaining a reasonably high price. However, requirements in terms of logistics, quality management and formal certification are also the highest here. In addition, you need to be able to compete with other countries that produce the same product. A pure export focus with only one product is therefore risky. In many cases it is a better strategy to sell different products in different markets (local, regional and global ones).

Companies involved in export often do not, or do not like to operate in local or regional markets. The local market is often a different range of products from the export market. Sometimes there is an overlap though, like in the case of mangos in Mali, where dried mangos are going for export (some to the local market, see box), first-grade fresh mangos are mainly sold in regional markets (some are exported), and the remainder goes for juice sold in regional urban markets. In Uganda, pineapples can be exported fresh or dried to Europe, while some truckloads of fresh pineapples are sold to the juice market in Kenya. For honey producers in Tanzania it turned out to be more profitable to sell to the Kenyan market rather then to export to Europe.

Promoting dried organic mangos in Mali
"Here in Mali, we are producing organic and conventional mangos. Part of the organic mango is dried for export. For this, we need to ensure that only organic mangos enter the drying process. Initially, we only produced dried mango chips, but then some buyers expressed interest in discs, which are more difficult to cut. Today, we offer both types of dried mangos, so that the client has the choice.

We also started to promote dried mangos in the local market so that our own people can benefit from this healthy product, and also to reduce dependency on exports. However, people were not used to consuming dried mangos, so we first needed to make the product known. At different occasions we offered people product samples to taste, and most people were surprised about how good it tasted. However, they usually found the price too high. We had to explain to them that several mangos are needed to prepare dried mangos for one package. Only after having understood this, customers accepted the price and bought the product. To introduce a new product, you really need to make efforts to sensitize consumers."

Characteristics of local and regional markets

In each country there are a limited number of consumers willing to pay more for organic products, mainly because of health reasons but also taste. The local market for organic products is often based on interest from middle to upper class people, and expatriates. These local markets typically start with products such as fruit and vegetables. With some promotional activities to raise consumer awareness, this type of market can grown significantly.

In India, for example, organic pulses and cereals fetch a better price in local markets because consumers value the quality and taste. In Laos, a traditional aromatic rice variety produced by the organic farmers of a specific region has successfully been introduced in urban markets. In Zambia, organic farmers sell part of their produce in local farmers' markets or to urban supermarkets, while in Uganda box schemes have been organised that supply individual households. In many cities in low and middle income countries, organic farmers’ markets have been established. Typical examples are the "Eco Ferias" in Latin America. Different producers come together to market their (organic) produce directly to consumers. This is especially suitable if you have a variety of products, but of smaller volumes.

There are many more successful examples of developing local markets for organic products. With increasing consumer awareness and rising incomes, the potential of local and regional markets for organic products is clearly increasing. Organic businesses should therefore think early about how to capture this opportunity

Whereas your initial interest may be in exports of one specific product, it is important to assist the farmers with marketing their other crops as well. This is especially true in the case of annual crops grown in rotation with the main crop. It is also a way of keeping the money turning over, the trucks rolling and your staff busy. Some traders of conventional agricultural produce offer attractive conditions to organised groups of organic farmers, as they appreciate the extension and quality control system and that logistics are already organised.

For processed products it is almost a must to try them on the local market and compete with imports before launching them in the export market. If you want to use the local market as a stepping stone towards exports you can target local supermarket chains. Their requirements are often similar to those of the export market. They usually want some sort of formal certification or labelling. Another demanding customer is the hospitality industry: restaurants and hotels. They are also strict on quality, delivery and reliability of supply.

How to gain a market share in a conventional market
The onion market in Burkina Faso is dominated by imported conventional onion from the EU. This is the case although onions are produced locally, using organic methods (not certified yet). The locally produced onions have a competitive disadvantage in that they are more expensive than the cheap onions imported from the EU. In this situation, the following options seem promising in order to gain a share for the organically produced onions in the local market:

• promote organic products among urban consumers and shops
• distinguish the product from conventional onion through packaging and labelling
• emphasize the advantages of the organic local onion (taste, shelf life, benefit for farmers)
• in order to penetrate the market, sell at a competitive price for the start-up period
• look for another new market segment (i.e. differentiate), e.g. dried onion

(Result of a group discussion in an organic value chain workshop)

Building on your competitive advantages

Even if the market demand for a certain product is growing, you can not take it for granted that you will secure your share in this market. Competition between different producers and different countries supplying organic products is increasing. It is therefore a good exercise to regularly evaluate how you compare with your competitors. You should not only consider the product and the price, but also what it is like for the buyer doing business with you.

What could your competitive advantage be?
Do you have a unique product that no-one else has? Suppliers often think overly positively about their own product but it is quite rare that someone has something really unique. Nevertheless, there are ways to stand out from your competitors. Your competitive advantage could for example be:

• Clear and reliable product specification: Do you actually know your product, have you analysed it; did you ask your buyers for their analyses? Do you have a formal product specification? Have you asked your buyers for your competitors’ specifications?
• Reliable and consistent quality: Is your product of consistently good quality? Even the fact that you might check your product yourself for aflatoxin, microorganisms or oil content can be seen as a good company attribute!
• Additional certifications: You can express your awareness around quality issues by exploring what extra certification or quality management systems may help you in developing your business. Would the buyer like you to use the ISO, GAP or HACCP system? Ask them.
• Flexibility in volumes: Are you willing to supply 200 kg to try? Can you supply one container less, or two containers more at short notice? Can you supply larger volumes next year?
• Logistics: How fast can you deliver? Can you rely on the container line you use and ensure that there are no delays in the port? Can you deliver during a period when a major competitor can not? Do you have good storage facilities and can you ship throughout the year?
• The story behind the product: Can you prove that your production has a positive social and environmental impact (see chapter "Having an impact")? Can you provide suitable information and visual material about your production?

Competing on price?
You should be sceptical about a low price being your main competitive advantage. Organic trade is not about the lowest price, and both buyers and sellers should be wary if the other party talks only about low prices. Discussion should be about remunerative prices, i.e. a price that you deserve but also allows other stakeholders of the value chain to make some money. If you are able to defend your calculations, then use this as a tool to demonstrate the minimum price required (see chapter "Financial planning and management"). Most businesses do not want to disclose their cost structure, but what is there to worry about confidentiality? You make a much better impression by being able to show your calculations and then ‘on the spot’ adjust the farm gate prices if there is a change in exchange rate, or a smaller or bigger order.

It's not only about price
"Price is only one aspect when deciding whether or not to buy from a specific supplier. Volumes for sale and availability of the product are of course important as well. The next thing then is the question of whether the supplier is able to handle the export bureaucracy and paper work, and the necessary logistics. Can the supplier ensure that the product is properly packed and shipped, or does he rely on sub-contractors? Having proper quality management in production, processing and exporting is key. Quality specifications indicated in the technical sheets need to be taken very seriously - they are binding. Probably the most important aspect, however, is the service provided by the supplier. Do I get precise and honest answers without delay? Can I rely on the promises of the supplier, and does he tell me when something I asked for is not feasible? If problems come up, does he work with me to find a solution?"

                                                        Peter Lendi, importer of organic spices, herbs and oil seeds

Nevertheless, price is an important aspect in any commercial transaction. If your prices are considerably higher than those of competitors, you will find it difficult to find a buyer. Some countries benefit from free trade agreements or preferential treatment conditions with importing countries. This can be an important factor in competing with other producing countries.

Summary of recommendations

• Inform yourself about the requirements and trends in different markets, including the expectations of the final consumer.
• Plan your business based on realistic price expectations - in the long term, you should be able to run it with a 10-15% organic premium.
• Before entering into production, check whether you can meet market requirements (quality, volumes, packaging, logistics) and whether you can compete with others while still making a profit.
• Get in touch with the market at an early stage; check quality requirements based on samples of your products.
• Be realistic with your plans; start small, get into the market, expand step by step.
• Diversify your markets and think of a fall back market in order to cope with fluctuations in market demand.
• Arrange for marketing of part of your production in local and regional markets, and help farmers to sell their rotation crops locally.
• Develop your competitive advantage beyond offering an attractive price. Focus on quality, flexibility, service and a unique story.