An empirical study on supply-side factors of the development of the organic food market

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1 ISSN paper version ISSN electronic version Economic and Environmental Studies Vol. 11, No.3 (19/2011), , Sept An empirical study on supply-side factors of the development of the organic food market Wrocław University of Economics, Poland Abstract: The purpose of the paper is, based on empirical research, to identify and evaluate factors of development of organic farming from the supply side. In 2008 and 2009, a survey was carried out among two groups of farmers in Lower Silesia (Poland): organic producers and conventional farmers. The questions for the first group referred to the practical aspects of their functioning. The survey among the second group concerned the conditions for development of organic farming. The willingness to start organic production increased from 16% of the conventional farmers in 2008 to 19% in An explanation for this is payments from agri-environmental programmes. Factors stimulating development of organic agriculture are: declared profitability of organic production, expected increase of income and optimistic predictions of demand. The most important barriers identified are: increasing production cost in comparison to conventional agriculture (mainly labour costs), poorly developed distribution systems and bureaucratic procedures. The majority of farmers perceive the current level of prices and subsidies as too low. The existing potential for organic farming should be supported by institutional and financial measures. Keywords: organic farming, sustainable agriculture, rural development, ecological products markets, agrienvironmental programmes, rural development policy. 1. Introduction When aiming at sustainable development of agriculture, an important tool may be an increase in the production in organic farming. Organic farming is featured as extensive (though labour intensive) production methods, strict environmental requirements and connections with local culture and tradition of rural areas (Tyburski and Żakowska-Biemans, 2007: 29-65). These requirements seem to fit very well in the Polish conditions. Consequently, Polish farms could relatively easily convert into organic farming, what should bring both economic, environmental Correspondence Address: Karol Kociszewski, Wrocław University of Economics, Institute of Economics, Ecological Economy Chair, ul. Komandorska 118/120, Wrocław. karol.kociszewski@ue.wroc.pl Opole University

2 and social benefits. The scenario, in which organic farming will have a major share in Polish agriculture seems to be unlikely. However, taking into account that this type of agriculture is most compatible with sustainable development (Zegar, 2009a: 36-47), an interesting question is whether if organic producers could obtain a fifteen per cent share among all Polish farmers, similar to the present situation in some EU member-states. The goal of this article is the identification and evaluation of factors which could stimulate or hamper the opportunities for development organic farming by way of a questionnaire survey. The research presented concentrates on economic factors of organic food supply: expected changes of price level, evaluation of different cost categories, income changes, the level of subsidies and sale opportunities. The characteristic of these factors is important in the context of favourable circumstances for organic farming after Poland s EU accession. Based on the research, it is tried to formulate recommendations related to the policy supporting organic production. The survey was carried out among two groups of farmers in Lower Silesia: the producers who possess an organic farming certificate and conventional farmers (not possessing such a certificate). The presented results were gathered in 2009 and were partly compared with the data from the previous stage of the research from In 2008, 4% of all organic farms in the region were researched. In 2009, 6% of all organic farms were investigated, making up about 0.8% all farmers in Lower Silesian. The sample size was 962 in 2008 (1.3% of all farms with an area over 1 ha in Lower Silezia (GUS, 2009)) and 977 in 2009 (1.38 of all farms in the region (GUS, 2010)). he survey was based on the method of direct interview. The questions for the first group (organic farmers) referred to the practical aspects of the functioning of the farm. The survey for the second group (non-organic farmers) concerned the conditions for the development of potential for organic farming, focusing on the evaluation of interest among farmers to converse into organic production. 2. Opportunities for development of organic farming Presently, the share of organic farms in overall agricultural holdings in Poland is approximately 1% (IJHARS, 2010: 1-3), which is less than the EU-27 average - 1.4% (Rohner- 322

3 AN EMPIRICAL STUDY ON SUPPLY-SIDE FACTORS OF THE DEVELOPMENT OF THE ORGANIC FOOD MARKET Thielen. 2010: 2). However, according to the survey results, between 16 and 19% of all farmers declare willingness to convert into organic farming (Table 1). Table 1. Declared willingness to start organic production (% of responses), 2008 and 2009 Answer Yes, I am interested in conversion into No, I am not interested organic farming Year Source: Author s own research No opinion In the light of the presented results it can be argued that there may be large potential for such kind of production in Lower Silesia. In the case of similar conditions for the whole country, such a potential would mean that the share of organic farms in the whole farming sector could be similar as in the countries with the highest share in the EU like Austria (12%), Denmark or Finland (7% respectively) (Rohner-Thielen, 2010: 12). In the context of opportunities for organic production, another favourable result is an 18% increase in the number of farmers interested in starting organic production compared to While on basis of the limited number of years it is difficult to draw conclusions for future development, the increase is similar to the increase in the real number of organic farmers grows - 15% for the period (IJHARS, 2010: 1-3). It may be that the increase in the number of organic farms is related to the diffusion of information on economic possibilities connected with organic agriculture. These possibilities (mainly subsidies) could stimulate farmers willingness to converse. If this would be true, in the future cumulative change could take place - the higher share of organic farming will be observed, the more farmers will be interested in organic methods of production. Table 2. Size of farms in ha/farm (%), 2008 and 2009 UAA* The group of respondents (ha) Year over 300 Interested in conversion into organic farming Not interested in conversion into organic farming No opinion on conversion Source: Author s own research *UAA Utilised Agricultural Area (in hectares) 323

4 Most of the farms belonging to owners interested in organic production are small with area up to 5 ha (Table 2). In fact, the majority of farms in Poland are small. In 2007, 68% of all Polish farms was smaller than 5 ha (Zegar, 2009b: 43). At the same time, only 36.5% of the organic farms operated on an area up to 5 ha (IJHARS, 2009: 24). In 2009, 33.6% of all organic farms had such area (IJHARS, 2011: 24). When we compare presented data to the results from Table 2 we can conclude there is potential within the family type agricultural holdings. However, the share of small farms in the whole number of organic farms will stay less than the share of small farms in number of conventional agricultural holdings. Thus, on average organic farms will still be bigger than conventional ones. The farmers taking part in the survey in 2009 could indicate factors influencing their decisions. The options that could be chosen were selected according to the declarations on willingness to convert into organic farming reported in the research from Organic producers and these farmers, who were interested in such type of production, could choose fostering factors. Those not interested could indicate one or more discouraging factors (Table 3). According to the opinions of both organic farmers and conventional farmers interested in organic production, the key factors favourable for organic agriculture are: profitability of production 1 and optimistic predictions regarding the opportunities for increase in sales. This is confirmed by the results presented later in this paper regarding the expectations on future demand for organic food. In the group of not interested in organic production, main discouraging factors were: high labour intensity, low profitability and low opportunities for sales. Table 3. The factors influencing decisions on conversion into organic farming (% of responses), 2009 The group of respondents The factors influencing the decisions Interested in conversion into organic farming Profitability of Growing sales Care for the Clean environment in factors of positive production opportunities environment, nature the area of the farm No answer influence Organic farmers Not interested in conversion into organic farming factors of Low profitability of Limited sales Lack of care for the Polluted environment negative influence production opportunities environment in the area of the farm Source: Author s own research High labour intensity Taking into account the responses of all surveyed farmers, it can be argued that their decisions are mainly influenced by economic aspects. However, these factors may be interpreted 1 The subsidies for organic farms were included as the factor of production profitability in that option of answer. 324

5 AN EMPIRICAL STUDY ON SUPPLY-SIDE FACTORS OF THE DEVELOPMENT OF THE ORGANIC FOOD MARKET in different ways. The group of farmers (interested in organic farming) which are encouraged by production profitability is smaller than the group discouraged by the same factor (not interested). A reverse influence was observed in relation to sales opportunities. Probably, a large part of farmers interested in organic farming expects an increase in demand, whole at the same time being sceptic regarding the profitability. Similar results were obtained regarding the evaluation of the level of subsidies (see Table 7 later in this paper). The importance of subsidies for stimulating the development of organic farming becomes visible when analyzing the results presented in Table 4. Most farmers interested in organic farming declare the willingness to take part in the agri-environmental programme, which is the main source of EU subsidies for such type of production. This may imply that financial support provides a strong incentive to engage in organic agriculture. Table 4. Declared willingness to take part in agri-environmental programme (% of responses), 2009 The share in the The share in the group The share in the group of The share in group of farmers of farmers not farmers without opinion on the whole interested in organic interested in organic conversion to organic sample The answer production production production I take part in the programme I am interested in taking part in the programme I am not interested in taking part in the programme I do not know Source: Author s own research Over 8% of the farmers interested in organic production taking part in one of the agrienvironmental measures, would at the same time like to participate in another one concerning organic farming. A result which is difficult to explain is that 17% of the farmers interested in organic farming do not want to participate in the programme in which they could receive subsidies for their activities. One reason could be a lack of knowledge on possibilities for EU support. Another possible explanation is aversion to the necessity of dealing with the requirements of the programme for a period of 5 years (the obligatory period of the argienvironmental agreement). When we add farmers who do not want to take part in agri-environmental programmes and at the same time are not interested in organic farming (250 persons) to farmers, which do not have opinion on conversion to organic production and do not want to take part in agrienvironmental programmes (97 persons), then we will have 347 farms or 35,5% of the whole 325

6 sample. Thus, more than one third of the Lower Silesian farmers are not willing to undertake measures for environment protection in agriculture. Taking into consideration the fact that intensive/industrial agriculture is the dominant type of production in the EU, this may be a normal phenomenon. A group of 23.4% farmers not interested in organic production would like to receive other agri-environmental payments. This could mean that while they do not perceive organic production as profitable, they see opportunities to provide environmental services in the area of their farms while receiving payment for this. 3. Factors influencing the potential for production growth The data in Table 3 indicate that the profitability of production is a meaningful factor for the development of organic farming. This factor is analysed here in more detail from the point of view of predictions regarding income change, change in costs as well as the evaluation of price and subsidy level. According to the results presented in Table 5, almost one third of the whole sample predicts that income would increase after conversion to organic farming. Table 5. Predictions on incomes change after conversion to organic production (% of responses), 2009 The group of respondents Decrease in Increase in incomes incomes No change No answer The whole sample Interested in conversion into organic farming Not interested in conversion into organic farming Without opinion on conversion Source: Author s own research The highest share of farmers having optimistic expectations can be found in the group interested in conversion. This may supports the idea that economic incentives are important for the development of organic farming. The majority of farmers not interested in organic farming predict that their incomes would decrease after conversion. Another factor which is important for profitability is the cost of production. In Table 6 data on the expectations of conventional farmers and observations of the organic farmers regarding changes of the most important cost categories. The majority of the respondents 326

7 AN EMPIRICAL STUDY ON SUPPLY-SIDE FACTORS OF THE DEVELOPMENT OF THE ORGANIC FOOD MARKET answered that the labour cost would increase after conversion. The results gathered among farmers with a certificate for organic farmers confirmed that organic agriculture is a labour intensive type of production. This result can be interpreted from different points of view. On the one hand, it is a factor putting pressure on profits, which may be a barrier for production growth. However, a question is to what extent this would be really the case, as labour is relatively cheap in Poland. On the other hand, it could be an opportunity for the local labour force to find a job, which in turn would limiting the migration from rural to urban areas. Table 6 Farmers observations and expectations on changes of particular cost categories after conversion to organic production (% of responses), 2008 and 2009 Answer Increase Decrease No change Year The cost of purchase Labour cost Expenses on plant Expenses on fertilisers protection and operation of machines, fuels O I. N.I. W.O. O I. N.I. W.O. O I. N.I. W.O. O I. N.I. W.O. 2008* No data O organic farmers; I interested in conversion into organic farming; N.I. not interested in conversion into organic farming; N.O. No opinion on conversion *In 2008 the survey within organic producers the question on detailed cost categories was not included. Source: author s own research In organic farming, the use of chemical fertilisers is forbidden, which should cause a downward pressure on the costs compared to conventional production. This was confirmed by the results of the survey. Most farmers predicted a decrease of these costs. However, there is also a group expecting an increase. This may be explained by the necessity of purchasing natural fertilisers and agricultural limestone. Similar responses were gathered in relation to expenses on plant protection. The use of pesticides is allowed under very strong restrictions (Tyburski and Żakowska-Biemans, 2007: 173). They are limited to products which are expensive and not easily available. They could be called organic pesticides and must have natural origin - made from animals, plants. (chemical substances are withdrawn). Plant protection in organic farming also involves physical, mechanical or biological pest control methods - inter alia - microbiological substances, species which are natural enemies which prey on or parasitize pest insects, traps and 327

8 barriers (PAN Europe, 2010). The most of respondents expect a decrease of costs related to the use of pesticides, which may be explained by the expectation of a reduction or complete resignation of their use. An interesting issue for further research is whether the respondents who expect an increase in expenditure consist of two groups of farmers: those who do not have enough knowledge and those who know that organic pesticides are more expensive. A majority of the farmers expect an increase in the operation costs of machines, probably due to the necessity of their more intensive usage for weeding. Thus, the increased use of machines use compensates the advantages of limitation of herbicides use. Table 7. The evaluation of the price level and subsidies for organic production in the opinion of farmers (% of responses), 2008 and 2009 The group of respondents Organic farmers Interested in conversion into organic farming Not interested in conversion into organic farming Without opinion on conversion Source: author s own research Evaluated factor Year Too low Too high * Right level No answer price level subsidy level ** price level subsidy level price level subsidy level price level subsidy level *The answer option too high referring to the price level means that if it was lower, the demand would be higher **The answer option too high referring to the subsidy level means that even if it was lower, organic farming would be profitable 328 Beside the above mentioned internal conditions for production, the organic food market is influenced by external supply-side factors such as subsidies, the distribution system and the price

9 AN EMPIRICAL STUDY ON SUPPLY-SIDE FACTORS OF THE DEVELOPMENT OF THE ORGANIC FOOD MARKET level (farmers have to adjust to the price level which is acceptable for consumers). Most farmers in all groups of respondents evaluate the price level as too low, which may be interpreted as an important barrier for production growth. In that light, it could be argued that an increase in the consumer price is an important condition for market development. In other words, there is a need for higher consumers willingness to pay. However, it seems to be unlike when considering the present level of consciousness related to ecological products (Tyburski and Żakowska-Biemans, 2007: ) and the relatively low level of income of Polish consumers. For example, in 2011, GDP per capita (Purchasing Power Parity) in Poland was equal to 60.5% of GDP per capita in EU, 57.2 % of GDP per capita in UK and 53.7% of GDP per capita in Germany (CIA, 2011). Considering the high cost of organic production, it may be stated that - in the short and medium term - the market is unlikely to expand without financial support. Consequently, there is a need for increasing the level of subsidies within the agri-environmental programmes. This would reduce the gap between consumer and producer prices. This need for an increase in the level of subsidies is confirmed by the farmers opinions. A majority assesses the subsidies being too low, both in the group interested as well as not interested in conversion. It may be that in the long-term the demand for organic food will increase together with increasing incomes and growing ecological consumer consciousness. In such a case, the market mechanism will lead to a price level which would be acceptable for consumers and producers. Growing demand is indicated as an opportunity for organic agriculture by almost 40% of farmers interested in conversion and over 50% of organic producers in 2009 (Table 8). Similar results were presented in Table 3 - growing sales opportunities were pointed out as the most important factor influencing decisions on conversion into organic farming. The surveyed farmers are optimistic regarding growing ecological consciousness of society. Over 47% of conventional farmers interested in conversion and over 60% of organic farmers pointed out that this creates opportunities for production. In their opinion this is connected with fashion for so called ecology and healthy food. Another important factor is the EU financial support, which was indicated an opportunity by 48.4% of farmers interested in conversion. Different opinions were observed among organic farmers. According to their responses the EU subsidies were on the third place - after increasing ecological consciousness and growing demand. This differing ranking may be related with the fact that they have more experience due to their functioning on the organic food market. 329

10 Table 8. The opportunities for organic production development in farmers opinions (% of responses), 2009 Interested in Not interested in No opinion conversion into conversion into on Organic organic farming organic farming conversion The factor creating opportunities farmers Growing demand Better distribution system Growing ecological consciousness of Polish society EU subsidies Favourable Polish state policy None of these factors Source: author s own research As is visible when looking at both answers regarding opportunities and barriers for the development of the organic food market (Tables 8 and 9), in general farmers are sceptical in their evaluation of the distribution system and Polish state policydespite of a weak distribution system, farmers indicate such barriers as: bureaucracy (ranked highest for all groups of respondents), difficult procedures (connected with the need to obtain a certificate) and too little demand. In relation to the last result, it is worth to compare the data from Tables 8 and 9. Many farmers presume growing demand as an opportunity, while at the same time indicating lack of demand as a strong barrier for organic production. This may imply that according to farmers the present level of demand is too low, but that there is a chance that it will increase in the future. Table 9. The barriers of organic production in farmers opinions (% of responses), 2009 Interested in Not interested in conversion into conversion into Organic organic farming organic farming The factor creating barriers farmers Without opinion on conversion Weak distribution system Too little demand Bureaucracy Too difficult procedures High production costs Source: author s own research Another important barrier is high production costs. This result confirms the results presented in Table 6. It is worth to consider that this is the biggest problem according to farmers not interested in conversion. Organic producers and farmers interested in conversion do not presume this factor to be a strong barrier (ranked on the fifth or the sixth place). Possible explanations are experience in production (non-organic producers may have less information on 330

11 AN EMPIRICAL STUDY ON SUPPLY-SIDE FACTORS OF THE DEVELOPMENT OF THE ORGANIC FOOD MARKET the real production costs) or that higher production costs are compensated by the subsidies within the agri-environmental programmes. 4. Concluding remarks According to the presented survey results, there is a relatively large potential for organic farming in Lower Silesia. This in particular concerns small, family type holdings. The key factors influencing the farmers decisions regarding conversion into organic farming have an economic character. Both organic farmers and conventional farmers interested in organic production indicated similar factors which enhancing the start-up of organic production: the expected increase in income after conversion and optimistic predictions of sales possibilities. They also expect an increase in profitability. However, this is strongly connected with subsidies - the majority of farmers interested in organic production declare willingness to take part in agrienvironmental programmes. Beside this rural development policy instrument, another factor pointed out as favourable for the development of organic production development is growing demand connected with consumers ecological consciousness. The most important barriers for development of organic farming which were indicated are: observed and foreseen increase of production cost in comparison to conventional agriculture (mainly in relation to labour), a weak distribution system combined with low sale possibilities as well as the difficulties connected with bureaucratic procedures. Besides, the majority of farmers perceive the present price level and subsidies level as too low. Further development of organic farming should be more actively supported in the institutional and financial dimension. There is a need for such public measures as: increasing the level of subsidies (which would reduce the gap between consumer and producer price), stimulation of the development of distribution systems and simplification of administrative procedures. The distribution system could be directly supported by measures within rural development programmes financed from the European Agricultural Fund of Rural Development It could also be indirectly stimulated by campaigns aimed at increase in consumers consciousness. Restrict requirements connected with EU laws and regulations related to organic farming should be fulfilled, which is related to the administrative difficulties. As they cannot be eliminated or reduced, there is a need for simplifying bureaucratic procedures trough changes in 331

12 the Polish institutional system. There is also a need for training and education activities for farmers both on production methods, environmental problems as well as possibilities for financial support. Literature CIA (2011). The World Factbook Available at: Accessed 3 March GUS (2008). Charakterystyka gospodarstw rolnych w 2007 r. Warszawa: GUS. GUS (2009). Rocznik Statystyczny Rolnictwa Warszawa: GUS. GUS (2010). Rocznik Statystyczny Rolnictwa Warszawa: GUS. IJHARS (2009). Rolnictwo ekologiczne w Polsce, Raport Warszawa: IJHARS. IJHARS (2010). Producenci ekologiczni w 2009 roku. Warszawa: IJHARS. IJHARS (2011). Raport o stanie rolnictwa ekologicznego w Polsce w latach Warszawa: IJHARS. PAN Europe (2010). Which Common Agricultural Policy for Europe after 2013? PAN Europe Position Paper. Available at: Accessed 3 March Rohner-Thielen, E. (2010). Area under organic farming increased by 7.4% between 2007 and 2008 in the EU-27. Eurostat. Statistics in focus 10/2010. Tyburski, J.; Żakowska-Biemans, S. (2007). Wprowadzenie do rolnictwa ekologicznego. Warszawa: SGGW. Zegar, J.S. (2009a). Z badań nad rolnictwem społecznie zrównoważonym 10. Raport końcowy synteza i rekomendacje. Warszawa: IERiGŻ-PIB. Zegar, J.S. (2009b). Struktura polskiego rolnictwa rodzinnego pod koniec pierwszej dekady XXI wieku. Warszawa: IERiGŻ-PIB. 332 Empiryczne badania czynników strony podażowej procesu rozwoju rynku żywności ekologicznej Streszczenie Celem niniejszego artykułu jest identyfikacja i ocena, w oparciu o badania empiryczne, czynników rozwoju rolnictwa ekologicznego po stronie podażowej. W 2008 i 2009 roku przeprowadzono ankietę skierowaną do dwóch grup rolników na Dolnym Śląsku (Polska): producentów żywności ekologicznej oraz rolników konwencjonalnych. Pytania do pierwszej grupy dotyczyły praktycznych aspektów ich funkcjonowania. Badania dotyczące drugiej grupy koncentrowały się na uwarunkowaniach rozwoju rolnictwa ekologicznego. Skłonność do rozpoczęcia produkcji ekologicznej wzrosła wśród rolników konwencjonalnych z 16% w 2008 do 19% w 2009 roku. Wyjaśnienie stanowią płatności z programów rolno środowiskowych. Czynnikami stymulującymi rozwój rolnictwa ekologicznego są: deklarowana opłacalność produkcji ekologicznej, oczekiwany wzrost dochodów i optymistyczne przewidywania co do popytu. Najważniejsze bariery, które zidentyfikowano, to: rosnące koszty produkcji w porównaniu do konwencjonalnego rolnictwa (głownie koszty pracy), słabo rozwinięte systemy dystrybucji oraz biurokratyczne procedury. Większość rolników uważa, że bieżący poziom cen i subsydiów jest zbyt niski. Istniejący potencjał rolnictwa ekologicznego powinien być wspierany poprze środki instytucjonalne oraz finansowe. Słowa kluczowe: rolnictwo ekologiczne, rolnictwo zrównoważone, rozwój obszarów wiejskich, rynki produktów ekologicznych, programy rolnośrodowiskowe, polityka rozwoju wsi.