Impact of organic guarantee systems on production and trade in organic products

Summary

The need for standards, with an accompanying certification system, in organic agriculture, causes problems for different players in the organic market. On the one hand, in the present situation extra direct costs (for inspection and certification) and indirect costs (related to production and marketing) can be expected as compared with a situation of increased harmonization. These extra costs can be expected both for producers and other players in the supply chain, such as processors, wholesalers and retailers. On the other hand, some exporters and producers in importing countries may be disadvantaged by a move towards increased harmonization. Consumers, especially in the importing countries, should be expected to gain with increased harmonization, when all effects have worked themselves through the system.
This study set out to quantify the benefits from harmonization of organic standards and certification. The first part looks at the concepts involved with harmonization in the organic sector. The second part attempts to quantify the issues. As with most changes, gains and losses would not be evenly distributed, so an analysis of the changes due to harmonization includes not only the gains but also identifies the winners and losers. At
this stage, only the wheat and coffee sectors have been included in the analysis. With conservative assumptions, the extra welfare in the organic wheat trade, due to harmonization of organic standards and certification, is estimated at over US$ 0.4 million, or over 1 per cent of the total organic wheat trade. This estimate increases to around US$ 2 million, or almost 7 per cent of the organic wheat trade, if the indirect costs are assumed to be 10 per cent of the total output, with gains going to both producers and consumers in rather equal ways. For coffee, the conservative estimate of welfare gain is close to US$ 8 million per year (or over 7 per cent of the traded value of organic coffee), increasing to over 8 per cent assuming indirect cost of 10 per cent of output, with most gains going to consumers.
Translating these figures into values for the whole of the organic sector, with the assumptions of farm-gate values being one third of retail values and conservative estimates of indirect costs, would lead to a range in annual gains between US$ 8 million (extrapolating from wheat only) or US$ 500 million per year (extrapolating from coffee only). This is a rather large range. It is difficult to know whether, if all commodities were included, the answer would lie somewhere between or outside those values. In addition, the effect on consumers and producers is different between the two - wheat producers capturing a much larger part of the gains made with harmonization than coffee growers.
These costs of harmonization are calculated on the basis of present trade, and would be higher if the trade had been larger – as can be expected if harmonization had been in place. In fact, it may well be that the real costs of non-harmonization are those of totally lost trade through, for example, experienced exporters not wanting to get involved in the complications of trade in organic products. The numbers are therefore more indicative than definitive. Care should be taken when drawing implications from these results.