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Conference on Supporting the Diversification of Exports in the Caribbean/Latin American Region through the Development of Organic Horticulture

• INTRODUCTION

• THE RETAIL SECTOR
• U.S. ORGANIC FARMING
• CONSUMER PREFERENCES AND PRICE CONSIDERATIONS
• IMPORTS OF FRESH PRODUCE
• PROSPECTS

INTRODUCTION

First of all, I would like to thank FAO and its co-organizers for inviting ITC to participate in this very important conference. It is a great pleasure for me to be here today to talk about the US market together with my colleague, Mr. Tim Larsen.

By way of introduction, I would just like to mention that the International Trade Centre UNCTAD/WTO or simply ITC, as we call ourselves, is the focal point in the United Nations system for technical co-operation with developing countries in trade promotion. I shall be pleased to provide you with more information on our various activities during a presentation tomorrow.

At this stage, I would just like to give you a short overview of the US market for organic food and beverages, which I hope will serve as a useful background to Tim’s more detailed presentation on organic fruit and vegetables.

With retail sales of organic food and beverages amounting to about US$ 8 billion in 2000 (probably reaching US$ 9-10 billion in 2001), the United States is the world’s largest market for this product group. Industry sources expect recent years’ strong growth to continue over the short to medium term. According to the Organic Consumer Trends 2001, published by the National Marketing Institute, in cooperation with the Organic Trade Association, retail sales might reach US$ 20 billion in 2005.

One of the main factors behind these very positive growth expectations is a strong and increasing consumer awareness of health and environmental issues, including a growing resistance amongst consumers towards GMO farming and genetically modified food products. Another important factor is the increasingly aggressive and targeted marketing and promotion by the retail sector, which is likely to intensify as mainstream retailers are moving into the organic trade. A similar effect is likely to result from the fact that the country’s major food manufacturers are also taking an interest in developing organic product lines.

The recently introduced national standards on organic agricultural production and handling, are likely to have a significant positive impact on the further development of the organic industry throughout the value chain, from farmers to the final consumer, as there will be increased focus on organic products both within the industry itself and amongst consumers.

Although the overall picture looks very positive, a number of potential risk factors or threats should be borne in mind. For example, occasional oversupply of a given product may not only have immediate but also more long-term negative effects. Reduced price premiums for organic produce and insufficient profitability amongst producers and traders are important factors. Furthermore, other forms of environmentally friendly and sustainable agriculture are likely to result in increased competition in the future. Finally, unfavourable press (e.g. fraud, of which we have seen several examples recently) and scare stories are also factors that have to be reckoned with.

Even in the likely event that the above market forecast turns out to be realistic, growth rates are bound to slow down at some stage similar to what has happened in certain European growth markets, e.g. Denmark and Switzerland, after years of rapid growth.

On balance, however, there is little doubt that the United States market will offer farmers and producers of organic products interesting business opportunities in the future, whether for domestic players or foreign traders who are looking for new markets. As far as developing countries are concerned, the following product categories are expected to be the most important:

• products, mostly tropical, that are not produced in the United States (or only in very small quantities): examples include coffee, cocoa and tea, most tropical fruit and vegetables (both in fresh and processed form, e.g. fruit juices, concentrates and pulp), certain spices and herbs, some dried fruit and nuts; in the foreseeable future demand is likely to be mainly for bulk-packed products to be used as raw material or ingredients for further processing and packaging or re-packing;
• off-season products, including fresh fruit and vegetables, that are produced in the United States, but where there is an unmet demand during certain periods of the year; potential suppliers will be producers in the southern hemisphere;
• in-season products, e.g. fruit and vegetables, for which there is a temporary or more permanent shortage because of strong and increasing demand.
• novelty or specialty products, like high quality organic wines, certain ethnic food products or retail-packed food products; this segment is currently of increasing interest to European food exporters (e.g. Danish and French cheeses), though some developing countries might also profit from such opportunities, e.g. wine exporters in Argentina, Chile and South Africa;

This conference deals with the first three product groups, and more specifically with organic fresh produce. I am pleased to let Tim Larsen, who has researched the US market in detail, continue this presentation. Thank you very much!

Good morning and thank you for the opportunity to talk about the U.S. organic market. Today I will talk about the overall market trends for organic fruits and vegetables as well as market opportunities and entry strategies to develop this market. I will also briefly talk about the Canadian market.

And even more important than the statistics, I would like to share comments I received talking to the U.S. industry. A major natural foods market vice president of produce said: "We're interested in any new fruit or vegetable", while an importer/distributor said there are products he cannot find today that he would buy as soon as an organic producer can provide the product.

What started this organic movement anyway? Why do consumers care and how did this industry evolve?

All farming was "Organic" before the 1840s when the first chemical fertilizer was patented in Germany. The late 1940s ushered in petrochemical use in agriculture, when synthetic fertilizers, herbicides and pesticides became the mainstay.

The USDA was researching organic production in the early 1900s when Mr. King researched and published a book "Farmers for Forty Centuries, or Permanent Agriculture in China, Korea and Japan". This was an early study on composting, crop rotation, mulching and cover cropping practices. The research was largely ignored in the U.S. when it was released.

In the 1940s, some groups began to experiment with "Organic" production. One early proponent was J.I. Rodale, a successful publisher who established an experimental organic farm. This led to the creation of "Organic Gardening", which is the highest circulation gardening magazine in the world today.

Another pioneer was Paul Keene, who established "Walnut Acres" in 1946. His organic apple orchard was the source of the first processed foods sold as "Organic".

The Environmental movement of the 1960s brought in a new group of environmentally conscious consumers. This included the "back to nature" movement and the establishment of natural food stores which featured organic foods.

In 1989 a report in the U.S. identified "Alar", which is a growth regulator in apple production, as a carcinogen. This lead to a large food scare in the U.S. and further increased interest in organic foods.

This new round of food safety concerns ultimately lead to the 1990 U.S. Farm Bill and initiated the establishment of National Organic Standards.

Much has changed since the 1960s and 70s. Our organic market has grown from "hippies" to mainstream consumers.

Celestial Seasonings started near my home when the founder began to collect local herbs and selling the herbs as tea in hand sewn muslin bags. Today, they have sales of over 400 million dollars.

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The U.S. market for organic and natural food was 6.5 billion dollars in 1999, growing to about 8 billion in 2000. It is one of the fastest growing segments of U.S. food sales. Produce represents 1.45 billion in sales and is almost evenly split between the natural food store sector and conventional retail stores and is an important part of all retail stores. Produce represents 8.8% of the total sales at natural food stores and 9.7% at conventional supermarkets. Both the natural food stores and the conventional supermarkets feel that the produce sector of their stores is one of the most important factors in attracting and retaining consumers.

Top 10 state locations of natural food stores
California   Florida  Texas  New York  Illinois   Pennsylvania   Ohio   Washington  New Jersey   Michigan	1,937 853 785 715 518 465 414 390 356 353

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THE RETAIL SECTOR

First, I’d like to review the "Natural Foods Market" and the conventional supermarkets. While each is a critical market for organic produce, they represent significantly different markets.

The natural food store sector has over 12,000 stores in the U.S. with a focus on selling organic and natural food products. This sector has several major chains that are often the focus on trade views on this market. Whole Foods, based in Austin, Texas and Wild Oats Markets, based in Boulder, Colorado have been aggressively growing in the past 3 years, but still only represent a total of 220 stores. This accounts for less than 2% of the total retail stores in this category, indicating that this market is still predominately independent retail stores.

Within the natural foods market, organic produce accounted for US$833 million in sales in 1999 and represents 69% of all produce sold in their stores. The produce department represents a critical category and creating a great looking produce section is a key to these stores. And they must keep their produce section fully stocked twelve months a year!

Both the natural food store sector and the conventional markets sell organic produce, but approach the sector differently. The natural food stores focuses on organic produce and will use conventional produce to fill in fruit and vegetable coverage when organic options are not available. The mainstream supermarkets feature conventional produce and provides limited organic produce to complement their conventional offering.

The annual industry report in the Natural Foods Merchandiser provides detailed analysis of the product segments in the natural products retailer segment.

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In the conventional supermarkets organic produce is offered as well as non-organic in some, but not all stores. According to the Fresh Trends 2001 Report, organic produce represents just 2% of the conventional supermarket produce sales. A store check of the two leading conventional supermarkets confirmed that organic options were offered in additional to conventional (non-organic) produce. It is also apparent that the organic offerings focus on the major produce items, not the more unique or exotic offerings.

Even though organic produce sales only accounts for 2% of total produce sales, the organic sales at conventional supermarkets now account for 618 million dollars. While there are currently 120,000 conventional supermarkets in the U.S. they do not all handle organic produce. Conventional supermarkets will be selective and only offer the organic products in stores where the customer is requesting them. Realistically, the more affluent markets will have organic products more than the lower income markets.

While we talk about natural food stores and conventional supermarkets, it is important to also remember that the U.S. market is really a collection of many markets.

Very few companies launch products in the total U.S. market. Most companies focus initially on a few key markets and then roll out a product nationally at a later stage. You should use a similar strategy when addressing the U.S. market. Think more about how to approach the Southern California market, for example, than how to approach the "U.S. market".

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U.S. ORGANIC FARMING

The United States is both a major exporter and importer of a broad range of fruits and vegetables. This trend of the U.S. as an importer and exporter will continue in the organic sector as well. A big advantage many of you will have is that you are located in the Southern Hemisphere are at least far enough south to provide produce for the U.S. market when domestic farmers can not.

In the U.S., the organic sector of agriculture has recorded growth of over 44% in certified acreage from 1992 to 1997. During the same time, cropland grew by 111%. Additional reports in 1999 indicate a continuing pattern of growth in organic acreage. The California Certified Organic Farms group reports their certified organic acreage is up 38%, and the Idaho Department of Agriculture report increases 55%. The Washington Department of Agriculture reports a growth of 150%.

Total U.S. certified farm land in acres   1992 1993 1994 1995 1997 % change Total 935,450 995,453 991,453 917,894 1,346,558 44 Pasture/rangeland 532,050 490,850 434,703 279,394 496,385 -7 Cropland 403,400 464,800 556.750 638,500 850,173 111 Total # of Certified growers 3,587 3,536 4,060 4,856 5,021 40

Cropland acreage used primarily for vegetable and fruit production as well as edible beans and herbs. Key vegetable crops include lettuce, potatoes, tomatoes and carrots.

 

Organic vegetable acreage
Tomates	3,780
Lettuce	5,780
Carrots	3,323
Potatoes	4,335
Mixed veg. (< 5 acres)	2,699
Mixed veg, (> 5 acres)	14,131
Unclassified/other veg.	18,550
TOTAL	52,598

Ten states have acreage over 1,000 acres in vegetable production. Of these states five are limited to summer vegetable production due to winter weather conditions.

Top organic vegetable acreage states
1. California	23,977	6. Oregon	2,413
2. Colorado	4,621	7. Minnesota	1,811
3. Wisconsin	4,532	8. New York	1,615
4. Washington	3,785	9. Illinois	1,199
5. Arizona	3,081	10. Florida	1,017

Fruit production is lead by the certified organic grape production with 19,299 acres. Organic grape production is primarily in California. Apples are the second largest crop, followed by citrus and tree fruits.

U.S. Organic fruit production in acres
Grapes	19,299
Apples	8,846
Citrus	6,099
Tree nuts	4,908
Unclassified	10,261
Total	49,413

Of the top ten states with organic fruit acreage, only 7 states have over 1000 certified acres. Again California is the leading state by a large margin, followed by Arizona, Washington and Florida.

Top organic fruit acreage states
1. California	32,582	6. Texas	1,344
2. Arizona	4,3661	7. Oregon	1,231
3. Washington	2,978	8. Minnesota	360
4. Florida	2,625	9. Michigan	336
5. Colorado	1,816	10. New York	326

There is no U.S. government program existing to encourage farmers to switch to organic production. In fact, the existing farm support and crop insurance programs provided by the U.S. government base their support on historical production and yields which would be a disincentive to a farmer switching to organic production. There is a pilot program to offer organic crop insurance, which would provide some crop insurance coverage for the first time for organic produce. This insurance could cover hail and other climatic impacts which up to now have not been covered for organic produce through conventional government programs. Some individual states are providing assistance in conversion to organic production.

Another speaker will be talking about the U.S. organic standards so I will not talk about the standards today. I will share with you that with the full implementation of these standards by October 2002 the U.S. industry is already preparing for increased interest in organic products. Major U.S. food companies are expanding into the organic market segment and a consolidation within the existing organic and natural foods product companies will lead to increased advertising and promotion of organics in general which will further increase U.S. consumer interest in organic products, including produce.

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CONSUMER PREFERENCES AND PRICE CONSIDERATIONS

US consumers are eating more produce. In fact US per capita consumption is 132 pounds of fruits and over 186 pounds of vegetables. The U.S. consumer is increasingly focused on personal fitness and better nutrition and produce is an important factor in a healthy lifestyle. Twenty four percent of the consumers have indicated that they have started or increased their consumption of produce as a diet or health requirement.

The publication. "The Fresh Trends, 2001 Profile of the Fresh Produce Consumer" provides us with insights into the US consumer on conventional produce purchases as well highlights on organic issues and opportunities.

The U.S. consumer has a variety of concerns that effect their fresh produce purchases. The primary factor is the anticipated taste of the product. If you will be introducing new fruits or vegetables, you should include provisions to provide consumer sampling at the retail level if possible. Equally important are the general appearance and the perception of cleanliness. Ripeness and nutritional value are also factors in the purchase decision.

Primary factors impacting fresh produce purchases
- 87% Expectations of taste	- 41% Item in season
- 83% General appearance	- 39% Knowledge of how to prepare
- 74% Cleanliness	- 33% Appearance of display
- 70% Degree of ripeness	- 27% Complements main entrée
- 57% Nutritional value	- 14% Where it is grown
- 47% Price	- 12% Organically grown

The origin of the produce is a lesser factor to the general consumer. The awareness and desire for organic produce, while not the primary factor in the purchasing decision, does contribute to the purchases with some consumers.

Food safety is a factor impacting produce purchases. Thirty two percent indicated that they felt certain fresh produce items are more prone than others for food safety concerns. Another study, indicates that 79% of the consumers report they are completely or mostly confident that the food in their supermarket is safe. In the survey on safety, 65% of the respondents expressed concern about chemical residue on fresh produce. Only 34% felt confident that the government agencies do a good job of insuring the safety of fresh produce.

Safety issues impacting produce purchases

65% Consumers feel they are concerned about chemical residues on fresh produce

34% Feel that government agencies do a good job of making sure fresh produce is safe to eat

20% Agree that fresh produce grown in foreign countries is as safe as produce grown in the U.S.

16% State that regardless of the cost, they'd rather buy organic produce

Twenty percent felt confident that fresh produce grown outside the U.S. was as safe as U.S. grown produce. A core group of 16% indicated that they would buy organic produce when discussing the safety of their produce purchases.

It gets a little confusing when we start talking target prices. While the premium for organic versus conventional produce ranged from 11 to 167 percent during our study (store checks), the general consensus is still that our target should be a 10-30% premium.

One of the largest distributors recently stated: "We’re seeing an 18 to 25 percent differential, but that can change depending on supply factors". Please keep in mind that the production cost (or cost of the imported produce) is only one factor in determining the retail price. Other factors include demand, regional transportation costs, local supply and competition.

Although the stereotypical organic customer has been perceived as the radical who will pay any price, a U.S. retailer has observed: " They are the minority, there is a larger group of people who will buy organic produce if it is reasonable, and the key word is reasonable."

Your target organic premium should be in the 10-30 percent range. And remember, if you get the higher premium one year, chances are other growers will notice and move to serve that market as well, so don’t make any long range plans for large premiums.

In the fruit area, you can see there were no organic bananas available during the February 2001 store check, while the apples seem to be well covered. You can also see the trend mentioned earlier. When the natural food stores such as Whole Foods can obtain organic products, they do not offer a conventional alternative, while the conventional markets do. The same holds true for vegetables, though we see some conventional and organic products in the natural food store.

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IMPORTS OF FRESH PRODUCE

While the value of imported organic produce is not known, the U.S. imports over US$ 6 billion in various fruits and vegetables some of which is organic. Many in the industry feel that each fruit and vegetable imported could have an organic option developed.

The U.S. National Organic Standards will be in full effect by the end of October 2002. Until that time, imported fruits and vegetables will not be regulated or controlled for "organic" designation. However, the importer and the retailer will want to know your organic certification, but it is not a legal requirement for entry into the U.S.

All fruits and vegetables shipped to the U.S. are regulated by a variety of US Government agencies. After October 2002, exporters of organic produce to the U.S. will still be required to comply with all these agency regulations, and will also have to document that the claim of "Organic" is recognized by the National Organic Standards group.

Those regulating importer produce include the Food and Drug Administration, the Center for Disease Control, the US Department of Agriculture, the Environmental Protection Agency, and the Federal Trade Commission.

 

 

U.S. regulation of imported produce
The Food and Drug Administration (FDA), which is part of the Department of Health and Human Services and the Public Health Service	www.fda.gov
Centers for Disease Control and Prevention (CDC)	www.cdc.gov
The U.S. Department of Agriculture (USDA)	www.usda.gov
Environmental Protection Agency (EPA)	www.epa.gov
U.S. Custom Service, U.S. Department of Treasury	www.customs.ustreas.gov
Federal Trade Commission (FTC)	www.ftc.gov

As mentioned, the U.S. imports in excess of US$6 billion in fruits and vegetables each year. There is no record of what percentage of these imports represent organic produce.

While the actual value of organic produce imported to the U.S. is unknown, the Fresh Trends 2001 report indicates that U.S. retail produce sales include 2% organic produce. Those suppliers who can ship produce to the U.S. during the winter months will find a greater reception at the market.

In the study we review 45 different fruits and vegetables. For discussion sake, we are indicating what 2% of the imports would be worth. This is a good starting point to project organic sales potential.

The key to accessing the U.S. market is the produce importer. Retailers, whether the natural food retailer sector or the conventional retailer, utilize produce distributors for obtaining their organic produce. Most of the importer/distributors focus on regional markets. While there are over 130,000 retail food stores (natural and conventional), an exporter needs only to locate a few importer/distributors to access these markets.

Produce importer/distributors are responsible for the importation, warehousing and distribution of the product. Some importers will function as the importer and distributor within a region, and sell the produce to other wholesalers for servicing other markets.

Sales of organic produce will develop market by market. Again, it is important to visualize the U.S. market by region rather than one big market. The greatest potential for imported organic produce is to fill the market void during the winter. The consensus of the industry is that organic produce offers great potential, provided the products offered match the quality, taste and price expected by the market. One distributor commented that his customers (the retailers) would not stock inferior organics. They would rather only present conventional produce if a quality organic product was not available.

U.S. retailers are requiring produce arrive at the store with the Price Look Up or "PLU" stickers. PLU stickers provide a standardized set of numbers identifying random weight items at a retail checkout. The importer/distributor can coordinate this program for exporters. The PLU system is ready for organic products. For organic products, the regular 4 digit number adds a "9" at the beginning, which designates that product as organic.

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PROSPECTS

Importer's interviewed for this study indicate that import programs offer great potential, if they include a well organized transportation program to deliver quality products. The exporter must pack products to U.S. market specifications, or find a key importer who can repack to the U.S. specifications.

With the finalization of the National Organic Standards and full implementation in October of 2002 the U.S. industry will be aggressively promoting organic products, which will greatly increase the U.S. consumer awareness. There has already been an increased focus on organic foods by the major U.S. consumer food product brands. Major companies have purchased existing organic food companies and introduced product line extensions of existing national brands with an organic focus. Mergers within the industry have also consolidated organic and natural food brands to create stronger market forces.

As these products enter the U.S. market with their accompanying advertising budgets, the consumer will receive a new level of promotion for organic products. This will increase the consumer awareness of all organic products.

The U.S. retail sector will respond to this public demand by providing a broader range of organic produce. This will also increase organic produce imports to provide year-round availability. One distributor interviewed indicated that he was very interested in exotic produce options. Another indicated "I could buy organic colored bell peppers 9 months a year if I could find a source."

The growing public awareness and desire for organic produce makes the United States a significant market for common and exotic fruits and vegetables. Retailers are seeking year round availability as the market demand increases.

Our study revealed over 20 vegetables with US market potential, and over 20 fruits and nuts.

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Top vegetable prospects include:

Top vegetable prospects Asparagus, fresh or frozen Okra, fresh or frozen Avocados Onions Beans, fresh or frozen Peppers Carrots, fresh or frozen Plums Cauliflower & broccoli, fr/fz Potatoes, fresh or frozen Celery, fresh Radishes, fresh Cucumbers Squash Eggplant Tomatoes Endive, fresh Cabbage Lettuce Garlic Mustard Peas, incl chickpeas

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Top fruit and nut prospects include:

Top fruit and nut prospects Grapes Other nuts Cashew nuts Peaches Melons Macademia nuts Citrus Kiwi fruit, fresh Mangoes Brazil nuts Pineapples Plums Apples Water chestnuts Strawberries Filberts Other berries Chestnuts Pears Pistachio nuts Pecans Bananas

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