Organic farming gaining ground
Over the five years through 2011-12, industry revenue is expected to grow an average 11.6% per year. Industry revenue in 2011-12 is forecast to reach $503.8 million, a growth of 9% from the previous year. The industry's key products are fruit and vegetables (about 51.5% of total value), beef and poultry.
Australia has the largest area of organic farmland in the world at 12 million hectares, with the vast majority of this land comprising large rangelands for organic cattle production. However, the industry is comprised mainly of small operators, which has contributed to difficulties in providing consistency in the quantity and quality of produce. Other dampeners to growth have been intermittent drought conditions over the past five years. Despite this, over the five years through 2011-12, revenue in the industry has remained resilient.
The industry will continue to grow strongly over the next five years, favoured by strong demand in domestic and export markets. Over the five years through 2016-17, industry revenue is anticipated to increase an annualised 12.1% to reach $892.3 million in 2016-17. Over this period, there will be increasing participation by supermarket chains in the organic market, downwards pressure on prices from growing economies of scale in production, and benefits from improvements in the certification of organic produce.
The organic farming industry will continue to grow quickly over the five years through 2016-17 by 12.1% per annum to reach $892.3 million. Growth will be driven by increased consumer demand, supply chain improvements and greater consolidation in the industry. Farm gate revenue growth will come from increased production rather than higher prices.
Demand remains strong
Domestic demand for organic food should continue to grow strongly over the five years through 2016-17. Higher real household disposable income levels, greater health consciousness, increasing environmental awareness and increased availability of organic food will drive demand growth. Demand is also expected to be aided by greater advertising for organic food. There will be a broader selection of processed organic foods, such as frozen vegetables, to cater to time-poor consumers. Processed products include cheese, wine, sugar, biscuits, bread, jam and olive oil.
A key opportunity for growth in demand will be greater production volume of processed organic products. This demand will come from greater processing capabilities, which will be aided by continued growth in organic farming to supply processing and more developed supply chains. There is a good range of high-quality fresh organic produce in Australia, but opportunities for growth still exist. A study conducted by Agriculture Western Australia found that there were opportunities for products including carrots, apples, eggs, rice, herbs and oranges.
Involvement of supermarkets
There is likely to be a greater selection of organic food in supermarkets, including more private-label products to target consumers wishing to pay a smaller price premium for organics. The growing involvement of supermarkets in the organic retail market is likely to affect organic farmers in a number of ways. Supermarkets will require consistency in quantity and quality of produce. They will also act as a sizeable buyer that may encourage greater scale and investment in the supply chain. Conversely, given their market size, they may be in a position to exert downwards pressure on prices.
Growing export demand
Export demand for organic food is expected to grow over the five years through 2016-17. Organic exports from Asia will compete with the industry for export markets; however, Australia will be able to capitalise on its clean and green reputation. Exports will be negatively affected by an appreciation of the Australian dollar over the next five years and slow growth in many of Australia's major export markets over the early part of the period. Growth in imports will depend on the development of the domestic industry and will benefit from a forecast appreciation of the Australian dollar.
An increase in supply will be the most important determinant of growth in the industry over the next five years. Growth in supply will depend on the number of farmers adopting organic methods, which will be influenced by the returns in organic farming relative to conventional farming, seasonal conditions and the development of an organic supply chain. Declining terms of trade in conventional agriculture may aid the conversion of farmers.
Growth in organically farmed products is expected to be aided by improved seasonal conditions. Assuming a return to average seasonal conditions, there is expected to be an increase in the overall production of beef, milk and wheat, based on data from Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). The forecast growth in these segments bodes well for the industry. In particular, an increase in wheat production is a good sign for the industry, with a shortage of organic wheat affecting production of organic livestock. The percentage of organic food produced that is not fruit or vegetable is likely to rise with the increase in production of organic grains and livestock.
Large revenue harvest
Trends in increased revenue reflect forecast growth in key products including beef, dairy, poultry and eggs. Growth will be driven mainly by increases in production. Prices are likely to fall as costs of production decline with increased economies of scale and as supermarket participation in the organic retail market increases. A small part of price movement will depend on the balance of demand growth relative to supply growth.
Industry profit will increase over the next five years based on strong growth in revenue. The industry will face some cost increases over the period. The price of fuel is expected to increase as world economic growth recovers. Labour costs in the industry will rise as the labour market tightens with a recovery in economic growth and employment increases. Industry profit should benefit from increases in productivity through economies of scale, greater knowledge of organic farming and developments in technology. However, profit is also expected to be dampened by a decline in prices.
New enterprises are forecast to enter the industry over the next five years at a moderate rate, aided by strong profitability, a recovery from drought conditions and the awareness of a shortage in organic supply. Establishments will grow at a faster rate than enterprises as established players consolidate to increase economies of scale and their supply levels. Employment and wage growth are both forecast to follow establishment trends closely.
More than taste
Consumers are increasingly considering a range of issues when purchasing food. Greenhouse gas production, sustainability, ethical sourcing and animal welfare concerns are joining health issues in the marketing of food.
Organic food faces competition from the increasing range of products claiming to meet the expectations of socially conscious consumers. For instance, the market share of organic eggs sold in supermarkets has declined as the market share of free-range eggs has grown. This may reflect shoppers choosing a lower-price product that still addresses their animal welfare concerns.
Another risk that may also represent an opportunity for the industry is the production of GM crops. In Australia, organic products may not include GM material, whether its use is intentional or unintentional. The increasing commercialisation of GM crops in Australia increases the risk of GM material contaminating organic crops and livestock. However, growth in GM production, both in Australia and overseas, is also a potential opportunity for the industry. Consumers who want to avoid GM foods may turn to organic food, increasing demand for organic products. This increase in demand will depend upon a lack of contamination from GM crops in Australia.
Less greenhouse gas
Organic farming appears likely to better adapt to changing conditions wrought by climate change than conventional farming. Studies suggest that organic farming is more resilient and provides higher yields than conventional farming during periods of extreme weather conditions.
Organic farming may also be in the position to benefit from the introduction of a carbon-trading scheme, however, these benefits may be only slowly realised. There are studies that suggest that organic farming methods result in lower greenhouse gas emissions than conventional farming methods. A US study quoted by the Organic Federation of Australia (OFA) states that organic farming practices can remove about 7,000 kilograms of carbon dioxide from the air each year and sequester it in a hectare of farmland.
Organic farming also uses less fossil fuel than conventional farming, particularly in regard to fertiliser use. The OFA quotes a figure of 30% less fossil fuel use for organic systems. The introduction of any carbon-trading scheme is likely to increase fuel, freight and electricity costs. A smaller increase in costs for organic farmers may encourage some conventional farmers to shift to organic methods.
Downstream demand from food and beverage manufacturers is a key driver of revenue in this industry, as it is a key purchaser of this industry's products. Downstream demand from this industry is driven by Australian consumer incomes, population growth, consumer trends such as health consciousness, competition from imports, export demand, and consumer, grocery retailer and food service establishments' demand for organic food.
Key success factors
- Having a good technical knowledge of organic farming systems: An organic farmer must be knowledgeable in organic farming principles and systems to be able to successfully produce organic products.
- Access to organic inputs: Organic producers need to be able to access organic inputs to produce organically. Livestock producers, in particular, need to be able to access organic grain sources.
- Consistent supply to the market: Organic producers need to be able to deliver a consistent supply of their products to market to ensure downstream demand. Organic producers can aid consistency through being part of a producer marketing cooperative.
- Accreditation from a certifying organic organisation: Organic producers need to be certified organic in order to be able to legally sell their products as organic in domestic and international markets.
- Production of value-added organic produce: Organic products must meet other consumer demands such as taste, product freshness, packaging and convenience (such as washed produce).
- Appropriate physical growing conditions: Regional weather conditions have an important impact on production levels and quality.