Organic Business Guide/Organic production and Fair Trade

Organic production and Fair Trade

In the following chapter you will find a summary of what you need to know about organic farming and Fair Trade, and what you can expect from entering this type of business. It also provides you with an overview of the different standards and certification options for organic farming, Fair Trade and related sustainability initiatives.

What is organic production?

The most simple understanding of organic farming is "No chemical pesticides + No chemical fertilisers + Certification = Premium Price". While this may be a useful formula to begin with, organic farming is really much more than this. Where farmers do nothing about soil fertility or pest problems you do not have a sustainable business. You may start with an ‘organic by default’ situation but pretty quickly you need to move into an active organic farming approach. At this point you are then looking at a sustainable agricultural production system that builds on ecological processes without using chemical inputs or genetically modified organisms, in order to produce safe and high-quality food. IFOAM, the International Federation of Organic Agriculture Movements, defines organic agriculture as follows:

"Organic agriculture is a production system that sustains the health of soils, ecosystems and people. It relies on ecological processes, biodiversity and cycles adapted to local conditions, rather than the use of inputs with adverse effects. Organic agriculture combines tradition, innovation and science to benefit the shared environment and promote fair relationships and a good quality of life for all involved."

What the design of organic production systems means in practice, and what challenges need to be addressed, is described in detail in chapter "Designing the organic production system".

Standards and their enforcement
Since the 1990s, organic production and trade has evolved into a whole industry of its own. In order to protect producers and consumers from fraudulent claims, the need arose to regulate the use of the organic label. In a participatory ongoing process, the international organic movement has defined organic agriculture in a set of principles and standards. These form the basis for many regulations at international (Codex Alimentarius), national (e.g. the US NOP, the Japanese JAS or the Indian NOS) and regional level (EU-Regulation), as well as for private labels (Soil Association, Naturland, BIO SUISSE etc.). There are organic standards for plant production, animal husbandry but also for wild collected products. Organic standards not only address primary agricultural production, but also include rules for processing and labelling. There are also rules for keeping organic products separate from conventional ones, to avoid contamination or mixing. All these rules and regulations are just the minimum requirements. It does no harm to go beyond the minimum; a lot of buyers and certainly the consumers will appreciate that!

Inspection and certification by an independent third-party ensure that products labelled organic really fulfil the requirements of the standard. For businesses that want to sell their products as organic in international markets, certification as per the respective standard is a must. In a situation where the product of a large number of smallholders is marketed, group certification systems based on an Internal Control System (ICS) are used (see chapter "Certification and Internal Control Systems"). Participatory guarantee systems (PGS) have evolved as an alternative to formal certification in situations where producers sell directly to consumers, in local markets. While in most markets there are national logos that are free to use, the use of a specific certification body allows the use of their private logo as well (e.g. Soil Association in the UK or Naturland in Germany). This can have certain advantages when marketing the produce.

What is Fair Trade?

The term "Fair Trade" usually refers to trading partnerships between producers in developing countries and market partners in consuming countries. It is based on conditions that enable producers to improve their livelihoods. A trade relationship does not necessarily need to be certified in order to be fair, but certification provides third-party independence which ensures the integrity of the trading relationship, also for communication to consumers.

There are several Fair Trade standards and labels in the market. The most widely used Fair Trade standard and certification system is the one under the Fairtrade Labelling Organization International FLO. The FLO standards address social, socio-economic and environmental aspects. They combine minimum requirements that need to be met before certification (see box), and progress requirements that require gradual improvement over a period of time. The FLO pricing system is explained in chapter "Handling pricing, premiums and payments for farmers".

The main minimum criteria of FLO:

• Small producers need to be organized in a democratic, participatory and transparent way
• The buyer and the producer organisation or company enter into a (preferably long-term) relationship with a formal buying agreement
• The buyer guarantees paying producers at least the minimum price defined by FLO based on the calculated cost of sustainable production
• If market prices are higher than the guaranteed minimum price, the market price must be paid; for organic products an additional organic premium is paid (see here)
• In addition to the payment of the product, the buyer pays a Fairtrade premium that the producer organisation uses for achieving its development objectives; this is administered democratically either by cooperative members or a joint body of management and workers
• Basic environmental standards need to be observed (e.g. no use of the most hazardous agro-chemicals, no GMOs) for certification, with progressively stricter requirements over time. The development approach also includes encouragement towards organic conversion
• Core labour standards need to be observed (e.g. no forced or child labour, freedom of association, safe working conditions, payment of minimum wages etc.)
  

www.fairtrade.net

When market prices fall below the Fairtrade minimum price, this can be a financial burden for buyers, and sometimes may even restrict access to certain markets. However the whole point of Fairtrade is to provide producers with a safety net for exactly those situations. As different minimum prices are defined for different regions, there is also a certain risk that those with high prices are not competitive in the Fairtrade market.

In addition to the generic standards that apply to all products, product specific standards need to be fulfilled. These are defined for an increasing range of products, but not yet for all. FLO certification is therefore currently not open to all products, but only those included in the FLO standards. The Fairtrade audit verifies compliance with the standard concerning the functioning of the producer organisation (including the handling of the Fairtrade premium), environmental and labour aspects and the commercial activities, like the payment and administration of the Fairtrade Minimum Price.

Fair trade certification

FLO standards and certification are designed to strengthen the position of smallholders organized into cooperatives as well as workers in plantations. Contracted farmers selling to a company can increasingly participate in FLO Fairtrade and the opening up to a broader variety of producer setups is under investigation.

Costs for FLO producer certification are usually covered by the producer organisation or the exporter. The FLO Producer Certification Fund offers a grant to small producer organisations, who are applying for Fair Trade certification but lack sufficient financial resources to pay the certification fee. Brands and retailers who want to use the FLO Fairtrade label pay a license fee to the national label initiative of the respective market (e.g. TransFair in Germany, Max Havelaar in France, Switzerland and the Netherlands, Fair trade Foundation in the UK). The national label initiative in turn raises awareness amongst consumers about Fairtrade and Fairtrade products. In many consuming countries, the FLO label has reached very high consumer recognition, e.g. 86% in the UK.

Some buyers, however, prefer to work with alternative Fair Trade certification systems such as those developed by organic certifiers like IMO (see box), Soil Association and Ecocert. These systems are more flexible concerning the definition of minimum prices, cover a wider range of agricultural products, and do not involve a licence fee. However, they are also not as well-known in the market as the FLO label.

Fair for Life

In 2006, IMO introduced “Fair for Life" in order to complement existing Fair Trade certification systems. The programme builds on key social and Fair Trade standards such as the ILO conventions, SA 8000, FLO standards and the social criteria of IFOAM. All agricultural operations including smallholder groups, plantations and contract production, manufacturing and trading companies worldwide that practice social responsibility and fair-trade can be certified.

Fair for Life certification confirms that price setting negotiations are transparent, that a Fair Trade premium for social development of the concerned communities is paid, and that workers enjoy fair and safe working conditions. The actual minimum price and Fair Trade premium is to be negotiated between the seller and the buyer. Some people in the Fair Trade movement, however, criticize that leaving this negotiation to players with unequal power does not guarantee prices that are fair and that cover the cost of sustainable production.

The Fair for Life certification programme is available for products and countries not (yet) covered by FLO. It covers all steps along the supply chain, and allows for certification of multi-ingredient products. Ingredients certified by FLO are accepted as being equivalent. A rating system for social and Fair Trade performance enables operators to demonstrate gradual improvement and achievements.

http://www.fairforlife.net

FLO aims at improving the position of the weakest part of the supply chain - farmers and labourers - through market access and a premium for communal investments. Adding more value and bargaining power through processing and exporting can be an avenue of empowerment. Some small producer organisations, however, lack the management capacity to handle commercial activities and the use of the Fair Trade premium. It is therefore essential for them to get support in their organisational development and in acquiring the necessary management skills.

The FLO Producer Services and Relations Unit (PSR) offers producer organisations assistance in different fields, such as offering guidance on certification requirements, helping producers to gain access to new markets and facilitating relationships with buyers. Locally based Liaison Officers support PSR’s work by providing training for producer organisations and facilitating input into the pricing process. Furthermore, FLO has elaborated training manuals for Fairtrade producers on different relevant topics.

Why is organic production an interesting business?

Consumers have an interest in organic production mainly for environmental and health reasons. They are increasingly concerned about the social and ecological production conditions of the products they buy. Development agencies support it because they see it as a way to reduce poverty (see chapter "Roles for facilitators, governments and donors"). Organics can also be an interesting business opportunity, both for entrepreneurs as well as for farmers.

From an entrepreneur's point of view

Sonya Mwadime of Biofresh (Uganda) Ltd promoting her produce at Biofach (Source: AELBI).

Business people may be attracted to the organic sector because they hear that there is a growing market that offers premium prices and therefore higher margins. Some think that the products they deal with are already organic and just need to be certified, and so it could be an easy way to make more profit. Others are involved because they sympathise with the goals of organic farming: with helping farmers, and doing something good for the environment. Some like the exclusivity of it: they like the image, they like to stand out from the crowd, and to be part of a People - Planet – Profit market. In such fairly small specialty markets, you would have relatively few competitors, and you could probably meet most of them every year during Biofach

In organic trade there are less intermediaries and so more direct contact with buyers. These buyers like to know you, like to visit your project, for reasons of integrity but also to be sure of their supplies over the years. Some buyers are interested in developing you as a supplier, and are therefore interested in discussing with you how to improve and expand your business. Over time you can become a preferred supplier which gives you a chance to develop longer term business relationships that give some security.

Some of the buyers are development oriented, they like to know and help the farmers. This sometimes leads to situations where besides doing business with you they offer to provide support to the farming communities. They might be able to organise trade finance for pre-financing the harvest. Some may even assist you in getting help from outside, doing a joint project with donor funding. This can help you in your standing with the farmers, and their loyalty towards you. As a premium price is usually paid, there is potentially a larger margin and hence more financial flexibility. However, there are also extra costs to contend with. If you can do it well, and can cope with the requirements, an organic business can offer more opportunities to make profit than conventional business. Additionally, there are some specialised funds to finance organic and Fair Trade businesses (see chapter "Financing your organic business").

From a farmer's point of view

Organic cotton farmer in Kyrgyzstan (Source: Helvetas).

Every farmer needs to decide individually whether organic farming is the right way to manage his or her farm. From a farmer's point of view, organic farming has some important potential advantages (Figure 3). Initially, few farmers believe that through organic farming they can achieve good yields. Many fear that by not using chemicals, yields will go down, or pests will destroy the crop - which is a true risk. Yields in conventional smallholder farms are often rather low, and soil fertility declining. When switching to more intensive and better managed organic production methods, farmers often managed to stabilize and even increase yields. Improvements in access to inputs, credit and know-how that usually goes along with an organic farming initiative play an important role in this. In addition, organic farming systems tend to be more diverse than conventional ones, resulting in more agro-ecological and economic stability.

Farmers usually find the possibility of getting a premium price very attractive. Even when conversion to organic means some uncertainty in the first years, and more work, the premium compensates for that. By becoming certified, farmers can make more money on the same size of farm. This can be important in a situation where population pressure is high. For farmer groups, the guaranteed minimum price in the Fair Trade system is an important reason to go for Fair Trade certification when that is possible. This premium offers an opportunity to improve their livelihood as well as getting a better farm gate price. What appeals to a lot of farmers, is the fact that they won’t need expensive, ‘unnatural’ external inputs. This is also a financial matter - many of them have had experiences with inputs on credit schemes, which might have cost them 1/3 of their income. Since prices for synthetic nitrogen fertilizers are tied to the crude oil price, it is likely that production costs in conventional farming will continue to increase. In organic production you usually need less money to buy inputs - provided appropriate training and technical advice on how to produce organically is available. Women especially find it easier to grow their own organic cash crops and to earn their own income. Lower production costs also reduce the financial risk involved, especially in situations where climatic conditions frequently cause crop losses.

Figure 3: Economic and non-economic benefits of organic production, as compared to conventional production.

Most farmers appreciate that organic production is better for their soils, but the benefits for water quality and bio-diversity are usually of less immediate importance for them. In many cases, there is also a health concern involved in the decision to convert. There are plenty of farmers who have experienced negative impacts from working with pesticides, like headaches and nausea. They know that pesticides are poisons and when they have an alternative to do without them then it is not a difficult choice. Many farmers know about natural alternatives and as these are considered less harmful, they prefer to work with those. Some farmers (especially women) can see the benefit that by not using pesticides, you are able to grow food crops safely in between the cash crops, like yams in coffee or beans in cotton, which improves food security. There is no more risk of food poisoning, and no pesticides need to be kept in the house.

It is true that a lot of farmers like organic and Fair Trade initiatives because of the assistance given. Organic farming initiatives usually provide some training, visits by extension officers, and sometimes inputs. They support farmers in forming groups and thus help strengthen their position in the market. Besides the premium this is the other big motivating factor. One should however not underestimate the extra effort that it requires to become a good organic farmer. It is important to be careful not to raise expectations too much; don’t create the impression that organic farming is easy.

The difference from normal agri-business

An organic business shares many features of any other agri-business. You need to manage production in an efficient way, you need to be competitive and professional, and you need to keep your figures and risks under control. Nevertheless, there are a couple of aspects that are specific to organic businesses. It is important to be aware of these.

Changes in primary production
At farmer level, the main differences from conventional agri-businesses are the following:

• The producer base is a fixed group of farmers who are certified organic and possibly also Fair Trade. You can only buy from the approved farmers, and from no one else. This means that you depend on them, and vice versa.
• You should start in an area of the country that is suitable for organic production, not in areas where the crop is heavily attacked by pests and diseases.
• There might be some technical problems with pest and diseases, soil fertility, nutrient management and alternative inputs that need to be solved.
• The farmers need to be informed about what it means to be an organic farmer, about what they are not allowed to use, and they need to be trained/guided in how to become good organic farmers. This training is a prerequisite for certification.
• The farmers need to be organised; you have to set up an internal control system to allow for group certification.
• The farms and the farmer groups need to be certified by an approved certification body. Once you are there you need to maintain certification.

For all this you need field staff: extension agents who double as internal inspectors and information carriers, and are also active in quality control (see chapter "Staff development"). Employing field staff is common in producer cooperatives, but not a normal role for most entrepreneurs, who may reside in the capital and delegate the buying to middlemen. An organic business must be closely involved with the primary production.

Different buying, storage, packaging requirements
The fact that you need to buy each year from the same farmers and will need very good recordkeeping of the quantities bought often means that the buying system will change. In many cases, the traditional middle men cannot cope with these changes and have to be replaced by buying agents and store keepers who are directly employed by you. You can only be certified if there is a high level of transparency. You may get questions that require you to trace back a certain shipment to the farmers. The organic product must be kept separately and identified as organic in a clean store which should not be fumigated against storage pests. There are some specific requirements for packaging and correct labelling: these are covered in detail in chapter "From field to market". While the additional requirements in buying, storage and packaging are likely to cause additional costs, they also provide opportunities for improving quality and increasing efficiency.

Different markets, different exposure
In organic markets quality often is an even more important issue than in conventional markets. As organic products command a premium price in the market, consumers and buyers expect a high quality product. Often the organic premium is for the combination of being certified and for having a good quality product. It is a market in which you are responsible for your product, and the business is not over the moment you have been paid. This sense of responsibility needs to be instilled into staff at all levels: you are responsible for your supply base.

Being involved in organic production will give you a certain exposure: people will enquire about what you are doing. Many people will visit you because you are in an organic project: scientists who want to study your project, an assortment of potential and hoax buyers, farmers who want to join in, authorities that want a share, and students who want to do an internship. Inspectors from the certification body who need to see your premises and your records at any time of the year can also come, announced or unannounced!

Different business models
Getting into an organic business may confront you with new challenges, but also new opportunities:

• It might be possible to interest a buyer in an early stage, to let them participate in the project so that they become a co-owner. Such joint ventures are some of the most successful businesses.
• Some buyers are ready to support you in overcoming hurdles and managing risks, so that you grow the business together. However, not everyone is prepared to do this.
• An organic project is more complex than running a normal buying and selling operation. You need to be pretty good at dealing with farmers, the certification body, and the buyers, and thus it requires a higher management capacity.
• You must be interested in getting to know other people who are active in this field. You need to be good at communication, and you should possess open-mindedness, a willingness to learn, to improve, and to go a long way. You don’t need to possess these virtues from the beginning, but you should be willing to take this route.

Different sorts of standards and certification

There are specific standards and certification schemes for particular types of organic production or related fields that are not covered in the broader organic regulations, such as wild collection, textiles, cosmetics etc. These are ‘regulated’ in private or industry standards. An overview on the main organic standards and labels is provided in the "Annex".

Sustainability standards
Besides organic and Fair Trade, there are a number of other sustainability initiatives and quality management options, some with, and some without formal certification (see overview here). Coffee producers, for example, have also the option of working with Rainforest Alliance, Utz Certified, 4C (Common Code for the Coffee Community) or with private programmes like Starbucks, Sara Lee and Coffee Partners. In cotton, options include the Better Cotton Initiative (BCI) and Cotton made in Africa (CmiA).

Most of the sustainability initiatives do not go as far as organic and Fair Trade concerning sustainable production practices and social standards. Nevertheless, they are an improvement from the common conventional practices (Figure 4). They can be a stepping stone on the way to organic production and Fair Trade.

Figure 4: Increasing sustainability in commodity production and trade.

Not all certification, however, necessarily means that farmers benefit. In some of the sustainability initiatives, farmers do not improve their practices that much, and do not receive a better price and income. Some of the standards, especially those that are not certified, are not always implemented on the ground. They look nice on paper but have little effect in practice. Even with organic and Fair Trade certification it should not be taken for granted that you comply with all possible social and environmental criteria. In order to stay in business, organic and Fair Trade initiatives need to seriously address issues like fair payment for seasonal labour, control of soil erosion and sustainable water use (see in chapter "Challenges in organic business"). Consumers, development agencies and civil society organisations will hold you accountable - rightly so.

Industry standards
For certain products, processing areas and markets, it may make sense to combine organic certification with mainstream certification schemes like Global-GAP (good agricultural practice, particularly for fresh food production) or SA 8000 (social accountability, particularly in manufacturing industries). The Certification Guide of FAO provides a comprehensive overview on the different options.

In any case, products and their packaging need to comply with the food regulation of the importing country. Their requirements include standards for hygiene, limits for contamination levels, restrictions on certain technologies and inputs like methyl bromide for fumigation (see chapter "Processing and Value addition").