8 October 1999

Will organic production always outstrip supply?

Organic milk production is

gaining ground. But what are

the market prospects as

more producers convert?

ONE of the first questions a potential organic milk producer must ask is whether attractive premiums will be sustained to make the switch worthwhile.

An equally valid question is whether the organic market will mimic its conventional counterpart and demand higher standards of production and milk quality as the market matures, says Antony Oliphant of the Laurence Gould Partnership.

"Given the constraints within which organic producers have to operate, it could be difficult for many to reach such targets." But, he adds, it could be used as a weapon to push prices down.

With organic milk production in its infancy, demand is outstripping production, says Mr Oliphant. Given this shortage, consumers accept differing standards, and gladly pay a premium of up to 50% over the standardised alternative, he says.

However, as more producers convert, perhaps encouraged by bigger co-ops who can use existing market outlets to supply organic milk, a more homogenous, reliable supply could develop, which might be sold at lower prices – and higher quality – to gain market share.

Powerful retailers

"Several years down the line, the profits from organic milk production may be no more than conventional production as powerful retailers, now with a guaranteed supply, demand higher, but arguably irrelevant standards."

What are the chances of this happening? It seems that shots are already being fired between the Organic Milk Suppliers Co-operative, the market leader, and Milk Marque Organics, says Mr Oliphant.

"OMSCo is rapidly building market muscle at the expense of the other co-operatives, having negotiated attractive and secure contract prices with Sainsburys."

This guarantees OMSCo members premiums of at least 10p/litre over todays conventional prices for five years, he says. "The Milk Group is also raising its profile and is attracting producers with higher in-conversion milk premiums and other benefits could follow.

"Milk Marque Organics, which is likely to overlay the three successor co-ops, has offered a similar scheme in some areas and also provides soft in-conversion loans."

So the battle for market share is hotting up. And there are signs that quality demands will rise to gain a marketing edge. "Milk Marque Organics is already offering guaranteed lower cell counts to its buyers. One has to ask whether the goal posts will be moved on the OMSCo deal too. Keeping within narrow cell count bands will demand high standards of traditional animal husbandry."

Production standards may also be tightened to gain market share, Mr Oliphant suspects. "Certainly differences are appearing as to what constitutes acceptable farming practice to the various certification bodies.

"The Soil Association, to which all OMSCo members must belong, is differentiating itself from other organic bodies by raising its credentials. It is demanding a lower proportion of non-organic feeds in the diet, which will raise feed costs. And new limitations on weed control will affect pasture quality and demand top management."

However, this raising of standards could also put some farmers off, limiting supplies and therefore benefiting those that can really make the grade, says Mr Oliphant.

"The jury is still out on how the market will go for prices and standards. You cannot underestimate the extent to which supermarkets can influence the outcome, but if co-operatives work together they can counter that. &#42