China’s Organic Industry: Winter Just Over, Chills Still Ahead

Shanghai, July 11,2013 — After a year of the nationwide implementation of the latest stipulations of “China’s Organic Agriculture Certification”, which was enacted by Certification and Accreditation Administration of China (CNCA) and regarded as the world’s toughest rule on organic industry, Chinese organic enterprises have undergone a reshuffle and accelerated its pace of industrial upgrading. This year has witnessed a great surge of demand in domestic organic food market due to the rise of food safety concern and environmental awareness, lifestyle improvement, as well as the continuous development of global organic food market. There is a voice inside the circle that as Asian’s largest organic food producer, China’s organic industry has not only recovered from the reshuffle, but also started to step into a booming phase of rapid growing and upgrading as a whole. The 7th Biofach China held in Shanghai this May could be described as a sign of the revival: 261 exhibitors attended this largest organic product fair in China, a sharp rise in number over the 189 of year 2012. With the theme of Eco-environment protection rather than conventional slogan of organic food consumption, the fair also extended its product range from organic food to daily necessities such as organic toys, organic mother and baby products, organic cosmetics, eco-friendly detergents, etc. A group of Chinese organic enterprises emerged as industry leaders with their grandiose stage array and on-spot events at the fair, such as Tony’s Farm, Beijing Organic and Beyond, Jinyuan Organic, Shanghai Organic, Tang Dynasty Farm and Shinho, etc. Almost all the exhibitors boasted of their products with traceable digital label – a compulsory unified label by CNCA’s new regulation taking effect last July 1st to ensure authenticity in organic foods, which helps a lot to restore costumer’s confidence and becomes the media focus. This fair also successfully attracted international exhibitors from Germany, France, Danmark, Korea, and USA. The booths with imported organic formulas are among the most crowed ones at the fair. The fair organizer NurnbergMesse China also arranged an investigating tour for the experts from Israel, Italia and Austria to visit organic farms, enterprises and stores in Shanghai, Yantai and Beijing.

 

RTICLE CLASSIFICATION

The success of this fair undoubtedly boosted the confidence of China’s organic circle, whereas the industry insiders share a common idea that as juvenility in the world’s organic family, China’s organic industry must confront a series of issues laid on the way:

– When will organic products be popularized and eventually enter the era of mass consumption?

– Can the ‘new rule’ really terminate the initial chaos in domestic organic market?

– Is there any real qualified executive ability to thoroughly carry out this toughest “new rule”?

– How to effectively guarantee the environmental safety of the sounding area of organic farmlands?

– Is it sure there is no any secondary pollution during all steps of the processing and distribution?

– Will there be another trust crisis to break out in domestic organic market?
-Regarded as referees living off sportsmen, how can the certification institutes of organic product work as independent and impartial judges?

– Is the certification procedure conducted precisely enough to ensure a flawless result?

– What about the relevant accountability system and social supervising mechanism?

– Can a self-disciplined enterprise survive this competitive market without utilizing any of the system’s loopholes or practicing any cheating or corruptive activities?

– Will there be a definite success mode for Chinese organic enterprises in the nearly future?

– How will the government continue its administration measures and supporting policies on China’s organic industry?

……

These are the questions haunting China’s organic market. In this regard, it is not springtime for this industry who just survive the winter.

 

Organic Food = Luxury Goods ?

In recent years, the promotion for health & organic lifestyle has taken effect; there is some achievement in the market cultivation. The increasing public attention to food safety also increases the market demand. Nevertheless, the high price of organic products is still the main barrier to mass market: organic potato – 20 Yuan ($3.2)/500g, organic carrot – 30Yuan ($4.8)/500g, etc. The price of organic vegetables in supermarket is 3-10 times the conventional ones, which is quite out of financial reach of mass customers, and also astonishes the international organic professionals. Dr.Ornit Raz, CEO of Israel Bio Organic Agriculture Association, told the writer that the prices of fresh organic vegetables are only a little higher than the conventional ones, with 2 times as the maximum. So are the prices around the world. Mr.Shi, Chef of Organic Farm stores in Beijing mentioned that most of their customers are mid-aged; they buy the organic food for their kids or give it to elders as presents. Young or mid-aged people don’t normally eat it themselves. Mr.Ma Aiguo, Director of Agricultural Products Quality Safety Supervision Bureau of China’s Agriculture Ministry, explained that due to the high cost but low productivity, organic food is still a high-end product for order-driven market. Thus, one can conclude that organic foods are still regarded as luxury products by Chinese household consumers.

 

Market Chaos Effectively Contained While Violations Continuing

According to the CNCA’s rule, each organic product on market should bear a unique 17-digit traceable label which enables the supervision department to trace the whole chain from origin to retail. For those agriculture products harvested from the farmlands in conversion period, the products should be labeled as “China’s Organic Conversion Product “during the sale. Moreover, Chinese government is still in negotiation with foreign organic associations on issue of mutual recognition of organic products. For the time being, all imported organic products are subject to be certificated again in China. Otherwise, the products are not allowed to sell under the name of “organic” in any form.  This “new rule” definitely imposes higher criteria on domestic organic market, leading to an optimization and a reshuffle of Chinese organic circle. As a consequence, the previous chaos in organic market was effectively contained, market confidence was restored.

However, “strict rules” need “reinforcement”. In organic market cheatings still continue, and frequently exposed by media: conventional vegetables in similar package are often put onto organic stock in some supermarket; foods with faked label are claimed as organic product by some stores; Conversion products sometimes are promoted as organic products without the special label or any notification of “Organic Conversion Product”.  Comparing with those dishonest cheatings, it is relatively understandable by the popular that some organic exclusive stores have to sell both organic vegetables and conventional vegetables to maintain the business.

There is always a claim of “No pollution, Zero residue” on organic market by some producers. Even some specialists give endorsement to the “zero residue” concept. Austrian organic businessman Mr. Johannes Huber argued that it is impossible to achieve a zero chemical residue either in term of scientific explanations or in Austrian organic agriculture practice. In a passive stance, the writer explained that the residue value is too low to be detected by measuring instruments, so it is just a Chinese metaphorical expression. As a matter of fact, there is a definite description in term 5.3.6.3 of “China’s Organic Agriculture Certification”: All the residue of substance allowed in organic production or processing should be in accordance with the relevant stipulations and standards. For those prohibited materials, the residue should not be detected.  Obviously, it is by no means a responsible slogan of “Zero residue”.

In addition, it is worth taking notice that this year there is an increasing number of exhibitions or fairs under the name of “organic” all over the country. Some of them are really “faked” ones, having no direct relation with real organic concept but just using this name. Disputes and complaints against these fairs have caused negative effects on the whole industry.

 

Environmental Problems in Organic Farmland 

The concept of organic farming originated as early as in 1930s. In 1970s, global concerns over industrial pollution and environment deterioration in developed countries of America, Europe and Japan spurred to launch a worldwide organic farming movement with the aim of environment protection, sustainable economic development and life quality improvement.

However, in recent years, China is confronting an extremely serious environmental crisis. Along with air and water pollution, soil contamination is a direct threat to organic farmlands. The pollution control for agricultural ecosystems & environment is absolutely a pain-taking work in those highly industrialized provinces and the surrounding areas of metropolitan cities.
Situations are even worse in small organic farms, with direct pollution threat from the surrounding farm fields. In a visit to an organic greenhouse, foreign agriculture experts quickly discerned the withered weeds by herbicides in the adjoining cherry farm just several meters away from the greenhouse. National Standard for Organic Products (GB/T 19630-2011, Part one: Production, Section 5.4: buffer strip) clearly stipulated that pollution risk assessment should be conducted to the conventional fields adjacent to organic farmland. In case there is the risk, buffer strip or physical barrier should be installed between the two areas. Products from the strip or barrier cannot be certificated as organic ones. But there are no clear-cut regulations in the clauses concerning the type and width of the buffer strip. To substantially protect the organic farmland from any conventional fertilizer, herbicide or pesticide pollution, rules in more details as well as effective implementation are expected in this regard.

 

Good at Rule-making but Poor in Executing, Authority Challenged in Certification Process

The new rule of “China’s Organic Agriculture Certification” is no doubt a good move to China’s organic industry. But to fully implement the rule is another story. The system designing should be improved, in addition to supervision strengthening and enterprises’ self-discipline.

Recently, 2 articles launched crusade against the system loopholes in organic product certification: “Chaos Haunting Organic Market, Strict Rules Need          Close Supervision”(May.31, 2013,www.cnr.cn) and ” Organic Chaos:     Self-proving  in Certification Exposes Loopholes Within Management”(June.4,2013, Chinese Enterprises Daily).  The 2 articles were respectively reposted by a series of Chinese mainstream websites such as xinhuanet.com, China.com.cn, Huanqiu.com, Sina.com, Hexun.com, cfi.net.cn .21cbh.com,etc.  The most prominent problem revealed by the articles is as follows:

Nowadays, the 23 organic certification institutes in China could be classified into 3 categories: subordinates to Ministry of Agriculture such as COFCC, affiliates to science research institutes at universities, and private ones. All the certification institutes live on the certification fees by organic enterprises, which put them into a dilemma as “referees living off sportsmen”.  Meanwhile, it is a normal practice of Self-proving in organic food inspection, i.e., organic food producers can present records of production process to prove “no problem” by themselves.  Thus, dishonest producers can take advantage of the loophole, apply prohibited pesticides and fertilizers to organic fields.

Although all the certification institutes are under the administration of CNCA, a subordinate body to General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ), most of them are with “unfathomed” background, such as Ministry of Agriculture, Ministry of Environmental Protection, etc.  “It is hard to penalize a certification institute with sufficient problems proved, due to the resistance from other government department — the background.” “After finding out the problems in certain organic food enterprise, PR company appears immediately. Then things are left unsettled, which always frustrate the inspectors.” “There must be some problems with the system designing for certification institutes,” An insider told Chinese Enterprises Daily.

 

No Worry About Capital but Waiting for the Heyday

“Capitals swarm into China’s organic industry. They do make much profit from it but still anticipate more. Since the market are not as ideal as expected, enterprises feel great pressure in operation.” Mr,Zhang Yu, Marketing Director of Jiangxi Jinyuan Agriculture Development Co. Ltd., gives his comments on domestic organic investment and business operation.

In 2008, Jiangxi Jinyuan decided to expand its business into organic industry. It attracted more than a dozen investors’ interest and finally signed the investment agreement with SAIF and DT Capital Partners with a total value of tens of millions USD, accounting for 20% and 10% shares respectively. Unfortunately, due to the change of export policy and company’s group settings, Jinyuan failed in achieving the annual profit of RMB 75 million Yuan and lost 20% shares to the investors as compensation In 2011, Jinyuan successfully obtained financing from IFC, a member of the World Bank Group, and Ping’an Innovation Capital, with a total value of hundreds of millions Yuan. Founder of Jinyuan Mr.Chen Gengsheng told the writer that the 2 successful cases of financing show China’s organic industry has become an investment choice of capitals.

In 2009, Tang Dynasty Group, which operates high-end restaurants in Shanghai, put investment into Shanghai Tech-BIA Agricultural Development Co. Ltd, establishing an organic production base named Tang Dynasty Farm, which supplies organic vegetables, poultry & eggs, b & mutton to the restaurants and the e-commerce business to explore home delivery service. By striding into organic industry, Tang Dynasty Group set up an industrial chain from production, purchasing, storage, logistics to store sales, thus achieved the control over variety, cost, and food safety. This organic project also shares customer base from Tang Dynasty Restaurants. Nevertheless, it still needs some time to make profit for Tech-BIA and its e-commerce platform ” Tang Dynasty Farm”. The company expects to make profit in year 2014-2015.


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