Why is there no organic production in Russia?

№ 1 от 2013 года
Автор: Шарова Н. Е.
УДК 338.43
Автономная некоммерческая образовательная организация высшего образования «Региональный финансово-экономический институт»

Эта статья доступна только на английском языке

Contemporary situation and policy in terms of organic production in Russia

Demand for organically produced food in Russia is small and the market for organic food is at an embryonic stage. However, issues such as the enactment of the above mentioned law, pesticide poisonings and GMOs have provoked a public debate about food quality and increased interest in organic food especially in urban areas. Thus, the availability of reliable labeled organic food may stimulate the Russian domestic market, as has been the case in many European countries. The Russian government regulation “About approval of the common list of goods for compulsory certification, and the common list of goods for which the confirmation of its conformity is in the form of a declaration of compliance” has entered into force from February 15 2010. The essence of this regulation is the replacement of compulsory certification for food and cosmetic goods with a declaration of compliance. This means transferring the responsibility for product quality and compliance with the requirements of State Certification Agencies to producers. It has aroused debates in mass media and the scientific community about the benefits and possible negative consequences of this regulation for both manufacturers and customers. On the one hand it will reduce administrative barriers for firms which should result in an increase in the number of players and competition in the market (Petrov, 2010), but on the other hand it can result in an increasing amount of sub-quality and counterfeit products from unscrupulous producers. The supporters of this law assert that customers’ preferences and corporate competition will eventually exclude substandard products from the market; but Russian consumers would consider mass poisoning via low quality products and ingredients during this transition period too high a price. After the enforcement of the above mentioned law, 11.6% of food consumers have changed their eating habits to organic products regardless of existing high prices.

Let us take a deeper look at what the term “producers’ responsibility” means in Russia.
Today Russian shoppers are more concerned about, and interested in, the food they eat than ever before. In these circumstances access to reliable information about the origin, ingredients, caloric and nutritional content of food is even more important in Russia. Currently, according to Russian Federal law № 29 “About quality and safety of food products” chapter 5, paragraph 27, the criminal liability for its transgression arises only in the case if “it has resulted in causing a disease, poisoning or death”. And what is the statutory punishment for misinforming customers and labeling a product as ecologically clean when it is not? According to Russian “Code of administrative violations” paragraph 14.4 “Selling goods or services with improper quality or violation of sanitary regulations” leads to an administrative fine of 4,000-5,000 Rubles (about $130-160 at the June 2010 exchange rate) for public officers or individual entrepreneurs and 40,000-50,000 Rubles (about $1290-1600 at the June 2010 exchange rate) for corporations. It is obvious that on the one hand labeling non-organic products as “organic” will rarely cause disease or death and consequently will never lead to criminal liability of producers, on the other hand the above mentioned lenient financial penalties are ineffective especially for large-scale producers and it seems very profitable for them to increase consumption without any efforts and costs devoted to improving product quality. Placing attractive words such as “organic” or “BIO” on the label will easily cover all financial penalties with considerable profit. Therefore this premeditated deception must be legally considered as fraud which is prosecuted as a criminal offense.

Consumers normally perceive organic food as healthier and more environmentally friendly (Jones and Clarke-Hill, 2001; Mann, 2003). With emphasis on soil management, prohibition of synthetic chemicals, resource conservation, and mechanical and cultural pest control practices,organic agriculture may reduce the cumulative adverse impact of agriculture on the environment even if more land comes into use. According to several studies (Pearson, 2001; McEachern and McClean, 2002), organic consumers’ main concerns are health, nourishment and the environment, together with a search for superior product quality. The concern for health in particular among Russian consumers can be considered as the main reason for increasing production and consumption of organic products. Open-air traditional Russian farmers’ markets also create a demand for organic produce, though the volumes are much smaller. The demand for organic produce at farmers’ markets is strong, and could grow considerably if consumers could be assured of the authenticity of the produce sold as organic, preferably by means of a certificate. The growth of local organic markets in Russia depends on two key factors when customers accept the quality of the product on trust rather than on the basis of certification. First, consumer confidence must be raised. Customers need reassurance that produce sold as organic has indeed been produced using organic methods, which must be defined and protected by Federal law. Obviously, a reputable and world recognized labeling system would help increase customer confidence. Second, produce must be easily available in supermarkets, local and specialized shops, and farmers’ markets. It is interesting to note that in the wake of the repealing of the mandatory certification of food products, the availability of organic production itself can reveal a hidden domestic demand thus demonstrating that awareness amongst consumers in Russia has perhaps been underestimated. Consequently, locally based organic certification could allow an increase in this market through collaboration with both local and small-scale private farms and with large agrofood collective farms. Their goal in meeting growing consumer needs and desires for organic food is to obtain greater economic profitability. However, the stringent conditions for competitiveness may be more easily met by the large-scale collective farming sector and there are a number of constraints on the profitable participation of smallholder farmers. According to current and historical practice in the Russian agrofood industry, the stringent conditions and entry barriers for competitiveness are in general more easily met by the large-scale commercial farming sector (Sharova, 2006). Thus, for example, in the United States, large agrofood enterprises have already entered the organic food sector. What is really ironic is that, to be successful, small organic producers (contrary to the large organic agrofood industry) need to unite and grow larger to increase their capital and thus obtain a wider distribution capacity (Fromart, 2006). Being able to sell with an internationally accepted certificate offers many benefits to farmers and agroholding companies. (Collective) farmers will receive a reasonable proportion of the organic premium as well as access to the domestic and international organic market segment.

There is considerable demand for organic food in developed countries and a small but rising demand for organic produce also exists in developing countries and countries in transition. The majority of the organic produce consumed in Russia is imported and local agriculture represents a source of a wide range of organic produce, especially traditional agricultural products like crops, fruits, vegetables, oils, and cereals. There is considerable potential for Russia to supply organic markets in European countries. The expanding EU market offers a huge potential to increase the volume of organic foodstuffs sold to Europe. There is a further market for prepared and processed organic foods. According to USDA economic research, production costs can be higher in organic production systems because of a number of factors including the relatively intensive use of labor; use of specialized equipment and other substitutes for synthetic chemicals; high prices charged for organic seeds and other inputs; use of longer crop rotations for pest and disease suppression in organic production systems. But currently Russia is in a very good position to add value to organically produced food while at the same time benefiting local economies with its lower labor costs in its rural regions (according to data of Russian Federal State Statistics Service the average salary in agriculture in 2009 was about $300 p/month) and low level of usage of synthetic herbicides, pesticides, and fertilizers.

What Russian people think about organic products and why

A survey was held in several cities of central Russia including Moscow examining consumer behavior to identify factors that influence restrictions and preferences for purchasing of organic foods. The data has been collected from three types of poll: Internet poll, phone poll and in person interview resulting in 512 data points. It is a statistical sample including only urban citizens. The reason for studying only urban customers is that Russian rural inhabitants traditionally prefer to consume local or self-produced foodstuff. According to the data of Russian Federal State Statistic Service, the sample is representative of the Russian urban population by gender and age structure. Respondents were asked to estimate their own income level and only 4.6% considered it “high”; 36.1% thought it to be low. A consumer’s own estimation of their income is very important because organic produce is more expensive and people who consider their income “low” will never pay the premium for ecologically clean products. In regard to prices, the majority of organic food in Russia costs as much as 100% more than conventional food. Cost is thus the chief obstacle to an increase in demand: only half of the respondents are ready to pay 50% higher price for organic food, including the 12.1% who are willing to pay a 100% premium. Only 1.2% of those interviewed said that they do not care about price and are ready to buy organic with a more than 300% premium. Another issue concerns what consumers are willing to pay only for recognized organic food. 38.6% of consumers trust only well-known foreign organic certification such as the USDA Organic label, ECOCERT etc.; an equal share, 38.5%, do not trust any certification and do not have any idea about existing certification standards and procedures in the USA and the EU countries; 10.8% of consumers rely on national certification and 12.1% believe any product label without any concern if its issuer guarantees product quality. Another obstacle to effective consumption of organic food is the consumers’ degree of knowledge regarding the subject and current level of State regulation. More than half of the respondents (53%) answered in the affirmative to the question about their awareness of what organic food labeling means and how organic food is defined. Only 49.4% are informed about the new Government regulation in the sphere of food and cosmetic products certification. 33.7% answered that their consumer interest regarding certified organic products increased, but 24.1% said that they do not want or cannot buy it at existing prices; 21.7% are regular consumers of organic food without any concern for Government regulation.

Main obstacles to consumption and production of organic foodstuff in Russia

The survey showed that the main obstacle to the expansion of the Russian organic food market is the price gap between conventional and organic food. More than 90% of organic production in Russian stores is imported from foreign countries which significantly increases the cost to the ultimate consumer because of expenses for transportation, customs charges, storage, natural loss, etc. This fact results in the huge premium in comparison with EU and the US which Russian consumers have to pay for organic foodstuff. Another fact explaining high prices for ecologically pure products is the small scale of present consumption in Russia. So we see the “vicious circle”: high prices as a result of low demand and low demand as a result of high prices. According to the fact established by the survey that the current organic premium is more than 100%, we can assume that the present demand could be increased significantly if the premium were brought down to a maximum of 50% in comparison with conventional food. As this premium is insufficient for importers it is important that a market emerges for local producers and is facilitated by highly reliable certification agencies.

Another significant obstacle to Russians buying organic products is their mistrust of all existing local systems of certification. This stems from the post-perestroika era when more than half the product labels and lists of ingredients did not correspond to the facts. The availability of ecologically clean food labeled by a well-known certification brand complemented by a 100% cap on the price difference between organic and non-organic products will satisfy the effective demand of most of the urban population if we use a model based on local food production and international certification, and maintain the same price gap between organic and non-organic products as exists in the USA. The USDA Economic Research Services analyzed organic prices using 2005 data on produce purchases (Lin et al., 2008), and found that the organic premium as a percent of the corresponding conventional price was under 30 % for over two-thirds of the items; the US average price premium for organic milk was 98% above the conventional price in 2004.
According to a list of USDA Foreign Accredited Certifying Agents, currently there is no USDA Accredited Certifying Agents or other well known EU agencies in Russia. Despite the fact that the USDA organic label is a highly trusted certificate for Russian consumers and despite the high demand for certified organic products, the price of imported food labeled as “organic” is too expensive for 59.3% of respondents, given their mid-level income. But the whole picture can be changed if we exclude costs for international transportation, storage, insurance and other associated services and leave only the cost of local production and organic certification. The estimated effective demand for locally produced organic certified food is supposed to increase significantly if such products cost no more than 50-100% more than their corresponding conventionally-produced food items and if marketing and educational activities are increased. It is obvious that certification services are the most mobile goods for international trade. The development of Russian certification bodies could be a result of the Russian Government, the Ministry of Agriculture, and international certification agencies collaborating to encourage and promote partnerships between US and EU certifiers and local large-scale producers, agroholding companies, Chambers of Industry and Commerce, and other existing Russian certification organizations with the objective of applying and adapting international organic standards and training and licensing of local inspectors.

The last of the three main obstacles for developing the organic products market in Russia is the lack of knowledge about organic products and certification practices and requirements both at the governmental level (there are no statistics of existing organic production initiatives in Russia, and the number of farmers engaged in organic agriculture for foreign sales is also unknown) and at the consumer level (as mentioned above, barely half of the respondents are competent about the meaning of organic labeling). The main tool to realize the untapped potential for organic goods is through education and explaining the meaning and advantages of “organic” products for peoples’ heath as well as highlighting their contribution to the ecologically sustainable development of local agriculture. At the governmental level, the development of organic agricultural innovations must begin with the definition of what it means for something to be organic, statistical and information systems, development of databases of organic food producers and their further support through administrative, tax and financial benefits; strengthening organic advisory and extension services within the network of the Russian Ministry of Agriculture; government support of organic farming and systems research in national agricultural research institutes as well as measures to help farms convert to organic farming, and operators to organize relevant supply chains in order to maintain diversity in production models.

How to jumpstart organic production in Russia

The analysis based on the results of current economic and market research as well as existing food quality and safety laws and regulations makes it possible to provide recommendations to Russian lawmakers:

  1. The first and most important challenge for the future of organic farming in Russia is to present a coherent and standardized development policy. There is a need to develop and legislatively authorize strict regulatory definitions for terms like “organic”, “healthy”, “ecofriendly”, “ecologically clean”, “natural”, etc. used to attract additional customers. The absence of the legislatively imposed definitions for this group of goods remains a huge loophole for unscrupulous producers to exploit by mislabelling standard or substandard food products as “organic” or “ecologically clean”. This fact considerably decreases consumer confidence in Russian “organic” products. After approving these definitions all current labeling must be reviewed. In the United States it took 12 years of often excruciating debate, argument, and compromise to provide the country with standards for organic food products that satisfied the vast majority of producers, consumers, and bureaucrats; hindsight allows us to adopt and apply these standards in Russia without reinventing the wheel.
  2. The existing government regulation “About approval of the common list of goods for compulsory certification, and the common list of goods for which the confirmation of its conformity is in the form of declaration of compliance” must be supplemented with significant toughening of penalties and top-level managers’ criminal liability for inaccuracies in product description, including both the official list of ingredients and literal description on the packaging, and mass media advertising. This measure will increase the confidence of Russian consumers in domestic products.

Список литературы

  1. Fromart, S. (2006) Organic Inc. Natural Foods and How They Grew. Harcourt, New York.
  2. Jones, P. & Clarke-Hill, C. (2001) Retailing organic food. British Food Journal, 103, 358–365.
  3. Lin, Biing-Hwan, Travis Smith, and Chung Huang. 2008. “Organic premiums of U.S. fresh produce,” Renewable Agriculture and Food Systems 23(3): 208-216.
  4. Mann, S. (2003) Why organic food in Germany is a merit good. Food Policy, 28, 459–469.
  5. McEachern, M.G. & McClean, P. (2002) Organic purchasing motivations and attitudes: are they ethical? International Journal of Consumers Studies, 27, 85–92.
  6. Pearson, D. (2001) How to increase organic food sales: results from research based on market segmentation and product attributes. Australasian Agribusiness Review, 9,8.
  7. Petrov, D. (2010) Certificated profanation. Expert, 7 (692).
  8. Sharova, N. (2006) Economies of scale and effective size of agribusiness enterprise, Monograph.
  9. http://www.gks.ru/, Russian Federal State Statistics Service.
  10. http://www.consultant.ru/, Russian law support system.