The Impact of External Environment on the Organic Farm Industry in Australia - Case Study Example

INDUSTRY REPORT Name: Course: Tutor: Date: Executive Summary The aim of this report was to ascertain the impact of external environment on the organic farm industry in Australia. External environment is defined as the external forces that influence the industry either directly or indirectly. The external environment is made up of two areas - the task environment and the general business environment. The task environment is the immediate environment within which the industry operates whereas the general business environment is the broad environment within which the business operates. This report concentrates on the general business environment and its impact on the organic product industry in Australia. The general business environment is also referred to as the mega environment and it has an influence on both the task and decision making environment of the industry. All organizations within the Australian organic industry are likely to have the same general business environment because the socio-economic and legal condition of the country affects them all. Incidentally, this report reveals that there has been an upward trend with respect to producers, processors, and marketers. The same growth has been observed with respect to the areas allocated to organic production and also in respect to the rate of returns attributed to sale of organic products both locally and internationally. AUSTRALIAN ORGANIC INDUSTRY Introduction Organic production is a system based on a wide range of practical action and philosophical strategies which directly contribute to a healthy biosphere. Organic markets are increasingly becoming popular globally. This is mainly attributed to the fact that concerns with regards to health and food safety are steadily on the rise. Incidentally, consumers have expressed desire for a steady food production. Today, the number of certified organic producers, retailers and processors of organic foods and fibre products in Australia is estimated to be close to 2000 (Duram, 2005; IBIS World, 2010; Cardoza , 2010). They operate in various industries which include horticulture, beef and pork, viticulture, grains and pulses, dairy and honey. These enterprises collectively account for products approximately valued at 180 million dollars per annum at the farm gate. It is also worth noting that consumption of organic products in Australia has massively increased (Rupali, 2007: Elliot, 2007).This report will evaluate the rapidly emerging Australian organic sector. Access to detailed elements of mega-environment portrays the constant maturation of the certified organic industry in Australia. Aim The aim of this report is to explain how the environmental elements affiliated to the certified organic industry in Australia work and also how these elements influence the industry. Two key factors likely to influence whether or not this industry will be accepted by the market are its technological as well as its socio-cultural environment. This report will critically look at these two to ascertain their impact on the Australian organic industry. Industry profile Organic techniques were brought from Europe to Australia in the mid 20th century (Department of Agriculture, Fisheries, and Forestry, 2004: Blanco & Lal, 2010; Dabbert et al 2004). Organic production emphasizes on the use of renewable resources, environment preservation, and conservation of energy. Application of advanced technology is essential as a means to achieve this end (Organic Produce Expert Committee, 2002). The demand for organic products has grown both locally and internationally and this implies that these products are among some of the top products that occupy shelves in major chain supermarkets and offer export opportunities for Australian producers. The upward trend in the level of demand is attributed to the industry’s socio cultural environment (Department of Agriculture, Fisheries, and Forestry, 2004). Current conditions Demand for organic products in Australia is estimated to be growing by between 20 to 45 percent per annum (IBIS World, 2010). For better comprehension, it is essential to evaluate the underlying factors contributing to this rapid growth. Technological elements and the socio-cultural environment are some of the key factors that have contributed to the industry’s growth. Basically, the contributions attributed to these two have taken various forms, that is, rigorous research on better production methods of organic products and changing religious and cultural beliefs which also entail eating habits (Lockie et al. 2002). Industry Risk within Mega-environment In a wider sense, the environment is infinite and includes everything that is not within the organisation. However, the analysis presented by this report only considers the environmental elements that the industry is sensitive to and relies on to survive. Mega-environment therefore refers to all elements that subsist outside the industry’s boundaries and have the potential to affect either the whole or part of the industry (Daft & Macic, 2008; Hitt et al, 2009; Wright & McCrea, 2007). This report will focus only on the environmental elements that influence the organic industry in Australia and more specifically technological and the socio-cultural environment of the Australian organic industry. The effects of technology on the organic industry are reflected on the technological changes incorporated by the Eden Valley biodynamic farm. This farm applies technology to maintain soil fertility and structure. Technology Technology plays a key role across all the business aspects. It offers fresh opportunities in data analysis and collection. Technology also facilitates deeper comprehension of the consumer’s behaviour thereby giving firms better opportunities for improving their marketing techniques (Fitzen, 2009). However, the level of technology applied by the organic farming industry is relatively low because the industry employs natural process enhancement (Walker, 2010). Incidentally, the organic farm industry in Australia is relatively young compared to other industries. However, demand for organic foods is significantly growing. Against the backdrop of a rapidly growing demand, technology and systems applied in organic farming are increasingly becoming advanced in tandem with the development of organic farming in the recent past (Walker, 2010). The impact of technology on organic industry is evident in the sense that it has amplified industrialisation in the industry. The key role of research and development in the organic industry sector is properly acknowledged in terms of the technology it offers to improve farm productivity. Technology in organic farming is applied in several areas. These include new biological equipments and techniques, management of soil and organic fertilisation, genetics and breeding to attain natural resistance and to surmount biological stress and so on (Baldwin, 2009). An example of some of the technologies applied by the Eden Valley biodynamic farm is the maintenance and composting of the soil structure and fertility. Stable humus is the end product of organic matter breakdown. The process usually relies on the matter from which it is broken down, the environmental condition within which it is processed, and decomposition of the microbes involved. Composting can facilitate management of the decomposition process. Compost and humus have the potential to offer a sustainable foundation for primary production that could lead to an optimum production system particularly on marginal soils. Totting up compost could bring forth the following effects. Slow release and stabilisation of nutrients Improved soil structure, moisture, and aeration Decline in harmful organisms and pests and neutralisation of toxins Intensifying extreme soil temperature and pH Spurring soil life, diversifying biota, and complexity of soil food web Increased soil minerals breakdown and soil weathering. The quality of compost depends on the methods, conditions, and the composting materials. The carbon to nitrogen ratio influences the process and the product (Bio Dynamic, Farming and Gardening Association in New Zealand Incorporated, 1992). . This is effectively illustrated by the table below: Table 1.0 Organic matter % Decomposition per year Soil structure Plant nutrients Fresh organic matter (high C/N ratio) 50–80% + +++ Dynamic humus/feeding humus 5–50% ++ ++ Stable humus (C/N ratio~ 10) 2–5% +++ + Source: Bio Dynamic, Farming and Gardening Association in New Zealand Incorporated (1992). Following the first year of application, the rate of organic breakdown falls between 50 to 80 percent. Stable humus on the other hand breaks at a much lower rate of between 2 to 5 percent per annum. This therefore implies that fresh organic matter contributes to soil nutrient and moisture (Bio Dynamic, Farming and Gardening Association in New Zealand Incorporated, 1992). The appeal of organic products in the food industry has led to an increase in their popularity in the international agriculture and food sector. There has been a steady increase with respect to the number of organic food producers, supermarkets, and stores that sell organic food. In addition, scientific institutions that carry out research on organic farming have also been on the rise (Lockie, 2006: Talloo, 2007). Gains in the industry should not be attributed to increase in knowledge or technological advancements only as there are other contributing factors as well. Economies of scale also play a central role with regards to the benefits and gains that have been achieved in the organic industry so far. Through economies of scale, productivity has increased as profit is expected to fall in conformity with the decline in prices. It is also important to note that organic farming is opposed to genetically engineered produce. In 1998, at the IFOAM scientific convention, participants unanimously voted against the use of genetically modified organisms in agriculture and food production. It became clear from this point henceforth that genetically modified organisms were not recognised as organic products. Even though application of transgenic technologies in organic farming is strongly opposed there are a few researchers who still vouch for its integration into organic agriculture as the ultimate means to sustainable agriculture. Consequently, there are a few organic farmers who question the dissatisfaction with genetically modified seeds claiming it is a biological technology in line with organic principles. Even though technology is slowly drifting into organic production, the rising discontent over some aspects cannot be overlooked as they are significant (Paull & Lyons, 2008; Jain, 2007; Higgins & Lawrence, 2005). Socio-cultural The socio-cultural element incorporates various attitudes, norms, values, and behaviours practiced in different countries. It is therefore imperative that the industry takes into account any opportunities or threats likely to influence demand shift. Since consumers are increasingly becoming conscious regarding their health and other related issues such as the food they eat, production of greenhouse gas, sustainability, and so on, there is need to consider various health issues prior to buying food commodities (Jain, Trehan, & Trehan, 2010; Goodman et al 2005; Srinivasan, 2008). Whereas most people attribute health benefits to organic foods, the industry faces challenges from the growing variety of products alleging to meet the socially conscious consumers’ expectations (Walker, 2010). Incidentally, a significant number of women compared to that of men expressed a positive attitude towards organic food and are the main consumers to these foods (Lea & Worsley, 2005). However, this fact should not be misinterpreted as it does not mean that men do not prefer organic product - generally the size of population that consume organic products is high. Organic farming attracted environmental movements in the 1970s. These movements culminated into political support paving way for increase in demand of organic products. Up to 1980, organic farming was a social movement opposed to conventional farming. Similarly, institutions disregarded this form of farming viewing those who practised it as backward. This changed in the 1990s based on two developments. There was no clear legal framework to distinguish between conventional and organic products. This in effect justified political action on the basis that the consumer was not protected. Second, the environmental movement had gathered significant political influence in the 1980s. Though these two did not share common goals, they attracted public sympathy and interest which culminated to a desire by the public to offer political support for the sake of the environment. These are the factors that initiated the move to standardise organic products. The society has been behind organic products due to their positive contribution to the society in the form of healthy food and a clean environment. However, those opposed to organic farming refer to its proponents as delusional and that they are still stuck in the nineteenth century (Dabbert et al. 2004; Halpin & Daugbjerg, 2008). An outstanding risk which offers opportunity for the organic industry is the production of genetically modified crops and the change of climate in Australia. The consumers who do not prefer genetically modified foods may opt for organic foods, thereby escalating the demands for organic foods (Walker, 2010). Change in climate can also influence how the consumers make their decisions on purchasing organic products considering organic products play a central role in the prevention of environment degradation (Biological farmers of Australia, 2008). Organic farming in Australia has helped to improve environmental conditions by preventing climate change. The implication is that organic soils amass carbon and do not use chemical fertilisers emanating from fossil fuels. The data presented here can be assessed from different angles. The assessment will however be restricted to particularly essential issues known as conventionalisation. Table 2 shows the scales in terms of items and reliability motivating organic product farmers. Given the apparent social appeal of some of these motivations, an effort was made to ensure that most items covered the main issues involved in their implementation in order to satisfactorily distinguish between producers without bringing forth those items that will discriminate against conventional farmers. The animal health scale addressed interviewees on their motivation level to ensure animals were enabled to act normal behavioural patterns with minimum chemical intervention. The environmental health scale covered those issues explicit openly raised in traditional farming ideas with respect to energy, biodiversity and nutritional recycling as opposed to land degradation. Motivations with respect to profitability were measured against viability and returns on investment as well as maximising the net returns. Motivations on productivity on the other hand were measured against production and output. Cost savings primarily addressed the decline of off-farm inputs but did not distinguish synthetic from allowable organic inputs. Premium marketing also shied from discrimination against niche marketing activities of conventional producers by evaluating motivation in terms of premium products without referring to organic produce markets. Risk aversion covered trade offs usually made by farmers at the expense of potential gains in an effort to cope with the unforeseeable production and the marketing environments. Chemical safety addressed the respondents’ motivation to lessen exposure to both themselves and their families. Even though food safety addressed the issue of chemical residues, it should not be misinterpreted to be discriminative against conventional producers as several industries are currently covered by quality assurance schemes that involve minimum preservation periods and other techniques of avoiding food-borne risks. Rural development dealt with the producers’ motivation with regards to their economic contribution within their local communities (Lockie & Halpin, 2005). Table 2: Scale items and reliability-motivations for farming Scale Items Reliability (Cronbach’s Alpha) Animal Health Ensuring animals can act of normal patterns of behaviour Reducing use of chemicals to maintain animal health 0.5617 Environmental health Maximising biological diversity Conserving native flora and fauna Minimising soil erosion Improving the biological health of soil Maintaining the processes of nutrient and energy recycling 0.7457 Productivity Increasing production Maximising outputs Maximising profits Ensuring a healthy return on investment 0.8142 Cost Saving Reducing farm cost Reducing use of expensive farm inputs 0.6228 Premium marketing Producing products that can attract a price premium targeting a lucrative niche market 0.6339 Risk Aversion Avoiding any sort of financial risk Implementing practices that are reasonably certain to turn a profit Avoiding farm debt 0.5278 Chemical Safety Reducing exposure to farm chemicals 0.8794 Food Quality Producing nutritious food Producing chemical free foods 0.6722 Rural development Contributing to the regional economy Contributing to the generation of local employment 0.7012 Source: (Lockie & Halpin, 2005) Figure 1 below portrays the significant differences between conventional and organic framers with respect to the motivating factors highlighted above. The most important factors that organic farmers considered were: chemical safety, food quality, environmental health, and animal health. Even though to a lesser degree, organic farmers were also highly motivated by sale of their products at a premium. However, this should not be misconstrued to imply that conventional farmers did no take these factors into account - it is just that these farmers did not prioritise these factors. Figure 1: Mean scores among organic and conventional farmers – Motivations for farming Source: (Lockie & Halpin, 2005) Future outlook The area under organic production globally has grown from less than ten million hectares in the year 2000 to more than 30 million hectares as of 2006 (Biological Farmers of Australia, 2008). A report by the Australian Organic Market revealed that as of 2008, 60 percent of Australian households purchased organic foods occasionally. The Australian organic industry is showing an upward trend in spite of the impact created by the global financial crisis coupled by drought (Austin, 2010). Table 2 highlights the development of the Australian organic industry. The impact of the extreme adverse climatic conditions all over Australia ought to be taken into consideration when the statistics are being reviewed. In spite of this, the number of organic processors in total, as well as marketers continues to escalate. Things are looking up in this industry; this is based on the fact that producers continue to display a steady growth which signifies the continuous growth of the primary product (Biological Farmers of Australia, 2008). Table 2: Organic Industry Development in Australia Year 1990 1995 2000 2003 2004 2005 2006 Producers Read More