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6 Organic food and drink processing in Scotland

6.1 This chapter describes organic food and drink processing in Scotland. We provide an overview of the market in general terms before describing the processing sector in Scotland specifically. We describe the supply chain issues we have identified from existing literature as well as those raised through our consultations.

The processing market in the UK

6.2 The processing market in the UK represents the value chain activity involved in transforming basic produce into higher value products of interest to retailers. Our analytical framework has defined the processing activity as including primary processors and added value processors. Primary processors transform the basic produce before selling on to added value processors or directly to the retailers or consumers. They include the following types of organisation:

• Livestock: abattoirs and milk groups
• Cereals: grain traders
• Fruit and vegetables: graders and packers

6.3 Added value processor activity covers all processed foods sold to the retail sector, with the exception of foods sold direct by primary processors. This includes manufacturing organisations of added value products as well as those involved in repackaging of products.

6.4 The processing market can be described at the primary processing level in terms of organic wholesale data and at the added value level using data on manufactured foods.

Wholesale market in the UK

6.5 The Soil Association Organic Food and Farming Report 2003 suggests the value of the UK organic wholesale market in 2002/03 was nearly £410million. The largest components of this by value were fruit and vegetables, and dairy and eggs. Meat was notably the smallest category by value. Imports are particularly high in fruit and vegetables, the highest value component, but this is offset to some degree by the level of UK sourcing in the other major category, dairy and eggs. According to this report the reliance on imports has declined as a result of:

• an increase in UK produce available
• improvement in UK supply (quality and consistency) and
• efforts to source from the UK (on the part of Government and multiple retailers)

Source: Soil Association Organic Food and Farming Report 2003

Figure 6.1: Wholesale value of organic produce in the UK 2002/03 by source

6.6 Table 6.2 shows the wholesale value of more specific product categories within meat, cereals and fruit and vegetables. The UK market for these specific categories is largest in beef, table birds, wheat, potatoes, protected crops, salad and fruit. The UK market is exposed to imports in all major categories:

• Meat: particularly beef and table birds
• Cereals: particularly wheat (both for feed and milling) and peas and beans
• Vegetables: particularly potatoes; carrots; onions; protected crops and salads
• Fruit: in both top and soft fruit

Source: Soil Association Organic Food and Farming Report 2003

Figure 6.2: Wholesale value of specific organic categories in the UK 2002/03 by source

6.7 UK opportunities appear to be in those categories that a) enjoy an increase in market value, b) hold export potential, or c) have scope for import substitution. Evidence from the Soil Association Organic Food and Farming Report 2003 suggests opportunities in the following categories:

• Meat: beef (import substitution) and fish (export potential)
• Vegetables: carrots; beetroot; leeks, cauliflower, cabbages and broccoli, protected crops; salad (growing markets)
• Fruit: top and soft (growing markets)

Manufactured foods

6.8 In the absence of more recent data, the Soil Association Organic Food and Farming report 2002 suggests the value of the UK organic market at the added value processor level was £721million. Information on key product categories at this level is shown in Table 6.3. The largest components of the market at this time were fruit and vegetables followed by dairy and multi-ingredients for example. Over the previous 12 months, the market had seen large increases in the meat, cereals and baked and beverages categories and a slight decrease in the eggs category.

Source: Soil Association Organic Food and Farming Report 2002

Figure 6.3: Value of product categories at added value processor level in the UK 2001/02

Characteristics of the processing industry

6.9 The organic certification requirements as they apply to processors have been outlined by Whitehead & Nicholson (2001) ¹⁰. These are:

• 'separation of organic products in time and place from handling and processing of non-organic';
• 'only specified ingredients of non-agricultural origin are permitted e.g. water, salt, permitted food additives, processing aids, carrier solvents and flavourings. Preservatives and colourings are prohibited'.

6.10 According to the Soil Association, the number of licensed processors in the UK has largely increased over recent years with the exception of last year (we are unable to discern if this includes primary processors). The data is set out in Table 6.4. In 2003 the number actually declined from 1,977 to 1,585. The number of licensed processors in 2003 represented 7, 575 different processing operations. The report suggests two main reasons for the recent decline:

• some processors entered the market to test the water and have now withdrawn
• supply chain consolidation through multiple retailers and major processors rationalising their suppliers

Source: Soil Association Organic Food and Farming Report 2003

Figure 6.4: No. of licensed processors in the UK

6.11 Processors are wide ranging in size. They include small farm-based businesses but also multi-national producers operating on a large scale. Whitehead & Nicholson (2001) characterised this stage in the organic value chain as:

• having very few dedicated organic factories. Most organic processors are conventional processors with one or more organic lines
• small scale and fragmented
• holding potential for efficiency gains through recent new entrants. Most notably this would be driven by the entry of some major established food manufacturers.

Processing in Scotland

6.12 Our research has collated information on primary processors and added value processors. Table 6.5 shows this information broken down by principal enterprise. From this information we are able to show that there are 68 primary processors and 57 added value processors based in Scotland.

Source: SQW

6.13 Aquaculture processors are engaged the smoking, marinating and packing of salmon, seaweed and other seafood. We have classed packing activity as primary processing, smoking and marinating as added value processing. All except one of the primary processors are based on the islands, with the added value processors on the mainland.

6.14 Arable processors are engaged in drying, packing and re-packing of animal feed, agricultural seed and cereal products. Primary processors are located across Scotland, a large number of whom are in the Grampian area. With the exception of one, added value processors are located in Lowland Scotland.

6.15 Horticultural processors are engaged in packing, re-packing and importing fruit, vegetables, salad, herbs and spices. Primary processors are largely located in Lowland Scotland; the only added value processor is based in Glasgow.

6.16 Livestock processors are involved in primary activity such as; auctioneering, slaughtering, meat cutting, packing and transporting in the livestock and poultry chains as well as dairy processing and manufacturing. Added value activity includes products such as frozen foods; sauces; and spreads. We have identified 13 organic abattoirs in Scotland, three of which are in the Highlands area (Orkney, Shetland and Inverness-shire). The majority of primary and added value processors are in Lowland Scotland. We are unable to determine how many are dedicated organic processors.

6.17 Processing activity that draws on more than one agricultural output includes the packing, repacking and importing of fruit and vegetables, agricultural seed, specialist ingredients, and dairy at the primary level. At the added value level processing activity includes baking; bottling and canning and covers hot drinks/coffee/beverages; baked goods; snacks; baby food; and conserves/spreads. The majority of these primary and added value processors are in Lowland Scotland.

6.18 Figures 6.5 and 6.6 illustrate the geographical distribution of primary processors and added value processors across Scotland respectively.

Figure 6.5: Distribution of primary processors in Scotland

Figure 6.6: Distribution of added value processors in Scotland

Issues and research needs

6.19 Our research identified a range of value chain and system issues from the perspective of processors. These included primary as well as added value processors. Our fieldwork in this area of the value chain is limited by two factors; the paucity of processors in Scotland and the reluctance on the part of the processors to engage in the study (for many organic activity is a very small sideline).

6.20 Whitehead & Nicholson (2001) suggest the lack of dedicated organic factories means that conventional processors take on specific organic processing activity. As segregation from conventional is a key requirement, the conventional processor must schedule specific organic production runs. As these can often be small scale, this necessarily increases the processing cost.

6.21 The Whitehead & Nicholson study also identified a number of additional factors contributing to higher costs in processing organic products:

• fragmented organic supply
• the small scale of the organic industry means higher costs in processing and transport
• unpredictable production - organic supply can be erratic and seasonality accentuated
• product supply cannot be guaranteed.

6.22 Such a fragmented market creates difficulties, for example the conveying of market signals throughout the supply chain is frustrated. The consequence of this is a lag in response to market changes. The study also found organic standards (as they apply to processing) to be controversial.

6.23 The sourcing of organic ingredients was also problematic due to supply shortages, variation in quality and different certification standards in different countries. According to the Soil Association, organic ingredients are largely imported to the UK. This is either because the product is not grown locally or, where it is, there are shortcomings in the primary processing infrastructure's ability to supply it in the required form - dehydrated, peeled etc.

6.24 Some of these issues are borne out in our consultations with Scottish processors (see below).

Supply chain - customers/marketing.

6.25 The size of the market and demand for organic produce is perceived as strictly limited. A number of processors indicated that price is an important factor in determining the size of the market, the level of demand and the willingness to supply.

6.26 From a livestock processing perspective, consumers are price sensitive and react to the higher price of organic meat. For a processor contracted to supply Waitrose, a supermarket that predominantly sells into high income households in the south of England, consumer demand for organic beef is not high and has experienced only slow growth. Scottish beef already attracts a price premium and will not produce an additional premium by the additional labelling of 'organic'. For the processor supplying Waitrose, the slow growth in the beef market is expected to continue, partly because organic beef is not promoted more widely.

6.27 Limited consumer demand is also influenced by other factors. One processor felt there to be low lamb consumption in Scotland, and considered that organic lamb is unsuitable for the UK as it is lightweight and the size of cuts too small.

6.28 For the processor, the potential for meat sales is influenced by retail outlet. The slow growth in the organic beef market has meant supermarkets do not stock a great deal of this beef. Notwithstanding this, the multiple retailers affect other retail outlets. Meat sales through independent butchers is difficult: the organic product has a shorter shelf life but in addition the multiple retailers provide added pressures on independent butchers through convenience and lower pricing.

6.29 The willingness to supply organic produce is influenced by the price that can be secured. For the beef supplier to Waitrose, volume and price is set through a fixed contract. This provides some stability and allows it to run a scheme for organic beef producers. Another processor felt that organic lamb producers have an inflated view of price (viewed as a result of SEERAD incentives) and this has led to an over-supply of organic sheep. At present the market for organic lamb is only just viable.

6.30 A processor of organic grain in Scotland felt that it was not making sufficient price premium to allow any serious momentum to develop. If this was to continue it may have to consider reverting to conventional grain processing.

6.31 The willingness to supply organic produce is also influenced by the volume demanded. All the processors we consulted processed organic food as a sideline to the mainstream conventional food processing. For the processor of organic grain, this was less than 1% of the entire business. In general processors require volume throughput to offset the fixed costs of operation thus maintaining cost effectiveness. Volume affects the viability of primary processing facilities e.g. marts and abattoirs as well as secondary processing in factory production lines. The feasibility of a cost effective organic production line depends on:

• ability to do batch production: enabling the processing of organic produce for a limited period to satisfy limited volume demand
• type of product: a non-perishable/storable product means large volumes can be processed and then stored. For example, Mackie's run their organic line of ice-cream two days per week and are able to store the product.

Supply chain - primary producers and other suppliers.

6.32 Many of the processors we spoke to rely on Scottish suppliers.

6.33 The processor contracted to supply organic beef to Waitrose is based in Yorkshire. Around half of the supply is from Scotland. The business draws on livestock producers in the Highlands and in the Lowlands of Scotland through a dedicated organic livestock scheme it has developed. The business promotes the scheme at agricultural shows and in the farming press, and expects suppliers to approach it.

6.34 The organic grain processor meanwhile uses inputs from Scottish farms. It also sells on to Scottish farms.

6.35 An added value processor, Mackie's, had difficulty in securing a supplier of organic milk in Scotland. It initially had to source this from Austria. Since then the supply of organic milk locally has improved and it is now sourced from Scotland.

6.36 Our consultation with Mackie's revealed more general, non-Scottish specific, concerns around the supply of organic ingredients. For Mackie's organic ingredients are very important components in new product development. Sourcing of ingredients; ensuring ingredients are certified to appropriate standards; and importing the ingredients are the issues it faces.

6.37 The high price of organic ingredients makes the pricing of products for export barely competitive. Organic ingredients tend to be significantly more expensive (organic coffee for example can be 10 times more expensive than non-organic).

6.38 Price is influenced by:

• the specialism and
• volume of available supply (which can make prices volatile year-on-year).

Infrastructure-land/supply logistics/customer distribution/technology.

6.39 Organic standards directly affect the viability of organic processing. In organic livestock processing, certification bodies insist on organic-only times at livestock markets. By prohibiting the mixing of conventional and organic livestock, this lowers the volume of throughput and raises the costs of the market operation for organic livestock.

6.40 The 2005 Feed Regulation may result in closure of some grain processing facilities in Scotland. Organic feed enjoys limited flexibility at present in that, until 2005, 25% of organic livestock feed per day is non-organic. The 2005 Feed Regulation will mean organic livestock must be fed on 100% organic feed. Processors of this feed in Scotland would then need a dedicated organic line. However the level of demand for feed in Scotland and the fact that farmers could grow feed (e.g. beans) on the farm themselves suggests there is no room for more than one dedicated line/processor in Scotland.

6.41 Our consultations with primary livestock processors suggest there is limited capacity for slaughtering organic livestock in Scotland. Most lambs are slaughtered in England as a result of the limited capacity in Scotland. In addition there would appear to be very few, if any, abattoirs in Scotland dealing with organic schemes for multiple retailers.

Knowledge and business support

6.42 Mackie's have difficulty obtaining data on export markets. An improvement in market knowledge was seen to be useful both in terms of supply (understanding who has organic livestock in Scotland for example) and also demand (to enable the supply chain to respond to market trends). For a number of processors scientific research on nutritional value would be very valuable: at present this value is felt merely to be an assertion on the part of producers and certifiers.

Capital/business services

6.43 Capital was not seen as a major issue: for many processors their organic activity was an add-on to their existing business.

6.44 Our consultations highlighted the importance of mechanisms that would improve market signals. One primary processor felt a more open system of selling (i.e. auctions) is required to obtain information on market price. At the moment, organic livestock sales are often undertaken through private, informal arrangements. Mechanisms are required to address what is seen as a "market failure" due to low volume and associated costs; this would lead to an important demonstration of market viability.

6.45 For Mackie's, Electronic Point of Sale ( EPOS) data is useful in that it is derived from the supermarkets to provide UK market trends. However this is reasonably expensive at £5,000 per annum. Signposting was seen to be a useful role for public sector support rather than funding.

Skills/labour

6.46 Labour and skills are not a specific issue for either primary or added value processors. A primary livestock processor felt the producers they deal with were 'first-rate'. The expertise, and subsequent success, of producers does vary. The successful organic producers are expert. The unsuccessful producers include those that are poor at providing high quality feed to their cattle to finish them to the required high standard. Highland livestock producers have difficulty getting grain, for example.

6.47 The abattoir encourages the less successful producers to send their livestock to the more successful, lowland producers who can finish the cattle. These producers have access to higher quality grains.

6.48 From an added value processing perspective, there were no organic specific labour or skills issues. The needs of organic business were exactly the same as conventional.

Recommendations

• given the low numbers of processors in Scotland and the variety of factors influencing their viability (price, volume of demand and mode of production) further work should be done to investigate the level of exposure to these factors and to ways of helping them secure critical volumes of production.
• many processors rely on Scottish inputs. Further work should be undertaken to identify specific constraints that may threaten the continued use of Scottish suppliers.
• it would appear that organic standards have a direct bearing on the viability of organic processing in Scotland. Work should be undertaken to identify the threats existing and proposed standards pose to processors and where these are unavoidable how they might be mitigated through appropriate public sector intervention.
• the need for market and scientific knowledge has been identified by processors. As with other organic stakeholders, there is a requirement for more market information - particular concerning demand and supply, and also research on nutritional value
• it is clear that there is a shortcoming in the signposting of market information and in some cases this impacts on market signals. Further work should be undertaken to identify signposting issues at all stages of the value chain and where consider options for intervention where this impacts on market signals.
• networking between organisations in the value chain should be considered as a means of addressing issues of competence either by facilitating partnerships or through exposure to good practice.

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