Organics outlook rosy despite food inflation

British enthusiasm for organic food shows no sign of waning thanks to a loyal consumer base and a green image, despite rising food and fuel prices, the head of Britain's top organic association said in a recent interview.

The sector's lofty double-digit growth of years past may be constrained in the near term as some cash-strapped consumers choose conventional foods over higher-priced organics, but contraction appeared unlikely, he said.

"It is inevitable that we might see some (decline in demand) among the less deeply committed consumers, but it's more likely to be a plateau than a reverse," said Patrick Holden, director of the Soil Association, which certifies more than 70 percent of the organic produce sold in Britain.

"When people are feeling the pinch they cut back on the luxuries, but many people that are committed to buying organic food do not regard it as a luxury. They regard it as a necessity and an intrinsic part of their lifestyle. They'd rather cut back on foreign travel and DVDs," he told Reuters.

Organic products are grown without chemicals or pesticides and tend to cost more, but a growing number of consumers are willing to pay the premiums because they view them as healthier and more environmentally friendly.

Organic products represent about 2 percent of total food and drink sales in the UK, and topped 2 billion pounds for the first time in 2006, according to the Soil Association.

Annual sales growth may slow to around 10 percent this year, down from roughly 20 percent a year expansion over the past decade as organics broke into the mainstream.

"Our predictions for this year are for about a 10 percent growth in the market. That's probably realistic," Holden said, adding that the true scope of the slowdown will depend on how high food and fuel prices rise and whether major global food shortages develop.

Crude oil prices have doubled over the past year, hitting an all-time high near $128 a barrel last week, and some analysts have forecast $150 to $200 a barrel oil in the years ahead.

The price of natural gas is also soaring and driving up the cost of conventional farming inputs like chemical fertilisers and pesticides, which could eventually encourage more organic farming in areas currently dominated by conventional methods.

FOOD INFLATION RAMPANT

Last week Britain's Office for National Statistics (ONS) said food prices were up 6.6 percent over the year to April, the highest annual rate since records began in 1997.

Sharp food price increases and food shortages in the developing world have triggered protests and riots, prompting protectionist hoarding of food supplies and thrusting the question of food-security into the public arena.

The White House and the United Nations' Food and Agriculture Organisation (FAO) have said food prices will stay high for two or three years and only settle down when stocks are replenished.

But Holden said consumers in industrialised nations would need to get used to spending more of their income on food.

British consumers on average now spend about 10 percent of their disposable income on food, compared with about 30 percent in the 1970s, Holden said.

Signs have emerged that British consumer spending habits were already changing and market conditions were poised to get worse, but demand for many organic products should remain robust despite rising prices, analysts said.

"Free-range and organic meat is flying off the shelves. Consumers can't get enough of it and retailers can't source enough of it," said David Bird, senior consumer analyst at market research firm Mintel. "Animal welfare has become quite a big issue now."

Tight supplies of organic livestock and poultry feed will continue to drive up prices of organic meat and poultry and high freight costs will buoy prices of imported foods, but the price of locally-sourced organic produce should not rise as steeply.

Organic food sales have grown by about 70 percent since 2002 and should expand by another 44 percent by 2012, Bird said, adding that the heady growth of the organic sector's infancy was bound to slow.

"Organics are not mainstream but they're not as niche as they once were. As in most markets there comes a point where growth rates will slow. It's just a sign of a maturing market."