Believe Me I am Genuine: Economics of Trust

Introduction

The world is moving towards consumption of healthy foods. Growing concerns over non-communicable diseases such as diabetics, high blood pressure and cholesterol have pushed people to consume healthy foods. 

One clear determinant of the “healthiness of food” is how it is being made/grown. Therefore it is advised to consume foods that are grown with less chemicals presumably less chemical fertilisers and pesticides. Our staple food is rice, we consume plenty of vegetables and we consume lot of tea. Hence in an ideal situation one should consume organic rice, organic vegetables and drink organic tea. 

Consumption of organic food depends on many factors such as disposable income, health consciousness, availability and accessibility. However the bigger question is “How confident are we on the quality standard of what we eat?”

Economic rationale

An organic produce is expensive because it reflects the opportunity cost of production. A producer has to invest more in producing a quality product that generate health benefits or prevent negative health externalities. The price premium, the difference between the organic and the non-organic produce reflects the above mentioned opportunity cost. A consumer would pay this price premium as long as he/she trusts that the produce is genuine. 

A producer uses a market signal to attract the consumer and that is the “certification”. Certification is essential if the producer is engaged in the global supply chain. Organic certifications may vary by region, by country and sometimes by the wholesaler. For example; to supply organic produce to “No frills” in Canada or “Coles” in Australia, one would need to obtain a bundle of certifications.

For a person who is consuming an organic vegetable imported from Sri Lanka or from anywhere else for that matter could be 100% sure without a reasonable doubt that it is in fact “Organic”. Therefore in a global value chain the problems are predominantly not with lack of certifications, but with costs, compliances and enforcements. The problem of genuineness mainly lies with the “local value chains”.

Issue on the ground

Local value chains do not necessarily require a certification to announce their produce as “organic”. At any market place there are plenty of farmers/producers who claim that their produce is pesticides and chemical fertiliser free. Sometimes you might find a label that says the produce is organic but even that is without the authorisation of any certifying body. Most of the time the consumer has to “trust” the producer and make his decision to pay more. 

The backdrop here is that the consumer might be spending for a “fake” produce. There are several interesting questions that can be explored in this situation. (1) Is certification really necessary, can’t we work with trust? (2) Is certification available? And if so why producers do not obtain that? (3) What are the mechanisms devised by people to replace the certification and work with trust?

Can’t we work with trust?

Majority of consumers still work with trust. Many of them are happy to pay few extra rupees to buy something that is claimed to be “organic”. This in no way conveys that the consumer is unintelligent and always paying for fake products. Rather a closer look at the situation would reveal that consumer puts his trust not on the “produce” but on the “producer”. Therefore as long as the consumer can trust that the producer would not sell fake produce he/she is happy to pay a price premium for a product that does not carry a certification. Therefore, yes we can work with trust, but the trust is closely related with the producer. 

The justifying argument for this is that, if all consumers place their trust on the produce, there should be many producers. In fact every producer would tend to claim his or her product as genuine. This does not happen because the “trust” is towards the producer. Only the producers who have built a solid “trust” would have the chance of survival as genuine organic producer.

Access and cost of certification

Certification is available. There are many institutions that will guarantee that the produce is organic. However the cost of doing that is high. Therefore, it will not be possible for a consumer to expect an organic certification from a vegetable seller at a “Sunday fair”. With these small producers; the consumer has to work with “trust”. However there are large producers. 

For example there are organic rice producers that claim to be genuine but without certification. Because of their production and profit making capacity they could well invest in obtaining a certification. However, sadly, even some of these large producers try to attract the “trust” of people by investing in advertising. They have colourful packaging and leaflets that mentions them as genuine.  Some producers have even used their professional achievements/qualifications as a means of establishing trust.

For example a producer would announce that he is a “traditional doctor”, expecting consumers to value his knowledge and trade that with trust. However at the same time there are large producers that have invested in obtaining organic certifications. 

How people establish trust?

Trust is mainly created with recommendations. For example a doctor prescribing a certain brand/farmer of organic rice would persuades the consumer to trust that producer. At the same time, a close friend, a relative could also provide the necessary recommendation. Since almost all of these small-scale organic producers do not spend money on certifications, details about them are being disseminated through word of mouth.

Another popular belief is that the large commercial producers are not genuine and small-scale producers are mostly genuine. A good example for this the perception on buying fresh vegetables from “small scale Koratuwa” growers as oppose to large-scale commercial farmers. One explanation for such a belief is that, the small-scale producers are not commercially oriented, and they only sell a small portion of what the produce. Because they sell from what they produce for themselves, the produce assumed to be genuine and good quality.

Then comes the trial and error method. For example, the popular belief is that a rice variety such as “Suwandal” has a pleasing aroma when being cooked. Farmers who grow these varieties organically claim that the aroma would not be there if chemicals are being used. Another popular belief is that organically produce rice once cooked would stand a significantly longer time without being spoiled. Therefore, consumers who are exposed to such information would look for these qualities in rice. The producer will be labelled as fake if the product does not hold these qualities.

Another approach that small-scale producers do in place of certification is to conglomerate. For example, small-scale rice producers can form a larger farmer group. These farmer groups work closely with the Department of Agrarian Services. In selling their produce as “organic”, farmers use their connections and associations with the government institution hoping that people would value them in establishing trust for their products. 

Conclusion

In a place where market signals such as certifications do not exist, consumers put their “trust” on the line. What is interesting in such a situation is that people tend to trust the farmers/producer and not the product itself. Economies of trust or replacing the certification with trust generate too much opportunity cost for small-scale producers. Small-scale producers are geographically constrained. The trust on them is with a small community of consumers at a particular locality. 

However it is important that large-scale producers try to obtain certification. Otherwise he/she would not be able to attract the consumers that are not known to them. In a local value chain of organic produce, the small-scale producers can survive without certification but it is essential for the large-scale producers and the functioning of the value chain. 

[Chatura Rodrigo is an independent economist working in the areas of agriculture and environment. He can be reached at 94703326834 and [email protected]. The particular research article is based on the research work carried out with farmers in Elpitiya (Galle), Minuwandoga (Gampaha), Kekanadura (Matara) and Ankumbura (Kandy).]