Important Insight For Importing Ingredients

By Dr. Winfried Fuchshofen

With the dramatic growth of the organic market, it’s almost an inevitable fact that most medium- to large-sized manufacturers will, at some point, have to import ingredients. One obvious reason for this is the fact that there are certain ingredients such as coffee, cocoa and tropical fruits that just don’t grow in the United States. In addition, over the last five years a growing number of companies have started importing ingredients that technically could be produced in the United States. This is, in part, because the growth of the organic market was not accompanied by a similar growth of organic agriculture in the United States, as depicted in Table 1.

Another explanation is simple economics: imported ingredients are, in many cases, cheaper and, since the retail price of organic products to a certain extent determines sales, the temptation to buy cheaper ingredients elsewhere has grown. And with this growth in demand, availability has also grown, making prices even more appealing. A third reason is less well known: certain products are very challenging to manufacture in the United States. This is true for chocolate, for example. There are very few processing facilities in the United States that do smaller runs of chocolate, as required in the organic chocolate industry, and the consequence is that a substantial part of the organic chocolate in the United States is imported almost exclusively from Europe.

Data on U.S. Organic Imports
Published data about U.S. organic imports is extremely scarce due to the fact that no official statistics exist on this subject. The United States is not alone in this regard—currently the only country with limited import statistics is Canada. The latest assessment of the total value of U.S. imports by Dimitri and Oberholtzer (USDA Economic Research Service) relates to the year 2002; for this year, they estimate the value of organic imports between $1 billion and $1.5 billion. Organic Monitor (2006) reports that the organic meat supply is more and more dependent on imports from Latin America, Canada and Australasia (the Region of Oceania: New Zealand, Australia, Papua New Guinea and neighboring Islands in the Pacific Ocean). And, occasionally articles such as one titled, “Organic Food Producers Losing Ground to Imports, ” published in the Des Moines Register, describe anecdotal evidence that more and more companies such as WhiteWave, Cascadian Farm and even Organic Valley Cooperative have resorted to importing certain organic products.

More than 500 different products from more than 50 countries are being reported from staples such as rice and beans to a variety of vegetables and fruits such as broccoli, cauliflower, blueberries, strawberries and fruit concentrates and extracts. In addition, many processed products are also being imported, ranging from gummy bears, pasta and chocolate spread to organic beer and whiskey.

Preliminary data from Organic Insight’s “Organic Trade Intelligence Project” shows the array of products that are imported is ever-increasing. Table 2 highlights the import data for 2006 and 2007 for three selected commodities. Two of which, cocoa beans and coffee beans, are “classic” tropical commodities. The vastly differing growth rates, 16.4 percent for coffee versus 102.4 percent for cocoa bean imports, is mainly caused by one single factor: the entry of United Cocoa Processor (UCP), a sizable Delaware processor of cocoa beans. UCP achieved organic NOP certification at the end of 2006. Since there are only a few small organic cocoa processors in the U.S., this market entry contributed majorly to the leap in the import growth rate for cocoa beans. Strawberries, on the other hand, show the slower, yet steadily growing trend for ingredients that could be grown in the U.S. coming from other parts of the world.

Based on numbers from the Organic Intelligence Project, the preliminary estimate of the value of imported organic products pegs that number at around $2 billion. However, keep in mind that the value of the imported ingredient or processed product on average at least quintuples before it reaches the supermarket shelf. Therefore, an import value of $2 billion would translate into retail sales of at least $10 billion or more.

Keys to Successful Importing
There is an array of issues to deal with when you make the decision to import organic ingredients including: factoring customs duties and shipping costs into your calculations; dealing with Letters of Credit, or LCs (the method of payment used for international trade); being aware of quotas (some ingredients like sugar have a maximum you can import); and understanding country-specific customs regulations. (For example, very few countries are allowed to import fresh herbs into the United States.) The main issues include:
• Certification
• Quality and Product Specifications
• Regulatory Issues
• Shipping
• Letters of Credit

But before delving into these aspects, it’s prudent to emphasize the most important piece of the import equation: the relationship to the foreign supplier. Unless you import only on occasion and only “simple” ingredients, this is the one aspect that cannot be overestimated. Meeting suppliers in person, understanding their capabilities and constraints and touring their facilities cannot be replaced by any information found on a website or from secondary sources. This is even more important in times of considerable supply constraints. For traders who are in organic for the long-term, this is the most crucial part of the equation.

If you cannot do this part yourself, seek somebody out who can do it for you or has prior experience with the specific supplier—a trusted trade colleague or consultant. Whoever it is, building that relationship is paramount. Case in point: hops, used to make beer. The prices of conventional hops have quadrupled in the last 18 months and many suppliers have doubled the price for organic hops. We have a long-term relationship with a European hops supplier, and the amount of hops traded has increased substantially in the last eight years. The proof that the relationship works and that suppliers are more interested in a long-term secure relationship than making a quick buck became apparent last year when the price of conventional hops tripled due to severe supply shortages. Several organic hop suppliers doubled their prices but our supplier didn’t.

Certification Clarification
When working with foreign suppliers to create products for the U.S. market, it’s important to make sure that the product is “USDA Certified Organic” by a National Organic Program (NOP) accredited certifier. There are several organic certifications that exist throughout the world from the EU to Australia and Japan, but until equivalency agreements between these countries and the United States are worked out, the only certification that counts for products sold in the U.S. market is the “USDA Certified Organic” seal. Make sure you see the certificate before you purchase any product.

Unfortunately, NOP organic certificates are notoriously fuzzy, as they have no expiration date. This is mainly because the International Organization for Standardization’s (ISO) 65 rule doesn’t require it. Since the NOP follows ISO 65 in many aspects, the language should be amended to make organic certificates less ambiguous. Until then, it’s a good idea to ask the certifier of your ingredients for a transaction certificate. The transaction certificate is specific to each and every transaction and should contain, at the least, the name of the specific product or products, the amounts, container number(s) and lot number(s) and the shipping date. While NOP does not require transaction certificates, most certifiers that are involved in international NOP certification will be willing to issue a transaction certificate when asked.

Other frequently required certifications include Hazard Analysis and Critical Control Point (HACCP) and kosher certification. HACCP has become a quasi food safety standard in food ingredient production during the last five years. Kosher certification, very common in the United States, can be a real headache in the context of international trade. It’s arduous to search for a rabbi in the jungles of Indonesia or the Amazon, and success is by no means guaranteed. Even in Europe, kosher certification can be difficult to achieve and can slow down production and increase costs considerably. Since kosher certification requires that a rabbi supervise every product run, this can become an expensive part of your product, especially when importing smaller amounts.

Quality and Product Specifications
For suppliers, complying with quality requirements and product specifications to the letter is also increasingly important, especially when dealing with large companies. Manufacturers should request all product specs and required certifications from the buyer well in advance and communicate clearly, and in writing, their own requirements and desires. Quality requirements are an increasingly hot topic.

Five years ago, a one-pound sample of product might have been enough to ensure that the product met quality requirements, but those days are long gone. There are factors that add to the complexity of this process including additional plant certifications (such as HACCP), complex spec sheets that differ from country to country and the fact that U.S. measures do not comply with the rest of the world, which is using the metric system.

Nutritional information is another obstacle. On occasion, you’ll need to have the analysis done in the United States as other countries don’t have the same nutrition panel requirements and may not have the data to create it according to U.S. requirements.

Regulatory Issues and Shipping
Regulatory issues are a never-ending story, and it is important that you and all your employees dealing with import issues keep abreast of the most current twists in regulations. But even if you do, things will go wrong, at least sometimes. Case in point: when the new wood pallet regulations were implemented in 2006 for U.S. imports, all shipping companies were notified in advance and ample transition periods were granted. A client was using a European shipping company and, sure enough, the sub-contractor for the shipping company neglected the information and used untreated wood pallets. Fortunately, customs at the seaport of Hamburg, Germany rejected the shipment before it made its way to the United States. In this case, little harm was done. The supplier was called immediately and switched the shipment to treated pallets and the shipping company was able to ship one week later. The key here is stay on top of each and every shipment as things are guaranteed to go wrong.

Crucial for dealing with all regulatory and customs matters is a savvy, reliable and quick customs broker. It’s their business to know what’s going on, and building a strong relationship with the best broker you can get will alleviate your stress substantially.
Another issue is shipping. Today, meticulously prepared shipping papers(including FDA registration and pre-arrival notices), correct Harmonized Tariff Schedule (HTS) numbers (used to identify products) and a fully manifested pre-clearance procedure are standard. For a complete run-through of (almost) all issues, review the U.S. Customs Department guide “Importing to the United States,” which can be downloaded at: www.usitc.gov/
trade_remedy/731_ad_701_cvd/investigations/customs_importation_guidelines.pdf. This guide contains the contact information of all ports of entry, touches practically all important import topics, and deals with frequent errors on invoices and much more.

Letters of Credit
While there is no space here to deal with financing, a few words with regard to LCs are in order. LCs create more trouble than one may think, and some sources peg the failure rate as high as 50 percent. Why is that? The biggest reason is that the underwriting bank does not accept the paperwork. This can create major headaches for both the exporter/seller and the importer/buyer.

Also keep in mind that most banks will count the LC against your credit line, reducing your available credit. Before entering into an LC agreement, review the specific requirements for the requested papers carefully, if possible by comparing them with papers of shipments you already received. An introduction to LCs can be found at: www.tradecorp.com/letter_of_credit/.

In Conclusion: Communicate, Communicate, Communicate
There is no simple recipe for successfully importing organic ingredients, but here are the most important steps:

• Talk to colleagues; visit trade shows. If you need professional help, contact a few consultants and check their product and supplier knowledge.

• Discuss financial terms including LCs early in the game and be painstakingly scrupulous in their preparation.

• Communicate clearly about all types of certification, request product certificates before you go ahead, and transaction certificates with the shipment, if at all possible.

• Make sure that everybody is on the same page regarding quality requirements and products specs.

• Stay on top of every single shipment, in terms of preparation and follow-through.

• Communicate often and don’t take anything for granted.

Dr. Winfried Fuchshofen specializes in agricultural and trade issues as well as certification, processing and sourcing. He is a speaker and writer for constituencies both domestic and international. He is also the president of Organic Insights, an organic consulting company.

OI’s latest project is the research and publication of organic import data at www.organicti.com.

Dr. Fuchshofen holds a Ph. D. in Organic Agriculture from the University of Kassel, Germany. You can reach him at info@organicinsights.com.

.