Organic Business Guide/Certification and internal control systems

Certification and Internal Control Systems

For organic businesses, achieving and maintaining certification is one of the most difficult aspects to master. It requires a level of organisation, communication and transparency that not everybody can provide. In this chapter you will find practical guidance on how to achieve and maintain certification based on an internal control system (ICS).

Certification options
In most of the larger markets for organic products - Europe, North America, Japan, Brazil, South Africa, China, India - labelling agricultural products as "organic" requires certification from an approved certification body (CB). Certification needs to be renewed on an annual basis and needs to also cover all processing and trading steps involved up to the sale of the product. Organic certification ensures that the product is truly produced in compliance with organic standards. It builds trust between the buyer and the producer, and also protects the genuine producer from unfair competition. The organic integrity of your products is a pre-condition for gaining access to organic markets.

Some buyers offer to pay for the certificate, on the condition that they have the ownership of the certificate. Although this may be tempting as it saves costs, it also leads to a strong dependency on this specific buyer. In most cases organic businesses are better off if they own the certificate themselves, and are flexible in whom they sell to.

What certification do you need?
Think early on about what your target markets are. If you want to sell to the European Union, you will require certification according to the EU organic regulation; if you want to sell to the United States, you need to be NOP-certified, and for Japan JAS-certification is necessary. For local organic markets, the standards and regulations of the respective country apply - if available. Although the most important official regulations have similar requirements, there are also some aspects which are specific. The NOP regulation, for instance, requires that producers have a production plan, and allows retrospective recognition of conversion.

In addition to the public organic regulations which are mandatory, in some markets voluntary private standards and labels play an important role. Private labels like Soil Association in the UK, Naturland in Germany or the BIO SUISSE bud-label ("Knospe"), for example, may be more popular than the respective official regulations and logos. Supermarkets and brands sometimes have their own company label and standards, which go beyond organic regulations. If you want to be able to cater to different markets and labels, make sure that you meet all the different requirements.

Some buyers may have additional requirements concerning production, social and food safety standards, or they want a combination of organic and other certifications, such as Fair Trade, Rainforest Alliance or Global-GAP (see chapter "Different sorts of standards and certification" and Annex "Sustainability and industry standards that can be combined with organics"). Organic and other certifications may be a pre-condition to marketing your products, but they are no guarantee for finding a buyer. As certification involves certain costs, make sure you only go for additional certifications when you have buyers.

How to choose the right certification body?
In most situations you can choose between certification bodies. Due to global competition, prices are very competitive, which you can use to bargain for a lower quote. However, cheap certification usually comes with a mediocre service. It is much better for your business if you insist on high quality inspection and certification, even if this is more expensive. Your certifier can help you establish real organic farming, good quality management, traceability and product integrity. Going for the cheapest offer may turn out to be more expensive in the end. There is a risk that farmers won't take the standards very seriously. It may also happen that a certifier who quoted a cheap price for a minimum product may later demand additional inspections or tests for which you need to pay. Make sure that everything is included in the offer - costs for travel, hotel, accommodation, residue analyses, second inspections, transaction certificates etc. Provide clear terms of reference when inviting offers from different certification bodies. Criteria for selection between different offers include:

13 steps to certification

• Create awareness among producers
• Decide together to go for O or OFT production
• Producers commit themselves to follow O or OFT rules
• Training on production rules
• Training on producer organisation (in case of OFT)
• Training on documentation requirements
• Formalization of ICS, registration
• Contracting of producers
• Application for external inspection
• Internal annual inspection, compilation of findings, corrective action when needed
• First external inspection
• Complying with the corrective action requests
• Second external inspection; certification

Criteria for selection between different offers include:

• recognition of the certification body in the target markets (ask potential buyers)
• range of certifications offered (EU organic, NOP, JAS, GlobalGAP etc.)
• local office; working with experienced local inspectors who speak the language
• service orientation; time required for processing files (track record)
• costs for travel, inspection, certification, transaction certificates

If your attitude is to go for quality instead of the cheapest possible certification, you will attract a better class of buyers who are willing to pay better prices. These are the buyers who want to build partnerships with reliable suppliers; they are not interested in shopping around every year for the cheapest raw material around. Therefore, think carefully how you want to position yourself in the market. Ask other organic businesses in your countries as well as potential buyers about their experience with different certifiers.

If available, chose a local certification body that is approved for certifying according to the standards you require. The European Union maintains a list of recognized CBs. Some countries like Costa Rica and India are recognized by the EU as having standards, certification and accreditation in place that are equivalent to those of the European Union. In these cases, the organic certificates of your local certification body can be used for imports into the EU. There are also international certification bodies that recognise certificates of a local certifier.

If no internationally accredited local certification exists - which is still the case for most developing countries - chose an international certification body that is working with local inspectors. This reduces travel costs, and makes it more likely that the inspector knows the local context and speaks the language of the farmers.

Certification contracts can be renewed - or cancelled - on an annual basis. Changing the certification body frequently does not reflect well on you. It may raise concerns about your credibility in the same way that changing your auditing company often would. It does not pay to change the certifier after they have detected non-compliances. Be aware that certification bodies are obliged to exchange information about you when you switch certifier.

Managing certification costs
Costs for certification consist of costs for travel and accommodation of the inspector, fees for the inspection (depending on the number of days required), a certification fee (depending on the different standards you want to be certified against, e.g. EU and NOP), as well as the eventual costs of transaction certificates.

Organic standards require that each farm must be inspected at least once per year. However, physical inspection of each smallholder farm by an external agency – whether by a local or an international certifier – would involve considerable costs. To reduce these costs and thus to facilitate certification of smallholders, most certification schemes have provisions for group certification based on an internal control system (ICS, see chapter "Developing an internal control system").

Although high certification costs are frequently cited as a major obstacle for smallholders to convert to organic farming, they are usually much lower than the costs for the extension and internal control system (salaries, transport, equipment etc.). Both costs can be reduced by setting up efficient systems. The more efficiently the extension system works, and the better the ICS performs, the less staff members are needed and the faster an external certifier can do the inspections. Another way to reduce per-unit certification costs is to include several crops under the same ICS and certificate, so that the additional organic premium can contribute to cover these costs (see box).

Big trees to support organic cotton
In Burkina Faso a cotton project included shea trees and sesame in their organic certification. As these crops are growing on the already certified and monitored area of the operator no conversion period and little additional costs were required. All the required production data could be collected during regular internal inspection visits. The data collected was submitted to the certification agency before external inspection. During the inspection these data were verified and then the crops were included in the certificate. The additional cost of including the crops in the certificate was about 1,000 Euro while the additional turnover now including shea nuts sold as organic, increased by more than 70,000 Euro.

There is no doubt that certification is costly even with an ICS, and even if several crops are covered under the same certificate. On the other hand, it opens up access to interesting markets. To be viable, the additional value generated through certification needs to be bigger than the costs of certification. This requires a certain scale of production: getting 1000 farmers certified under an ICS does not cost much more than getting 100 farmers certified. You will require more staff for extension and ICS if there are more farmers to be covered, but you can gain in efficiency. After 3-4 years, certification costs should not account for more than 2-3% of the export price, while the cost of field staff for extension and ICS may cost 4-6% in an efficient project.

Costs of Fair Trade certification by FLO-Cert depend on the type of organisation, its size (number of members) and the number and volume of certified products. FLO International has created a fund from which small farmers' organisations can receive a subsidy of up to 75% for their initial Fair Trade certification.

Developing an internal control system

In an ICS, a central body (e.g. the cooperative or the processor) ensures and verifies that all individual farmers comply with the respective standards. Each farmer needs to sign a contract with the organisation in which they declare their commitment to following the specific internal regulations of the project (see examples in Annex "Farmer agreement example" and "Internal regulations"). The ICS operator maintains files of all producers and inspects each member at least once a year. Risks which might jeopardise the organic integrity of the product need to de identified at all levels of production, transport, storing, and processing. The internal control procedures need to focus on these specific risks.

Figure 18: The structure of an internal control system and its relation to the external certifier (adopted from IFOAM).

Internal inspectors need to inspect the farms at least once a year. Additional inspections - announced or un-announced - can be conducted. An internal approval committee or an approval officer deals with non-compliances according to set procedures and sanctions, and decides whether a specific farm can be approved for certification.

In this setting, the external certifier inspects the functioning of the ICS based on its documentation and physical re-inspection of a certain percentage of the farms. The re-inspection rate depends on the size of the group and on the performance of the ICS. Overall, the ICS and the external certification need to cover all trade and processing steps implemented by the project (Figure 18).

For a detailed description of group certification and guidelines to develop an ICS, refer to the IFOAM tool ‘Smallholder Group Certification’. IFOAM also provides a training curriculum with transparencies to train project staff on ICS. Therefore, the following chapters explain the aspects that need further attention from a business perspective.

Key questions in building up an internal control system

• What structure will the ICS of the project have? How will it be managed?
• Who will develop the documents for the ICS? How?
• How will the project involve the farmers in the ICS?
• Who will decide internally about approval of farms and about sanctions?
• How will inspections be organised (by whom, how often, separation from advice)?
• How will you ensure that internal inspections are effective and reliable?
• What measures will you implement to ensure traceability?

Structures and roles in the ICS

Figure 19: People involved in an ICS, their roles, and the key tools they use.

The ICS is closely interlinked with the extension system (see chapter "Building up an extension system"). It is important that you set up a lean and efficient extension and internal control system in which all staff have clearly defined roles (Figure 19). An example on how the roles and responsibilities of each actor can be defined in detail is given in Annex "Organisational set-up and processes".

ICS processes and forms
The main processes that are relevant for the ICS are the registration and training of the farmers, the documentation of farm and field data, the internal inspection of the farm including estimation of the expected harvest, and the maintenance of traceability during bulking of the produce. The person responsible for the ICS needs to supervise the work of the internal inspectors and check traceability in processing, storage and sales. Table 9 lists these processes, defines the responsible persons and indicates the required forms.

Table 9: Processes of an ICS, responsible people and documents needed.

The procedures and forms are documented in an ICS manual or within the overall operating or quality management manual. This helps you to develop a clear idea on roles and responsibilities of the involved staff, and to have all relevant documents in one place. It also allows new staff and the certifying body to understand how your system functions. There are various sample ICS documents available. It is recommended though that you engage an experienced local consultant in the design of your ICS. In most countries fellow organic business people can give you a recommendation. The consultant may also train your staff in implementing the ICS.

Dealing with non-compliance
Thorough selection and training of the farmers and a well functioning internal control system are crucial to ensure farmers’ compliance with organic standards. However, even with the most sophisticated inspection system it is impossible to have 100% control. At least of equal importance is the trust relationship between the farmers and the project. Farmers should understand that if just one of them violates the standards, the certification of the entire project could be at stake. If farmers have a strong feeling of responsibility, mutual social control among the farmers can become an effective way key for guaranteeing the organic integrity of the project.

Still, in every project there will be some farmers who - purposely or by mistake – violate the organic standards. If these violations are not detected and sanctioned by the internal control system, but only come out during the external inspection or when checking for residues on the final product, the project risks losing its organic certification. To reduce this risk, projects might consider creating incentives for farmers themselves to admit to the application of prohibited inputs, for example by giving them the chance to re-join the project after passing through the conversion period again.

If a farmer is found to have violated the standards, the project needs to apply clearly defined sanctions (see the example of a sanction catalogue in Annex "List of non-conformities and sanctions). This may start with refusal of their produce for one year right up to removal of that farmer from the organic group. There is normally an Approval Committee that decides on these issues. It is important to inform and discuss the results with farmer representatives to avoid the same thing happening again.

Ensuring traceability
One of the most critical risks jeopardising the organic product integrity is that produce from farms that are not covered by the ICS enter the organic product flow. When organic products fetch a price which is considerably higher than the conventional market price, some farmers and produce buyers may be especially tempted to deliver product from conventional producers. In order to ensure that this does not happen, it is compulsory to make a harvest estimate of each individual farm. For this it is important to verify the field size indicated by the farmer (with measuring tape, GPS or Google Earth). When farmers deliver their production to the company or cooperative, the quantity delivered is checked with the estimated harvest volume (Table 10).

Table 10: Approved farmers list with delivered produce vs. harvest estimates.

It is equally important to keep track of the volumes of organic products during transporting, processing, storing and selling. Establish a system of weighing and written records and receipts at each level, and cross-check the totals.

Training field staff on the ICS
Once you developed the basic elements of the ICS, your field staff needs to be trained on how to implement the system. The ICS manual (or the respective chapters in the operating or quality management manual) provides the basis for this training. You need to pay particular attention to providing a thorough on-the-job training to the internal inspectors. They not only need to be able to fill in the forms in a way that reflects the reality in the field, but also to focus on the critical control points and to ask the right questions during the inspections. Besides the initial training, all staff require an annual refresher. In most countries the national organic movement can connect you with experienced consultants who can help you in this.

Too often, ICS activities start late in the year, and inspections and farm visits are done in a hurry. Too many farms are then inspected in one day, or forms are even filled in without visiting the farms and fields. Allowing this to happen is short sighted, as it jeopardises your certification, and is also not really of assistance to the farmers. On the other hand, there also is a danger that the staff are too slow, wanting to do a ‘too good’ job. This means that it will take them too much time, which causes high costs. On the other hand they may create a write up that is how it should be, rather than how it is on the ground, in order to please the management and the certifier. Good training and supervision of the field staff needs to address these aspects in an appropriate way. You need to have a really good field supervisor.

Traceability and data management

Managing a business that involves several hundreds or thousands of individual farmers who need to be monitored also means handling a large amount of data. For each farm, you need to collect and update various types of data: information about the farms (details of the farmer, landholdings etc.), their production (field size under each crop you are dealing with, estimated and real harvests), the inputs you provided, the inspections, the payments etc. In addition to the field level data, you need to handle data at central level, like staff data, client data, and data concerning stocks, processing and sales (Figure 20).

Having these data available is not only a necessity for certification - it is also crucial for managing your business. You need to be able to plan the extension and ICS operations, the purchase of inputs and the transport and processing of the produce. Based on these data you will manage your cash flow, and you will know how much production you can offer and when it is available in the market. It may start with a bundle of hand-written tables, some excel sheets or perhaps a real database system.

A database has the following functions:

Figure 20: Functions of a central database in an organic business; arrows indicating flow of information.

• Keeping an updated list of approved farmers to hand at any time
• Collecting and centralising field data (e.g. production details of each farm)
• Calculating totals and averages (e.g. total expected harvest or average yield)
• Keeping track of extension and ICS activities (e.g. participation in trainings, completed/pending inspections etc.)
• Feeding processed information back to the field (e.g. lists of approved farmers)
• Handling personal data (addresses of producers, staff, clients etc.)

Developing a database for your business

Before you start developing a database, think carefully about which data you really need to manage at central level. It is easy to prepare a database with all kinds of fields for data entry, but collecting and updating this data is time consuming and costly. Therefore, you should restrict the data to the absolute minimum. You may, for example, be tempted to collect the numbers of farm animals of all farmers in your database, in order to get an idea of how much manure is available. Keeping these data up to date, however, is a Herculean task. You might be better off with collecting this information in a survey on just a representative sample of farms. The simplest form of a computer-supported database is an excel sheet in which all essential data of each farmer are entered into a table (see Table 11).

Table 11: Extract of a producer database.

The disadvantage of Excel is that the data records are difficult to handle when the business grows and farmers produce several crops.

A database system like Access allows storage of data in a way that you can easily:

• enter data via simple forms
• interlink different levels of data
• access extracts of data for specific years, crops, regions etc.
• create summary reports
• export specific data in a simple format (e.g. as form or excel file)

As this is a specialist area, consult with other organic projects on which system they use and whose services they use to set up and maintain the system, including training your staff to use it properly.

Managing data
The most sophisticated database is of no use if the data contained are incomplete, incorrect or not up to date. Managing the database therefore involves checks and cross checks. The person responsible for data management should periodically check whether the data of the current year are entered completely. Furthermore, s/he should check whether the entered data are realistic, e.g. by simple sorting and cross-calculations. Ideally, this also involves spot-checks on randomly selected farms.

Collecting data is equally of not much use if the results are not available at the right time at the level where they are needed. The decisions of the approval committee and the harvest estimates, for example, need to be available in the villages when the product is collected from the farmers - otherwise they are of no use. It is therefore important that you think about how to transfer data from the field to the centre, and back.

Make sure that the right persons have access to the database. As the database may contain some sensitive producer data, take appropriate measures to ensure confidentiality.

Maintaining certification

Being certified is not a one-time thing, but an ongoing process. While achieving the first certification is a big effort, the challenge of maintaining certification should not be ignored. Losing your organic certification is the worst thing that can happen to you, as you can not sell your production with an organic premium, but still have to bear all the additional costs (including those for certification!).

As the farmers are expected to comply with the standards throughout the year, the surveillance by the ICS should also be active throughout the year. It is not enough for someone to fill in the forms and do a skimpy internal inspection shortly before the external inspector arrives. The ICS needs to start its operations before the season starts (registering and training new farmers on ICS, updating farmer files etc.) and needs to continuously monitor the ongoing activities up to the time of harvest. Some CBs insist that you employ field staff on fixed contracts to be sure that they are active the whole year round. The person who is responsible for the ICS makes an annual plan of activities. The internal inspection usually takes three of the twelve months of the year and is finished one month before the harvest starts (see example of an annual operational plan in Annex "Annual operational plan").

Checking the system
It is not sufficient to set up an ICS and to hire and train field staff. You also need to make sure that they really do their jobs, and that the collected information is correct. Collecting reliable information in the field is a tiresome process, and field staff may be tempted to fill in approximate figures, possibly even without visiting the farms. To prevent this, a system of cross-checks through the person responsible for the ICS should be introduced. S/he should re-visit a randomly selected sample of 2-5% of the farms at certain critical moments during the season (e.g. after farmer registration is completed, before harvests start), and cross-check the registered information. Regular supervision of field staff also helps identify bottlenecks and shortcomings, and thus contributes to continuous improvement of the effectiveness and efficiency of the system. In the end this helps in saving time and money.

ICS and quality management
Having a system in place which is in continuous contact with the farmers can be turned into THE big competitive advantage of an organic business. The ICS allows inclusion of quality management aspects without much additional effort. You can integrate measures that improve product quality during production, harvesting and post-harvest handling in the internal regulations, and verify their implementation through the internal inspections (i.e. include them in the inspection report). The most important quality management measures are usually to keep the product free of contamination and to sort out produce of lower quality (see chapter "Getting quality produce from the farmers").

Managing growth
It is particularly challenging to maintain quality of the ICS in situations of fast growth of the business. Including large numbers of new farmers requires hiring new field staff, which in turn need to be trained and supervised by the Field Supervisor. Although growth is necessary in order to reach economies of scale (see chapter "Financial planning and management"), it increases the burden for the initial team - and costs additional money. In the end, growth which is too fast may jeopardize certification, as quality of the internal control measures go down. To avoid this, make sure that your staff is well prepared to manage the growth, and keep the speed of it within reasonable limits.

Revising the ICS system
It is advisable to revise the ICS including the manual after the annual external inspection and before the start of the new season. External inspections usually result in some corrective action requests or conditions and recommendations from the certifier. These need to be incorporated in the ICS for the next season. It is a good idea to combine this external review with an internal review, in which the concerned ICS staff are involved. A simple method of doing this is to conduct an analysis of strengths, weaknesses, opportunities and threats (SWOT-Analysis). During a meeting, ask the ICS team to list the strengths and weaknesses they observed in the ICS during the previous season. Ask them which opportunities they see to improve the effectiveness and efficiency of the ICS, and which threats they see for its functioning in the next season. Based on this analysis, you can then define appropriate methods to improve the system.

Take care that all staff (including the buying agents) are aware of the changes you decide. If necessary, conduct refresher trainings with the staff. Also make sure that the farmers are properly informed on changes they need to be aware of. Be careful with introducing new forms whenever a new aspect is taken into consideration. It might take a bit more time to think how the aspect can be integrated in the present set of forms and processes, but this pays off as you gain efficiency. Many ICS tend to get big and heavy over the course of the years, making it difficult to handle the data. It therefore is advisable to conduct a larger review of the ICS forms and processes every five years. Keeping it lean and simple is the most important principle in managing an ICS. Otherwise there is a risk that the ICS becomes inefficient - and too costly!

Summary of recommendations

• Think early on about what your target markets are in order to decide what certification you need
• Insist on quality certification services rather than going for the cheapest option
• In order to reduce certification costs, try to increase the efficiency of your ICS and cover several commercial crops under one certificate
• Set up lean extension and ICS structures and clearly define roles and responsibilities for all involved
• Define clear processes and practical forms; make sure that they are applied
• Set clear internal standards, and define and apply effective sanctions in case of non-conformity
• Use harvest estimates and receipts to check traceability of the organic produce
• Train ICS staff "on the job" and ensure timely implementation of internal controls
• Keep all production and ICS data up to date in a well managed database
• Ensure close monitoring of the ICS and revise it periodically, without making it too heavy
• Exchange experiences and tools with fellow organic projects in the region