The Iceland supermarket group announces it has cornered close to 40 per cent of global organic vegetable supplies to meet the growing demand of its customers, who will be getting exclusive products at ordinary prices.

The strategy seems incredible if not financially risky, but there is no doubt the British supermarket group's announcement caused many of its bigger rivals to splutter as they dunked organic biscuits in their Wednesday morning coffee.

Then again, it must be remembered, supermarkets have a reputation for masterful marketing and spotting trends even before they become instinctive customer buying habits. In reality, it is all about market share; who is losing it, who is gaining it. What is behind the Iceland move?

It concerns a small but growing player with a relatively small line in organic products laying down a challenge to mega-size supermarket retailers who like the idea of selling organic foods at a premium of 50 to 100 per cent. For Iceland to be hailed for its audacious attempt to "transform organic food from a middle class speciality to a staple of the mass market" is a perfect propaganda coup.

Iceland's chairman, Malcolm Walker, puts it somewhat differently. "Ethically and morally we are happy to be fighting for better food. Commercially it makes sense as well. The market is expected to grow at 40 per cent over the next five years. We are giving the customers a choice of buying natural organic food at affordable prices." (The retailer would be paying higher prices for organic produce but spending £8 million a year to make sure the added costs were not passed on to customers.)

It so happens that the retail market may also be demonstrating the beginnings of a fundamental shift in food retailing. The signs are there and it's not as if Iceland was privy to indicators of consumer trends and preferences and others were not. More than one in four people in Britain now eat some form of organic food, though higher prices put many customers off. In Ireland, consumption is less, but growing steadily.

Organic food is produce grown or reared without the use of chemicals, pesticides or GMOs, and independently certified as such. In the healthy food context, this type of food has become the single biggest priority of consumers aside from safety issues relating to foodborne illness - E.coli O157 and salmonella infections. Consumers in the UK spend £540 million on organic food. But 80 per cent of all organic fruit and vegetables has to be imported as demand far outstrips supply. It is similar in Ireland, but demand is only beginning to accelerate here. The European picture provides further evidence of the shift. Demand for organic milk is particularly strong. Germans are spending £1.5 billion a year on organic food.

The organic sector is growing, but price differences between organic and conventional prices have remained marked - though many consumers seem willing to pay based on perceived quality of product and the "production environment". The surge in popularity of organic food has seen a widening of the range available. Shops now sell organic vegetables, fruit, chocolate, ready meals, wine, champagne and snacks. The UK government has made £24 million of subsidies available to farmers who want to go organic in a bid to increase supplies; an unprecedented level of investment through the agricultural research organisation, Teagasc, has identified the sector as a major growth area, particularly organic milk.

Iceland says its investment was prompted by a survey suggesting three out of four customers would prefer to buy organic goods if they were cheaper than current prices; the classic "we are listening to you" approach, which Irish supermarket group Superquinn has mastered.

So how does supermarket owner Senator Feargal Quinn view it? He has a sneaking regard for the Iceland approach, as his company too likes to steal a march on bigger supermarkets - though Superquinn puts more emphasis on fresh produce as opposed to frozen food, and on developing a close relationship with local growers. He acknowledges its ability in the publicity stakes. Iceland is developing a habit of annoying its bigger rivals as it did with its GM foods ban. "Others have to appear to follow suit," he explained. "It will be interesting to see if Iceland can do it with organic foods."

But the move has exposed current limitations with the organic farm sector, notwithstanding stunning recent growth. Britain has minimal organic production due to lack of government investment in the organic industry in its formative years, according to Walker. "We hope our investment will help change this. At present, only 3 per cent of UK agricultural land is organic and all the supermarkets are forced to rely on imports (80 per cent of sales) to meet the demand."

Patrick Holden, director of the Soil Association (the main UK organic certification body), said it had advised successive governments for the past decade that consumer demand for organic products was certain to grow. "Now we have the sad situation where Iceland is forced to source organic products in other countries when there are thousands of British farmers literally facing bankruptcy." (The UK government had promised to triple land using organic methods to 9 per cent by 2006).

The Irish organic sector is significantly smaller with less than 1 per cent of agricultural land (33,000 hectares) developed organically, according to Helen Scully of the Organic Trust, one of three certifying bodies. All told, 1,058 farms are organic or under conversion management, reflecting a 300 per cent growth between 1994 and 1999.

The food writer and cook Darina Allen, who farms organically with her husband Tim at Ballymaloe, Co Cork, plans to fulfil a dream in September by getting a large group of Irish farmers together with the help of the trust to talk about the merits of going organic on purely economic grounds; forget about the green approach and "food we can trust".

But she said at a recent Guild of Agricultural Journalists meeting that there was a discernible difference between Ireland and Britain, with mistrust and ignorance about organic farming, not to mention the contrast between organic farmer optimism and conventional farmer pessimism. She is not talking about converting every Irish farmer, but believes "there is a very good future for a proportion of Irish farmers to convert and to fill the growing niche market for organic food".

Darina Allen has regular contact with organic farmers. She cites the case of Caroline Robinson and her husband Edward who farm about 30 acres in west Cork. "They grow about five acres of vegetables and sell their produce directly to the public through two weekly markets and cannot keep up with the demand. Off that 30 acres, they educate three children, pay a mortgage and live comfortably. They love what they do and are greeted like heroes by the people who flock to buy their produce. How many other 30-acre farmers are earning a living on the land without any subsidies?"

Current supply problems are considerable. Sainburys is reported to have bought sites in the Caribbean to guarantee its organic supplies and to be working with exotic fruit farmers there on the possibility of them converting to organic production. The Liberal Democrat MP Paul Tyler, sponsor of a private member's bill on organic food which proposes targets of 30 per cent of farmland and 20 per cent of food consumed in the UK to be organic by 2010, has warned of a flood of organic food into Britain from abroad. This would undermine environmentalists' efforts to cut pollution from transportation and make it difficult to guarantee standards. Incentives to encourage organic production in the UK to help meet demand from stores like Iceland are needed, he said.

Some of Iceland's existing frozen vegetable suppliers are switching to organic, others are falling by the wayside. But this was inevitable, Russell Ford, Iceland's managing director, said. The move was "one of the most significant the organic industry has seen", he declared. Mass production of organic food with global distribution none the less has the potential to threaten the organic movement's core principle of genuinely green farming. To counter this Alan Woods, chief executive of Going for Green, urges consumers to persuade supermarkets to buy locally-grown produce. "It is no good having organic food in supermarkets if it has to be flown in from abroad - that simply causes pollution. Transporting strawberries from Israel to the UK by plane burns up four litres of fuel for each kilo."

Demand for naturally grown food has increased, he stresses. "People crave a healthier lifestyle and don't want to damage the environment and wildlife. Who wants crops that are sprayed with pesticide when you can have food that is grown naturally?"

Having mopped up a large chunk of the world's organic crop with order books of 35,000 tonnes of fresh produce a year, retail experts say Iceland's investment could act as a spur to the rest of the food industry, increase competition and cut prices further. Competitors coolly dismiss the claim. The supermarket group Sainsburys, which prides itself as the biggest retailer of organic food in Britain, noted caustically that it had 30 per cent of the market, selling £3 million worth of organic food a week, compared to Iceland's 1 per cent. Tesco said it expects to sell £200 million of organic products this year and Iceland is merely playing catch-up.