By Colin Packham

SYDNEY (Reuters) - A landmark GMO contamination ruling in Australia could possibly usher in lower organic farming standards, ending the country's world-leading premium niche and threaten organic exports in an industry set to double in size by 2018.

Australia currently does not allow any trace of genetically modified organisms (GMO) in its organic produce.

But after an Australian court ruled on Wednesday against an organic farmer's damages bid, after GMO canola seed heads blew onto his property, causing him to loose his organic licence, many believe the zero GMO standard will now be watered down.

A move to a European Union model, which allows up to 0.9 percent, is being mooted to prevent farmers falling short of the required Australian organic standard and against a backdrop of increased GMO sowing in Australia.

However, a watering down of the regulations could limit Australia's organic exports to some key markets.

Andrew Monk, chairman of Australian Organic Ltd, the country's largest certifier, said he did not believe the standard needed changing and warned of the dangers of doing so.

"We would be really shooting ourselves in the foot in terms of future supply into markets like Asia and Europe for what are high valued, premium products," said Monk.

RISE OF THE GMO

After the Supreme Court of Western Australia rejected Steve Marsh's bid for damages from his former friend Michael Baxter, after winds carried harvested seed from Baxter's Monsanto Roundup Ready canola crop on to Marsh's farm, legal experts said Australia's zero tolerance towards GMO will difficult to maintain.

"If any organic food consumers or producers want to maintain a strict and rigid GM-free standard for their organic products, the judgement means it will be harder to do this," said Joe Lederman, Managing Principal, FoodLegal. "It is not impossible but there will be a huge cost in doing so."

GMO crops accounted for about 15-20 percent of Australia's 3.2 million tonne canola crop in 2012/13, according to the Australian Oilseeds Federation (AOF), and the proportion has been growing.

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Australia is the world's second largest exporter of canola, with approximately 50 percent of its sales to the European Union, but it profits from being largely non-genetically modified, unlike market leader Canada, says Nick Goodard, Executive Director, AOF.

"While the EU standard is 0.9 percent, the market effectively demands our canola to be completely free of any trace GM," said Goodard.

SLOWING THE GROWTH OF ORGANIC

Should Australia keep its organic standard, it risks having to decertify farmers and increasing the oversight impositions on growers, deterring farmers from producing organic produce.

Whatever course Australia chooses, analysts said the Marsh vs Baxter ruling will challenge Australia's rapidly growing organic market.

Australia's organic market was seen as a A$655 million industry in 2013, according to a report by IBISWorld, having grown at 12 percent a year over the last five years, and it is set to top A$1 billion by 2018, driven by soaring prices.

While the market has grown substantially, the IBISWorld report says Australian industry has already struggled to attract significant increases in organic farmers, despite the attractiveness of profits.

According to a International Federation of Organic Agriculture Movements 2011 report, a total 37.2 million hectares of global agriculture land was devoted to organic farming in 2009, with Australia having the most organic agricultural land with 12 million hectares used for organic farming.

(This story refiles to correct a spelling in the first paragraph)

(Reporting by Colin Packham; Editing by Michael Perry)