Competitiveness of the Pig Production in Hungary

1. Competitiveness of the Pig Production in Hungary Levente Nyárs PhD Research Institute for Agricultural Economics Hungary nyars.levente@aki.gov.hu http://www.aki.gov.hu International Summer School Gödöllő, 25-30 June, 2010

2. Population growth – ‘food’ demand 1.1% (70-80 million people) a year Income growth – ‘feed’ demand Asian economic growth 5-6% a year Means more meat and dairy consumption Biofuels expansion – ‘industrial’ demand Land availability is limited Potential in Ukraine, Russia, Latin America Technology uptake Need another ‘green revolution’ Will GM be it? Incentives for change? Climate change Speculation Important to market liquidity But can add to price volatility You’ve got mail on gmo! Economic growth The food security problem: challenges Europe’s ban on GMO:it is unnatural… but food is not produced for the environment!

3. GDP Growth for Major Regions:Developing Economies Exhibit Stronger Growth Percent China 8.0% & India 7.5% Developing Asia Africa US EU 25 Source: USDA Agricultural Baseline Projections to 2019, February 2010.

4. Crude Oil Prices Refiners' Acquisition Cost US Dollars per barrel Price is combinations of spot and contracts which refiners use Nominal cost Real cost, adjusted for inflation Source: USDA Agricultural Baseline Projections to 2019, February 2010.

5. World Pigmeat production (2009) Total pig-stock (2009): 1,2 billion heads Source: FAO, Eurostat

6. Pigmeat production/consumption/trade Source: FAO, USDA, Eurostat

7. Major Pork Importing Countries Million metric tons Japan Mexico Russia South Korea United States Hong Kong & China Canada Source: USDA Agricultural Baseline Projections to 2019, February 2010.

8. European Union Meat Production: Pork, Poultry, and Beef Million metric tons Pork Poultry Beef Source: USDA Agricultural Baseline Projections to 2019, February 2010.

9. Outlook on the commodity markets • Strong global trade growth in most agriculture commodities, without significant increases in real world commodity prices. • Strong income growth in developing countries and urbanization lead to increased import demand for grains and High Value Products • Trade to remain very competitive Expanding production potential in Brazil & Argentina, FSU, EU China shifts from net corn exporter to importer in 2011. • Uncertainties Pace of economic recovery Energy prices and costs of agriculture production Policy changes by importers and exporters Biofuels production (policies and profitability) Exchange rates, especially for dollar-denominated commodities

10. The place of agriculture in the economy of Hungary Source: Central Statistical Office

11. Comparison of the farm structure of certain Member States • FSS 2007: 626,000 ‘farms’ • Agricultural households • Lower limit: 1 pig or 400 m2 vegetable garden • Subsistence farming Source: Farm Structure Survey, Eurostat(2007)

12. Demographic problems in Hungarian agriculture • Ageing of the farmers • Wages in agriculture are only 75% of the national average • 40,000 € starting subsidy for young farmers • 1,500 young farmers were supported in 2008 • Most of them are young members of family farms • Early retirement program: only 61 applicants since 2007 Share in land use Share in land use Source: Farm Structure Survey, CSO (2005, 2007)

13. Area of the major field crops in Hungary (2003-2009) Source: Central Statistical Office

14. Changes in the pigmeat supply chain in Hungary (2008 vs 2003) 60 845.8 Percent Source: Central Statistical Office & AKI

15. Development of Pig stock in the EU-15 and NMSs (december) Source: European Commission

16. Development of Pig stock in Hungary and in other EU member states Source:FAO

17. Development of Pigstock in Hungary (2003-2009) Source: Central Statistical Office

18. Structural changes of pig production in Hungary (2005-2007) Source: Central Statistical Office

19. Evolution of Pigmeat price (carcass weight, quality ‘E’) NMS:drop of demand for pigmeat Economical crises Pig producers: Declining offers Old MS: Stagnating demand for pigmeat Source: European Commission

20. Evolution of Pig-meat and live pig external trade in Hungary (2005-2009) Live pig external trade Pig-meat external trade Pig-meat export in 2009: 235 million €; import: 173 million € (balance of external trade in volume: 6 800 tons) + live pig import = net import Source: Central Statistical Office

21. Pig-meat and Poultry-meat consumption in Hungary Source: Central Statistical Office

22. International Competition Source: Rasmussen (2006), Danish Bacon and Meat Council (2007)

23. Cost and income of pig production in Hungary (market maker producers, 2008.) average cost worse better Source: AKI

24. International Pig Production costs (2007) Hungary: 1,14 €/kg

25. Live pig-export: 270 th. head or. 10 th. on meat Black economy Selling for consumption in Hungary: 232 thousand ton meat Pig-meat export: 66 thousand ton meat Hungarian processing. Only processing companies. Pig-meat import: 48 th. ton Home slaughter: 622 th. Head or 49 th. ton Slaughtering and processing 4 759 th. Pig, or 298 thousand ton meat Live pig import: 706 th head or 36 th.ton meat Pig stock (1December 2006): 3 987 thousand head Pig numbers of the 594 companies: 2 519 thousand head Pig numbers of 250 thousand private farms: 1 468 thousand head. Gross domestic production is: 4 945 thousand slaughtering pigs, or 321 thousand ton meat Pig-meat marketing channels (2007) Source: AKI

26. Consumption Approximately 50 % of the total meat consumption in EU is pig-meat. The average consumption of pig-meat in Hungary 27 kg per capita (2006) There was 38 kg in 1980’s. ”Unhealthy, old-fashioned, rich in fat and cholesterol, boring product”.

27. In 2005, according to the AKI database, there were 103 EU approved slaughterhouses and 72 cutting plants. The nominal slaughter capacity: 8.5 million heads per year. According to AKI slaughter statistics, in 2008 4.3 million live pig were slaughtered in Hungary (including imported pigs: approx. 600 thousands heads) so the capacity utilization was 50%. Processing

28. Regional relationship between the pig production and the meat processing in Hungary (2005) Source: AKI

29. Production and capacity concentration in pork processing Source: AKI 2005

30. Competitive Disadvantages in the Pig Supply Chain Consumption (internal market) • Consuming habits varies from country to country and from region to region. • Multinational companies operating in several EU member states are in an advantageous situation. • The market share of traditional products decreases, the consumption of the meatproducts reflect a declining tendency • The Hungarian purchaser/consumer is indifferent to the origin of the product. Price-sensitive. • The frozen pig meat is not popular in Hungary (the fresh meat is rather frozen at home).

31. Competitive Disadvantages in the Pig Supply Chain Retailers, commercial chains • Retail as consumer’s guardian. • Concentration of retail; • Price oriented; • Back margins; • Saturated markets, Retail war on prices; • Private label vs. manufacturers' brands; • Market power; • Market distortion.

32. Competitive Disadvantages in the Pig Supply Chain Processing Cutting, chopping and meat production units are not separated in Hungary. Lack of specialization. Logistical disadvantages. Large share of black marketing:25-30%. Due to high proportion of illegal market players, the legal competitors can not offer a competitive price for retail sector. Out of date technology, low capacity utilization. Lack of trust and weak contract enforcement along thepig supply chain

33. Who affects the consumer (and why)? The changed nature of the food supply chain throughout the example of economical crisis Chain before 2-3 generation: short, simple • „austerity virtue” • Economization • Recycling • Direct relation (CONFIDENCE!!!) • Full traceability • True food • Disadvantages • time-consuming • labour-intensive Traditional key position: at least 1 „nutritinal top manager” Raw materials Household Food CHAINS NOWADAYS: LONG and DIFFICULT The crises brought the renaissance of these values BUT We want them without disadv! Publ. Admin. & Authority All Functions Food Industry Input suppliers Agric. Prod. Retail Consumer

34. By Who and why is driven the Chains?Concentration: declining of the traditional retail chains Along the modern retail chains, alternative retail chains: others+groceries = 42% (2000) Along the modern retail chains, alternative retail chains: others+groceries= 23% (2009 I. semester) and 14% (2013projected) Source: : GfK Hungária

35. Contradiction along the Food Supply Chain The Aim in the hole food supply chain (consumer!) to maximize the profit! • Anticipated profit is not crime. It is natural demand (Economical questions). • „You want to achieve the best”(1st keyword) Publ. Admin. & Authority Swiss Food Industry Input suppliers Agric. Prod. Retail Consumer Innovations can answer to all demand. Fertility Rigidity Storable Packaging,taste convenience Food-safety Traceability Easy of proccess Standardized quality Low level of losses Keepable Standardized scale Easy to sell The requirements concerning the food differ in the hole supply chain. • The different demands can lead to contradictious product characters (engineer questions). „Time of the Sophisticated demands”(2nd keyword) • Difficult and costly to find out a product character, which is essential for the consumer and which is not easy to replace (Marketing). „ban of replaceable” (3rd keyword)

36. Competitive Disadvantages in the Pig Supply Chain Production (1) Lack of specialization at farm level: sow keeping, pig breeding, pig fattening phases are not separated. Heterogenic biological basis, few breeders, small stock, small selection basis. Pigs with high value genetics can not be kept at fattening farms, which do not have perfect animal health status and up-to-date technology.

37. Production (2) Cross-compliance regulations, regarding to environmental/animal welfare/animal health status, cause competitive disadvantage to farmers, especially during economical/financial crises. High interest rates and the lack of capital (foreign capitalinterest rates: 14-15%). Keeping pigs requires land area (manure disposal, producing grain fodder). Fees coming from different authorities are high (veterinary inspection charges, rendering costs of animal by-products etc.). Guarding and protection also increases production costs (may constitute 0,5% of the production value); Geographical disadvantages.

38. Impacts of the Crisis on the Hungarian Pig Supply Chain Input Suppliers • „…no crisis in agriculture except the credit crisis…”; • credit is important for the agricultural input industry; • credit insurance companies zeroed he credit lines of 30-40 big Hungarian agricultural companies; • the objective of investments became cost reduction, not the enlargement of capacity; • the solvency of the domestic buyers; • Producers were expecting feed producers to finance production and to receive payments after some delay;

39. Impacts of the Crisis on the Hungarian Pig Supply Chain Pig Producers • Pig farmers were expecting serious consequences when the economic-financial crisis developed but in fact seasonality, i.e. the classical pig cycle, had a stronger impact. • the weak HUF made the imports of slaughter pigs more costly, domestic pig producer prices remained lower than forecast; • most farmers tried to avoid using credit; • The feeding of home made feeds became more frequent;

40. Impacts of the Crisis on the Hungarian Pig Supply Chain Processors • The crisis did impact the supply of raw materials for processing. • It seemed that the consumption of basic food did not decrease to the same extent as of other products. most farmers tried to avoid using credit; • Imports stop at an exchange rate over HUF 300, and exporters’ profit grows. • Interviewees differ on the impact of the crisis on the demand for food products; • One stated that neither the volume of sales nor sales revenue declined due to the financial crises. • Another said that the demand for pigmeat and pigmeat products had been declining. • However, retail prices remained relatively stable in the region due to the demand from Romania.

41. Processors • Retailers are trying to cap prices, thus, for the consumer, there have been no perceptible impact of the 5 % VAT increase in July 2009, at least in the case of pigmeat and pigmeat products. Exports to some countries had fallen due to the lack of credit to importers; • Processors cut back on spending where possible, but invested in improving efficiency; • The domestically owned and legally operating meat processors were mainly hit by the consequences of the economic and financial crises; • The increase in the rate of VAT was to the advantage of the illegal market players in the food supply chain; • In Hungary, the retail sector was in favour of the financial crisis because they had a stronger negotiating position with the suppliers.

42. Future of the Hungarian Pig Sector • Meat processing • Strategy: marketing based approach instead of production based approach; • There exists internal market; • Own marketing channels; • Own grocery in large scale supermarkets; • First: Stabilized internal market, Second: export to EU market (not contrary); • Export strategy; • Adequate quality and quantity of pig-meat; • Reorganisation of meat industry; • Pig production • cooperation (producer groups); • Cooperation of pig producers and meat processors (interdependence); • Reduction of exposed efficiency difference; • Efficient farm advisory system. • State activity • Favourable macro economical environment; • Keep back the black economy.

43. Thank you for your attention! E-mail: nyars.levente@aki.gov.hu