Begegnungen
Schriftenreihe des Europa Institutes Budapest, Band 28:81–88.

GYÖRGY MAKAY

The Opportunities and Risks of the Hungarian Grain Economy and Romania’s Accession to the Union

I have not elaborated the topic indicated in the title as a scientific researcher but as an expert who has spent several years in the field of grain economy. I express my opinion on the basis of market data and other relevant sources of information and I do not think that I am in possession of the philosophers’ stone.

At the beginning we should see what kind of market Romania represented for us during the past three years. I would begin the series with the Hungarian export of processed products (Table 1), and later on I would also discuss unprocessed grain.

Processed Grain-based Products

The year 2003 was unique for both Hungary and Romania. Grain crop was extremely weak, greatly influencing export possibilities. If we look at Hungarian exports in the lines of wheat flour, wheat bran, maize flour and compound feed (Table 1) it can be seen that wheat flour achieved a very good output in 2003, but from then on I can report on rather modest figures. Export dropped to 22 thousand, and even to 14 thousand tons/year, and unfortunately it would not grow in 2006 either. In fact, Romania happens to be our main export market for flour. The bad situation of the Hungarian flour milling industry is shown by the fact that it cannot even calculate with exports reaching twenty thousand tons, which is only a rounded figure compared to more than a million tons of grain usage. The 2003 export which may be regarded as a significant one was generated by the Romanian shortage. The same applies to bran, the export possibilities of which have become rather marginal by now. The export of maize flour and grist was not high even in 2003, but unfortunately a 100 per cent fall could be experienced in these products last year. As far as the compound feeds are concerned, there is a slight increase. Dog and cat foods were contributed to it, as there has been a growing demand for pet food.

Slow growth can be experienced in the case of other processed products that include everything from muesli bars to the most diverse grain-based goods, but unfortunately not even the total quantity is significant.

A slight tendency of growth is to be observed in the case of compound feeds and other processed products, it is a consequence of wider choice, but as far as the main products are concerned, such as wheat flour and maize flour, the figures are expressly modest at present. It should be added to the assessment of the turnover and the possibilities that currently there are contingents and customs duties limiting import. The elimination of customs barriers may be of beneficial effect in this respect too.

Differences in Market Prices

Obviously, the market opportunities are fundamentally influenced by the prices that have evolved in the two countries. In the first week of April 2006 the so-called transfer, wholesale price without VAT of flour calculated in Hungarian forints was 7–8% higher in the case of lower quality, and 18–20% higher in the case of better quality in Romania. At that time the flour type 550 had a price within HUF 43–48. The price of the so-called lower quality flours (bread flour) was between 37 and 42 HUF/kg.

It should be noted here, that, unfortunately, the transfer price of the good quality flour was between 37 and 42 HUF/kg in Hungary, in the domestic market. It means that flour prices were higher in Romania in April 2006. It is supported also by the price of wheat in Romania, where that of the lower quality wheat was between 27–28 thousand HUF/t. Better quality wheat should be mixed to it in order to produce goods corresponding to the Hungarian standards and the quality requirements of bakery products, but import restrictions and solvent demand create barriers.

The difference between the Hungarian and the Romanian prices of compound feed is astounding. The Hungarian reality today is that the producers sell maize for HUF twenty-five thousand, because they are busy with intervention (even storage is given to the offered maize supplied hence good rental is also earned), and they are not interested in the market at all. At the same time the price of maize is between 12 and 17 thousand HUF/ton in Romania, which is a significant advantage to Romanian livestock breeders. This price would encourage imports from Romania to Hungary, but turnover is moderate because of trade barriers.

Export of Unprocessed Grain

The year 2003 had a weak crop, particularly in Romania, which promoted Hungarian export. In addition this was our last year outside the European Union. Membership influences the entire Hungarian grain market significantly, the situation of prices, and the high intervention price hinders export.

The export of wheat from Hungary to Romania plays primarily the role of quality improvement, excepting 2003, a year of extraordinary shortage, when an absolute shortage evolved in Romania (Table 2). I am sure that Hungarian wheat may primarily have a so-called quality-improving role in Romania in the future, too.

At the same time it should be added that since our accession to the EU no one is encouraged by the market situation and by the economic environment to make significant efforts for exports in a year of a so-called normal crop (or even in a year of good crop like in 2005), because the intervention price determines the market prices. Logistics costs are significant. The intervention price-level together with the logistics costs approximate and even reach the price levels obtainable in Romania. I estimate export possibilities at 140–150 thousand tons annually, which is the aggregate of the so-called margin transactions. A ’margin transaction’ is when the businessman finds the price margin of 500 or 1000 HUF/ton for which he produces something. There is no opportunity for major contracts, instead the partners are seeking out each other, they are looking for the ’margin’ and watch out to find a small price margin, hence the above quantity is built up by lots of small transactions. Not like earlier when this trade could be carried on by contracting for big transactions.

Average Yields, the Intervention System

Table 3 shows that the average yields of wheat and maize of Romania are extremely low: it is 2.5–2.6 t/ha for wheat (half of the Hungarian one), and 2.8–3.25 t/ha of maize, but it is less fluctuating than in the case of wheat. Why is it important to pay attention to the average yields?

The worst year of Romania for the total of grain production was 2003, when ten million tons could hardly be harvested. In a good year Romania has crop of about 14 million tons which is above the domestic needs. The fluctuations of crops are about the same as in Hungary, as unfortunately we are also far from the practice of optimal input.

Studying the impact of EU-membership on Romanian grain production, the role of direct payments and the price stability based on intervention should be considered. In my opinion the input would grow as a result of better and safer incomes. In case the additional input brought about half a ton of crop growth in the coming years (as presumably the 50 kg of fertilizer input would be increased to 60 or 70 kilos) then more than two million tons of additional crop would be achieved. Romania has been a net wheat exporter in mediocre and good years. Market stability and the possibility of higher incomes would, by all means, create an opportunity for improving the conditions of production.

(The Hungarian experience, though, is different: the Hungarian producer does not use the money received for the causal and optimal expansion of production, but would immediately realise and extract that money. In our country neither quality improvement nor quantitative growth has resulted from surplus receipts.)

Let us assume that we are not identical and it is not unlikely to expect growth in Romania in view of the low levels of production.

The accession of Romania and its increasing production would, therefore increase grain surplus in the EU.

The situation can be assessed widely differently in the case of wheat and maize. The author of this article expects that quantitative growth would not be accompanied by a quality breakthrough in the case of wheat. Here once again the Hungarian example should be quoted. The system of intervention for wheat, which is presumably to stay on for long in the Union, is expressly against quality. If a Hungarian producer does not think about caring for quality why should a Romanian one think differently when he can also have access to the same possibility of intervention? In addition their ecological conditions are less favourable for the quality production of wheat. Consequently, I do not expect major changes in the field of quality wheat production in Romania at least not as long as the present system of intervention remains in operation.

In fact this could offer us market opportunities in Romania provided our production of quality wheat would not decline and we would at least preserve the standard we have had so far. Hopefully, Hungarian quality wheat production would rather expand.

In the case of maize I am of the view that Romania has a big production potential, it possesses sizeable territory, and if Romania improves its average yield in no time it can become a very serious competitor for us in the Greek market, for it is in a more advantageous position due to its geographical location. Greece happens to be an extremely important maize market for us and its loss would be a highly sensitive one.

Maize production would be extremely promoted by the 47-100% higher intervention price (depending on whether we compare it to the current twelve thousand or seventeen thousand HUF/t prices). And the level of intervention price would hinder the Romanian maize export less than the Hungarian one due to their lower logistics costs.

I think that due to higher maize prices livestock breeding is facing serious difficulties in Romania, too. The present HUF twenty-five thousand intervention price of maize places Hungarian animal husbandry into a major disadvantage. In my understanding a lower Hungarian price of maize supported animal husbandry in the earlier years (prior to the EU accession). The `support’, however, should be put in inverted commas. The price of maize, which was lower than the European prize, was able to compensate for the additional cost of protein import, which was not due to the clumsiness of Hungarian importers but to the fact that Hungary is farther away from the seaports. This difference was more or less compensated by a lower price of maize.

In Romania, seeing what ’support’ is given to livestock breeding by cheap maize this ’support’ would disappear in no time if intervention is introduced there, too, and they would lose the advantage they have at present.

Intervention, however, can only have a price-increasing effect if the countries concerned can prepare their set of institutions for it. Presumably there is a chance for Romania not to close a year of intervention we had in 2004, but only if they produce something that is by itself enough to ’prop up’ the market.

Studying the achievement of the intervention season of 2005–2006, today it is in full play in practice that the intervention price and system prop up the market, and this determines the prices. And this is going to happen in Romania, too.

Romanian Livestock Breeding and Meat Consumption

In the following there are some pieces of information on Romanian livestock breeding and meat consumption, expressly from the angle of the fact that a larger part of grain is used in animal husbandry. First of all, as contrasted to the daily Hungarian realities, today the integrated production in percentage as in its totality is far more characteristic of the Romanian economy, of animal products than in Hungary. There are 78 integrations in the broiler branch, of which 33 are of significant size. 40–42% of the domestic consumption of chicken and pork originate from import.

The import of chicken meat is 158 thousand tons/year, of which 92 thousand tons come from the USA and 42 thousand tons from Brazil. The Romanian import of poultry is decreasing parallel to the growth of domestic production but it is still significant. Parallel to EU-membership it is impossible to ’rewrite’ these imports. It is not realistic to expect that their imports would be replaced by shipments from member states, and that the efficient Hungarian poultry industry would penetrate the Romanian economy. The customs protection of the EU, as reflected by the WTO negotiations, would get increasingly unable to keep away competitive goods coming from outside the Union.

There have been extraordinary developments in the pig industry of Romania and the continuation of this trend is expected in the future, too. This is something one should definitely pay attention to. Currently the purchase price of pig is 300–400 HUF/kg, to which 70 HUF/kg of animal welfare support is ensured. If somebody is somewhat familiar with pork production he/she would presumably agree with me when I say that a price income of 370–410 HUF/kg is quite attractive for the producer. Romanian poultry production is also heavily subsidized, and the extent of support reaches 104 HUF/kg.

The Hungarian firms working also in Romania find that the entire system of preparation is far more concentrated, better considered and more flexible than the Hungarian practice was. It is said by Hungarian companies, market actors who had gone through preparation for the EU as it happened, and now experience what happens there through their Romanian firms. These market actors say that the SAPARD programme has been functioning in an organised way. The very same people had strongly criticised it, therefore their attitude is well known, and they are not at all conditioned for praising anything unilaterally.

Summing up the situation of animal husbandry, it can be said that a support system promoting Romanian preparation is in operation in animal husbandry, in sectors that are large concentrate consumers. It can be inferred that this would significantly reduce their import-dependency, and their livestock would move in a tolerable or acceptable direction of competitiveness. The sweeping impetus by which presumably “cheap import would flood Romania” may somewhat hamper this development. It should not be forgotten that if exporter countries regard the Romanian market as draining surpluses, even market distortion may occur.

If the Hungarian milling industry is going to regard the Romanian market as a drain for surpluses or a promoter of the better utilisation of its capacity after the accession, for there would be no customs protection anymore, then I believe that the flour mills near the border in a distance of 100–150 km would have possibilities in the Romanian market, but that could also cause serious disturbances there.

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The elimination of customs borders would only promote significant turnover of grain from a market aspect if there emerges an absolute shortage in the Romanian market due to the weather. Thus, the opening of the market cannot be expected neither that large quantities of Hungarian grain and its products could be dumped there. As intervention does not encourage quality, it cannot be assumed that a qualitative improvement of wheat would take place in Romania. Presumably the continuous and slow growth of the demanding Romanian purchasing power will have to be served with eminently processed goods slowly and with enduring work, possibly with the help of wheat or flour imported for quality improvement.

In the case of further processed products and their sale the spread of chains of department stores should be kept in mind. The so-called listings may not only cover a country, but often entire regions (Central Europe) and even the whole of Europe.

The spread of the chains of department stores in Romania also enhances the opportunities of the sale of products listed in Hungary. At any rate, mass products and less processed ones are highly sensitive to logistics costs, hence in this case it is more realistic to formulate short-term goals.

The growing Romanian maize production may cause problems for us in the Greek market. In relation to pig rising and slaughtering many people may have read about the giant slaughterhouse of Timişoara, etc. Apparently the ‘game’ is not over. It may bring about the growth of the export of live pigs from Hungary, which we already have, but it is also possible that their production would grow slower than the demand.

I have mentioned that the Hungarian flour mills may even appear in the Romanian market with aggressive prices in order to utilise their surplus capacity. Our domestic investors of the grain industry would become more interested if the administrative barriers disappear, and they may also produce at favourable costs. We must also take into consideration that they may be active in a market where, at least in an area of significant-size they do not have to wrestle with basic language obstacles.

The accession of Romania does not automatically yield the enlargement of the market, but modest results can be achieved with tenacious work. With its accession, however, the grain surplus of the EU would grow and it would press for the reform of grain policy as well.