October 18, 2006
Agrofert Holding and Agropol Group play a dominant role in the country’s domestically dominated grain and grain processing industries
by David McKee
Agrofert Holding and Agropol Group are not widely known outside the Czech Republic, but it is the commanding position of these two corporations that helps define the Czech agriculture and grain processing industries. In the 15 years since the fall of communism and rapid-fire privatization of state-owned enterprises, each of these holding groups has cobbled together a diverse array of enterprises that includes the supply of basic inputs to farmers, grain storage facilities, grain and feed milling and meat production, as well as baking, confectionary and retail sales.
Their skill at strategic acquisitions has enabled both companies to turn themselves into major fixtures on the Czech business landscape, with both ranking among the nation’s largest companies. Annual sales turnover of the 18 operating companies controlled by Agropol is about U.S.$2 billion, and Agrofert’s 79 fully consolidated subsidiaries generated U.S.$1.1 billion in 2005.
What is remarkable about these numbers is that the Czech Republic is a small economy in which agriculture accounts for only 3.4% of GDP and 4% of the labor force.
GRAIN PRODUCTION AND STORAGE Czech agriculture is efficient, producing 7 to 8 million tonnes of grain in most years, or three quarters of a tonne for each of the country’s 10.2 million people, making for a large surplus. The 2004 crop was a record at 8.8 million tonnes, but in 2003 the grain harvest was just 5.8 million tonnes. More than 80% of grain production is by large corporate farms or private cooperatives.
The wheat crop this year fell to 4 million tonnes from over 5 million in 2005, due to heavy rains at harvest and a 10% reduction in yields. Only about 1.2 million tonnes is used for milling, with another 1.7 million tonnes going to feed use. The State Agricultural Investment Fund (SAIF) makes intervention purchases of between 500,000 to 1 million tonnes of wheat, barley and maize in most years, and leases storage, principally from Agrofert and Agropol. Eventually much of this grain gets exported to other E.U. countries or abroad.
It is in the profitable storage of the grain crop that both Czech agricultural giants got their start. Huge government elevators from the communist era were among the first state assets liquidated when privatization began in 1991. Between them, Agrofert and Agropol were able to take over the lion’s share of the non-farm storage facilities. Today, Agropol owns 10 elevators with total storage capacity of more than 1 million tonnes. Agrofert has even more storage enterprises and capacity.
Control of storage for farmers provided the marketing channels that made possible synergies from acquisition of seed, fertilizer and agricultural chemical production. Agrofert now ranks as the second-largest producer of chemicals in the country.
FEED AND MEAT Industrial feed production has gone down due to a continual, long-term decrease in livestock numbers. With a 30% share of compound feed, Agrofert is the biggest feed producer. A large part goes to its own meat production, primarily beef and swine.
Agropol’s focus is on poultry production at a number of large integrated operations. It enjoys about a 40% market share. Broilers are exported to Slovakia and Ukraine, but the Czech poultry industry’s greatest competition is from meat imports from Poland.
Since the fall of communism, the main trend in Czech meat consumption has been a steady increase in poultry, large declines in beef, and even levels for pork.
Aside from the two leading players, the rest of the Czech feed industry is fragmented. The Union of Grain Warehouses, an industry association that includes both grain storage and feed milling companies, estimates there are 150 feed millers. Consolidation is proceeding rapidly as smaller mills close and larger ones expand, while overall feed demand stagnates. On-farm mixing of feed has been increasing for many years.
FLOUR MILLING Flour milling is a sector in which Agrofert and Agropol have a smaller presence. However, this year Agrofert acquired Penam, a milling, pasta and baking company with a broad product assortment, and a 15% to 20% share of domestic flour production, making it the second largest. The top milling company is Unimills with a 25% market share from its four mills, the largest having a wheat grinding capacity of 300 tonnes per day. Only one other Czech milling company has a market share of greater than 5%. The Association of Industrial Mills, the main industry grouping, counts 47 member mills that each processes a minimum of 2,000 tonnes of wheat per year. Total wheat grind in 2005 was about 1.2 million tonnes, equivalent to 115 kilograms per capita.
Many of the medium-sized Czech mills were founded in the 19th century and are housed in architecturally handsome, historic structures. The industry was fossilized by nearly 50 years of communism, and in the early 1990s an attempt was made to restitute most mills to their pre-communist owners as part of the privatization process.
During the transition period in the 1990s, dozens of new mini-mills popped up, but many have already ceased.
Today the industry is going through a period of consolidation, and the main concern of mill owners is to raise productivity by gradually shedding jobs. In general, production costs are low by European standards, thanks to ample local wheat and low wages, and so there is no threat from imported products.
OILSEEDS AND BIOFUELS Thanks to the biodiesel boom in Germany, oilseeds are one of the more dynamic sectors of Czech agriculture. The rapeseed harvest in 2006 grew by 130,000 tonnes to around 900,000 tonnes. Sunflowers and some soybeans are also grown in rotation. Rapeseed planted area increased by 8% in 2006 to more than 300,000 hectares. Observers predict rapeseed pro- duction will increase to 1 million tonnes — the maximum feasible amount given the need for rotation — to meet demand from new biodiesel plants.
Setuza is the dominant company in the oilseeds sector, crushing 60% of the domestic crop in two plants. It is the only producer of food oils in the country. Like its larger agroindustrial rivals, it has vertically integrated forward into consumer goods like margarine and vegetable oil and diversified into cosmetics, toothpaste, soaps and detergents.
Its main investment goal at the moment is to increase the current capacity of 53,000 tonnes for methylesterifcation of vegetable oil for biodiesel at its two crushing plants. It plans to build a dedicated biodiesel refinery with 100,000 tonnes of capacity at a third location.
The leader in biodiesel production is Agropodnik Jihlava, which produces 70,000 tonnes annually. Agrofert has also announced plans to build a biodiesel plant with 100,000 tonnes of annual capacity.
Nearly all Czech biodiesel production is exported, thanks to the seemingly unquenchable German thirst for the green fuel, and because the subsidies offered by the Czech government for domestic sales are administratively too complicated.
DOMESTICALLY DOMINATED Though imported food products now account for about 20% of the market, the Czech agriculture and food industry has remained mostly in the hands of domestic companies.
An early exception to domestic control is the vaunted brewing industry, which was bought up almost entirely by the big international players in the 1990s. They have turned historic Czech beers like Pilsner Urqell and Staropramen into global brands.
Is the Czech Republic’s market too small for the multinational grain and oilseed giants to worry about buying into? Or could it be argued that well-managed mini-conglomerates like Agrofert and Agropol have become national champions that have reduced the opportunity for entry of multinationals?
Whatever the case, the Czech example shows that full participation in the world economy does not mean sacrificing local ownership of the majority of the grain and food industry — at least in the short term.
David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate businessin new markets. He can be reached by e-mail at email@example.com.