The benefits to the average citizen of the last decade of economic reforms in the CEE countries are as evident in the food industry as anywhere. Central planners had permitted only a limited number of standard bread and pastry types, but now small entrepreneurs, foreign companies and re-energized former state enterprises have combined to offer an astounding diversity of baked goods.
Liberalization of processed food imports by Russia in the early 1990s made it one of the largest export markets for Western European food companies. This competition set a high standard for Russian producers, and also made inevitable investment by multinational food companies in local production.
The economic change has also brought hardships to consumers in the form of higher food prices, and in almost all CEE countries, meat consumption and livestock counts dropped sharply during the last decade.
There has been a dynamic restructuring and considerable new investment in the flour milling industries of Central and Eastern Europe in the last 10 or 12 years. The upgrading of old plants is not yet complete in much of the region, but several factors argue against further capacity expansion.
First of all, the countries of Central and Eastern Europe have some of the lowest rates of population growth anywhere. In all but two or three of the countries in this survey, the growth rate is negative. In Russia, plummeting birth rates, shorter life spans and outward migration have caused an average decline in population of over half a million per year. Even without stagnant or declining population numbers, actual milling capacity is far beyond what is needed in most countries.
Romania provides a somewhat extreme example. Doris Stoian, executive director of the Romanian National Association of Flour Milling and Baking Industries (ANAMOB), estimates that the milling capacity in Romania is twice what is required. Just the members of her association, which are mainly small or medium-sized private mills that started in the 1990s with 25 to 75 tonnes daily capacity, have a combined annual capacity of 6,130 tonnes. That figure alone matches Romania’s consumption. But the large former state-owned flour mills that have been privatized as joint stock companies are not members of ANAMOB and also offer as much capacity.
What happened in many, if not most, countries of the region was a mushrooming of new mills just a few years after private enterprises were allowed.
Stoian said that virtually every town or village in Romania now has a flour mill, many of which operate on a toll basis. A local farmer may bring in wheat and pay to have it ground into flour that he may partly use for himself, while selling or bartering the rest.
The large former state-owned milling enterprises in Romania were still centrally controlled and lacking in working capital when the small private mill phenomenon started. Now they have been reorganized as independent entities and can start to compete.
Inevitably, there will be consolidation, and many of the new, smaller mills have already been idled, Stoian said. Nevertheless, the association is contacted from time to time by newcomers who want to build small mills. Needless to say, they are discouraged.
However, steady upgrading of facilities in order to achieve production efficiencies in a highly competitive environment seems likely. This process could be sped along in countries entering the EU. In particular, all food processing enterprises will have to meet the EU’s strict hygienic standards, often by more actively enforcing existing regulations.
In feed milling, the picture is much different as the potential for growth and new investment is much larger. This results from a recently begun upward trend in meat consumption, associated with nascent prosperity in many CEE countries.
Despite this positive movement, feed production is only a fraction of what it was at the end of the Soviet era. There was huge contraction in livestock herds and feed production during the 1990s transition period. Only in the last few years have the numbers of domestic farm animals begun to stabilize in most countries.
Most of the new meat consumption has been poultry, with the trend expected to continue. The Czech Republic is one example. There, during the early and mid-transition period, consumption of pork, a traditional staple, held fairly steady while beef plummeted. Poultry is a relatively new item in the diet of the average Czech.
In Russia, the shift to poultry as a cheap source of protein has been particularly pronounced. Through 2001, the country has been the largest poultry importer in the world, with nearly 80% of the supply coming from the U.S. Exports to Russia had accounted for 8% of all U.S. production with the annual total exceeding 500,000 tonnes, and monthly shipments averaging US$50 million.
Now, rising incomes in Russia are expected to bring about a doubling of poultry consumption in just a few years. Much of this higher consumption could be met by increases in domestic production. Several large poultry projects have been announced, some by prominent business groups not previously involved in the food industry.
The highest profile project is being built by Mosselprom, Russia’s largest advertising agency. The new company, Agro-Industrial Complex Mosselprom, said its poultry operation will be the largest in Europe and fully integrated from incubation to packaged product. Heading the new company is Sergei Lisovsky, former chairman of the Russian Poultry Union and a supporter for Russian products against low-priced ‘Bush legs,’ as U.S. poultry is universally known in Russia.
Existing Russian poultry companies are also expanding. Elenar Broiler Farm, located south of Moscow, has a unique origin. Its funding was from the U.S. government to provide poultry technology transfer as a settlement in a mid-1990s dispute with Russia over veterinary standards for poultry products being shipped to Russia. With a team of American managers supplied by the U.S. Agricultural Export Council, the company has been expanding rapidly.
The most explosive growth in poultry production may be taking place in Ukraine. Andriy Yarmak of APK-Inform said poultry production is expected to double in 2002. However, there is expected to be ample supplies of feed grain due to the country’s bumper crop in 2001 and that projected in upcoming years (see companion article). To help absorb these large grain stocks, government officials have announced that Ukraine will become a major supplier of poultry and other meat to its immediate neighbors and even on world markets.
The CEE countries were important players in oilseed markets both as consumers of soy meal and producers of sunflower seeds in the socialist period of the 1980s. They continue to play that role today, but in different ways.
Increased domestic poultry production is driving increased demand for soy meal in several CEE countries. In addition, demand for edible oils is up in most countries as diets improve. The bulk of new European investment in oilseed crushing plants is taking place in the CEE countries.
In Russia, the consumption of edible oils in the form of margarine, mayonnaise and salad dressings has grown enormously and is likely to continue to increase. Average annual per capita vegetable oil consumption in Russia is 14 kg — up from previous years, but still far below the average level in the U.S. and most of Europe.
In recent months, there have been a spate of announcements of new soybean processing plants to be built in Russia and Ukraine. Agros, the newly created agribusiness arm of Russian business group Interros, has announced it will build a medium-capacity soybean extraction plant near St. Petersburg in conjunction with an unnamed international partner. Other announcements have been made for similar projects at both Russian and Ukrainian Black Sea ports. Other companies, including Dupont Technologies in the U.S., have made public plans to build plants to produce edible soy proteins and flour concentrates.
The industry in Ukraine has attracted some multinational investors. Cargill’s sunseed crushing plant in Donetsk, Ukraine is the world’s largest, with a daily capacity of 1,500 tonnes of seed. The French company Cereol owns a large plant in Dnipropetrovsk. At least a couple of other sunseed crushing plants have been built with participation of foreign investor groups in the last five years.
BREWING AND MALTING
There is hardly a country in the CEE where international brewing groups do not control a significant share of beer production.
In Russia and Ukraine, beer consumption has seen dynamic growth. Annual Russian and Ukrainian imports of barley malt and malting barley now exceed one million tonnes per year. There is a move to build modern malting capacity in Russia and the Ukraine. A malting plant in St. Petersburg was built jointly by Russia’s largest brewery, Baltika together with the French maltster Soufflet. Recently, the Belgian brewing group Interbrew announced a project to build a large malting plant in the Ukraine. Other malting projects by independent breweries and other groups are underway.
The new efficient domestic malting plants will stimulate the breeding and production of local barley varieties for brewing, eventually replacing imports and augmenting in another small way Russia’s and Ukraine’s position as net grain exporters.
David McKee is a consultant that assists companies seeking to initiate business with the agricultural, food processing and beverage industries in the former Soviet Union and other countries. He can be reached by E-mail at email@example.com.