October 17, 2006
by Meyer Sosland
Growing agricultural output supports vibrant grain industry on the Black Sea
by Juliet Zavon
Grain originating from the Black Sea region is an increasingly important part of global trade, and Romania serves as a shining example of this trend.
Romania’s story is one of transformation. Having survived a half-century of economic mismanagement under the central planning of the communist regime, and the years of declining output and economic chaos that followed its collapse, Romania’s grain industry is on its feet again. It’s gaining strength and bolstering economic development. Preparation for E.U. accession, scheduled for 2007, has been part of the transformation and contributes to the positive outlook.
Romania’s fertile soil, good climate and vast farming regions underpin its huge agricultural production potential. Despite these natural advantages, Romania’s star didn’t rise overnight. Romania was a high-risk, volatile place to do business in the early and mid-1990s. Agricultural output was declining, and there were too many unknowns to attract investment from most grain companies.
In this unstable business environment, the initial wave of businesses that invested in newly privatized elevators, flour mills and other grain industry facilities tended to be speculators and various types of financial investors. They were willing to take high risks with the hope of selling the assets in a few years at appreciated values, but they invested little. Strategic investors — companies whose core businesses are in the grain industry — began operating and investing in the country in increasing numbers in the late 1990s, nearly 10 years after the fall of communism. The grain industry began to revive in a market-oriented economy. Negotiations for E.U. accession began in 2001 and paved the way for additional growth in the grain industry.
Attracted by Romania’s agricultural resources and market, both domestic and foreign companies, including Amylum, Bunge, Cargill, Dobrogea, Expur, Loulis, Pan Grup and others, are now operating in the country. Only a few, such as Belgium-based Amylum, invested in the mid-1990s. Many came later and started slowly, often by first testing the wa-Sunflowers are Romania’s main oilseed crop, with annual production area varying from 800,000 to 1 million hectares. A significant part of the 2005 crop of 1.3 million tonnes was exported, much of it to France. Photo courtesy of Pioneer Hi-Bred International. ters and becoming familiar with the business environment through trading operations before investing in facilities and fixed assets.
As negotiations for E.U. membership advanced, confidence in the business environment grew and helped justify business expansion and investments.
Romania’s grain industry began to expand, promoting growth in upstream and downstream businesses it depends on, such as services, engineering, construction, transportation, supplies and more. Most importantly, the recovering grain industry created a demand for grain and oilseeds that began to stimulate market-oriented farm production and a supply network in an economy that was rapidly restructuring.
Market pull from the grain industry has been an important factor in boosting agricultural output, but other obstacles remain and are slowly being resolved. These include land fragmentation and the lack of farm finance. Both are the legacy of Romania’s tumultuous recent history.
INCREASED GRAIN PRODUCTION E.U. accession will help address the problem of farm finance. The payments farmers will receive under the Common Agricultural Policy will be a key source of financing, enabling them to purchase the inputs needed to improve yields, productivity and quality.
For instance, the current lack of farm credit means that about 30% of Romanian producers use hybrid maize seed. Proper use of hybrid seed on farms that can’t afford to buy it should increase their yields from the current level of 3 to 3.5 tonnes per hectare (approximately 45 to 55 bushels per acre) to 7 to 8 tonnes per hectare (about 110 to 125 bushels per acre). Companies in the grain industry look to this kind of improvement in agricultural productivity to fuel their growth in the next two to three years.
In the meantime, grain processors and the grain trade have had to step in to provide much-needed farm credit that is essential in boosting Romanian output of grain and oilseeds. Traders and processors currently finance many of the farms growing the sunflower seed and other grains and oilseeds they process and export.
Providing farm finance is an example of a broader strategic approach many companies have adopted during the transition period in Romania. Companies in the grain industry have integrated forward or backward or taken on additional business activities in order to reduce risk and assure vital supplies and inputs. For instance, the lack of good quality on-farm grain storage has led grain traders and processors to lease storage to farmers.
Flour milling is another example. Fully integrated into flour milling, the major baking companies — Loulis, Boromir, Vel Pitar and Baneasa — are also the country’s major flour millers. The strategy of integrating into businesses upstream and downstream in the supply chain is not unusual in emerging markets around the world. In time, as the market matures, non-core businesses tend to be sold, thus creating growth opportunities for other companies.
Progress in consolidating fragmented land holdings is also increasing grain output. In the early stages of economic restructuring in Romania, privatization and redistribution of land had resulted in many land-holdings that are only a few hectares. These are largely households producing for their own consumption.
Of Romania’s 4 million farms, about one-third currently operate on a commercial basis. The status of land fragmentation, however, should not mask the fact that Romania also has large commercially viable farms of hundreds to thousands of hectares. Many are in the southern and eastern plains, where some of the country’s most productive agricultural land is located.
The opportunity for large-scale farming in Romania is attracting farmers from E.U. countries where farms are much smaller and growth opportunities are extremely limited. There are numerous private initiatives to aggregate farmland into larger parcels, and government policies also encourage this.
E.U. ACCESSION Preparation for E.U. membership is a major factor transforming the grain industry and the economy in general. E.U.-sponsored programs include road construction and port modernization and improvement. E.U. standards for food safety, worker safety and the environment have been gradually introduced. Large companies that have built or modernized their facilities have done so to E.U. standards.
Many Romanian businesses in the grain industry have adopted E.U. standards and are already operating very close to E.U. environmental regulations. However, for small companies, the cost of the investments required for regulatory compliance will continue to be a major hurdle. Many have exited the business and more will follow, leaving market share up for grabs as the industry continues to grow and develop.
E.U. accession will also affect animal production and feed demand, which should grow over the next 10 years. There are bright spots in animal production and feed demand, but overall the first years of E.U. membership could be difficult for these sectors. Like the grain industry, animal production and feed milling collapsed when the centrally planned economy disintegrated. Before that, Romania had been a net exporter of meat, but the economic chaos of the early 1990s saw animal output decline and meat exports disappear.
Romania currently imports more than 50% of its meat. Individual households account for 75% of hog production, and 40% of beef is consumed by the families that raise it. The early years of E.U. membership might well cause commercial animal production to decline further since imports from other E.U. members will be duty free. However, a country with Romania’s natural competitive advantages in grain production also has an underlying economic advantage in feed, which is a major cost in animal production.
Feed formulations can make use of locally produced maize, barley and feed wheat. Soybean meal is largely imported. Romania does grow some 200,000 hectares of soybeans, but sunflower is its main oilseed crop. This year more than 80% of the soy crop is genetically modified, but that will change with E.U. membership, which will prohibit it.
In recent years, feed grain prices in Romania have been below world prices. Feed costs were lower in Romania than in the E.U. The operations of both Romanian and foreign companies such as U.S.-based Smithfield, Romanian-based Avicola Buzau and others are a pull factor for the feed industry. However, it will take more than their individual investments and inexpensive grain to restructure the industry.
Despite advantageous feed grain prices, overall costs of animal production in Romania are higher than in the E.U., and changing it will take further investment, time and effort. The transformation will occur gradually.
Overall, the benefits of E.U. membership to the grain and livestock industries and the evolving rural economy give the feed industry much upward potential over the next decade. However, grain output will likely grow more quickly than feed demand, and this has implications for the equilibrium between exports and domestic demand.
At present, Romania produces slightly more grain and oilseeds than it consumes. It exports oilseeds to Western Europe and grain to North Africa. The volume of exports should increase in the early years after accession to the E.U. In time, though, growth in animal production and the feed industry will have a major impact on domestic grain consumption. Look for it within the next decade.
Black Sea Port: Outlet to world markets
The Black Sea port at Constanta , gives Romania an outlet to world markets and an easy trade connection with neighboring Black Sea nations, most notably Ukraine, Russia, Bulgaria and Turkey. The port is served by river, rail and road.
The Danube, flowing through Hungary and parts of the former Yugoslavia before cutting across Romania’s own fertile plains, reaches the port through a canal system. Grain transported on Danube barges can be loaded directly onto Panamax vessels at Constanta.
As Romania’s grain industry expands, so are the port’s grain handling facilities. Transport Trade Services, a privately held Romanian company whose business includes barges on the Danube and cargo at the port, is constructing new facilities at the port.
The facilities, which are expected to begin operating in 2007, will be able to load and discharge trucks, railcars, barges and panamax vessels, and will ultimately include 80,000 tonnes of transshipment storage. Other grain companies operating at the port include Toepfer, United Shipping, North Star, Glencore and East Point.
The port of Constanta , on the Black Sea is one of Europe’s top 10 ports, and it’s growing. Total traffic in 2005, up 20% from 2004, was more than 60 million tonnes (bulk and container). According to the port’s statistics, this included 6.5 million tonnes of cereals and oilseeds and over 1 million tonnes of animal feed and other foodstuffs. The port receives by rail, road and river with more than 5,000 seagoing vessels and almost 9,000 river vessels entering the port in 2005.
The Rhine-Maine-Danube water system links the Black Sea to the North Sea 2,000 kilometers away, offering further options for trade. Constanta , is the biggest container hub in the Black Sea and a major storage and distribution center in the region.
In 2005 alone, the E.U. invested more than €17 million in port improvements. E.U. financing for construction and improvements of Romania’s highways, roads and transportation systems also supports growing business at the port.
Juliet Zavon is a consultant working with the international grain industry. She recently returned from Romania where she was evaluating business trends and investment opportunities for the U.S. Agency for International Development. She can be contacted at email@example.com.