Romanian Agriculture - Potential vs Reality
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
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+40-21-314.91.90
+40-21-312.61.85
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+40-21-310.02.46
+40-21-311.18.19
Website
www.bcr.ro
Executive summary:
1. High potential along with rising prices of agricultural products on international markets are likely to maintain foreign investors’ interest towards Romanian agriculture
2. Romania has the highest level of family labour force in agriculture in EU 27; low investment rates have left the local agriculture sector at the nature’ mercy and induced an erratic development
3. Highly fragmented land holdings represented a major setback in attracting new investments and affected significantly productivity gains
4. The sector is characterized by a considerable segment of economically and socially vulnerable farm population, who face difficulties in complying with the new and complex set of agricultural requirements
5. External financing is crucial for agriculture as government’s support for this sector will be modest in the coming years, in line with increased pressures upon public spending from areas with an important social component
6. Banks have so far focused on large customers, rather than small ones to which some national programmes have been addressed and this is very much related to risk taking
7. Current international turmoil is no good news particularly for agriculture
Soaring food prices are an opportunity for countries with strong agricultural sectors
Food prices increased strongly on international markets during the last years, following some specific developments: increasing food demand due to population growth and higher living standards in Asia, increasing biofules demand especially in USA and EU, severe weather conditions that slashed agricultural output in many countries. Important structural changes in global economy, including fast growing GDP in China and India, have been closely reflected by commodity price increases – food, energy, metals.
Wheat price went up by nearly 200% between 2001 and 2008 on world markets. The upward trend is likely to continue in the coming years, although at a moderate pace, as the supply will adjust slower to the increased demand.
Romania - high potential, low performance
Romania stands very comfortable in terms of agricultural resources. Arable land represents 39.5% of its total area and only 5 other countries in the world have a better position than Romania.
Romania’s agricultural sector is often referred to as a main potentialbeneficiary of EU membership. Opportunities stemming from increasedbudgetary transfers are expected, as the EU funds earmarked for Romaniaunder the Common Agricultural Policy amount to EUR 7.5 billion during 2007-2013.
Furthermore, opportunities are expected to arise from a more stable and predictable agricultural regulatory and market environment due to the EU seven-year programming cycles and, in particular, the market price stabilization effects of the interventions under the Common Market Organizations (CMOs).
Full integration into the EU could translate into increased market opportunities for the Romanian farmers who, in principle, have the opportunity to supply a market with more than 500 million consumers.
Romania might become the third agricultural power in Europe after France and Germany given good absorption of EU funds until 2013, high FDIs directed towards agriculture and strong governmental support.
Self employment and low productivity dominate the landscape
Romania has the highest level of family labour force in agriculture in EU 27 (3 million persons in 2005). The significant difference between Romania and the main agricultural countries in EU (France, Spain) reflects the structure of ownership in agriculture (self-employed: family labour force in Romania vs. hired workforce in France and Spain).
This structure of labour force along with low investments in agriculture results in a very low productivity. Average yield per hectare for main crops is well below European standards (only 40% on average as compared to France). Gross value added per employed person in agriculture is by far the lowest in the national economy.
The share of agriculture in total Gross Value Added has been quite significant in Romania (7.5%) as compared to average EU 27 (1.9%) a situation which is similar to that in other EU member states such as Bulgaria, Lithuania and Poland.
Actually, erratic development of agriculture in Romania has become chronic and even its share in total gross value added has constantly decreased in the recent years from 14.3% in 2004 to less than 8% in 2007, this should be rather ascribed to bad weather conditions than higher productivity gains.
Romania still at the nature's mercy
Low investment rates in agriculture along with rather poor interest of foreign investors in this area – land has been also bought for speculative purposes – stood behind flat productivity gains in agriculture. Land price in agriculture has gone up 5 times in the last 5 years to EUR 1000-3500/ha, but still it is 3 to 7 times lower than in most European countries. Market estimates indicate that the price is likely to remain on an upward trend in the next years.
In addition, inadequate structure of the sector, which is dominated in number by miniaturised semi/subsistence holdings with limited market orientation and eligibility for funding, resulted in a pretty low utilisation rate of the widely recognized agro-climatic potential.
While agricultural policies and institutions have largely met all the formal accession criteria in time, the sector has not been fully prepared to effectively use the opportunities offered and to satisfactorily cope with new challenges.
Although labour productivity is very small, gross value added is high and this can be explained by the very low intermediate consumption as services in agriculture are still at an early stage.
This is demonstrated by the strong discrepancy between the low number of employees working in agriculture on payrolls (2.6% of total employees in the Romania) and the “employment” figure which shows that actually 30% of the people work in agriculture.
A significant amount of work in the Romanian agriculture is done by so called “self employed people” who usually work for their own benefit. Actually, more than 33% of the total households’ income in the rural area is “selfconsumption” (agricultural products retained for consumption within the household).
Highly fragmented land holdings - important setback for the local agriculture
Romania should reduce the number of individual farms, while increasing the average crop areas per one farm to meet the performance criteria set by the European Union.
There are more than 4.2 million agricultural holdings, while the percentage of individual farms is predominant. Out of the total number of agricultural holdings, 99.6% were individual agricultural holdings, while companies and associations had an insignificant share of 0.4%. There is plenty of room for future strong concentration of agricultural holdings with positive impact upon profitability.
The average agricultural area per holding lags far behind the European standards, standing at 2.1 hectares for individual agricultural holdings and 263 hectares for companies and associations in 2005.
Only 29% of the total number of agricultural holdings is aligned to the European standards, having a size of at least 1 ESU. ESU (European Size Unit) represents the economic potential of an agricultural holding and equals EUR 1,200 according to the European regulations. This explains the low profitability of the Romanian agriculture and the limited capacity to attract new investments in such highly fragmented environment. Apart from Romania, the share of agricultural holdings having a size of at least 1ESU is 44% in Poland, 62% in Czech Republic, 79% in Slovenia.
Currently, 50% of the agricultural land is utilized by around 4 million holdings, i.e. 98% of the total number of Romanian farms. About 80% of all farms can be classified as subsistence holdings; 45% are even smaller than 1 hectare and are therefore not eligible for most CAP support schemes.
The sector is characterized by a considerable segment of economically and socially vulnerable farm population, who face difficulties in complying with the new and complex set of agricultural requirements, and thereby are unable to effectively utilize market opportunities and available EU and domestic support in order to sustainably manage their income and their assets.
Actually top 50 agricultural producers, including foreign companies, in terms of land size account own and exploit only for 4% of the total arable land and this shows that the fragmentation is maybe the highest in Europe. Out of a total 9.4 million hectares arable land around 7 million hectares could be subject to EU funding, while the balance of 2.4 million hectares are subsistence farms.
Total subsidies received by top 50 agricultural producers stood at EUR 34 million.
The current situation in the land structure, which is also the effect of a delayed property reforms, will gradually change to a more consolidated landscape in agriculture and this will be underpinned by a wave of land acquisitions made largely by foreign investors.
Trade gap on food, beverages and tobacco segment to be closed in 5-7 years
Considering a scenario consistent with good absorption of EU funds (around 80%) and high FDIs in agriculture, Romania might double the cereal yield/ha by 2013-2015. Trade deficit on the segment of food, beverages and tobacco (which stands now at around 1.8% of GDP) might be closed thus in the long run.
External financing is crucial for agriculture as government’s support for this sector will be modest in the coming years, in line with increased pressures upon public spending from areas with an important social component (pensions, health, education).
2008 could be the first year since 2002 when trade deficit (nominal terms) generated by food, beverages and tobacco should contract as compared to 2007 based on higher production and improved export capacities in food industry.
Output should be more market oriented
More than 81% of the individual agricultural holdings use more than 50% of their own production for self consumption. Small farms are not able yet to sell their crop and animal production in modern hypermarkets and supermarkets. Combined support, Governmental and European, is crucial for individual agricultural holdings.
Macroeconomic implications should be major, securing an increased progress in the quality of life in rural areas, and further development of food industry while imports of agricultural products should join a downtrend.
Strong support could rather come from foreign investors who are currently pretty active
Significant growth potential of the agriculture in Romania combined with an increasing investment process supported by both subsidies from the EU budget and expanding agricultural policies of some European countries based on which foreign companies can get loans at very low interest rates and long maturities.
Usually, most foreign investors who came to Romania to invest in agriculture were keen to buy large plots of land but, again, the high land fragmentation as well as the important red tape in merging several land plots could be an important setback for further investments. Foreign companies hold now more than 300,000 hectares (over 3% of total arable land).
Project commitments in agriculture in 2008 likely to exceed EU yearly funds allocation
Due to some legislation drawbacks and dialog difficulties with EU institutions, Romania couldn’t absorb EU funds in the first year of accession. Actually, agriculture was by far the last performer in terms of EU funds absorption (only 1%), total funds that came in standing at a mere EUR 10 million out of 740 million earmarked for 2007.
Things seem to improve gradually in 2008 in terms of number of projects qualified, although net inflows could become more visible as of 2009. More than 1,000 projects, including those within the state aid schemes were filed in the first 5 months, with a total value of almost EUR 600 million and we estimate that total commitments in 2008 will exceed the EU allocation for agriculture (EUR 1bn). The acceptance rate of the projects presented during March-May was around 36% while the average value per project stood at EUR 580 thousand.
Shifting from simple households in the country side to small farms
From a legal point of view, households in the countryside should turn into small farms or micro-farms in order to qualify for both domestic and EU funding. This problem cannot be solved over night and it is likely to take quite a while to see it through due to the delayed property reforms that has only recently come more or less to an end, the poverty which is quite present in some areas as well as the lack of experience in dealing with such “challenges”.
Banks have so far focused on large customers, rather than small ones to which some national programmes have been addressed and this is very much related to risk taking.
Current international turmoil is no good news particularly for agriculture
Even though Romania has been a sought after destination in terms of FDIs, the current international crises could affect more the least developed areas in economy such as agriculture.
This sector is crucial to the country’s macro development, at least from CPI point of view since food products in local consumption basket have the highest share (more than 37%) as compared to peer countries or EU Zone (15%). So far, Romania has been indirectly affected by the international turmoil, while FDIs have been on an upward trend (+66% in the first 7 months). It is possible however that the situation in agriculture shouldn’t change to much on short term if the current international crisis worsens and moreover extends also to the European Union - the main investor and trading partner of Romania.
