Romania Agribusiness Report

Romania is a rural and relatively poor country, which, helped by EU accession and subsidies, is making positive, if sometimes gradual strides towards modernisation and improving the lives of its citizens.

Romania is an important agricultural producer. Corn is usually the most important grain and in 2006 Romania was the third biggest corn producer in Europe. Wheat, sunflower seeds, rape and barley are also important crops. However, a drought earlier this year is likely to help lead to a fall in crop production in 2009. Ziarul Bursa quoted the president of farmers' organisation Agrostar Federation saying that a lack of government financial support is also to blame for the anticipated fall in wheat production and there are fears that regular seasonal work in autumn will be disrupted by lack of resources. Nonetheless, the publication also reported that the government is introducing a 'First Silo' programme whereby grain producers should be able to store crops in silos licensed by the agriculture ministry and receive a certificate of deposit which could act as collateral for a bank loan.

BMI is expecting growth in production and consumption of poultry until the end of the forecast period in 2013, although production of pork and beef is forecast to decline reflecting the fall in national herd numbers, problems with disease and limited investment. However, for the pig industry at least, it is worth noting that a corner may have been turned - according to the National Institute of Statistics in June 2009 an estimated 324,000 pigs were slaughtered, up from 309,000 in June last year. The export ban to the EU imposed because of Classical Swine Fever is due to be reviewed in the second half of this year. The number of sheep is on the rise, up to 8.9mn in 2008, making Romania the fourth biggest sheep producer in the EU. It is the fifth biggest producer of sheep and goats meat combined.

In 2005 45.3% of the population was classed as rural and just under a third of the country's population worked in agriculture. Many of these people live on small, family run farms where they grow crops and rear livestock for their own use or to sell directly locally. Fragmentation in land ownership creates a number of serious problems for Romanian agriculture and production has suffered. Small scale owners have not been able to invest in modern technology or inputs. According to a report by Banca Comerciala Romana SA 45% of farms are even smaller than one hectare (ha) and are therefore not eligible for most EU Common Agricultural Policy (CAP) support schemes. The report says average yield per hectare for main crops is well below EU norms, only about 40% of those in France.

The report adds that a significant proportion of the farm population find it difficult to comply with the new and complex set of agricultural requirements and so have been unable to fully utilise market opportunities and EU and domestic financial support to manage their income and assets.

Also fragmentation has dissuaded some foreign investment. The report notes that investors usually want to buy sizeable amounts of land, but the red tape involved in buying up individual plots has made Romanian agriculture a less attractive option. Nonetheless, improvements are being made in the sector and given time, the situation will improve and a level of consolidation will occur allowing proper economies of scale and attracting further investment. Indeed, Ziarul Financiar reported in February 2009 that the recession was pushing land prices down which could provide opportunities for those who are in a position to invest. The top five entrepreneurs and their companies in the agricultural sector own 2% of Romania's arable land area. According to the report, Culita Tarata, owner of agricultural and industrial enterprise TCE 3 Brazi, has the largest area of farmed land, over 55,000ha. In August Mihai Anghel, who manages 25,000ha of agricultural land through Cerealcom Dolj, was reported as planning to expand and farm over 40,000ha within three years.

BMI reported in July 2009 that Romanian President Traian Basescu had invited entrepreneurs from the Czech Republic to invest in his country's agricultural sector. Basescu believes that there is enough potential in domestic agriculture to significantly redress the current situation whereby the majority of domestically consumed food is imported.

The percentage of the population classed as rural is forecast to drop to 36.9% by 2030, as people move to the towns attracted by work and better money. According to a United States Department of Agriculture (USDA) report published in March 2008 Bucharest has a per capita income of more than three times the national average. Increased disposable income (before the recession hit wage growth had been accelerating quickly and the labour market had tightened in recent years) helped fuel a massive growth in the mass grocery retail (MGR) sector (total sales of which are expected to grow by 149% between 2008 and 2013) which has in turn encouraged investment in the food and drink industry, and provided incentives to agricultural producers. For instance, in 2007 the European Bank for Reconstruction and Development (EBRD) announced that it was investing EUR20mn to finance the construction of a new malt plant in south east Romania, being built by Soufflet Malt Romania SA (part of French Groupe Soufflet). It will have a maximum annual capacity of 105,000 tonnes of malt and Soufflet has said that it aims to buy all malting barley from local farmers. The permanent representation of Romania to the EU announced in May 2009 that construction will be completed this year.

Consumption patterns are gradually converging towards those of more developed economies in the region and wider Europe. Customers are demanding a variety of good quality foods, healthier options and convenience meals. This has presented new opportunities for manufacturers and their suppliers. One of the winners so far has been the dairy industry. Ziarul Financiar reported in January 2008 that the dairy industry was the 'star' of the consumer goods sector, and some producers were forecasting increases of up to 25%, supported by the rising prices of end products and a growing consumer preference for healthier food alternatives. However, the recession is slowing down growth and profits. In June, Sergiu Mititelu, CEO of cheese producer Hochland Romania, was quoted by Ziarul Financiar as saying that the dairy industry had been hit by the recession and consumption was about to stall this year.

Growth potential has attracted foreign investment. In September 2008, leading European dairy group Muller entered the Romanian market and announced its intention to become the leading yoghurt brand in the country by the end of 2009. In April 2008 French dairy conglomerate Groupe Lactalis purchased local dairy firm LaDorna. One of the key producers, LaDorna is mainly engaged in the manufacture of liquid milk, dairy products and cheeses. In 2007 LaDorna posted a turnover of EUR40mn, collecting some 35mn litres of milk.

A good future is also predicted for local rice cultivation. Albeit starting from a low base, rice production in Romania has grown rapidly in recent years. BMI expects that between 2008 and the end of the forecast period in 2013 production will continue to increase to 85,000 tonnes, up 74%. Investment in Romanian rice from western European companies and farmers has helped, and will continue to help, push up production.

Even though the majority of Romania's poultry population is still kept on small, private agricultural holdings, the poultry industry in Romania is relatively modern and concentration is high. According to the USDA in mid-2006 the seven biggest operators accounted for about 50% of commercial production. The largest companies are fully integrated and foreign investors and suppliers are active in the industry. The Agroli Group, which specialises in poultry production, notes on its website that the growing competitiveness of the Romanian economy following accession to the EU coupled with the problems associated with the recession, will lead to the disappearance of producers that haven't invested in technology and can't operate rigorous price control measures. The market will include a small number of big companies that implement development strategies and can offer quality food at affordable prices. On a low note, the possibility of livestock disease is a constant threat to the industry. In addition to the Classical Swine Fever and avian flu outbreaks (one as recent as February 2009 - although it was resolved by March) Romania's poultry has also recently experienced Newcastle disease. However, there hasn't as yet been a recorded case of BSE.

Another potentially lucrative area is organic production. The growing demand for organic products in other European markets, combined with Romania's low-cost labour and plentiful and readily convertible arable land means that organic cultivation and production could be extremely successful for local producers and outside investors. According to a USDA report the Romanian Ministry of Agriculture has said that it would like to see 400,000ha under organic cultivation and production by 2010, double the current rate. Eurostat notes that fully converted crop area rose from 65,111ha in 2006 to 71,597ha in 2008.

Problems remain which make development and investment difficult, such as run-down agricultural infrastructure and a transport system which lags behind much of the rest of Europe in terms of maintenance and modernisation. However, the ball has started rolling and given time the Romanian agricultural and food processing sectors will develop and expand. Even during recession some business people are optimistic about the future of agriculture in the country. In February 2009 Ziarul Financiar quoted Culita Tarata as saying that he invests everything he earns because agriculture will endure. He said that Romanian farmland was currently only realising 35% of its potential. His company produced 370,000 tonnes of grain in 2008.

Of immediate concern is the state of the global and national economy. Global and domestic recession (BMI is expecting Romania's real GDP growth to contract by 5.7% in 2009 from a 7.1% expansion in 2008 and unemployment to rise to 8.1% of the labour force from an estimated 4.4% in 2008) is putting a break on consumer spending growth, and negatively affecting food purchases in general. Foreign and private investment has slowed in the short term until confidence returns and dragged down industry growth. Credit tightening by the banks has impacted companies' ability to invest and expand and consumers' ability to spend.

However, the IMF's approval of a 24 month EUR12.9bn Stand-By Arrangement should help. It is hoped that the financial package will help cushion the effects of the drop in capital inflows, address the country's external and fiscal imbalances and strengthen the financial sector. The Stand-By Arrangement, combined with other international financial support totals EUR19.9bn.