The future of European agriculture

The European agriculture is much more regulated industry than, let's say, the U.S. one. The government has fundamental impact on the future of regulated market. The government, in this case, means the European Commission, the 'almost-federal-government' of the European Union. Its agriculture policy (called CAP, Common Agriculture Policy) will fundamentally changed after 2013, impacting the future of European agriculture and food business.

Current situation

The EU's Common Agriculture Policy (read a good summary on Wikipedia) goals "to provide farmers with a reasonable standard of living, consumers with quality food at fair prices and to preserve rural heritage." In other words: the CAP always have involved "off-business", environmental and social efforts, and this is behind the European food business protectionism. The CAP has 2 focuses: current or direct payments (DP) to farmers and the rural developments, which represent the major share of EU budget.

CAP post-2013: European Commission's proposals
The European Commission realized the need for a reform in CAP. The CAP reform has 3 objectives:

#1 enhanced competitiveness: The Commission would like to finish some old school protectionism: eliminate production limits (e.g: for sugar) and certain aid schemes, would like to improve food supply chain positions (e.g: enforcing producer organizations), and increase funding for some programmes like school milk and fruit programmes.

#2 improved sustainability: The 'almost-federal-government' proposes a redistribution in direct payments, and tries "to green" DPs. "Green payment" goals to diversify crop production, enlarge permanent grassland, and introduce some ecological focus areas. The proposal is about a 30% green share of direct payments. Improving sustainability also means a 'young farmer programme' for <40 years farmer.

#3 greater effectiveness: The Commission would like to emphasize much better the importance of effective agriculture policy. For this purpose, it tries to shorten food supply chains, implement local promotions, and support producer groups and organic farming. The advisory services and business development support for young/small farmers also goals a better usage of agruculture budget.

The following presentation is the official communication of European Commission about the CAP 2014-20 reform:

European agriculture policy 2014-2020 from Balazs Csorjan dr.

Conclusions

The European food market is one of the most (over?)regulated markets - and unfortunatelly it won't be much easier to entry to EU food market in the future. It will be greener, more organic, more effective, but, if you are a non-EU food seller, it will be challenging also in the future to entry this market. One option is to launch a new food production facility, let's say, in the low-cost Eastern Europe.

Or, if you had any better ideas, we were more than happy if you share it with us.

Government grants to boost food processing investments in Eastern Europe

Agriculture is one of the most subsidized sector of the European Union, and Eastern European governments are keen to subsidize food processing investors.

Generally we can say, Eastern European governments' threshold stimulus is around 50 million euros investment and approx. 250 new jobs in food processing industry, under these numbers you are a very small investor. Governments normally sign an agreement with investor, so receiving a government grant is a contractual connection between the company and the government. It means, you get some money, but you also have some obligations, e.g: for job creation money you have to employ your staff for 1-2 years - and when you could't, you have to pay back the grant.

The subsidizing process always starts at the governmental investment promotion agencies: the PAIZ in Poland, the HITA in Hungary, and the RomTradeInvest in Romania. Decision making about the government subsidy requires normally 1-3 months.

There are several dues you can apply for, here we overview the most important:

#1 Subsidies for investments in "assets"

Governments appreciate the investments is real estate (new processing plant) and machinery. Machinery investments can be the main part of investment costs, e.g: Polish government subsidizes it with a 2-10% grant.

When you think about real estate grants, do not forget: real estate business is a particular profession, and real estate costs are approx. 10% only of the total investment - it's much easier to lease a property on a subsidized fee.

Case study: subsidized leasing in Polgar, Hungary Polgar Industrial Park, Hungary won an EU grant in 2012 for development of a new, 7,000sq.meter (75,000 sq.feet) manufacturing hall, available from Q4 2012. The grant provides a leasing fee discount for potential investors, and in the meantime they don't have to invest in a real estate.

#2 Job creation and other HR-related subsidies

The G-spot of Eastern European governments is job creation, this is the magic word you should build on. Some countries simply provides a "head money" for each new job created, others provide grant frameworks. For example, if you invest 40 million Euros in Romania, AND create at least 300 new food processing jobs, the Romanian government will offer a maximum 20 million Euros package. The final job creation grant in Romania depends on the location of the new plant (investments in underdeveloped regions get higher grants), contribution to infrastructure development, involving research and development, energetic efficiency improvement etc. Other governments subsidize also smaller costs (e.g:  training costs and employees' commuting cost in Hungary), but these are the typical schemes.

#3 Tax relieves

Eastern European governments are a bit shy when its about tax relieves. Before EU accession, most government provided large scale corporate income tax relieves, but the European Union doesn't like it indeed. However, most of the governments found smart, EU-compatible solutions for tax relieves. For example, the Hungarian government provides "development tax allowance", with the following scheme:

• Amount of subsidy: exemption for 80% of the corporate tax payable for 10 years following installation. Up to HUF 500 M turnover the corporate tax rate is 10%, above HUF 500 M the tax rate is 19%.
• Conditions: investment volume min. HUF 3 B (EUR 11.3 M), min. 150 new jobs OR HUF 1 B (EUR 3.7 M) investment volume and 75 new jobs in preferred regions
• Application: depending on investment volume request or application needs to be submitted
• Provider of incentive: Ministry for National Economy

#4 Cash grants

In the love packages of Eastern European governments there is two types of cash. All the grants above have specific goals, preferences, and obligations (e.g: re-training grants have to spend for local trainings), but when you hear about "cash grants" it means in general: you get money (normally not more than 5% of total investment costs) as a bonus.

The European sandbox

Finally: the government grants ("state aid" in European jargon) are generally prohibited by European Commission (the "federal government of EU"), because government grants have a negative impact on internal market competition. However, there are some exceptions, when EU not prohibits but supports state aids: the underdeveloped regions of Eastern Europe can provide grants on this way. The understanding of EU state aid policy can help to make better investment decisions, so lets take a look at the following presentation:

State Aid Rules - EU Commission from ICIP Serbia - EU funded project

3 hot trends in Europe's agriculture

The European Comission ("federal government of EU") published its agricultural yearbook in March 2012. The following brief overview would like to provide a starting point to European food raw material business.

Share of agriculture in GDP (source: EC)

#1: Boosting agri-production


After the horroristic 2009, 2010 and 2011 was characterized by +10% and +3.7% increase in real agricultural income.The general agri-production was increased by 1.4% in 2011 (and the prices increased by  5.7%). Raw milk production has increased to 151.4 million tonnes, the average yield per diary cow is approx. 6,431 kg (17,230 pounds).Poultry meat production slightly increased by 0.4% in 2011, but the EU export grew by 13% (mainly to China and to Middle East). The EU beef consumption remains at 16.2 kg per capita, and the beef production increased by 1.8% in 2011. The pig sector is facing a continuing process of concentration  to larger production units, and the production increased by 1.7% in 2011.

#2: Rising prices


The increasing global demand for food has increased both production and prices of EU agriculture in 2011. The raw milk prices has increased with 11% in 2011, from 30.5€/100kg to 34€/100kg (=12.68€ per cwt). Polutry meat prices has reached the historical 194€/ 100kg (=72.38€ per cwt). Beef prices were between 333-380 €/100 kg (124-142€ per cwt), higher levels in all categories than in 2010. Average pig meat prices reached 153€/100kg (57€ per cwt), 13€/100kg higher than in 2010.

#3: Increasing efficiency 


The agricultural employment fell by 2.7% in 2011 (compared to 2010). The agricultural income per annual labour unit (practicly, the labour productivity) boosted in more Eastern European states, especially in Romania and Hungary (over 40%). Developing technologies, concentrating farms resulted a more efficient agri-business in EU.


Some background information


The following short video provides a brief guide to the EU Common Agriculture Policy, for the better understanding of European food business' sandbox:

How to select your new food processing site in Eastern Europe?

Dr. Balazs Csorjan, chief editor of FoodSites Blog published a new SlideShare presentation:

How to select your new food processing site in Eastern Europe?

View more PowerPoint from Balazs Csorjan dr.