Competitiveness of the Pig Production in Hungary

Competitiveness of the Pig Competitiveness of the Pig Production in HungaryProduction in Hungary

Levente Nyárs PhDLevente Nyárs PhDResearch Institute for Agricultural EconomicsResearch Institute for Agricultural Economics

[email protected]@aki.gov.hu

http://www.aki.gov.huhttp://www.aki.gov.hu

International Summer SchoolInternational Summer School

GödöllőGödöllő, , 2525--3030 June, 2010 June, 2010

The food security problem: challenges

• Population growth – ‘food’ demandPopulation growth – ‘food’ demand

– 1.1% (70-80 million people) a year

• Income growth – ‘feed’ demandIncome growth – ‘feed’ demand

– Asian economic growth 5-6% a year

– Means more meat and dairy consumption

• Biofuels expansion – ‘industrial’ demandBiofuels expansion – ‘industrial’ demand

• Land availability is limitedLand availability is limited

– Potential in Ukraine, Russia, Latin America

• Technology uptakeTechnology uptake

– Need another ‘green revolution’

– Will GM be it?

– Incentives for change?

• Climate changeClimate change

• SpeculationSpeculation

– Important to market liquidity

– But can add to price volatility

Economic growth

You’ve got mail on gmo!

Europe’s ban on GMO: it is unnatural… but food is not produced for the environment!

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

-6

-4

-2

0

2

4

6

8

10

GDP Growth for Major Regions:Developing Economies Exhibit Stronger Growth

Percent

Source: USDA Agricultural Baseline Projections to 2019, February 2010.Source: USDA Agricultural Baseline Projections to 2019, February 2010.

Developing Asia

EU 25

Africa

China 8.0% & India 7.5%

US

0

20

40

60

80

100

1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Crude Oil PricesRefiners' Acquisition Cost

US Dollars per barrel

Nominal cost

Real cost, adjusted for inflation


Price is combinations of spot and contracts which refiners use

World Pigmeat production (2009)

Total pig-stock (2009): 1,2 billion heads

Source: Source: FAO, EurostatFAO, Eurostat

Pigmeat production/consumption/trade

Source: Source: FAO, USDA, EurostatFAO, USDA, Eurostat

0

1

2

3

4

5

6

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Major Pork Importing Countries

Million metric tons


Japan

Mexico

South Korea

Hong Kong & ChinaCanada

Russia

United States

0

5

10

15

20

25

1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

0

5

10

15

20

25


Million metric tons

European Union Meat Production:Pork, Poultry, and Beef

Pork

Beef

Poultry

Outlook on the commoditOutlook on the commodityy markets markets• Strong global trade growth in most agriculture commodities, without

significant increases in real world commodity prices.

• Strong income growth in developing countries and urbanization lead to increased import demand for grains and High Value Products

• Trade to remain very competitive Expanding production potential in Brazil & Argentina, FSU, EUChina shifts from net corn exporter to importer in 2011.

• Uncertainties

Pace of economic recovery

Energy prices and costs of agriculture production

Policy changes by importers and exporters

Biofuels production (policies and profitability)

Exchange rates, especially for dollar-denominated commodities

The place of agriculture in the economy of Hungary of Hungary

20032003 20042004 20020055 20020066 20020077 20020088

Share of agriculture Share of agriculture in the GDP (%) in the GDP (%) 3.73.7 4.14.1 3.63.6 33..55 3.53.5 3.93.9

Share of agriculture Share of agriculture in employment (%) in employment (%) 5.55.5 5.35.3 5.5.00 4.4.99 4.4.77 4.4.55

Share of agriculture Share of agriculture in total investments (%) in total investments (%) 6.16.1 4.34.3 4.4.55 44.2.2 33..77 4.4.77

Share of agri-food products Share of agri-food products in consumption in consumption 26.626.6 26.126.1 25.125.1 25.825.8 26.726.7 n/an/a

Share of agri-food products Share of agri-food products in total exports (%) in total exports (%) 6.56.5 6.06.0 5.5.88 55..55 6.36.3 6.6.77

Foreign trade balance of the Foreign trade balance of the agri-food sector (bln HUF)agri-food sector (bln HUF) 303.2303.2 223.1223.1 181.1181.1 214.5214.5 342.0342.0 376.0376.0

SourceSource: Central Statistical Office: Central Statistical Office

FSS 2007: 626FSS 2007: 626,,000 ‘farms’000 ‘farms’ Agricultural households Agricultural households

Lower limit: 1 pig or Lower limit: 1 pig or 400 m400 m22 vegetable garden vegetable garden

Subsistence farmingSubsistence farming

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Proportion of Farms

Pro

po

rtio

n o

f U

tili

zed

Ag

ric

ult

ura

l A

rea Denmark

Germany

Poland

Slovakia

Hungary

Comparison of the farm structure Comparison of the farm structure of of certain Member States certain Member States

SourceSource: Farm Structure Survey, Eurostat: Farm Structure Survey, Eurostat ((20072007))

Average Average farm size farm size (hectares)(hectares)

DenmarkDenmark 57.657.6

GermanyGermany 48.348.3

PolandPoland 7.07.0

SlovakiaSlovakia 45.545.5

HungaryHungary 8.78.7

Ageing of the farmersAgeing of the farmers Wages in agriculture are only Wages in agriculture are only

75% of the national average75% of the national average 4040,,000 € starting subsidy for 000 € starting subsidy for

young farmersyoung farmers 11,,500 young farmers were 500 young farmers were

supported in 2008supported in 2008 Most of them are young Most of them are young

members of family farmsmembers of family farms

Early retirement program: only Early retirement program: only 61 applicants since 2007 61 applicants since 2007

Agricultural training 2005Basic training 6.50%Agricultural training 67.50%Practical experience only 26.00%

Share in land useShare in land use

Age Group 2003 2007< 35 years 8.20% 8.30%35-54 years 52.70% 49.30%≥ 55 years 39.10% 42.40%

Share in land useShare in land use

Demographic problems Demographic problems in Hungarian agriculturein Hungarian agriculture

SourceSource: Farm Structure Survey: Farm Structure Survey, CSO (2005, 2007), CSO (2005, 2007)

Area of the major field crops Area of the major field crops in Hungary (2003-2009)in Hungary (2003-2009)


0

500

1 000

1 500

2 000

2 500

3 000

3 500

2003 2004 2005 2006 2007 2008 2009

1 0

00

he

cta

res

Wheat Corn Barley Sunflower Oilseed rape

Changes in the pigmeat supply chain Changes in the pigmeat supply chain in Hungary (200in Hungary (2008 vs 8 vs 20020033))

SourceSource: Central Statistical Office: Central Statistical Office & AKI & AKI

60 845.8

-39.2 -30.6 -22.7

109.6

19.9

222.3

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200

300

Per

cen

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2000

4000

6000

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10000

12000

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16000

18000

20000

2004 2005 2006 2007 2008 2009

Pig

sto

ck (

'000

hea

ds)

Poland Romania Austria Hungary

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

2004 2005 2006 2007 2008 2009

Pig

sto

ck

('0

00

he

ad

s)

EU-15 EU-12

Development of Pig stock in the Development of Pig stock in the EU-15 and NMSs (december)EU-15 and NMSs (december)

Source: European CommissionSource: European Commission

0

5 000

10 000

15 000

20 000

25 000

30 000

1984 2008

'000

hea

ds

Spain Denmark Hungary

Development of Pig stock in Hungary and in other EU member Development of Pig stock in Hungary and in other EU member statesstates

Source:Source: FAOFAO

0

1000

2000

3000

4000

5000

6000

pig

sto

ck

('0

00

he

ad

s)

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360

380

so

ws

('0

00

he

ad

s)

Pigstock Of whichl: sow

Development of PigDevelopment of Pig stock in Hungary (200stock in Hungary (20033-200-20099))


•Pigstock•head

•Share of total pig farms, % •Share of total pigstock, %

•2003 •2005 •2007 •2003 •2005 •2007

1-9 90,24 90,31 90,41 21,97 18,00 15,0

10 - 49 8,92 8,85 8,64 15,13 12,87 11,4

50 - 99 0,49 0,50 0,55 3,18 2,82 2,7

100 - 199 0,16 0,14 0,17 2,07 1,53 1,7

200 - 399 0,06 0,05 0,08 1,67 1,29 1,7

400 - 999 0,04 0,05 0,04 2,28 2,57 1,8

1000 - 1999 0,02 0,02 0,02 2,34 2,69 2,5

2000 - 4999 0,03 0,03 0,03 8,30 8,42 7,5

5000 < 0,04 0,05 0,06 43,06 49,81 55,7

•Total 100,0 •100,0 •100,0 100,0 •100,0 •100,0

Structural changes of pig production in Hungary (2005-2007)Structural changes of pig production in Hungary (2005-2007)


Evolution of PigEvolution of Pig meat price (carcass weight, quality ‘E’)meat price (carcass weight, quality ‘E’)

Source: European CommissionSource: European Commission

80

100

120

140

160

180

200

Jan-

03Ap

r-03

Jul-0

3O

ct-0

3Ja

n-04

Apr-0

4Ju

l-04

Oct

-04

Jan-

05Ap

r-05

Jul-0

5O

ct-0

5Ja

n-06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

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Oct

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Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0

€/10

0 kg

Germany Denmark Poland Hungary

NMS:NMS: drop of demanddrop of demandfor pigfor pig meatmeat

Old MS:Old MS:Stagnating demandStagnating demand

for pigfor pig meatmeat

Pig producers:Pig producers:

Declining offersDeclining offers

Economical crisesEconomical crises

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40

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80

100

120

2005 2006 2007 2008 2009

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tons

import export

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40

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70

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2005 2006 2007 2008 2 009'0

00 t

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simport export

Evolution of PigEvolution of Pig--meat and live pig external trade in meat and live pig external trade in Hungary (2005-2009)Hungary (2005-2009)

PigPig--meat external trademeat external trade

Live pig external tradeLive pig external trade

Pig-meat export in 2009: 235 million €; import: 173 million € (balance of external trade in volume: 6 800 tons) + live pig import = net import


PigPig--meat and Poultrymeat and Poultry--meat consumption in Hungarymeat consumption in Hungary

23

24

25

26

27

28

29

30

31

32

2004 2005 2006 2007 2008

kg/c

apita

poultrymeat pigmeat


International CompetitionInternational Competition

Name Hungary average

Hungary best

Denmark Netherlands Spain

Slaughter pigs/sow/year 16.8 22.7 24.3 23.2 21.9

Mortality in weaner section 5.0 3.3 5.0 2.0 4.0

Mortality in finisher section 7.0 4.75 4.0 3.0 7.0

Kg feed per kg gain in the finisher section

3.7 3.3 2.8 2.65 2.71

Daily gain (g) 695 710 849 774 683

Source: Rasmussen (2006), Danish Bacon and Meat Council (2007)Source: Rasmussen (2006), Danish Bacon and Meat Council (2007)

Cost and income of pig production in Hungary Cost and income of pig production in Hungary (market maker producers, 2008.)(market maker producers, 2008.)

-32263

-100

-50

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350

400

HU

F/k

g

piglet feeding cost other cost Price Subsidies

better

average cost

worse

SourceSource: : AKIAKI

International Pig Production costs (2007)International Pig Production costs (2007)Hungary: 1,14 €/kg

SourceSource: : AKIAKI

Slaughtering and processing4 759 th. Pig, or

298 thousand ton meat

Hungarian processing.Only processing companies.

Pig-meat export: 66 thousand ton meat

Live pig import: 706 th head or36 th.ton meat

Home slaughter:622 th. Head or

49 th. ton

Pig stock (1December 2006): 3 987 thousand head Pig numbers of the 594 companies: 2 519 thousand head

Pig numbers of 250 thousand private farms: 1 468 thousand head. Gross domestic production is: 4 945 thousand slaughtering pigs, or

321 thousand ton meat

Live pig-export:270 th. head or.10 th. on meat

Pig-meat import: 48 th. ton

Selling for consumption in Hungary:232 thousand ton meat

Black economy

Pig-meat marketing channels (2007)

Consumption

Approximately 50 % of the total meat consumption in EU is pig-meat.

The average consumption of pig-meat in Hungary 27 kg per capita (2006) There was 38 kg in 1980’s.

”Unhealthy, old-fashioned, rich in fat and cholesterol, boring product”.

In 2005, according to the AKI database, there were 103 EU approved slaughterhouses and 72 cutting plants.

The nominal slaughter capacity: 8.5 million heads per year.

According to AKI slaughter statistics, in 2008 4.3 million live pig were slaughtered in Hungary (including imported pigs: approx. 600 thousands heads) so the capacity utilization was 50%.

Processing

Regional relationship between the pig production and the meat Regional relationship between the pig production and the meat processing in Hungary (2005)processing in Hungary (2005)

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slaughering capacity, % chopping capacity, % pigstockSource: AKISource: AKI

Activity

Salami Sausage Others

Production%

Capacity%

Production%

Capacity%

Production%

Capacity%

Top-5processors

85.6 59.7 57.8 26.8 46.2 33.3

Top-10processors

94.3 77.7 80.3 44.8 66.9 51.4

Production and capacity Production and capacity concentration in pork processingconcentration in pork processing

Source: AKI 2005Source: AKI 2005

Competitive Disadvantages in the Pig Supply Chain

Consuming habits varies from country to country and from region to region.

Multinational companies operating in several EU member states are in an advantageous situation.

The market share of traditional products decreases, the consumption of the meat products reflect a declining tendency

The Hungarian purchaser/consumer is indifferent to the origin of the product. Price-sensitive.

The frozen pig meat is not popular in Hungary (the fresh meat is rather frozen at home).

Consumption (internal market)

Retailers, commercial chains

Retail as consumer’s guardian.

Concentration of retail;

Price oriented;

Back margins;

Saturated markets, Retail war on prices;

Private label vs. manufacturers' brands;

Market power;

Market distortion.


Cutting, chopping and meat production units are not separated in Hungary. Lack of specialization.

Logistical disadvantages.

Large share of black marketing: 25-30%.

Due to high proportion of illegal market players, the legal competitors can not offer a competitive price for retail sector.

Out of date technology, low capacity utilization.

Lack of trust and weak contract enforcement along the pig supply chain

ProcessingCompetitive Disadvantages in the Pig Supply Chain

Who affects the consumer (and why)? The changed nature of the food supply chain throughout the example

of economical crisis

Chain before 2-3 generation: short, simpleChain before 2-3 generation: short, simple„austerity virtue”•Economization

•Recycling•Direct relation

(CONFIDENCE!!!)•Full traceability

•True food

„austerity virtue”•Economization

•Recycling•Direct relation

(CONFIDENCE!!!)•Full traceability

•True food

Disadvantages•time-consuming•labour-intensive

Disadvantages•time-consuming•labour-intensive

CHAINS NOWADAYS: LONG and DIFFICULT

CHAINS NOWADAYS: LONG and DIFFICULT

The crises brought the renaissance of these values BUT

We want them without disadv!

The crises brought the renaissance of these values BUT

We want them without disadv!

Traditional key position: at least 1 „nutritinal top manager”

All Functions

Raw materials

Household Food

Input suppliers

Agric. Prod.

Food Industry

Retail Consumer

Publ. Admin.

& Authority

By Who and why is driven the Chains?Concentration: declining of the traditional retail chains

14 13 12 10 10 9,8 8,9 8,9 9 9 4

1 1 1 4 4 2 2 2 2 33

28 25 24 21 17 16 15 15 14 1410

7 10 11 14 16 15 15 14 14 14

13

6 5 4 4 43 3 3 3 2

1

16 15 15 15 15 17 17 18 18 1722

15 15 14 14 15 14 15 15 17 1922

14 17 19 21 22 24 24 25 23 24 25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

I. fé

lév

2013

(p)

Hypermarkets

Supemarkets

Hard discounts

Cash&Carry

Hungarian retailchains

Groceries

Drogeries

Others

Source: : GfK HungáriaSource: : GfK Hungária

Along the modern retail chains, alternative retail chains: others+

groceries = 42% (2000)

Along the modern retail chains, alternative retail chains: others+

groceries = 42% (2000)

Along the modern retail chains, alternative retail chains: others+ groceries = 23% (2009 I. semester)

and 14% (2013projected)

Along the modern retail chains, alternative retail chains: others+ groceries = 23% (2009 I. semester)

and 14% (2013projected)

Contradiction along the Food Supply ChainThe Aim in the hole food supply chain (consumer!) to maximize the profit!

Anticipated profit is not crime. It is natural demand (Economical questions).

„You want to achieve the best”(1st keyword)

Innovations can answer to all demand.

FertilityRigidityStorable

Easy of proccessStandardized qualityLow level of losses

KeepableStandardized scale

Easy to sell

Packaging,tasteconvenienceFood-safetyTraceability

•The different demands can lead to contradictious product characters (engineer questions). „Time of the Sophisticated demands”(2nd keyword)•Difficult and costly to find out a product character, which is essential for the consumer and which is not easy to replace (Marketing). „ban of replaceable” (3rd keyword)

The requirements concerning the food differ in the hole supply chain.

Swiss

Input suppliers

Agric. Prod.

Food Industry Retail Consumer

Publ. Admin.

& Authority

Production (1)

Lack of specialization at farm level: sow keeping, pig breeding, pig fattening phases are not separated.

Heterogenic biological basis, few breeders, small stock, small selection basis.

Pigs with high value genetics can not be kept at fattening farms, which do not have perfect animal health status and up-to-date technology.


Cross-compliance regulations, regarding to environmental/animal welfare/animal health status, cause competitive disadvantage to farmers, especially during economical/financial crises.

High interest rates and the lack of capital (foreign capital interest rates: 14-15%).

Keeping pigs requires land area (manure disposal, producing grain fodder).

Fees coming from different authorities are high (veterinary inspection charges, rendering costs of animal by-products etc.).

Guarding and protection also increases production costs (may constitute 0,5% of the production value);

Geographical disadvantages.

Production (2)

Impacts of the Crisis on the Hungarian Pig Supply Chain

•„…no crisis in agriculture except the credit crisis…”;

• credit is important for the agricultural input industry;

• credit insurance companies zeroed he credit lines of 30-40 big Hungarian agricultural companies;

• the objective of investments became cost reduction, not the enlargement of capacity;

• the solvency of the domestic buyers;

• Producers were expecting feed producers to finance production and to receive payments after some delay;

Input Suppliers


•Pig farmers were expecting serious consequences when the economic-financial crisis developed but in fact seasonality, i.e. the classical pig cycle, had a stronger impact. •the weak HUF made the imports of slaughter pigs more costly, domestic pig producer prices remained lower than forecast;• most farmers tried to avoid using credit;•The feeding of home made feeds became more frequent;

Pig Producers


•The crisis did impact the supply of raw materials for processing.•It seemed that the consumption of basic food did not decrease to the same extent as of other products. most farmers tried to avoid using credit;•Imports stop at an exchange rate over HUF 300, and exporters’ profit grows. •Interviewees differ on the impact of the crisis on the demand for food products;•One stated that neither the volume of sales nor sales revenue declined due to the financial crises. •Another said that the demand for pigmeat and pigmeat products had been declining. •However, retail prices remained relatively stable in the region due to the demand from Romania.

Processors

• Retailers are trying to cap prices, thus, for the consumer, there have been no perceptible impact of the 5 % VAT increase in July 2009, at least in the case of pigmeat and pigmeat products. Exports to some countries had fallen due to the lack of credit to importers;

• Processors cut back on spending where possible, but invested in improving efficiency;

• The domestically owned and legally operating meat processors were mainly hit by the consequences of the economic and financial crises;

• The increase in the rate of VAT was to the advantage of the illegal market players in the food supply chain;

• In Hungary, the retail sector was in favour of the financial crisis because they had a stronger negotiating position with the suppliers.

Processors

Future of the Hungarian Pig SectorFuture of the Hungarian Pig Sector

Meat processing•Strategy: marketing based approach instead of production based approach;•There exists internal market;•Own marketing channels;•Own grocery in large scale supermarkets;•First: Stabilized internal market, Second: export to EU market (not contrary);•Export strategy;•Adequate quality and quantity of pig-meat;•Reorganisation of meat industry;

Pig production•cooperation (producer groups);•Cooperation of pig producers and meat processors (interdependence);•Reduction of exposed efficiency difference; •Efficient farm advisory system.

State activity•Favourable macro economical environment;•Keep back the black economy.

Thank you for your attentionThank you for your attention!!

E-mail: [email protected]: [email protected]

Competitiveness of the Pig Production in Hungary

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