It is already clear what the new target countries will be for Hungarian agricultural exports
Only a “break-out” can help, i.e. advancing of companies towards higher added value and development. We need to reach the production volume and quality level of EU competitors in Hungarian agriculture, Ákos Varga, chairman of the board of UBM Group, told Portfolio. According to the head of the feed producer, grain and protein crop trader group, many Hungarian food producers are internationally competitive, and many demanding markets are no longer “averse” to Hungarian products, and even specifically look for them.
According to statements by the Ministry of Agriculture, an additional 4,300 billion HUF will be available for the development of agriculture until 2027, with the modernisation of the food industry being a priority. What do you think are the biggest gaps in the industry today, and where are the greatest needs for improvement?
The food industry is an important and strategic sector for all countries, in terms of the use of agricultural land and self-sufficiency, and that is particularly true for Hungary, due to its more favourable conditions and high share of food exports. This may also have contributed to the priority given to it in Hungarian government support policy in the following years.
One of the major problems of the Hungarian animal product and food industry is economies of scale. Only those who can produce food at a reasonable cost, with the quality required by the market and meeting sustainability criteria can survive in a fiercely competitive market. Accordingly, priority should be given to supporting investments and developments that meet competitiveness criteria.
Fortunately, the Hungarian food industry provides the main product groups for domestic consumption, but since 35-45% of the Hungarian food industry’s products are sold on export markets, the primary condition is international competitiveness and full compliance with the conditions of the EU markets, to which a well-formulated support can make a major contribution.
Forecasts show that the global population will increase sharply in the coming decades, to more than 10 billion people. How much opportunity does this create for the domestic agriculture and food industry?
Rapid global population growth is creating significant additional consumer demand, which, together with the visible increase in solvent demand, especially in developing countries, could be the driving force behind a significant increase in food production. This growth cannot be achieved in an extensive way, it requires a concentration of available resources and production, and the same is also true for the potential of domestic agriculture and the food industry. As Hungarian exports are currently mainly directed towards EU markets, it would be necessary to expand our export markets in order to increase volumes.
Although demographic growth is impressive, the distribution of this growth has a fundamental impact on market opportunities. While some countries and regions are experiencing rapid population growth, others are experiencing drastic population decline, such as China or Eastern Europe. Accordingly, the market in these countries and regions is shrinking, and they need to expand in other directions.
At the same time, population change is creating not only market problems, but also labour problems, as Europe is ageing and its population is declining, especially in the eastern parts, so there is an increasing shortage of labour, which is also true of Hungarian agriculture and the food industry; it is no coincidence that a large number of foreign guest workers are employed in this sector.
However, from a food production and marketing perspective, the uneven distribution of solvent demand in the world today and even more so in the future could be a problem. In which relations can the domestic food industry’s sales prospects improve the most?
Because of the uneven population distribution, only regions with growing solvent demand, which are geographically accessible to us, i.e. where we do not have a significant logistical cost disadvantage and of course we have the right connections in the country concerned, are the most likely options. Growth cannot be achieved through the export of commodity products, apart from in neighbouring countries, so the solution may be primarily the production and export of value-added products, which is also a basic necessity for domestic food production to be effective.
REALISTICALLY, GIVEN THE MEDIUM-TERM TRENDS, THE COUNTRIES OF NORTH AFRICA AND CENTRAL ASIA WILL BECOME MORE VALUABLE FOR US, APART FROM WESTERN EUROPE, AS MANY COUNTRIES THERE ARE EVEN EXPERIENCING POPULATION GROWTH.
The value of Hungarian agricultural exports has grown dynamically in recent times, but it is striking that the bulk of exports are still destined for the European Union, more specifically Germany, Italy and Romania. How unbalanced do you consider this export structure to be?
The structure of exports is shaped primarily by opportunities, competitiveness and of course by past traditions and relations, so it is understandable that these countries lead Hungarian exports. It is obvious that the European orientation of exports will remain, but it is necessary to extend it to other markets that are still available, in order to reduce exposure and to increase the performance of the domestic food sector.
In addition to exports, the main sales market for domestic food products will remain the domestic market, where, however, there will be a continuing threat from imports. In the long term, how do you think food companies can maintain and increase their domestic sales opportunities?
It is probably the wrong reflex to talk about a continuous threat of imports, as the market typically works logically, i.e. products are imported from other countries because there is demand, because they are more competitively priced or because they serve a customer need or choice. Of course, it can also be ‘disrupted’ if economic conditions in one country are unfavourable compared to others and the imported products become ‘more preferred’.
And of course there are also wrong political decisions, such as the duty-free import of Ukrainian products into the EU, which is a gesture to Ukraine but creates an impossible situation for agriculture in EU countries,
especially in the Eastern European countries, as Ukraine’s characteristics also contribute to grain dumping, but this is something that the countries concerned are trying to deal with politically.
The global Covid epidemic and the consequences of the Russian-Ukrainian war have shown that the importance of safe and high-quality food production for a country is growing and could become a strategic and even national security issue. Can the Hungarian agriculture and food industry meet these growing and more complex requirements?
Fortunately, the Hungarian agriculture and food industry traditionally have a good basis for safe and high quality food production and it is indeed strategically important to maintain self-sufficiency and exports. It is also fortunate that many Hungarian food producers are now internationally competitive (this was not the case in previous decades) and many demanding markets are no longer “averse” to Hungarian products, and even specifically look for them.
The requirements and conditions for production aspects and food have become much more complex and only a part of the businesses can meet them, so efficiency, quality and environmentally conscious production are coming to the fore.
This is expected to further reduce the number of businesses, as not all of them can meet professional, financial, commercial and management requirements, which will lead to concentration. This obviously does not apply specifically to small-scale production or to supplying segmented markets, but it does apply increasingly to high-volume production.
Today, however, food companies are also faced with the fact that domestic food consumption is declining as a result of the drastic price increases of recent years. How much of a problem is this for businesses in the industry and, indirectly, for farmers?
No business can be independent of the constant market and economic pressures. Last year, 45% of the Hungarian food industry’s turnover came from exports, which fell by 15% in the first half of this year, while domestic sales also fell by 12.5%. Even with all the difficulties, the food industry’s importance to the national economy is paramount, with a turnover of HUF 5,500 billion and a profit of HUF 384 billion in 2022, which could fall sharply this year, meaning that food production performance is volatile and profitability could falter. This could “divide” the field to a large extent, i.e. fewer firms will emerge from this downturn.
ONLY A “BREAK-OUT” CAN HELP, I.E. ADVANCING OF COMPANIES TOWARDS HIGHER ADDED VALUE AND DEVELOPMENT,
meeting quality and environmental requirements, while of course significantly increasing efficiency. This requires more efficient operations and energy use, international market and technical knowledge, and of course business courage. We need to match the production volume and quality levels of EU competitors.
Government support (EU and Hungarian) is a key element to adapt to the competitive market situation. Self-sufficiency and support for domestic products is also of strategic importance for Hungary. Support for agriculture and the food industry should not be normative, only internationally competitive companies that can meet the required production conditions and create added value should be given priority.
The significant increase in transfer prices in the food industry was justified by the fact that the costs of the companies in the industry had also risen significantly, but some argued that they had increased prices more than necessary and thus made an ‘inflationary profit’. To what extent has this phenomenon been present in the domestic food market?
The fact that food prices have risen above inflation is not an assumption, as the statistics show that food prices have risen at twice the rate of inflation. While the food industry’s turnover increased by 22.2% last year, which is understandable given the inflation and the fall in turnover, its profits doubled, so it is not difficult to assume that inflationary profits were made. Prices are starting to normalise as demand falls and supply expands (firms are also under a sales pressure) and while they are not expected to return to previous levels, they are heading in a reasonable direction.
The efficiency and competitiveness of the industry could be significantly improved by the resources of the Rural Development Programme. How do you think the situation of food businesses could be eased when issuing calls for support, assessing applications and paying out funds?
As I have said before, improvements are essential to maintain competitiveness and to underpin the strategic importance of the food industry. Calls for proposals should clearly reflect clear expectations in terms of competitiveness, value creation and environmentally sound management. Only internationally viable companies and projects should be supported if we do not wish to waste resources. Clear expectations must be clearly met, and if this can be demonstrated, the administrative burden and procedures can be eased.
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