Much has been made of the potential threat to UK agriculture from the new member states acceding to the EU from eastern Europe, and the potato sector has been seen as a prime example of this. But as with most things, the overall picture is not as simple as it might first appear, and there may well be as much opportunity in the East for the UK sector as there is threat. However, the window of opportunity in eastern Europe for further investment might be relatively small in the short to medium term. Many of the “best bets” might well have already been taken. Don’t forget that many operators from the West moved into eastern Europe some 15 years ago, and have already established a strong presence in the region.
Think back to what happened in Spain after it joined the EU. Initially Spain was seen as a low cost centre of production and attracted a number of key investors to the country after EU accession. However, as land costs and labour prices have increased over the years Spain’s role has changed: now it is no longer seen as the low cost centre in the EU, but as a source of supply that fits in with the all year round nature of production to the UK and other international markets. The mantle of low cost production has now shifted further south, and resides with the emerging north African suppliers such as Tunisia, Morocco and Egypt.
Looking at eastern EU markets and suppliers, it is not unreasonable to assume that something of a similar fate awaits Poland. This country has always been a big producer of potatoes, but in recent years has seen production consistently fall from over 20 million tonnes down to around 13mt a year. A high proportion of the Polish crop has historically gone into the animal feed sector, and although the overall quality of the Polish crop is improving, much still remains to be done vis-à-vis the development of the infrastructure in terms of R&D, storage, distribution and processing facilities. One of the key issues though is how all of this improvement will be funded. Organisations such as the European Bank for Reconstruction and Development based in London, and the EU Commission itself, have poured in millions of pounds to assist with both the improvement of the physical infrastructure and the transfer of technology, but there still remains a huge task ahead.
Further EU funding will help the situation, but the real impetus will have to come in the end from the emergence of the private sector, either from within Poland itself or from outside. Institutional money can only take the country so far. With farm incomes across the East being subject to market forces as the sector opens up after EU accession, the chances that significant investment will come from the primary agri-producing sector are pretty low. Average farm size in Poland is very small, and the sheer scale of activity needed to underpin a major investment is just not there.
Significant activity has taken place over the years in the processing sector, with the likes of McCain and Farm Frites having established their own operations in the region.
McCain, for example, has been involved with the Polish market since the early 1990s when it began selling products to the East from its plants based in the Netherlands. Exports reached such a level that a dedicated plant was justified, and this was built in 1999 in the SW region of Poland. The decision to “come onshore” was made not least because of the difficulties being encountered because of the relatively high rate of import duty being faced by exporters from the West into Poland. McCain now employs over 150 staff in Poland, and from here also supplies other East European markets such as the Czech Republic, Hungary, Slovakia, Slovenia and Croatia where the company has sales offices. The factory in south-west Poland is operating with state of the art technology, and to date produces a reasonably limited range of frozen potato products.
Other food processors have been attracted into the East European market on the back of investments made by large scale operators such as McDonald’s and other fast food businesses that in effect want western standard quality at East European prices.
Organisation of the supply base has often been a major problem, and has required a huge commitment in terms of management time and resource to make it work. Not least, building trust and confidence with locally based producers has been a big challenge. After the collapse of the Communist system which saw everything in effect controlled from the centre, any sense of supply chain relationships broke down, and there was often huge conflict between the grower and what remained of the previous State-run processing sector. The situation was not helped at all by incidences of opportunistic trading deals struck with foreign based operators, and at one stage the situation looked to be spiralling out of control, with serious implications for food supply per se.
It has largely been the investment put into the East by large food processors and their suppliers that has helped restore some sense of order to the growing sector, but it is also very clear that the gap between “the best” in eastern Europe and then “the rest” is still huge and will take a long time to close, if it ever does.
What is also clear is that in many cases western EU companies are investing in the eastern markets not so much to supply back to the West, although this might happen in the long term, but initially to supply the local markets in which they operate. This is seen not only in the horticultural sector, but also in other areas of the agri food business such as meat, dairy, cereals, brewing and confectionery.
There has been a lot of talk about how the eastern countries will swamp the West with cheap farm products, but to date this is just not the case, and might not be so for some time to come. The reality of the situation is that at the moment from the Big Picture point of view, the western European agri sector is exporting around 10 times as much to the eastern countries as it imports. No wonder the farming sector in countries such as Poland and Hungary are just as worried about EU accession as some of their counterparts in France and Germany.
So much for Poland: the other reality in eastern Europe is that if one takes potatoes as an example, the level of production is very small. Both Hungary and the Czech Republic produce less than a million tonnes per annum, as do the Baltic States.
Of the other countries to accede to the EU, Cyprus produces less than 150,000t per annum, and has exported its early season potatoes to the UK for well over 30 years. Exports have been organised through a central marketing board which has had mixed success over the years, and problems remain with the basic structure and dimensions of the industry, almost regardless of post farm gate marketing arrangements.
In most of the countries that joined the EU in May 2004, production of potatoes is falling and, with the exception of Poland, is on a relatively small scale. The focus to date has been on supply to the local markets in conjunction with the investment programmes of international food processors. This in itself has been a huge task, and with the challenges of ongoing improvement to quality control, food safety and GAP, the agenda is full.
It might well be that growers and processors in the East continue looking in that direction: market opportunities in Russia for example still hold massive attraction, and to some extent are the more natural markets for Polish and other eastern European operators. The western markets will always be a major challenge for the East, and it might be some time before there is a structural shift in where food is sourced from. Not least, in the western potato processing sector, although there has been radical concentration in plant capacity over the years, there are still major multi million pound investments taking place, and these will not easily be written off.
What opportunities exist for the UK sector in all of this? As stated at the start of this piece, many of the best bets in terms of growing and processing activity might well have already been snapped up, in some cases some time ago. But this is not to say that the door is shut firm.
With the Mid Term Review of the Common Agricultural Policy forcing the farming sector to minutely examine the way they run their businesses, the opportunity to do things afresh is huge. What is clear is that UK expertise and technology is highly relevant to what is happening to the horticultural sector in the eastern European markets: how to grow on a professional basis for demanding retail clients, how to innovate not only the product but also the service that goes behind it, how to introduce new management systems such as HACCP and category management style techniques, and how to drive out costs from a business that is being put under huge structural pressure.
All these scenarios await the eastern European horticultural sector. The UK has been here already, and it might be this experience that is more valuable to other investors in the East rather than the ability to simply grow potatoes. It is easy to work out how much a tonne of produce costs, or should cost - putting a value on hard commercial and technical experience as well as understanding how markets might well develop in the mid to long term is more tricky to define, but should not be undersold.
John Giles is a divisional director with Promar International, a leading agri food chain consulting firm and a subsidiary of Genus plc, a major provider of technical services to the international agri business sector. Promar has been working in eastern Europe since the late 1980s with clients from across the supply chain. The company is based in the UK, but also has offices in North America and Asia. John Giles can be contacted at the following email address: jgiles@promar-international.com
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