STRUCTURING MODERN AGRI-FOOD SECTOR IN CEE COUNTRIES
CZECH REPUBLIC
Dr. Tomás Doucha
Deputy Director
Research Institute of Agricultural Economics (RIAE)
Prague, Czech Republic
INTRODUCTION
The document describes some aspects and factors linked to the
formation of a new agri-food sector in the Czech Republic after
1989. The document focuses on the price and price relations developments,
on the development of the new forms of integration in the agri-food
sector and on the role of state, foreign firms and capital in
modernization of the agri-food sector. These aspects influence
the development of terms of trade in the agri-food chain.
1. Price formation in the agri-food chain in the Czech Republic
during the reform period
The price and price relation developments in the Czech agri-food
chain since 1989 are shown in table 1 and in graph 1.
Table 1 - Price developments in the Czech agro-food chain (1989 = 100)
| CPI | |||||||
| Farm prices | |||||||
| - crop production | |||||||
| - animal production | |||||||
| Processors prices | |||||||
| Retail food prices | |||||||
| Input prices | |||||||
| Exchange rate (CZK/USD) | |||||||
| CPI/Retail food prices | |||||||
| Input prices/Farm prices | |||||||
| Processors prices/Farm prices |
1) 1995 - provisional, end of the year
Source: Report on the Czech Agriculture 1995 (Ministry
of Agriculture)
During the reform period, the price and price relations developments
presented in the table 1 were influenced especially by the following
factors:
a) The supply/demand development on agricultural market
Considering almost constant number of population (10,3 mio) during
the period of 1989-1995, we can present the development of the
domestic demand for agricultural products by the development of
the per capita consumption for main foods (see the graph 2). This
development was influenced by the abolishment of consumer subsidies
in 1990, by the price liberalization in 1991, by the introduction
of the VAT system in 1993 and by the corresponding changes in
price relations and in the structure of the household expenditures.
Compared with 1989, these factors together with the decrease of
the real purchasing power of population have resulted in the significant
decline of demand. Since 1993, the demand for foods has stagnated
or has slightly increased for some commodities. However, the expenditures
on food (including beverages and tobacco products) amounted to
nearly one third of the total household expenditures (32 % in
1994).
The supply development can be in general characterized by the
development of the gross agricultural production, as it is shown
in the graph 3. Corresponding to the demand development, but with
some delay, the supply of agricultural products has also decreased.
The decrease deepened particularly in the period of 1991-1993.
For the first time in the reform period, agricultural production
has grown in 1995 in comparison with 1994.
Livestock production has declined more than crop production during
the reform period. The decline in livestock production was caused
by the decrease of the number of animals and in the same time
by the stagnation of yields (productivity). The number of cattle
has dropped by 42 % (of which cows by 38 %) in 1995 in comparison
with 1989.
With regards to the crop production almost all agricultural land
(4,2 mio ha) is still used, with a stagnation of cereal area,
a decline of sugar beat and potato areas and an outstanding increase
of the rape seed area. In the case of the rape seed area, the
acreage increase is a consequence of the growing demand for
food and non-food processing, the latter being linked with the
construction of new processing capacities for bio-oil. The consumption
of the rape seed for this purpose amounted to more than 100 thousands
tons in 1995, about one sixth of the rape seed production. The
total decline of crop production in comparison with 1989 is caused
especially by the decline of yields, as a result of the shortage
of finance for variable inputs (fertilizers, pesticides etc.).
Graph 1
Graph 2
Graph 3
b) The trade developments
The general tendency of the agro-food trade in the transition period was a dynamic increase of trade both in imports and exports. However in the years 1994 and 1995 the rise in import is much higher than the rise in export. The trend is also reflected by the evolution of the agro-food trade balance (-8.5 bio CZK in 1994; the estimated total deficit of agro-food trade balance for 1995 is 12,5-13,0 bio CZK).
The developments of the two years, 1994 and 1995, can be characterized
as a return to the pre-reform situation as the agro-food trade
balance is concerned. As shows the table 2 the shares of agro-food
trade on the total trade did not changed dramatically. The share
of total import remains stable, while the exports after a rise
of its share in 1991, decreased during the following years but
its share still remained above the pre reform level. To summarize,
the role of the agro-food trade in the economy has not changed
substantially during the reform period.
Table 2 - Agro-food trade and total Czech trade (bio CZK)
| Total exports | |||||||
| Total imports | |||||||
| Trade balance | |||||||
| Agro-food exports | |||||||
| Agro-food imports | |||||||
| Agro-food trade balance | |||||||
| Agro-food share on total exports | |||||||
| Agro-food share on total imports |
1) provisional
The figures 1989 -1992 are for Czechoslovakia, 1993-1995 for the Czech Republic including the trade with Slovakia. The values for 1989 are calculated at 1989 exchange rate, for 1990-1995 at current exchange rate.
Source: RIAE, Custom statistics CR
In the 1994-1995 period the decline in exports of animal products was a consequence of the fall in animal numbers (this process is to be considered as the recessive adaptation of the agricultural production sector to new market conditions).
The agro-food trade situation in the years 1994 and 1995 is reflecting
the decline of exports (especially in the meat exports), the level
of which was in the period of 1991-1993 influenced by huge surpluses.
Nevertheless, food exports are still dominated by milk and milk
products where a surplus production (compared with the internal
demand) is still persisting. An important and till 1993 dynamic
group of exports is represented by beverages and dominated by
beer export (which has to be considered together with malt and
hops as the product traditionally exported on the bases of comparative
advantages). In 1994 and 1995 the export of beverages remained
at the level reached in 1993. In 1994 and 1995 export of oilseeds
and animal feed stuff increased. Hops and malt are the other important
exported products. The shares of the other main product groups
have not changed substantially. The share of grain exports is
largely depending on the size of the domestic harvest. In 1995
(first half) the grain export were influenced by the exports of
the stocks of the State Fund for Market Regulations (SFMR) from
the 1994 harvest.
The commodity structure of agro-food imports remains fairly stable
with no major changes in the general trends. The main imports
(in value terms) are fruits and vegetables representing around
20 per cent in the period 1991-1995. The second most important
group of imported products are tropical beverages (coffee, tea
and cocoa) representing about 11 per cent. In reaction to structural
changes and decrease in animal production the imports of animal
feed are continuing to fall. Imports of soya cakes fell from 14
to 5 per cent in the period 1991-1995. Tobacco and related products
are also a major import item (about 10 per cent). The analysis
of the commodity structure of the agro-food trade in 1994 and
1995 is confirming these tendencies especially as the rise in
imports of tropical zone products are concerned.
c) Market protection
The protection of the domestic agricultural market has been developing
roughly in three stages during the reform period, as it is presented
in the table 3.
Table 3 - The development of agricultural market protection in the period of 1989-1995
| General level of tariff protection | relatively very low, on the level of about other goods | higher: the increase of tariffs (approximately on the level of the EU tariffs) after the implementation of the new tariff system in 1992 | the implementation of the UR GATT in the tariff system, with the protection on the level as of 1994, including the tariffication of import levies |
| Tariff preferences and concessions | insignificant | concessions in the framework of the European Agreement and agreements with the EFTA countries; the establishment of the custom union with the Slovak Republic in 1993 | updating of the European Agreement and other agreements as a consequence of the UR GATT and the enlargement of the EU |
| Non-tariff protection | administrative system of licenses on imports, exports | the implementation of import levies | the abolishment of import levies (their tariffication); ad hoc strict application of licenses (especially on exports - cereals, flour) |
| Influence of the exchange rate | considerably protective influence after the devaluation in 1990 | the decreasing protective influence of the nominal exchange rate by its gradual appreciation (approximately by 8 % per year) | |
The effects of the tariff protection of selected commodities are
presented in the form of the so-called landed prices (see the
table 4). These prices are calculated on the base of world prices
in CZK, increased by the level of tariff protection. In this way,
landed prices represent an upper limit for the growth of the domestic
prices, issuing from the level of the tariff protection.
Tab. 4 - Landed prices in 1994 (CZK/t)
| Wheat | ||||
| Barley (feed) | ||||
| Rape seed | ||||
| Sugar (refined) | ||||
| Cattle (lwe) | ||||
| Pigs (lwe) | ||||
| Poultry (lwe) | ||||
| Milk |
Exchange rates used: CZK/ECU 24,06, ECU/USD 0,841
Source: A prognosis of world prices, EU prices and
prices in the Czech Republic in 1994, 1997 and 2000 (working document
RIAE, Vojtìch, 1995)
As indicated in the table 4, the level of tariff protection, in
spite of the decreasing protective influence of the exchange rate,
has still been sufficient for the majority of commodities, with
exception of pigs and milk. Besides this, we have to consider
the imports of some more subsidized foods from the EU (fruits)
and the lower tariff imports which fall under the framework of
trade agreements. For example, the agreements in the framework
of the CEFTA (Additional Protocol Nr. 3, 1995) and the bilateral
agreements with Poland and Hungary which came into effect in 1996,
forming a more competitive condition for domestic producers (e.g.
in case of poultry, vegetables and potatoes).
d) State market regulation
After the price liberalization in 1991, the state has interfered
into the agricultural market through the activity of the State
Fund of Market Regulation (SFMR), through buying out agricultural
surpluses and subsidizing their exports. In 1995, the state continued
to interfere in the market functioning by applying licenses (in
the competency of the Ministry of Industry and Trade - see the
table 3). The dimension of the state intervention in agricultural
market through the SFMR during the reform period is evident from
the figures in the table number 5.
Table 5 - Expenditures on market regulation in the period of 1991-1995 (bio CZK)
| Expenditures from the state budget on the SFMR | |||||
| Net expenditures of the state on market regulation | |||||
| Share of net expenditures on market regulation in total subsidies for the agro-food sector (%)1) | |||||
| Share of net expenditures on market regulation in adjusted value of agricultural production (%)2) |
1) including tax concessions
2) adjusted value of agricultural production according to the method used by the OECD for PSE calculations.
Source: Review of agricultural policy, market and
trade developments in 1995 - Czech Republic (OECD, 1996)
The main mechanisms and instruments used by the SFMR:
× intervention purchases of the
selected commodities at guaranteed (minimum) prices and exports
of intervention stocks (or exceptionally the selling these stocks
on the domestic market, as in case of cereals in 1995/1996); since
1994, the intervention purchases at administrative (institutional)
prices with advance (before harvest) payments has been applied
for food wheat,
× assignment (distribution) of
export subsidies to export firms on the base of tenders and under
some special conditions (e.g. the purchase of agricultural products
by processors at least guaranteed - minimum prices); this mechanism
has been used only for dairy products since 1994.
As a rule, institutional prices are stated on the level of unit
costs in the better than average farms (milk) or under the level
of market (world) prices (wheat).
In general, after the period of big surpluses (1991-1993), the SFMR has developed in a special institution functioning as a distributor of export subsidies to private firms (dairy products) and as a state trade firm in case of cereals, respectively. As a state trade firm, the SFMR gains much better terms of trade than private trade firms can usually achieve. There is also a question of better access to cheaper bank credits for the advanced payments to farms for cereals.
e) The situation in transformation - privatization of the national
economy
In general, the real privatization in farm sector is to some extent
ahead of the real privatization in up- and downstream sectors
(with exception of the privatization in retail sector, based prevailingly
on the small-scale privatization). Firms in up- and downstream
sectors were prevailingly privatized by the coupon privatization.
In 1995, after the two official waves of privatization, an unofficial
"third wave of privatization" started, aiming at a concentration
of the still extremely scattered ownership and capital and at
a formation of real owners of firms. The part of property (about
20 %) of firms in the food industry and distribution sectors has
still remained in the hands of the state. The foreign capital
has started rapidly to penetrate into both sectors, especially
into the more lucrative food industry firms and into the retail
sector. A natural downstream structure, consisting of the
mixture of small, medium and large enterprises, has been gradually
emerging. However, in some branches (vegetable oil, confectionery)
the highly concentrated structure is dominant, with the decisive
role of 1-2 firms in production. In spite of these facts and the
liquidation of several big firms (meat processing, dairy, sugar
refinery), it is necessary to stress, that a needed production
and economic restructuring processes are still in the initial
phase. This applies especially to the food industry with still
existing overcapacities (20-40 %, depending on sectors).
2. Market and contractual form of agro-food vertical and
horizontal integration
The development of the agri-food chain has been influenced by
new contractual forms and new forms of vertical or horizontal
integration, introduced in the last years. First, there is a question
of capital linkages between farms and downstream firms. In the
course of the two waves of the coupon privatization, the state
has reserved about 20 % of shares of downstream firms for their
future sale to farms at reasonable prices. In 1994, the Fund of
National Property transferred these shares to the new established
Support and Guarantee Fund for Farmers and Forestry (SGFFF) to
strengthen its portfolio. The part of shares was already sold
to farmers. However, in several cases farmers immediately sold
these shares to other interested people, particularly to foreign
investors (sugar refineries, dairies). The SGFFF has started to
deal with the remained shares on free market.
The government also supported capital linkages between food industry and agriculture, suggesting a capitalization of claims of farmers towards food industry and by the direct support of building up processing capacities on farms (till 1993). The government has also interfered in relations between processors and farms with other instruments, e.g. with export subsidies for food industry firms, assignment of which has been conditioned by payments in time to farmers and at minimum (guaranteed) prices. In case of food wheat, the SFMR offers to farmers contracts with advance payments before harvest (see also the part 1).
The Commodity Exchange, established during the reform period,
has not yet any influence on market.
Milk producers have established 15 (regional) cooperatives and
joint companies for the distribution (delivery) of milk from producers
to processors. These companies provide services for approximately
25 % of the Czech milk production. The Ministry of Competition
has argumented with cartel agreements and some of these companies
were penalized. Nevertheless, activities of these companies have
contributed to the increase of farm prices of milk.
Long-term contracts (3-5 years) between rape seed producers and
processors, including the delivery of special inputs, are in the
stage of preparation. At present, a system of "contracts
on future contracts", based on general conditions agreed
by the Association of producers and processors and with minimum
prices for the first two month after harvest, is used in the sector.
The similar aims are pursued in the meat sector. Several big processors
and traders are preparing a joint company for processing and marketing
of meat products.
The Agrarian Chamber, associating farmers and a part of food industry,
is trying to establish a system of long-term contracts between
the mentioned interest groups.
However, this effort does not meet with the position of the Ministry
of Competition, argumenting with cartel agreements. For this purpose,
the Ministry of Agriculture suggested to exclude agricultural
commodities from the Competition Law, so far without success.
Under these conditions, informal agreements among processors have
the higher impact on market. In March 1996, the Association of
Processors, pursuing interests of processors inside of the Agrarian
Chamber, was established.
3. Role of state policy in promoting agro-food development
The state has influenced the agri-food sector not only through
market regulation (see the part 1), but also by means of its structural
policy. After 1994, the structural policy in agriculture, introduced
by legislative, subsidy and tax instruments, has been oriented
especially on meeting the following goals:
× completing the privatization
(particularly the privatization of the state land) and restitutions,
× modernization of agriculture
through cheap credits (soft loans, interest subsidies) and credits
with the state guaranty,
× restructuring of agriculture
in less favorable areas through direct subsidies on afforestation,
grassing and maintenance of grassland (countryside),
× development of a non-food use
of agricultural products, particularly the development of production
of bio-oil.
The total support of the agro-food sector from the state budget
is apparent from the figures in the table 6.
Table 6 - Net expenditures of the government on the agro-food sector
| 1. Price support | |||||
| 1.1 Internal price support | |||||
| 1.2 Export subsidies | |||||
| 2. Direct payments | |||||
| 2.1 Produce support | |||||
| 2.2 LFA support | |||||
| 2.3 Compensation payments | |||||
| 3. Other support | |||||
| 3.1 Investment support | |||||
| 3.2 Input subsidies | |||||
| 3.3 General services | |||||
| 3.4 Other sources | |||||
| 3.5 Tax exemptions | |||||
| Total |
1) provisional
Source: Ministry of Agriculture, SFMR, SGFFF, RIAE
The main instrument of the credit policy
since 1994 has been the Support and Guarantee Fund for Farmers
and Forestry (SGFFF). The main sources for its functioning are
state budget (in 1994 2,6 bio CZK, in 1995 2,3 bio CZK) and shares
of food industry and distribution enterprises from the two waves
of privatization (the nominal value of shares was about 5,9 bio
CZK, the present market value of shares is about 2,6 bio
CZK).
Besides the original programs (schemes)
of the SGFFF (FARMER, OPERATION, YOUTH, LANDSCAPE), in 1994 and
1995 the further programs, for solving temporary problems as a
rule, have been introduced (SERVICES, AGROREGION, RESTITUENT,
PRIVATISANT, OLD DEBTS). In all of these schemes the SGFFF gives
the support in the form of guaranty on bank credits and/or in
the form of interest subsidies.
Through the services of the SGFFF more
than 16 bio CZK of bank credits and about 1 bio CZK interest
subsidies were directed into agriculture during the period of
1994-1995. The average interest rate after deduction of support
amounted to about 2,7 % (in 1994).
The SGFFF undoubtedly contributed significantly
to the flow of needed credits to agriculture, with considerably
high multiplicative effects of invested state money. Nevertheless,
especially from the side of the Ministry of Finance there are
some objections regarding the activity of the SGFFF. These objections
concern e.g. infringing the principle of neutrality from the side
of the government in allocation of capital and the operative use
of the SGFFF for solving topical (temporary) problems.
Food industry uses the similar services
of the Czech-Moravian Development and Guaranty Bank (CMDGB) aimed
at promoting the development of small and medium undertaking (in
1995 the net support was about 100 mio CZK).
Besides the activities of the SGFFF
there were other investment supports for the modernization and
reconstruction of agriculture:
× soft
loans for investments in the period of 1991-1994 (about 8 bio
CZK in total),
× direct
subsidies for afforestation, grassing and construction of newvineyards
and hopyards,
× direct
subsidies for the anti-erosion measures and on the cleaning of
ponds.
Other support policies included subsidies
for general services for agriculture. The main part of these subsidies
were aimed at giving the support for genetics, development of
informatics, extension services, research and education.
4. Foreign capital and multinational corporations in the
process of agri-food sector modernization
Foreign capital is step by step penetrating into the up- and downstream
sectors. Direct foreign investments in food industry amounted to 424,5 mio USD
during the period of 1990-1995, which
represents 7,3 % of the total foreign investments in the national
economy.
Foreign capital penetrated into the
food industry especially in dairy, starch production, sugar refinery,
brewery, confectionery and other food production with higher value
added.
The ownership of enterprises in the
distribution sector (input supply, elevators) after the two waves
of privatization is proportionately divided among investment funds,
the government and small shareholders. A big move in ownership
in 1995 was initiated by investment funds. There are signals that
a part of property in this sector fell under control of foreign
firms. In other upstream sectors the positive effect is the increasing
competition, including foreign competition.
The structure of wholesale and retail
sector is beginning to influence the trade relations in agro-food
chains. The growth of food import is caused not only by a growing
demand for food of a higher quality, but also by the penetration
of subsidized food from international firms from the EU into the
privatized marketing chains, which are to a large extent in the
hands of foreign firms (Meinl, Delvita, Kmart etc.). There are
also more convenient terms of payment in case of import of foreign
food. Only few domestic entrepreneurs have penetrated into the
marketing chains and supermarkets.
5. The development of terms of trade in particular links
of agri-food chain
The development of the aggregate price
indices (see the table 1) reflect to a considerable extent the
development of the position of the particular links in the agri-food
chain on market. Terms of trade have also been influenced by other
aspects, presented in the parts 2-4. The development of terms
of trade is briefly described in the table 7.
Table 7 - The development of terms of trade in the agri-food chain
| Input suppliers | a relatively advantageous position, given by the monopolistic position and by the anti-import influence of the exchange rate | the position is getting worse, which is caused by sharpening of foreign competition and by a partial demonopolization |
| Farmers | an extremely disadvantageous position, given especially by the supply/demand inequilibrium (surpluses) and by the price scissors | the position is getting better, which is caused by the increased competition in upstream sector, but particularly by the lower agricultural production and by the competition among processors "in the battle for agricultural products" |
| Processors | a relatively advantageous position, given by the monopolistic structure, by the surpluses of agricultural production and by the state support of exports | the position of the still only formally privatized food industry firms with overcapacities is getting worse; the competition "in the battle for agricultural production" pushes the prices of agricultural products up, but in the sharp competition among processors the higher prices for raw materials can not be fully projected into processors prices1) |
| Wholesale and retail sector | relatively the most advantageous position in the chain | the preservation of the advantageous position as a consequence of the competition among processors and the weak pressure from the side of consumers |
| Consumers | relatively the most disadvantageous position in the chain | the preservation of the disadvantageous position, but with a growing interest of the state in protection of consumers |
1)
as a consequence of the competition some big food industry enterprises
(meat processors, dairies, sugar refineries) were liquidated during
the last years.
Consumers are protected by the Consumers
Protection Act. However, since 1 January 1995 the obligatory technical
standards for foods were abolished. The government approved in
1995 the principles of the Food and Tobacco Act. There are problems
with the definition of competencies of the state inspection institutes
in the agro-food market, it means competencies of the Czech Agricultural
and Food Inspection, the Czech Market Inspection, the State Veterinarian
Office and the Hygienic Services of the Ministry of Health. If
the Parliament approves the draft of the Food and Tobacco Act,
its functioning is not expected before 1 July 1996.
The shares of particular links in the
total value added of the agri-food chain is difficult to ascertain,
because the Czech statistics still does not monitor sectoral values
added and their intersectoral relations. Nevertheless, the Czech
Agricultural University of Prague tried to estimate these shares.
According to analytical studies of the Czech Agricultural University
of Prague, the shares of particular sectors in the 100 CZK expenditures
on food were in the period of 1992-1993 the following: 23,90 CZK
agriculture, 26,30 food industry and 49,80 CZK other sectors (input
sector, distributing sector) (In: " Adaptation of the agro-food
sector on the integration of the CR into the EU. Svato., M. et
al, CAU, Prague 1995").
The relative weight of the farm sector
in the agri-food chain can be approximately derived also from
the share of farm prices in retail prices, as shown in the table 8.
Tab. 8 - The share of farm prices in retail prices (in %, 1992)
| Cereal products | |||
| Meat and meat products | |||
| Milk and dairy products |
Source: Report on the Czech Agriculture 1995 (Ministry
of Agriculture 1995), RIAE - Štiková
The calculation and comparisons in the
table 8 were provided by the Research Institute of Agricultural
Economics Prague for 1992. Rough estimates for 1993 and 1994 show
that the share of farm prices in retail prices stagnated or slightly
decreased. However, these shares still highly exceeded analogical
figures of developed countries.