16 April 1999

Hungary pioneers stand to prosper

In the second of our series

on farming in central and

eastern Europe, Philip Clarke

travels to Hungary to see

how one British farm

management company has

fared as the country

prepares for EU accession

THERE is a theory about pioneers which says it is best to come second.

The first to arrive in a new territory get killed by the natives, while those who are third are too late. It is those in between who reap the biggest rewards – or so the theory goes.

But Richard Merrikin is not so sure. In Hungarian agriculture, the westerners who moved in immediately after the collapse of communism in 1989 stand to gain the most.

These earliest pioneers were able to buy land outright, acquiring an asset that is almost bound to appreciate, especially once the country joins the EU.

Mr Merrikin did not reach Hungary until later on. "We had been trying to find a farm of our own for some time. But every time we bid, we were pipped at the post by the Italians or Austrians who were already here. We felt we were not in the know."

But then, in 1995, an advert for someone to contract farm 4000ha (9880 acres) on the great Hungarian plain in the east of the country appeared in farmers weekly. Mr Merrikin and his partners tendered through managing agent Bidwells and won the contract.

The unit was owned by a property development company, which had bought the former state farm before foreigners were barred from owning land in 1993.

Arriving in September 1995 at Tizsa Farm, near the village of Kiskore, Mr Merrikin found a business in serious trouble.

"The whole economy was in a mess. No money had been invested in the farm for six years. The country had just suffered from 10 years of drought. It was all very run down."

The first job was to improve soil structure. "Compaction and bad drainage was a real problem. The Russians had previously filled in all the ditches to make the fields bigger, tillage had been kept to a minimum and most drilling had been done with the fertiliser spreader," says Mr Merrikin. Using two large tractors imported from the UK, the management consortium set about subsoiling, ploughing and drilling, putting in as much wheat as possible before the snows arrived.

Winning the confidence of the workforce was another priority. "There was a real suspicion of foreigners," recalls Mr Merrikin. "Many of the first incomers had asset stripped the holdings and earned us all a bad reputation."

A lack of motivation and a slowness of the older generation to change from a communist mentality is still seen as one of the biggest problems in progressing the business.

To counter this, Mr Merrikin concentrated on the younger staff, encouraging them in capitalist thinking and devising a proper career structure. In total about 100 people work at Tizsa, compared with about 400 when it operated as a state farm.

But despite the smaller workforce, Mr Merrikin has continued to expand the business over the past four years. In April 1996 another 1500ha (3700 acres) became available at Heves, a few miles to the north. And since then, various plots have been taken on, effectively linking the two units.

"Much of this area has been released by farmers who were given the land following the break up of former state farms, but have since discovered they cannot make a living."

This additional land is rented, being about the only way westerners can now get into farming in Hungary. The deals are constructed so as to give the management first right of refusal when Hungary joins the EU and land ownership rules change. Rents average about £15/ha (£6/acre) and the total area farmed now extends to almost 8000ha (19,800 acres), ranging from clay loam near Kiskore to sandy soil at Heves.

"Normally we go for a typical English rotation, with two-thirds winter-sown cereals and one-third spring break crops," says Mr Merrikin. "But this year is very different. Heavy rain from September to December meant we could only get about 10% of our area drilled."

There is even about 50ha (124 acres) of last years maize still to be harvested and this years cropping will be dominated by spring varieties (see table).

"Normally we reckon to get about 20in of rain a year. This season we got 10in from September to December, with another 5in falling as snow over the winter."

Temperature is the biggest limiting factor, however, ranging from -30 degrees in the winter to +40 degrees in the summer. "We can get frost to the end of April, but then things just take off," says Mr Merrikin. "It is like a glass-house. Sometimes wheat grows so fast it misses out growth stages. But by June we have run out of growing days because it gets too hot."

This puts a real brake on output. "When we first got here, wheat was only yielding 3.5t/ha. With sub-soiling and better management we have got this up to 5t or 6t/ha, but it is hard to get more."

The emphasis is, therefore, on quality, using local Hungarian varieties suitable for breadmaking. "We tried bringing out some Brigadier and Hereward in the early days, but they did not work so well."

Marketing the grain is another challenge. Even after four years, translators are still used for all business meetings. Most deals are done with middlemen and Mr Merrikin is conscious of a Mafia involvement. "Most business is on a one-off basis. It is very hard to develop continuous working relationships," he says.

Barter is not unusual, either. Last season some of the fertiliser requirement was met by providing the Ukrainian supplier with tomatoes.

Market volatility is a way of life in central and eastern Europe, with wheat prices oscillating from ft36,000/t (£140/t) in 1996 to as low as ft14,000/t £41/t last year.

"At the moment our best market is Poland. Despite a 60% import tax, it still pays us ft30,000/t (£90/t) compared with ft20,000/t (£58/t) in the home market," says Mr Merrikin. "It is risky, however. Last year we had a train load of grain returned from the Polish border for no apparent reason, and we still had to pay the freight costs both ways. But others were not so lucky and lost their wheat as well as their money."

The general principle with the export market is to trade in hard currency, insist on a 50% payment up front and never go more than £20,000 in the red.

Selling at harvest is also a "no-no". "So many people in Hungary have no storage there is real pressure on prices." Mr Merrikin is grateful of the 30,000t of storage he has access to at Kiskore and Heves.

As well as marketing, Mr Merrikin has also had to get to grips with the system of government grants.

Until the end of last year, most subsidies were aimed at improving infrastructure and employment. For example, it was possible to get 25% of the cost of new machinery (local or imported) back from the government, plus 40% of any new investment in irrigation. There were also 40% subsidies on interest rates.

The Tizsa unit also got some ft20m (£59,000) in compensation for farming lower quality land.

But this is now changing as Hungary prepares for EU accession. This year the government has begun a detailed land registry as a prelude to area aids being introduced this summer.

"Initially the government said it would pay ft8000/ha (£24/ha) to everyone, which would have given us over ft60m (£176,000). But then it said it would only pay on farms up to 300ha (741 acres), which ruled us out completely," says Mr Merrikin.

The reason, he suggests, is that the government is trying to break the old state-owned co-ops which are blamed for many past abuses of the subsidy system.

Although dismayed by the loss of subsidies, Mr Merrikin says that there is still money to be made farming in Hungary. Gross margins are not spectacular (see table), but overheads are also low. Land is cheap to rent, while the average farm wage is about £100/month.

But Mr Merrikin says his involvement in Hungarian agriculture is a long term strategy, not a get-rich-quick solution. Any profit is ploughed back into the enterprise rather than repatriated. "When we first came out here, we believed accession to the EU would be relatively quick and we would then be able to capitalise on rising land values and a more competitive enterprise. But we stopped living that dream a couple of years ago.

"It is becoming clear that we will have to wait a lot longer than that before the EU is ready to take in new members from the east. And when it does, there is also likely to be a lengthy transition before they are fully integrated."

The recent backtracking on CAP reform in Brussels and Berlin has strengthened that view.

But in the meantime farming in Hungary satisfies the pioneering spirit, says Mr Merrikin, while the rewards will hopefully come to those who wait.

HUNGARIANSNAPSHOT

&#8226 Population 10.5m.

&#8226 Agricultures share of GDP, 7%.

&#8226 Farming covers 6.2m ha, or 70% of land area.

&#8226 4.7m ha of arable land.

&#8226 Land ownership by foreigners outlawed since 1993.

&#8226 Share of land ownership: 5% state farms, 40% co-ops, 55% private.

&#8226 Continental climate (-25C winter, +35C summer, 550mm rainfall).

&#8226 Alluvial soils on Great Hungarian Plain.

&#8226 Cereal output, 5m t (4.2t/ha), mostly milling quality.

&#8226 Grain export surplus of 2m tonnes.

&#8226 Maize output, 6m t (6t/ha).

&#8226 5.4m pigs, up 8% in 12 months.

&#8226 870,000 cattle.

&#8226 Milk output, less than 1bn litres.

&#8226 Agri-food exports of $1.2bn compared with imports of $650m, but trade surplus declining.

Forecast gross margins for 1999

Winter wheat Barley Sunflowers Peas

Yield (t/ha) 5.0 5.0 1.5 2.0

Price ft/t (£/t) 25,000 (74) 20,000 (59) 90,000 (265) 40,000 (118)

Output ft/ha (£/ha) 125,000 100,000 135,000 80,000

(370) (295) (398) (236)

Variable costs ft/ha (£/ha)

Seeds 9000 (26) 8000 (24) 14,000 (41) 17,000 (50)

Sprays 11,000 (32) 6000 (18) 24,000 (71) 25,000 (74)

Fertilisers 17,000 (50) 4000 (12) 12,000 (35) 6000 (18)

Total 37,000 (108) 18,000 (54) 50,000 (147) 48,000 (142)

Gross margin ft/ha (£/ha)

88,000 (262) 82,000 (241) 85,000 (251) 32,000 (94)

Assumes exchange rate of £1 = 340 forint.

Expanded dairy herd a top priority

EXPANDING the dairy herd has been a top priority since Mr Merrikin and his management consortium arrived at Tizsa in 1995.

"When we got here there were just 70 cows, mostly Simmentals and Jerseys," says Jeremy Roberts, who looks after the unit. "Since then we have increased that number tenfold."

Imported Holstein semen has been used to improve the herd performance, with average yields now topping 5000 litres.

Six cowmen do the milking twice a day in a 72 stall parlour, with the milk going into two 8000 litre bulk tanks for daily collection.

Butterfat averages 4% with protein at 3.6%. The emphasis on maximising output means milk hygiene takes a hit, with cell counts at just under 400,000. "New legislation means this has to come down to 250,000 from 2001, but the pressures not on yet," says Mr Roberts.

The milk all goes to a local dairy for UHT, yoghurt and cheese, with a base price fixed at ft61.5/litre (18p/litre). "We also get a ft4/litre (1p/litre) fat bonus, though this will fall as the Holstein influence takes over from the Jerseys."

Calving is all-year-round, with the herd replacement rate high at about 30%. They dont breed for longevity in Hungary.

The extreme climate means stock stay indoors at all times. Maize silage and lucerne make up the bulk of the feed, supplemented with home-grown cereals, sunflowers and soya. "Haulage is expensive and it makes more sense to produce our feed on site," says Mr Roberts. &#42