15 January 1999

Local partner vital

for Czech success

Farming in central and

eastern Europe is not for the

faint-hearted. The language,

infrastructure, climate and

culture all represent real

challenges. But, with EU

membership beckoning, the

potential rewards are also

significant. In the first of a

new series on Farming in the

CEECs, Europe editor

Philip Clarke visits the

Czech Republic to see how

one group of British

investors

is getting on

HAVING a local partner who fully understands the ways of the domestic market is the key to success when investing in central and eastern Europe.

"Westerners are often attracted by the prospects of large areas of fertile land and new, emerging markets," says William England of Sentry Farming, which manages 5000ha (12,500 acres) for British investment company Farmwealth in the Czech Republic. "But very soon they find out its all about contacts. You need a trusted partner to provide a reliable interface with the local customs and cultures."

The local partner in this case is Vlastimil Rosacha, a well-known agri-businessman with an involvement at all levels of the Czech potato trade. Together, Mr Rosacha and Farmwealth have invested in three farms, including the 1850ha (4570 acre) Agrosev at Jihlava, two hours drive south-east of Prague.

This farm is split up into five blocks of arable land, with a 200-cow dairy on one of the sites. Like the other two farms, Agrosev has its own Czech farm manager, Tonda Horejski, to oversee day-to-day operations.

Potatoes make up a sizeable chunk of the farming operation and has been the real growth enterprise since the Sentry Farming management team arrived two years ago.

The area down to the crop has tripled in that time to 260ha (640 acres), though most of the suitable ground has now been accounted for and continued expansion will mean taking more land under contract.

This season over 9000t have been lifted, using two imported Pearson Enterprise Hydros. The main variety is Asterix, which is grown for seed, pre-packing and chipping. Rosara is also grown for the pre-pack trade and Saturna for crisping.

Much of the focus, and some of the best opportunities, lie in improving quality. Like many central and eastern European countries, the Czechs have taken high crop losses for granted. Poor handling and non-existent insulation, despite many weeks of sub-zero temperatures, mean up to 40% wastage is not uncommon.

As such, Mr England and his team have upgraded the main 2500t bulk potato store at Heroltice – the home farm of Agrosev – totally recladding it and installing proper insulation and ventilation.

Another 3600t capacity store takes boxed potatoes for pre-packing, while the remaining 3000t goes off at harvest to aid cash flow.

Prices vary greatly, depending on end use, though this season ware has been fetching about 2.5 crowns/kg (£52/t), with seed getting nearer 6 crowns/kg (£125/t). Average price is about 3.5 crowns/kg (£73/t), with gross margin for the potato enterprise put at just over £1400/ha (£566/acre).

"We do not sell everything on the open market because that leaves us too exposed," says Mr England. "Contracts account for about 60% of our turnover."

Farmwealth has also invested in a joint venture potato packing business, EuroAgras, as another way of countering market volatility. Based on the outskirts of Jihlava, close to the central Prague-Brno motorway, this provides an ideal base for distribution.

A great deal of emphasis is put on developing local farm management skills. "Our role is to find a blend of best practice from the farming cultures of the east and west," says Trevor Atkinson, Sentry Farmings eastern European director. "Undoubtedly we lead the way in terms of attention to detail, but we still have a lot to learn about farming commodities at world prices."

General farm policy is a compromise between local experience, Farmwealths investment criteria and Sentry Farmings financial discipline. "This may sound cumbersome, but it works. Crucially, it gets everybody involved in the decision-making process and helps cement good relations with the staff," says Mr Atkinson.

Through this process, the decision has also been taken to expand the spring barley crop, which last harvest accounted for 537ha (1327 acres) – more than one-third of the arable area.

Yield has been fairly constant at about 4.5t/ha (1.8t/acre), but again the emphasis has been on quality, producing malting barley on contract for the countrys leading maltster, Tchecomalt in Prostejov.

A healthy price premium makes up for the yield penalty, with malting quality fetching 4000 crowns/t (£83/t), compared with 2800 crowns/t (£58/t) for feed. The buyer also subsidises the seed.

The management team was especially pleased to win the national prize for the best malting sample last harvest, another useful step in building credibility with the locals.

The other main crops are wheat and oilseed rape, which together match the barley area.

Wheat is divided 50:50 between breadmaking and feed, averaging 5.7t/ha (2.3t/acre). The crop is aimed almost entirely at the domestic market, with the Czech Republic doing little in the way of import/export business.

Despite this, prices are broadly in line with international levels, with feed wheat valued at 3200 crowns/t (£67/t) and milling quality at 4000 crowns/t (£83/t). "These values are lower than a few years ago because of the drop in livestock numbers and the consequent fall in feed demand during the 1990s," says Mr England.

In common with other central and eastern European countries, the Czech economy suffered during the years of austerity following the collapse of communism, leading to reduced demand for luxuries such as meat.

Wheat markets are supported, to some extent, by a form of intervention. Under this, the government sets the basic floor price and decides on movement times, though the grain itself is kept in farm stores. At Agrosev there are facilities for up to 5000t of cereals to be held.

"Many of our crops are grown on contract, with specifications such as Hagberg, specific weight or admixture similar to those in the UK," says Mr England. "The Czechs have been keen to mirror western-style contracts as part of their preparations for joining the EU."

This also applies to the subsidy system, which mimics the EUs IACS arrangements. Area aid is paid in May and September, though the actual amount is minimal.

"On 1850ha (4570 acres), with a turnover in excess of £1.5m, we only receive about £20,000 direct income support, or 1.5%," says Mr England. "Most subsidies in the Czech Republic are targeted at the livestock sector or towards improving the basic infrastructure." Grants for liming and 10% interest rate subsidies for machinery purchases are two examples.

Input prices are generally similar to those in the UK, with the exception of agrochemicals and fuel, which are more expensive.

Roundup, for example, retails at about 300 crowns/litre (£6.25/litre) in bulk, or 350 crowns/litre (£7.30/litre) in cans. Roundup is extensively used at Agrosev to deal with couch grass.

And diesel is more than double the UK price at 13 crowns/litre (28p/litre). "There is no such thing as red diesel over here," says Mr England. "We get through a lot of fuel as we deliver a lot of produce ourselves."

Seeds are cheaper, at around 6240 crowns/t (£130/t) for basic wheat, though the price range is a wide one. Fertilisers, however, are similar to UK values at 4800 crowns/t (£100/t) for 34.5% ammonium nitrate, and 3360 crown/t (£70/t) for urea.

Since arriving at Agrosev, the Sentry Farming team has made many changes, not least on the machinery and labour fronts. "When we got here the farm had 58 low horse power tractors and 58 dedicated drivers," recalls Mr England. "It was not uncommon to see seven or eight of them all in the same field doing the same job."

This ageing tractor fleet has been rationalised with four new Massey Ferguson machines now doing the bulk of the work. Similarly, seven old Russian combine harvesters have been reduced to two, supplemented by one new Massey Ferguson 40RS.

The most difficult task, however, has been restructuring the workforce, cutting staff from almost 160 to just over 50. "We were able to give them one months notice and three months pay, and have also given many of them part-time work on the potato lines. But inevitably we have encountered some hostility," says Mr England.

Dealing with different attitudes and traditions also takes patience and tact. The Czechs are sticklers for bureaucratic detail. Cattle passports were introduced years ago and even the farm trailers have registration numbers.

Early starts are another feature of life in the Czech Republic, with schools and offices opening their doors at 6.30am. This is so staff can go home at 2pm or 3pm to tend their own garden plots.

"Traditionally, looking after your own plot was a lot more important than working on the state farm," says Mr Atkinson. "After all, thats where most of the food came from. Our Czech staff are just about getting used to the idea of combining on a Sunday or loading spuds after dark, but its taken time – and extra pay – to convince them."

Old habits also die hard, as was revealed when tramlines were introduced for the first time at Agrosev. "The tractor drivers would keep beautiful lines up and down when spraying, but would then drive diagonally across the whole field to fill up again at the water bowser!"

Dealing with staffing problems is just one aspect. An even greater challenge has been integrating into the local trading and political environment.

"The Czechs are not xenophobic by nature – far from it," says Mr England. "But they are definitely suspicious of westerners and it has taken a lot of effort to get accepted."

Developing trust is essential, however, because much of the business is done with an element of barter. "Its not unusual to buy inputs on credit, with a promise to pay in kind at harvest. One of our tractors, which we financed locally, involved part-payments in grain.

"And while everything is done on contract, the payment terms are continually renegotiated, right up to the point of completion – and sometimes after!"

But, despite the challenges, Mr England believes there are still good opportunities for UK farmers to head out east, so long as they have the right attitude, depth of support and partners.

"Many westerners think that all they need is land – and it is certainly cheap to rent. Similarly, the Czechs think that all they need is western capital. But both are wrong. What they really need is management – management is the missing link. And for that to work, both sides need trusted partners."

Agrosev cropping plan 98

Crop ha

Arable

Spring barley 537

Winter barley 62

Oilseed rape 254

Winter wheat 282

Rye 111

Grass seed 44

Potatoes 260

Forage

Grass 118

Hay 20

Lucerne 36

Maize 85

Agrosev gross margins

Winter wheat Potatoes

Yield 5.5t/ha 30t/ha

Price £83/t £73/t

Output £457/ha £2190/ha

Seed £31/ha £417/ha

Fertiliser £63/ha £146/ha

Sprays £63/ha £208/ha

Gross

margin £300/ha £1419/ha

CZECHSNAPSHOT

&#8226 Population 10m

&#8226 Farming covers 54% of land area.

&#8226 27,000 farms.

&#8226 Over 200,000 full-time farm workers.

&#8226 98% of land now privately owned.

&#8226 90% of land is arable land, between 200m and 600m.

&#8226 Land ownership forbidden to foreigners.

&#8226 Continental climate, 485mm of rain.

&#8226 Cereal output: 6.7m tonnes (4t/ha).

&#8226 Oilseed output: 700,000t (2.6t/ha).

&#8226 Sugar beet output: 3.4m tonnes (40t/ha)

&#8226 Potato output: 1.5m tonnes.

&#8226 Milk production: 2.6bn litres.

&#8226 Suckler cows: 55,000 head.

&#8226 Total cattle: 1.7m.

&#8226 Total pigs: 4m

&#8226 Poultry: 29m