22 May 1998

No quick bucks but

good long-term bet

Disillusioned with farming in

the UK, growing numbers

are looking overseas for

opportunities to invest. Last

month 20 farmers went to

Hungary to check out the

possibilities. Europe editor

Philip Clarke went along too

HUNGARY has a history of invasions; first came the Mongols in the 14th century, followed by the Turks, the Austrians and the Germans.

Latterly, the country was under the command of Soviet overlords until the collapse of communism in October 1989 signalled a return to self rule.

But now, according to a recent article in The Guardian, Hungary is bracing itself for another invasion – British farmers looking to invest in agriculture.

"Farmers are joining a rush to acquire cheap land in central European countries, to cash in on EU subsidies when they join the CAP in 2002," says the newspaper. "Despite much rhetoric about CAP reform, these countries will almost certainly soon benefit from the same subsidies as UK farmers." With land costing just a few hundred £s an acre, they should make a financial killing, it claims.

But this picture is, at best, misguided, and at worst, downright mischievous, says Jeremy Elgin of the London-based East European Trade Council.

For a start, it is extremely unlikely the five central European countries negotiating to join the EU will qualify for the same area aid and livestock premia paid in the west. "If they did, it would give such a boost to production nobody could afford it," he says.

Even if Hungary joins the EU in 2002, or soon after, there is likely to be a long transition period before subsidies are paid in full. Over that time, the level of payment in the west will be wound down, a process already set in motion by the Agenda 2000 CAP reforms.

In addition, Hungarian law prevents foreigners from owning land, thwarting any attempt by British farmers to "snap up farms on the cheap", explains Mr Elgin.

Such is the sensitivity of the land ownership question, that a referendum on the subject had to be abandoned late last year in the face of public opposition. Fresh government elections this month are unlikely to bring any change in the law.

But that does not mean opportunities do not exist, as the 20 UK farmers on the recent EETC trade mission found out. According to Richard Lock of Budapest solicitors Koves & Partners Clifford Chance there are several ways in which foreigners can still invest in land.

One option is to find a company that owns land, and buy the company. "While this has worked for some investors, these opportunities are now rare," says Mr Lock.

Less than 1% of productive land is company owned. "The problem is that the law was changed in 1994 to prevent companies, as well as foreigners, from owning land. This also rules out the possibility of forming joint venture companies with local Hungarians to buy the land for you."

Another possibility is to enter into some kind of management agreement with an existing land owner (about 90% of the area is now in co-operative and private hands), though this tends to lack security.

The most common way, therefore, is for farmers to rent land from the state or larger private landowners on a 10-year lease, often with an option to buy when ownership laws change with EU accession.

Rents are worked out using the Hungarian golden crown system (see table above), typically ranging from about £20/ha (£8/acre) to £70/ha (£28/acre), depending on the quality of the land and additional infrastructure.

"The more you can entrench yourself in this sort of agreement, the better," says Mr Lock. "For example, you may agree a level of investment that the landowner would find hard to pay off at the end of the term, so increasing your security of tenure. It is also possible to buy the freehold of any associated farm buildings, and secure your position that way."

One UK farmer who has gone for the rental approach is Peter Bennett of FPDSavills who, as part of a consortium of UK farmers, leases 100ha (247 acres) of potato ground from a Hungarian co-op two hours south of Budapest.

Like much of the land on Hungarys great plain, the soil is dark and rich, though it suffers from compaction. The climate is demanding, with freezing conditions in the winter and hot, dry summers. Irrigation is essential and is negotiated with the co-op.

"When we set up three years ago, we wanted to stay light on our feet so if we needed to we could walk away," explains Mr Bennett. Only tillage, planting and lifting kit was brought out from the UK, tractors were leased locally. And, while he employs a full-time British manager on the unit, additional power and labour are provided by the co-op on an "as and when" basis.

Despite this, investing in Hungarian agriculture is a long-term business, says Mr Bennett. "Land and labour may be cheaper than in the UK, and there are also generous subsidies (of up to 40%) on capital. But other inputs are not dissimilar to western costs, while yields will never match those in the west due to the short growing season."At face value, prices look quite attractive. Wheat was at £80/t off the combine last harvest, with potatoes over £50/t and milk at 16p/litre.

"But markets are volatile and comparing prices with those in the west is a dangerous exercise," says Mr Bennett. "Yes, you have to do your budgets. But the real issue is when you want to get your money out of Hungary. Currency swings have a huge impact, and there are also tax considerations on repatriation of profits."

Finding suitable land to rent can also be a problem. But Peter Merrikin, a member of a British consortium farming about 10,000ha (24,700 acres) in eastern Hungary, knows of a number of available units, to suit a range of pockets. "When you take on the leasehold of some land, it is normal to also take on the freehold of the buildings, plus any livestock and machinery," he says. "You also get pre-emption rights, giving you the option to extend the lease or buy the land should the law change."

On this basis, he knows of a 300ha (740-acre) unit with a small sheep flock and traditional buildings for just over £100,000, including key money. At the other end of the scale is a 5000ha (12,355-acre) arable unit, with modern buildings and machinery, for £3m.

But, apart from the financial considerations, investors also need to consider the social and cultural implications. With high rural unemployment, theft is commonplace, while the Hungarian language challenges even the most gifted linguist.

"My advice is do not come out here if you are looking for a quick buck," says Mr Merrikin. "But the long-term prospects are good, with some of the finest land in Europe and growing market prospects at home and abroad."

This marketing potential is spelt out by commercial attaché at the British embassy in Budapest, Simon Martin. "The Hungarian economy is booming," he says. "Following years of austerity in the early 1990s, gross domestic product is now growing at 4%. As incomes improve, more and more foreign retailers are opening here, demanding higher quality and better service." Tesco has just opened its second store in Budapest, sourcing 90% of its lines locally to avoid punitive import duties.

Kovacs Endre of Budapest-based commodity traders, Agrimpex, also points to a growing export market for certain commodities.

"Russia used to be our number one outlet. But that has collapsed. Our biggest wheat buyer now is Italy, as the EU has reduced tariffs." Between 1m and 1.5m tonnes a year is exported, out of a 5m tonne crop, including significant shipments down the Danube to the Black Sea ports. Oilseeds tend to go the other way, up the Danube to big crushers in Germany and the Netherlands.

With this range of outlets, and prospects of unimpeded access to the EU early in the next century, Hungary has a lot of potential for UK farmers looking to invest. "But its not for the faint-hearted," says Mr Elgin.

"Start-up costs are always more than anticipated and there are major cultural differences to be overcome. The supply of suitable land is also getting tight. An invasion of farmers is out of the question. But for the determined few, long-term prospects still look good."

Hungarians are traditional shoppers in search of better quality.

Jeremy Elgin of the East European Trade Council explains to Hungarian television that inward investment can benefit both parties.

GOLDEN CROWN RENTS

&#8226 Land is graded from zero to 40 golden crowns, depending on quality.

&#8226 Each golden crown is worth 15kg of wheat a hectare.

&#8226 Average 20 crown land, therefore, commands a rent of 300kg of wheat a hectare.

&#8226 The value taken is the price of wheat on Aug 1 at the Budapest commodity exchange.

&#8226 Last year this was £79/t, giving 20 crown land a rent of £24/ha.

Sample gross margins (£/ha)

Milling wheat

Output:

5.5t/ha

@ £70/t) £385

Var costs Seeds £25

Sprays £34

Ferts £48

Gross margin £278

Sunflower seed

Output:

2.5t/ha

@ £140/t) £350

Var costs: Seeds £70

Sprays £40

Ferts £26

Gross margin £214

Hungarian farming – a snapshot

Farmed area 6.2m hectares

Arable area 4.7m hectares

Climate Continental (winter -25C, summer +35C, rainfalL

550mm)

Soils Rich alluvial soils on Great Plain

Share of GDP 7% farming, 4.5% food industry

Share of exports 25%

Employment 8.5% farming, 3.8% food industry

Land ownership 8% state farms, 38% co-ops, 54% family farms

Rents £20-£70/ha

Output Hard milling wheat 5m tonnes (4t/ha)

Maize 6m tonnes (6t/ha)

Sunflower 1m tonnes (2t/ha)

Barley 1m tonnes (3t/ha)

Cattle 871,000

Pigs 4.9m

Sheep 858,000

Poultry 30m

Milk 1.9bn litres

Livestock numbers have fallen steadily since 1989, primarily due to falling consumption as a result of the governments austerity programmes. Arable production also fell in the initial years after liberalisation, but bottomed out in 1995 and has since been increasing.

As in many central European countries, agriculture is held back by a shortage of capital. Crop losses beyond the farm gate are also a problem, due to poor storage and handling facilities. The government is keen to correct this, offering preferential interest rates and subsidies on machinery and buildings. It is generally welcoming of foreign involvement, except when it comes to land ownership.

The country is self-sufficient in many products and is eager to join the EU when higher prices and easier access will give farming a boost.

This years crop goes in, as last years crop goes out. Hungarian farming is often a mix of the new and the old.