Quest for strength sees expansion in the east
Quest for strength sees expansion in the east
In early 1999, farmers weekly visited the Hungarian farm of
Richard Merrikin, one of the first pioneers to take up the
challenges of farming in eastern Europe. Returning last
month, Europe editor Philip Clarke heard about the
problems faced in the past two-and-a-half years and the
achievements made in driving the business forward
BAD things, it is said, come in threes and on that basis Richard Merrikin should be a worried man.
In the past two years his corner of eastern Hungary has been hit by two major disasters, both of which made international headlines.
The first incident was in early 2000 when a quantity of cyanide escaped from an Australian-owned gold mine in neighbouring Romania and entered the headwaters of the Tisza river.
Mr Merrikins Tisza Farm at Kiskore is next door to the river, about 200 miles downstream from the gold mine, and the pollution posed a real threat to the water courses crossing his land.
"Most of the fish further upstream were killed and quite a lot around us also perished," he says. "Fortunately we were not irrigating at that time of year and, by the time we did, everything tested clear."
Shortly after the pollution incident, disaster struck again – this time some of the worst flooding Hungary has ever seen.
"Several local villages were up to their roof tops in water and many houses had to be rebuilt. The floods were caused by the heavy rains and too rapid snow melt into the Tisza from the Ukraine, where large areas of forest have been cleared," says Mr Merrikin.
"Some of our fields were underwater for three months. Our drains simply could not empty and we lost 30% of our winter cereals. It did at least clear the river of cyanide and we were able to claim about £20/ha in compensation on 1700ha (4200 acres) of affected land."
Despite these challenges, Mr Merrikin has achieved an impressive expansion of his business.
When FW first visited him at Kiskore in early 1999 – four years after he had arrived in Hungary – the total farmed area was about 8000ha (19,800 acres) and turnover came to around £3m.
Returning to the farm last month, both had grown substantially, with the total area now standing at 12,000ha (29,652 acres) and turnover close to £6m.
The main addition has been a large block of arable land at Ketpo, about 60 miles south of Kiskore. The 3000ha (7410 acre) plot was part of a state-owned co-op, but, like so many in Hungary, it ran into serious financial difficulties and went into liquidation in 1998.
Mr Merrikin took on the rental of the land in 1999. Rent is fixed according to the Golden Crown system (see box) and is valued at up to 30 crown/ha, worth £28/ha (£11/acre) at this years official wheat price of £62/t.
As well as having above average soil quality, about one-third of the Ketpo land is under a linear irrigation system, providing more flexibility and cropping options.
The move to renting ground represents a significant change in business strategy since Mr Merrikin came to Hungary as part of a four-man consortium (now reduced to three). Initially they operated as a farm management company and contract farmed for a property development business which had secured ownership of the land around Kiskore.
"That five-year contract came to an end in 2000 and was not renewed because a preferred rental option was then possible."
The rents are typically for five years, though some are for longer. "We have to negotiate terms with each landowner, which over our entire cropped area amounts to almost 1000 individuals," says Mr Merrikin. "Where we have taken on new land we have employed people to put all the parcels together. But the main farm office oversees the distribution of the rents."
These are paid annually, usually after harvest. About one-third of the fees are paid in crops and the rest in cash.
Unlike many western farmers in Hungary, Mr Merrikin does not have any pre-emption rights built into his rental agreements. "Land ownership is still barred for foreigners and is likely to remain so for at least seven years after EU accession (now targeted for 2004).
"Many of the first farmers to come in, especially from Austria, devised so-called pocket contracts with the Hungarians, giving them first right of refusal when land sales to westerners are eventually legalised.
"These are not worth the paper they are written on. The government is undertaking a major clampdown on these deals, so when a land market does get going, the Hungarians will get a proper return."
Renting land has the added advantage of keeping Mr Merrikin "light on his feet" should he ever decide to quit farming in Hungary. But that is not to suggest there is any lack of commitment to the business, as is clear from the considerable investments made in the past two-and-a-half years.
On the machinery front, he has bought six new Claas Lexion 480 combines, all sourced locally and all equipped with caterpillar tracks to reduce compaction. Two are fitted with the Claas Lazer Pilot system.
Mr Merrikin has made full use of the 25% machinery investment grants available from the government. The tractor fleet is based on 20 machines over 200hp for fieldwork, while most of the haulage is done by 10 owned lorries. Each site also has a mobile diesel tanker.
Another large area of investment has been in storage, which is seen as key to underpinning the viability of the business. Stores have been upgraded at most sites, making the most of 40% improvement grants. Mr Merrikin now has the capacity to hold on to 52,000t of crops.
In particular, the company has taken over the grain silos at nearby Heves, which used to belong to a trading company. This offers 19,000t of storage in eight silos, including weighing, laboratory and drying facilities.
"We can test everything for protein, moisture and gluten within five minutes of it arriving and direct it to the appropriate bin," he says. "Knowing exactly what we have and being able to prove it is even more important in Hungary than it is in England."
Being able to store the grain also enables him to plan his marketing better and avoid the harvest rush. "Last year was very difficult," he says. "After the floods we had no rain at all between April and June and yields averaged just 3t/ha. Harvest prices were about £58/t, but we held on and sold one-third of our wheat to Romania for £102/t in February 2001."
Having storage should pay dividends again this year. Harvest got off to a flying start and 70% of the wheat crop was gathered in excellent condition with a better than average yield. But then the rains came in early July, with 15cm (6in) falling in just one week.
"The final 30% of our crop will only make feed quality and is currently worth £45/t, which just about breaks even. But we wont sell anything for a month or two and see what it looks like then. I am optimistic we should get some decent milling premiums on our quality wheat."
Prices are unlikely to match last years, however, with the whole country having a bigger export surplus and currency – the forint – having strengthened this year.
"The Hungarian economy is looking pretty strong at the moment," says Mr Merrikin. "Investment is flooding into the capital Budapest and inflation is under control at 8%. The government recently extended the peg on the forint, which was previously only allowed to move 5% against the k. The subsequent 15% firming of currency has hit our export values accordingly. This is what we left England to avoid."
This volatility in the commodity markets is one reason why the business is increasingly focused on quality crops for human consumption.
"We are aiming to grow as much veg as is manageable under the linear irrigation because this gives us a more sensible margin."
Specialist crops are all grown on contract, though getting buyers to honour them is sometimes difficult. Sweetcorn is a case in point, with much of the crop booked early at a £10/t premium to the harvest price of £58/t. But with yields up everywhere following the rains, Mr Merrikin had to accept a lower premium to get his crop into the factory before quality dropped.
Generally, however, trading relationships are much improved. When FW first visited Tisza Farms, repeat business with buyers was almost unheard of and Mr Merrikin insisted on 50% cash up front. That has now changed.
"Buyers now know we deliver what we say we will deliver. We deal with a range of merchants as well as with end users. We trade on western business terms. Barter is a thing of the past."
There is little doubt that this build up of trust has been instrumental in pushing the business forward. But Mr Merrikin has also put a great deal of time and effort into integration and innovation as a way of securing his business interests.
He has been careful to offer encouragement to his 120-strong workforce. "We pay a basic wage of about £160/month net – 50% more than the official minimum wage. My individual managers are also allowed to pay up to a 30% bonus for good performance and I have the option to do the same."
This means the best tractor drivers are taking home up to £250/month after the government has taken its 41%. That is more than double the standard agricultural wage. For this, they have willingly adopted western work practices.
But its not just about buying loyalty. Mr Merrikin takes an active part in the local community, for example organising an annual harvest supper and taking a number of his more senior staff to Hungarian sporting events each year. He also speaks their language.
As an example of his innovative approach, Mr Merrikin has arranged for a leading Hungarian brewer to carry out £28,000 of repair work to the eight grain silos at Heves. In return, the brewer will be allowed to advertise its brand on the sides of the silos, making them look like giant cans of beer.
The partnership is also in the process of developing a shoot, but Mr Merrikin has no intention of losing sight of his core business, which he feels has now reached its optimum size for the management structure he has in place.
"In future we will not look to take on more hectares, though we will try and improve the quality of our land by renting better ground and relinquishing some of our poorer areas."
Profits will continue to be ploughed back, he adds, paying off loans and improving facilities to make the business strong enough to withstand whatever other "disasters" lurk around the corner.
GOLDENCROWNRENTS
• Land is graded from 0-40 golden crowns, depending on quality.
• Each golden crown is worth 15kg of wheat/ha.
• Average 20 crown land commands a rent of 300kg wheat/ha.
• The value taken is the price of wheat on Aug 1 at the Budapest commodity exchange.
• This year it is £62/t, giving 20 crown land a rent of £18.60/ha (£7.53/acre) and 30 crown land a rent of £27.90/ha (£11.30/acre).
Forecast gross margin for 2001
Winter wheat Sweetcorn (irrigated) Peas (irrigated)
Price £65/t £50/t £146/t
Yield 5t/ha 20t/ha 6t/ha
Output £325/ha £1000/ha £876/ha
Variable costs Seeds £30/ha £110/ha £88/ha
Sprays £45/ha £112/ha £100/ha
Fertilisers £38/ha £63/ha £37/ha
Total £113/ha £285/ha £225/ha
Gross margin £212/ha £715/ha £651/ha(before rent & finance)