Rich resources make for a land of opportunity

9 July 1999

Rich resources make for a land of opportunity

Sited between the affluent

markets of the EU and the

growing markets of the

Pacific rim, Romania is a

land of opportunity. Europe

Editor, Philip Clarke,


IF one word can be used to describe the opportunities that exist within Romanian agriculture, it is "potential".

This stems from the fact that, despite having some enviably rich resources, agricultural output has been in almost steady decline since the end of communism in 1989.

Statistics from the Ministry of Agriculture and Food in Bucharest tell the story.

Livestock numbers have collapsed, with cattle, pigs and sheep halving since 1989 to 3.2m, 7.1m and 9.5m head, respectively.

Wheat production slipped from 8m tonnes in 1989 to just 3m tonnes in 1996, though it has since recovered to about 7m tonnes. Similarly, sugar beet has dropped from 7m tonnes to 3m tonnes, barley from 3m tonnes to 2m tonnes and potatoes from 4m tonnes to 3m tonnes. About the only growth crops have been oilseeds and maize.

The reasons behind the decline are threefold, according to Stefan Romosan, policy director at MAF.

First, production has become highly fragmented since reforms returned the land to the people in 1991. Out of the 15m hectares of agricultural land, about 11.5m hectares is held by 3.6m individuals, giving an average holding size of just 3ha.

An attempt to encourage households to group together in "associations" has been only partly successful, with the 15,000 set up covering less than 10% of the farmed area.

Second, the government has allowed food imports in at relatively low tariff levels, which has undermined the domestic market.

Third, the past 10 years have seen the disintegration of the processing sector in Romania, depriving farmers of a market. "Producers are unwilling to sell to factories knowing it will be many months before they get paid," says Mr Romosan. "Instead, they prefer to operate at subsistence level."

Yet this decline has occurred in a country rich in agricultural resources.

Arable land accounts for about 60% of the farmed area, mostly on the Romanian plain in the south east. The soils are deep, fertile and well-textured. And though the hot summers put a constraint on yields, labour is cheap and there is good access to world markets through the Black Sea ports.

It is this potential that has encouraged a number of British agri-businesses to invest, convinced that, once the economy improves, there will be good profits to be made.

Dalgety, for example, has been operating in Romania for just under a year, buying a majority shareholding in local merchanting business, Gavem. It is now the countrys biggest independent distributor, with a $30m turnover and good connections into many of the remaining state farms and the associations.

Despite this, trading is a difficult business, says company director, Stephen Price. "There is a real shortage of cash in the economy. Barter deals are the norm accounting for about 80% of our pesticide sales."

Where cash is involved, it often takes the form of vouchers, issued by the government as a subsidy for inputs. "We have to collect the vouchers in return for deliveries and present them to the bank," says Mr Price. "This year when we did this the finance ministry would not release the funds to the agriculture ministry for several months and we were left banking cardboard."

An alternative way of doing business is to establish a chain of contracts, with payment effected once the end user sells the goods. For example, last year Dalgety exchanged agro-chemicals for cereals. With no obvious export market at the time, a deal was set up involving a compounder, a pig producer, an abattoir and a retailer. Only when the finished meat was sold to the customer did any cash enter the system and Dalgety get paid.

While the risks of default are higher in this sort of dealing, there is a premium built in. More importantly, it protects the business from the ravages of currency devaluation – the Lei can lose value pretty quickly in Romania.

Another advantage of barter is that it delays invoicing. "In Romania, companies are charged 38% corporation tax, which is triggered by invoicing," says Mr Price. "If you are not then actually paid for another nine months, and the Lei devalues by 60%, you have had it."

But despite the pitfalls, he is optimistic. For a start, the government is more progressive in its thinking than some others in the region. "Once its agriculture is reformed, Romania will be better-placed than either Poland or Hungary. The real growth markets in the world are to the east, not the west. India will be a net importer of grain by 2003 and the Middle East also takes big tonnages.

"Romania has another advantage in that it grows crops that are not already in surplus in western Europe – soya, sorghum and sunflower. EU accession is not the answer, growing for real markets is," he says.

That optimism is shared by Eamonn Kendrick of Power Farming – a key distributor for Massey Ferguson based in Bucharest. "If Romanian agriculture does not take off, the whole country will be shot. It is the main industry and I believe it can be transformed reasonably quickly."

But he is more cautious in the way he does business, keeping credit facilities to a minimum and insisting on payment before delivery for spare parts.

Most new machinery sales are now to the Western farmers already set up in Romania, who can take advantage of cross-border leasing laws which exempt them from 19% import duties and 22% VAT.

"We used to supply the state farms and associations with new kit too, selling over 70 combines in our first two seasons," says Mr Kendrick. "But those were the days when there was plenty of World Bank cash floating around.

"That has since dried up and, following bad harvests in 1997, when yields only reached 1t/ha, and 1998, when the wheat price fell to $50/t, there just isnt the finance."

To try to widen the client base, he is setting up a deal with a local grain trader, whereby farmers make a 30% down-payment on new machinery, with the balance paid in grain or cash a few months after harvest.

Mr Kendrick believes that Romanian agriculture will take off, once the land ownership problems are sorted, but it will also take further foreign investment and management expertise to lead the way.

So what sort of reception can outside investors expect if they do take up this challenge? Certainly at grass roots level there is a good deal of suspicion – a fear among farmers that incomers may take their land or their jobs.

But at official level there is a broad acceptance of the need for foreign capital, especially now there is less money coming in from the World Bank and International Monetary Fund.

"We have to develop our agriculture to improve efficiency and compete in world markets," says Marian Marinescu, prefect of the agriculturally rich Dolj County, in the south of the country. "At the same time we must rebuild our processing sector so that, if people are displaced from the land, there are still jobs for them in the towns and villages."

There are many opportunities for investors, he says. Facilities lying idle throughout the country can be brought back into production with a minimal capital outlay.

This has certainly been the experience of the UKs Pig Improvement Company, (PIC), which has been importing breeding stock to the region for over a year and is now setting up its own nucleus herd, near the village of Vasilati to the west of Bucharest.

The unit – imaginatively named "Farm Number 7" – was built in 1989 and has stood empty since the fall of the Ceaucescu regime that year. "We saw about 50 similar units before settling on this one, which we chose because of its location – 2km from the nearest habitation," says company director, Jerry Thompson. Since most local farmers have backyard pigs, disease is always a concern, he says.

PIC has been attracted to the region by the growth potential, with strong demand for more efficient pigs and better carcass quality. So far, most sales have been to former state farms on a cash-up-front basis, though Mr Thompson acknowledges that barter will come as the business expands.

"I would definitely encourage other people to come out here from the UK," he says. "There are plenty of sites which are either empty or waiting for privatisation. Labour and feed are cheap, there are good export opportunities to neighbouring countries and a local population of 23m people who enjoy eating pigmeat."

Market volatility is a problem, especially since price fixing by the state was abandoned in 1997. Combined with the global depression of pig markets and the devaluation of the Lei, values have slipped from 120p/kg to just 35p/kg in 12 months. "The free market is still sorting itself out," says Mr Thompson.

This evolution of the free market certainly makes life more complicated, admits Peyo Filev, a Bulgarian manager working for UK agro-chemical giant, Zeneca, in Bucharest.

"ICI, (as Zeneca used to be), had its heyday in Romania in the 1980s, when everything was state-owned and big volume business was guaranteed. Now it is much more difficult. There are too many middlemen, there is constant pressure to deal on credit and, unless you are tied to a distributor with western financial backing, you risk not being paid."

The current stagnation in agriculture he blames on the fragmented land ownership, the absence of government and commercial funds and the lack of vision among the countrys producers. "The Romanians need more western farmers and companies to come over and show them how to operate agriculture as a business. They need to get away from a survival mentality and start to think about making money."

Only in this way can the countrys full potential be realised, he believes. &#42

Romanian agriculture

Total population 22.7m

Rural population 10.2m

Rural workforce 3.2m

Total area 23.8m ha

Agricultural area 14.8m ha

Arable area 9.3m ha

Pasture and meadows 4.8m ha

Irrigated area 3.0m ha

Ownership structure

Private 11.5m ha

(3.65m holdings)

State 3.2m ha (4000 units)


Cattle 3.2m

Pigs 7.1m

Sheep/goats 9.5m

Poultry 35.1m


Maize 12.7m tonnes

Wheat 7.1m tonnes

Barley 1.9m tonnes

Sugar beet 2.7m tonnes

Potatoes 3.2m tonnes

Agriculture share of GDP 19%

Agri-food imports $531m

Agri-food exports $421m

Deficit -$110m

Cereal trade surplus +$269m

Sugar trade deficit -$170m

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