"Prospects of animal product markets in Central and Eastern European countries (CEEC)" - Prof Dr. F. Hilsemeyer, Federal Dairy Research Centre, Kiel, Germany

I would like to start with three preliminary remarks:

(1) In spite of the relevance of this theme and in spite of a lot of past and present data and facts the limit of detailed information about a condensed forecast on the development of those 10 CEEC that are introduced as followed is quickly reached.

Fortunately the EU commission published on 29th of November 1995 the draft of a "Study on alternative strategies for the development of relations in the field of agriculture between the EU and the associated countries with a view to future accession of these countries" the so called "Agricultural Strategy Paper" to which my statements are mostly related.

This "Agricultural Strategy Paper" is based, among other things, on several expert options, which were made by 4 European scientists - Tangermann (D), Buckwell (UK), Tarditi (I) and Mahé (F). The options were selected by the chief executive of the European Commission lead by Sir Leon Britton, however,the Commission did not agree with the authors’ conclusions about some essential topics.

(2) It is also useful to refer to the "Agricultural Strategy Paper" as this theme has a quite relevant background, i.e.: the politically wanted accession of the CEEC to the EU as soon as possible. The new Polish President of State who visited Germany some weeks ago mentioned the year 2000 as a desirable date for accession.

(3) Against this background I will divide my lecture into 3 parts:

At first I will give a short presentation of the agricultural situation in the CEEC. Then, based on some assumptions, I shall state the perspectives of production, consumption and the expected surplus on the markets for animal products up to the year 2010.

A last short chapter will deal with the consequences of the accession of the CEEC to the EU.

The agricultural situation in the CEEC

The 10 CEEC, which are mentioned in this paper represent an area of nearly 108 million ha and a population of about 106 million people. This corresponds to 33 % of the EU-area and 29 % of the EU-population.

- Importance of agriculture: with reference to the area, the contribution to the Gross Domestic Product (GDP) and to the proportion of total employment, agriculture in the CEEC is more important than in the EU. On an average 25 % of the working population (that means 9,5 million. people) are engaged in agriculture (EU: 6 % or 8,2 million. people) and they contribute 8 % to the GDP (EU: 2,5 %).

Development of the agricultural production: although crop production seems to recover the animal production in all CEEC except Slovenia and Romania - is still considerably lower than it was before the beginning of the process of transformation.

Table I: CEC-10 in comparison with EU-1.5

Source: EU Commission, Study on alternative strategies for the development of relations in the field of agriculture between the EU and the associated countries with a view to future accession of these countries (Agricultural Strategy Paper). Brussels, November 1995, p. 18b

There are two main reasons for this falling-off

- a first consumption has decreased because of the cancellation of subsidized consumer prices;

- a second reason is bound to the fact that the relation between prices and costs in agriculture have increasingly become worse. It means that prices of production inputs have risen more quickly than producer prices.

But within the years we expect that the price difference should decrease. Because of the relatively high inflation (the fall in the value of money being not totally balanced) and because of the expected increase in the demand of food (the demand is probably higher than the production), the internal agricultural prices will probably increase. That is why it is expected, that increasing production will makes it possible to reflect better production costs in producers prices.

Assumptions of a prognosis

Because of the general increase of income in the CEEC, the demand of agricultural products (especially animal products) will recover, although the per-capita-consumption will not become as important as it was before the political and economic changes.

In most countries the land reform and the restructuring of the agri-food sector will not be finished before the end of this decade. The development of the agricultural structures will 14 probably be slower because of the limited range of investors who will be attracted by the agricultural sector.

Considering the difficult budgetary position in most CEEC, we expect, that national support to agriculture will hardly increase. This fact reduces most possibilities of both interventions in the market and of structural subsidies. As a result of the last GATT meeting, import protection has increased within the last months. This higher protection level which still fulfils the GATT efforts, is supposed to stabilize, because there is a limit to increasing prices, as a consequence of the high share of available income of the private households that is spent on food. In most countries it also result from the still extremely high rates of inflation.

The supply and demand structure of the CEEC agriculture is supposed to overcome the shock that was caused by the transformation process until the end of this decade. The crop production will change, namely the production of grain and oil seeds will increase and as a result of this the potential of net-export will become higher. The recovery of animal production will not be comparably high. In the dairy sector the potential of net-export will be considerably smaller than it was before the 1990’s. Supply and demand of meat will more or less counterbalance, although on a lower level than before.

It means that there is the agricultural production will slowly increase within the years to come. There is little doubt that a high production potential in the CEEC. But nevertheless, there are enormous structural problems that hinder the realisation of this potential in the foreseeable future. There are three main problems in the foreground, i.e.:

- The lack of capital. Although investments to modernize production and to better rural infrastructure are really urgent, the state of finances often does not permit it. Most enterprises have quite a limited self-financing potential. The capacity of the countries concerned in terms of public support is also limited. The demand for credit exceeds the actual availability and because of its relatively limited profitability, the agricultural sector is not attractive to investors. The delay in bringing a final solution to property rights makes it more difficult to use real estates as required security. This is the reason why in most CEE countries the property market is not functioning. Furthermore, administrative regulations hinder foreign investors to invest in the agricultural sector.

- Farm structure problems. Within the first years of the change, while the industry was restructured, agriculture served in some CEEC as a buffer in respect to employment and to some extent it is still so. This fact contributed to the creation of very small farms or to increasing their number. On a long term basis these small farms contribute to self-sufficiency. They are supposed to be just viable as an additional source of income but at the same time they hinder the modernization of agriculture. In some countries there are also oversized farms which in the long run will not be economically viable either. Besides these economic and social problems there is also, in most countries, a qualitative problem. Farmers, especially those who run small farms, are in comparison to the average age structure of the population, relatively old and hardly prepared to manage will in a free market system.

- Structure-problems in the agri-food sector. In most countries privatization and structural transformation slowly make progress; however, quite often urgent needed foreign investments and know-how are missing. Aside from some sectors inefficiency is still a general characteristic of the agri-food sector in the CEEC. In several countries the food processing industry is still controlled half by the State and there are monopolistic tendencies. In many cases there seems to be no international competitiveness.

As a conclusion one can say that the CEEC on the one hand need higher prices and farmer incomes, but on the other hand they need more special help to reconstruct, modemize and diversify their production capacity in the agricultural sector and in the processing areas.

Table 2a: Supply balance (1.000 t)

Source: EU Commission, Agricultural Strategy Paper, p. 18b.

In view of the probable tempo of restructuring the agricultural sector and the food industry the studies of the CEE countries (with a forecast rating of the situation in 2000) conclude that the agricultural production will shift especially to grain and oilseed production and in these markets to a higher potential of net-export in comparison with the years before transformation. The animal production is supposed to recover less clearly. The potential of net-export of milk and milk products will be smaller than it was before the reform. Supply and demand of meat are supposed to counter-balance each other on a lower level than before the reform.

This "scenario 2000" of the CEEC studies is based on a quite detailed analysis of the agricultural situation in every country, of their possibilities to develop and of their specific disadvantages. It is also based on the judgement of the CEEC and of the EU specialists about plausible/possible developments.

Proceeding from the hypothesis that all ten associated countries join the EU in 2000 and that their price levels adjust to those of EU’s price level within a five-year interim period, an acceleration of an increasing production together with a decreasing demand at the same time is probable. As a result of this the potential of netto-exports of the most important agricultural basic commodities products will increase in the CEEC.

Projections of supply balance sheets also for the years 2005 (last year of the transitional period) and 2010 have been prepared too. These projections proceed from the facts that all new member states will have subdued their structural problems and will be integrated into the Union. It means that they will even have adopted the CAP as it is nowadays (1995) including the payments per acres and animals, the setting aside of arable land and the quotas for milk and sugar.

Long term run projections are always risky because they are generally based on many arbitrary assumptions. The main reasons for this impact analysis was to get an idea of the probable directions of the market development of the dimensions and of the budgetary consequences.

The projections in table 3 show that meat surpluses will increase. There will be a surplus especially as regards beef if a stock of special cattle breeds is built up in some countries, that will be increase advanced by higher prices and premiums.

Table 2b: Supply balance (1.000 t)

Source: EU-Commission, Agricultural Strategy Paper, p. 18b.

The intervention stock might not increase in an acceptable extent within the following decade with the surpluses of CEEC and EU countries together. A reason is that the EU prices will probably still be higher than the world market prices and export subsidies will have to be reduced. There might be also a problem in the pork and poultry sectors if the difference between EU and world grain market prices lasts.

In the milk sector it was considered as an hypothesis, that discussions about quotas limit a further expansion of milk production in the new member countries.

However, increasing milk prices would result probably in a reduction of domestic consumption in the CEEC. As a consequence, milk surpluses may increase by more than 50% between the years 2000 and 2005. This would add to the rising surpluses in the EU, where the decrease of per capita consumption is supposed to continue as the diminution of butter and high fatty milk products consumption is quicker than the increase of that of fresh milk products and cheese.

Following this hypothetic assumption of all 10 associated countries joining the EU in 2000 the budgetary consequences after a period of transition and adaptation - table 4 refers - will lead to additional costs of round about 12 bill. ECU a year (compared to 42 bill. ECU as a forecast for the EU- 15). These costs would include payments for crop production, animal premiums (these direct payments cover about one half of the whole budget) and for 17 accompanying measures (environmental programmes, programmes of afforestation and early retirement of farmers).

Source: Based on table 2.

Political consequences

Option 1. Trying to keep the political status quo up to the year 2000 and longer would not be a good decision although it seems to be possible throughout for a limited number of years. For both parties it is even an attractive option because it promises apparent stability - nothing would have to be changed - and because the extension of the Eastern group could start like former EU extension: there are common assets that have to be adopted by the new members after a transitional period and possible problems are discussed when they appear.

However, in the bigger external and internal context, looking for the end of this decade as keeping the status quo quickly proves to be short-sighted. A big disadvantage of this option is that agricultural development in the EU is more and more limited.

On the one hand there will be - even without extension of the East - increasing yields in the future and as a consequence production will increase in some key sectors as well, except milk where production quotas reduce the cattle stock.

Table 4: EAGGF guarantee expenditure on CEEC-10 (mio. ECU) accompanying measures 500 1500 2000

On the other hand the possibilities for subsidized exports are limited and might be further restricted in the future, while at the same time the internal demand will not sensibly increase. In some sectors the demand might even still decrease and as a consequence the relation between supply and demand in the EU- 15 might become imbalanced because of new higher surpluses.

To fulfil1 the EU obligations of the GATT agreement the option "status quo" offers only the possibility to intensify production control, for example by introducing new quotas, higher rates for set aside programs etc. and this at a time where competitive pressure by third countries on the internal market will probably increase, either within the scope of WTO objectives.

Option 2. This is why proposals of a renewed and radical reform of the CAP were made by some important agricultural economists as well in connection with the discussion about the joining of the CEEC. In their opinion there is too much inefficiency, distorted competition and bureaucracy in the CAP and therefore the CAP cannot serve as a good base for the future and especially for the Eastern extension.

This is why they give preference to no price support, but to gradually reduced incometransfers, to abolition of quotas and of all other measures of supply regulations.

Although this radical reform seems to be attractive to economists it would include a lot of social and environmental policy risks, which could have quite negative effects at least in regions being at a disadvantage. Further more this option would - at least within the first five to ten years before the reduction of the government transfer payments begins - cause enormous additional public costs.

Option 3. All this is probably the reason for a way of compromise between these two alternatives, i.e.: a continuation of the CAP-reform, started in 1992 and with prospect for extension to and expansion in other sectors. This includes a further reduction of price supports, which will be probably compensated by transfer payments - however this will have to be organized.

In accordance with the logic of the reform, from 1992 government transfer payments are a compensation for reduced support prices to the farmers. To a limited extend the reform of 1992 has already combined the direct payments with social and environmental and political conditions. On a long term run it has to be reflected in a development of this fundamental philosophy.