Tuesday, September 29, 2009

Foreign investors are bullish about pigs

By Thomas Escritt
Published: September 28 2009
The Financial Times

Everybody is talking about farming, with bankers, politicians and businessmen extolling the virtues of a homespun sector that should be an area where the country has a genuine competitive advantage.

Mircea Geoana, leader of the Social Democratic Party and its candidate for president in elections to be held in November, says: “We have enormous potential in agriculture and yet we are importing 70 per cent of our agricultural products.”“Our agricultural land could feed 80m people,” his adviser chimes in, reinforcing the new pride Romanians are taking in a sector that looked stodgy and unexciting during the boom that ended with the onset of the financial crisis last autumn.

The government, a coalition between the Social Democrats and the right-leaning Democrat-Liberal Party, has taken up the chorus, with Cristian Diaconescu, the foreign minister, recently announcing that Romania should seek to win the agriculture portfolio when the new European Commission is appointed this autumn.

Part of the enthusiasm stems from an increasingly desperate hunt for returns in a tougher economic environment. Last summer saw the end of an eight-year asset price boom that began with the millennium and lasted through accession to the European Union in 2007.

At its peak, land and property prices in Bucharest hit levels not far off those to be found in wealthier western European capitals.Meanwhile, other sectors, from automotive components to banking, were attracting investment on an ever greater scale. In 2007, Erste Group, the Austrian bank, paid almost €7bn for BCR, a leading Romanian commercial and corporate bank, while manufacturers such as Dacia, a Renault subsidiary, were fostering a growing list of component suppliers.

Against this backdrop, Romania’s rickety agricultural sector, with only 35,000 farms large enough to be run as agribusinesses and attract EU subsidies and a further 4m near subsistence-level smallholdings looked distinctly unappealing during the good years, for investors, lenders and employees alike.

But this year, with an austerity programme in place as part of the country’s bail-out deal with the International Monetary Fund, the real estate market frozen, and many employers struggling, investors and lenders are taking another look at the neglected sector.Increasingly, banks are showing an interest in agriculture. Unicredit Tiriac, the Italian bank’s Romanian subsidiary, has moved from lending little to agricultural producers last year to setting up a department targeting agribusiness this year.

Dan Pascariu, a banker and entrepreneur, is clear that the hunt for better returns is driving this enthusiasm. “Agriculture wasn’t sexy. The yields weren’t good enough, but today agriculture is a competitive advantage [for Romania].”He adds: “Though the sector has a very atomised ownership structure, all banks are taking a fresh look at it because of the tremendous potential and the flow of EU structural funds.”Mr Pascariu has put his own money where his mouth is.

The business case for his pig farming business is straightforward: “Romania imports 4m pigs a year, and yet pork is a staple,” he says. “We have 70 farms, producing entirely to meet domestic demand, and there is enough demand for another 80.”Despite the high interest rates they are paying on loans, the farms are profitable. But it will take more than capital to build a secure future for Romanian agriculture.

Gabriel Popescu, an agricultural economist at Bucharest’s Academy of Economic Sciences, points out that capital investment is only relevant to producers with a connection to the market.“The 4m subsistence farms are closed systems,” he says. “They produce for their own consumption. These smallholdings produce only for their own subsistence, meaning nobody has any interest in their efficiency.Capitalisation is only relevant for the 35,000 farms large enough to count as agribusinesses.

The challenge for public policy is not to make the smallholdings more efficient, but to open the system and make them market participants.”The 4m smallholdings are cut off from the market and too small to be eligible for EU funding, making them a challenge for social, not economic policy, he adds.

But, whatever the current political enthusiasm for the sector, the government should tread carefully, he says: “We’ve had three agricultural reforms in the past 20 years, when co- operative farms were created in 1991, when state farms were privatised in 2000, and when we joined the EU in 2007.“Each reform is like surgery and it takes 15 years to recover.”Meanwhile, large forces, such as the US livestock farmer Smithfield, remain bullish about the country.“

Once, Romania was known as the breadbasket of Europe,” the company says. Smithfield, which has annual sales of $145m, has invested $600m since arriving in the country in 2004, and has just announced a further $35m greenfield investment in pig farming.

No comments: