A systematic analysis of the agribusiness sector in transition economies: The Serbian meat value-chain Food and Agriculture Organization of the United Nations ACKNOWLEDGEMENTS This study was commissioned by the European Bank for Reconstruction and Development (EBRD) jointly with the Investment Centre of the Food and Agriculture Organization of the United Nations (FAO), under the co-operation agreement between the two institutions. The EBRD team was led by Heike Harmgart, Principal Economist in the Office of the Chief Economist in close collaboration with the Agribusiness banking team of the EBRD under the directorship of Gilles Mettetal. The FAO team was led by Emmanuel Hidier, Senior Economist; with team members D’mitry Prikhodko, Agricultural Economist, on whose background research a substantial part of this analysis is based, and Nada Zvekic, Communications Officer at the FAO. The report benefited further from discussions with Marc von Strydonck, Senior Banker, Vedrana Jelusic, Senior Banker and Miljan Zdrale, Principal Banker at the Agribusiness team of the EBRD. Special thanks to Kerstin Meins, analyst at the Office of the Chief Economist for her editing and layout assistance. The EBRD team would like to extend its warm thanks for the kind assistance received from all the government and private sector representatives who kindly shared time with the team, in particular. Zoran Bogdanov, Director, Nenad Miscevic, CFO and Svetlana Bogdanov, Economist from Mesopromet/Banat (meat processing company). From Ministry of Agriculture, Forestry and Water Management Tomislav Topalovic, Expert on Bovine Production and Mirko Novakovic, Expert on Pig production. The EBRD is also grateful to Dragana Pogarcic, Head of Unit for livestock breeding and fishing statistics at the Republic Statistical Office; and the Association of Pig Producers in Bogatic, for their helpful inputs. Special thanks are extended to Milos Milovanovich and the Ministry of Agriculture, Forestry and Water Management for his collaboration. 1 Executive Summary Serbian livestock husbandry has been faced with a twenty year crisis leading to a decline in the volume of production of around 1.5% every year. This has been driven by a significant shrinkage of the national market together with numerous other challenges of transition: the privatisation of state agricultural enterprises followed by the absence of any long-term livestock husbandry development strategy; the technological obsolescence and underinvestment into processing capacities, particularly in the exporting sector of the meat processing industry; poor relationships between livestock producers and processors with no coordinated representation on either side; an absence of positive structured policy measures and delays, sometimes lags lasting up to half a year, in the implementation of comparably sparse subsidy measures. All these factors resulted in the marginalisation in particular of livestock product exports. Compared to 1990, in 2005 total meat production was 30% lower, and by particular sectors the fall was: beef 42%; pig meat 11%; lamb 22% and poultry meat 40%. The major challenge now is to consolidate the primary production side to enlarge farm size and allow for specialisation. Farmers also need to upgrade genetic potential in particular in pig production. The slaughtering industry has the capacity to fulfil both domestic as well as export potential but years of underinvestment and low hygienic, sanitary and veterinary standards pose a significant obstacle. Here investment needs are substantial and one route the industry has taken is further vertical integration either with producers/farmers or with the processing industry. The processing industry itself has started to invest in increasing capacity, technology and standards, but only a few private processing companies have achieved EU standards. The major policy challenge is to harmonise certification beyond the beef industry with EU standards, as well as switching from vaccination of pigs against swine fever and poultry against Newcastle disease and most importantly upgrade slaughterhouses to EU HACCP quality standards. 2 1. Introduction This report will closely follow the structure of the meat value chain combined with the EBRD transition assessment indicator methodology (Table 1). The analysis will focus on the extent and structure of markets; existing policies and institutions; skills and business conduct. The report concentrates on the commercial production of pig and beef meat, its processing and retail. In addition to secondary sources this report draws on interviews with relevant parties along the value chain such as the Ministry of Agriculture, the Pig Producer Association, meat processing companies and the Statistical Offices responsible for livestock. Table 1. The Meat Value Chain Value chain segments Activities Primary production Meat production (commercial pig and beef production) Processing Meat processing and preserving (slaughterhouses, processing plants) incl packaging and canning Wholesale & Retail Wholesale Open market sales Small-scale retail trade Large-scale retail trade 2. Primary production In the following analysis we will differentiate – if applicable – between poultry, pork and beef production with the main focus on the latter two since they are of significantly higher commercial importance for the country. Some of the institutional conditions faced by each sector are rather similar, but in particular in the primary production the individual markets look quite different. Overall agricultural production accounted for 14.5% of total Serbian GDP in 2006, with food processing and agriculture combined amounting to 20%. Within agricultural production in 2006, 67% was crop production and only 33% livestock production. The total meat sector accounts for 6% of Serbia’s agricultural exports by value and 2% of the value of agricultural imports in 2006. Pig production dominates the Serbian livestock and meat production, accounting for 58% of the total production in 2005, while the contributions from beef (21%), poultry (16%) and lamb (5%) were only modest in comparison. The overall trend in Serbian livestock population and meat production in the period between 2000 and 2006 was a significant decline in overall numbers of nearly all kinds of livestock (see Table 2). 3 Table 2 – Livestock population 2000-2006 and meat production 2000-2005 Kind of livestock 2000 2006/2005 Decrease in % Cattle (in mill heads) 1,246 1,096 2.0 Pigs (in mill heads) 4,066 3,213 21.0 Poultry (in mill heads) 20,373 17,905 12.1 Beef (in 000t) 104 90 13.5 Pork (in 000t) 283 253 10.7 Poultry (in 000t) 67 64 0.5 Source: Ministry of Agriculture, Forestry and Water Management 2.1. Structure and extent of markets Serbian livestock production is characterised by a dualism of a large number of small/medium- sized privately owned farms on the one side and of a large, unreformed state- owned livestock production on the other side. Only a small number of farms, in particular out of the smaller farms, are commercially orientated 1 and we can observe two opposing trends: smallholdings consolidating into commercial farming, and medium farms downsizing and moving into subsistence farming. Table 3 shows the breakdown of farms by ownership in 2006; 80% of cattle are produced on privately owned farms, whereas only 61% of pigs and 59% of poultry is farmed on private farms. Evidence suggests that the overall decrease in both livestock population and animal productivity was mainly due to a decrease on state owned farms. One important productivity indicator – the difference in average weight – is most pronounced for cattle with over 10% less average weight for cooperatives-reared cattle. This is somewhat surprising since privately owned farms are on average only 3 ha in size and thus produce significantly below efficient scale. For a detailed comparison of carcass weights see Annex IV. Table 3. Farm ownership structure in 2006 Total Private Cooperatives av. weight av. weight av. weight # thous. in kg # thous. in kg # thous. in kg Cattle 1096 418.30 867 427.80 230 380.66 Pig 3212 64.63 1966 65.33 1246 63.54 Poultry 17905 2.26 10601 2.30 7304 2.20 Source: Ministry of Agriculture, Forestry and Water Management 1 See World Bank report on “Supporting Serbia’s Agriculture Strategy”, 2006. 4 Private sector livestock production is still used to large extends in a semi-subsistence way for household consumption and as a safety net. Most of these very small farms (<1 ha) have not specialised, but rather mixed their animal holdings - an average farm consists of two cows plus 3-4 pigs and 20 chickens. Total agricultural labour force accounts for around 17 % of the population, or over 1,300,000 people. However, according to government data, the farming population is rapidly ageing, and not being replaced in sufficient numbers, in turn putting the country’s industry at risk. Government figures point to the following agricultural labour force structure: livestock breeding (43%), field crop farming (42%), fruit and wine production (12%) and other crops (3%). Figure 1 shows the distribution of agricultural land by categories and ways of use in 2005. Figure 1 Source: Ministry of Agriculture, Forestry and Water Management Another important aspect for the decline both in numbers and productivity of livestock is the state of the food input industry in Serbia. Both fattening and overall numbers depend largely on maize availability and price. Several years of poor maize harvest and subsidised biofuel production