Agribusiness investors should look to the new EU member states for growth, says Robabank

New EU member states such as Romania will be the most dynamic European markets in the next five to ten years for food and agri investors, as farmers from these countries “seek to boost productivity to counteract the eroding positive effects of the Common Agricultural Policy (CAP)”, according to a recent Rabobank report.

The Dutch bank is estimated to own farmland in Romania worth some EUR 20 million, according to media reports.

Reforms to the CAP, which should come into effect in January 2014, will include higher direct payments for the new member states. In Bulgaria and Romania, payments will go up by more than 50 percent while the Czech Republic, Hungary and Slovenia this will be less than 10 percent. The increases, however, will not be as significant as when direct payments were first introduced, according to the report.

This, coupled with rising fixed costs caused by asset appreciation in many of these states – for example, land prices in Poland almost tripled in the period 2004 to 2012 – will further force farmers to boost production to meet their income needs, and could lead to “widespread consolidation of farms in new member states”.

“The potential to increase agricultural production in the new member states is enormous (…). Yield gaps – the difference between the technically feasible yield and the actual average yield – in the new member states are large compared to the old member states. Therefore, in the coming years, farmers in the new member states can be expected to utilise this potential and increase productivity, and thus production, to maintain an acceptable income”, said Rabobank analyst Harry Smit.

Production growth will vary from country from country, depending on direct payment increases and agricultural sectors. “Arable farming, which is less capital-intensive and has a shorter production cycle, should see rapid growth while beef production is set to remain static”.

In the old member states, where yield gaps are much lower, changes in the CAP are expected to have little impact on agricultural production. “With the exception of sugar, market management remains unchanged and European support prices remain below world market prices. However, individual farm incomes could be seriously affected, due to the redistribution effects of moving towards more uniform direct payments per hectare, with the most significant decline in income support being felt by farmers with historically high production per hectare, such as dairy farmers,” reads the report.