State of thе polish foоd economy sector after Poland's European Union accession

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State of thе polish foоd economy sector after Poland's European Union accesion

Состояние польского сектора продовольствия после вступления Польши в Европейский союз

Antoni Mitskevich, Pavel Mitskevich

Антони Мицкевич, Павел Мицкевич

Аннотация

В статье представлены будущие направления развития польского продовольственного сектора в Евросоюзе. Отмечается, что вступление Польши в ЕС привело к увеличению сельскохозяйственных доходов. Согласно данным Евростата средний доход, полученный от сельскохозяйственной деятельности в Польше в 2008 г. (по сравнению с 2000 г.), вырос на 90%. Вступление Польши в ЕС привело к резкому увеличению инвестиций в сельское хозяйство и ускорило модернизацию ферм. Преференциальные инвестиционные кредиты и фонды помощи ЕС сыграли огромную роль в этом процессе. Устранение торговых барьеров между Польшей и ЕС показало высокую ценовую конкурентоспособность сельскохозяйственной и продовольственной продукции. С момента вступления поддерживается положительное сальдо в торговле этими продуктами. В период с 2003 по 2007 гг. экспорт увеличился на 230%, в то время как импорт - приблизительно на 125%. Другие страны ЕС стали играть всё более важную роль как торговые партнёры Польши. Улучшения в текущей сельскохозяйственной деятельности и системе прямых платежей в пересчёте на гектар земли привели к быстрому увеличению цены на сельхозугодья.

Abstract

The paper presents the future directions of Polish Food sector in the European Union. It was J underlined that Poland's entry into the EU resulted in an increase of agricultural incomes. According to Eurostat data, average income obtained from agricultural activity in Poland in 2008 (as compared to 2000) grew by 90%. Poland's entry into the EU brought about an investment boom in agriculture and it accelerated farm modernization. Preferential investment credits and EU aid funds played a huge role in the process. Removal of trade barriers between Poland and the EU showed high price competitiveness of domestic agricultural and food products. From the moment of the accession we maintained a trade surplus in foreign trade of these products. During 2003-2007 export soared by 230%, while import by approx. 125%. Other EU countries acquired an increasingly important role as Poland's trade partners. Improvements in running an agricultural activity as well as a system of direct payments granted to a hectare of land impacted on a quick increase of agricultural land prices.

Introduction

It's been 5 years science Poland joined the European Union. It is a land enough period for integration effects to show including al so the resulting benefits which occurred in our entire economy and in the agricultural and food sector. It's been a time in which various phases of periodical and situation - related changes in production and supply of agriculture have taken place. The progressing integration with food economy of the EU reveals to a greater and greater extent, the influence of globalization and phenomena occurring in the world market on our agriculture, market and processing

Mutual and complete market opening did not act as a brake on the development of Polish food industry, but it provided a strong impetus to growth. The following phenomena are a proof of that:

1. In 5 years' time of our EU membership export of agro-food produce rose from 4.0 to 11.3 b euro (2.8 times), whilst import in the sector rose from 3.6 to 9.8 b euro (also 2.8 times), and a surplus increased 3.3 times from 0.4 to 1.5 b euro.

2. Trade exchange with the EU states grew even faster. Food supplies from Poland to the EU-25 in the course of 2003-2005 soared by 248%, and transport into Poland swelled by 212%.

3. EU membership gave a new, powerful impetus to the exports of polish agro-food produce into the EU-10/12. Increase in the trade dynamics with these countries as well as improved results were particularly noticeable in recent years, whereas trade with the EU-15 recorded a drop in the dynamics and deteriorating results.

4. Trade surplus in agro-food produce improved:

- in total from 0.4 b euro in 2003 to 1.5 b euro in 2008,

- with the EU-25 from 0.4 b euro to 2.3 b euro in 2008,

- with the UE-15 from 0.2 b euro to 0.8 b euro in 2008 (during 2006 - 2007 - 1.5 b),

- with the UE-12 from 0.2 b euro to 1.5 b euro in 2008.

Functioning within the framework of the Common European Market has not led to flooding the Polish market with EU imported food - a threat frequently occurring in pre-accession forecasts. Foreign trade in mat period became an important factor in the development of food industry and agriculture, because - with relatively stable domestic demand - it was absorbing a substantial part of national production increase. Export share of the production sold in 2008 reached 22% in comparison to 16.5% in 2004 and 10.5% in 2000.

Materials and method.

Statistical material from reports prepared by the Central Agency for Agriculture Development and Modernization, Agriculture Economics Institute in Warsaw and the Central Statistical Office /CSO/ were used in the paper. The analysis focused especially on five issues concerning:

- the economic situation of Polish agro-business,

- financial aid to the agro-food sector from the EU budget,

- agricultural income,

- investments into and modernizations of farmsteads,

- activity diversification in rural areas.

Research results and discussion

Economic situation of the Polish agro-business after the l^st May 2004

Poland's accession into the EU did not lead to profound changes at the level of production in such major areas of Polish agriculture as crops, milk and pork. Production of root plants, potatoes and feed crops in particular, demonstrates a strong downward tendency. Following our accession into the EU fruit production dropped slightly, but its current level is approx. 15% higher than during 1998-2000. Agricultural activities which recorded a production increase following the EU entry include poultry sector as well as rape crops, inter alia, on account of an increasing demand for bio-fuels.

After Poland's accession to the EU, global agriculture production in permanent prices amounted to approx. 58.5 b and it was higher than in 2001-2003 by 2.5% on average. Following the accession animal production grew by 6.9%, while plant production fell by 1.1%. Plant production was characterized by a faster rate of increase in end and commodity production than in global production, which means that external use, both for production and consumption purposes, decreases, while marketability of production increases.

A drop in food consumption occurred only in the first year of our EU membership and it resulted mainly from a substantial rise in food and non-alcoholic drink prices. The decrease in food consumption stopped in 2005, and since 2006 a renewed demand growth for agro-food products was recorded in most markets.

Source: own calculations on the basis of SCO data

Li the course of 2003 - 2008 significant income changes in Polish farmsteads took place. Once Poland acquired a status of a European Union member state in 2004, Polish farmers' incomes grew decidedly. Income obtained from farms during the pre-accession period rose over twofold per person employed full time (working a minimum of 2200 hours on a farm during a year). It was the subsidies that farmers received through off-market channels which impacted so positively on the income situation. In 2003 the subsidies constituted a 9.4% share in income generation, in the subsequent year the share rose to 39%. The largest share of subsidies in income generation was recorded in 2006, when subsides were of higher significance in income generation that production activity. Following the accession relative farmers' profitability improved in comparison to that of other professional groups. Although an average farmer's income calculated per person employed full time constituted 24.2% of an average net salary in the national economy in the period prior to accession, then during the first year of Poland's membership the ratio grew over twofold, reaching the level of 56.2%. In subsequent years the relations oscillated from 43.3% in 2005 to 57.5% in 2007 - during a very good year for agriculture.

Table 1. Selected data on salary and subsidies in the farm sector in Poland during 2003 - 2008.

Source: Calculation of Z. Floriaсczyk and L. Goraj on the basis of macroeconomic calculations for agriculture -EAA and CSO data

According to estimates conducted with the Economic calculations for Agriculture, the value of Polish agricultural production (calculated according to market prices) during 2004-2008 grew by over 18.7%, and the value of subsidies by 38.5%. Simultaneously, the value of intermediate consumption rose by 28.1%. Consequently, income per person employed full time in agriculture at the time decreased by 2.2%, while average net salary in the national economy grew by 27.3%. Forecast assumptions and results on farmers' income, prepared by the European Commission for the period from 2005 to 2014, need to be quoted here. The forecast indicated that real income calculated per person in full employment is to rise by 32.2% in the 10 countries which joined the European Union in 2004, on condition that employment is reduced during that time (measured in the number of persons in full employment) in agriculture by 21.8%. To achieve such growth, employment in agricultural sector would need to fall by an average of 2.4% annually.

- income increase is the driver for the development of domestic food and beverages market,

- food industry companies produce more for export, which is demonstrated in increasing share of export in sales.

The impact of these two growth factors of food industry production varied at particular phases of integration of our economy into that of the European Union. A production boom during the period directly prior to Poland's accession into the Community was caused mostly by fears of inflation, which led to an increased domestic demand in late 2003 and the first months of 2004. At that time the economy recorded some increase in exports of №gro-food products. Whereas price growth during the first months of 2004 caused domestic demand to fall, with simultaneous quick growth in export dynamics.

Nevertheless, this weakened domestic demand was only transitory, as under the influence of Poland's increased economic growth population remuneration increased and another domestic market boom occurred from mid-2005.

The phenomenon was particularly noticeable in 2007. At the same time, high ratк of increased agro-food exports persisted, which indeed demonstrates some downward tendencies (from nearly 30% in 2004-2006 to 18% in 2007), but it remains high.

Since mid-2005 food processing started to develop on solid grounds, creating both permanent rise in domestic and export demand. With growth rate, food industry production rate in 2003-2004 and early-2005 oscillating significantly, from mid-2005 onwards the growth rate of the sector stabilized at a high level (approximately 6% annually). In 2008 the growth rate in food industry slowed down to 3% annually. Growth slowdown in this industry branch was being recorded especially since May 2008.

After the EU accession - similarly to previous years - secondary processing, that is multi-component product manufacture, highly processed product manufacture, recorded the highest growth rate. During 2003-2008 the production value of this type of processing (in permanent prices) rose by approximately 36%, while production growth rate only amounted to 2% per annum.

Following the EU accession financial ratios improved dramatically in the entire food sector. In the course of 2004-2007 (in comparison to 2003):

- net profitability rose twofold to approx. 4%, while ROE (ROE - en. Return on Equity) two and half times to approx. 12-13%, to the level over twice as high as NBP's basic interest rate;

- profitability ratios grew only slightly: gross profit margin (from 2.5-3.0 to 4.5-5%), cash revenues (from approx. 5 to 7%), and operating margin (from 8.5 to 9.5%);

- burdens of financial costs levied on revenue decreased (from 2.3% to 1.2-1.3%) and so did income tax on profit from 40% to approx. 20% (main sources of improved net profitability ratios).

As a result of a significant improvement of profitability in the years past, the following growth rate was achieved:

- four times for the net profit amount - from 1.6 b PLN in 2003 to 6.5 b PLN in 2007,

- equity - respectively from 30.1 b PLN to 44.8 b PLN (by 59%), including own active assets from 5.1 b PLN to 10.8 b PLN.

The above made financing of enlarged (by 41%) investment expenditure possible along with stabilization of relative long-term debt, whose value increased similarly to equity.

After Poland's accession to the EU and during the following years no changes in entities structure took place in the food sector. There were also no mass bankruptcies (of domestic companies). The economy did not record any increased number of mergers, takeovers or consolidations of entire sectors. However, the number of industrial companies, mostly small and micro-companies, fell slightly.

Financial support of agro-food sector from the EU budget.

The years directly preceding our membership as well as the first five years of it are a period during which agriculture and rural regions were receiving financial support from the EU budget. During 2004-2008 funds for the development of agriculture and rural regions came from four programs of many years: a pre-accession SAPARD program (although the implementation process of SAPARD ended in early-2004, but on account of the principle of n+2, under which projects can be carried out and settled during the year of joining the program and two subsequent years, a significant amount of SAPARD funds was directed to rural regions already in the course of our membership), Rural Areas Development Program for 2004 - 2006, Sector Operational Program “Restructuring and Modernization of Food Sector and Rural Areas Development” (financial settlement of both programs was concluded on the 31st December 2008), as well as Rural Areas Development Program for 2007 - 2013. The total amount of public funds, both national as well as EU funds, which were distributed to rural regions during our membership via these programs can be estimated at 26 b PLN, that is over 5 b PL annually.

Table 2. Public funds, co-financing «rural» programs during 2004 - 2008 (estimates; public national and EU funds paid to beneficiaries in million PLN).

Source: own studies

Of all the programs listed in table 2 only SAPARD featured a clear character of an investment program, supporting above all infrastructure investments (roads, water mains, drainage system), modernization of some food industry sectors, adjustment to the EU standards, modernization of farmsteads (chiefly, purchase of farming machinery and tractors). The remaining programs, carried out entirely in the course of Poland's membership, were of mixed nature. Apart from supporting investments in numerous branches of agro-food industry and further modernization of farms, both in the period of 2004-2006 and during 2007-2013, substantial funds were allocated to the programs supporting incomes (subsidizing regions with unfavourable conditions) as well as social programs (structural sickness pensions) and environment protection programs.

Agricultural income.

Poland's entry into the EU resulted in an increase of agricultural incomes. According to Eurostat data, average income obtained from agricultural activity in Poland in 2008 (as compared to 2000) grew by 90%. However, in comparison to 2007, there was a drop in Polish farmers' incomes by nearly 16%, which was caused by the supply-demand situation in agricultural markets. Only Latvia and Estonia recorded higher fall in incomes from among new member states. Yet, in those countries income growth during 2000 - 2008 was decidedly higher and it oscillated between 186% (Latvia) and 155% (Estonia).

The volume of agricultural produce sold (less costs incurred) is not the only factor influencing agricultural incomes. Money transfers played a significant role, too. Thanks to Poland's participation in the EU and covering the sector with CAP and structural policy mechanisms, the scale of financial flows for the benefit of agriculture rose dramatically. In the entire period of 2004 - 2008 Polish agriculture received 10 387,321 m euro only in direct payments (jointly from the EU and national budgets). Despite the fact that the amounts of direct payments are gradually increasing in Poland and they are going to reach the level of direct payments received in the EU-15 only in 2013, their impact on agricultural incomes is significant. In 2008 42% of farmers' income came from the payments, while a few years before, prior to Poland's accession to the EU, the share of payments from public funds did not exceed 10%.

Nevertheless, income growth in the sector does not mean that each farm experienced positive effects of the accession to an equal degree. Relatively the highest rise in incomes was observed in very small farmsteads. However, despite the support received from CAP, a definite majority of farms was not and will not be able in the future to turn into entities which can ensure the level of income guaranteeing the standard of living to a farmer's family similar to that achieved outside of an agricultural sector (parity of consumption level) and funds for farm growth. Only farms larger than 35 hectares (approximately 76 thou.) can be deemed to have a potential, guaranteeing both proper standard of living to a family and investment opportunities.

Investments and modernization of farmsteads.

Poland's entry into the EU brought about an investment boom in agriculture and it accelerated farm modernization. Preferential investment credits and EU aid funds played a huge role in the process.

The obligation to adapt to sanitary, hygienic and veterinary requirements with simultaneous access to funds constituted a powerful investment impulse. Bringing dairy farms to the EU quality standards posed a substantial challenge. In mid-2003 barely 4% of farms supplying milk to dairies fulfilled the conditions of production and milk quality standards in force in the EU. Investments into modernization of cow-houses, construction of rooms for milk storage, installation of modern systems of ventilation, lightning or cow milking were necessary. That is why milk farms were granted a transitory period (until the end of 2006) to bring their milk up to the quality standard required.

Before Poland's accession into the EU, the standards of environment protection and animal well-being imposed on Polish farms rose substantial doubts among farmers. There were fears that costs of adjustment, estimated at 1708 m euro, would be too high and would cause many farms to go bankrupt. animal production farms, which, inter alia, needed to build devices for manure and liquid organic waste storage, required the highest pro-environment investments. It was estimated that the cost of adjustments per one farmstead could even reach 17 thousand zloty. Egg producing farms also needed to carry out suitable adjustments. Consequently, during accession negotiations they were granted a transitory period (until the 3lst December 2009) for the modernization or exchange of cages in which layer hens were kept, thanks to which the investment process could have been spread over a period of several years.

In a situation of low agriculture profitability the support from public fund was needed to conduct modernization changes. Investment activities aimed at adjustment to the EU standards could already be carried out prior to the accessions itself, particularly thanks to the support received under the SAPARD program. However, farmers showed moderate interest in the aid provided. As a result, only a limited number of animal breeding agricultural farms took advantage of the aid scheme. Most of the funds were spent on modernization of machine park.

Following Poland's accession to the EU, funds for the adjustment to the EU standards were available under the Rural Areas Development Program (RADP) 2004 - 2006. Aid could have been obtained for, inter alia, equipping farms with devices for manure storage, the investments necessary at milk farms and at chicken farms. Farmers demonstrated fairly high degree of interest in that activity. In total, nearly 631 m euro of public funds was spent on bringing farms up to the EU standards, from which 70.8 thou. farmers benefited. Under SOP Agriculture in 2004 - 2006 nearly 27 thousand farmers obtained direct aid to investments carried out at agricultural farms.

It was expected that direct payments would become one of the instruments which would stimulate the investment process in Poland after its entry into the EU. Although their influence on the improvement of farmers' income is unquestionable, it is still not known to what purpose were these funds mostly spent. Sub-studies indicate that a significant part of payments was allocated to expenditure relative to on-going agricultural production.

During 2004 - 2007 investment outlays in agriculture grew by nearly 70%. Investments of farms on buildings rose from 844 m zloty to 1430 million at that time. Making the funds available stimulated a demand for farming machines. In 2007 tractor deliveries soared by nearly 70% in relation to 2007. Sales of cultivators rose as well (550%), combine harvesters (20%), potato planters (78%). Modernization activities resulted in, inter alia, concentration of stock-breeding in modern farms, the share of high standard milk grew. Yet, on the other hand, some farms, especially smaller ones, gave up production. From the season of 2004/2005 to 2008/2009 the number of milk suppliers fell from 355 thousand to 195 thousand. Nevertheless, it did not affect the total volume of milk production in Poland, as livestock population rose and cows' lactation yield improved.

Activity diversification in rural areas.

During the period of transformation in the early 1990's the conditions of carrying out agricultural production in Poland deteriorated markedly. Restriction of state interventionism led to a dramatic drop in real prices for agricultural produce, and with decreasing domestic demand difficulties with produce sales ensued. Unfavourable agrarian structure (dominance of small farms) limited the possibilities of improving agricultural production efficiency. Finding alternative employment would be a solution out of the situation. However, opportunities of earning a living outside of farming decreased dramatically at the same time as due to general economic conditions. Unemployment was growing, whereas farms fulfilled a role of a social buffer. It is estimated that unemployment (overt and hidden unemployment jointly) affected over 2 million people in the countryside.

The question of surplus labour force and unemployment in the countryside was one of the main problems occurring in the rural areas. Poland's entry into the EU seemed to offer a chance of improving the situation of countryside residents in the labour market. Thanks to pre-accession aid, and in particular the funds available under the SAPARD program, Polish countryside was given a powerful impulse for developing all forms of entrepreneurship. During the entire period of the program operation 45 m zloty was spent on creation of additional income in the countryside. The activities which received support included, inter alla, services for farms, building and installation works and services, tourist and transport services. A majority of the projects carried out aimed at developing agro-tourism activities. Under the activity targeted at entrepreneurs, 2620 projects were implemented to the total amount of 220 m zloty, aimed at creation of additional job places.

Poland's economic growth after its accession to the EU had a positive impact on the labour market and it created new places of work in all of Poland. Some residents of rural areas found employment in cities or emigrated to other countries. Approach to the agricultural policy changed, taking into account the issue of multi-functional development of rural areas to a greater degree. The implemented instruments of the EU structural policy provided additional support to income diversification in rural areas. SOP Agriculture had a budget exceeding 300 m zloty to back up the development of alternative sources of income in the countryside, out of which 90% was spent. The Integrated Regional Operational Programme (IROP) created opportunities for professional reorientation of the people abandoning agriculture or for support to micro-businesses. In the Rural Areas Development Program for 2007 - 2013 (RADP) 1.37 b euro is to be allocated for rural economy diversification in that entire period.

Poland's entry into the EU accelerated the process of reducing the agrarian character of the Polish countryside and improving its situation in the labour market. During 2003 - 2007 registered unemployment in rural areas fell by over one third, a percentage of people employed in farming during that time dropped from 18.3% to 15%. In 2007 those working outside of farming in the countryside found employment in industrial processing (31.9%), commerce and repairs (17.1%) as well as the building sector (9.9%).

Although the funds from the EU budget have undoubtedly influenced the pace of the process and enabled the development of alternative sources of income, it is difficult to estimate the efficiency of all the supported projects. Still, the actions targeted at the countryside have not always been well-aimed or carried out in a manner that suited the needs. Low interest demonstrated by farmers in using individual consultancy services on choosing a new occupation or subsidizing work places, where farmers would be employed, serves as a good example. At present the policy of rural areas development is implemented in Poland under the RADP 2007 - 2013. Yet, allocation of funds to particular activities indicates that the concept of a multi-functional development of the countryside has not gained wide support in Poland. A majority of funds have been allocated to activities related exclusively to agricultural production. This shows that the countryside policy maintains its traditional character and there is a need for a change in the approach to the idea of a sustainable growth of rural areas not so much on a strategy, but rather on implementation level.

Conclusions

1. Poland's entry into the European Union served as a boost to changes in rural areas. Instruments of the common agricultural policy had a positive impact on the profitability of agricultural production and improved farmers' financial situation. In 2008 average income of a person employed in farming in Poland was higher by 90% from the level obtained in 2000. Income growth in the sector does not, however, mean that every farm experienced positive effects of the accession to an equal degree. Although very small farms recorded relatively higher income growth, their level still continues to decidedly deviate from average income earned in cities and does not ensure means for investments into farm development. Implementation of rural areas development policy accelerated the process of the agricultural sector modernization and diversification of sources of income in the countryside.

2. The accession changed the supply and demand conditions in individual agricultural markets. Global agricultural production in 2007 was 46% higher than in 2000. Gross value added of agricultural production rose by nearly 10 b zloty in that period (from 17.7 b zloty to 27.2 b zloty).

3. Improvements in running an agricultural activity as well as a system of direct payments granted to a hectare of land impacted on a quick increase of agricultural land prices. In 2008 the price of one hectare of arable land traded between farmers grew by 140% in relation to the price recorded in 2003, whereas the price of one hectare of arable land sold by the Agricultural Real Estate Agency rose by 230% in the same period. Nevertheless, the fears, prevailing prior to the accession, of foreigners buying up land did not come true. Interest in purchase of farm land and forested land, as well as the so-called second homes, did not rise significantly.

4. Removal of trade barriers between Poland and the EU showed high price competitiveness of domestic agricultural and food products. From the moment of the accession we maintained a trade surplus in foreign trade of these products. During 2003-2007 export soared by 230%, while import by approx. 125%. Other EU countries acquired an increasingly important role as Poland's trade partners. In 2003 nearly two thirds of all agro-food exports were directed to the present EU-27 states. Four years later that share has exceeded 80%.

polish agriculture investment credit

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