Romania Agribusiness Report Q2 2012

BMI View: On the back of a bumper grains harvest in 2011/12 expected to provide livestock and dairyproducers with cheap feed in 2012, elevated grain stocks encouraging farmers to take advantage of highglobal prices on export markets and the lifting of a ban on pork exports to the EU, certain sections of theRomanian agricultural industry have started 2012 on a high. However, freezing temperatures and dryground are threatening crops, and poor investment management is holding the industry back. Over thelonger term, we hold a relatively positive outlook on the Romanian consumer, largely on the back of alarge population and low base effects.

Key Forecasts

.. Milk consumption growth to 2016: 9.6% to reach 5.5mn tonnes. We note thatmilk consumption at 16kg/capita by 2016 will still stand starkly below the European average of75kg/capita, suggesting much more room for consumption upside.

.. Wheat production growth to 2015/16: 18.8% to 8.5mn tonnes. Growth will be buoyed by EUagricultural subsidies, foreign investment and increased plantings in response to higher prices.

.. Pork production growth to 2015/16: 11.5% to 507,000 tonnes. The lifting of a ban on porkexports to the EU poses upside risks to an already healthy growth outlook.

.. 2012 GDP growth: 1.4% (down from 2.1% in 2011)

.. 2012 consumer price inflation: 3.1% (down from 5.8% in 2011)

Key Industry Developments

Valeriu Tabara was replaced as Romania's minister of agriculture by Stelian Fuia in February 2012. LikeTabara's appointment before him, Fuia's has caused considerable controversy owing to his advocacy ofgenetically modified organisms. He has worked for various agribusiness firms producing seeds andpesticides, but his longest tenure was with GM crop giant Monsanto and, like his predecessor, he isperceived to be pro-biotech. This has already made him a target of ire for Romanian GM critics, whoasked the prime minister to revoke his nomination 'considering his long career within Monsanto.'

In February 2012 Romanian dairy producer Covalact opened a EUR1.1mn logistics centre in SfantuGheorghe. The firm also plans to spend a further EUR4mn over the coming years to boost capacity andlaunch new products. However, in December 2011 Israeli dairy producer Tnuva pulled out of the countryhaving invested EUR60mn in its business there. Tnuva intended to use Romania as one of its initiallaunch pads for international expansion. Tnuva wanted to establish a complete system from milkproduction through distribution under the Tnuva and Yoplait labels. So while Covalact's investmentshould be celebrated and its timing deined to be more fortuitous than Tnuva's, it is nevertheless dwarvedby the Israeli company's original investment and ambition; and the demise of Tnuva's Romanian storyperhaps points to a business environment that is still marked with pitfalls for the potential foreigninvestor.

Romania was cleared to start pork exports to the EU as of January 1 2012. The ban was initiallyimplemented due to the country's controlling of Classical Swine Fever. However, according to RaduRoatis, president of the National Medical Veterinary and for Food Safety Authority (ANSVSA), thedecision to overturn it was unanimous among member states. The last outbreak of Classical Swine Feverwas recored in Timis County, Romania in 2007 at farms belonging to US firm Smithfield. 50,000 pigswere killed at the farms. Romania is still not yet considered free of the disease. 'Lifting the commercialbarrier imposed on Romania because of the swine pest might bring between EUR600mn and EUR1bn inthe first year, according to the estimate made by the representatives of the Romanian meat processingindustry,' said Roatis.