Report Highlights

For the second year in a row, pork was Romania’s top agricultural import in 2005 (almost USD 400 million worth), as domestic supplies are low and of variable quality. Beginning October 1, 2006, U.S. pigmeat exporters will be allowed to ship to Romania only from EUapproved plants. Romania’s decision to implement EU regulations prior to the country’s accession raises potential national treatment concerns under the WTO, as the measure holds third-country meat products to a higher standard than Romania’s own domestic product. Live cattle continue to be a major agricultural export.

Executive Summary

The Romanian cattle herd is fairly stable, but the GOR’s efforts are currently directed towards the introduction of specialized beef versus dairy production breeds, improvements in feed and forage practices at farm level, and advanced techniques for animal husbandry, in an attempt to maximize support from the European Commission upon Romania's EU accession, anticipated for January 2007. Cattle slaughter is slowly recovering after the significant decline in 2004 and 2005, although the pace of exports of live bovine animals to the EU remains intense. Romania continues to be a net importer of beef in 2006, on the background of a quasi-constant consumption.

In the beginning of the 2006, Romania’s swine herd reached a new low at 4.85 million head (down 1 percent from the previous year), mainly attributed to the reduction in sow numbers, in partic ular the reproduction stock, in 2003 and 2004. The pig crop is nonetheless expected to start rising again in 2006 and 2007, which will result in some recovery of the sector by end of the first year of Romania’s EU membership. A major problem remains the quality of the domestic pork supplied to the processing industry, as the majority of the swine herds (81 percent in 2005) are held in individual households, with deficient feeding and husbandry practices, and generally poor genetics.

For 2006, we anticipate that pork production will be fairly stable (or will shrink marginally), while from 2007 it should resume growing as a result of direct investments in the sector. Although abundant local corn production and still-cheap labor should be key to the sector’s competitiveness, currently domestic production costs are high. With imminent EU membership, Romania is having to make significant structural changes in pig growing.

In 2004 and 2005, swine meat was Romania’s top agricultural import (almost USD 400 million 2005), as domestic supplies are low and of variable quality. However, imports will be limited in 2006 by the country’s decision to implement EU regulations prior to actual accession, which, from the month of October, will allow entry of U.S. swine meat only from EU-approved plants. The United States is the third largest supplier of pork cuts to Romania, with 31,000 MT (CWE), worth USD 57 million. U.S. swine meat exports to Romania have continued to grow in 2006, and are up almost 150% during the first 4 months of the year (to USD 14 million) compared to the same time -period in 2005.

Production

Recovery in Romania’s cattle is slow (with herds just 0.7 percent up at the end of 2005 compared to one year earlier) and this trend is expected to continue in the medium run. This situation is, as mentioned in our past analyses, due to both the long production cycle and the structural deficiencies that are still characteristic of Romanian agriculture, even though the GOR came up with various subsidy schemes (see section on Domestic Support Policy) for bovine growers.

Cattle and calves on feed were just above 2.9 million head in the beginning of 2006, with some marginal increase in inventories registered the first semester compared to the corresponding period of the previous year, which, on the background of a quasiconstant reproduction stock, makes us anticipate that end-year numbers will stand at similar levels. While it is generally admitted that in practice there are no differences in feed ration formulation for dairy cows versus beef cows, the Romanian Ministry of Agriculture is currently preparing the National Program for Cattle Growing Restructuring, which will provide figures to make the distinction between the two categories.

This document is aimed at addressing a number of priorities that would help the sector to better absorb the European support granted upon country’s EU accession. As the slaughter premium (as per Council Regulation (EC) No. 1254/1999) agreed as a result of the agriculture negotiations between Romania and the EU can be granted for a maximum of 1,148,000 adult bovine animals and, respectively, 85,000 calves, efforts are currently directed towards the introduction of specialized beef production breeds, improvements in feed and forage practices at farm level, advanced techniques for animal husbandry, and the introduction of carcass grades and standards.

This is also important because Romania is currently in the process of preparing the national registry of farmers eligible for future direct payments for milk from 2007, as the country negotiated a pretty substantial quota for milk. The total national reference quantity for milk was set at 3,057,000 MT of which 1,093,000 MT for deliveries and 1,964,000 MT for direct sales. This, together with the “Reserve” quota that might add in 2009 in order to count for current on-farm consumption, reflects Romania’s potential to improve milk collection, cold storage and processing facilities.

Official data provided by the Romanian National of Statistic s to EUROSTAT indicate that the total number of cows and heifers on November 30, 2005 was 1,817.6 thousand head, of which dairy cows 1,625.4 thousand head. This is not reflected in the Production, Supply and Demand Table below, as, for the sake of consistency inter-years, Post uses December 31 data in the analysis1.

Beef production was 5 percent up in 2005 (203,000 MT on a carcass weight basis) and originates mainly from small farms and individual households. This was the result of both the additional 12,000 animals slaughtered over the marketing year, but also the increase in the average carcass weight (due to Governmental programs meant to extend the period until calves are butchered). Interestingly enough, the share of beef used for self-consumption in rural households declined to 25 percent, as against 38 percent in 2004. For 2006, we anticipate that the growth in bovine meat production will be just marginal (some 2-3 percent), as the high domestic prices maintain consumption pretty stable, while demand for live cattle in Europe has accelerated lately, triggering significant exports from Romania in the first semester of the year.

In the beginning of 2006, Romania’s swine stocks reached a new low at 4.85 million head (1 percent down from the previous year), mainly attributed to the reduction in sow numbers and in particular in the reproduction stock in 2003 and 2004. The pig crop is nonetheless expected to start rising again in 2006 and 2007, which will result in some recovery of the sector at by end of the first year of Romania’s EU membership. A major problem remains the quality of the domestic pork supplied to the processing industry, as the majority of the swine herds (81 percent in 2005) are held in individual households, with deficient feeding and husbandry techniques, that add to the generally poor genetics.

For the fiscal year 2006, the GOR put in place a number of domestic programs meant to help the livestock sector to recover prior to country’s anticipated 2007 EU accession (see section on Policy).

An important boost to the hog industry is expected to come from Smithfield Foods2’ new operation in Romania, currently under development. The multinational purchased a large pork processing plant in the western part of the country, dating from the socialist era, and is currently investing to turn it into a top platform in the proximity of some major export markets in early 2007. Smithfield is also constructing and populating farms to raise highquality hogs for slaughter (within five years, the company expects to raise and slaughter in Romania about 4 million hogs per year), which will soon make them a major consumer of fodder and feed grains, as well as of services delivered by local farmers and suppliers.

According to revised data released by the Romanian Ministry of Agriculture, total hog slaughtering in 2004 stood at 5.67 million head (from 5.96 million head reported in RO5011), resulting in 470,000 MT (carcassweight) of meat. In 2005, production raised by 5 percent, attributed to both the number of animals delivered for processing (up by almost 4 percent), but also to some increase in the average liveweight at slaughtering.

For 2006, given the anticipated evolution in hog population, pork production will be fairly stable (or will just shrink marginally), while from 2007 it may resume growth, as a result of direct investments in the sector. The average liveweight at slaughtering in the first semester of 2006 was 104 KG/head for hogs and, respectively, 350 KG/head for bovine cattle, slightly under the values registered in the corresponding period of the previous year. In fact, such reduced weight of the calf carcasses makes the Romanian beef only very seldom accepted on the EU markets.

Ministry of Agriculture’s statistics show that, in 2005, only about 28 percent of domestic pork supply was delivered to processors (the corresponding figure a year earlier was 21 percent). The share of self-consumption decreased to 53 percent (from 63 percent in 2004), with the remaining 19 percent channeled directly to the retail market (such sales absorbed just 16 percent of the total pork domestic production in the previous year). This gives an indication about the quality inconsistency of domestically supplied hog meat, often unacceptable for the processing industry. As a result, pork imports expanded rapidly, becoming the top agricultural import into Romania from 2004.

Although abundant local corn production and still-cheap labor should normally be key to domestic swine sector’s competitiveness, currently domestic production costs are high. With the imminent EU membership, Romania is encountering significant structural changes in pig growing. We forecast that very soon only the few farms that invested in technologies will remain operational, on the background of an accelerated industry consolidation and vertical integration. Currently, the domestic meat supply is very fragmented and originates from operations largely inconsistent in terms of technical endowment.

As far as accession preparations related to food safety are concerned, Romania was granted a transition period until December 31, 2009 for modernizing and re-vamping its slaughtering and meat processing units, in compliance with the EU requirements, while products from establishments subject to transitional arrangements will not be sold to other Member States and will be clearly identified.

In the beginning of 2006, there were 19 plants for red meat approved to export to EU (falling under “A” category), while another 238 were expected to be EU compliant by January 1, 2007 (the “B” category). In the “C” category, there were 25 red meat establishments (i.e., expected to meet the EU requirements by the end of 2009). The “D” category (likely to be shut down by October 1, 2006) were 274 operations, of which some might move up into other categories, depending on their availability to invest in revamping and modernizing their facilities. The existing processing capacity totals roughly 730,000 MT/year for slaughtering and, respectively, 777,000 MT/year for meat products, of which an estimated 30 percent will be closed.

Consumption

Expansion of swine meat domestic consumption, in response to consumers’ reticence to buy poultry after the numerous highly pathogenic avian influenza outbreaks in Romania was also encouraged in the first semester of 2006 by the pork price depreciation. The situation is currently changing and we forecast a downward scenario in the second half of the year, as the Romanian authorities decided, via radical and abrupt sanitary-veterinary requirements EU-like, to cut, from October 1, imports from US and Canada, two major sources of swine meat in the past. It is thus hard to believe that Romanian consumers will be able to keep pace with the raising meat prices on the alternate import markets (EU) as well as the domestic ones.

Per capita meat consumption in Romania is very slowly increasing and still represents just about half of the EU average. Poultry’s share in the average diet is steadily going up (reaching an estimated 35 percent in 2005), although pork still holds about 45 percent of the total meat preferences. Beef and veal are not traditional in the consumption pattern, with some 15 percent share in the total.

Intake of calories of animal origin continues to be relatively low in the consumption pattern (about 23 percent in 2005, from 20 percent a year earlier). It is expected that consumption of pork originating from backyard individual households (which typically produce for self-consumption) will shrink in the near future. The meat and meat product market is expanding, in tandem with an ascending purchasing power of the population. Concentration is fairly high, with the largest five meat-processing companies accounting for roughly 40 percent of the sales. Romanian market nonetheless still has an important growth potential, given its dimension (22 million people), the still relatively low labor costs, and the good quality of the traditional meat products. Limiting factors are currently the rapid appreciation of pork prices in Europe, the limited domestic supplies, as well as the elimination from the market, through sanitary and veterinary restrictions, of the North-American swine meat suppliers.

Companies make efforts to develop brad awareness establish national distribution channels, sales and logistics infrastructure. Despite a visible trend towards buying higher quality, nicely packed branded products, more than half of the meat and meat-processed products are still sold in bulk. Demand for liver-paste (“paté”) is high among the lower income population segments.

Trade

Romania’s top agricultural export continues to be, like in all recent years, live sheep and bovine animals. The main markets for cattle are the EU and the Middle East countries. In 2005, 150,000 head (compared to 172,000 head a year earlier), mainly fattening calves to be finished in the country of destination, were shipped to Croatia, Greece, Bosnia and Herzegovina, Egypt, Germany, etc. With the EU’s reconfirmed interest in buying calves from Romania, regardless the breed, the weight or whether male or female, the pace of these exports remains high in 2006, with over 72,000 live animals shipped in January-May.

Exports of beef and veal, on the other hand, are very limited. The European markets practically do not grade the small carcasses of about 150-250 KG, quite typical in Romania, as animals are often slaughtered too early. Breed improvement for beef production remains a major priority for the sector to move to higher value products. Government support measures are in place for increasing the period when the animal is kept on feed (slaughtering premia, that will remain operational also after country’s EU accession).

United States consolidated its position in this marketplace, becoming the third largest supplier of pork cuts to Romania, with 31,000 MT (CWE), worth USD 57 million. US swine meat exports to Romania have continued to grow in 2006, by almost 150% during the first 4 months of the year, compared to the same time -period in 2005. The value of US swine meat exports to Romania reached $14 million in 2006 (4 months), with 125% more than last year.

Nonetheless, under the pressure of the domestic growers, the GOR approved in September 2005 a regulation with a major impact on pork meat exports to Romania. Veterinary Order no. 53/2005 transposing the EU 79/542/CEE and 2005/234/CEE, regulates animal health and veterinary certification requirements for non-EU members. The regulation sets standards which limit US exports to Romania as only EU approved red meat processing plants, would be eligible to export.

The above veterinary order was to go into effect on July 1, 2006. However, according an amendment published on June 23, 2006, the implementation date was delayed by three months and current veterinary certification for US pork meat exports will remain in place until October 1, 2006. Consequently, all pork meat exports certified on or before September 30, 2006 will be accepted in Romania accompanied by the current health certificates. After October 1, 2006 pork meat shipments must be certified with revised certification that indicates compliance with EU requirements.

As numerous processing facilities in Romania have already been granted a transition period to meet the requirements outlined in Veterinary Order 53, the decision Romania took to implement EU regulations prior to country’s accession raises potential national treatment concerns under WTO, as the measure should hold third country meat products to a higher standard than Romania’s own domestic product.

Under preferential arrangements, various livestock products originating from EU can enter Romania duty-free, while other enjoy TRQs until January 1, 2007 (see Table 1 below). Currently, as Romania's granting of preferences to the European Union is inconsistent with a mandatory criterion of eligibility for the US GSP program, the USG is considering removing the country from the program.

In order to ship fresh pork to Western Europe, Romania must be declared free (eradicated) of Classical Swine Fever. According to OAI rules, a country is eligible to export at the earliest 6 months after the last outbreak is closed. For the past couple of years, vaccination against the disease was forbidden affected in rural households, which resulted in 456 outbreaks (that is, 3,173 pigs all over the country) and 1.2 million euros paid in compensations only in January- July of 2006.

Currently, the National Veterinary Authority is considering requesting a transition period from the EU, according to which vaccination will be compulsory for the hogs kept in rural households and optional for the ones raised in industrial operations. Vaccination will be phased out in parallel with progress achieved in: (i) farm identification and registration; (ii) biosecurity at farm level; (iii) tracking animal movement; (iv) animal rendering. Annually, budgetary outlays for CSF eradication stand at euro 70 mill.

For live swine animals Romania remains a net importer, with 172,000 head in 2005 (38 percent up from 2004) and a similar trend during the current year. All imports originate from EU member states and are either pure breed animals for reproduction or animals for slaughtering.

Policy

In 2006, most support measures are handled by the Paying and Intervention Agency. In addition, the national SAPARD agency (for rural development funding) was turned in March 2006 into a Paying Agency for Rural Development and Fisheries, in preparation for the future structural funding.

One main change in policy is the shift to direct support per cultivated areas and animal head. These measures are considered transitory to the EU direct payment system, while schemes from the previous years were largely discontinued.

Most of livestock production subsidies are provided per head of animal and can be described as “green box-type”. Eligible are dairy cows, sheep, and fish and the subsidy is especially meant to increase livestock number and improve husbandry practices. Market price support, counting in the Aggregate Measurement of Support, but below the “de minimis level”, is budgeted for hogs and broilers delivered to processors.

Dairy cows will be subject of a payment per head ranging from RON 500-700/head, as follows: 200 RON/head within the initial 60 days from giving birth if calf resulted through artificial insemination, 100 RON/head if the cow had been conventionally inseminated by a certified bull; 300 RON/head for all cows which are registered with the Official Performance Control Office, 100 RON/head for cows registered with the genealogic register, 200 RON/head for cows ecologically certified, 200 RON/head after 6 month age of a calf resulted through artificial insemination, 100 RON/head for a calf resulted through conventional insemination. A slaughtering premium of RON 700/head for young bovine animals weighting over 450 KG liveweight is considered an important incentive for investments in the beef sector.

In the hog sector, between Jan 1 – March 1, 2006, the subsidy per head was set up at 100 RON for animals weighing 90-110 KG and delivered for slaughtering. During the same period, the amount paid per head for ecologically grown hogs was 20 percent higher. From the month of March, there were additional conditions attached to the subsidization scheme, as follows: the hogs were to originate from plants compliant with specified biosecurity measures and to be delivered to authorized slaughterhouses; the unit subsidy varies according to the quality class of the carcass (classified under the EUROP system), as follows: 120 RON/head for hogs in the “E” category; 100 RON/head in the “U” category. Carcasses classified as “R”, “O” or “P” are not eligible for market price support. Ecologically grown hogs from “E” and “U” quality classes are paid 120 RON/head. The overall budgeted amount for swine growers was increased in August 2006 to 96 million RON.

Prices

After prices for both beef and veal and swine meat were on an upward trend in the first part of 2005, they started to temperate towards the end of the year and even depreciated in January-June 2006. This was primarily due to the good grain and protein crops in the MY05/06, which cheapened feed significantly. Nonetheless, AgBucharest forecasts that this tendency will be reverted in the second semester of 2006, given the pretty modest level of feed crops, the raising prices for pork in EU, as well as the elimination from the market, via sanitary and veterinary restrictions, of the US and Canadian swine meat in the last quarter of the year.

The price gap between beef and pork increased compared to the previous year. Poultry remains significantly cheaper.

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September 2006