Hungarian agriculture cannot regain the tens of billions that it will lose in 2020 due to the coronavirus outbreak - claims László Bárány, founder-owner of the Master Good group in Kisvárda, which plays a leading role in the Hungarian chicken market. The performance of agricultural companies may fall dramatically this year, and the performance of agriculture is expected to decrease to 80 percent of the 2019 base. We can hit rock bottom in late May-early June, and agricultural markets can only reach pre-crisis levels by this time next year. However, it is still uncertain how much of the lost sales opportunities will be recovered later and when food prices will recover after the current plunge.
The outbreak of the pancemic first triggered panic buying in Hungary, but later, according to reports from the industry, both domestic and foreign demand for poultry products has declined significantly and product prices have fallen. Do we have to face the risk of mass corporate bankruptcies in the sector if the economic crisis caused by the virus persists?
Everyone has serious difficulties, but at the moment I don’t have information about any company facing the risk of bankruptcy.
Of the medium and large companies, those with an export ratio of more than 30 percent are in real trouble now. Master Good, for example, is one of the largest chicken suppliers of McDonald’s in Europe, but the fast food chain’s restaurants have closed in most European countries in recent weeks, so, the quantity of chicken breast we are selling to McDonald’s has dropped to almost zero. This fact also shows how much the sales of Hungarian food products are affected by the closure of the HORECA market, which includes cafés and restaurants. Incidentally, this sector already accounts for nearly 50% of the food turnover in Western Europe.
The government is now seeking to relieve the crisis caused by the pandemic, through tax and contribution cuts that also apply to agricultural businesses. Would further action be necessary?
Representatives of the poultry sector suggested to the government that, within a short period of time, they should mobilize financial resources which could stabilize the liquidity of enterprises. Food processing companies should be supported with low-interest, short term loans and storage subsidies, so that companies which supply to them can also survive.
Today, poultry companies are storing most of their poultry products in freezers because of the decrease in commercial orders, and so their revenues are significantly decreasing. Therefore, there is a risk that they will start having their operations financed by suppliers, i.e. they will pay them with a 45-50 day or even longer deadline, instead of the usual 30 days.
For smaller poultry businesses, it has been a problem so far that they have not really been able to get bank financing for their activities because they have hardly been considered creditworthy. How can these companies access promotional credit now?
Let me clarify the situation here. Poultry companies can be divided into three groups. The first group consists of strong and well-managed companies with a stable sales background, the second one is companies with temporary financial problems in the normal course of business but are still creditworthy, and the third is small businesses which keep entering and then leaving the market. Businesses in the third group are not eligible for bank financing because their officially reported yearly results are zero or negative every year.
Of the 1,800 registered poultry businesses a few dozen belong to this third category, so their share is not significant, but their activities considerably distort the structure of the whole sector.
In the current situation of falling prices, it was these companies that immediately suspended slaughter and told their livestock farming partners that they could take their reared poultry wherever they wanted. So I will not shed tears for these businesses, and very much hope that they will disappear from the sector as a result of the crisis. This way, the Hungarian poultry market can become cleaner in the next 12-18 months.
There is another question: at what price can the companies which survive maintain their operations? Can we expect major redundancies in this sector, for example?
In this respect, even a few days ago, I was extremely pessimistic, because, in the first place, companies with a large export share may get into difficulties as employers, too. Today, however, it has become clear that several countries have started to ease the restrictions, so I hope that the recovery of the markets can begin.
At Master Good, we now believe that we have little or no need to reduce the number of employees and we can strive to retain our stable and highly experienced workforce. I hope that the situation will be similar in the whole sector.
When is the market recovery you mentioned expected to begin?
We are expected to hit rock bottom in late May-early June.
After that, I expect a cautious and gradual recovery, so agricultural markets, in general, can reach previous levels by this time next year. The phasing is well illustrated by the predictions we receive from McDonald’s almost weekly. Everyone is hoping that the planned reopening will boost demand, but nobody can foresee how fast it will happen. Similarly, we can’t predict how fast the frozen stocks of tens of thousands of tonnes stockpiled in Europe could start to be reduced in the next period.
Today, there is still a great deal of uncertainty about how Hungarian agriculture, as a whole, can emerge from the crisis. Can there be winners and losers?
In relation to this, Prime Minister Viktor Orbán said that everyone would be forced to get out of their comfort zones due to the pandemic, and this is also true of agriculture.
The crisis is causing very serious business losses to all players in the agricultural sector, so the overall performance of the whole sector will be weaker this year. The losses are mainly due to the need to limit production and the decrease in sales prices.
For this reason, I believe that the domestic agricultural output in this year may not reach more than 80 percent of that in 2019, and the profitability of companies will fall dramatically. Unfortunately, it is also a fact that the money we are now losing can no longer be earned in 2021 or later. Therefore, this year will be a survival period for the entire Hungarian agricultural sector, full of lessons to be learnt.
In the export-oriented domestic poultry sector, it is vital to regain the previously acquired foreign markets. Do you see a chance for that?
The consequences of coronavirus and bird flu should be discussed together. It is almost certain that we will be pushed out of the foreign markets for foie gras and other fattened products, and will be replaced by the French.
As a result of the two epidemics, the sales opportunities of the Hungarian chicken and turkey sector have also become endangered, here, however, it is mainly a question of price whether we can get back our markets. Master Good wasn’t excluded from the European stage because our products weren’t good enough, but because our customers shut down their businesses. Now we expect that as the crisis eases, we will be able to increase foreign sales. Marketing work, direct costs and the pricing of products will all play a key role in that, however.
European poultry associations are putting increasing pressure on Brussels to suspend imports of poultry products from so-called third countries due to the crisis. What impact would this have on the market?
The suspension of poultry imports would have an immediate upward effect on the EU market. Poultry products come into the EU from third countries, mainly Brazil and Ukraine, at appallingly low prices. Personally, I do not understand why Brussels did not suspend such imports much earlier.
It is hard to see why to take the risk of the European poultry sector going bankrupt if we have to resort to various costly measures for its recovery afterwards.
You have pointed out earlier that the pandemic will hit all agricultural players this year. What result is Master Good group expected to achieve by the end of the year?
There are so many uncertainties now that it would be at least as hard to say as to predict the winning numbers in the national lottery. There is no doubt, however, that our performance will significantly deteriorate this year.
In the case of chicken breast fillets, for example, sales prices fell so sharply that we should have reduced poultry purchase prices by HUF 60 per kilo. However, we only cut producer prices by 25, and took the remaining 35 as our loss, and then we still haven’t mentioned the other products. As far as I see now, we can definitely avoid making an overall loss, but our profitability may well decrease by HUF 3.5-4 billion compared to 2019. This also means that we may have to temporarily stop preparations for our planned 8-10 billion HUF investment.
In January this year, Master Good completed the acquisition of SáGa Foods Zrt in Sárvár, which is involved in turkey processing. Are you considering further acquisitions despite the crisis?
It is no secret that we had been examining the possibility of buying SáGa Foods for at least three years, and we had been raising the necessary funds for a long time, until last year we finally managed to sign the deal with the foreign owners. However, instead of making further company acquisitions, we believe in an organic development and so we do not intend to open towards new farm animal species. We believe that it is primarily a market and a brand that is worth buying, and these criteria were perfectly met by SáGa.
At the moment, we do not see any other poultry businesses in Hungary which meet these criteria, and we do not want to make acquisitions abroad.