For well over a decade, the 13 countries of Central and Eastern Europe (CEE) encompassed in this regional review have been in a state of transition from socialist central planning to open market economies. Their progress along this arduous path has varied, but all have shared a common beginning as members of the former Soviet Bloc.

Seven of these nations are newly independent states resulting from the break-up of the Soviet Union itself in 1991: the small but strategically placed Baltic states of Lithuania, Latvia and Estonia; the geographically immense Slavic lands of Russia, Ukraine, and Belarus; and oft-overlooked Moldova. The FSU (former Soviet Union) countries, with the exception of the three Baltic lands, are members of the CIS (Commonwealth of Independent States).

The six contiguous countries to the west were classified as Eastern Europe during the Cold War, though these days Poland, Czech Republic, Slovakia and Hungary — with pending accession to the European Union — are thought of as Central European. The final two countries treated here, Romania and Bulgaria, are keys to an economically and politically stable southeastern Europe.

Without exception, grain production and grain processing in all of these countries has been subject to wrenching changes with privatization of farms, storage, flour milling, feed milling, and oilseed crushing on one hand, and liberalization of domestic and international trade on the other. Progress has been made, although interrupted by periodic — but severe — economic crises from country to country, such as the 1998 ruble devaluation in Russia, and the sharp 1996 recession in Czech Republic. Nevertheless, in all of the countries, privatization and trade liberalization in the grain industry have progressed.

Perhaps the most important change for the world grain industry is the potential for Russia and Ukraine to emerge as grain-exporting superpowers. In the other countries, grain production and consumption were, more or less, in balance during Soviet times and remain so today. Hungary is a moderate exporter, and Romania has potential to be a consistently moderate exporter of wheat. Poland, Czech Republic, Slovakia and Bulgaria primarily need to import soybean meal as poultry production expands. Aligning themselves with the EU’s common agricultural policy will probably result in a continuing status quo in grain production for all six countries. Of the FSU, only swampy Belarus imports a lot of grain.

In the grain processing industries, a key factor is the coming EU membership of up to nine of these countries: Poland, Czech Republic, Hungary and Estonia in the first wave; and later Latvia, Lithuania, Slovakia, Romania and Bulgaria. The need to meet EU standards could mean flour and feed industry consolidation with the closing of small inefficient plants, but it could also invite much needed investment from the West. Another highlight is surging investment in poultry production and oilseed crushing in several countries.

BELARUS
Capital: Minsk
Population: 10.3 million
Of the countries reviewed here, Belarus is the most unreformed both politically and economically. It is the largest net grain importer, now that Russia and Ukraine have turned around their agricultural sectors. The country’s low-priced but sturdy tractors could benefit from the investment boom in Russian and Ukrainian grain production.

BULGARIA
Capital: Sofia
Population: 7.7 million
Bulgaria is essentially self-sufficient in grain, with average production of 5 million tonnes. Of the average 3 million tonne wheat crop, 10% to 15% is surplus available for export. As an aspiring EU member, some consolidation in the flour milling sector is expected. Farm sizes are small, and privatization of agricultural land has been slow.

CZECH REPUBLIC
Capital: Prague
Population: 10.2 million
Though agriculture accounts for only 2% of its GDP, the Czech Republic is self-sufficient in wheat and most grains. In the last decade, rapeseed has become an important crop, and exports of malting barley and barley malt have surged to Russia’s and Ukraine’s booming breweries, which are importing over one million tonnes per year from Europe.

ESTONIA
Capital: Tallinn
Population: 1.4 million

Estonian ports could become an important outlet for Russian grain exports if international rail tariffs can be lowered. As traditional markets were lost after independence, livestock herds plummeted to half the level of the 1980s. The grain boom in Russia and Ukraine could stimulate exports of phosphate fertilizers from here and the other two Baltic countries.

HUNGARY
Capital: Budapest
Population: 10.1 million
Grain production averages about 14 million tonnes, of which wheat accounts for 5 million. About one-fifth of wheat production and one-third of wheat flour production is generally shipped to neighboring countries. High production costs and cutbacks of export subsidies with EU entry could lead to reduced wheat exports.

LATVIA
Capital: Riga
Population: 2.4 million
Farmland was returned to the pre-communist period owners very early in the transition period in Latvia, the first FSU country to enter the WTO. Food enterprises were also privatized early, resulting in a very competitive sector able to withstand imports. Some of the former focus on livestock is being switched to poultry production.

LITHUANIA
Capital: Vilnius
Population: 3.6 million
A wide variety of grains are grown and consumed; production of barley, rye, and millet together exceed wheat. Since 1998, production of rye, a traditional favorite for bread baking and porridge, has declined by 41% to 234,000 tonnes on 111,000 ha in 2001, while wheat has held steady at just over one million tonnes on 350,000 ha.

MOLDOVA
Capital: Chisinau
Population: 4.4 million
Moldova has an advantage in sunflower seed production, achieving the highest yields in the region, with 1.27 tonnes per hectare. About 40% of the labor force is in agriculture, and 53% of the small country’s land is arable. Privatization of government farms has resulted in 1.1 million citizens owning a total of 1.7 million ha of farmland.

POLAND
Capital: Warsaw
Population: 38 million

Poland’s ag sector remained in private hands while in the Soviet bloc, resulting in numerous individual farms averaging 6 to 10 ha in sizes. Although occupying over 20% of the population, farm production contributes only 3.8% of GDP. Protection from competition by import tariffs slowed farm modernization and restricted Poland’s affect on world grain markets — despite its large population and 2001 grain production of 23 million tonnes, 8 million of which was wheat.

ROMANIA
Capital: Bucharest
Population: 22.3 million
Romania has struggled in market reforms. Although state farms broke up into small inefficient units, 17 million tonnes was harvested in 2001, 5 million of which was wheat, and grain production remains potentially competitive. Export infrastructure is being built at Black Sea ports, and Romania is likely to become the number three net grain exporter in the region, surpassing Hungary.

RUSSIA
Capital: Moscow
Population: 145.4 million
Long a major net importer of grain, Russia is on the way to becoming a large net exporter. The 2001 harvest of 85 million tonnes left a large surplus to be carried over, due to poor export infrastructure. Agriculture is now one of the hottest sectors for investment. New laws passed in the Russian Parliament this summer permit the buying and selling of farm land for the first time since the Russian Revolution. Poultry production is set to take off, perhaps bringing soybean and soy meal imports back toward the levels of the 1980s.

SLOVAKIA
Capital: Bratislava
Population: 5.4 million
Grain production is on a bigger scale and more mechanized than in Poland and Hungary. One of ADM’s few joint ventures in CEE is a maize milling operation in Slovakia. ADM also has operations in Hungary, Romania and Bulgaria. EU accession could mean increased grain production. Only about 4% of GDP is from agriculture.

UKRAINE
Capital: Kiev
Population: 48.7 million
Ukraine has been lagged in market reforms; the state is only now withdrawing from flour milling ownership. Grain production is responding to the economic reforms, and the 2001 crop of 46 million tonnes severely tested the Ukraine’s long underutilized export infrastructure as 9 million tonnes left Black Sea ports. Grain exports could increase greatly in coming years. A dynamic poultry and livestock industry will help absorb some excess grain production.

The benefits to the average citizen of the last decade of economic reforms in the CEE countries are as evident in the food industry as anywhere. Central planners had permitted only a limited number of standard bread and pastry types, but now small entrepreneurs, foreign companies and re-energized former state enterprises have combined to offer an astounding diversity of baked goods.

Liberalization of processed food imports by Russia in the early 1990s made it one of the largest export markets for Western European food companies. This competition set a high standard for Russian producers, and also made inevitable investment by multinational food companies in local production.

The economic change has also brought hardships to consumers in the form of higher food prices, and in almost all CEE countries, meat consumption and livestock counts dropped sharply during the last decade.

FLOUR MILLING

There has been a dynamic restructuring and considerable new investment in the flour milling industries of Central and Eastern Europe in the last 10 or 12 years. The upgrading of old plants is not yet complete in much of the region, but several factors argue against further capacity expansion.

First of all, the countries of Central and Eastern Europe have some of the lowest rates of population growth anywhere. In all but two or three of the countries in this survey, the growth rate is negative. In Russia, plummeting birth rates, shorter life spans and outward migration have caused an average decline in population of over half a million per year. Even without stagnant or declining population numbers, actual milling capacity is far beyond what is needed in most countries.

Romania provides a somewhat extreme example. Doris Stoian, executive director of the Romanian National Association of Flour Milling and Baking Industries (ANAMOB), estimates that the milling capacity in Romania is twice what is required. Just the members of her association, which are mainly small or medium-sized private mills that started in the 1990s with 25 to 75 tonnes daily capacity, have a combined annual capacity of 6,130 tonnes. That figure alone matches Romania’s consumption. But the large former state-owned flour mills that have been privatized as joint stock companies are not members of ANAMOB and also offer as much capacity.

What happened in many, if not most, countries of the region was a mushrooming of new mills just a few years after private enterprises were allowed.

Stoian said that virtually every town or village in Romania now has a flour mill, many of which operate on a toll basis. A local farmer may bring in wheat and pay to have it ground into flour that he may partly use for himself, while selling or bartering the rest.

The large former state-owned milling enterprises in Romania were still centrally controlled and lacking in working capital when the small private mill phenomenon started. Now they have been reorganized as independent entities and can start to compete.

Inevitably, there will be consolidation, and many of the new, smaller mills have already been idled, Stoian said. Nevertheless, the association is contacted from time to time by newcomers who want to build small mills. Needless to say, they are discouraged.

However, steady upgrading of facilities in order to achieve production efficiencies in a highly competitive environment seems likely. This process could be sped along in countries entering the EU. In particular, all food processing enterprises will have to meet the EU’s strict hygienic standards, often by more actively enforcing existing regulations.

FEED MILLING

In feed milling, the picture is much different as the potential for growth and new investment is much larger. This results from a recently begun upward trend in meat consumption, associated with nascent prosperity in many CEE countries.

Despite this positive movement, feed production is only a fraction of what it was at the end of the Soviet era. There was huge contraction in livestock herds and feed production during the 1990s transition period. Only in the last few years have the numbers of domestic farm animals begun to stabilize in most countries.

Most of the new meat consumption has been poultry, with the trend expected to continue. The Czech Republic is one example. There, during the early and mid-transition period, consumption of pork, a traditional staple, held fairly steady while beef plummeted. Poultry is a relatively new item in the diet of the average Czech.

In Russia, the shift to poultry as a cheap source of protein has been particularly pronounced. Through 2001, the country has been the largest poultry importer in the world, with nearly 80% of the supply coming from the U.S. Exports to Russia had accounted for 8% of all U.S. production with the annual total exceeding 500,000 tonnes, and monthly shipments averaging US$50 million.

Now, rising incomes in Russia are expected to bring about a doubling of poultry consumption in just a few years. Much of this higher consumption could be met by increases in domestic production. Several large poultry projects have been announced, some by prominent business groups not previously involved in the food industry.

The highest profile project is being built by Mosselprom, Russia’s largest advertising agency. The new company, Agro-Industrial Complex Mosselprom, said its poultry operation will be the largest in Europe and fully integrated from incubation to packaged product. Heading the new company is Sergei Lisovsky, former chairman of the Russian Poultry Union and a supporter for Russian products against low-priced ‘Bush legs,’ as U.S. poultry is universally known in Russia.

Existing Russian poultry companies are also expanding. Elenar Broiler Farm, located south of Moscow, has a unique origin. Its funding was from the U.S. government to provide poultry technology transfer as a settlement in a mid-1990s dispute with Russia over veterinary standards for poultry products being shipped to Russia. With a team of American managers supplied by the U.S. Agricultural Export Council, the company has been expanding rapidly.

The most explosive growth in poultry production may be taking place in Ukraine. Andriy Yarmak of APK-Inform said poultry production is expected to double in 2002. However, there is expected to be ample supplies of feed grain due to the country’s bumper crop in 2001 and that projected in upcoming years (see companion article). To help absorb these large grain stocks, government officials have announced that Ukraine will become a major supplier of poultry and other meat to its immediate neighbors and even on world markets.

OILSEEDS

The CEE countries were important players in oilseed markets both as consumers of soy meal and producers of sunflower seeds in the socialist period of the 1980s. They continue to play that role today, but in different ways.

Increased domestic poultry production is driving increased demand for soy meal in several CEE countries. In addition, demand for edible oils is up in most countries as diets improve. The bulk of new European investment in oilseed crushing plants is taking place in the CEE countries.

In Russia, the consumption of edible oils in the form of margarine, mayonnaise and salad dressings has grown enormously and is likely to continue to increase. Average annual per capita vegetable oil consumption in Russia is 14 kg — up from previous years, but still far below the average level in the U.S. and most of Europe.

In recent months, there have been a spate of announcements of new soybean processing plants to be built in Russia and Ukraine. Agros, the newly created agribusiness arm of Russian business group Interros, has announced it will build a medium-capacity soybean extraction plant near St. Petersburg in conjunction with an unnamed international partner. Other announcements have been made for similar projects at both Russian and Ukrainian Black Sea ports. Other companies, including Dupont Technologies in the U.S., have made public plans to build plants to produce edible soy proteins and flour concentrates.

The industry in Ukraine has attracted some multinational investors. Cargill’s sunseed crushing plant in Donetsk, Ukraine is the world’s largest, with a daily capacity of 1,500 tonnes of seed. The French company Cereol owns a large plant in Dnipropetrovsk. At least a couple of other sunseed crushing plants have been built with participation of foreign investor groups in the last five years.

BREWING AND MALTING

There is hardly a country in the CEE where international brewing groups do not control a significant share of beer production.

In Russia and Ukraine, beer consumption has seen dynamic growth. Annual Russian and Ukrainian imports of barley malt and malting barley now exceed one million tonnes per year. There is a move to build modern malting capacity in Russia and the Ukraine. A malting plant in St. Petersburg was built jointly by Russia’s largest brewery, Baltika together with the French maltster Soufflet. Recently, the Belgian brewing group Interbrew announced a project to build a large malting plant in the Ukraine. Other malting projects by independent breweries and other groups are underway.

The new efficient domestic malting plants will stimulate the breeding and production of local barley varieties for brewing, eventually replacing imports and augmenting in another small way Russia’s and Ukraine’s position as net grain exporters.