Innovative Practice Hungary: Successful cooperatives in the Hungarian poultry sector

by Anikó Juhász and Györthy Kürthy, Agricultural Research Institute, Hungary

Summary

This case study is about an agricultural cooperative, AVIUM, and a poultry processing cooperative, AVIUM 2000 in the Besnyő village, Hungary. AVIUM agricultural cooperative is a "new type" purchase and marketing cooperative. It was founded in 1993 - after the new cooperative law came into force - to reduce costs and offer agricultural related services. AVIUM had the aim to concentrate the supply of live chicken and to organize the joint procurement of inputs. However, in the region of AVIUM small-medium sized processors were not present. To fill this market niche and to acquire the market security and profit surplus, five members of the agricultural cooperative established in 1999 AVIUM 2000 poultry processing cooperative.

AVIUM and AVIUM 2000 coordinate 15 poultry fattening member farmers in the region. Most of the farmers are medium sized belonging to the 10 and 50 chicken/year category. The smaller producers are only part time poultry farmers. On average the income composition of them is as follows: 30% from chicken fattening, 30% from business activity, 20% from wages and 20% from other sources. Only two of the members are full-time poultry farmers with 100% of their income coming from chicken fattening. The reason for the high share of part-time farmers is the fact that poultry rearing is one of the few farming activities which up to the 100-150 thousand bird/year category can be done by one or two persons.

AVIUM coordinates the chicken fattening farmers and in some cases the feeding. The most important element in the coordination is the collective and pre-financed purchase of baby chicken. AVIUM also has a service of consultation for the members in animal health, welfare and environmental issues. At the end of the fattening cycle AVIUM organizes the quality control and transports the chicken from farmers to AVIUM 2000. The producers' price is then paid by AVIUM 2000 to AVIUM. Then, it is transmitted to the farmers without the price of the baby chicken and 1 HUF/kg for operational costs.

AVIUM has a large number of sale partners ranging from whole sale to restaurants. The processor cooperative maintains numerous partners because they have some advantages: they buy the products at favourable prices and pay immediately, sometimes even in cash. The other important reason is security. To be a supplier of only one purchaser would make AVIUM vulnerable. For this same reason the processing cooperative wants to avoid being the supplier of the multinational retail companies. At the moment 60% of AVIUM sales go to small individual food shops, butcheries.

What were the potentials and limitations of private business models in promoting smallholder participation?

Potentials:

· The processing activity can work more effectively and profitably than just agricultural production, ensuring secure market for the agriculture producers if the prices are in accordance with the market situation.

Limitations:

• The situation of the Hungarian poultry processing industry in the international context is of a less concentrated sector without cost-advantage and in a difficult competitive position.
• Only around 20% of the Hungarian chicken farmers fatten a considerable amount of chicken (minimum 500 thousand per year) and more than 50% are only keeping chicken to complement their income. They feel economically forced to do so.
• Lots of "forced entrepreneurs" are keeping chicken even when it becomes unprofitable.
• This "forced entrepreneurs" status is the main reason for the existence of the black market. Part of these forced businesses could only be legally unprofitable. They have no other way of staying viable than to defraud either the consumer (lower quality) or the state (tax avoidance).
• The income of the sector can not cover the cost of investments.
• The direct subsidies given to the sector is low, the other incomes do not influence very much the returns.
• The decreasing profitability of processing is a weakness.
• At AVIUM, more inclusions are highly improbable in the near future because the present depressed market conditions do not allow further expansion.
• The turnover of AVIUM is too low for the new type investment subsidies.
• Both cooperatives are directed by the same person, he is the "central motor" of the two organisations.
• Some of the members do not feel the advantages of the cooperation. The main reason is that the members who invested into AVIUM 2000 stopped their agricultural production and now their main activity is processing. Their point of view shifted from that of a farmer.

What were the enabling and hindering policies?

• To counterbalance the diminishing profitability of the sector in the 90s the government implemented development and cost-decreasing (animal health) subsidies.
• From 1995 the Ministry of Agriculture started to support the renovation, reconstruction of animal breeding plants.
• The export-subsidy system of the EU offers less opportunity as the former Hungarian.
• The situation of the producers is worsened by the new subsidy system, applied after the EU-accession, which closes out the low turnover excluding producers from the present development subsidies. In this way the investments must be financed solely from own resources.

What factors explain the inclusion of the smallholder producers in the market chain (while others are excluded)?

• The most important conditions for inclusion in the AVIUM agricultural co-operative were the geographical location, the personality and the professional background of the farmer.
• In case of the investment-intensive AVIUM 2000 the financial contribution proved to be the strongest aspect.
• Farmers who were reliable.
• Farmers who can easily adapt themselves to new standards.
• Farmers who were open-minded.

What are the costs and benefits of inclusion?

• The benefits deriving from the cooperative membership are: higher producer prices as the general average of the sector, lower baby chicken input prices, stable market for the fattened chicken and short pay period.
• Other benefits are market and financial security.
• Farmers benefit from the transport logistic of the cooperative. AVIUM 2000 has 3 live poultry transport cars which are quite new (between 1 and 3 years). The total capacity is around 11,800 chicken.
• Producers with larger livestock (250 thousand animals/year) achieved significant development with the total reconstruction of the farm and technology improvement.
• Producers with smaller animal number carried out technology modernisation.
• The producers carried out several developments during their membership; all together spent HUF 200 million.

 

What does this all mean for efforts to promote smallholder participation in dynamic markets?

Individuals become poultry farmers more out of necessity than as a matter of choice. The poor economic situation of Hungary pushes individuals to become entrepreneurs. Agriculture is one way out. Individuals invest on chicken to have a source of income. There are no clear advantages on being a member of the cooperative.