Despite several bans which affected the Polish food sector negatively, this has performed quite well, mainly because of the rising domestic consumption.
Market performance at a glance
- Good outlook as domestic consumption is expected to grow
- Dairy products and vegetables affected by Russian import ban
- Decreasing margins in some segments
In general, the Polish food sector has performed quite well in 2014, despite issues such as cases of African Swine Fever (ASF) causing an import ban from China, and the Russian ban on food exports from the EU. One reason is rising domestic consumption (around 70% of Polish food products are consumed domestically). Normally, food prices in Poland decrease only in the summer months, but this year food prices have fallen since February. Coupled with rising disposable incomes, this means that Polish consumers have been able to spend more on food and this growth in sales is expected to continue.
In 2013 Poland exported food worth around EUR 20 billion. Overall the direct impact of the Russian import ban is limited as Russia accounts for just 6.3% of Polish food exports, with the highest share going to EU neighbours: mainly Germany and the UK. Exports to countries outside Europe, including China and Saudi Arabia, have also increased significantly over recent years.
Nevertheless, Russia is a key buyer for some subsectors and they are feeling the most impact from the embargo.
Around 12% of Polish output of tomatoes, pepper, mushrooms, cabbage and lettuce are usually destined for Russia at this time of the year. According to the Polish Ministry of Agriculture, in 2013 Poland exported more than 804,000 tons of fruit and vegetables to Russia with a value of about EUR 336 million. It is estimated that the Polish fruit and vegetable sector will lose around EUR 500 million as a result of the Russian embargo. Parts of the dairy industry are also affected, as they traditionally ship around 10% of their exports of hard and cottage cheese to Russia. Both vegetable and dairy farmers have called for compensation from the EU for losses resulting from sanctions and the European Commission has already announced that it will compensate farmers producing perishable goods. In contrast, while many assume that Polish apple farmers will be adversely affected, they can in fact store their harvest for a considerable time and, as soon as Russia announced the embargo, apple producers began seeking new outlets: finding buyers in North Africa, China, India, Vietnam and Canada. Even though sales margins may be lower than in the case of Russia, they are still acceptable.
The Polish meat sector continues to grow, although many investments in this subsector have been financed externally, as a result of which companies are highly indebted. This may become an issue in the event of a drop in profitability or sales volumes. However, the current historically low interest rates are helping businesses in this sector. Despite the recent ASF cases and the Russian food ban, the situation of meat processing businesses is stable, made more so as they are benefitting from lower raw material (pork) prices.
Food processing companies could even profit from the Russian import ban, as it has led to falling prices from some of their suppliers. However, the meat, fruit and dairy subsectors are expected to be negatively affected by the indirect consequences of the Russian ban, i.e. oversupply in the EU markets leading to lower sales prices. The indirect impact of the Russian import ban is the main reason why we have lowered the industry performance outlook from “good” to “fair”
The food sector is highly leveraged, with substantial reliance on readily accessible finance from banks. On average, payments in this sector take 45 days and, after some deterioration in the last couple of months, we expect payment delays and insolvencies to decrease. As a result, our underwriting stance is quite relaxed, although we exercise caution in some case as many farmers, slaughter houses, dairy processors and retailers are experiencing falling margins. Because of the Russian import ban, some smaller food businesses or those highly dependent on deliveries to Russia may face serious problems if they cannot withstand lower sales against their fixed costs. We are generally more cautious when underwriting the meat, dairy and pork breeding subsectors.
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