Agriculture in Hungary: farming smarter for future growth
Technology and finance will combine to bring much-needed transformation to Hungary’s agricultural sector
Hungary’s agricultural sector is important. About two-thirds of the food on the country’s retail shelves is grown at home, and agricultural exports such as grains and meat account for 9% of all total exports.
Agriculture’s share in GDP has been steadily around 4% over the past 10 years and it also supports the food industry, which represents 2% of GDP. Hungarian agriculture also contributes 2% of EU agricultural output.
At the same time, the sector is not showing huge growth signals. Pre-tax profit before tax on turnover is 3.6%, compared with the whole economy’s average of 5.5%. The pandemic disrupted markets, which affected production and processing.
Meanwhile, the weight of much-relied-on EU farm subsidies within the agricultural budget is steadily declining, so improving efficiency and continuous development are essential.
The tasks ahead are guaranteeing sufficient quantity and quality of production, lowering environmental impacts and increasing economic efficiency, all in the face of a rapidly changing climate. All demand a joined-up approach to financing to unlock the potential.
"SMEs account for 80% of the value-added in agriculture, against a 44% average for the national economy"
Attila Tóth, Head of Trade Finance, CIB
Challenges and competence
SMEs account for 80% of the value added in agriculture, against a 44% average for the national economy. This, along with long and unpredictable production cycles, means that the sector has above-average financing needs.
Currently, about 65% of the resources of agricultural businesses are from financial institutions. “To achieve each HUF 100 of annual turnover, the sector needs an average of HUF 17-21 in loans – compared with around HUF 8 per year for the national economy,” says Attila Tóth, Head of Trade Finance at CIB. “And fixed assets per HUF 100 of turnover are HUF 80, compared with the national average of HUF 37.”
The diversity of the sector, seasonality, changes in markets, epidemics reaching livestock farms – African swine fever, avian influenza – and changes in consumer habits pose challenges to producers and financiers.
Three years ago, CIB set up the Agricultural Competence Centre within CIB Bank Trade Finance. The competence centre connects with:
- product councils
- the Agricultural Research Institute
- the Chamber of Agriculture
- the Central Statistical Office
- the National Food Safety Office
- the Ministry of Agriculture
- the Banking Association
- the sales network
- Hungary's largest agricultural university
- the Credit Approval Department
The centre gathers the most up-to-date performance and risk data, by subsector of agriculture, to inform strategic financing decisions with greater detail.
“In order to assess the real risks, in addition to the analysis of financial data, it is necessary to see the production and trade processes accurately, which requires a competence in the farm sector from those participating in the banking process,” says Tóth.
“It is important to be familiar with the product paths and their participants, and to map cross-border markets as well – because we have to provide our customers with a complete financial solution, including credit, export letters of credit and factoring.”
Digitalisation and environmentally friendly farming
Agricultural exports in Hungary are a priority strategic sector – although during the early stages of Covid-19, closed borders meant exports took a hit.
“Goods for export were not getting out of the country or were late,” says Tóth. “Import goods were delayed. Hungary's arable crop production imports input materials, so spring fertiliser application and crop protection was an issue.”
Domestically, the food service sector demand also withered as restaurants closed, similarly to the rest of the world.
Now, with EU and government support the sector is recovering and looking to new technology to enhance recovery while meeting EU targets for carbon neutrality by 2050.
"With EU and government support the sector is recovering and looking to new technology to enhance that recovery"
Attila Tóth, Head of Trade Finance, CIB
“Advanced technology not only helps to save inputs, but also helps farmers to make data-driven decisions,” says Tóth. “Digitalisation is a major contributor to production stability and modern data analysis can be used to better schedule certain operations.”
In fact, digitalisation can potentially provide a route to farming that is better for the environment and more productive. It does this through precision farming, which uses data to inform farming strategies that are less resource-intensive and better for crop and soil health.
This is a growth area in which finance can support farms, most of which are SMEs, to transform their operations. Tóth predicts data- and information-based farming could boost agricultural productivity by 60%.
Another key area for improvement is irrigation. Rainfall has decreased by 10% in 110 years and just over 2% of agricultural land is irrigated. The government will provide HUF 170 billion by 2030 to increase the area of irrigated land.
In terms of financing, the trend will be to support those businesses looking to farm smarter.
“In the past, we have taken into account the environmental impact of the investment to be made when making lending decisions, but we will now measure it,” says Tóth.
“Preference will be given to investments with a low environmental impact and which are planned in a conscious way – not only in financial terms but also in terms of sustainability.”