ASSESSMENT REPORT. Network of Independent Agricultural Experts in the CEE Candidate Countries

ASSESSMENT REPORT Network of Independent Agricultural Experts in the CEE Candidate Countries CONSUMPTION TRENDS FOR DAIRY AND LIVESTOCK PRODUCTS, AND THE USE OF FEEDS IN PRODUCTION, IN THE CEE ACCESSION AND CANDIDATE COUNTRIES ADVISORY BODY MEMBERS: STEFFEN ABELE, KLAUS FROHBERG, MONIKA HARTMANN, ALAN MATTHEWS AND PETER WEINGARTEN JANUARY 2004 Theodor-Lieser-Straße 2, D-06120 Halle (Saale), Germany Phone: +49-345-2928 110 Fax: +49-345-2928 199 E-mail: iamo@iamo.de Internet: http://www.iamo.de

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 2 This Assessment Report is based on information provided by the country experts of the Network of Independent Agricultural Experts in the CEE Candidate Countries. The country experts contributing to this Assessment Report are: Estonia: Latvia: Lithuania: Poland: Czech Republic: Mati Sepp Matthew Gorton Natalija Kazlauskiene William H. Meyers Waldemar Guba Françoise Simon Tomas Ratinger Slovak Republic: Marian Bozik Jerzy Michalek Hungary: Slovenia: Romenia: Bulgaria: Martin Banse Tibor Ferenczi Stefan Bojnec Jernej Turk Graham E. Dalton Crina Sinziana Turtoi Maria Magdolna Vincze Plamen Dimitrov Mishev Nedka Momtscheva Ivanova Sophia Davidova Prepared under contract no. 029506 of the European Commission, Agricultural Directorate General.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 3 CONTENTS EXECUTIVE SUMMARY...5 1 Introduction: Aim and structure of the study...9 2 Food Consumption...9 2.1 Method of analysis...9 2.2 General determinants of consumption...10 2.3 Methodological approach of the study...11 3 Assessment I: Meat and dairy consumption in the nineties...12 3.1 Meat consumption...12 3.1.1 Meat total...12 3.1.2 Beef...13 3.1.3 Pig meat...14 3.1.4 Poultry...15 3.1.5 Mutton and goat...15 3.1.6 Concluding remarks on the meat consumption in CEEC-10 during the nineties...16 3.2 Dairy consumption...16 3.2.1 Total milk consumption...16 3.2.2 Consumption of butter...17 3.2.3 Consumption of cream...18 3.2.4 Consumption of cheese...18 3.2.5 Concluding remarks on milk consumption in CEEC-10 during the nineties...18 4 Assessment II: Prospects for meat and dairy products...19 4.1 Overall meat and dairy consumption in CEEC as prospected until 2008...19 4.2 Detailed consumption prospects for meat as reported by the experts...19 4.2.1 Overall demand developments...19 4.2.2 Determinants and effects of changes in meat consumption patterns...22 4.3 Detailed consumption prospects for dairy products as stated by the experts...25 4.3.1 Overall demand developments...25 4.2.3 Determinants and effects of changes in dairy consumption patterns...27 5 Feed use...29 5.1 Introduction: Aim and structure of the study...29 5.2 Theoretical and methodological aspects...29 5.3 Prospects for feed use...31 5.3.1 Developments in animal production...31 5.3.2 Impact on feed production and use...32 References...34 Annex I:... Consumption and food demand issues 35 Annex II:...Animal production and feed-use 65

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 4 BSE CEE CEEC-10 EU FAO FAPRI Kg n.a. p.c. ZMP Bovine Spongiform Encephalopathy (mad cow disease) Central and Eastern Europe Ten Central and Eastern European Countries that are associated to the EU European Union Food and Agriculture Organisation of the United Nations Food and Agricultural Policy Research Institute Kilograms Data not available per capita Zentrale Markt- und Preisberichtstelle (Central Statistical Office for Agricultural and Food Products in Germany)

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 5 EXECUTIVE SUMMARY This Assessment Report aims to find out what the determining demand factors are within the extended EU food markets by discussing food demand and feed use, elaborating on meat and dairy demand in the past and their prospects for the future. Most of the assessment is based on judgement of the country experts of the Network of Independent Experts in the CEE Candidate Countries (CEEC). Although food consumption usually follows a rather steady pattern, the animal diseases that occurred during recent years have made it much more dynamic in case of certain products. BSE, foot and mouth disease and swine fever have had a severe impact on food markets in the EU causing demand for meat to decrease rapidly. Simultaneously, attitudes towards and origin of food seem to have changed, the perception of increasing the chances of better health by eating so called "functional food" is an important issue of marketing, while ethical aspects of animal husbandry have also entered people's consciousness. These developments are of high importance for the analysis. The Report provides an assessment of meat and dairy consumption in the nineties, which concludes that meat consumption generally faced a sharp decline during the period in almost all accession countries, amounting to 10-20 % of the consumption level of the late eighties. This however, took place with great differences among the countries. The only country with a positive development of meat consumption is Slovenia, where meat consumption sharply increased by 80 percent. The main cause of this increase however is probably due to changes in the Slovenian statistical survey. The decrease in demand for meat varied according to the different types of meat. Beef and mutton consumption declined sharply while that of pork and poultry developed positively. An income effect and a substitution effect could be observed with the former being stronger than the latter. This development was only partly caused by the direct income effects of transition. Income declined until the early mid-nineties, and recovered from 1995 in most of the countries. Another part of the decrease of consumption was due to the rising prices of meat. A reduction of formerly planned and subsidised production yielded in a shortage of supply, rising prices and finally reduced consumption. Imported meat must have been too expensive to bring consumption up to the former level. It is also noteworthy that consumption of white meat grew being relatively low cost and having short production cycles. An additional cause might be the loss of consumers' confidence especially in beef products after the BSE-crises of the late nineties. Milk consumption during the nineties also fell, but unlike total meat consumption it did not - except for a few countries - recover in the late nineties. The only positive trends can be seen in Slovenia, Lithuania and Romania. While milk and milk products show a decline in consumption, the picture here is less diverse than for meat consumption, which might have statistical reasons, as there is a broader variety among meat than dairy products. However, it can also be observed that in the dairy sector, there is increasing demand for high value products, like cheese. Milk consumption in the form

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 6 of fresh milk seems to be highest in the relatively wealthy countries, and in poorest countries, where there is great reliance on subsistence represented by small farms with only a few cows that produce and consume on the spot. Following the consumption patterns of the nineties, the Report delivers an assessment of the prospects for meat and dairy products, according to which the forecasts of meat consumption reflect a certain continuation of past developments. Total per capita consumption is expected to rise only slightly until the end of this decade, but substitution effects are more dynamic: Beef and veal consumption is expected to decrease slightly, whereas pig meat consumption will be more stable with a slight increase. Continued growth in poultry meat consumption is expected. Ovine meat consumption will also decline at a high rate in relative terms, but at a low rate in absolute terms, as it is already at a low level. Contrary to meat consumption, forecasts of dairy consumption show a likely, but only slight decline. Butter and fresh milk consumption will be reduced, but the strongest relative effects are foreseen for cheese. According to the detailed consumption prospects for meat as reported by the experts, beef consumption is expected to experience only a slightly positive trend. High beef cuts are expected to be consumed more in Poland, Romania, the Slovak Republic, the Baltic states and Slovenia. Consumption of low beef cuts is likely to develop negatively in the Czech Republic, the Slovak Republic and Estonia, whereas in the rest of the region, there is no change expected. For meat products containing beef, the picture is diverse. In Poland, the Czech Republic and the Slovak Republic, trends are negative, while in the rest of the countries trends are neutral or even positive. Veal will have positive consumption trends in most countries, whereas in the Czech Republic, the Slovak Republic and Poland, there will be no change. Pig meat forecasts follow the expected statistical trends, that is high cuts are expected to be demanded in increasing quantities throughout the CEEC-10, except for Poland where the development will be neutral. Consumption of low cuts will decline in Estonia, Poland, Bulgaria and Romania, whereas only Hungary is expected to experience a rising demand for low cuts. The consumption of pig meat products is also expected to increase, except for Estonia and Bulgaria. Mutton and goat meat consumption is expected to rise in most of the countries, except for Estonia, the Czech Republic and Bulgaria. The poultry meat forecasts as well as those for poultry meat products are positive with the exception of Estonia that expects strongly negative consumption developments in this market segment. Regarding total meat consumption, the trend is also mainly upwards for meat, as in only two countries the consumption is anticipated to be stable in the future. The same holds for meat products, whereas offal consumption is likely to increase only in Romania and the Czech Republic. Therefore it can be observed that meat consumption will by and large follow in CEEC-10 the same trends that can be seen in the EU. The determinants and effects of changes in meat consumption patterns are income and the related effects of out of home consumption and growing convenience, prices (especially for poultry), health consciousness and to a lesser extent environmental consciousness. Ovine meat is seen as having positive perspectives,

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 7 contrary to some forecasts. This type of meat is seen as trendy, positively income elastic and relatively healthy, however, not to the degree of poultry or pig meat. According to the detailed consumption prospects for dairy products as stated by the experts, a positive trend is assumed in dairy consumption in almost all countries except Bulgaria, where no change is expected in the next decade. Prospects for the dairy sector seem to be more homogeneous across countries than in the meat sector, at least as far as the main products are concerned. This can also derive from the fact that differences are more pronounced among meat than dairy products included in the questionnaire used for the assessment. The worst expectations are reported for butter, which is the only product with a negative prospect. Positive expectations for butter consumption only occur in Romania and Hungary. Cheese is the product with the best expectations for the next decade throughout all the countries (except for Estonia), closely followed by yoghurt, for which only Bulgaria is expected to have no changes at all. Desserts and milk drinks are also expected to develop positively in all the countries, whereas fresh milk and cream are expected to have a rather moderate growth. Romania is the exception, where the fresh milk phenomenon will continue in the future: A low income and high income-elasticity for milk products that are of a relative low price are the driving factors for this development. Among the determinants and effects of changes in dairy consumption patterns, health consciousness and convenience have a strong impact, as they outperform positive income elasticity for butter and cream. Income effects seem to be stronger than for meat and peak ratings for dairy products, especially for income, are higher than for meat products. Dairy products are partly seen as substitutes for meat products. Fruit and vegetable products will substitute products with high fat content. The Report is concluded with an analysis of feed use. This study is justified because next to consumption, production forms the opposite end of the production and marketing chain, and recent developments have shown that these ends are much closer together than one might expect. Recent occurrences have shown that feeding of animals is controversially discussed among consumers, and the consequences of the BSE-crisis were that feeding was adjusted, also because of the pressure from the demand side. An increased consumer demand for white meat has a consequence that cereals and especially soft wheat will be used to a larger extent than before, affecting the wheat markets in Europe and beyond. Assessing feed use from a quantitative and qualitative point of view, the analysis tries to take into consideration the relationships of different factors influencing feed demand, -production and -use. The prospects for feed use are assessed by observing the developments in animal production and their impact on feed production and use. The number of livestock heavily depends on the demand for meat and meat products, as well as milk and milk products. As assessed earlier, the increase in meat demand will mainly affect white meat, while the demand for red meat will decrease during the next decade. This results in an increase of poultry stocks and a consequent higher demand for appropriate feed items.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 8 Pig production is also to increase, so that the use of feed grains will most likely be on the rise. Beef cattle production is likely to decrease, given the decreasing demand for beef and veal. The demand for milk products will slightly decrease, but at the same time, there will be a structural change in the dairy herds: While the number of cows will decrease by 13 percent until the year 2008, the yield per cow is estimated to increase by 11 percent. This implies that overall fodder demand will decrease but also the structure will change, as roughage and pasture will be substituted or at least supplemented by protein and starch containing feedstuffs. Due to the technological progress that is expected for almost all CEEC, feed conversion will be improved in all production systems, meaning that less feed will be needed to produce the same amount of meat. Thus with the exception of cereals and fodder wheat, overall feed production and consumption will be reduced. These developments have the following consequences for feed use in the CEEC. The increase in poultry production will result in higher feed use of cereals, especially wheat, which is expected to increase by 23 percent from 2000 to 2008. The feed use of coarse grains will also increase by the high rate of 22.7 percent. Oilseeds are also expected to experience a growth in feed use, whereas feed potatoes will experience a slight decrease in the next decade. Cereals will probably play their most important part in poultry and pork production. Protein feed will be most affected by the developments both in pork and poultry production. Especially legumes are expected to experience an increase in beef and milk production, whereas starchy roots will, according to the survey results, not be affected by the changes in animal production. Despite the expectation of an intensified milk production and a consequent shift to cereals and protein, pasture and other roughage will still play a major role in beef and dairy production. The analysis shows that when looking at technologies that affect feed use, things are more dynamic than when looking at the production systems themselves. Technological changes will strongly affect feed use, but besides a strong increase in protein feed traditional feeding systems like pasture or roughage will maintain their share in overall feeding, and even experience a certain increase. This is also due to a certain awareness that feeding determines various aspects of animal products required by the consumer, and pasture is certainly seen as healthy both for the animals and for their consumers.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 9 1 INTRODUCTION: AIM AND STRUCTURE OF THE STUDY Twelve countries are likely to join the EU within the next five years. For ten of them membership is foreseen to be granted in 2004. These are eight Central and Eastern European countries, namely Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary as well as Slovenia. The other two are Cyprus and Malta. In 2007, Bulgaria and Romania are scheduled to join the EU. With this change in membership, EU markets for agricultural and food products will be affected. The question is by how much. It is therefore of substantial importance to many groups such as farmers, food processors, traders, consumers and also politicians how these markets are going to develop after the enlargement. Assessing market developments requires an analysis of both production and demand. This study is only concerned with changes in domestic disappearance. Production has been dealt with in other analyses. The core consideration to be addressed in this paper is thus to find out what the determining demand factors are within the extended EU food markets. For example will there be a shift to high products, biologically safe and functional, as expected in the present EU, or will there be a continuing demand for traditional agricultural products. Among the various items making up total disappearance only food consumption and feed use will be analysed. They account for the largest part of domestic disappearance. The other items such as industrial use, seeds, wastes and stock changes are of minor importance for drawing a picture of past and likely future changes in domestic disappearance in these countries. Of particular interest are dairy and meat products. Dairy products are of high value and are highly differentiated into a wide variety of products. This implies a differentiated set of processing and requirements. Labour productivity and profitability are higher in the dairy industry than in other branches of the food sector (HARTMANN 2001). Thus, markets are expected to be highly dynamic in the future. Almost the same holds for meat, where consumption is also driven by health aspects and ethical questions, and where changes in markets seem to be even greater than on the dairy product markets. Since Cyprus and Malta have a relatively small population they will not affect demand for agricultural and food products considerably and are not considered in this study. Only the other ten, i.e. the Central and Eastern European countries (CEEC-10) are included in this report. The study is structured as follows: Food demand and feed use will be discussed in sequence in the following two chapters. Each of them is further divided in various sections. Regarding food demand this includes some remarks concerning the theoretical and methodological aspects of the analysis. Thereafter, meat and dairy demand in the past and prospects for the future are elaborated on. Most of the assessment in the latter part is based on judgement of the country experts of the Network of Independent Experts in the CEE Candidate Countries. 2 FOOD CONSUMPTION 2.1 Method of analysis While food consumption usually follows a rather steady path during most recent years animal diseases occurred making it much more dynamic for some products such as meats. Most

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 10 recently, BSE, foot and mouth disease and swine fever have had a severe impact on food markets in the EU: Demand for meat in the wake of these disease outbreaks decreased rapidly, so that market interventions had to be envisaged. Simultaneously, attitudes towards and origin of food seem to have changed: Risks for human health, such as the impact of residues from veterinary and feed stuff treatments are perceived more sensitively. At the same time, the perception of increasing the chances of better health by eating so called "functional food" is an important issue of marketing. Ethical aspects of animal husbandry have also entered people's consciousness. All this has had a significant impact on production, processing and marketing of agricultural products. Biologically safe and ethically correct production will increase costs and thus has to be passed on to those consumers who are willing to pay for such products. Investments for improvement, but also for product innovation have to be made. Innovative products might yield higher margins, but it is not yet clear how these benefits will be shared by primary producers and the processing and trading industries. 2.2 General determinants of consumption According to Samuelson, consumers' behaviour can be analysed by assessing the costs of different combinations of goods. By choosing between different bundles of goods at different costs (i.e. commodity prices multiplied with the quantities consumed), a consumer reveals his preferences for certain goods or bundles of goods (see e.g. SAMUELSON 1948), or HOUTHAKKER 1950). According to this, consumers responses on price and income changes are assessed by means of analysing quantities, prices and income or budget constraints. Parameters of price and income responses are relatively easy to estimate, but they do not provide a complete assessment of all the influences on food demand. One of them is differentiation: For example, meat is to be differentiated not only between different types (pork, beef, mutton and poultry) but also between various levels of qualities, i.e. different cuts. Demand for these varieties of meat changes with income (where, given a rise in income, one shifts from a cheap pork chop to an expensive t-bone-steak), with consciousness for health aspects (substituting "red" meat by "white" poultry meat), or with changing ethical attitudes (when meat produced in feedlots is replaced by meat from grazing animals). The same holds for milk: The consumption of whole milk declines over time and with increasing income. Demand then shifts to dairy products with higher level of processing, like cheese (which is, to some extent, a luxury food item) or yoghurt, which is often consumed for functional purposes like health or beauty. Other factors are socio-cultural effects like changes of age or household structure or sectoral employment structure and consequently different nutritional requirements both in terms of food quantity and. For example, less food is consumed at home, more is consumed at work. Or processed food like instant soups becomes more important in societies where time preferences are of high significance and opportunity costs of cooking are also high. Due to all these facts, the scope of determinants considered in the analysis of meat demand is more and more broadened and supplemented by factors which account for differences in the structure of age, gender, social status etc. of the population. Each group of them is believed to have also differences in their preferences themselves. Hereafter, they are summarized with the term "socio-cultural" factors, instead of revealing them only by means of prices and quantities (HENZE 1994).

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 11 2.3 Methodological approach of the study The above mentioned developments are of a high significance for the study. It attempts to apply both aspects of the analysis: The "classical" (or rather: neo-classical) one which assesses the impact of changes in prices and income on food demand, and the "modern" one that tries to depict demand changes from changing attitudes, preferences and demographic structures. The classical analysis is based on information from various statistical sources: The FAO- Agrostat database and recent EU-reports. It assesses demand quantities with respect to prices, income and supply. The modern analysis is based on an expert survey that was conducted for the purpose of this study. In this survey, the country experts first had to give their estimations of demand changes for a broad scope of food items in various forms until the year 2010 for the country they are responsible for. The scale of possible estimations comprised five degrees: -2 = strongly negative, -1 = negative, 0 = no change of demand, 1 = positive change of demand, 2 = strongly positive change of demand. There were nine dairy products under assessment, including dairy products as a whole, and 14 meat products, including three categories of total meat demand (Table 1). Table 1: Products and product categories assessed Milk products assessed Liquid Milk Other drinks containing milk ingredients Yoghurt Ice cream Other desserts Cream Cheese Butter Total dairy products Source: Own questionnaire. Meat products assessed Beef, of which High cuts Low cuts Meat products containing primarily beef Veal Pig, of which High cuts Low cuts Meat products containing primarily beef Mutton and goat meat Poultry meat, of which Breast meat Other poultry meat Meat products containing primarily poultry Meat total, of which Meat Meat products (e.g. sausages) Offals (e.g. kidney, liver) In a second step, the reasons for the expected developments in food demand were assessed by the experts. The scale was the same (from -2 = strongly negative impact on demand to +2 = strongly positive impact on demand), and there were 13 reasons given both for the meat and the dairy group (Table 2). There is no doubt that such a rating-based survey is to be interpreted with highest care. First, experts were asked only once and not in several rounds as in a formalised Delphi-study, which implies that the experts had no chance to correct their ratings in the light of the other experts' ratings. Second, the ratings given by the experts cannot be transformed into ordinal numbers but have to be interpreted in relation to the country background. Thus, aggregation across countries or products is difficult and will not be done in cases where countries are heterogeneous in their economic and especially consumption

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 12 characteristics. However, the rating can provide valuable information. Absolute figures already exist in various reports (see e.g. EUROPEAN COMMISSION 2001). The present study goes further and does not only assess what will happen, but also why. It therefore closes the gap between aggregate and descriptive figures on the one hand and modern assessment on the other hand, and it thus enriches existing studies of demographic factors mentioned above. Table 2: Reasons for forecasted development by product category Increase in health consciousness Trendy product Increasing level of variety Change in demographic structure Growing relevance of convenience Growing importance of environmental consciousness Increasing share of off-home food consumption Increasing relevance of advertisement for competing products (e.g. liquid milk vs. soft drinks) 1 Please, assess how the retail price of the good considered will change relative to all other food items. Please, assess how the expected increase in real income per capita affects the consumption of the good considered. Please, indicate whether for the good considered there is a trend towards varieties with higher. Is there expected to be any change in the consumption of competing food items that will affect the demand of the product considered? If yes, please, name the food items and indicate the direction of change for the product considered. What influence can be expected from the integration into the Single Market on the demand of the product considered? Remark: 1 Asked only for meat products. Source: Own questionnaire. 3 ASSESSMENT I: MEAT AND DAIRY CONSUMPTION IN THE NINETIES 3.1 Meat consumption 3.1.1 Meat total Meat consumption generally faced a sharp decline during the nineties in almost all accession countries. Declines amounted to between 10 and 20 percent of the consumption amount in the late eighties, however with great differences between the countries. The greatest falls were experienced in Latvia (-49 %) and Lithuania (-28 %), followed by other countries, like Bulgaria and Estonia, where the rate of decline significantly exceeded ten percent. The only country with a positive development of meat consumption is Slovenia, where meat consumption sharply increased by 80 percent (Table 3). However, this increase is probably mainly caused by changes in the Slovenian statistical survey ("statistical break"), which took place between 1992 and 1993.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 13 Table 3: Changes in meat consumption (kg p.c. and year) during the nineties Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000, (in % of 1997) Estonia -18 2-6 Latvia -49 2-7 Lithuania -28 2-1 Poland -6 6 Czech Republic -20 1-5 Slovak Republic -13 1-10 Hungary -17 25 Slovenia 80 2 2 Romania -16-5 Bulgaria -21 13 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). From 1992 to 1993, the statistical survey in Slovenia changed considerably. Source: Own calculations, data: FAO-Agrostat. The absolute amount of meat consumption was, by the end of the nineties in most of the countries below that of the European Union (about 90 kg p.c.) and ranged between 51 kg p.c. in Romania and 96 kg p.c. in Slovenia, the exception to the rule again, as Slovenia is the only country where meat consumption exceeds that of the EU-15 in the nineties (Annex I, Table I.1). At the end of the nineties, meat consumption recovered in some of the countries, namely Hungary, Bulgaria and Poland, but not enough to reach pre-transition values. The largest increases during the period 97-99 were found in Hungary and Bulgaria, while in Slovenia the slow growth indicated rather saturated markets. The development of meat consumption in the transition countries, immediately after transition in the early nineties, was the result of the overall structural adjustment. First of all, income declined in most of the countries until the mid-nineties and then only slowly recovered in the second half of the decade. Income recovered long before meat consumption recovered or at least showed some kind of recovery. Thus, there must have been other reasons for the decline in meat consumption: Supplies were reduced even more than demand, and the resulting price increases were a major cause of the fall in purchases. In addition, a much broader scope of consumption goods was offered so that consumers reconsidered their eating habits. The sharp reduction in supply was due to the fact that a formerly subsidised sector now had to reorientate towards market conditions. Input prices, especially for feedstuffs, increased, and these costs could not be covered by the market returns. Production decreased, and with the consequently rising prices demand followed on its way down. Livestock husbandry contracted substantially reaching the bottom at around the mid-nineties, so that a recovery of supply was not likely to be achieved with a possible demand-increase in the late nineties. This again affected prices and consumption. Consequently, as major causes for the sharp fall in meat consumption in the nineties the restructuring of spending together with the fall in real income and increases in relative prices for food, especially meat. The latter was also caused by higher production costs and a shrinking agricultural sector that has not yet recovered (EUROPEAN COMISSION 1998). 3.1.2 Beef Beef consumption declined most sharply in the nineties and unlike the case for other kinds of meat has not recovered so far. The lowest fall was in Romania with 31 percent during the

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 14 nineties and the greatest fall of 68 percent was observed in Latvia. Slovenia was the only country to have shown an increase of beef consumption in the nineties, but even so in the late nineties, there was also a decline of 5 percent (Table 4). This shows that the beef sector was the one that was most affected by the adjustments described above in section 3.1.1. Table 4: Changes in beef consumption (kg p.c. and year) during the nineties Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia -57 2-24 Latvia -68 2-14 Lithuania -61 2-23 Poland -53-14 Czech Republic -62 1-41 Slovak Republic -49 1-27 Hungary -34-18 Slovenia 36 2-5 Romania -31-13 Bulgaria -35 10 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). From 1992 to 1993, the statistical survey in Slovenia changed considerably. Source: Own calculations, data: FAO-Agrostat. How highly the beef sector was subsidised can be shown by the fact that before transition, in many CEE-countries beef consumption was higher than in the EU, especially in the Baltics where beef production was subsidised by the former Soviet Union. These countries show the sharpest decline of all (Annex I, Table I.2). 3.1.3 Pig meat Pig meat consumption did not fall to the same extent as beef. In Lithuania and the Slovak Republic pig meat consumption increased after transition (The reported increase in Slovenia is probably caused by the statistical break in 1992/93). In Poland consumption was more or less stable. In the other six countries, it decreased during the nineties but shows, in most of the countries, tendencies of recovery in the late nineties (Table 5). Table 5: Changes in pig meat consumption (kg p.c.) during the nineties Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia -4 2 25 Latvia -37 2-11 Lithuania 32 2 38 Poland 1 10 Czech Republic -28 1-5 Slovak Republic 12 1-14 Hungary -39 17 Slovenia 49 2 2 Romania -21-10 Bulgaria -19 17 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). From 1992 to 1993, the statistical survey in Slovenia changed considerably. Source: Own calculations, data: FAO-Agrostat. For the six countries where pig meat consumption has declined since the beginning of transition, it can be said that in two of them, Hungary and the Czech Republic, consumption

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 15 has decreased from a high level to the level of the EU-15. Bulgaria, Romania, Estonia and Latvia have traditionally had a low level of pig meat consumption but even so the level fell further in response to declining incomes (Annex I, Table I.3). 3.1.4 Poultry Poultry consumption has increased since the beginning of transition in most of the countries. Only Bulgaria, Lithuania and Latvia show a decline of poultry consumption, Lithuania and Estonia have a declining consumption in the late nineties. In the other countries, the increase of poultry consumption has slowed in the late nineties, but on the whole poultry is the booming branch in the CEEC-10 livestock sector (Table 6). Table 6: Changes in annual poultry consumption (kg p.c.) during the nineties Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia 80 2-28 Latvia -2 2 16 Lithuania -14 2-29 Poland 62 9 Czech Republic 85 1 20 Slovak Republic 46 1 5 Hungary 63 49 Slovenia 231 2 8 Romania 18 9 Bulgaria -15 20 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). From 1992 to 1993, the statistical survey in Slovenia changed considerably. Source: Own calculations, data: FAO-Agrostat. Poultry consumption of Hungary and Slovenia exceeds that of the EU, whereas the Czech Republic has reached about the EU-level (Annex I, Table I.4). 3.1.5 Mutton and goat Ovine meat consumption shows the same features as beef consumption: In most of the countries, except for Slovenia, it has decreased during the nineties. And, except for Bulgaria, where a slight recovery is seen in the late nineties, this trend has not been turned around at the time when overall meat consumption began to recover (Table 7). Table 7: Changes in mutton and goat consumption (kg p.c.) during the nineties Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia -73 2 0 Latvia -87 2 0 Lithuania -60 2-33 Poland -100-100 Czech Republic -20 1 0 Slovak Republic 0 1 0 Hungary -60 0 Slovenia 300 2 133 Romania -32-11 Bulgaria -18 5 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). From 1992 to 1993, the statistical survey in Slovenia changed considerably. Source: Own calculations, data: FAO-Agrostat.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 16 In most of the ten CEEC, mutton and goat consumption is significantly lower than in the EU. The exception is Bulgaria, where even after the decrease of the nineties consumption is higher than in the EU, and Romania. Romanian consumption has fallen over the nineties from a level originally higher than in the EU. In all the other countries, consumption of ovine meat is and was on a relatively low level, so that small absolute changes are high in relative terms (Annex I, Table I.5). 3.1.6 Concluding remarks on the meat consumption in CEEC-10 during the nineties It can be concluded that whereas the overall demand for meat fell during the nineties the underlying developments varied according to the type of meat. Beef and mutton consumption declined sharply while that of pork and poultry developed positively. An income effect and a substitution effect could be observed with the former being stronger than the latter. This development was only partly caused by the direct income effects of transition. Income declined until the early mid-nineties, and recovered from 1995 in most of the countries, except for Bulgaria that had to face crises in 1996/1997. Another part of the decrease of consumption was due to the rising prices of meat: A reduction of formerly planned and subsidised production yielded in a shortage of supply, rising prices and finally reduced consumption. Imported meat must have been too expensive to bring consumption up to the former level. It is also noteworthy that consumption of white meat grew being relatively low cost and having short production cycles. An additional cause might be the loss of consumers' confidence especially in beef products after the BSE-crises of the late nineties. 3.2 Dairy consumption 3.2.1 Total milk consumption Milk consumption during the nineties also fell. But unlike total meat consumption, it did not, except for a few countries, recover in the late nineties. The only positive trends can be seen in Slovenia, Lithuania and Romania. This is interesting, as two economically extremely different countries, Slovenia and Romania, show the same consumption patterns - at least at first glance. Yet, looking closer, explanations can be found that lead to different conclusions. Milk consumption in Romania has not increased despite the well-known fall in income, but because of it. Small scale farming including one or two dairy cows has increased in the last decade, and consequently raw milk has become an important food that is produced and consumed on the spot. Slovenia is the country where increasing income has probably led to a rise in consumption in the form of processed products. Concerning Lithuania, it is likely that the reasons for the slightly increased milk consumption were the same as in Romania. The developments during the nineties can be seen in Table 8.

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 17 Table 8: Consumption of milk* (excl. butter) in CEEC-10 during the nineties (kg p.c. and year) Country Changes 1989-2000 (in % of 1989 or base year 1,2 ) Changes 1997-2000 (in % of 1997) Estonia -32 2 27 Latvia -13 2-18 Lithuania 22 2 41 Poland -24 2 Czech Republic -6 1 10 Slovak Republic -26 1-2 Hungary -13 4 Slovenia 12 2 0 Romania 41 1 Bulgaria -19 0 Remark: * all dairy products except for butter converted back to their primary equivalent, i.e. raw milk. 1 Data since 1993 (base year), 2 Data since 1992 (base year). Source: Own calculations, data: FAO-Agrostat. Milk consumption per capita at the end of the nineties was in all of the CEEC-10 lower than in the EU. It can be assumed that the trend in dairy consumption was induced by the same factors that made beef consumption decline, namely declining incomes plus on the supply side rising production costs and downsizing of herds. The absolute values of milk consumption development are shown in Annex I, Table I.6. 3.2.2 Consumption of butter The consumption of butter shows the same negative trend as milk consumption during the nineties. The only positive trend can be seen in Estonia. Romania and Lithuania, although with positive trends in milk consumption, now show negative effects (Table 9). This may have arisen because butter is a processed derivative of milk, which, contrarily to its raw product, cannot be easily produced and consumed on the same spot. Thus, with greater reliance on subsistence agriculture, raw milk consumption increases, while butter consumption consequently decreases. Table 9: Consumption of butter in CEEC-10 during the nineties (kg p.c. and year) Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia 25 2 59 Latvia -63 2-14 Lithuania -63 2 0 Poland -50 2 Czech Republic -16 1 8 Slovak Republic -18 1 13 Hungary -58-17 Slovenia -10 2 0 Romania -75-25 Bulgaria -90 50 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). Source: Own calculations, data: FAO-Agrostat. Butter consumption in the low income CEE-countries lies far below the EU average, whereas in the high income CEE-countries, butter consumption is equivalent to the EU average, namely in Poland and the Czech Republic, but also in Estonia (Annex I, Table I.7).

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 18 3.2.3 Consumption of cream Cream consumption shows the same patterns as the items discussed before. It declines in most of the countries except Estonia, Hungary, the Slovak Republic and Slovenia. Changes are shown in Table 10, absolute values are shown in Annex I, Table I.8. Table 10: Consumption of cream in CEEC-10 during the nineties (kg p.c. and year) Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia 0 2 16 Latvia -45 2-4 Lithuania -64 2-54 Poland -53 6 Czech Republic -32 1-28 Slovak Republic 20 1 24 Hungary 4 64 Slovenia 133 2 43 Romania n.a. n.a. Bulgaria n.a. n.a. Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). Source: Own calculations, data: FAO-Agrostat 3.2.4 Consumption of cheese Cheese consumption is the only light in the darkness of dairy consumption. It shows positive developments in most of the CEEC-10 in the nineties. Countries with a negative trend are Bulgaria, Romania (probably both due to declining income), and Latvia. The latter shows at least some recovery in the late nineties (Table 11). Table 11: Consumption of cheese in CEEC-10 during the nineties (kg p.c.) Country Changes from 1989-2000 (in % of 1989 or base year 1,2 ) Changes from 1997-2000 (in % of 1997) Estonia 28 2 58 Latvia -25 2 39 Lithuania 11 2-2 Poland -1 0 Czech Republic 31 1 16 Slovak Republic 65 1 34 Hungary 22 0 Slovenia 23 2-11 Romania -50-5 Bulgaria -78-39 Remark: 1 Data since 1993 (base year), 2 Data since 1992 (base year). Source: Own calculations, data: FAO-Agrostat. Cheese consumption in the CEEC-10 lies at maximum 75 % of that of the EU, but mostly far below this amount. Absolute values are shown in Annex 1, Table I.9. 3.2.5 Concluding remarks on milk consumption in CEEC-10 during the nineties Milk and milk products show a decline in consumption during the nineties. The picture here is less diverse than for meat consumption, which might have statistical reasons, as there is a broader variety among meat than dairy products. However, it can also be shown that in the dairy sector, high value products like cheese show increasing demand. Milk consumption in

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 19 the form of fresh milk seems to be highest in the relatively wealthy countries (consumption of high value added milk products), and in poorest countries, where there is great reliance on subsistence represented by small farms with only a few cows that produce and consume on the spot. What is also indicated by the above mentioned "fresh milk phenomenon" is the need for further differentiation of milk products, as differences in socio-cultural factors may explain some part of the variation in consumption of these goods. An attempt will be made in the subsequent chapter, to explain both of these for meat and dairy products. 4 ASSESSMENT II: PROSPECTS FOR MEAT AND DAIRY PRODUCTS 4.1 Overall meat and dairy consumption in CEEC as prospected until 2008 The forecasts of meat consumption reflect a certain continuation of past developments. Total per capita consumption is expected to rise only slightly until the end of this decade. But substitution effects are more dynamic: Beef and veal consumption is expected to decrease slightly, whereas pig meat consumption will be more stable with a slight increase. Continued growth in poultry meat consumption is expected. Ovine meat consumption will also decline, at a high rate in relative terms, but at a low rate in absolute terms, as it is already at a low level (Table 12). Table 12: Meat consumption prospects for the CEEC-10 (in kg p.c.) 1999 2004 2008 Change '99-'08 (% of 1999) Beef and veal 9.6 9.3 9.2-4.2 Pig meat 41.4 40.8 42.1 1.7 Poultry meat 15.4 17.6 19 23.4 Sheep and goat 1.1 0.9 0.8-27.3 Total per cap. Consumption 67.5 68.6 71.1 5.3 Source: EUROPEAN COMISSION 2001. Contrary to meat consumption, dairy consumption is likely to decline, but only slightly. Butter, and fresh milk consumption will be reduced. The strongest relative effects are seen for cheese, but that only means an absolute increase of 1.6 kg p.c. (Table 13). Table 13: Dairy consumption prospects for the CEEC-10 (in kg p.c.) 1999 2004 2008 Change '99-'08 (% of 1999) Milk 227.00 224.00 223.00-1.8 Butter 2.75 2.69 2.68-2.6 Cheese 7.50 8.40 9.10 21.3 Total 237.25 235.09 234.78-1.0 Source: EUROPEAN COMISSION 2001. 4.2 Detailed consumption prospects for meat as reported by the experts 4.2.1 Overall demand developments Table 14 shows the expected changes in meat consumption as stated by the experts. For evaluation purposes, the ratings from strongly negative to strongly positive have now been transformed into quantitative figures with a range from 2 to 2, in units of one. This approach should not create the illusion that these are ordinal numbers. They can only be interpreted relatively and with respect to the country background. Thus, the simple average given at the bottom of the table will provide only a trend that has to be carefully interpreted by taking into

Consumption Trends for Dairy and Livestock Products, and the Use of Feeds in Production 20 account the differences in characteristics of the population of each country. The subsequent section will briefly assess the different meat products. Beef is expected to experience only a slightly positive trend. High cuts are best off with an overall trend of 0.67, low cuts are worst off with 0.33. These figures reflect the trend in the individual countries: High beef cuts are expected to be consumed more in Poland, Romania, the Slovak Republic, the Baltics and Slovenia, whereas in Hungary, the Czech Republic and Bulgaria, it is expected that there will be no increase in consumption of this product. For low beef cuts, the same holds: Consumption is likely to develop negatively in a third of the countries, namely in the Czech Republic, the Slovak Republic and Estonia, whereas in the rest of the region, there is no change expected. For meat products containing beef, the picture is diverse. In Central Europe, namely Poland, the Czech Republic and the Slovak Republic, trends are negative, while in Eastern and South-Eastern Europe the trends are neutral or even positive. Veal will have positive consumption trends, especially in Eastern Europe and Slovenia, whereas in Central Europe, namely the Czech Republic, the Slovak Republic and Poland, there will be no change. Pig meat forecasts follow the expected statistical trends: High cuts are expected to be demanded in increasing quantities throughout the CEEC-10, except for Poland where the development will be neutral. Consumption of low cuts will decline, with a value of -0.44, that means a negative development in four of the countries (Estonia 2, Poland, Bulgaria and Romania 1, whereas only Hungary is expected to experience a rising demand for low cuts. More pig meat products are also expected to be consumed except for Estonia and Bulgaria (both 1). Mutton and goat meat consumption is expected to rise in most of the countries. Only three of the countries expect no change at all (Estonia, the Czech Republic and Bulgaria), all the other countries expect positive changes. It is very interesting, that for this product, and only for this, expectations of the experts differ from the forecasts of the European Commission. The poultry meat forecasts are in agreement with the expectations of the statisticians. Breast meat has the highest score of 1.22, with only one country, Hungary, expected to have stable consumption (0). Almost the same holds for other poultry meat. The forecasts for poultry meat products are also positive with some exceptions, namely Estonia that expects strongly negative consumption developments in this market segment. Regarding total meat consumption, the trend is also mainly upwards for meat, as in only two countries, the consumption is anticipated to be stable in the future. The same holds for meat products, whereas offal consumption is likely to decrease in most of the countries, except for Estonia, Hungary and Slovenia (no change at all), and Romania and the Czech Republic (positive trend). Looking at the above discussed facts, the anticipated consumption of different types of meat seems to be diverse enough to be able to assess in detail the reasons for differences in future consumption trends.