A MARKET INTELLIGENCE BRIEF THE AGRIBUSINESS AND FOOD PROCESSING SECTOR

Executive Summary
Overview The agribusiness sector in Bosnia has never supplied all the food required for its citizens and may currently be producing a smaller percentage than at any time in its history. The reasons are many, but primarily are the result of past political decisions exacerbated by the effects of five years of war. One doesnt have to loo much beyond the estimated one billion !eutsche "ar s of expected food imports for the current year to obtain an idea of the enormity of the problem. T ere i! "# !i"$%e !u&'!ect#r #( t e a$ri&u!i"e!! a") (##) i")u!try t at )#e! "#t re%y eavi%y #" im*#rt! + i%e t e "atura% a") uma" re!#urce! t# *r#)uce t e ma,#rity #( t e!e item! are rea)i%y avai%a&%e- "eat, including poultry and livestoc , constitute the largest single category of imports, yet there are adequate pastures and grazing lands to double or even triple production. Opportunities #n developing economies there always seems to be pressure to develop exports to help with the balance of payments problems, yet stemming the influx of imports produces the same result. $ertainly t e %ar$e!t mar.et #**#rtu"ity i" t e B#!"ia" a$ri&u!i"e!! !ect#r i! t e re*%aceme"t #( im*#rt! and this opportunity is almost unlimited in some areas. %pon examination of the charts presented in the text, it becomes apparent that most imports come from neighboring countries whose agricultural sectors operated under the same conditions, both geographic and political, as that of Bosnia, yet these countries have become exporters. &lthough shifts in the rural population will affect the nature of agricultural and the types of mar ets for food products, t e i"crea!e i" rea% +a$e! i" B#!"ia +i%% u")#u&te)%y !*ur !a%e! #( c#"ve"ie"ce ty*e (##)!T e #"e c#mm#" (ai%i"$ am#"$ a%% !u&'!ect#r! #( t e (##) *r#ce!!i"$ i")u!try i! rec#$"iti#" #( t e "ee) (#r /ua%ity . B#!"ia" c#"!umer! ave acce*te) t e c#"ce*t #( &ra") i)e"ti(icati#" and will see out those products they perceive as being high quality ' not simply ta e whatever is available in the local shops and supermar ets. #n a survey completed for this report, eighty(five percent of the shelf space devoted to fruit )uices was occupied by imported brands selling twenty(five percent higher than domestic brands. T e (ruit ,uice !ect#r u")#u&te)%y *r#vi)e! t e $reate!t $r#+t #**#rtu"ity (#r )#me!tic *r#ce!!e) (##) *r#)ucer!. There are export opportunities as well, but these pale in comparison with the import replacement. &gain, the greatest opportunities are in the fruit and vegetable sub(sector in supplying niche mar ets and ethnic Bosnians living in *urope and abroad. Constraints S #rta$e #( cre)it %i"e! (#r *urc a!e #( m#)er" mac i"ery a") e/ui*me"t i! a *rimary c#"cer" t# *r#)ucer! trying to compete with

imported products. +aw materials of the required quality are also not always available due to a lac of ,production- credit lines. A %ac. #( a+are"e!! #" t e *art #( *r#)ucer! #( (##) !a(ety i!!ue! a") t e "ee) (#r /ua%ity c#"tr#% t r#u$ #ut t e !u**%y c ai" i! a%!# a" i!!ue . &lthough a few companies have received #.O certification, /azard &nalysis and $ritical $ontrol 0oint 1/&$$02 procedures are relatively un nown. T e ma,#rity #( t e (##) *r#ce!!i"$ c#m*a"ie! are !tate'#+"e) and are either shut down or operating near 345 of capacity. "anagement in these companies is more dependent upon being in the correct political party than being nowledgeable about the product, the process and the mar et. O"ce *rivati0ati#" #( !tate'#+"e) c#m*a"ie! i! c#m*%ete)1 #**#rtu"itie! +i%% exi!t (#r ,#i"t ve"ture *art"er! a") e"tre*re"eur! t# #r$a"i0e *r#)ucti#" t at ca" c#m*ete e((ective%y +it im*#rt!A host of opportunities for future business development programs exist in assisting the domestic agribusiness and food processing sector to overcome the constraints that prevent them from competing effectively with imports.

Bac.$r#u") I"(#rmati#"
This study was underta en primarily to furnish some detailed ,mar et intelligence- for use in the identification and quantification of domestic and export mar et opportunities in the food and agro(processing sector in Bosnia and /erzegovina. The ma)ority of the data concerning imports was furnished by the $ustoms and 6iscal &ssistance Office 1$&6&O2 0ro)ect and therefore applies only to the 6ederation. The data on customs collections in the +epublic of .rps a is gathered by their internal organization and was made available in a summarized form. 6urther, much of the information furnished by the "inistry of &griculture, 7ater "anagement and 6orestry 1"&7"62 is also applicable only to the 6ederation- T e c#"!e"!u! #( m#!t i")u!try re*re!e"tative! i! t at ! a)#+ interviewed that these unofficial imports are on the decrease, though there is no hard evidence to support such a statement. &lthough the level of detail for +. imports was not equal to that furnished by $&6&O, the total figures support the premise that per capita imports of the various products does not differ substantially from those of the 6ederation. & second function of this report is to assess the constraints to the successful penetration of those mar et opportunities identified. The sub(sectors selected for this study8 meats and livestoc , chic en and poultry, fruits and vegetables, and mil and dairy products comprise the ma)ority of domestic production. 7ithin each of these sub(sectors, there is a vast variety of products and product types, any one of which could be the sub)ect of an in(depth study. This reports examines only the broad product categories of fresh, frozen, preserved 1through some heat process and pac aged in tin cans or glass )ars2, dried and9or smo ed and dehydrated. The premise of this mar et intelligence report is that if the product is being imported then the demand for that product exists and a measure of that demand can be determined by the quantity of imports. #t also assumes that local producers can produce a product of comparable quality given the necessary resources and more importantly, the will to do so. 7hether this can be done at a price that is competitive with the imported product including protective tariffs is a question that must be studied in depth by anyone underta ing such a pro)ect.

im*#rt! i" a" am#u"t at %ea!t e/ua% t# t e #((icia%%y re*#rte) im*#rt! e"ter BiH a""ua%%y &ut remai" u"re*#rte). There is a ,sense- among some of those

%nequivocally this report is about imports and import substitution, although there are limited exports of some processed food items. 7ith one or two exceptions, these are primarily oriented towards Bosnians residing in other countries as a result of the war and its after effects. One ma)or exception is berries8 blac berries, raspberries, blueberries, and strawberries.

A$ricu%ture Natura% Re!#urce!

The first question that should be as ed is whether or not there is sufficient land of appropriate quality and with a suitable climate to significantly increase agricultural production. &lthough Bi/ encom(passes some 3,:4;,<=> hectares of land that is classified as agricultural, less than :?5 of this is suitable for modern agricultural technologies. There are some :??,??? hectares suitable for year( around livestoc grazing and an additional 4??,??? ha in the higher elevations available for seasonal grazing in the summer months. The climate is considered to be continental("editerranean, characterized by long, hot, and dry summers and cold, wet, winters. There is considerable contrast between the productivity of the lands in the northern sections of the +epublic of .rps a and the more mountainous regions of the 6ederation..

A$ricu%tura% Pr#)ucti#" i" BiH v!- 2e!ter" Eur#*e

7hy is it necessary for Bosnia to import some one billion !eutsche "ar s of agricultural products every year while most 7estern *uropean countries are forced to deal with irate farmers complaining of low prices and surplus production@ & brief loo at the situation prior to the war provides some insight as to ,what happened-. The Augoslav government paid little attention to the agriculture sector following 7orld 7ar ##, rather focusing its attention on industrial production. &s a result, agricultural production as a share of national product declined from :;5 in 3=4B to approximately 3?5 by 3==3. Cess than 3<5 of the wor force was engaged full time in agricultural production prior to the outbrea of the war. Devertheless, agriculture remained an important part of the economy with approximately >?5 of the rural population conducting some agricultural activities on a part time basis. "ost of these units were small and thirty percent of their production was for home use. &lmost ninety(four percent of agricultural land was in the hands of private owners in 3==3 and these producers operated under severe administrative restrictions, primarily the maximum of ten hectares per holding. #nsufficient or non(existent credit facilities coupled with inadequate mar et infrastructure resulted in inefficient land use with large areas of fertile land lying idle and low investment in agricultural technology. The few large state(owned agricultural enterprises, although operating a small percentage of the arable land, were able to produce well beyond their size due to high quality land, large, efficient bloc s of land suitable for mechanization and relatively high investment in advanced cultural practices. &lthough these farms still exist today they are for the most part dysfunctional producing at less than ten percent of capacity due to lac of wor ing capital and ineffective management. The future of these entities is unclear at present. !uring the five(year period prior to the war, agricultural production in Bosnia was insufficient to meet domestic demand for wheat, corn, beef, vegetable oil and sugar. The other Augoslav republics, primarily $roatia and .lovenia, provided for more than half the domestic demand for food.

E((ect! #( t e 2ar
7hat were the effects of the war on agriculture and more importantly, what is the relevance for the future development of the food industry in the short term@ &griculture and farming were heavily impacted during the war to the extent that all production was stopped in many areas. Over =?5 of agricultural production was accounted for by 4<?,??? small(scale private farms. 7hile the war resulted in loss of life, property, agricultural machinery, livestoc , destruction of orchards and vineyards, etc., the more serious long(term consequence was the fact that much of the farming population was driven off the land or illed. The situation was further exacerbated by the fact that most of the young men were conscripted into the army or emigrated resulting in a high average age of farmer coupled with a low level of professional nowledge. Total damage to the agriculture sector was estimated at %. EF.4F billion 3, of which E:.=4 billion occurred in the 6ederation and E3.4= billion in the +.. #n some areas up to <?5 of farm assets were lost and >?5 of livestoc were lost. Over :B<,??? hectares of prime agricultural land was rendered unusable due to the presence of mine fields. By the end of the war the agro(processing industry was operating at less than 3?5 of pre(war capacity due to heavy damage to buildings and equipment, the disruption of mar eting and supply channels and a lac of mar et infrastructure.

Curre"t Situati#"
!uring the three and one(half years of war, approximately 3.: million people, approximately B?5 of the pre(war population, left the country and up to :??,??? are dead or missing. &s one might expect, the greater impact of the war was felt in the rural areas and thus the dislocation in the agricultural areas was the most severe. 0resent trends indicate that the war will also result in long(term demographic changes that will have a ma)or impact on agricultural production. "any of the rural people who moved to the cities during the war are now reluctant to return to their farms further accelerating a migration trend that began before the war. The younger rural people as well as citizens from the more remote and9or less productive areas are li ely to find better economic opportunities in the urban areas. This situation is not limited to Bi/, but is prevalent in most developed countries. T e !i$"i(ica"ce #( a%% t i! (#r )eve%#*me"t #( t e (##) i")u!try i! t at
t e ty*e! a") %#cati#" #( a$ricu%ture +i%% c a"$e a! a re!u%t #( t i! ! i(t i" t e rura% *#*u%ati#" a! +i%% t e !i0e a") "ature #( t e )#me!tic mar.et-

Si$"i(ica"ce t# Bu!i"e!! Deve%#*me"t

0roductive $apacity 0ost(war crop production is still less than >45 of the pre(war levels and at those levels the production was less than 4?5 of the countrys requirements for several ma)or crops including wheat. Aields for the six ma)or vegetable crops 1;45 of all vegetable production2 are in the range of :45 of yields achieved in the %nited .tates. Thus, raw materials will be in short supply thereby necessitating contract farming and its concomitant requirement for increased wor ing capital to fund inputs for the farmers. #mportation of raw materials will continue to be a necessity.
1

A Medium-Term Agriculture ector trategy for the !ederation of "osnia and #er$egovina% Ministry of Agriculture% &ater Management and !orestry 'MA&M!( with the assistance of !A)% !ebruary 1***% p. 3.

The agro(processing industry, primarily state(owned, is operating at less than 3?5 of pre(war capacity. "ost have not found the funds necessary to repair damaged buildings and machinery while raw materials are in short supply.

Pr#ce!!i"$ tec "#%#$ie! ave "#t &ee" a&%e t# .ee* u* +it +#r%) )eve%#*me"t!1 *ac.a$i"$ e/ui*me"t a") tec "#%#$ie! are #ut #( )ate1 a") "e+ *r#)uct )eve%#*me"t i! at a !ta")!ti%% . This does not reflect the situation at those

small private firms who have managed to secure financing and re(start their businesses. !emand exceeds the supply for their products, they have invested in new products and technologies, and they have invested heavily in quality management. Two companies in this category plan to double their production in :??? over 3=== and would increase more if wor ing capital were available at reasonable rates. 2#r.i"$ ca*ita% "ee)! (#r c#m*a"ie! i" t i! !ect#r +i%%
c#"ti"ue t# &e i$ a") c#m*a"ie! may "#t &e a&%e t# ac ieve *r#,ecte) re!u%t! +it #ut !#urce! #( a""ua% +#r.i"$ ca*ita% cre)it %i"e!-

"ar et .tructure The mar et for food and agro(products is a function of the population and disposable income both of which have undergone dramatic shifts since 3==3. The population of both entities was estimated at F,B<<,??? in 3==3. : Over 3,:??,??? residents immigrated to safer countries and :??,??? were estimated to have been illed. Of the 3.: million refugees who left Bi/, it is estimated that over <??,??? have found permanent residences abroad leaving about 4??,??? that are ,potential- returnees. #n addition, another F:,??? highly qualified people immigrated from Bi/ between 3==> and 3==;B, approximately the same as the number of returning refugees during this period. %D/$+ estimates the number of returning refugees for :??? to be approximately B?,???, although their pro)ections usually are optimistic. The birth rate in 3==< was estimated 3:.=93??? while the general mortality rate was <.>93???, thus the natural increase is about 4.B5 per year. Table 3. P#*u%ati#" a") Dem#$ra* ic Data
1Gune B?, 3===2

*ntity 6ederation +epublic of .rsp a Total

Total :,:<>,?F 4 3,FF;,4B < B,<:F,4; :

? ' 3F F<<,?F =

34(>F 3,4F3,>;3

>4H :4<,B34

0opulation is estimated to have fallen by roughly 3<5 from 3==3 to 3==>. The age structure of the population had begun a shift towards the elderly prior to the war ( being about =5 in 3==3. This trend appears to have accelerated during the war due to the exodus of younger people and in Gune 3=== reached 33.B5. The average size of a household has also fallen from B.>: in 3==3 to B.B; in 3==>. On the other hand and of greater consequence to the development of the food industry is the fact that wages have risen rather dramatically since the end of the war in real terms. Table :. Avera$e 2a$e Data *ntity
2 3

!ec

!ec

!ec

!ec

.ep

!ec

tatistical Almanac of "osnia and #er$egovina% 1**1. "i# ,conomic -pdate% 1***%-Third .uarter% )ctober% 1/% 1***

=F 6ed &vg. Det Dominal 7age in I" +eal 7age 1!ec 3==F J 3??2 &vg. Det Dominal 7age in Im +atio to 6ederation 7age
34 466 ;5 34<=

=4
56 ;7: 37 78=

=>
375 4569 5: 38=

=<
768 4<36 443 75=

=;

=;
79: 34: 3

+.

457 ;8=

&nnualized real wage growth is estimated to have grown roughly :?5 since 3==;. %.&#! estimated the ,apparent unemployment rate- at B?.45 in the 6ederation and B3.45 in the +..F
T e e((ect #( *#*u%ati#" $r#+t #" )ema") (#r a$ricu%tura% *r#)uct! i! ex*ecte) t# &e mi"ima% + i%e t e e((ect #( ri!i"$ +a$e! ca" &e ex*ecte) t# !timu%ate )ema") (#r i$ er /ua%ity *r#)uct! a") m#re c#"ve"ie"ce (##)! a! !*#u!e! m#ve i"t# t e %a&#r mar.et t# ta.e a)va"ta$e #( ri!i"$ +a$e!-

.ources at the 6ederal "inistry of &griculture, 7ater "anagement and 6orestry estimate the total imports of food products for the year :,??? will approach !" 3 billion including official and shadow imports. *stimated shortfalls in domestic production of primary food categories are presented below8 Table B. E!timate) S #rt(a%% i" Pr#)ucti#" #( Se%ecte) F##)! 9 Fe)erati#" #( B#!"ia > Her0e$#vi"a 1"etric Tons2 #tem Beef Keal Camb .wine
Su&'T#ta% Meat

!emand :3,>?? >,??? ;,4>? 3<,<=? 4B,=4? B3,:<? B=3,??? :4,??? F,4?? <4,??? 57;15:6

0roduction 3:,3?? B,??? F,><? =,:BF :=,??F 3B,BF? :=B,??? 3;,??? B,4?? :=,4?? ;4917;8

.hortfall =,4?? B,??? B,;=? ;,44> :F,=F> 3<,=B? =;,??? <,??? 3,??? F4,4?? 34<1733

$hic en "il &pples 0ears

Other Keg 6ruits L

T#ta%5

#t should be noted that while there are a few items in which there is excess production, namely potatoes, eggs, and plums there is very little export potential for these items. The stated strategy of the "inistry of &griculture is to produce all of their own needs and to that end they have prepared a document termed a "edium(Term &gricultural .ector .trategy for 6Bi/. &lthough this document identifies the problems and suggests solutions, it is considered unli ely that funding for many of these programs will be available. #t is expected that some gradual increases in production will result from additional investments made by private farmers, but until the state(owned first(line mar ets for agricultural products are privatized and investment funds and credit lines made available to them, little improvement is to be expected. !omestic production of cereal grains
+ /

"i# ,conomic -pdate% 1***-!irst .uarter% April 22% 1***. MA&M! 0 Total demand for the product% i.e% the short fall will be filled with official and shadow imports.

and forage crops is li ely to see incremental increases, while those products requiring further processing will continue to remain at present levels or even decrease. Bosnian citizens have embraced the concept of ,brand recognition- and consistently buy well(mar eted imported products at higher prices than domestic products. .ince many of these products are also sold in the *% they meet the higher quality standards and pac aging required for competing successfully in that mar et- Fruit ,uice! #((er t e &e!t evi)e"ce #( t i! eve"t + ere #"e (i")!
a&#ut 89= #( ! e%( !*ace i" %#ca% !u*ermar.et! a") ! #*! )ev#te) t# im*#rte) &ra")! + ic u!ua%%y !e%% at a 39= i$ er *rice t a" t e (e+ )#me!tic *r#)uct! t at are #((ere)- #n the local television newscasts it is normal to see the imported

brands of )uices on the tables at meetings of various government officials.

&lthough there are a few exports of agricultural products from Bi/, they are very small and aimed at niche mar ets. #n the mid(eighties frozen and fresh berries were a ma)or export of the region with some estimates being as high as 3?,??? tons in some years. #n 3==;, :; tons of fresh berries were reported exported and zero processed berries.< There are some exports of fresh and processed fruits and vegetables but the quantities are small 1less than 3?5 of imports2 and focused on countries bordering Bosnia or Bosnian populations living in 7estern *urope.

2entral tatistics )ffice% ara3evo