Required Report - public distribution

**Date:** 3/31/2004

**GAIN Report Number:** HU4007

HU4007

**Hungary**

**Grain and Feed**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Sarah Hanson

U.S. Embassy

**Prepared by:**

Dr. Ferenc Nemes

**Report Highlights:**

Report Highlights: After the very low grain harvest in 2003, Hungary's
grain trade is small. The upcoming EU accession will not result in major
changes in the growing pattern. Normal weather points to an average crop
in 2004. Contracting animal production will result in higher wheat and
corn exports in 2004/2005. Hungary strictly follows EU biotechnology
regulations, and it is expected that biotech varieties will not be
introduced in the next few years.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Unscheduled Report

Vienna \[AU1\]

\[HU\]

# Production

Fall planted wheat area is 1,140 thousand hectare (plus 10,000 hectare
durum wheat). The green crop wintered well under partial snow cover and
had adequate precipitation. Yield expectations are for a solid average.

Farms seeded 193,000 ha of winter barley. Spring barley planting is
still ahead but area is usually at about 160,000 ha.

The two other winter grains (seeded in the autumn) are rye and
triticale. The rye area of 49,000 ha is in line with the long-term
average, while triticale area, 160,000 ha, registers an eight percent
increase over 2003.

The Government of Hungary (GOH) and industry forecasts a slight increase
in corn area to 1.2 million hectare.

# Production Factors

Fertilizer use in 2003 was at 460,000 MT active ingredients, 8.7 percent
above the 2002 level. Analysts expect higher fertilizer use and more
rational input use from 2004 as a result of increased production support
for grain cultivation.

Prices and leasing fees for agricultural land were low in Hungary until
2003. Due to increasing EU and GOH support, leasing fees and land prices
have started to increase. Direct payment on arable land was HUF 7,000/ha
(USD 34/ha) in 2003. This support may reach HUF 38,000/ha (USD 183) in
2004 \[although a part of it may effectively be paid out only in 2005;
see Policy section for additional information\].

Land owners/users registered only 3.5-3.6 million hectares of arable
land for parcel identification by mid-March 2004. Registration is the
precondition for direct payments. The original deadline for farms was
December 20, 2003, but the GOH prolonged registration by one month more.
Until now only eighty percent of Hungary's 4.477 million hectares of
eligible arable land acreage has been registered. The smaller registered
area may reduce direct payments to farms per one hectare.

# Consumption

Grain use by the domestic food industry is not expected to change in
2004. Dry milling uses 1.7 ‑ 1.8 million MT of wheat and 170 ‑ 200
thousand MT of corn annually. The above figures were somewhat lower in
CY 2003 - 1,45 million MT and 122 thousand MT --respectively. Wet
milling (high fructose corn syrup production) consumes about 500,000 MT
of corn annually.

Swine stock was 4.7 million at the end of 2003, the lowest in ten years.
Opening stocks of adult poultry in 2004 were 55.4 million, 2.3 million
lower than a year ago. The increase of chicken, turkey and geese could
not counterbalance the drop in the number of layers and ducks.

Production in the main feed grain-consuming sectors, poultry and swine,
will decline further in 2004 and 2005 (see Gain Reports HU4001 Poultry
and Products and HU4006 Livestock and Products reports). Consequently
domestic coarse grain consumption for feed will be lower.

In the case of an average crop, exportable surpluses of wheat and corn
may go up to million tons. Preliminary compound feed production data for
CY 2003 shows an 8 percent drop from the previous year. Feed for swine
was 2.1 million MT, poultry 1.6 million MT, cattle 0.6 Million MT, and
other mixed feed 0.2 million MT.

# Trade

Hungarian grain exports after the short 2003 harvest were rather low
until March 2004. High domestic prices, later administrative export
limitations by the GOH (see at GAIN Report HU4003 Grain and Feed report)
stopped the sales of wheat and cereals.

Imports were also bearish despite duty free import quotas for wheat and
rye. The last months of the 2003/2004 marketing year may be short for
grains, although the GOH plans to sell 150,000 MT wheat from central
stocks.

The GOH will survey grain stocks of major trading and producing
companies as of May 1, 2004. The EU 1972/2003 and 230/2004 orders
mandate this measure. The EU imposes high taxes on grain stocks above
the "normal" (previous years statistical) level. The regulation is
designed to prevent speculation in cheap grain stocks by traders in EU
acceding countries (who could later exploit the high intervention price
of the EU). In Hungary's case, the probability of an above average grain
stocks is minute.

After the May 2004 EU accession, Hungary may be a regional supplier of
quality wheat and corn. Major importers of wheat may be Italy, Spain and
Switzerland and Bosnia, Croatia and Romania. For feed corn, major buyers
will be Austria, Germany and Poland. Having large processing capacities,
Hungary may maintain its exports of flour, feed and other cereals to the
neighboring countries.

In the case of continued good weather, 2004/2005 exportable surpluses of
wheat could be 1-1.5 million MT, barley 130,000 MT, and corn about 1.5
to 2 million MT.

Wheat, Barley and Corn Trade of Hungary in the 2003/2004 MY (Metric
Tons)

  ----------------- --------- --------- --------- -------- --------- --------
                              Exports                      Imports    

                    Wheat     Barley    Corn      Wheat    Barley    Corn

  July              112,769   17,253              0        0          

  August            186,428   9,753               0        0          

  September         152,627   11,575              390      2,609      

  October           59,094    10,321    39,003    1,128    4,357     0

  November          31,879    11,938    51,944    5        16,135    513

  December          25,481    2,556     51,579    3,704    30,327    3,618

  January           18,113    n/a       11,105    n/a      n/a       n/a

                                                                      

  TOTAL             586,391   63,396    153,631   5,227    53,428    4,131
  ----------------- --------- --------- --------- -------- --------- --------

Source: Grain Processors and Traders Association and industry estimates

# Prices

Futures prices for 2004 May at the Budapest Commodity Exchange (BCE) for
wheat were at the top (HUF 52,000/MT; USD 241.86/MT) in December, 2003.
After the export levy was introduced, BCE dealers started to reach their
quotes and prices of wheat dropped to HUF 42,000/MT; USD 201.92/MT by
mid-March, 2004.

Feed corn prices (also for May, 2004 delivery) were also at their
highest at the end of 2003 (HUF 43,400/MT; USD 201.86/MT) but than sank
linearly until the HUF 36,50/MT; USD 175.48/MT in March, 2004.

Feed barley slowly increased until January 2004 (HUF 39,000/MT; USD
185.71/MT) and than registered a rapid decrease until March (HUF
36,500/MT; USD 176.48).

August 2004 futures for wheat and barley, and November 2004 futures for
corn started to decline as a result of good weather conditions and
unchanged expected plantings.

**BCE futures for August 2004 (wheat, barley) and November 2004 (corn),
USD/MT**

  ----------------------- ----------------------- -----------------------
                          January 15, 2004        March 16, 2004

  Milling Wheat           151.00                  139.90

  Feed Barley             131.43                  128.85

  Feed Corn               148.81                  134.62
  ----------------------- ----------------------- -----------------------

# Policy

Year 2004 will be a cornerstone year for production support in the farm
sector. The EU domestic support priorities differ from Hungary's, and
this may lead to changes in the production structure in the next years.

Hungary's agricultural support budget was USD 838.3 million (HUF 216.3
bn) in 2002 and USD 1,021.7 million (HUF 235 bn) in 2003. The government
has made major changes in the complex system of production subsidies for
2003 in order to orientate producers to the CAP system introduced in
2004. Still, the 2003 production subsidies represented the traditional
Hungarian system more than the CAP priorities.

In January 2004, the Ministry of Agriculture (MOA) terminated many kinds
of domestic production support due to two main reasons; first, the MOA
was starting the transition to the EU support regime; second, the GOH
needed to initiate austerity measures due to overspending in its central
budget in 2003. Farmers started road demonstrations as a response to the
cut of traditional forms of subsidies. MOA had to bring back some
transitional support measures (valid until May) worth HUF 50 bn (USD 244
million) for swine, poultry and dairy.

The above unexpected spending, as well as the HUF 80 bn (USD 390) worth
of carryover obligations from 2003 reduced the national agricultural
budget of 2004. The GOH launched a (HUF 100 bn; USD 488 million) loan
guarantee program for farms under EU and domestic government
supplemental subsidies when the short budget occurred (paid only from
the end of the year). Commercial banks and farms will finance the loan
guarantees until the relevant "Paying Agency" grants direct payments.

The original GOH agricultural budget plan for CY2004 is about HUF 290 bn
(USD 1,415 million). HUF 154 bn (USD 751 million) comes from the
Hungarian budget, HUF 136 bn (USD 663) is expected from different EU
funds).

Concerning the structure of the direct payments in Hungary, the country
proposed the following Complementary National Direct Payment (CNDP)
version under the Single Area Payment Scheme (SAPS).

  -------------------------------------------- ------------ --------------
  **Breakdown of Complementary National Direct               
  Payments in Hungary**                                     

  ** **                                                      

  ** **                                        **Forint\    **US Dollar\
                                               (HUF)**      (USD)**

                                                             

  EU Direct Payment (25%)                      76 bn        370 million

                                                             

  Compl. National Direct Payment (30%)         92 bn        449 million

  of which                                                   

                                                             

  Arable land                                  72 bn        351 million

  Rice                                         0.7 bn       3 million

  Tobacco (Burley and Virginia Schemes)        4.5 bn       23 million

  Beef cattle (Beef and Suckler cow Schemes)   9.4 bn       46 million

  Dairy                                        3.6 bn       18 million

  Ewes                                         1.7 bn       8 million
  -------------------------------------------- ------------ --------------

The EU has not approved the above direct payments proposal of the GOH.
This is why the final per hectare payments are not known. However,
direct payments for grains, forecasted at above HUF 30,000 (USD 144)/ha,
will be higher than the production support of the previous years. This
may create better financing for the grain production and will increase
land prices and leasing fees.

The other factor that affects per hectare direct payments is the
registered area. Hungary claimed EU direct payments for 4,477,000 ha,
but until now only 3.5-3.6 million ha have been registered. This may
reduce the overall budget and per hectare direct payments.

# Tariffs

Hungary's EU membership will not change tariff conditions for the grain
imports from the United States. The exceptions are barley and milled
rice. The EU external tariff for rice is about 63% vs. the 39.6 percent
Hungarian applied tariff (although the EU's application of the margin of
preference results in a lower tariff for many U.S. suppliers). The EU
tariff on barley is about 120% vs. the actual Hungarian duty of 32.8%.

# Biotechnology

The Hungarian government may potentially be one of the EU\'s more
forward-leaning members in support of biotechnology. Although the
Hungarian government has pledged to adopt all relevant labeling and
traceability legislation passed by the EU, the Hungarian government has
allowed field tests for herbicide resistant corn, wheat and other crops.

Extensive biotechnology research is taking place in Hungary, which
indicates the country's interest in further developments and the use of
biotech will likely grow over time. Hungary has promulgated the main
pieces of legislation required by the time of accession (such as
executive orders on the labeling of food; sampling and threshold \[GMO\]
limits for imported materials; responsibilities of different authorities
in enforcement etc.). However, Hungary's considerable grain and seed
business will not open for biotech varieties in the near future.
Seemingly the country follows the EU's hesitant (de facto) application
of rules already made (several GMO plant varieties have passed the
required field tests and are waiting for (the deserved) registration).
The GOH has not shown any sign of having a real agricultural
biotechnology policy so far, rather than repeating the importance of a
"GMO-free" image for the country.

  --------------- ------------- ---------- ---------- ---------- ---------- ----------
  **Country**     **Hungary**                                               

  **Commodity**   **Wheat**                                      (1000      
                                                                 HA)(1000   
                                                                 MT)        

                  2002          Revised    2003       Estimate   2004       Forecast

                  USDA Official Post       USDA       Post       USDA       Post
                  \[Old\]       Estimate   Official   Estimate   Official   Estimate
                                \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                 07.2002               07.2003               07.2004
  Begin**                                                                   

  Area Harvested  1100          1100       1200       1112       0          1150

  Beginning       757           568        714        658        384        300
  Stocks                                                                    

  Production      3910          3900       2920       2900       0          4400

  TOTAL Mkt. Yr.  345           0          350        20         0          5
  Imports                                                                   

  Jul-Jun Imports 345           0          350        20         0          5

  Jul-Jun Import  0             0          0          0          0          0
  U.S.                                                                      

  TOTAL SUPPLY    5012          4468       3984       3578       384        4705

  TOTAL Mkt. Yr.  1278          860        800        600        0          1105
  Exports                                                                   

  Jul-Jun Exports 1278          860        800        600        0          1105

  Feed Dom.       1000          1000       900        900        0          900
  Consumption                                                               

  TOTAL Dom.      3020          2950       2800       2678       0          3000
  Consumption                                                               

  Ending Stocks   714           658        384        300        0          600

  TOTAL           5012          4468       3984       3578       0          4705
  DISTRIBUTION                                                              
  --------------- ------------- ---------- ---------- ---------- ---------- ----------

  --------------- ------------- ---------- ---------- ---------- ---------- ----------
  **Country**     **Hungary**                                               

  **Commodity**   **Barley**                                     (1000      
                                                                 HA)(1000   
                                                                 MT)        

                  2002          Revised    2003       Estimate   2004       Forecast

                  USDA Official Post       USDA       Post       USDA       Post
                  \[Old\]       Estimate   Official   Estimate   Official   Estimate
                                \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                 07.2002               07.2003               07.2004
  Begin**                                                                   

  Area Harvested  372           372        300        380        0          355

  Beginning       149           100        64         25         44         40
  Stocks                                                                    

  Production      1100          1100       830        825        0          1100

  TOTAL Mkt. Yr.  32            5          50         60         0          30
  Imports                                                                   

  Oct-Sep Imports 31            5          50         60         0          30

  Oct-Sep Import  0             0          0          0          0          0
  U.S.                                                                      

  TOTAL SUPPLY    1281          1205       944        910        44         1170

  TOTAL Mkt. Yr.  117           80         50         70         0          50
  Exports                                                                   

  Oct-Sep Exports 122           100        50         70         0          50

  Feed Dom.       800           850        550        550        0          800
  Consumption                                                               

  TOTAL Dom.      1100          1100       850        800        0          1045
  Consumption                                                               

  Ending Stocks   64            25         44         40         0          75

  TOTAL           1281          1205       944        910        0          1170
  DISTRIBUTION                                                              
  --------------- ------------- ---------- ---------- ---------- ---------- ----------

  --------------- ------------- ---------- ---------- ---------- ---------- ----------
  **Country**     **Hungary**                                               

  **Commodity**   **Corn**                                       (1000      
                                                                 HA)(1000   
                                                                 MT)        

                  2002          Revised    2003       Estimate   2004       Forecast

                  USDA Official Post       USDA       Post       USDA       Post
                  \[Old\]       Estimate   Official   Estimate   Official   Estimate
                                \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                 10.2002               10.2003               10.2004
  Begin**                                                                   

  Area Harvested  1150          1150       1100       1100       0          1200

  Beginning       251           519        239        750        173        350
  Stocks                                                                    

  Production      6121          6000       4534       4600       0          6900

  TOTAL Mkt. Yr.  0             5          0          6          0          5
  Imports                                                                   

  Oct-Sep Imports 0             5          0          6          0          5

  Oct-Sep Import  0             0          0          0          0          0
  U.S.                                                                      

  TOTAL SUPPLY    6372          6524       4773       5356       173        7255

  TOTAL Mkt. Yr.  1533          685        500        600        0          1555
  Exports                                                                   

  Oct-Sep Exports 1533          685        500        600        0          1555

  Feed Dom.       4000          4200       3500       3800       0          4100
  Consumption                                                               

  TOTAL Dom.      4600          5089       4100       4406       0          5000
  Consumption                                                               

  Ending Stocks   239           750        173        350        0          700

  TOTAL           6372          6524       4773       5356       0          7255
  DISTRIBUTION                                                              
  --------------- ------------- ---------- ---------- ---------- ---------- ----------