February 23, 2015

Güldem Atabay Sanli Director – Research and Strategy EGC Agri Capital

With some 30% of household spending going to food, beverages and tobacco; Turkey’s food industry has registered a steady growth in recent years, with the Turkish consumers becoming increasingly demanding, spoiled by the plethora of choices offered by mass grocery retail outlets. The strengths of the industry include the size of the market driven by the country’s young population, a dynamic private sector economy, substantial tourism income and a favorable climate.

The added value of the food sector is at $62.0bn per annum, representing one-fifth of the manufacturing sector’s total output. There are about 60 thousand companies that are active in the food and beverage sector in Turkey. Turkey’s exports of agriculture and food products have reached $17bn in 2014; accounting for about 10% of the country’s total exports of $158bn in 2014.

We find low but increasing productivity in most segments of the primary agriculture, with greenhouse and poultry being the leading exceptions. Productivity profile is largely dictated by small parcel size and a host of other structural factors, such as poor education, migration to cities and low-grade pasture land. The greatest success story in innovation is the rapid expansion of organic farming, cattle and chicken raising and dairy farming in Turkey.

Food retailing is the star of the Turkish agricultural value chain. It has expanded its market share against the informal sector over the last 15 years, using cost cutting, clever marketing and extensive advertising. Fruit and vegetables industry is also estimated to be world-competitive in many staples because of Turkey’s abundance in fruits, but thanks to efforts to improve quality and marketing as well. The current star of the agriculture in terms of competitiveness is poultry, which has demonstrated very high productivity and efficiency to boot. It has proven its mettle in export markets from Russia to Singapore.

Low productivity is not destiny. The state is helping to overcome structural shortcomings through a large variety of programs. These efforts are making a slow but noticeable difference to address the productivity and lack of innovation problems.

Over the last five years, there has been a glacial but irreversible transformation in Turkish agriculture towards more state intervention, regulation and participation of non-traditional private actors. Non-traditional actors from upstream and even some from abroad have already sensed the prospects of above-average returns and begun taking stakes. Yet, private investment in agriculture is still in its infancy and the state of regulation is in flux.

The future of Turkey’s agri-business will be all about boosting regional agribusiness development and agro-industrial processing to climb up the value-chain ladder to eventually become an “AGRO-INDUSTRIAL TECHNOPOLE”; also called “agropole/agropolis” that stands for shared facilities and services (e.g. transport, storage and packaging) built explicitly for the processing of agricultural products. Turkish farms are becoming commercialized and are increasingly managed by a younger, more sophisticated generation. Efficiency gains become the Holy Grail of the industry, as growth is driven by new partnerships and alliances up and down the supply chain. Increasingly public scrutiny, globalization and exports lead to higher quality, more environmental sensitivity and hygiene consciousness.

Currently Turkish consumers largely use what farmers produce. In the next decade, farmers will produce what consumers demand. The engine of this transformation will be large-scale agro-industry enterprises, multi-nationals, restaurant chains, fast-food franchises, and mega-markets which will integrate vertically and upstream or relay price/quantity information to the distributors, wholesalers and finally farmers about what the end client wants. This process will be driven by the rather significant profits along the chain of production, while those at the top are being whittled away by competition and excess regulation.

As we call it “commercialization”, it will lead to a quest for FDI:

• Demand growth is very robust and can be forecast up to 10 years.
• While annual price fluctuations are large, trend wise food prices are still rising in excess of headline CPI.
• The government subsidizes a large portion of the investment in terms of cheap loans, VAT, income tax even payroll tax exemptions.
• The state provides R&D, veterinary, seed and breeding stock support.
• Profit squeeze among end users suggests that vertical integration will bring large benefits.
• Economies of scale will add to these benefits.
• Yet the biggest source of profits will be know-how and management expertise.

Few Turkish agricultural companies have the expertise in managing large scale integrated national chains or operating in global financial environment. Survival will depend on attracting FDI.

Güldem Atabay Sanli is a member of the speaking faculty at Global AgInvesting Middle East in Dubai, 23-25 February 2015.