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Austria Toughs Out EU Transition
By Walter Krucsay
U.S. producers, having adjusted to many recent changes driven by global economics, can appreciate what farmers in Austria have withstood since their country's accession to the European Union (EU) in 1995.
Austrian farmers and sectors of the food industry have taken it on the chin with newly enacted strict economic measures and declining incomes. Prior to accession, the Austrian agricultural sector enjoyed a cozy relationship with its government, which traditionally protected small family farmers devoted to sustainable farming practices.
Enter globalization and EU political realities.
To keep Austrian markets competitive, the Austrian government has been struggling to amend its comfortable but outdated ways. It is determined to meet head-on the EU fiscal convergence criteria in order to become a charter member of the European Monetary Union (EMU).
Not since World War II has the country's economy been so stressed. With no transition period, the Austrian government embraced fiscal austerity measures designed to reduce the budget deficit and prepare the country for conversion to the new currency.
Besides a tightened belt at home, Austrian industry has had to cope with encroachment by large EU enterprises, increased competition and application of EU technical regulations (particularly food and veterinary laws), common regulations of the market order, trade policy, customs tariffs and statistics.
The country's food industry statistics for 1995 and 1996 are not precise because of the changeover to new accounting methods, but it is estimated that the sector's gross production value declined 6 percent in 1995 and 5 percent in 1996. But a payoff is already discernible--a turnaround in 1997 is expected to have measurable effects by 1998.
Agenda 2000 Goal Induces Heartburn
The EU's plan to make certain European agricultural products (grain, beef and dairy products) more price-competitive on the global market by the year 2000 has understandably met massive resistance from Austrian farmers. They regard the reduction in subsidies and setasides and efforts to meet World Trade Organization (WTO) commitments as an assault on their small farms and ecological programs.
The hard times caused by Austria's accession to the EU have inevitably raised skepticism about the Euro (new European currency) among agricultural businesses. But suspicions aside, a common currency has built-in advantages for the farmer. Austria has suffered from currency fluctuations in the past, losing markets when currency devaluations occurred.
Downsizing Follows Accession
Small shops, long a familiar part of the Austrian retail landscape, are declining drastically. In 1972, over 20,000 of the businesses dotted the countryside. Now at about 7,500, the number of shops is expected to drop below 6,000 by 2002.
In 1996, two supermarket chains accounted for more than half of the $11.5 billion food retail sales in Austria. The increasingly concentrated market power provides unrelenting pricing pressures on the remaining shops.
The large food chains have their own buyers for most products, leaving food product purchasing in a few hands. With this concentration of buyers, farmers outside marketing organizations cannot hope to compete.
How Consumers React
Globalization has also impacted consumer behavior among the usually traditional Austrians. Exotic, ethnic foods have become commonplace. Also, the trends toward single households and women working has upped demand for convenience foods, particularly frozen items. About one-third of the population regularly eats meals outside the home, while snacking between meals has become evermore common.
However, Austrian consumers want to receive value for their purchases. They consider freshness and natural condition (i.e., no food additives) top priorities.
The ecological awareness movement in recent years has made consumers suspicious of new products produced through biotechnology. Although even European regulatory agencies recognize the safety of biotech products, a recent poll indicated that 95 percent of the Austrian population questions the safety of foods produced from genetically modified organisms or those that have been irradiated. They want to be able to buy "natural" food.
In their quest for quality and natural products as well as to demonstrate their opposition to downsizing and the depersonalization of the new food distribution systems, consumers have changed their buying habits. There's a growing mistrust of the new commerce, and an expressed desire to deal one-on-one with the producer that's created a small boom in direct farm sales.
Because of this commitment to maintaining a healthy environment, Austrian participants in the next WTO round will promote ecological and social criteria.
What's in it for U.S. Exporters?
Trade with the United States declined in 1995 and 1996 due to a sluggish economy and to Austria's accession to the EU. Two of the best U.S. sellers--rice and cotton--lost their duty-free status and are now subject to higher EU tariffs. Two other factors affected sales: Before EU accession, large rice stocks were established; and Austria had to adopt the EU ban on imported meat from animals treated with growth protectant hormones, and this has caused a decline in Austria's imports of high-quality U.S. beef.
Now that the WTO has ruled
that this ban is inconsistent with the EU's international commitments,
the EU should lift the ban, which would open opportunities for a
renewed beef market in Austria.
But changing consumer preferences have opened untapped market opportunities. The fast-food sector is growing quickly, and is expected to rake in $530 million in 1997. Current favorites: pizza and hot dogs.
Seafood exports are also expected to increase. Diners with rising incomes have already demonstrated a fondness for lobsters and freshwater crawfish. Why not U.S. catfish, squid and salmon?
The pet food market is clearly not saturated; domestic production and imports are rising. [See AgExporter, December 1997: "Austrian Pets Hunger for Quality U.S. Pet Foods."] The country's demographic profile showing an increasing number of single households tends to support a growing pet population.
Imports of snack foods and ethnic foods are increasing--Austrian consumers enjoy Tex-Mex foods and light beer.
The United States has been a traditional supplier of tobacco and cotton. These products are expected to continue at current levels.
Then there are the franchise opportunities. Already in place: McDonald's, Dairy Queen, Subway, Pizza Hut, T.G.I. Friday's and Häagen Dazs.
Dairies' Dilemma
The dairy industry in Austria provides a good example of the disruptive effects that the intense price competition following EU accession has had on the Austrian economy.
Following EU accession in 1995, milk prices declined sharply. The number of dairy cows dropped 7 percent in 1995 and 6.6 percent in 1996; milk output fell 6 percent and 3 percent, respectively.
After the shake-out, two large holding companies controlled half of the milk market. Small groups and single dairies make up the rest of the industry, with 90 percent of the milk going to dairy cooperatives.
This fierce competition has caused heavy losses ($95 million per year) throughout the dairy industry. The marketplace benefits, but the industry sector has faced forced sales, mergers and closures. And the reshuffling isn't over yet: While the two largest companies are negotiating a merger, they are also courting eager foreign partners.
To help farmers cope with income losses, the EU is providing declining compensation payments. The payments dropped from 84 per kilogram of milk in 1995 to 34 in 1997, with phaseout set for 1999.
The regulating hand of the EU was evident in 1997 because, due to excellent feed and grazing conditions, milk deliveries were above quotas. The Austrian government then urged farmers to reduce their deliveries because once quotas are overreached, a "super" tax of 8-164 per liter of surplus milk is levied.
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The author is an agricultural specialist with FAS' Office of Agricultural Affairs in Vienna, Austria. Tel.: (011-431) 31-339-2249; Fax: (011-431) 310-8208; E-mail: AgVienna@compuserve.com .
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