Growth-related Pains in the Food Sector 

Food sector, which is in a continuous growth trend, has been undergoing industrial and financial transformations particularly recently all over the world. Having grown by 6% in Turkey last year, the sector is expected to grow by 10% this year.

Food sector which operates through processing the output of livestock and fishery has the title of being the most important branch of world manufacturing industry with an annual sales volume of over 2 trillion dollars. The sector which responds to survival needs has been facing especially recently some industrial and financial transformations. Firstly, cheap food came to an end when many countries increased controls on food prices. There occurred price explosions in most of the staple foods after the end of the cheapening trend which led to a decline in agricultural sector along with. For instance; the price of wheat exceeded 400 dollars per ton in September 2007 thus seeing its highest ever value in history. Although the price of wheat is expected to be around 200 dollars per ton by the next May, this price doubles the 25-year average.

Another product breaking a record by early 2007 is corn. The price of corn which rose up to 175 dollars per ton and is currently 150 dollars, is still above the 2006 average by 50%. But what do these high prices indicate? Normally, the answer to this question would be either poor harvest or scarcity. However, the interesting thing is that prices rise despite an abundance of harvest. The data presented by the International Grains Council (IGC) already confirm this “abundance.” The total amount of grain crop in 2007 was 1.66 billion metric tons; almost 89 million tons more than the previous year’s amount. The scarcity prices that could not be stopped even by this huge stock prove that there are other reasons which fuel world demand for grains. 

Income Increase in China and India

Doubtless to say, there are various reasons for this demand… One of these reasons is the gradually rising incomes in China and India which have been among the rising countries especially in recent years. The rise in incomes brings a parallel rise in the demand for meat products and this indirectly means buoyancy in the demand for grain used for feeding livestock. While the demand for grains used in bread production is directly linked with population increase, the demand for meat is completely in direct proportion to economic development. Higher incomes have made millions of people in India and China able to afford the prices of meat and other staple foods. The average annual meat consumption of a Chinese was 20 kg in 1985, but it already exceeded 50 kg today. Other developing countries follow China which has already reached a saturation point in consumption. At this point, one cannot help but think whether it is a realistic approach to relate the price increases only to rising incomes.

In order to explain the situation, there is a need for a second reason, and that reason is America’s boundless demand for ethanol. Ethanol is a fuel that is either used alone or is mixed with gasoline in automobiles or other motor vehicles. It is widely produced out of either corn or sugar cane. In 2000, 15 million tons of American corn was turned into ethanol, the amount for 2007 is around 85 million tons. While America is the world’s largest corn exporter, the amount of corn it uses now for producing ethanol is more than that it exports. At this point, the ethanol project which started in 2005 explains why corn prices began to rise. Of course, this difference in areas of use affects food market. According to the World Bank, the amount of corn used for filling the tank of an SUV (Sport Utility Vehicle) is enough to meet a person’s annual food requirement. Every government has made various arrangements in order to protect its citizens against the rising prices. Controls on prices were increased in many countries. For example; Argentina, Morocco, Egypt, Mexico and China put some restrictions on local prices. Another group of countries including India, Vietnam, Serbia and Ukraine have resorted to increasing import taxes and setting a certain limit on import. Under these circumstances, it would not be a right approach to fully reprobate expensive food. In addition to losers, there have been winners as well in the process of the rise in food prices. While the overpricing in staple foods which constitute a significant part of the budgets of consumers in poor countries has brought destructive results, agricultural producers have begun to get their labor’s worth and to show signs of economic recovery. 

The Sector’s Position in Turkey

Food sector in Turkey entered a transformation phase in the first years of the Republic. The sector has quickly become the flower of national economy thanks to young labor force and rich agricultural resources of the country. It is seen that production increase in food sector across periods has been much greater than that in other sectors. In recent periods, however, changing spending trends and nutritional habits appear as very important developments with respect to their overall effect on the sector. It is observed that such factors as; the increase in income per capita, the increased participation of female labor into production, the change in lifestyles due to urbanization which brought the predominance of nuclear family, have all combined to transform consumption patterns. With greater importance attached to quality and product safety, trusted brands and products stand out in food sector. Another trend that stands out is organic vegetables and fruits. Upper-income people no longer want to consume products contaminated by chemicals. This developed consumer awareness is evaluated as an opportunity for food sector. In addition to this, food sector’s possibility of selling products in the EU or in proximate markets is another opportunity, too.

The food sector has the advantage of benefiting from the current opportunities thanks to the young labor force which can easily adapt to innovations. It is evident that positive developments take place, but the sector’s problems should not be ignored. For example; high sectoral risks and the low educational level of employees in the sector are among the chief problems. External dependence regarding technology and the inadequacy of R&D works are also leading reasons for the worry over sector’s future. Excess capacity, absence of continuity in the supply of raw materials and the inability to produce at a fixed quality and quantity are also among other problems which draw attention. This lack of coordination between agriculture and industry is exacerbated also by the informal economy which is caused by the problems in marketing channels. A VAT reduction was recently made in order to fight the informal economy and unfair competition in the sector. After reducing the VAT rate from18% to 8%, application of three different VAT rates (1%, 8% and 18%) which caused complications in the sector was removed. This tax relief which seriously reduced the tax burden on the sector seems to be the remedy for the problem of agriculture-industry integration that has been the greatest issue in food sector for years. Thanks to this, the sector is expected to reach a volume of nearly 100 billion dollars. 

The Food Companies Which Aggrieved Their Investors

The food sector which seems to have bright prospects has undergone great problems in the past. In fact, many companies are facing serious financial problems even now. Some food companies like Dardanel and Kerevitaş have overcome the problems they faced. These two largest companies of the frozen food sector have undertaken huge obligations when they tried to finance capacity enlargement investments with short-term bank loans. Especially the 24% customs duty on canned tuna export has further increased the problems. After higher interest rates were applied to their debt during the economic crisis and with their exports declining, these companies began to have greater problems in competing with countries of the European Union which is the largest market for frozen food producers.

But the problems were overcome by gradually enlarging the capacity and after restructuring the credits. In addition to this, there were companies which went bankrupt after going public. Among those companies, Sezginler Gıda, Apeks Dış Ticaret, Lio Yağ and Mudurnu Tavukçuluk can be cited as examples. For instance; Sezginler Gıda has aggrieved its 6.900 investors when it failed to repay the 40-million dollar debt to the banks which it borrowed after 2001 crisis. Apeks Dış Ticaret was also another frozen food company which has aggrieved its investors with the 9,2 trillion Lira debt, 2,8 trillion Lira loss and 2,2-trillion Lira capital on its balance sheet. Currently, there are 23 food companies quoted on Istanbul Stock Exchange (ISE). The analysis of the capital structures and management methods of these companies is important for obtaining a general idea about the sector. These companies are all large and established enterprises of food sector. Ages of companies vary between 8 and 42 but the average age is 27. Preferring either İzmir or Istanbul as their base, these companies are all private enterprises and most of them are holding/group companies controlled by families. Operating in almost every subsector of the food industry, management of these companies is in independent and professional hands although they are family companies. 

The 2007 Performance of Food Companies

The sector host many foreign investors. The total number of food and beverage companies with foreign capital operating in Turkey is 258. Around 10% of companies with foreign capital which are involved in manufacturing industry and 2% of all companies with foreign capital investing in Turkey prefer food sector. When analyzed with respect to the total amount of investments, 363 million dollars of 1,463 billion dollars manufacturing investment go to food sector constituting 3% of the total foreign capital investment of 11,108 billion dollars. Joint venture which is widely used as the form of investment in Turkey is preferred also in the food sector. After the latest data is analyzed, it is seen that in 2007 production in 40 thousand food enterprises amounted to 90 billion dollars and 400 thousand persons were employed in the sector. According to foreign trade statistics relating to January-November period, the export of agriculture and food products amounted to 10,254 billion dollars rising by 16,7% on a year-over-year basis. While it was stated that both expectations related with elections and the drought have meant a difficult year for food manufacturers, the sector which grew by 6% in 2007 is expected to show a 10% growth performance in 2008. While export is expected to increase by 25% and import is expected to rise by 10%, it is thought that mergers will continue.