EC/FAO Programme on Information Systems to Improve Food Security

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EC/FAO Programme on Information Systems to Improve Food Security Decision-Making in the

European Neighborhood Policy (ENP) East Area

Study tour to Hungary Farmer cooperation

25–27 July 2011

Summary

Different types of measures are implemented to support the agricultural sector in Hungary. One set of measures aims at supporting the establishment and development of farmer organizations. The type of support instruments available to farmer organizations is different for the vegetable and fruit sector and the non-vegetable and fruit sector. In the vegetable and fruit sector, growers are encouraged to join producer organizations (POs), which receive support for implementing operational programmes, based on a national strategy. In Hungary, during a transitional period, support is also provided to encourage producers to form producer groups (PGs) by covering the administration and investment costs which have to be met to attain recognition as POs. In the non-vegetable and fruit sector, flat rate support is provided to recognized PGs. POs are the basic actors in the fruit and vegetable regime supported by EU. In the face of ever greater concentration of demand, grouping supply in this way strengthens the producers’ position in the market. The EU fruit and vegetable regime supports the operational programmes implemented by recognized POs, by contributing to the programmes’ operational funds. The regime requires Ministry of Rural Development (MRD) to recognize any group of producers that applies to PO status, if they meet a number of requirements. Especially the group should:

• Be created on a voluntary basis;

• Contribute to the general aims of the regime;

• Prove its utility through its scope and the efficiency of the services offered to members. POs’ operational fund is financed by the financial contribution of the government and the POs themselves, and the EU financial assistance. As a general rule, EU financial assistance is limited to 50 percent of the total amount of the operational fund. PGs are legal bodies formed by farmers who grow produce covered by the regime and wish to acquire the status of recognized producer organizations. The duration of the transition period to meet the conditions to be recognized as a PO is five years. PGs must present a phased recognition plan to MRD and Agriculture and Rural Development Agency (ARDA) in order to qualify. If the plan is accepted, it constitutes preliminary recognition and signals the start of the transitional period. During the transition period, the authorities provide funding to these groups to:

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• Encourage them to form and cover administrative costs;

• Cover part of the investment needed to attain recognition (as set out in their recognition plan).

This funding is partially reimbursed by the EU until the PG is recognized as a PO. The support provided to cover administrative costs is calculated on the basis of the value of marketed production (VMP). The MRD sets up a national strategy for sustainable operational programmes which defines the measures that are eligible for support, and approves POs' operational programmes. Both the programmes and the national strategy are monitored and evaluated by the Commission, based on a common set of performance indicators. POs are also required to produce annual reports on the implementation of their operational programmes with the MRD. The annual reports accompany the applications for aid. Similarly, MRD sends the Commission a national annual report on all POs, PGs, operational funds and programmes, and recognition plans. In the non-vegetable and fruit sector, flat rate support is provided to facilitate the establishment and administrative operation of PGs which have been formally recognized by MRD. Support is provided if PGs pursue the following objectives:

• Adapt production of member producers to market requirements;

• Jointly place goods on the market, including preparation for sales, centralization of sales and supply to bulk buyers;

• Establish common rules on production information, in particular on harvesting and available supply. The support is provided in annual installments for the first five years following the date at which the PG was recognized. The amount of support is calculated based on the PG’s annual VMS. PGs/POs in Hungary have either a status of cooperative or of limited trade company (LTC). Member status and/or core group composition determine the status. In a cooperative, a member has only one vote, while in LTC one member might have at most 30 percent of a voting right. However, in either case, member revenue depends on the volume of transactions made through organization. Both physical and legal persons are found to be members of cooperatives and LTCs. In most cases, the majority of members are physical persons/growers. The volume of transactions made through PGs and POs is in general roughly equal. Specific requirements have to be met by farmer organizations to get recognition either as a PG or a PO. The main requirements are the minimum membership, minimum VMP, share of non-producing members, membership duration and fees, voting rights, improved practices in production and product handling along the supply chain, and appropriate management of the organization. PGs/POs are specialized in the production of one or more products. Members have to market at least 70–80 percent of their production through their organization. A farmer can be member of several organizations, if he/she does not transact with these organizations with the same products. In large PGs/POs the management finds it difficult to control whether members honour their commitment on delivery benchmarks. Both cooperatives and LTCs are subject to double taxation: the organization pays profit tax while members, depending on their legal status, pay either a profit or income tax. Therefore, PGs/POs try to distribute all profits among members. The size of PGs/POs in terms of membership varies. It depends on the type of activities pursued and the objectives of the organization. In the vegetable and fruit sector, small organizations (20–40 members) tend to be more concerned with quality and employ very stringent screening procedures when enlisting a new member. In small PGs/POs, members seem to have a strong feeling of ownership, while this is not the case in large cooperatives, which are often perceived by farmers as mere intermediary trading companies. The main factor that motivates farmers to join a cooperative seems to be market security – ensured markets and stability in income.

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Members in all PGs/POs receive technical guidance to improve production and marketing practices from outside extension agents. PGs/POs have established discount/premium payment mechanism based on the quality of their members’ deliveries. Members of farmer’s organizations are found to be united around a core group of members and/or value adding activities. In general, the core group is represented by pro-active personalities which have strong linkages with upstream supply chain/buyers. It seems that PGs/POs’ main objective is to shorten supply chains from producers to buyers, and offer its members more value adding services. The financial support provided by the EU and Hungarian Government to PGs/POs and the attached requirements regarding the adoption of improved management, production and product handling practices, facilitates the access of PGs/POs to commercial credits. Reportedly, the major shortcoming of the subsidy system is the time required for a paper work and the delays in payment. Some farmer organizations, especially the large ones, employ staff specifically to handle paperwork related to the subsidies. The positive side of the system is that it provides incentive to the organizations to concentrate supply compared to demand, since the subsidies are based on VMP. It was evident from Hungarian experience that the support provided to farmer organizations has a positive impact on all the actors of the chain: consumers, member producers, and farmer organizations. For consumers, benefits come from the higher quality of produce and the safety of supply due to:

• Large investments to improve handling conditions, cold chain and processing tools;

• Participation of member-producers in quality control systems such as marketing standards, GLOBALGAP, etc.;

• Organization of control of pesticide residue carried out by national competent authority;

• Increased focus on markets and better adaptation to consumer demand through research and innovation;

• Respect of environmental and food safety standards beyond legal requirements;

• Provision of social and regional services. For producers and their organizations, benefits have been the following:

• Farms and marketing centres have been modernized and working conditions improved;

• Members and organizations have invested in equipment to optimize sorting, weighing, packaging;

• At the farm level, member producers have invested in varietal renewal, integrated pest control, water and packaging recycling systems, irrigation, and modernization of production methods;

• Member producers were able to access the aid and technical means required to manage their farms;

• Improved communication between members and their organizations due to investments in improved communication technologies;

• Growth and modernization of marketing centres, increased turnover and logistics;

• Pursuance of all activities in a professional manner in accordance with advise of specialized experts;

• Possibility to launch export programmes without EU export subsidies to other countries;

• Concrete efforts in terms of research and innovation.

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1. Background of the study tour The Ministry of Agriculture of Georgia (MoA) intends to initiate a strategy consultation process with stakeholders from the 2011 fall, when the first draft of the Agricultural Development Strategy is scheduled to be finalized and circulated. One of the priority areas off the strategy document is the creation of an overall policy environment conducive to the development of cooperation among farmers, inclusive of poor small-scale farmers, and facilitation of the establishment of member-driven structures that will become market competitive agents. The EC/FAO Food Security Programme provides support to the Working Group of the MoA (WG) which is responsible for the formulation of the Agricultural Development Strategy. Several activities are being implemented in the framework of the Programme to support the MoA in the formulation of policies fostering cooperation among farmers. The members of the WG have expressed interest in learning from Central-Eastern European Countries (CEEC) experiences in developing and implementing policies to foster farmer organizations, in particular in taking stock from the achievements of the producer groups and the constraints they face. During the last Country Coordination Team (CCT) meeting of the Programme in May 2011, the MoA asked the Programme to support a study tour of the members of the WG to Hungary. Hungary has a good record in terms of supporting producer organizations and presents similarities with Georgia in terms of geography, climate, production profile, etc. Also, Hungary’s EU membership provides a useful perspective of EU policies related to producer. The Proposal was endorsed by the CCT. Participants of the visit were nominated by the MoA and the Prime Minister’s Office. The MoA nominated two key members of the WG, Mr Vakhtang Gogaladze, Deputy Head of Agriculture Development Department, and Ms Marika Kasradze, Deputy Head of International Relations Department. The Prime Minister’s Office has designated Ms Lana Oniani, Adviser to the Advisory Group on International Relations at the Georgian Government Chancellery. The participants were accompanied by the Country Coordinator of the EC/FAO Food Security Programme, Mr Rati Shavgulidze. The objective of the study tour was for Government representatives to get better knowledge and understanding of the policies being implemented in Hungary to support producer organizations and discuss experiences with policy makers and producer groups. During the study tour, Government representatives were interested in learning on:

• Current policies;

• Evolution of policies over years;

• Transition experience from centrally managed agriculture organizations to member-driven producer organizations;

• Policy formulation processes;

• Implementation of support policies;

• Monitoring of implementation;

• Producer organization structures and management;

• Membership characteristics;

• Member responsibilities and roles;

• Organization responsibilities to members and services provided;

• Channeling of support/subsides to members;

• Constraints and challenges faced by producer organizations and coping strategies.

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Before the visit the Programme has supplied participants from the Government with relevant reading material - Promoting farmer entrepreneurship through producer organizations in Central and Eastern Europe (John Milns, Institutions for Rural Development, FAO, 2006). The visit in Hungary was coordinated by the EU Coordination Department of the MRD, specifically by Mr Aron Thuroczy, EU Coordination Officer. The three day tour comprised one day of presentations at the MRD, and two days of field visits to different farmer organizations (study tour agenda in Annex 1). Mr Thuroczy has provided Georgian participants before arrival to Hungary with a brief description of farmer organizations in Hungary (Annex 2).

2. Presentations The sources of funding to support the establishment and development of farmer organizations, PGs and POs, in Hungary are the EU, governments and farmer organizations themselves. The Ministry of Rural Development (MRD) is the main responsible government entity for defining support policies and elaborating regulations in line with respective EU regulations. The Agriculture and Rural Development Agency (ARDA) is a paying agency, responsible for implementing support measures (Annex 2, Box 1). First day The first day of the agenda comprised a meeting of the Georgian representatives with their Hungarian colleagues and several presentations of MRD experts. The meeting was chaired by Mr Laszlo Vajda, Head of EU Coordination Department. Mr Vajda welcomed Georgian visitors and briefed them about current policies, EU support measures and the importance of effective farmer organizations for overall sector development. The welcoming speech was followed by the presentations of MRD experts. The presentations are summarized in Annex 3. Ms Livia Kranitz, Economic Advisor at MRD, delivered a presentation entitled “Beginning of the cooperatives and changing in production structure”. The presentation provided a historical overview of the cooperative movement and its evolution in the structure of production. The historical overview focused on the start of the cooperative movement in Hungary (Sandor Karolyi and Ignac Daranyi), on the 1967 Act on Agriculture Cooperatives and the dictatorial organization of cooperatives, and on the 1992 Act on transformation of Agriculture Cooperatives. Mr Istvan Barta, MRD Producer Group (PG) Adviser, presented “Producer organizations in Hungary”. He briefly reviewed the history of cooperative movement in Hungary, Government support to the establishment of cooperatives in 1999–2007, the benefits generated by farmer organizations for their members, the general characteristics of active PGs and the regulations governing PGs’ activities in all agriculture sectors, except vegetables and fruits. Mr Zoltan Geczi, MRD PO Adviser, in his presentation: “Producer groups and producer organizations in Hungary - Recognition criteria and acceptance of recognition plans” discussed PGs and POs in the fruit and vegetable sector. Mr Geczi’s presentation focused on the definition of POs, the recognition criteria for POs, and the procedures of recognition and recognition plan which determine the recognition of PGs as POs. Ms Hajnalka Torok from ARDA made a presentation on “Aid to producer groups and producer organisations in the fruit and vegetable sector - Administrative control of the applications.” Ms Torok’s presentation started with a brief review of the structure and responsibilities of ARDA. Ms Zsuzsanna Papp’s presentation “On-the-spot-control (OTSC) system of the fruit and vegetables POs and PGs performed by ARDA” described details of the OTSC of POs and PGs in vegetable and fruits sector.

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Field Visits During the first day of the field visits, the representatives of the Georgian Government, and EU Coordination Officer and PO Adviser at MRD have visited two farmer organizations active in the vegetable and fruit sector: Pannon Paprika Ltd., Fresh Fruits, and Koros-Kertesz Cooperative. Meetings were held with the leaders of the organizations. The visitors discussed different aspects of support policies, the characteristics of the organizations, and the management, production and marketing practices. Pannon Paprika Ltd., Morahalom Pannon Paprika is a cooperative comprising 15 members which represent five families. The Cooperative was formed in 2011 by former members of a large cooperative which went bankrupt due to the financial crisis in 2008. The cooperative specializes in the production of paprika. The 15 members farm and produce paprika on 12 ha area of greenhouse. The cooperative provides various services to its members including grading/sorting, packaging, cooling, transportation, and storage. Fresh Fruits, Kecel Fresh Fruits was founded in 2003. The organization is a recognized PO and has a LTC legal status. Fresh Fruits is a member of umbrella PO Fruitmarketing LTC that comprises other three POs. Fresh Fruits specializes in different stone fruits (cherries, sour cherries, apples, plums), and to a lesser extent in the marketing of vegetables (paprika and cabbage) and berries (elderberries). In addition, the PO implements another EU support instrument, the School Fruit Programme. Koros-Kertesz Cooperative, Kiskoros The organization was founded in 2003. Membership increased from 31 members in 2003 to 52 today. The size of land farmed by members ranges from 1 to 100 ha and averages 10–15 ha/member. It is a PG in transition to become a PO, and has a LTC status. Ten percent of its members are legal person, while 90 percent are physical persons. The turnover share is about 50-50 percent between legal and physical persons. Maximum allowed share in PG is 25 percent. During the second day of the field visits, the representatives of the Georgian Government, and EU Coordination Officer and PG Adviser at MRD have visited two farmer organizations active in cereals and poultry sectors. The meetings were held with the leaders of organizations. Visitors discussed different aspects of support policies, characteristics of organizations, and management, production and marketing practices. Revel Regional Cereal Producer and Marketing Group, Telev The group was founded in 2004 on the basis of former socialist collective farm. The Group is specialized in cereals production and marketing (mainly wheat and corn). Services provided to members include joint procurement of inputs, grain drying, and marketing. Initially the group consisted of 33 members. It now comprises 70 members. The majority of members are represented by physical persons, and only five members have a legal status. Hegyháti Cooperative, Kurd The Cooperative has a PG status and specializes in poultry meat production and marketing. The Cooperative consists of 23 members, three quarters being physical persons and one quarter legal persons. The Cooperative provides its members with day-old chicks, and inputs needed to grow chicks until they are ready to be supplied to slaughterhouses.

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3. Conclusions and recommendations The knowledge and experience gained by the Government representatives of Georgia during the study tour is expected to inspire and feed the work which is being carried out by the WG of the MoA to formulate the Agricultural Development Strategy and the following Plan of Action. The policies and activities addressing improved cooperation among producers are central to the Strategy and the Plan of Action to support agriculture. The participants in the study tour were much interested in the cost-sharing approach to cooperation which is adopted in Hungary. Farmer organizations match financial support provided by the State and EU either through capital raised among members or borrowed capital. An organization has a greater chance to access financial resources than an individual producer. The participants were also interested in the fact that the procedures for interested producers to join and leave the organization are simple and have no legal implications. The system allows any producer to take part in every important decision of the group and participate in several organizations if he produces more than one product. The participants realized the interest of creating member-managed organizations to pursue common goals, taking benefit of every opportunity provided by the grouping, such as procurement of higher quality inputs at lower prices, access to machinery, storage facilities and common marketing. The approach pursued in Hungary to develop farmers groups was found useful and many elements of the approach were applicable to Georgia even if the Georgian government does not provide direct financial support to farmer groups. Farmers can benefit from cooperation to cope with a number of constraints they face; in particular they are in a position to concentrate supply against the demand and gain bargaining power in the supply chain. Along with economic benefits, the promotion of cooperation among farmers should ensure the continuation of rural traditions and sustainable development of rural areas. The participants recommend building on the collaboration which was established with MRD experts. Specifically, it was recommended to invite Hungarian experts to Georgia to discuss the constraints faced by (small) farmers in Georgia and to share Hungarian experience in addressing shortcomings in the farm sector. Specific and detailed face-to-face training sessions should be organized to provide an opportunity to MoA staff to understand the rational underlying different aspects of implemented support policies in Hungary. For instance, the reasons for which a certain size of membership in an organization is requested, a given proportion of production has to be marketed through the organization or a specific level of financial contribution/cost sharing is required for the organization. In addition, Hungarian experts during the training sessions should assist the relevant staff from the MoA to identify and document the gaps (technical, institutional, infrastructure, legislative, financial, etc.) that prevent the implementation of relevant policies in Georgia, and to elaborate a sequenced and time-delimitated activity plan to address acknowledged drawbacks.

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Annex 1. Agenda of the study tour

Georgian study tour- Producer organizations

Hungary 25–27 July 2011

Venue: MRD, room 199. 1st day, 25 July (Monday)

9.00–10.30 1st session

Speakers: Ms Lívia KRÁNITZ, Mr. Jenő SZABÓ - Hungarian agriculture and producer organisations (POs) Main developments after World War II., especially from the 90’; Characteristics of Hungarian agriculture before/after the EU accession; Different forms of producers cooperation.

(presentation, discussion)

10.30–11.00 Coffee 11.00–12.00 2nd session


Speaker: Mr István BARTA - Regulation background of POs I. Evolution of policies over years Policy formulation process; Implementation of support policies, institutional background; Channeling of support/subsidies to members.

12.00–13.30 Lunch (MRD, IV. floor) 13.30–14.30 3rd session

Speaker: Mr Zoltán GÉCZI - Regulation background of POs II. PO structures and management; Membership characteristic; Member responsibilities and roles; Organization responsibilities to members and the services provided.


14.30–15.00 Coffee 15.00–16.00 4th session (presentation, discussion) Speakers: Ms Zsuzsanna PAPP, Ms Hajnalka TÖRÖK - Introduction to the implementation of aid schemes for POs in the fruit and vegetable sector Basis of the aid, submission of claims; Administrative and on-the-spot controls; Control and monitoring of the approval criteria for POs 2nd day, 26 July (Tuesday)

MRD: Zoltán GÉCZI, Áron THURÓCZY 08.00 Departure (MRD) 10.00–11.00 Pannon Paprika Ltd.,

Pannon Paprika is a producer organization with 15 members; it was founded in 2011 and its focus lies on fruits and vegetables, especially on paprika. The cooperative provides various services for its members including processing, marketing, transport, storage and lending of machines.

MÓRAHALOM

11.00–12.00 Transfer to Kecel 12.00–13.30 Lunch, Natura-Horgászpark Restaurant,

KECEL

13.30–15.00 Fresh Fruit Producer Organization, KECEL

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Fresh Fruit was founded in 2003 with 61 members. Today it counts 360 members and 1800 ha. In 2010 more than 7 500 tonnes of products were marketed, out of this more than 90 percent was exported, mostly to EU countries. Fresh Fruit is also member of an “umbrella” PO (Fruitmarketing Ltd.) consisting of 4 individual POs.

15.00–15.30 Transfer to Kiskőrös 15.30–17.00 Kőrös-KerTÉSZ Cooperative,

This producer organization was founded in 2003 and today it has 52 members. Services provided by the cooperative include packaging and processing. The product portfolio covers all fruits from the Hungarian fruit sector, additionally; asparagus and paprika. Their main product is winter apple. The cooperative is producing its own apple juice.

KISKŐRÖS

19.00 Arrival to Budapest 3rd day, 27 July (Wednesday)MRD: István BARTA, +1 MRD participant, Áron THURÓCZY

08.00 Departure (MRD) 10.00–12.00 Visit of Tevel Region Cereal Producer and Marketing Group, TEVEL

This producer group was founded in 2003 and has 70 members of which 5 are companies while the majority farmers. The producer group is specialised on cereals (mostly grain and corn) production and marketing. Main services for members include grain drying, common marketing and procurement.

12.00–13.30 Lunch, Gányi Restaurant,

TEVEL

13.30–14.00 Transfer to Kurd 14.00–15.30 Visit of Hegyháti Cooperative, KURD

Hegyháti Cooperative is a producer group specialised on poultry production and marketing. It has 23 members; both companies and farmers. The cooperative provides day-old chicks, feed and other materials, such as germicides, for its members. Additionally it connects its farmers with slaughterhouses.

18.00 Arrival to Budapest Annex 2. Producer groups and organizations in Hungary

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Agricultural producer cooperation in Hungary

Background information for the study tour of the Georgian Ministry of Agriculture

(Hungary, 25–27 July 2011)

The transition of state owned agricultural cooperatives formed in the socialist regime into private-owned businesses had different forms and took place in the ’90th. From 1999 national regulation intended to promote producer cooperation while approaching the European Union (EU) membership (2004) national regulation increasingly followed the EU regulation. Regulation on agricultural producer cooperation among sectors is similar yet there are differences between non fruit and vegetable sectors and the fruit and vegetable sector.

Producer groups (PGs) are formed among producers of a specific product and aim to cooperate on production related activities e.g. procurement, marketing and storage.

Producer cooperation in non-fruit and vegetables sector

PG regulations from 2002 onwards focused on the terms of PG recognition (e.g. number of members, revenue requirements) and on the conditions of subsidies for the establishment and operation of PGs. Subsidies can be provided up to five years and their degree is depending on PG’s revenue.

Box 1. Principal Regulations governing operations of PGs and POs are as follows: • COUNCIL REGULATION (EC) No 2200/96 of 28 October 1996 on the common organization of the

market in fruit and vegetables; • COMMISSION REGULATION (EC) No 1943/2003 of 3 November 2003 laying down rules for the

application of Council Regulation (EC) No 2200/96 as regards aid to producer groups granted preliminary recognition;

• COMMISSION REGULATION (EC) No 1432/2003 of 11 August 2003 laying down detailed rules for the application of Council Regulation (EC) No 2200/96 regarding the conditions for recognition of producer organizations and preliminary recognition of producer groups;

• COMMISSION REGULATION (EC) No 1580/2007 of 21 December 2007 laying down implementing rules of Council Regulations (EC) No 2200/96, (EC) No 2201/96 and (EC) No 1182/2007 in the fruit and vegetable sector;

• COUNCIL REGULATION (EC) No 1182/2007 of 26 September 2007 laying down specific rules as regards the fruit and vegetable sector, amending Directives 2001/112/EC and 2001/113/EC and Regulations (EEC) No 827/68, (EC) No 2200/96, (EC) No 2201/96, (EC) No 2826/2000, (EC) No 1782/2003 and (EC) No 318/2006 and repealing Regulation (EC) No 2202/96;

• COUNCIL REGULATION (EC) No 1234/2007 of 22 October 2007 establishing a common organization of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation);

• COUNCIL REGULATION (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD);

• COUNCIL REGULATION (EC) No 1257/1999 of 17 May 1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) and amending and repealing certain Regulations.

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Table 1. Facts on PGs (2010) Number of PGs 245

Net revenue of PGs 0.9 billion EUR

Number of members 20 500

Average share of natural producers in PGs 85%

Average number of members/PG 170

Number of people employed by PGs 800

The number of PGs increased between 2006 and 2010 from 229 to 245. The largest number of PGs exists in the following sectors: cereals (81), poultry (36), oil seed crops (35) and swine (27). In the vine and wine, sheep and milk sectors 12 PGs are present respectively. In 2008 in average 17 percent of the agricultural sector’s output can be attributed to the PGs. High share can be seen in the tobacco sector (100 percent), rabbit sector (52 percent), milk sector (39 percent), sugar beet sector (34 percent), sheep sector (28 percent) in the pig sector (23 percent), oil crops (22 percent) and poultry (20 percent ) sectors. Relative weaker PG performance can be seen in the following sectors: bulls (1.6 percent), wine and vine (4.2 percent), cereals (8.6 percent). Producer cooperation in the fruit and vegetable sectorNational regulation on producer cooperation in the fruit and vegetable sector is largely following the EU regulation. Producer organisations (POs) need to fulfil certain conditions in order to be recognized. These conditions are, among others, member related or managerial conditions.

The fulfilment of the conditions is controlled and monitored through administrative and on-the-spot controls. POs can apply for subsidies to support their operation. This is depending on the revenue of the PO and, just like in case of PGs, can last up to five years. As of January 2010, there were 24 preliminary recognized 24 POs and 48 operational POs. Additionally five associated PO groups were formed. Table 2. Facts on POs in fruit and vegetable sector (2006) Area of POs 5 854 ha

Area on fruits 2233 (38.1%)

Area on vegetables 3621 (61.9%)

Number of members 5332

Share of natural producers in POs 98%

Average number of members/PO 762

Average output/member 7900 EUR

Output 114 million EUR

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Annex 3. Summary of presentations Ms Livia Kranitz, Economic Advisor at MRD, presentation “Beginning of the Cooperatives and Changing in Production Structure”, concentrated on historical overview of cooperative movement and evolution in the structure of production. Historical overview has focused on the start of cooperative movement in Hungary (Sandor Karolyi and Ignac Daranyi), on 1967 Act on Agriculture Cooperatives and dictatorial organization of cooperatives, and on 1992 Act on transformation of Agriculture Cooperatives. According to the presenter, in 1945 provisional Government has abolished the squatter system and land was distributed among peasants. Dictatorial organization of cooperatives was regulated by Decree N. 9000 as of 1948. Different types of holdings were involved in organization of cooperatives. Until 1967, household farms comprised 0.5–1 ha, 1 cow, 1–2 heifers, 1–2 sows, and unlimited number of poultry. Formation of cooperatives was implemented into three phases. Area of land managed by agriculture cooperatives increased to 4.7 million ha from 1959 to 1961. About 80 percent of land was transferred under the ownership of cooperatives. The main characteristic of that time cooperative was negligence of the principle of voluntarity. 1967 Act on Agriculture Cooperatives provided the following definition of agriculture cooperative: individual economic organization (from legal stand point as well), manages its own property at its own risk, objective is agriculture production and other activities not forbidden by law, and it should pursue planned production, and prepare annual production and financial plans. As of 1990, most of the agriculture production was concentrated in a cooperative sector with the exception of a livestock sector. In 1992 the Government has adopted the Act on the Transformation of Agriculture Cooperatives. The Act stipulated the following definition of agriculture cooperatives: agriculture cooperative is based on principle of freedom, has a legal status, operates with personal assistance and financial contribution of members, is managed on democratic principles, and serves member interests. As a result of adoption of 1992 Act, member is free to leave cooperative and independently pursue farming activities, cooperative can be transformed into a company, and based on member decision cooperative can be dissolved, 2/3 of votes are needed to make a decision. According to Ms Kranitz, in some sectors current production levels are lagging behind of those recorded in 1980s, while in others performance after initial deterioration has recovered and improved. Ms Kranitz has identified factors that have contributed to production decline after the break-up of the centrally managed system:

• Structure of holdings;

• Low investments;

• Inadequate soil conservation and pest control;

• Low labour productivity and payroll burden;

• Lack of skills and expertise;

• Farmer weak advocacy. Mr Istvan Barta, MRD Producer Group (PG) Adviser, presentation “Producer organizations in Hungary”, briefly reviewed the history of cooperative movement in Hungary, Government support to the establishment of cooperatives during 1999–2007, benefits generated by farmer organizations for their members, general characteristics of active PGs and regulations governing PG activities in all agriculture sectors except of vegetables and fruits. According to the presenter, cooperative movement has been active in the first part of the 20th century. Different type of a cooperative form of organization was introduced during the Socialist regime that lasted until the end of ‘80s. Beginning from 90th traditional form of cooperative organization has emerged in Hungary. Based on Mr Barta, the Government provided significant support in terms of investment and credit subsidies to cooperatives during 1999–2007. In order to be eligible for support, five members were sufficient to qualify as a

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cooperative, and every cooperative received about EURO 60 000 as a subsidy. This has resulted in increased interest among farmers to join cooperatives, and more than 700 cooperatives were formed during that time. Many of them are still active. More stringent rules were introduced at a later stage; specifically, new rules were adopted that addressed different issues such as membership size, revenue requirements and a ceiling on provided support was introduced. These cooperatives were single purpose organizations. In 2007 national subsidies to cooperatives were phased out, and they were replaced by EU support measures. Members of cooperatives benefit from joint procurement, marketing, investments, access to finances, and services such as consultancy, training courses, processing, pest and disease management, and a market security. According to Mr Barta, market security, should be considered as the main motivation factor for farmers to join a cooperative. As reported there are different forms of producer organizations currently active in Hungary, and they are as follows: producer organizations, producer groups, machinery groups, and association of forest holders. Mr Barta presentation has focused on PGs. Mr Barta has presented participants with main characteristics of active PGs in Hungary as of the end of 2010. As reported there are total 245 PGs. Value of turnover of these PGs in 2010 was approximately EURO 0.9 billion. 20 500 persons are members of PGs, and out of this total farmers represent 85 percent. Average number of members per PG is 170 persons. PGs provide employment to 800 persons. Value of investment made by PGs is approximately EUR 7.7 million. Table 3 below illustrates sector specific share of sales through PGs in total sector sales, and number of PGs active in specific sector. Table 3. PG Share in total sales and number of PGs active in specific sectors

Sector Share of PG sales N. of PG

Vine and wine 4% 12

Cereals 9% 81

Poultry 20% 36

Oil crops 22% 35

Swine 23% 27

Sheep 28% 12

Milk 39% 12

Honey 10%

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Fish 13%

Potato 13%

Soybeans 20%

Sugar beet 34%

Rabbit 52%

Tobacco 100%

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After presenting main statistics on PGs, Mr Barta briefed participants about regulations governing PGs. Two definitions/characteristics of PGs are as follows: producers should cooperate in production of same products, and they should cooperate in additional activities to production such storage, processing, and marketing. According to Mr Barta, formation and successful development of PGs was negatively affected by bad memories from ‘60/’70, member distrust toward leaders, difficulties to gain position at the market as a new player, and the lack of joint marketing, or activity discipline. Several regulations have been governing PGs since 2002. PGs should have relevant legal background, to be eligible for financial support and consultancy services. According to 2004 relevant regulation there are several required criteria to be met by PGs to get preliminary and final recognition by the Government and they are as follows:

• PG should have at least 15 members;

• PG should have the legal status either of a limited trading company or a cooperative;

• PG minimum revenue should be EURO 23 000;

• At least 70 percent of marketed produce by PG should be supplied by members;

• Membership and payment of a membership fee should be obligatory for at least three years;

• Revenue generated by a member (physical person) should not be less than 3 percent to 10 percent of total revenue depending on a product/sector.

Significant financial support to PGs comes from the EU that is available for up to a five year transitional period. The value of support is based on revenue generated by PGs. The base of support for administrative operations is the value of marketed production (VMP). Upper limit of a five year period support is EURO 390 000 (Table 4). Table 4. Annual Level of Support to PGs

Revenue Year 1 Year 2 Year 3 Year 4 Year 5

> EUR 40 000 2.5% 2.5% 3% 1.5% 1.5%

< EUR 40 000 5% 5% 4% 3% 2%

Annual Subsidy Ceiling, EURO 100 000 100 000 80 000 60 000 50 000

In 2010, as a subsidy PGs have received about EUR 7 million, out of which 80 percent was EU contribution, and 20 percent from Hungarian Government. According to Mr Barta, main motivation factors for PG formation have been availability of subsidies, market security, and good examples of well operating groups. Mr Zoltan Geczi, MRD PO Adviser, made presentation “Producer groups and producer organizations in Hungary - Recognition criteria and acceptance of recognition plans”. Mr Geczi’s presentation discussed PGs and POs in fruit and vegetable sector. Mr Geczi presentation focused on the definition of Producer Organizations, recognition criteria for POs, and procedures of recognition, and recognition plan based on fulfilment of which PGs are recognized as POs. As reported, regulations governing aid provision to PGs in vegetable and fruit sector differ from those in other sectors. PG should be a legal entity and should be formed based on farmers’ initiative who are growers of one or more products representing fruit and vegetable sector and/or products that solely are used for processing. In the fruit and vegetable sector the objective to form a PG is to get recognition as a PO.

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PGs are allowed a transition period to meet criteria and to qualify for recognition as POs. Pre-condition for recognition is submission of time delimitated Recognition Plan to the Government. If submitted recognition plan is accepted, this is considered as a preliminary recognition and represents a signal to start a transitional period. Transitional period should not exceed five years. Table 5 illustrates requirements and conditions of recognition.

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Table 5. Requirements and conditions for recognition Requirements for recognition Conditions for recognition

• It should be formed based on farmer initiative

• Objective should be the use of environmentally sound production and waste management practices

• At least two conditions from below provided three should be honoured:

o Production plan meets demand requirements in terms of quality and quantity

o Supply concentration and placement of products on the market

o Optimization of production costs and stable producer prices

• The rules governing the organization are in line with special requirements in relevant council regulation

• Organization complies with conditions of recognition and can prove it

• Organization has minimum number of members and the value of marketable production is above the lower limit. The minimum membership size is 10 persons, and minimum VMP is about EURO 555 000.

• There is a sufficient evidence that organization can carry out their activities properly, both over time and in terms of effectiveness and concentration of supply

• Organizations effectively enables members to receive technical assistance in using environmentally sound production practices

• Organization effectively provides their members where necessary with technical means for collection, storing, packaging, and marketing of their produce

• Organization ensures proper commercial and accounting management of their activities

According to Mr Geczi, every PG maintains a Register of members. Registry provides information on the number of members, new members and members who have left organization, provides member specific information by product, informs whether member is producer or not, provides information on voting rights (that should be maximum 30 percent per member), and on the length of membership. PGs are required to collect necessary data to register production of products for which membership is in force. PGs responsibilities in this regard are as follows:

1. PG regulates and fulfills requirements on data collection;

2. Records that production covered through membership is marketed through the organization;

3. Enforces sanctions in case of non-compliance;

4. Maintains registry of members who have suspended or ended their production activities. Financial support to PGs is based on the VMP. The threshold of VMP is set by MRD. The value should be higher of the value that is lodged in the application. When calculating VMP, only those products are included in calculations that are covered by recognition plan. The value of production supplied by non-members and sold through organization should be below of the VMP. Table 6 presents issues and specific aspects controlled by competent authorities to evaluate fulfilment of recognition criteria.

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Table 6. Control of the fulfilment of recognition criteria Issues Specific aspects

The use of environmentally sound cultivation practices, production techniques, and waste management practices in particular to protect the quality of water, soil and landscape and preserve or encourage bio-diversity is ensured

• Fixed assets are used properly in line with attached regulations

• Different types of services are provided to members, specifically extension services

• Services are provided to members who are involved in agri-environmental programmes, and record keeping of membership size

• Quality control system is established, and is operational

Planning of production to meet demand in terms of quality and quantity is ensured

• Regular and proved increase in VMP

• Relevant data is collected that helps to plan activities

• Market chains are supplied with the quantity and value of produce by organizations

• Market research activities are carried

• Quality standards are enforced – personal, systems, fixed assets Supply concentration and market supply with member produce is ensured

• Regular and proved increase in VMP

• Relevant data is collected that helps to plan activities

• Market chains are supplied with the quantity and value of produce by organizations

• Rules on pricing are enforced; specifically, the method of calculation of price paid to the members/producers, terms of payment, and financial contribution of members

• Organization carries market research activities

• Organization actively is involved in marketing

• Organization is open for new members

• Organization activities are aimed at optimizing production costs and stabilizing producer prices

• Members are involved in joint acquisition of inputs

• Producer prices are established transparently

• Organization markets produce of all its members, based on continues and effective collection of data

• Regulation on financial contributions are in place and enforced Proper commercial and accounting management is ensured

• Ensures that management has adequate qualification to ensure proper commercial and accounting management

• Information provided in relevant documentation and reports can be verified

• Investment accounting is clear and verifiable Collection, storage, packaging, and marketing of member produce is ensured

• Organization has an ownership of the site where organization activities are pursued

• Assets necessary for added value activities have sufficient capacity to handle member produce

• If assets are rented, the duration and objectives of the rent are in line with organization objectives

• There is a sufficient number of skilled personal to fulfil objectives

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The following institutions are involved in recognition process:

• Ministry of Rural Development (MRD)

o State Secretary;

o Department of Agriculture markets;

o Unit of Producer Organizations;

• Agriculture and Rural Development Agency (ARDA). Further, Mr Geczi, briefed participants about the content of recognition plan. As reported, in recognition plan applicant organizations are required to include information as follows: value of marketed production, minimum number of producer members, rules of organization, and regulations on pricing. Recognition plan includes description of initial situation of organization, activities required to be undertaken by organization for recognition, information on needed investments and the element of subsidy to realize these investments. In general, implementation of recognition plan starts upon acceptance of application or from 1 January of the following year. The format of application for recognition follows uniform standard format. It contains obligatory annexes such as rules of association, information on member producers, on production, marketing and infrastructure. Also, application must include recommendations provided by inter-branch organization. In addition, an application should include all complementary information. Mr Geczi then briefly touched issues related to administrative controls. Administrative controls focus on the rules on association, voting rights, democratic scrutiny (Ltd/cooperative); membership: length, products covered, double membership, direct marketing by members, roles and responsibilities of non-producer members, financial contributions and sanctions for breaching membership responsibilities, other regulations, and outsourcing. According to Mr Geczi, relevant authorities also carry on the OTSC. PGs are notified priori by phone and fax, members are informed about the mission, and based on OTSC findings a report is prepared. Based on Mr Geczi, relevant authorities assess accuracy of application vis-à-vis OTSC findings; specifically:

• Membership (information on members and registry of members). Control is carried by interview of members based on the sample from the registry.

• Marketing – information on accounting system, member/non-member invoices. Control is carried by assessment of invoices based on the random selection of samples.

• Organigram – organigram of organization and records of formal meetings such as general assembly, legal document of organization, etc.).

• Information on organization personal – marketing, finance, accounting.

• Information on assets used in activities including information on ownership.

• Information on planned investments. Organizations are allowed to amend a recognition plan. Amendments should be made to whole application document, and organization should provide information as a summary of modification and reasons for revisions. Competent authority then carries evaluation of the possible impact of amendment on recognition criteria. Investments can be started upon the Ministry makes decision considering timing of investment.

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According to Mr Geczi based on evaluation findings of application and findings of OTSC, the Head of the Agriculture Markets Department prepares a proposal for decision, and submits the proposal to State Secretary for decision making. Applicant and the paying agency are notified about the decision. Mr Geczi has presented the structure of the recognition plan. The structure is as follows:

• Duration of the plan;

• Product coverage;

• Initial situation:

o General information on members/membership;

o Activities;

o Administrative, book-keeping activities followed;

o Ownership of assets.

• Planned activities to attain recognition:

o Collection, storage, packaging and marketing;

o Commercial and accounting management;

o Marketing strategy;

o Environmentally friendly methods;

o Production planning and quality assurance.

Every recognition plan is required to have a summary:

• Identification:

o Name;

o Home;

o Duration of the plan;

o Date.

• Summary:

o Principles;

o Membership;

o Produce;

o Partners;

o Value of marketable production;

o Financial contribution;

o Closing remarks.

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Recognition plan should include the following data:

• Duration of recognition plan by calendar years:

o Duration of recognition plan;

o Start of execution;

o Expected date of recognition.

• Category of recognition:

o Products. Recognition plan also should have information on initial situation. Table 7 presents information required to describe initial situation of applicant. Table 7. Content of the description of initial situation

General headings Specifics

General introduction of organization and members

• Geographic data, activities, ownership, land use

• Number of members, production area, planned production volume

• Product, market relations, consumers Activity of the organization

• Product handling from production through marketing

• Documentation

• Production environmental protection Organizational structure

• Human resources

Administrative system, accounting, and financial stability

• Financial, accounting, and administrative activities on the sport (register of members, contracts, reports, documentation, regulations)

Book-keeping

Separation of member activities • Member turnover, non-member turnover, subsidies, other income, etc

Financial situation of the organization • Financing buying the produce

• Financing selling of produce

• Price formation

• Assets

Mr Geczi briefed the audience about the measures required to get recognition, and activities needed for the fulfilment of the objectives (Tables 8-9).

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Table 8. Measures required getting a recognition Measure Specific information

Ensure collection, storage, packaging and marketing of produce

• Current situation

• Annual development plan

• Capacity of planned assets

• Financing of investments Ensure proper commercial and accounting management of activities



• Compliance, main functions (Production, buying-in, marketing, finance) register of activities and documents

Marketing strategies, distribution methods, promotion



• Basis for marketing development Use of environmentally friendly practices


• Annual development plan Necessary personal for an effective functioning


• Annual development plan Table 9. Activities required for the fulfilment of objectives (recognition)

Measure Specific information

Optimization of production costs and producer price stabilization • Current situation

• Annual development plan Production planning (varieties, technologies)


• Annual development plan Objectives and tools for the development of quality


• Annual development plan Ms Hajnalka Torok from ARDA made a presentation "Aid to producer groups and producer organisations in the fruit and vegetable sector − Administrative control of the applications.” Ms Torok’s presentation started with a brief review of the structure and responsibilities of ARDA. According to Ms Torok ARDA is a paying agency of EU subsidies in Hungary from 2003. It is a successor of the SAPARD Agency and the Agriculture Intervention Centre. ARDA is directly managed by the Minister of Rural Development. Day to day management is carried by the President of ARDA. ARDA’s legal status is as follows: independent financially managed central budgetary agency with separate legal entity status and nationwide scope. It has a separate budget chapter of the Ministry or rural development. The sources of ARDA funding are European Agriculture Guarantee Fund (EAGF), European Agriculture Fund for Rural Development (EAFRD), and a national budget. ARDA is headquartered in Budapest with six directorates, and has 19 county offices. ARDA directorates comprise:

• Directorate for Market Supports and External Trade Measures;

• Financial Directorate;

• Directorate for Rural Development Supports Measures;

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• Directorate for Intervention Measures;

• Directorate for Direct Payments;

• Directorate for County Offices. Directorate for Market Support and External Trade Measures include following units: Internal Market Measures, External Market Measures, National Support Measures, Market Licensing and Registration, and Producer Organizations Support Unit. Ms Torok briefed the audience about support measures available in fruit and vegetable sector:

• Aid to PGs:

o Operational aid to PGs;

o Investment aid to PGs;

• Aid to POs for financing their operational fund;

• School fruit scheme. Ms Torok’s presentation concentrated on aid to PGs and POs in vegetable and fruit sector.

1. Aid to PGs Operation aid to PGs. Base of the support is the value of marketed member produce by PGs. Application for aid is submitted within three months of the end of each annual or six month period of the Recognition Plan. Payment of the aid takes place in six months. As mentioned above base of support is the VMP, and the rate is differentiated by threshold revenue level and by years during which PGs are receiving aid. Maximum ceiling of annual aid is EURO 100 000 (Table 10). Table 10. Operation aid to PGs

Value of marketed produce Year 1 Year 2 Year 3 Year 4 Year 5

<= EUR 1 million 10% 10% 8% 6% 4%

> EUR 1 million 5% 5% 4% 3% 2%

Annual subsidy ceiling, EUR 100 000 100 000 100 000 100 000 100 000

ARDA carries administrative checks on all applications. During inspection the following required compliances are considered:

• Date of submission;

• Compliances like:

o existence of preliminary recognition;

o eligible products;

o products produced only by members;

o calculation with correct exchange rate;

• Declarations;

• Value of marketed production;

• Amount of aid claimed;

• Supplementation: if necessary.

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After documentary check, OTSC is carried out by ARDA Central Physical Control Department. Payment of aid depends on the results of OTSC. Investment aid. Base of support is allowed cost of investments set out in the Recognition Plan and approved by MRD. Applications are submitted within three months of each annual or six month period of the Recognition Plan. Payment of aid is made in six month period. One of the pre-conditions of the investment aid is that investments cannot be sold for five years after recognition is received by applicant. Investment aid comprises EU contribution with 50 percent share, national government contribution (5 percent), and applicant contribution of 45 percent. In 2011 national contribution has increased to 25 percent. Similar administrative checks are carried to that of operational aid to PGs. ARDA carries administrative checks on all applications. During inspection the following required compliances are considered:



o existence of preliminary recognition;

o correct invoices;

o eligibility of investments according to the Recognition Plan;

o fully paid invoices;

• Declarations;


• Supplementation: if necessary. After documentary check, OTSC is carried out by ARDA Central Physical Control Department. Payment of aid depends on the results of this on the spot control.

2. Aid to POs Aid of operational funds. Base of support is the value of expenses allowed in Operational Programme. Application for aid in partial isntallement can be submitted any time, but not more than three times in a given year. Application for aid in one, annual installement should be submitted before 15 February of the year following that for which the aid is requested. Partial payments should be made within three months after application is approved, while for annual installement, the payment should be made before 15 October. The amount of the aid is based on the smallest value of the following:

• Amount of financial contribution paid by the POs itself or by its member related to the relevant period;

• 4.1 percent of the value of marketed products in the reference period (the previous year of implementation of operational programme);

• 50 percent of expenses. Beginning from 2008, POs can apply/claim national financial assistance. Extent of aid is 100 percent of expenses, but maximum ceiling of national financial assistance is 80 percent of financial contribution. ARDA carries administrative inspection of all applications. During inspection the following required compliances are considered:



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o existence of recognition;

o correct invoices;

o eligibility of implemented measures according to the Operational Programme;

o fully paid invoices;

• Declarations;


• Supplementation: if necessary. After documentary check, OTSC is carried out by ARDA Central Physical Control Department in case of annual application, but the controllers carry inspection during whole year. Payments depend on the results of the OTSC. Table 11 presents value of support disbursed through these three policy instruments to PGs and POs. Table 11. Value of aid granted to PGs and POs (million EURO)

2005 2006 2007 2008 2009 2010 2011 (1st semester)

Operation aid to PGs 0.9 3.9 1.9 2.0 3.0 1.0 1.0

Investment aid to PGs 0.9 4.2 7.7 11.0 13.0 7.9 1.4

Operational fund to Pos 0.5 2.8 1.9 1.3 4.1 5.4 4.3

Total 2.3 10.9 11.5 14.3 20.1 14.4 6.7

Ms Zsuzsanna Papp’s presentation “On-the-spot-control system of the fruit and vegetables POs and PGs performed by ARDA” described details of the OTSC of POs and PGs in vegetable and fruits sector. According to Ms Papp, ARDA has 19 county offices, out of which 7 have regional competencies. As reported, general procedures of OTSC comprise the following:

• Administrative check of application;

• OTSC: report fill-in;

• Decision of the administrative check-unit;

• Payment by financial department. OTSC of PGs comprises inspection of investment and operational support, while OTSC of POs consists of inspection of operational programmes. As reported OTSC of PG investment comprises physical inspection of investment, and inspection of documentation. Physical inspection assesses whether made investment allow implementation of Recognition Plan, and whether made investments correspond to description of investment provided in application (type, quantity, ID number). Inspection of documentation is assessment of the value, name, type, quantity, ID number of the investment whether is the same as in documentation submitted like invoices, machinery book, building diary, and as provided in the application; whether investment is used by PG, and whether investment is paid out, and book-keeping is correct. OTSC of application for PG operational support consists of confirmation of the stated value of sales and inspection of buying up, and monitoring of admissions conditions and investments.

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• Confirmation of the stated value of sales and inspection of buying up. The former consists of inspection of invoices, book-keeping, trial balance. The basis of the value of sales can be one of the following delivery of products, member deliveries sold by PGs, and a net value. The latter is an inspection of buying up tickets, invoices, book-keeping, and whether procurement of non-members is less than 50 percent of total procurement.

• Monitoring of admissions conditions focuses on the following:

o PG is operational, and is operational in original location;

o Number of the members, register of the members includes all required information;

o Member contribution to operational costs;

o Maximum voting right of a member is 30 percent;

o The number of the not-producing members is less than 10 percent;

o The PG is managed on democratic basis (general assembly meeting records);

o For one type product the member can’t take part in other PG;

o At least 75 percent of the production of the member has to be sold on the PG;

o The PG has to ensure to the members environmentally production technology.

• Monitoring of the investment assesses whether investments are used by the PG or rented, the investment is used as written in the admission plan (is in connection with admitted products), and investment can be found and checked on the spot.

OTSC of application for operational support of POs consists of inspection of the reported value of marketed products, inspection of projects, inspection of worker costs who are involved in project implementation, and monitoring of admissions conditions and investment.

• Reported value of marketed products. This inspection consists of assessment of the reported value of marketed products. The applied method is similar to that in case of PGs.

• Projects. This should confirm that there is documentation and can be physically checked. That costs incurred are in direct relation to the project, correspond with the aims of the operational programme, are not too high, and have been incurred. Also, it should prove that costs were incurred after approval of the programme, and that invoices are correct, and reflected in PO books. Special attention is paid whether double financing is not used. Check consists of inspection of all documents against agreements, etc. If the Project is in the form of investment, inspection methods is similar to that of POs investment checks.

• Worker costs who are involved in project implementation. This inspection consists the following: whether costs incurred on workers is in connection with the Programme: random selection and check of at least three workers, checking of attendance registry, salary payments, common charge and appurtenance.

• Monitoring of admissions conditions and investment. Applied methods are similar to that in case of PGs.

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Annex 4. Visited organizations Pannon Paprika Ltd., Morahalom Pannon Paprika is a cooperative comprising 15 members. Members represent five families. The Cooperative was formed in 2011 by former members of a large cooperative which due to financial crises in 2008 went bankrupt. Cooperative specializes in production of paprika. These 15 members farm and produce paprika on 12 ha area of greenhouse. The Cooperative provides various services to its members including grading/sorting, packaging, cooling, transportation, and storage. After establishment of a new cooperative in 2011, members have re-established contacts with supermarkets. Reportedly, the cooperative has a very strong upstream market linkage. The greatest benefit for this cooperative is to have direct linkage with buyers, and possibility to conduct transactions with retailers without intermediaries. Margin that used to go earlier to intermediaries is either distributed among members or is used to cover operations of the cooperative. In addition, the cooperative makes group purchases, and saves members expenditures on inputs. Cooperative operates the fleet of three trucks used to deliver produce to buyers, and their transportation cost is at cost basis. As reported, cooperative has a very well organized logistics. Every morning, the cooperative receives information from a retailer on a daily demand. Information on demand is disseminated immediately among members, and members agree on member-specific deliveries. The cooperative owns grading/sorting and packaging equipment, and provides services at a cost basis to members. The cooperative is quality oriented and has a reputation of reliable producer and supplier of quality produce. Objective of the cooperative is to maintain and improve the quality of produce. An external extension agent provides members with advisory services on quality production and marketing. Due to its reputation as a reliable supplier of quality produce, buyers have requested the cooperative to supply more and to diversify production. According to the Head of the Cooperative, organization plans to double production, and to diversify into tomato production through enlistment of new members. Reportedly, 10–15 reputable farmers are going through the screening to become new members of the cooperative. As said, selection process has been very stringent given PG’s quality and reliability consciousness. According to the head of the cooperative, in general it is easier for a reputable member driven organization to qualify for a commercial loan than for an individual producer. Although, the cooperative has not applied for commercial loan, and in general, there is mistrust to agriculture producers among financial institutions. The head of the cooperative shared his views about the preferred size of a cooperative. As reported, the cooperative would work in case of small group of about 30 members. In organizations with small membership, members have the feeling of ownership, and other advantages of small size are that the process is visible to members, and it is easier to ensure quality and traceability. Reportedly, the cooperative regularly collects feedback from their customers, and always tries to adjust supplies to demand in terms of both quality and quantity. The cooperative organizes general assembly meeting once in a year, where past activities are discussed and future plans are made. The cooperative pricing is based on a quality, and a premium and discount pricing is practiced. The cooperative is subject to double taxation. Therefore, all profit that generates goes to members. The cooperative is a PG, and has been in transition to gain the status of PO. Sorting and packaging equipment and facility represents investments partially covered by subsidies during the transition period. The head of the cooperative briefly assessed advantages and shortcomings of the current support system. Basing of support on the value of turnover is considered as an advantage, since the cooperative has an incentive to expand its operations. Shortcomings comprise time required for paperwork, and delays in payments.

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Fresh Fruits, Kecel Fresh Fruits was founded in 2003. The organization is a recognized PO and has a LTC legal status. It is a member of umbrella PO Fruitmarketing LTC that comprises other three POs. Fresh Fruits specializes in marketing of different stone fruits (cherries, sour cherries, apples, plums), and at a lesser extent in marketing of vegetables (paprika and cabbage) and berries (elderberries). In addition it implements other EU support instrument like the School fruit Programme. Upon establishment Fresh Fruits comprised 61 members. Currently, it unites 360 growers farming on 1 800 ha area of land. Member farm size ranges between 0.5 to 400 ha. About 10 percent of members are legal persons, while the rest are physical persons. The volume of transactions made through the PO by legal and physical persons are about the same. In 2010, PO marketed more than 7 500 tonnes of member produce. Export markets, mainly Germany, represent an outlet for about 90 percent of PO member produce. PO has good linkages with buyers in export markets. Wholesale prices in Hungary are considerable lower than export prices. As reported, one of the main reasons growers to join PO is the guaranteed premium price received for supplied produce. PO also serves non-members, but price paid to non-member is lower than that paid to a member. Reportedly, the only benefit not to be a member of PO is that non-members are not registered with tax authorities. Also, according to the head of PO, Hungarian market is too small for the organization, and cannot absorb on a daily basis supplies made by PO members. Therefore, the main market is Germany, where member and non-member produce is supplied on a daily basis. Approximate volume of daily shipments is 10 tonnes, and shipments are made about 6 times per day. As reported, the benefits to be part of umbrella organization are reduced costs to participate and promote produce at different exhibitions, and synchronized administration and management of 4 member POs. According to the head of PO, it is nearly impossible to control whether a member supplies required volume of produce to PO. Often reference is made to poor crop. Insurance system is not well functioning in Hungary, and there is a limited trust to insurance companies among producers. General assembly meetings are held once in a year, but sometimes twice. There are five members in supervisory board, and the head of PO and board members have regular meetings every 2–3 months. The main objectives of these meetings are to discuss sales strategy and evaluate member performance. Through the subsidy support PO has established grading/sorting, packaging and cooling facilities. Recently, it started production of juices, jams, and different added value products. As reported processing services are outsourced. The produce for sale is available at the PO premises. Reportedly, the biggest shortcoming of the current subsidy system is time required for a paper work. The Company has three permanent employees solely responsible on subsidy related paper work. According to the head of PO, the best strategy for a cooperative formation would be to promote value adding activities. Koros-Kertesz Cooperative, Kiskoros Organization was founded in 2003. Upon establishment it united 31 members, and now the size of membership is 52 growers. The size of land farmed by members ranges from 1 to 100 ha, and on average farm size is 10–15 ha/member. It is a PG in transition to become a PO, and has a LTC status. Ten percent of members are legal persons, while 90 percent are physical persons. Turnover share is about 50-50 percent between legal and physical persons. Maximum allowed share in PG is 25 percent. Services provided to members include sorting, packaging, cooling. The product portfolio includes all fruits grown in Hungary, and additionally production and marketing of asparagus and paprika. However, the main product is a summer apple. As reported, PG was established around apple processing. There was a significant supply of summer apples not meeting fresh market requirements, and also, there was a demand on natural fruit

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juice. Thus, it was decided to form PG around apple processing activities. Processing facility was established with 50 percent of EU contribution, 5 percent of Hungarian Government contribution, and 45 percent of member contribution. The sources of member investments were member credits and a bank loan. Processing facilities provide employment to 200 people from April through October. The main market for PG fresh asparagus and sour cherry is Germany. It is also involved in marketing of paprika, since this product is a source of stable cash flow. PG markets member produce through intermediary companies.

Revel Regional Cereal Producer and Marketing Group, Telev The group was founded in 2004 on the basis of former socialist collective farm. The Group is specialized in cereals production and marketing (mainly wheat and corn). Services provided to members include joint procurement of inputs, grain drying, and marketing. Initially the group consisted of 33 members, and currently it comprises 70 members. Majority of members are represented by physical persons, and only 5 members have a legal status. The Group has a status of a PG. There are about 995 PGs in Hungary involved in cereal production and marketing. All these PGs are members of umbrella nationwide association. The head of the group the same time serves as a president of umbrella association. Primary objective for setting up a framework association is to assist PGs to find export markets. Umbrella association is operated under a non-profit scheme. Public extension service provides advice to members on production methods. The drying facility was established in 2008 with the support from the EU and the Hungarian Government. The Group provides grain drying services to both members and non-members. The service price for members is half of the market price. The legal status of the Group is a cooperative, and there are no intentions to change it into LTC. The reason is that members are interested to have one member one vote. Area of land farmed by member ranges from 1 to 100 ha. As it was planned originally, the Group was interested to unite as many small farmers as possible. Small farmers discerned an interest to become members of the Group; however, they did not approve transformation of from a Cooperative into a LTC. As reported, the cooperative form of business does not represent an obstacle for a member to generate revenue, since profits are shared among members based on the value of transactions made. Therefore, members are interested to sell their produce through the Group. Members are entitled to sell up to 20 percent of their produce independently. Also, as reported, members are free to find buyers of produce by themselves; however, they are required to make transactions through the PG. In general, the PG always manages to make contracts for 10 percent higher price than the market price. The required period for membership is three years. After this period, members are free to leave the Group. Membership fee is EURO 10 per ha. After termination of membership, producer is entitled to receive back accumulated membership fee. One of the members of the Group has identified necessary pre-conditions small scale farmer organization to succeed:

• small-scale farmers have to be led by a leader or a group of leaders;

• services provided to members should include both input supply and marketing, plus machinery service;

• small-scale farmers have to be grouped either around value adding activities or a large producer. He also added that it is important members to see benefits of membership, and should be interested in cost saving on input procurement, higher market prices, and access to finance. One of the EU instruments, Public Storage Ticket, allows the Group to stabilize cash flow of members, and market member produce at a higher market price. The scheme works the following way: if market prices on

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wheat grain are low after harvest, and there is an expectation of price rise, PG applies for a commercial loan with an annual interest rate of about 10 percent. Dried grain serves as a collateral. Recognized third party inspects stored dried grain in terms of quality and quantity, and based on inspection results, issues a Public Storage Ticket. The Group submits the Ticket to the Bank, and Bank disburses credit to the Group, which is further distributed to members based on the value of supplies. When price go up during the marketing season, the Group sells stored commodities, and uses generated revenue to pay back bank loan (plus interest) and distribute profit among members. On the inquiry in regard of the optimum size of cooperative in cereals, the head of the group stated that the more is produced by a cooperative, the better. Also, he added that cooperatives to function in cereals sector, should produce at least 5 000 tonnes of wheat and 10 000 tonnes of corn. Hegyháti Cooperative, Kurd The cooperative has a status of a PG, and is specialized in poultry meat production and marketing. It consists of 23 members; 75 percent of members are represented by farmers, while 25 percent by legal persons. The cooperative provides its members with day-old chicks, and inputs needed to grow chicks until they are ready to be supplied to slaughterhouses. The main benefits for members are contracts/secure market, access to inputs, and coordination. The membership fee is EURO 1 per chick. Membership fee along with input costs is deducted from the price paid by cooperative to a member for delivered chicks. Membership fee is accumulated, and when member leaves the PG, he/she receives back accumulated fees. Similar crediting system is practiced in poultry sector as in cereal sector discussed above. The contract with slaughterhouses is used as collateral, and an interest is paid from subsidies. The cooperative serves as a linkage between farmers and slaughterhouses. On a weekly basis, the cooperative supplies slaughterhouses with about 30 000 chicks. Slaughterhouses itself are involved in marketing and supplying poultry meet to supermarkets. Several slaughterhouses dominate entire market, and the cooperative has a poor negotiation power with them and it cannot sell directly to supermarkets, since it does not own required infrastructure. The cooperative plans to integrate upward. Ownership of one of the heavily indebted slaughterhouses soon will be transferred to the cooperative. As reported, this will allow the PG to increase output and provide services to non-members.

Documents

EC/FAO Programme on Information Systems to Improve Food Security