Restructuring of Czech large scale farms will continue – Ladislav Jelínek

23 May 2018 - Czech Republic has its own specifics regarding the structure and development of farms. Recent studies report that a relatively small number of farms operate most of the country’s agricultural area. Although only about 20% of the farms are 100 hectares or more in size, they account for almost 90% of the total farmland area. With the average of 102 hectares per farm, this is one of the highest values in the EU. No wonder that the debate on the efficiency and profitability of such farms relative to small- and medium-size farms has been contentious in Czech society. Our interview with Dr. Ladislav Jelínek, Senior Researcher and coordinator of the research project "The role of agroholdings in the Czech agriculture" at the Institute of Agricultural Economics and Information (IAEI) in Prague, sheds light on the state-of-the-art of large scale farming in Czech Republic.

What are the main factors that drive the development of large scale farming in your country?

The main reasons for proliferation of large farms in my country include the historical development of farm structures, agricultural policies and market effects. Large farms in Czech Republic were established in the period of collectivization. In the 1950s, individual farms were merged and forced to enter collective units – the so-called joint agricultural cooperatives or state farms. The process of collectivization that protracted until the beginning of the 1970s had a particularly strong impact on the farm structure. Generally, market power is positively related to farm size. The policy measures that aimed to reduce or compensate for power of large scale farms were mostly insufficient or had only partial effects. Besides, we observe concentration in the processing and retail industries, a process that changes industrial structures worldwide and also leads to concentration of suppliers, i.e. farmers. In turn, this high concentration is driven by new requirements toward products or production operations. 

So how does the farm structure look like in Czech Republic today?

There are 34.8 thousand farms with total agricultural area of 3.5 million hectares today. The average size of a farm is 102 hectares. We also observe significant vertical and horizontal integration of farms: 49% of farms are integrated in this or that way; around 10% of them are classified as large enterprises with integration of down- and upstream sectors. They are involved in nearly 20% of farmland use. In addition, ten largest agricultural holdings are estimated to receive nearly CZK 1.2 billion (more than €46 millions) of public support from Modernization measure – I.1.1 via European Agricultural Fund for Rural Development (EAFRD) in 2014-2020. These agricultural holdings are characterized by a strong lobbying power and impact on policy-makers.

Given their increasing role, do you observe any evidence that large farms are more efficient than small or medium-size farms?

Yes, in some branches they outperform their smaller counterparts. It very much depends on the type of production, availability of production factors, degree of competition on the market and, inevitably, on the managerial skills. We observe that large farms are the most productive in cash crops (grains, rapeseed, etc.) or in some livestock sectors such as pork or poultry meat production. Large farms were also estimated to show higher productivity growth rates in our analyses of total factor productivity of Czech farms. They appear to be in a better position to exploit economies of scale and to invest in productivity-enhancing technologies than small scale farms. 

Are there any specific problems associated with the development of large scale farming in Czech Republic?

As mentioned above, strong negotiating and market power of large scale farms may provide unfair competitive advantages. I assume they may be less flexible to respond to market and consumer demands but this needs to be further researched. Large scale farms operate large blocks of farmland that may be at odds with environmental sustainability objectives such as biodiversity, prevention of erosion, etc. 

Do you think that the societal benefits of large scale farming outperform the problems they (potentially) bring to the society?

The benefits that we take into consideration are conditional. For one, these are economic benefits associated with higher production efficiency enabled by improved access to capital and partially reduced transaction costs due to farm integration. But, theoretically, there are no real benefits the large scale farming could provide to a society that the small farms would not be capable of providing. Furthermore, if environmental disadvantages go hand in hand with production size and efficiency, their positive effect for the society diminishes as soon as negative externalities appear.   

What are the main problems the farming sector faces in your country?

One of the main obstacles is lack of human resources, especially in the livestock sector, where the requirements toward labor qualification are high. Another problem is a high competition for better farmland resources among large farms as well as between large and small farms. Last but not least, there is uncertainty about future capping of direct payments in the next CAP programming period (after 2020) and potential limitation of investment support. Yet, the capping of direct payments will not likely impact large farms viability.

Given these considerations, do you think that large corporate farms have a long-term perspective?

This is a question that often resonates with the discussions in Czech academia. Agroholdings or large scale farms will definitely not disappear in a medium term while their further restructuring is very likely – less effective large farms or holdings will be taken over by more effective, in some way more “aggressive” units. There seems to be two distinct development paths in the future – toward further concentration of agroholdings that may become even bigger as well as toward fragmentation of farms or existing agribusiness groups. There are also important external factors such as the development of CAP after 2020, including aspects such as capping, migration policy and consumers’ perceptions. 

In this context, what should small farms expect from the future?

Current figures show that the number and sizes of small farms remain relatively stable since 2000. They have potential to grow but the lock-in effect created by large farms is significant – access to land is restricted mostly due to institutional issues such as problematic arrangements with regard to land plots. 

In your opinion, what would be the most interesting future research topics with regard to large scale farming?

The range of related topics is broad and includes, for example, investment strategies, corporate social responsibility aspects, profitability analysis, etc. We currently analyze structural characteristics and economic results of Czech agroholdings. Besides, we look into how capital integration of agricultural enterprises has changed over the last years.