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Farm Productivity and Profitability: A Comparative

Analysis of Selected New and Existing EU Member States1

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 Comparative Economic Studies, 2005, 47, (652–674)
r 2005 ACES. All rights reserved. 0888-7233/05 $30.00
www.palgrave-journals.com/ces

Farm Productivity and Profitability: A

Comparative Analysis of Selected New
and Existing EU Member States1
SOPHIA DAVIDOVA1, MATTHEW GORTON2, TOMAS RATINGER3,
KATARZYNA ZAWALINSKA4 & BELEN IRAIZOZ5
1
Imperial College Wye Campus, AEBM, Wye, Ashford, Kent TN25 5AH, UK.
E-mail: s.davidova@ic.ac.uk
2
University of Newcastle, Newcastle, UK
3
The Czech Institute of Agricultural Economics, Czech Republic
4
CASE Foundation, Poland
5
Public University of Navarra, Spain

This paper attempts to shed light on the recent performance of farms in the Czech
Republic, Hungary and Poland and to compare the findings with the situation in two
regions of existing EU Member States. Utilising farm survey data, ratios of
agricultural profitability and productivity have been estimated. Analysis indicates
that Hungarian farms have the best prospects among the analysed CEECs according
to their profitability. The poor profitability and structural problems of Polish
agriculture are highlighted. Family farms are less productive than corporate farms in
the Czech Republic and Hungary despite the expectations at the outset of the
reform that better incentives would boost their productivity.
Comparative Economic Studies (2005) 47, 652–674. doi:10.1057/palgrave.ces.8100066

Keywords: farm performance, profitability, productivity, EU accession

INTRODUCTION

The 1990s witnessed widespread changes in farm structures, government

policies and agricultural markets in the Central and East European Countries
(CEECs) that are New Member States (NMS) of the EU. These changes have

1
This paper is based on research conducted within the EU FP5 IDARA Project, QLRT-1999-1526.
The authors are grateful for the financial support and the usual disclaimers apply. The authors also
thank Barna Kovács and Tamás Mizik for their collaboration.
 S Davidova et al
Farm Productivity and Profitability
653

resulted in a more differentiated set of farming systems that have to deal with
the effects of international trade liberalisation and competition in an enlarged
single European market. In view of the enlargement of the EU, there has been
a growing interest in the competitiveness, productivity and profitability of
farming in the CEECs. More specifically, farm performance has been seen as
critical in several debates about the implementation of the CAP in the NMS,
such as how farm structures and the agricultural labour force will evolve in
the region, whether collective farms and their successor forms will survive in
mature market conditions and how adoption of the CAP will affect farm
profitability.
This paper presents an overview of the key findings of research
undertaken on the performance of CEEC farms, which sought to shed light
on these issues. The research investigates the private profitability and total
factor productivity (TFP) of farms classified by several variables including
size, legal type and agri-environmental region. This is used as the basis for a
discussion of the overall survivability of farms in different countries and,
thus, the likelihood of future restructuring. The study focuses on three CEECs,
namely the Czech Republic, Hungary and Poland and concerns both
corporate and individual farms. In order to compare the findings from the
CEECs with the situation in existing EU Member States, similar analysis was
conducted for two contrasting regions, the region of Navarra in Spain and
South-East England. These areas were chosen to reflect the diversity of
agricultural regions that already exist within the EU: Southern and
mountainous agriculture in Navarra and North European lowland agriculture
in England, and small family farms in Navarra and much larger farms in
England using a high proportion of hired labour.

AGRICULTURAL TRANSITION AND FARM PERFORMANCE IN THE CEECS

At the outset of transition, agriculture in the CEECs was widely perceived as

inefficient (Brooks et al., 1991). Three main factors were believed to account
for inefficiency: (a) inappropriate farm sizes, (b) the weakness of state- and
collective-owned farms as an organisational type and (c) central planning.
The centrally planned environment insulated farms from market signals and
by providing enterprises with soft budget constraints created a disincentive to
improve efficiency (Lerman et al., 2001). Dismantling the command
economy, liberalising prices and instituting hard budget constraints were
therefore seen as mechanisms for improving productivity in the agricultural
sector of the CEECs. However, improvements in efficiency were seen as
achievable not just from macroeconomic reform but also from ‘micro-level’
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changes in farm size, organisational type and other agency factors (Lerman
et al., 2001).
As the main specific features of the CEECs at the outset of transition were
perceived to be the large size of commercial farms and the dominant share
of agricultural land managed by cooperative and state farms, size and
organisational type have been the most frequent factors considered in
investigating variations in performance (Hughes, 2000a). While other factors
are clearly also important in determining performance (such as agri-
environmental characteristics, endowments of human capital and the nature
of up- and downstream markets) (Mathijs and Vranken, 2001), these issues
have received comparatively less attention (for a review, see Gorton and
Davidova, 2004). In this section of the paper, the CEEC-specific debate on size
and organisational type is introduced and previous analyses of variations in
agricultural performance in the Czech Republic, Hungary and Poland
discussed. This provides a basis for the cross-national comparative analysis
presented in Sections ‘Methodology’ and ‘Data Sets’.

Farm size
Former Czechoslovakia and Hungary were characterised by a bi-polar farm
structure. Agricultural land use in both states was dominated by large state
and cooperative farms supplemented by small-scale auxiliary plots. By the
end of the 1980s in the Czech Republic, cooperative and state farms
accounted for 61 and 25 percent of the total agricultural area, respectively. For
the same year in Hungary, cooperative and state farms accounted for 75 and
15 percent of the total area, respectively. In both countries, the mean farm
size of state and cooperative farms was in excess of 4,000 and 2,000 ha,
respectively. In contrast, Poland never extensively collectivized, and during
the 1980s, private farms accounted for approximately 75 percent of
agricultural land and a similar share of agricultural output (GFA, 1997).
These private farms were small by Western standards (over 2 million units
with approximately 1.4 million ha). Regarding the socialised farms that were
established in Poland, state farms were in size and employment levels similar
to those in Hungary and Czechoslovakia but the cooperatives were smaller
(mean of 297 ha in 1985) (GUS, 1990).
The size of state and cooperative farms was widely perceived as sub-
optimal (Brooks et al., 1991). Such large farms, it was argued (Schmitt, 1993),
suffered from high transaction costs due to the large number of workers
employed in absolute terms and per hectare (Lerman et al., 2001). With such
a large hired labour force, the costs of monitoring effort were seen as a cause
of diseconomies of scale. In Poland, the persistence of small-scale peasant
farms was also seen as sub-optimal in that economies of scale were not
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655

realised (GFA, 1997). In short, the bi-polar structure, it was argued (Lerman
et al., 2001), meant that agricultural land use was dominated by collective
farms that were too large and peasant farms in Poland or auxiliary plots in the
Czech Republic and Hungary that were too small.
The relationship between efficiency and farm size in the post-communist
era has been extensively studied and analysis for the Czech Republic,
Hungary and Poland is reviewed below. Hughes (2000a), through a
comparison of total factor productivity, found evidence of economies of
scale for arable farms in the Czech Republic for up to 750 ha and little
evidence of diseconomies of scale above this threshold. For Hungary, in
contrast, he found that diseconomies of scale did appear to set in above
500 ha, supporting the view that the communist era collective farms were
excessively large. In Poland, empirical work has concentrated on individual
farms. In an early study using data for 1993, van Zyl et al.’s (1996) TFP
analysis indicated that individual farms that were relatively large by Polish
standards (above 15 ha) were, on average, less efficient than farms below
15 ha in size. This result was surprising for the authors in that it appeared to
show that the smallest peasant farms were not less efficient. However, given
the absence of significant numbers of individual farms of above 25 ha, it
could not be concluded that economies of scale did not exist for sizes outside
the sample range. In addition to estimating TFP, van Zyl et al. (1996) also
applied data envelopment analysis (DEA). From the DEA analysis, they
discovered no significant differences in scale efficiency between farm sizes.
Latruffe et al. (2005), using more recent data and applying DEA analysis,
found, however, a significant difference in terms of scale efficiency with the
smallest farms (between 1–2 and 2–5 ha) being the least efficient for both
crop and livestock production.
The empirical evidence on the relationship between farm size and
efficiency is less clearcut than many supposed at the outset of transition.
There is both mixed evidence on the view that the state and collective farms
were too large (some support for Hungary but not the Czech Republic) and
that the peasant farms in Poland were too small (only for very small farms
under 5 ha is there evidence of clear inefficiencies of scale). These findings
point to the importance of factors other than size in determining efficiency
and that there is no clear cross-national optimal farm size.

Organisational type
In addition to inappropriate size, state and cooperative farms were widely
seen as an inefficient organisational form (Schmitt, 1993). Institutional
economists, in particular, have argued that family farms are a superior
organisational type in agriculture in that they minimise transaction costs and
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Farm Productivity and Profitability
656

are therefore more efficient than cooperative, state-owned or corporate

enterprises (Schmitt, 1993; Hagedorn, 1994). Family farms, it is argued
(Pollak, 1985), do not suffer from a principal-agent problem in that incentives
for workers are internalised as the family provides both management and
labour. As the costs of supervising and monitoring hired labour in agriculture
can be high:
‘All production cooperatives based on member labor suffer from shirking and
free riding, which are induced by strong moral-hazard behavior among the
members. In socialist agriculture, these weaknesses were further aggravated
by monitoring and enforcement difficulties associated with size (also a well-
known universal factor) and by the evils of the administrative command
system (a unique feature in the socialist countries)’.
(Lerman et al., 2001, p. 33).

As with the assumptions on size, a number of empirical studies have

analysed the relationship between organisational type and efficiency. These
studies have looked at the differences between individual and corporate
farms, where the latter category includes production cooperatives, joint stock
companies and limited liability firms. Most corporate farms have their origins
in the state and cooperative farms of the communist era and a review of the
transformation of collective farms in the Czech Republic and Hungary is
presented in Hughes (2000b) and Csaki and Lerman (1998), respectively.
Using data for the mid-1990s and applying TFP and DEA analysis, both
Hughes (2000b) and Mathijs and Vranken (2001) found that, when other
factors were controlled for, family farms in Hungary did appear to be more
efficient than their corporate counterparts. In the Czech Republic, a similar
significant difference was found for livestock farming but not crops. Curtiss
(2002), who applied Stochastic Frontier Analysis (SFA) for analysing arable
farms in the Czech Republic, found that cooperatives performed better than
individual farms in wheat and rapeseed production but that the latter were
superior for sugar beet cultivation.
As with farm size, the evidence on the relationship between efficiency
and farm type is therefore not clearcut. While there is support for the initial
propositions for Hungary, in the Czech Republic the results are more
complex. Moreover, even where the average corporate farm is less efficient
than the average family farm, some cooperatives and companies perform
well. This suggests that at least some corporate farms can solve the
governance problems discussed by Lerman et al. (2001).
While empirical work to date has been informative, further research can
be justified on two counts. First, the research to date has been based mainly
on data for the early and mid-1990s. This was a period of immense change in
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Farm Productivity and Profitability
657

agriculture with a widespread and significant drop in output throughout the

CEECs (OECD, 2000). In some countries, reforms were delayed and changes
in ownership and management recorded in official statistics masked the
developments at the farm level (Hughes, 2000b). It is therefore important to
see if the trends identified for the early and mid-1990s reflect merely the
characteristics of initial transition or more durable phenomena. Second, the
studies reported above analyse variations in relative efficiency on a country-
by-country basis, identifying the characteristics of farms that are relatively
more efficient in a particular sample. However, this offers little insight into the
comparative cross-country picture and the profitability of farms and returns
on resources employed. An analysis of profitability is important to
understand the probable nature of future restructuring in the sector,
especially when compared against existing EU Member States. These
objectives guide the methodology presented below.

METHODOLOGY

Profitability
Farm profitability is analysed through the estimation of ratios between the
costs and revenues for each farm. A ratio smaller than one indicates a
profitable farm and vice versa. The use of ratios has been preferred as it
simplifies cross-farm and cross-country comparisons. Costs include labour,
land, capital (depreciation and interest) and intermediate consumption. The
revenue side includes proceeds from the sale of agricultural products, the
value of non-marketed agricultural output, proceeds from other activities and
net current subsidies. Revenues from other activities refer to proceeds from
gainful activities that are inseparable from the main farm accounts (Tanton
and Williams, 2000). As the share of the revenue from these other activities is
rather small, for example, 3.9 percent in Navarra and 8.4 percent in Hungary,
and as farm accounting records do not split the costs of these activities but
treats them as integrated into total farm costs, the overall revenue and costs
for each farm were taken into account in the analysis. The most important
source of ‘other revenue’ in the CEECs is from renting out agricultural land.
Three cost-revenue ratios for each farm have been calculated. The central
ratio used as a reference is the private cost benefit ratio (P_CB). For the ith
farm, the P_CB is taken to be:

f
ðCit þ Ci Þ
P CBi ¼ ð1Þ
Ri
Comparative Economic Studies
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Farm Productivity and Profitability
658

where Cit is the cost of tradable inputs, Cif is the cost of non-tradable factors of
production (based on private prices or estimates for non-paid land and labour
input) and Ri is revenue excluding current subsidies net of taxes. This ratio
provides a framework for evaluating profitability when the full opportunity
costs of all factors are assessed. The initial data did not include a notional rent
for owned land and wages for non-paid labour input. For this reason, for non-
paid land and labour input, a set of shadow prices were estimated using
regional averages. Family labour was valued using the average regional farm
unit labour costs. Farm labour costs were used as it was assumed that most of
the farmers in the studied CEECs had low opportunity costs and their second
best alternative would be to become farm workers. Given significant spatial
variations in wage rates, adjustments were made at the regional level. As far as
land was concerned, if a farm had a mix of rented and owned land, the rent
paid was imputed to the owned land, as it was assumed that rented and own
land were in close proximity, and thus, were of a compatible quality. If a farm
did not rent land, then the average regional rent was applied to the owned land.
Two other profitability ratios were also calculated. The first, cost–revenue
plus subsidies (C_Rs), exactly matches the entries in the EU’s Farm
Accountancy Data Network (FADN) that was transposed to the CEECs and,
therefore, Cfi does not include estimates for non-paid labour and land, and Ri
includes the net current subsidies. This ratio is used as an indicator of farm
survivability. If farmers can cover their paid costs, they may continue farming
even though the returns to their own factors might be very low or zero (Ellis,
1988). The final ratio, cost–revenue without subsidies (C_R), does not include
estimates for non-paid labour and land, and also excludes direct subsidies. The
rationale for calculating this last ratio is to give an insight into the effect of the
direct budgetary transfers on different farm types and between countries. It is
expected that the ranking of farms will change with the use of different ratios
depending on their integration into factor markets, namely the role of hired
labour and rented land in the farming process. Such effects are deliberately
sought in order to provide a complete assessment of the economic profitability,
survivability and dependence on government transfers of farms in different
countries and with varying characteristics. As the approach is static, little,
however, can be said about dynamic adjustments to changes in policy.
In addition to the ratios used in the profitability analysis, some standard
financial ratios (Debt to assets, Leverage, RENGO and RENGM) were
constructed on a farm-by-farm basis. The Debt to assets ratio represents the
proportion of assets owed to creditors. Leverage is the relationship between
the total loans and the net worth of the farm. It measures the degree to which
debt is used to finance the farm business. RENGO is the ratio of rental costs
(rents plus interests paid) to gross output and RENGM is the relationship
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 S Davidova et al
Farm Productivity and Profitability
659

between such rental costs and the gross margin. The last two indicators are
measures of ‘financial stress’ – the pressure placed on a farm by the
repayment of rent and interest (Franks, 1998). All value units are expressed in
euros for ease of international comparison.

Productivity
Productivity differences were estimated by the construction of a Tornqvist–
Theil TFP index for all farms in the sample relative to a base case ‘average
farm’ with results interpreted relative to the sample mean, showing groups of
farms having above or below average TFP scores. The Tornqvist–Theil TFP
index is recognised as a measure of technical efficiency and is considered to
be an acceptable alternative to econometric estimation in cases where the
data do not permit an underlying production function to be estimated
(Capalbo and Antle, 1988). The Tornqvist–Theil TFP index applied here is a
relative measure of productivity, comprised of the difference between an
aggregated output index and an aggregated input index. Supposing there are
two firms i and b that produce n outputs Qj (j ¼ 1, y n) using m inputs Xk
(k ¼ 1, y m), then the index t can be defined as:
n   
1X
t1 ¼ Rij þ Rbj ln Qij  ln Qbj
2 j¼1
ð2Þ
1X m   
 Si þ Sbk ln Xki  ln Xkb
2 k¼1 k

where for firm i, Rji represents the share of the value of the jth output in the
total value of all n outputs, and Ski represents the share of the costs of the kth
input in the total input costs of all m inputs. Two TFP indices have been
calculated, one including estimated costs for own land and labour (TFP1) and
one with paid costs only (TFP2).

DATA SETS

Data were extracted from FADN surveys, which are implemented in all EU
Member-States and some New Member States of the EU. Derived from
national surveys, FADN is an important source of micro-economic data and
is widely used for farm-level analysis. It is broadly representative for
commercial agricultural holdings.2 As the survey does not cover all

2
A commercial holding is defined as a farm that is large enough to provide the main gainful
activity of a farmer and a level of income sufficient to support his or her family.

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Farm Productivity and Profitability
660

agricultural holdings except only those that are of a size that can be
considered as commercial, FADN is biased towards larger holdings in
comparison to the total farm population. Therefore, the FADN sample
excludes subsistence producers and this sector is not discussed in the scope of
the paper. Although the subsistence sector is important in some CEECs,
studying larger farms and excluding the purely subsistence ones is adequate
for a comparison with the EU, as the very smallest ‘farms’ are likely to
continue to produce for self-consumption, and to be less integrated into the
market and exposed to competitive pressures even after accession (Kostov
and Lingard, 2002).
FADN is still being piloted in Poland and at present the only national,
annual, farm survey is conducted by the Polish Institute of Agricultural and
Food Economics (IERiGZ)3, and this has been used as the main source of
data. In the UK and Spain, FADN data collection is not organized on a
national basis but through a network of regional surveys. While aggregations
of a limited range of variables are available at national level, it is difficult to
collate individual farm data at a national scale. For this reason, one region
was selected from Spain and the UK in order to reflect some of the variations
in farm characteristics and natural conditions existing in the EU-15. Table 1
details the main characteristics of the datasets used in the analysis.
In the Czech Republic, the initial sample included 1,087 agricultural
enterprises of physical and legal persons, which collectively managed
887,026 ha. After checking the individual data, 264 farms were excluded
due to missing or inconsistent information, so the analysed sample included
823 farms. Considering management form, the largest group in the sample are
individual farms, numbering 513 (62 percent) with an average size of 134 ha.
Producer cooperatives are the second largest group, 154 (19 percent). The rest
of the sample is made up of 95 joint stock companies (12 percent) and 61
limited liability companies (7 percent). The average size of corporate farms
(cooperatives and companies) is 1,526 ha.
Hungary’s FADN provides useable information on over 1,100 agricultural
enterprises (individual and corporate farms). The 233 corporate farms that
were included in the sample were made up of 21 partnerships, 66 limited
liability companies, 10 joint ventures, 71 cooperatives and 65 other legal
forms. For both Hungary and the Czech Republic, the main difference
between the FADN and Agricultural Census returns is the lack of ‘farms’
below 1 hectare in size.
The Polish sample included 1,001 observations of only individual farms,
as corporate farms have played a far more limited role than in the Czech

3
Instytut Ekonomiki Rolnictwa i Gospodarki Zywnosciowej.

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661

Table 1: Characteristics of the data sets used in the analysis

Country Year(s) Type Useable Comments

analyseda number of
farm records

Czech Republic 1998–1999 FADN 823

Hungary 2000 FADN 1,121
Poland 1999 IERiGZ 1,001 Only individual farms
Navarra Spain 1996–1999 FADN 369
South-East 1999 FBS 183 The UK farm business survey (FBS) is
England organised at the request of the Department
of Environment, Food and Rural Affairs
(DEFRA). Only a proportion of farms surveyed
contributes to EU FADN. FBS indicators are
consistent with FADN indicators.
a
For comparative purposes, the presentation of Czech and Spanish results in this paper focuses on data
for 1999.

Republic and Hungary. While it would have been beneficial to cover the
corporate farm sector, such enterprises are not included in the IERiGZ
database and as individual farms account for approximately 80 percent of
Utilised Agricultural Area (UAA) in Poland, the survey does cover the
backbone of Polish agriculture. A close examination of the data brought about
the removal of 22 farms and the analysis was carried out with 979
observations. Classified by UAA, the highest proportion of the sample farms
was between 10 and 25 ha (41 percent). Farms above 100 ha accounted for
only 4 percent of the sample.
Finally, regarding the data available, it should be noted that although the
conclusions are affected by the sample size, the existing samples were large
enough to justify quantitative analysis. However, attention should be paid to
the differences in data collection procedures between countries (especially in
the allocation of fixed costs). While most New Member States are harmonising
their own surveys with FADN procedures, this is still an on-going process. The
cross-national analysis of data should therefore be seen as a way of
highlighting broad trends and differences rather than giving pinpoint results.
As mentioned above, in the Czech Republic and Hungary, there are two
major management types, individual farms and corporate farms, and different
organisational types within the corporate group. In theory, there should be
substantive differences between different corporate forms, particularly in
their decision-making process (Hughes, 2000b). However, in the CEECs such
differences are frequently far from clearcut. For example, often cooperatives
do not apply the ‘one man one vote’ principle and their operation is similar to
those of companies. In several joint stock companies, managers are also the
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Farm Productivity and Profitability
662

largest shareholders. In addition, the pace of change in organisational

structures is still strong in the CEECs. For these reasons, and having in mind
the relatively small numbers of different corporate types, the emphasis is not
on explaining variations in the performance of different corporate forms but
mainly on comparisons between individual and corporate farms, and cross-
country comparisons.

BASIC FARM CHARACTERISTICS: A COMPARATIVE PICTURE

Table 2 compares the sample farms according to four sets of variables: size,
rented factors, intensification and income variables. Size variables are the
utilised agricultural area (UAA) per farm, the value of output and total assets
per farm, and labour input measured in annual work units (AWU). Rented
factor variables are the shares of hired labour and rented land in total labour
input and land utilized, respectively. Also two measures of relative factor use
are shown in Table 2. The first one is the amount of land per AWU with larger
scores being an indicator of less intensive agriculture. The second measure is
the value of depreciation per annual work unit (DEPAWU), in which case
higher values are used as a proxy for greater capital per worker employed.
The returns to hired labour are expressed as wages paid per hired AWU.
Table 2 shows that according to the four size measures (average UAA per
farm, average output, total assets and labour input), the countries fall into
three groups. These three groups are: the largest farms (the Czech Republic),
medium size farms (Hungary and South-East England, although measured by
assets, the South-East English farms are the largest)4 and small farms (Poland
and Navarra).
The main differences among the CEECs in farm size stem from the
existence, or the lack of, corporate farms. Although corporate farms are
widespread in both the Czech Republic and Hungary, there is a considerable
difference between the two countries. The land area available to successor
farms in Hungary decreased substantially during transition as a result of the
adopted procedures of land reform and farm restructuring, especially because
a large area of land had to be set aside for compensation purposes under the
Compensation Act (OECD, 1994). Thus, although in the Hungarian FADN
sample there were more than 200 corporate farms, 55 percent of them were
below 300 ha. As mentioned, in the Czech Republic, the average size of the
corporate farms was above 1,000 ha. In addition, in comparison to Hungary,

4
Capital assets are valued at the cost of replacing them. Therefore, fixed capital items for
South-East England are re-valued each year to reflect changes in their market value (Tanton and
Williams, 2000).

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663

Table 2: Background sample characteristics, 1999a

Czech Hungary Poland Navarra South-East

Republic Spain England

Average UAA per farm (ha) 658 202 25 50 141

Average outputb (EUR) 532,665 224,073 18,000 97,000 399,753
Average total assets (EUR) 870,542 204,484 86,000 292,000 1,345,154
Average total assets per ha (EUR) 1,450 1,977 3,440 5,840 9,540
Average AWU per farm 32 7.45 1.85 1.49 6.35
Land rented (%) 76 42 17 45 34
Hired labour input (%) 50 31 6 10 53
Land per AWU (ha) 38 53 13 36 41
DEPAWU (EUR) 2,421 2,427 1,294 6,281 7,810
Average paid wage (EUR per paid AWU) 3,552 3,490 2,308 12,312 18,790
a
For Hungary 2000 as the 1999 data set had many inconsistencies.
b
Output includes net current subsidies.

corporate farms use a much higher share of UAA in the Czech Republic. These
differences are reflected in the larger average area, output and assets per farm
in the Czech Republic compared with Hungary.
The Polish farms are the smallest by all size measures. However,
according to size they appear closer to farms in the EU (Navarra, Spain) than
their counterparts in the Czech Republic. When assets are measured per ha,
then the Polish farmers seem to be much better capitalised than farms in the
Czech Republic or Hungary. This results from their longer history of
independent farming. Not surprisingly, South-East England has the most
capitalised farms, having assets per ha more than 60 percent higher than in
Navarra and nearly three times that of Poland.
The differences between the countries regarding the use of land rental
and labour markets are striking. The Polish farms rely almost entirely on their
own resources. Only 6 percent of labour input is accounted for by hired
labour and only 17 percent of total land is rented. Thus, they are dependent
on the initial family endowment of resources and familial human capital. This
lack of integration into factor markets is a clear indicator of the peasant
character of Polish agriculture. Most of the farms in Navarra are located in
marginal areas (Less Favoured Areas [LFAs] or former Objective 5b areas)5.

5
Objective 5 (b) areas were selected to receive special support from the EU’s Common
Agricultural Policy (CAP). According to the Council Regulation (ECC) No. 2052/1988 of June 1988
(Official Journal, L144, 27.05.1988), ‘Areas eligible under Objective 5 (b) shall be selectedy taking
into account in particular the degree to which they are rural in nature, the number of persons
occupied in agriculture, their level of economic and agricultural development, the extent to which
they are peripheral and their sensitivity to changes in the agricultural sector, especially in the context
of reform of the Common Agricultural Policy’.

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Less favoured areas include mountainous areas, which are in danger of

abandonment due to low land productivity and difficult cultivation, but
where the conservation of the countryside is a priority, and other areas where
agriculture is affected by a specific handicap. Farmers in EU LFAs receive
compensation payments to help ensure that they continue farming, maintain
the countryside and promote a viable rural community. In addition, with an
aim of achieving regional economic and social cohesion, in the 1990s the EU
used Structural Funds to promote rural development in regions with a low
level of socio-economic development which had a high share of agricultural
employment, poor agricultural incomes or were subject to rural depopulation
(Objective 5b). Although most of the sampled farms in Navarra are located in
these marginal areas and rely on own labour, in contrast to Poland they also
rent land in order to achieve a reasonable size and generate an acceptable
income: family farms in Navarra have three times as much land per AWU
than in Poland. The Czech Republic and Hungary, due to their corporate
farms that depend almost fully on rented land and hired labour, are nearer to
the English case of large family farms in terms of the extensive use of land
rental and labour markets.
Another striking difference concerns the pay of hired labour. In this case,
the clear divide is between existing and new EU Member States. Although
theoretically accession to the EU may accelerate the equalisation of product
and factor prices, the order of magnitude of the differences in agricultural
wages is such that most probably a large gap will persist for a long time post-
accession. Incentives for agricultural labour from the CEECs to move to work,
at least seasonally, in West European farms, are likely to persist and this is a
phenomenon that currently occurs.

FARM PROFITABILITY

The differences in farm structural characteristics bring about important

consequences for the profitability of farming. Table 3 presents the average
farm profitability for the sample farms in each of the analysed countries
according to the three profitability ratios.
The private cost–benefit ratio is sensitive to the shadow prices applied to
non-paid labour and own land. This is particularly important for individual
farms that mainly rely on own resources. However, as shown in Table 3, even
in regions where farming uses mainly own resources, as in Navarra, if the
resources are effectively used, farms can be near the break-even point
according to the private cost–benefit ratio.
The most profitable farms are in Navarra and Hungary. The fact that in
this group there is one existing and one new EU Member State tends to
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Table 3: Profitability ratios

Czech Hungary Poland Navarra South-East

Republic Spain England

Average private cost-benefit score 1.224 1.03 3.83 1.098 1.374

% of sample profitable on private cost–benefit 20 60.9 8.7 45.0 14.8

Average cost–revenue without subsidies score 1.086 0.81 1.01 0.714 1.095
% of sample profitable on cost–revenue 38 81.5 60.4 85.4 42.6
without subsidies

Average cost–revenue plus subsidies score 1.003 0.76 1.01 0.604 0.922
% of sample profitable on cost–revenue 48 85.4 60.4 92.7 74.9
plus subsidies

Table 4: Direct payments

Czech Hungary Poland Navarra South-East

Republic Spain England

Direct payments as % of gross output 6.4 5.2 0.03 13.6 14.0

% of sample that receive direct payments 80 82 1.9 99.2 72.1

undermine any easy generalisations. The profitability of farms in Navarra

cannot be solely attributed to CAP headage and acreage payments and
transfers received because of their location in LFAs or objective 5b areas. It is
true that direct payments account for 13.6 percent of the gross output of
Navarra’s farms and that almost all sample farms receive direct payments
(Table 4). However, the importance of direct payments in South-East England
is not substantially different but the English farms are unprofitable on both
the private cost–benefit and cost–revenue without subsidies ratios.
The Hungarian farms have the best prospects among analysed New
Member States according to their profitability. They are near the break-even
point on the private cost–benefit ratio and are profitable according to the
other two ratios (Table 3). They achieve this profitability with more modest
direct payments than in existing EU states. Net current subsidies account for
slightly more than 5 percent of the gross output (Table 4).
For the Czech Republic and Poland, agricultural profitability is a major
problem. The average scores for each of the three profitability ratios are above
1. Even without accounting for the opportunity costs of own resources, and
including net current subsidies, 52 percent of the sample farms in the Czech
Republic and 40 percent in Poland are unprofitable. While Polish farmers do
not benefit from direct payments, the Czech farms receive more net current
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subsidies in relative terms than the Hungarian farmers, but nevertheless their
private profitability is low.
Undoubtedly, agri-environmental conditions play an important role in
farm performance. For example, the Czech farms are classified into five agri-
environmental regions that reflect different conditions for farming, notionally
called the maize, sugar beet, cereal-potato, potato and mountainous-forage
regions. The best for agriculture is the first zone (maize region) and they are
listed in descending order. In terms of agri-environmental regions, the worst
results were recorded, not surprisingly, in the mountainous forage region
where, on the basis of the private cost–benefit measure, no farms were
profitable (Table 5). However, even in the best agri-environmental regions
(maize and sugar beet) the majority of farms were loss making. In the cereal
and potato regions, only 22 and 13 percent of farms were profitable,
respectively, according to the private cost–benefit ratio.
The comparison of average profitability scores by legal form for the Czech
Republic and Hungary (Table 6) reveals that Czech farms are uniformly loss
making with the exception of individual farms on the cost–revenue plus
subsidies ratio. The opposite is true for Hungary with only one ratio above 1,
the private cost–benefit measure for individual farms.
When the results by region and legal type are considered together,
the individual farmers in the Czech Republic register the best results in the
maize region but they have one of the worst returns in the mountainous
forage regions according to P_CB and C_R ratios (Table 7). Only when
subsidies are accounted for in the revenue (C_Rs), can individual farms be
identified as having the highest profitability in all agri-environmental regions.

Table 5: Profitable and loss-making farms according to agri-environmental region, Czech FADN sample,
1999, number and percentage

Maize Sugar beet Cereal-Potato Potato Mountainous

region region region region forage region

P_CB
Profitable 7 (35%) 70 (22%) 66 (22%) 18 (13%) 0 (0%)
Loss making 13 (65%) 253 (78%) 238 (78%) 118 (87%) 40 (100%)

C_R
Profitable 13 (65%) 137 (42%) 124 (41%) 32 (24%) 3 (7%)
Loss making 7 (35%) 186 (58%) 180 (59%) 104 (76%) 37 (93%)

C_Rs
Profitable 13 (65%) 160 (50%) 153 (50%) 54 (40%) 19 (47%)
Loss making 7 (35%) 163 (50%) 151 (50%) 82 (60%) 21 (53%)

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The poor economic performance of the Polish and Czech farms is also
clear from Table 8, where the net value added (NVA) per ha and AWU is
presented. Their labour productivity is also low; in Poland NVA per AWU is
nearly 12 times less than in South-East England and 14 times less than in
Spain. This is in line with Pouliquen’s estimates that the value added per
worker in Poland is equal to only 8 percent of the EU level (Pouliquen, 2001).
The best performers according to NVA are the Spanish farms. Hungarian
farms again record good results.
The lack of profitability makes the long-term viability of a large number
of Czech and Polish farms questionable unless they manage to restructure.
The issue is even more serious in the Czech Republic due to the high level of
farm indebtedness (Table 9). Czech farms are funded by debt and average
debts are higher than the net worth of the farms (leverage above 1). However,
their financial stress is not as high as would have been expected by their level
of indebtedness, in fact it is less than in the two EU regions. This is because
most of the debt is in the form of non-bank liabilities, held by the successor
farms either to individual owners of the assets for producer cooperatives or to
the state for limited liability companies. As a result of the adopted reform
legislation, these farms did not need to repay these debts for several years
after their establishment.6 For this reason, the financial stress is lower than it
would have been under similar situations in Western Europe.
Polish farmers do not rely on external financing either due to external
constraints (access to credit) or personal choice.

TOTAL FACTOR PRODUCTIVITY

TFP scores are expressed in relation to the sample mean that has been
normalised to unity. While one is able to identify farms which are relatively
more efficient with a higher TFP index score in a particular sample for one
country, this might bear little relationship to what may be considered
internationally productive. Therefore, what it is possible to compare
internationally is the share of farms that have high TFP scores in each
sample and whether they produce the predominant portion of output and to

6
Limited liability companies are to a large extent successors of the former state farms. Their
assets had to be purchased and the new owners had to pay an initial instalment while the rest was
recorded as long-term liabilities to the state. Cooperatives carry liabilities to former, currently non-
farming, owners of assets (so-called eligible persons). The start of the repayment of these liabilities
was delayed for 7 years. However, since January 2000 eligible persons have been entitled to claim
their assets from cooperatives.

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Table 6: Profitability ratios for the Czech and Hungarian samples according to management type

Hungary Czech Republic

Individual Ltd Coops Other Individual Ltd Joint Coops

farmers corporate farmers stock
farms

Private Cost–Benefit
Average score 1.09 0.86 0.78 0.93 1.26 1.20 1.19 1.14

Cost–Revenue without subsidies

Average score 0.82 0.86 0.78 0.79 1.05 1.19 1.19 1.13

Cost–Revenue plus subsidies

Average score 0.77 0.77 0.75 0.74 0.95 1.10 1.13 1.07

Table 7: Profitability according to agri-environmental region and management form, Czech FADN sample,
1999

Class means Maize Sugar beet Cereal–Potato Potato Mountainous Legal type
region region region region forage region averages

P_CB
Individual farmers 1.046 1.166 1.293 1.366 1.694 1.2623
Ltd companies 1.064 1.129 1.217 1.274 1.270 1.2035
Joint stock comp. 1.178 1.214 1.104 1.244 1.429 1.1944
Production coops 1.256 1.068 1.143 1.178 1.341 1.1372
Regional averages 1.089 1.156 1.242 1.282 1.563

C_R
Individual farmers 0.901 0.997 1.052 1.089 1.391 1.0467
Ltd companies 1.064 1.125 1.200 1.263 1.256 1.1932
Joint stock comp. 1.178 1.207 1.096 1.240 1.429 1.1879
Production coops 1.256 1.059 1.134 1.173 1.336 1.1297
Regional averages 1.002 1.040 1.081 1.157 1.363

C_Rs
Individual farmers 0.880 0.961 0.978 0.895 0.898 0.9544
Ltd companies 1.029 1.086 1.121 1.134 1.022 1.0981
Joint stock comp. 1.152 1.167 1.038 1.170 1.071 1.1302
Production coops 1.235 1.024 1.062 1.095 1.198 1.0658
Regional averages 0.979 1.004 1.008 1.023 0.966

what extent they depend on net current subsidies. The ranking of productivity
scores between different management types can also be compared.
Table 10 presents the country results according to TFP1 (including
estimated costs for own resources).
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Table 8: Net value added (NVA) per farm, hectare and AWU (EUR)

Czech Republic Hungary Poland Navarra South-East England

Spain

NVA per farm 97,166 125,483 4,685 44,723 142,959

NVA per ha 116 974 199 1,961 1,436
NVA per AWU 3,472 16,481 2,044 29,185 23,665

Table 9: Financial ratios for the sample farms

Czech Republic Hungary Poland Navarra South-East England

Spain

Debt to assets 0.33 0.16 0.03 0.08 0.15

Leverage 1.53 0.39 0.04 0.11 0.25
RENGO 0.04 0.03 0.02 0.05 0.09
RENGM 0.09 0.04 0.04 0.12 0.36

Table 10: Farm productivity (TFP1 scores)

Czech Republic Hungary Poland Navarra South-East

Spain England

No of high productivity farms (TFP41) 381 488 346 106 86

% of high productivity farms 46 44 35 29 47
% of sample UAA in TFP41 farms 53 64 63 29 38
% of sample output in TFP41 farmsa 60 85 56 37 69
% of sample subsidies in productive farms 46 49 52 33 26
a
Output includes net current subsidies.

In all countries, farms with TFP scores above 1 are in a minority and in
the case of Navarra they constitute only 29 percent of the sample farms. At
first glance, it seems that the results for Navarra are contradictory: too high a
percentage of profitable farms and too low a share of farms with higher than
the average productivity. However, a more detailed analysis shows that all the
farms that have a TFP score above unity are also profitable according to all
profitability ratios. Productive farms account for 62.7 per cent of all Navarra
farms that are profitable according to P_CB ratio. Thus, productivity and
profitability are related (w2 coefficient significant at the 0.01 level).
Two important features stem from the productivity analysis. With the
exception of Spain, the minority of productive farms produces a majority of
the total output. From this point of view, once again Hungary has the best
performance with 85 percent of the output produced in farms having
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Table 11: Farm productivity by management type (TFP1 scores)

Hungary Czech Republic

Management type Average TFP score Management type Average TFP score

Family farms 0.96 Family farms 0.987

Limited liability companies 1.16 Limited liability companies 0.971
Cooperatives 1.19 Cooperatives 1.033
Joint ventures 1.42 Joint stock companies 1.035
Other 0.96 Other N/A

Total 1.00 Total 1.00

technically efficient input–output combinations. The results for South-East

England indicate that the productive farms tend to rely less heavily on net
direct subsidies. In South-East England, 47 percent of productive farms
absorb only 26 percent of the total net current subsidies of the sample. This,
however, is not the case in the other analysed countries.
In Hungary and the Czech Republic, according to management type,
corporate farms have higher TFP scores than individual farms (Table 11).
Family farms are less productive despite the high expectations at the
outset of the reform process that better incentives involved in individual
farming would boost their efficiency. The reasons for this result are complex,
including the long-standing tradition of farming in association in the NMS
and a high share of hired labour in corporate farms allowing them to recruit
labour with necessary skills for technical agricultural and management
positions. In some cases, former collective farm managers were able to siphon
off the most attractive parts of the business into new corporate farms that
yield good returns. The argument that corporate farms benefit solely from
economies of size does not seem to hold, at least for Hungary. When for the
present data set the size has been controlled for, individual farms still
appeared as less productive than their corporate counterparts.

CONCLUSIONS

The 1990s witnessed extensive restructuring that created a more complex

pattern of farming in Central Europe. As a result, there is no neat divide in
profitability between Western and Central Europe. The estimated profitability
ratios indicate that farms in Hungary and Navarra fared the best, with the
worst problems being in parts of the Czech Republic and Poland. The main
difference between the two West European cases and Central Europe is not in
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terms of the number of farms that are profitable but rather in terms of capital
intensity and wage rates.
In explaining the relatively poor profitability of farms in the Czech
Republic, Poland and South East England, a number of factors can be cited.
Comparing farms in the Czech Republic with their Hungarian counterparts,
the former appear overmanned. In the Czech case, land per AWU is
significantly lower than in Hungary (38 ha compared with 53 ha) despite
average wage rates being higher. Agri-environmental conditions also play a
part with profitability in less attractive areas (eg potato and the mountainous
forage regions) being significantly worse. As a result, Net Value Added per
AWU is over four times greater in Hungary compared to the Czech Republic.
Comparing the family farms of Navarra with those in Poland, it is
apparent that in the former case farms rent in more land to generate a
reasonable return. In the Polish case, farms are relying to a far greater extent
on family-owned land. The Spanish farms are also better capitalised. Polish
farms have high average values for total assets per ha by Central European
standards, but they are still significantly less than in the Spanish case. In
addition, the quality of Polish capital has been questioned (Latruffe et al.,
2005). Latruffe et al. (2005) in their efficiency analysis identify that many
Polish farmers have purchased an extensive range of machinery and
equipment irrespective of their farm’s size and the potential efficiency with
which such capital could be used. The maintenance costs for old and obsolete
capital inherited from the communist era are high. While farmers in a better
financial state and with larger farms have invested in modern and more
expensive equipment, the bulk of the smaller farms have invested in old,
second-hand machinery. The smallest farms as a result allocate the highest
percentage of depreciation in comparison to the original costs of capital
(IERiGZ, 1998, 2002). The relative superiority of farms in Navarra compared
to Poland is apparent for all three ratios and cannot just be reduced to the
effect of direct payments, although the latter play their role in supporting
private profitability.
While the majority of Polish farms are unprofitable when the opportunity
costs of own land and labour input are accounted for, 60 percent break-even if
only paid costs are considered. If self-exploitation (accepting low returns to
owned labour and land) occurs, as in many peasant societies (Ellis, 1998), the
survivability of small-scale farms in Poland is likely to be greater than
economic cost benefit analyses would predict.
In Hungary and the Czech Republic, when the opportunity costs for own
labour and land are accounted for and farms operate without current
subsidies (private cost–benefit ratio), corporate enterprises are the most
profitable. Corporate farms in both countries, however, do suffer from
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relatively high debts, often due to the nature of the reform process. They also
rely almost exclusively on hired labour and rented land so that unlike most
small individual farms they cannot rely on self-exploitation as a strategy to
cope with a downturn in agricultural fortunes. As a result, the farms that are
the most competitive during an era of good returns may not be those best
placed to weather a period of poor agricultural profitability.
In South-East England, high factor costs are important determinants of its
relatively poor profitability. For example, NVA per AWU in South-East
England was 23,665 euros compared to an average wage rate per AWU of
18,790 euros. In Navarra, NVA per AWU was 29,185 euros compared against
an average paid wage rate of 12,312 euros. Thus, wages account for the
equivalent of 79.4 percent of NVA per AWU in South-East England compared
against only 42.2 percent in Navarra.
As measured by the P_CB ratio (full cost–benefit), the greatest structural
problems lie in Poland. The returns on own labour and land are exceptionally
low and the figures on poor private profitability mirror the findings of
research on the international competitiveness of Polish agriculture (Gorton et
al., 2001). The majority of individual farms persist through a lack of other
employment options and a degree of self-exploitation – too many people are
trying to earn a living out of too small farms. To deal with this problem, the
stimulation of the non-farm rural economy is paramount. At present, the
latter is underdeveloped in Poland (Chaplin et al., 2004) and this hinders
structural adjustment. Chaplin et al. (2004) identify that diversification (both
enterprise and/or off-farm employment) is linked to the level of general
education and the availability of public transport. In Poland, the educational
attainment of farmers is low and infrastructural issues are poorly addressed in
current EU-led initiatives for rural development. Dealing with structural
problems in rural Poland will thus require a greater emphasis on improving
educational attainment and mobility.
For the years analysed, direct payments in Poland were insignificant. In
Hungary and the Czech Republic about four-fifths of commercially oriented
farms received direct payments but these were much less in absolute terms
and as a percentage of gross revenue than in existing EU Member States. In
December 2002, the Copenhagen European Council concluded the accession
negotiations with countries from Central Europe. It decided that direct
payments for acceding countries should be ‘phased-in’ over a period of 10
years from an initial level of 25 percent of the direct payments granted to
farmers in the current EU Member States. However, national governments can
‘top-up’ the direct payments. Subject to authorisation by the European
Commission, they can top-up by up to 30 percent or to a maximum of 10
percent above the level that farmers received under pre-accession national
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schemes. The introduction of these direct payments in the NMS will have a
significant impact. However, it is important to note that there is a core of
farms in Western and Central Europe that could potentially survive without
direct payments and that are not strongly dependent on policy protection.
Moreover, Chaplin et al. (2004) found that increases in agricultural price
support and the introduction of direct payments lowers the propensity of
farmers to diversify and vice versa. Therefore, while direct payments could
improve the private profitability of agriculture in Central Europe, they are
likely to impede restructuring in countries like Poland where structural
change and the movement of labour out of agriculture are critical.

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