Hungary: Food industry investments increased but inflation persists as economy slows

Food industry investment value up by 9% in 2022; Coca-Cola commits to biggest capacity increase in Hungary in 16 years; economist explains reasons behind record inflation; new tax on privater investments as economy slows; agriculture digitalization service announced by food chain safety authority - Our weekly briefing on agriculture, food and nature news in Hungary.

A person is working with machinery producing some sort of food

Value of food industry investments increased by 9% in 2022

According to a recent report by the Research Center for Agricultural Economics (AKI), the total value of investments in the food industry increased by 9% last year compared to 2021.

Last year, the largest investors in Hungary were in the confectionery manufacturing, soft drink and mineral water, and poultry meat processing industries. These three industries together accounted for 40% of the total investment amount, with a combined worth of nearly €375.8 million.

57% of the investment amount was allocated to machinery and equipment, 37% to buildings and structures, and 2% to vehicles.

The businesses financed 71% of the investments from their own resources, while the share of subsidies was around 10%. The value of bank loans accounted for 8% last year. The value of other loans was negligible, with a share of only 2% in 2021.

Coca-Cola invests €23 million in Hungary reports that Coca-Cola HBC Hungary is making its biggest investment in 16 years in their production facility in Dunaharaszti, in Transdanubia, Western Hungary. The country's largest soft drink manufacturing company is expanding its production and logistics capacities by constructing a new production hall. The company is also installing a high-capacity, modern production line. In order to support the increased production capacity, they are also implementing improvements to enhance their loading and storage capabilities.

Over the past 27 years, the company has carried out several large-scale investments, resulting in the establishment of two manufacturing units and eight logistics distribution centers, including Hungary's largest food industry warehouse. Today, the company is recognized as the country's largest soft drink manufacturer. The production unit in Dunaharaszti plays a crucial role not only in serving the entire Hungarian market but also in supplying products to seventeen countries.

The reasons behind food inflation – Leading agriculture economist answers

The economic news portal has interviewed György Raskó, one of Hungary’s leading agriculture economists about the factors behind food inflation.

According to Mr. Raskó, the first wave of price increases in 2020 was caused by the pandemic, which resulted in severe supply disruptions for many essential food items. In addition to energy production costs, agricultural input prices also rose dramatically. The prices of fertilizers, pesticides, seeds, and fuel increased by as much as 50-300% within a few months. Subsequently, speculation arising from the war pushed commodity prices in the agricultural sector to unprecedented levels in real terms. All of this led to significant price increases in the food market.

György Raskó believes that the fact that food prices increased the most in Hungary was primarily due to political decisions. As of February 2022, “the Orbán administration froze the consumer prices of eight essential food items at the October 2021 level,” Mr. Raskó says. This step caused a shock effect among retail businesses due to the expected and unavoidable losses resulting from higher procurement costs and lower selling prices. The retailers then transferred the resulting losses to other products, unnecessarily increasing their consumer prices. Furthermore, the government reintroduced the retail special tax, which stands at 4% in 2023. Retailers have to pay this tax proportionally to their turnover, effectively raising the VAT rate from 27% to 31% and consequently increasing the overall price level.

Later in 2022, the price caps led to compound losses in retail trade, and also, the weak national currency led to price increases in import products. "Stores are closing down, and customers are dwindling as well. Thousands of shops have closed permanently or temporarily as long as the price freeze regulation lasts," Mr. Raskó says.

Regarding the mandatory discount policy, the economist described it as "ridiculous."

"So, the requirement is something they would voluntarily do anyway? The government is giving free advertising to the retail chains which will be obligated to offer discounts, attracting even more customers. This is another blow to Hungarian-owned chains operating on a franchise basis and independent domestic-owned convenience stores," Mr. Raskó commented.

Mr. Raskó added, "With the price cap regulation, the foreign-owned retail chains actually benefited. The three largest chains, Lidl, Aldi, and Penny Market, increased their market share in Hungary from 31.4% to 34.4% between February and December 2022 among the nine largest revenue-generating chains. With the continuation of the price cap regulation and mandatory discounts, their market share is projected to reach 38% by December 2023."

New tax on investments while economy slows

The news portal reported on Thursday that following their earlier tax on investment interest, a new tax is being introduced for income after investment (bank bond, share, etc) interest. According to the new regulation, „during the state of danger,” private individuals are required to pay an additional 13% social contribution after income from interests in investments, based on personal income tax basis on these interests.

Governmental bonds are exempt from this tax, and banks are required to inform private investors on the interest rates of governmental bonds, including calculations on how much an investor would have made for the given period if they invested in governmental bonds instead of their current investments.

Meanwhile, the economic news portal projects in a recent analysis that Hungary’s economy is headed towards a “negative spiral.” The portal highlights that retail trade decreased in annual volume by 9.5% between January and March; guest nights in tourism dropped by 9.6%; the construction industry had 27.9% fewer orders in the end of March than in last year; the catering industry is plummeting, with businesses in the sector dropping below 40 thousand compared to the 50+ thousand in the 2010s; and companies decreasing their investments by 2.8% in Q1.

The portal concludes that the inflation, which is the highest in Europe, is eroding purchasing power from the market for both households and for corporate buyers, demand is collapsing, leading to many bankruptcies and closures. The closing down of EU funds is also affecting the economy, and governmental spending is also being curtailed, which in turn shuts down the demand for entire industries. Meanwhile, wages are not increasing enough to conserve the real values of incomes.

National Food Chain Safety Office launches digital soil sampling service

The National Food Chain Safety Office (NÉBIH) has announced that its new digital sampling service has been launched. The service allows for direct data submission to the National Soil Database for laboratories conducting soil analyses.

The API (Application Programming Interface) provided by Nébih allows company and farm management software users to integrate various agricultural and food chain supervision data services, as well as modules required for other official administrative tasks, into their own systems. As the latest addition to the office's API services, the interface for the National Soil Database has been completed. This will further aid in the digital transitioning in Hungarian agriculture.