Market Monitor - Focus on the food industry - Poland

• Successfully managing Russian food embargo
• Payments take 45 days on average
• New taxes on banks and supermarkets could harm the sector

As in 2014, the Polish food sector has performed well to date. Food producers have benefited from robust domestic demand (which accounts for about 70% of sales) and increasing export. Businesses proved to be able to cope with market environment changes: e.g. in the fruit segment, Polish apple farmers and producers were originally adversely affected by the Russian food embargo. However, apple producers were successful in entering new markets in order to replace discontinued exports to Russia, and even became the world's leading producer of apple juice.

It is expected that in 2015 Polish food exports will reach a historical peak of about EUR 25 billion (EUR 21.3 billion in 2014). The major Polish export destination remains the EU, notably Germany and the UK, but the share of exports going overseas to Asia and Africa is increasing.

The Polish meat subsector continues to grow, although many investments in this segment have been financed externally, as a result of which many companies are highly indebted. Pork production, which accounts for the lion´s share of Polish meat production, is decreasing due to lower pork prices and lower profitability, which has been partially caused by the Russian embargo. However, poultry production has doubled over the last decade, reaching 2.2 million tonnes in 2015, with further growth expected in 2015. Meanwhile, Poland has become one of the major poultry producers in the EU, stimulated by increased domestic demand and higher export sales.

Since the EU milk quota ended in April 2015, the dairy sector has been facing more challenges in the short term. However, in the long term, Polish farmers and dairy producers could benefit from the lifting of production limits, utilizing their full production capacity.

Given its current fragmentation, a further concentration and consolidation process in the Polish food sector is highly probable. With the support of investment funds such a process is already on-going in the food processors segment, while in the food producers segment the process of consolidation is still in its initial phase.

The Law and Justice (PiS) party, which won the October 2015 general elections, has announced the introduction of an extraordinary tax for supermarkets in early 2016. While this was introduced in order to protect smaller domestic-owned retail businesses, it could be a challenge for (mostly foreign-owned) large supermarket chains.

Another issue could be the planned extraordinary tax on banks’ assets, as this could have a negative effect on the external financing of Polish businesses – especially in the food sector where dependence on bank finance and overall indebtedness is high.

On average, payments in the food sector still take about 45 days. We expect payment delays and insolvencies to remain stable or even to decrease slightly in the coming months.

As the expected negative consequences of the Russian embargo have largely not materialized, our underwriting stance for the Polish food sector remains quite relaxed. However, we exercise more caution in the retail segment due to the planned tax introduction. The same accounts for slaughter houses and processors in the red meat segment, pork breeding and the dairy segment due to decreasing margins.