Agricultural and Rural Development Support

ANALYSIS OF THE AGRARIAN SECTOR OF AND OBLASTS AND ADJACENT DISTRICTS OF ZAPORIZHZHYA OBLAST

Report on Research Findings 2017

The survey was conducted by the USAID Agriculture and Rural Development Support Project. The authors’ views do not necessarily reflect the views of the USAID or the United States Government. The research is i mplemented under Subcontract ARDS-S2-03 within the US Agency for International Development (USAID) Agriculture and Rural Development Support Project (ARDS). More details about the USAID ARDS project is available at https://www.facebook.com/usaid.ards/

2017

2 USAID Agricultural and Rural Development Support project CONTENTS

AIMS AND OBJECTIVES OF THE RESEARCH ...... 4

INTRODUCTION ...... 7

THE SITUATION IN THE AGRARIAN SECTOR OF ZAPORIZHZHYA OBLAST ...... 8

THE SITUATION IN THE AGRARIAN SECTOR OF ...... 10

THE SITUATION IN THE AGRARIAN SECTOR OF ...... 13

STRUCTURE OF MEAT, DAIRY AND HORTICULTURE PRODUCTS MARKET OF DONETSK, LUHANSK OBLASTS AND FOUR DISTRICTS OF ZAPORIZHZHYA OBLAST (DESK RESEARCH FINDINGS) ...... 17

ANALYSIS AND ASSESSMENT OF MARKETING AND LOGISTICAL CHANNELS FOR THE FORMATION OF A LOCAL MARKET FOR HORTICULTURE, MEAT AND DAIRY PRODUCTS ...... 21

WAYS TO IMPROVE MARKETING AND LOGISTICAL CHANNELS FOR THE FORMATION OF A LOCAL MARKET BY TYPES OF PRODUCTS BY REGION ...... 29

CHARACTERISTICS OF INSTITUTIONAL FORMS FOR DEVELOPMENT OF FARMING IN DONETSK, LUHANSK AND FOUR DISTRICTS OF ZAPORIZHZHYA OBLAST ...... 38

NEEDS OF THE TARGET GROUP OF AGRICULTURAL PRODUCERS, INCLUDING WOMEN AND SMALL FARMERS, FOR SKILLS AND KNOWLEDGE IN EFFICIENT ECONOMIC MANAGEMENT ...... 42

USAID Agricultural and Rural Development Support project 3 AIMS AND OBJECTIVES OF THE RESEARCH

The aims of this research within the framework of the USAID Agricultural and Rural Development Project (ARDS), implemented by Chemonics, Inc., were as follows: A ssessment of the current status of the development of the local agrarian market, the capacity of local small and medium enterprises (SMEs) and cooperatives to complete it, and obstacles and ways to eliminate them; D evelopment of proposals for increasing the capacity of SMEs and cooperatives to develop value-added chains, market saturation and development of agrarian products markets in Luhansk and Donetsk Oblasts and districts close to the confrontation line in Zaporizhzhya Oblast.

OBJECTIVES OF THE RESEARCH The research involved the following: D esk research on the actual structure of the agrarian sector of Donetsk and Luhansk Oblasts ( Government-controlled areas), as well as districts close to the con- frontation line in Zaporizhzhya Oblast (, Bilmak, Huliaypole, and Rozivka districts and the city of oblast subordination of Berdyansk). C ollection of primary data with regard to the speci¿ cs of the production, processing and sales of products in the region, as well as determination of the needs of target groups of agricultural producers. D evelopment of recommendations for increasing the potential for SAPs and large enterprises, as well as households, with regard to the development of value added chains, as well as prospects for local agrarian products markets. A nalysis and assessment of marketing and logistical channels for the formation of a local market for horticulture, meat and dairy products. C haracterization of the institutional development of farmers’ organizations in the region, their capacity to represent the interests of farmers and landowners, and their activities. D etermination of the needs for urgent and long-term support to agricultural producers in Luhansk and Donetsk Oblasts and districts close to the confrontation line in Zapor- izhzhya Oblast, the sta tus for provision and effects of military actions on the situation with provision with means for production, processing and other resources.

4 USAID Agricultural and Rural Development Support project D etermination of the needs of target groups of agricultural producers, including wom- en and small farmers, regarding acquiring skills and knowledge in ef¿ cient business management. Proposing and justifying ways to improve marketing and logistical channels for local market development; the most suitable locations, from the economic point of view, for creating units for the development/ processing of agricultural production aiming to improve value-added chains; and provision of the region with the required food- stuffs.

RESEARCH PROCESS The research was conducted by SYNERGY DEVELOPMENT CONSULTING LLC in consortium with Business-Accelerator Agrochallenge LLC and MLC Group LLC within the period of May-June 2017. The de¿ nitions of small and medium enterprises (SMEs) and agricultural service co- operatives (ASCs) used by the ARDS Project have been applied within the framework of the research: Small agricultural enterprises are enterprises having staff employees in addition to family and seasonal employees. A small farm must have more than 10 (ten), but less than 50 (¿ fty) family and seasonal workers, and a certain number of staff employees, not to exceed 50 (¿ fty) full-time or part-time workers, including family members. Small non-agricultural enterprises in rural areas shall have more than 10 (ten) but less than 50 (¿ fty) full-time employees. Small agricultural enterprises must focus their activities on the sale of goods in the existing channels. Enterprises capable of presenting ¿ nan- cial statements on sales of goods for three or more years with an annual turnover not less than UAH 1 million, but not exceeding UAH 15 million, shall be suitable for the purposes of these activities. The same criteria shall apply to non-agricultural enterpris- es with consideration of sales of goods and services. Medium agricultural enterprises must have signi¿ cant number of seasonal and part- time workers, in particular, 50 or more staff employees. Unlike in small enterprises, staff employees at medium-sized enterprises must play a leading role in certain man- agerial and technical solutions. Non-agricultural medium-sized enterprises must have a signi¿ cant number of workers, and at least 50 (¿ fty) of them must work at one of the locations included in the program. Enterprises with a smaller number of employees located on the territory of program implementation may also be considered. Medi- um-sized agricultural and non-agricultural enterprises must present ¿ nancial state-

USAID Agricultural and Rural Development Support project 5 ments on sales of goods for at least three years for an amount exceeding UAH 15 million, but not to exceed UAH 100 million annually. An agricultural service cooperative shall be a legal entity set up by agricultural pro- ducers (individuals and/ or legal entities) that have voluntarily united through common membership in order to conduct business and engage in other activities related to the production, processing, storage, and sales of horticulture, stock-raising, forestry and ¿ shery, the delivery of goods and materials for members of the cooperative, and the rendering of services to satisfy economic, social and other needs on the basis of self-government. The following has been completed within the framework of the research: 1. Desk research, including analysis of existing research ¿ ndings on similar topics and other informational sources 2. Meetings with key stakeholders on the agrarian market, including state and local authorities and representatives of international technical and humanitarian aid projects 3. Interviews with representatives of medium, small, and micro enterprises of the agrarian sector and private family-operated farms (hereinafter referred to as “PFOFs”).

6 USAID Agricultural and Rural Development Support project INTRODUCTION

The war in Donbasis causing steadily deteriorating economic indicators for the de- velopment of Donetsk and Luhansk Oblasts, which is accompanied by the loss (de- struction, plunder, etc.) of a part of assets in the agrarian sector. Assessments of the value of destroyed components of production, municipal, social, transport, energy and other infrastructure for the agrarian industry are estimates due to the impossibility of inspecting sites located on the territory controlled by terrorist groups. Proceeding from the above, direct economic losses alone in the country’s agrarian sector caused by the intensi¿ cation of the social and political situation and the armed confrontation in the east of the country are estimated at over UAH 30 billion. The conÀ ict, which has been ongoing for more than 3 years, caused a sharp increase in prices for food, fuel, transport, seed, fertilizers, fodder and other agricultural and household needs. Economic conditions and the lack of reliable safety guarantees are decreasing people’s capacity to adapt. In the ¿ rst two years, based on the standards for humanitarian response, external aid to residents of eastern Ukraine mainly con- sisted of direct distribution of foodstuffs as humanitarian aid. However, presently the response stage is transitioning to the stage of early recovery, and in order to ensure a fully-functional return to peaceful life in the territories liberated from military actions, it is necessary to facilitate the development of agriculture as a major branch of the econ- omy providing for the life of the rural population and the country in general.

USAID Agricultural and Rural Development Support project 7 THE SITUATION IN THE AGRARIAN SECTOR OF ZAPORIZHZHYA OBLAST

As of 2017, on the territory of the Bilmak, Rozivka, Berdyansk and Huliaypole Dis- tricts of Zaporizhzhya Oblast there are 31 legal entities engaged in the production or processing of meat, dairy and horticulture products. Stock-raising, horticulture and gardening are not necessarily the main type of activities for the above-mentioned en-

8 USAID Agricultural and Rural Development Support project terprises; however, they have the production/processing capacities to perform the re- spective types of economic activities and are presently engaging therein. At the same time, the oblast has been provided with 52.8% of meat and meat products, 26.7% of milk and dairy products, 31.1% of potatoes, and 32.1% of fruit and berries, which re- quires the delivery of such products from other regions. The share of processing enter- prises amounts to 8% of the total number of agricultural enterprises, and, accordingly, 92% are producers of agricultural products. Major processing capacities in the territory under examination relate to ¿ sh products, which account for 62.5%. Thus, on the territory of the surveyed districts of Zaporizhzhya Oblast covered by this research project, there are no of¿ cial producers of vegetables, and fruits are only grown by enterprises in Berdyansk district, whereas meat and dairy products are produced in all four districts: Huliaypole, Bilmak, Rozivka and Berdyansk. The peculiarities of the location of Berdyansk District and the city of oblast subordination itself cause the concentration of enterprises engaged in ¿ shing and aquaculture. Based on the analysis of the desk research ¿ ndings, the structure of business enti- ties in the agriculture of the districts under survey has hardly changed within the last three years; the number of agrarian enterprises decreased slightly in 2016 compared to 2014 by 1.5% in total. Business entities make up a signi¿ cant part in the general structure; their number increased by 6.5%, while the number of production coopera- tives decreased slightly (by 7.9%). Thus, processes for reform in production relations and forms of ownership seeking the most competitive and ef¿ cient forms of business incorporation in the agrarian sector are underway. The cumulative volume of agricultural lands covered by potatoes and vegetables has remained almost unchanged over the last three years. The major reserve for increas- ing the yield is the ef¿ cient use of mineral and organic fertilizer. As the result of ¿ nancial hardships in agricultural enterprises, the share of lands fertilized with mineral fertilizers has decreased from 77.6 to 73.8% over the last three years. The use of mineral fertilizers has certain disadvantages: pollution of surface ground waters, the atmosphere and surface soils; nutritional chemicals contained in the min- eral fertilizers are not completely utilized by the agricultural crops. The use of organic fertilizers does not have the above disadvantages; however it is limited by the vol- umes of stock-raising production. The use of organic fertilizers for agricultural crops in Zaporizhzhya Oblast is quite insigni¿ cant, and the share of fertilized area decreased from 0.7% in 2012 to 0.4% in 2016.

USAID Agricultural and Rural Development Support project 9 THE SITUATION IN THE AGRARIAN SECTOR OF DONETSK OBLAST

Donetsk Oblast is an administrative and territorial unit of Ukraine. Its area is 26,517.5 km2 (4.4% of the total area of Ukraine). The administrative center is the City of Donetsk. Starting from June 13, 2014, the Donetsk Oblast State Administration has temporarily been relocated to the City of , and as of October 13, 2014 – to the City of because of the

10 USAID Agricultural and Rural Development Support project start of military actions in the east of Ukraine and anti-terrorist operations (ATO). Donetsk Oblast has around 1.4 mln ha of agricultural lands, including 1.3 mln ha of agriculturally used lands, at the disposal of agricultural enterprises and households (Ukraine Government-controlled territory). Ploughable lands account for about 82%, and hay meadows and pasture ¿ elds for almost 16% of the total area of agriculturally used lands. In total, the agriculturally used lands are characterized by the high natural land capacity, which creates favorable conditions for development of stock-raising and horticulture. Agricultural production will provide for about 1,400 agricultural agro-entities of different forms of ownership and business patterns producing around 3% of the gross agricultural production of Ukraine. The rich chernozems of Donetsk Oblast create the general conditions for production of wide range of agricultural products. The Donetsk economic district, prior to the Russian aggression in 2014, used to be a powerful inter-regional territorial and production complex which included Donetsk and Luhansk Oblasts. Occupying 8.8% of the territory, Donetsk region produced 25% of the volume of industrial products and 8.0% of the volume of agricultural products of the country. The industrial and agrarian economic complex developed in the region with the prevailing development of heavy industry. However, up until 2014, the Donetsk economic district was not capable of fully satisfying its needs for food products, since consumption of the majority of types exceeded production volumes. Proceeding from the peculiarities of the natural and climatic conditions of the region, agriculture in (with regard to the surveyed districts) specializes in growing grain (winter and spring wheat, corn and grain) and industrial (sunÀ ower) crops, as well as horticulture, vine growing and gardening, especially close to big cities. Stock raising is represented by meat and dairy cattle farming, swine breeding, sheep raising and poultry farming. The region is characterized by a high share of agricultural lands. They amount to 75.5% of the territory of the district, which is 3.3% higher than average in the country. However, the ploughness of agricultural lands of the regions is lower than the average indexes. Croplands in the Donetsk regions decreased 17.3% from 2002 to 2010. From 2014 until the present, they decreased by another 20% in the controlled territories. Before 2014, grain crops took the key place in the structure of croplands, amounting to almost 50% of the region’s crops. The dynamics of the region’s agricultural production demonstrated that the crisis in 2008 covered the branch to a larger degree than Ukraine in general. Major types of agricultural production include winter wheat, sunÀ ower seeds, vegetables, fruit and berries. According to the of¿ cial statistics, the proportion of vegetables – cucurbits and potatoes – is 6.1%, and feed crops account for 4.8% of the total crop acreage area by all categories of enterprises in Donetsk Oblast in 2016 (Government-controlled territory). The yield

USAID Agricultural and Rural Development Support project 11 of potatoes by all categories of enterprises in Donetsk Oblast in 2016 (Government-controlled territory) is 115.4 centners per ha, and for vegetables (on the ¿ eld and in greenhouses) it is 140.5 centners per hɚ. In stock raising, a high level of swine raising is noticeable, as well as dairy and meat stock raising, poultry and sheep raising. 130,000-150,000 tons of meat in live weight, 230,000- 250,000 tons of milk, up to 70 mln eggs and 70 tons of wool are sold in the region. Production and processing of meat is nominally represented in each district; however 58% of all registered subjects are located in , Velyki Novosilky, Maryinka and Pokrovsk districts.Based on the latest of¿ cial data (as of the end of 2016), the volume of agricultural production compared to 2014 decreased by 34.7%: Ɣ potatoes amounted to 396,800 tons, which is almost 49% less than in 2014. Ɣ gross vegetable harvesting decreased 2.3-fold and amounted to 210,000 tons. Ɣ fruit and berries amounted to 108,800 tons in 2016, which is almost 15% less than in 2014. Ɣ meat production amounted to 131,500 tons, which is 13.4% less than in 2014.- milk yield increased by 19.5%, amounting to 227,900 tons. Ɣ eggs amounted to 629.4 million, which is 2.6 times more than in 2014. Ɣ cattle, numbering 72,200 as of January 1, 2016, decreased by 23.7%, including a 24.0% decrease in cows, which numbered 37,600. Ɣ swine decreased by 7.1% to 445,000. Ɣ poultry stock as of January 1, 2016 amounted to 3.7 million, which is 35.4% less than a year before. Based on the number of registered enterprises, and Maryinka districts are engaged in the production/processing of milk. Kostyantynivka, , Manhush, and Nikopol districts presently lack milk-producing enterprises completely. Of¿ cially registered producers of horticulture production are absent only in Volnovakha district; in Nikopol, Oleksandrivka, Pokrovsk, and Slovyansk districts and Lyman ATC, legal entities are engaged in production of fruit and berries; production of vegetables is not available, however.

12 USAID Agricultural and Rural Development Support project THE SITUATION IN THE AGRARIAN SECTOR OF LUHANSK OBLAST

Luhansk Oblast is an administrative and territorial unit of Ukraine. As of September 2014, the City of Severodonetsk became the oblast center of Luhansk Oblast. The area of the oblast is 26,684 km².

USAID Agricultural and Rural Development Support project 13 As of 2017, a total of 1062 agroindustrial entities and 45,600 private family farms (9,900 employees) were engaged in agricultural production in the Ukraine Government controlled areas in the surveyed districts, including only 98 legal entities engaged in the production and/or processing of meat, dairy and horticulture products. Foodstuffs production in Luhansk Oblast is represented by 37 large and medium business enterprises and 83 small enterprises. Meat producers/processing entities are represented in each district of Luhansk Oblast (the part controlled by Ukraine); however 70% of all production/processing facilities are concentrated in the central part: Bilokurakino, , , and Bilovodsk districts. Meat production in all categories has been reduced by 6.1% and currently amounts to 26,000 tons (households – 21,600 tons, agricultural enterprises – 4,400 tons); reduction of meat production occurred as the result of average daily growth and the stock of cattle and poultry. As of January 1, 2017, cattle stock had been reduced by 19.8% in all categories of enterprises compared to the same period of last year, and presently amounts to 51,400, including a 10.7% reduction in the number of cows to 25,900; swine stock has decreased by 11.5% and amounts to 60,500; poultry stock has been reduced by 25.6% and amounts to 1,135,400. Reduction in livestock is occurring due to the lack of knocking pens, an insufficient number of processing enterprises and, as a result, a lack of market. Meat processing and meat products production is done by 3 enterprises with a capacity of 3,600 tons per year: Lyubiy G.V. PE (Svatove district), “Voronyanski Kovbasy” PE ( district), and “Pryvillya” Agrofirma PAE. Meat processing enterprises have reduced volumes of major types of produce: meat (fresh, refrigerated) – by 6.1%, sausage products – by 5.4%. Over 6 months of 2017, 50 tons of sausage products have been produced. The situation with milk producers/processors is similar; however, it differs by a more proportional distribution of enterprises throughout the oblast, as well as the availability of additional capacities in district in addition to those listed in the previous paragraph. Production of milk decreased during the first half of 2017 by 22.9% compared to a similar period, and currently amounts to 113,800 tons. The reduction occurred both in households, by 27.4%, and in agricultural enterprises, by 10.7%, and amounts to 78,600 tons and 35,200 tons, respectively. Dairy products are produced by 6 enterprises: “Redan” Agroprocessing Enterprise Public JSC, “Bilovodskiy MRZ” Private JSC, “Prodgrupservice” PE, “Starobilskiy Zavod ZNM” Public

14 USAID Agricultural and Rural Development Support project JSC, “Aidar” LLC, and “ Cheese-Processing Plant” LLC, with a capacity of 135,000 tons per year. 19.0% of the total gross milk production is transferred for industrial processing, with a range of products exceeding 90 item names. Based on the operational information of the Department of Agroindustrial Development of the Oblast State Administration, dairy- processing enterprises increased the output of the whole-milk assortment, including processed liquid milk, by 39.9%, and sweet butter, by 17.2%. At the same time, yogurt production has been reduced by 13.8%, and lactic cheese, by 3.2%. 2,950 tons of processed liquid milk has been produced, 1,200 tons of sweet butter, 300 tons of hard cheese, 80 tons of fresh lactic cheese, and 420 tons of yogurt. Producers/processors of horticulture products are represented in the districts bordering Russia and Kharkiv and Donetsk Oblasts: , Markivka, Novopskov, Bilokurakine, Troitsk, districts, as well as Novoaydar district, which currently borders the ATO area. As in the country in general, the majority of horticulture products in the surveyed territory are produced by family farms, at the level of 82-83%. There are districts in the territory of Luhansk Oblast that have the historical capacity for development of horticulture and gardening: PFOFs are active in Stanytsya Luhanska district, as well as in Novoaydar district. Major challenges in the agrarian sector of Donetsk, Luhansk and Zaporizhzhya Oblasts (surveyed districts): Ɣ A slowdown of economic activities in the region in general because of anti-ter- rorist operations. This downward trend affected both the agrarian market and the agricultural sector of the region, as well as lack of interest from prospective investors. Ɣ Mining of agricultural lands bordering the military action and the ATO area. Many ¿ elds in the region have been mined and covered with destroyed military hardware and thus cannot be used for sowing, which results in signi¿ cant losses for farmers and the agrarian sector of the region in general. Since the beginning of 2016, more than 1000 acts on de-mining were completed. However, based on the of¿ cial data, more than 4 years of work and more than 5 billion dollars are needed to de-mine all territories (Donetsk and Luhansk Oblast). Ɣ The majority of agricultural producers are engaged in growing grain, legumes and oil seeds, which is determined by the specialization of the region, but shifts the balance in the structure of production. Other types of economic activities in agriculture are not represented at all, or represented by very few producers.

USAID Agricultural and Rural Development Support project 15 According to experts, up to 30% of the yield of grain crops is lost in the oblasts due to a decrease in the level of agricultural mechanization. Signi¿ cant losses are caused by the failure to comply with the agro-technical conditions for the sowing campaign and harvesting, as well as violation of the technology for agri- cultural crop treatment. Application of organic fertilizers for agricultural crops in agricultural enterprises was practically unavailable in recent years. Ɣ Low procurement prices for produce, which causes stock reduction of cattle and cows in household enterprises (households produce huge amount of milk and meat with low level use of modern technologies). Ɣ Lost competitive advantages in horticulture and gardening (outdated technolo- gies, almost complete loss of infrastructure for procurement, storage and sales of raw material, decrease in area). Ɣ Research revealed a very low number of enterprises engaged in processing of agricultural products. Ɣ An adverse ecological situation. Donetsk Oblast is the most polluted region of Ukraine. All of these factors have a detrimental effect on the development of ag- riculture and the prospects for maintaining high quality standards for production. Ɣ Issues with human resources, in particular, a decrease in the number of employ- ees of agricultural enterprises. The sharp decrease in the number of employees may be explained by the low level of wages and arrears on the payment thereof.

16 USAID Agricultural and Rural Development Support project STRUCTURE OF MEAT, DAIRY AND HORTICULTURE PRODUCTS MARKET OF DONETSK, LUHANSK OBLASTS AND FOUR DISTRICTS OF ZAPORIZHZHYA OBLAST (desk research ¿ ndings)

The market of meat, dairy and horticultural products producers/processors consists of two basic elements – (1) of¿ cially registered persons carrying out their re- spective activity in accordance with the determined in- dustry classi¿ cation system code, and (2) smallholders, also dealing with the production and sale of their own products, but the of¿ cial statistics on their number, kinds of activity and products, production volumes, etc. is not available. However, smallholders produce the majority of products, primarily horticultural products, and are re- sponsible for saturation of local markets. That is why further research on the marketing and logistic channels of local markets will be conducted in the light of those two categories. In general, as of 2017, within the research territory there are 239 legal entities carrying out production and/or pro- cessing of meat, dairy and horticultural products, includ- ing 110 entities in Donetsk Oblast, 98 in Luhansk Oblast and 31 in the territory of Bilmak, Rozivka, Berdyansk and Huliaypole districts of Zaporizhzhya Oblast. The share of processing enterprises is 16%, and, ac- cordingly, that of producers is 84%. 94% of all legal entities dealing with the products subject to research are within the SME category. 71% of all entities carry out production/processing of only one kind of product, e.g., milk or vegetables, but, on the other hand, activities in horticulture were not subject to documentation and study within this re- search.

USAID Agricultural and Rural Development Support project 17 MEAT AND DAIRY PRODUCTS MARKET The meat and dairy products market of Donetsk and Luhansk Oblasts and four districts of Zaporizhzhya Oblast has the following peculiarities:

Ɣ Cattle and swine are the basic types of SMALLHOLDERS FOCUSED ON COMMERCIAL meat produced for sale; however, poultry PRODUCTION

breeding is carried out by smallholders • Smallholders focused on selling their produce in average have almost at the same level due to the to- tal time required for production, which is head of 2-4 cattle 50-100 lower for poultry, which makes it possible head of poultry to obtain faster results.

Ɣ Compared to 2016, the highest livestock expansion is documented for swine, at 2 pigs Up to 30 head of the level of 35%. At the same time, the sheep highest livestock reduction was observed

for poultry. It is worth mentioning that in Smallholders own up to 4 cows to sell milk, having 1-2 cows is the most common practice this case we are dealing not with a re- duction in the number of poultry-breeding households, but with changes in the ag- gregate livestock values per one small- holders carrying out that kind of activity. Ɣ In 2016, compared to 2015, 44% of smallholders experienced a reduction in Ɣ Characteristic features of smallholders livestock; at the same time, this ¿ gure for focused on the sale of products in addi- enterprises was 23%. However, concern- tion to the satisfaction of their own needs ing milk production volumes in 2016, 70% have not changed since 2016. For exam- of enterprises and smallholders retained ple, on average people have 2 to 4 cows, the previous volumes or increased them. 2 pigs, 50 to 100 poultry birds, and up to Ɣ On average, milk yield per cow for small- 30 sheep. holders is 3.28 tons per year, while for Ɣ 68% of smallholders engaged in stock enterprises it amounts to 4.01 tons. raising for the sale of meat are focused on the sale of more than 50% of their products. Sales of milk amount to 77%.

18 USAID Agricultural and Rural Development Support project HORTICULTURAL PRODUCT MARKET In characterizing the horticulture market on the territory of the research, the following peculiarities shall be noted:

Ɣ The main production facilities are locat- DIFFERENCES BY OBLASTS ed in 6 districts of Luhansk (Bilokurakine, Volume of every vegetable crop production by producers from Markivka, Novoaydar, Kreminna, Troy- mentioned oblasts itske, Popasna) and 11 districts of Do- beetroot 57 25 19 vvegetablee 86 20 6 netsk Oblast (Bakhmut, , mmarrow

Velyka Novosilka, , Manhush, ccabbage 57 60 25

Maryinka, Yasynuvata, Oleksandrivka, potato 86 50 31 Nikolske, Slovyansk, Lyman ATC). In carrot 43 45 31 Zaporizhzhya Oblast, fruit production fa- cucumber 86 30 63 cilities are located in Berdyansk District. redish 43 5

Ɣ There are districts on the territory of tomato 71 40 88

oblasts with historically developed ca- onion 71 25 31 pacity for horticulture development. For Zaporizhzhya Obl. Donetsk Obl. Luhansk Obl. example, Slovyansk district, in particular Chervonyi Molochar, is such a center in Donetsk Oblast, where before 2014 there SMALLHOLDERS WILLING TO SELL THEIR PRODUCE

used to be 300 ha of lands designated Share of citizens willing to sell more than 50% of their produce for vegetable production. Currently, res- toration of pre-war production volumes is being carried out by local farming enter- prises. Velyka Novosylivka district, where 68% meat 77% milk enterprises producing fruits (in particu- lar, apples) and smallholders engaged in berry cultivation and local gardening exist, has a capacity for gardening/ber- ry cultivation. On the territory of Luhansk Oblast, smallholders are active in Stanyt- 64% vegetables 33% fruit 60% berries sya Luhanska, Novoaydar, Novopskov, Kreminna and Starobilsk districts. Ɣ Potatoes, cabbage, beets, carrots, and tivated primarily by smallholders. 99% onions are the main crops cultivated by of vegetables cultivated by SMEs and the enterprises. Garlic, cucumbers, to- smallholders on the researched territo- matoes, radishes, and eggplant are cul- ries are open ground;

USAID Agricultural and Rural Development Support project 19 Ɣ The main focus in gardening are apples, whereas other seed fruits are sold in case of sur- plus at farming enterprises, and delivered to the territories of Donetsk and Luhansk Oblasts from Zaporizhzhya, Kharkiv regions, or imported. Ɣ 64% of smallholders cultivating vegetables focus on the sale of more than 50% of their own products; for berries this rate is 60%, and for fruits it is 33%. The latter con¿ rms the lack of development of deliberate cultivation of fruit for sale, but available surplus may be sold at the local markets. Ɣ Strawberries and raspberries are the main berries being cultivated and sold on local mar- kets.

FISH MARKE T The peculiarities of the researched areas of the ¿ sh market are the following: Ɣ A small number of business entities and smallholders dealing with commercial aquacul- ture and/or fishing. The area of leased water reservoirs is up to 950 ha. The main kinds of fish cultivated in local ponds are silver carp, carp, pike-perch, pike, crucian, and white amur. Trout and red-finned mullet are not common. In addition, Azov pigfish and kilka are harvested. Ɣ Limited access to information on tenants of water reservoirs due to holding tenders at the oblast level, and, as a result, a lack of information from district and rural authorities on the types of economic activity – recreation or fish production – conducted by the winning bidders; Ɣ Fish is one of the main products delivered to the territory of the oblasts being researched. Local harvesting is not being realized on the local market in full volume. But the satura- tion of the sales network is ensured through delivery from other oblasts as well.

HONEY MARKET Ɣ According to producers, honey extraction is one of the most sustainable areas of agri- cultural activity. Beekeepers were affected by loss of sales markets, fluctuations in prod- uct prices, problems with production facilities and consequences of unfavorable weather conditions to a lesser extent. Ɣ 80% of the population focused on honey sales owns 10 to 50 beehives. Ɣ The average cost of honey production (according to the estimation of producers) is UAH 32 per kilo, whereas the wholesale price is UAH 23 to 55 per kilo, and the retail price is UAH 33 to 180 per kilo.

20 USAID Agricultural and Rural Development Support project ANALYSIS AND ASSESSMENT OF MARKETING AND LOGISTICAL CHANNELS FOR THE FORMATION OF A LOCAL MARKET FOR HORTICULTURE, MEAT AND DAIRY PRODUCTS

MARKETING AND LOGISTIC CHANNEL MODELS EXISTING LOCAL MARKET CHAINS FOR FRUIT-AND-VEGETABLE AND MEAT-AND-DAIRY PRODUCTS

PRODUCER CONSUMER This model is typical for 63% of small holders and 58% of producing SMEs

PRODUCER PROCESSOR SALES NETWORK CONSUMER 20% of small holders and 47% of producing SMEs use this channel to sell their products

PRODUCER WHOLESALE PROCESSOR SALES NETWORK CONSUMER MEDIATOR This model is typical for 48-50% of small holders and of SMEs

PRODUCER SALES NETWORK CONSUMER

This model is typical for 19% of SMEs and small holders

PRODUCER OWN SALES CONSUMER NETWORK 14% of SMEs use this channel. As a rule, it is a sales point located at a production facility.

USAID Agricultural and Rural Development Support project 21 Proceeding from the fact that a marketing channel means an integrated network of all market stakeholders united by the product, including producers, agents, processors, buyers, etc., we would like to analyze the available chains that form local markets for horticulture, meat and dairy products.

First model: This model is typical for 63% of smallholders MARKETING MODELS BY TYPES OF PRODUCT and 58% of producing enterprises for all Producers focused at different sales channels, breakdown by product, % kinds of products on the surveyed territory,

Wholesale 54 and involves production and sale of the intermediaries 49 59 product directly to the ¿ nal buyer within one End consumers 49 38 59 region. Transportation of products is done Processing companies 21 42 4 exclusively for the purposes of sale within Wholesale 24 7 34 one settlement or to the market place, as a intermediaries rule, within the territory of the regional center. End consumers 46 21 60 Processing 34 65 17 Collection, slaughter, etc. is done at the place companies Small- Producers in SME of production, i.e., within the same settlement. general holders

Second model: 20% of the products of smallholders and 47% of the products of producing enterprises are sold through this marketing channel. Direct contact with the processor ensures sustainable procurements of raw materials and a higher price per unit. Such a model is not represented at the horticulture market in the researched area, as the existing processors of vegetables and fruits process their own raw materials rather than buying them from the population. Products are moved on the meat and dairy market at every new segment. The focus of the sales network on one territory of several districts reduces the ¿ nancial burden for transportation and increases the bene¿ ts of each segment from the sales of raw material/product.

22 USAID Agricultural and Rural Development Support project Third model: The focus of the wholesale agent is typical both MARKETING MODELS for smallholders and enterprises at the level of BY TYPES OF PRODUCT 48-50%, but the distinctive feature of this model Producers focused at different sales channels, breakdown by product, % is the À exibility of continuation; at the same time, Wholesale 56 67 55 the producer is usually not aware of further sales intermediaries of his/her products with regard to the channels End consumers 56 61 Farmers markets 17 67 13 and geographic coverage.

Wholesale 35 63 17 Wholesale agents working in the territory of intermediaries Donetsk Oblast include: End consumers 70 50 83 Farmers markets 25 25 25

Velyka Novosilka, Nikolske, Manhush districts Small- Producers in SME holders (mainly to Zaporizhzhya Oblast). general Lyman, Slovyansk, Bakhmut, Kostiantynivka, Oleksandrivka, Dobropillia, Pokrovsk (mainly to other districts of Donetsk Oblast). In Luhansk Oblast wholesale agents working in: MARKETING MODELS Markivka, Novopskov, Troyitske, Bilokurakine, BY TYPES OF PRODUCT Svatove, Bilovodsk, Starobilsk, Kreminna Producers that deliver their produce for processing, breakdown by oblasts, % Portion of products supplied for processing, Portion of products supplied for districts (mainly to other districts of Luhansk and breakdown by product processing, breakdown by product Kharkiv Oblasts). 62% 97% 71% 98% 15% 13%

50 In addition to the wholesale agents from one’s 26 26 18 own oblasts and closest neighbors, there are 15 5 also transit dealers from other oblasts, such as Meat Milk Dnipropetrovsk, who can carry out irregular trips to buy cattle.

Luhansk Oblast Donetsk Oblast Fourth model: In total, up to 19% of enterprises and smallholders are focused on this marketing channel. Sales network in this context means supermarkets, shops, and markets as further distributors of products.

USAID Agricultural and Rural Development Support project 23 Fifth model: The channel is used by 14% of enterprises and requires that one have one’s own sales outlet, usually located at the territory of the production facilities. It is mainly popular among horticulture producers. Within this model the stage of product movement is almost eliminated or reduced to a minimum within one settlement.

Available models are used in parallel by producers in the process of selling their products.

As small and medium-sized business and smallholders are the focus of this research project, we consider the channels represented in the ¿ rst, second and fourth model as top-priority channels for reproduction and development.

The number of segments in every chain affects both the ¿ nal price of products and bene¿ ts received by each participant of such relations. Therefore, the main purpose is to increase the cost of sale of raw materials by way of including the processing stage in the chain, and, as a result, sales of ¿ nished products, but not raw materials.

SALES OF PRODUCTS With regard to the analysis of the sale of products as one of the segments of marketing channels directly affecting the prices on products, it is important to make distinctions among the following categories of producers.

The ¿ rst category includes small Smallholders (land area designated for vegetable production and gardening not exceeding 0.5 ha, number of livestock is typical throughout the territory) focused on sale of surplus of products cultivated/ produced by them. Deliberate cultivation/ production of products for sale is usually not performed. The main function of this category of smallholders is compensation of a shortage of a certain type of product at the local level. Sales territory for such smallholders is usually limited to the territory of a rural council (with a village being a part of it) and markets in the district centers within 50 kilometers from the enterprise. Location of a settlement on transport links opens one more sales channel for the producers – sales from home to transit buyers. 100% of sales of one’s own products within the territory of one’s own district is typical for this category of buyers. The exception is smallholders located close to the cities of oblast subordination – Mariupol, Kramatorsk, Slovyansk, Pokrovsk, etc. – and making sales on the markets to retail buyers.

24 USAID Agricultural and Rural Development Support project The second category includes smallholders engaged in deliberate cultivation/production for sale – 0.5 ha of land area and/or a number of livestock exceeding the average throughout the territory. Such producers are focused on the sale of their own products to end buyers through independent trade on district markets (or on markets in cities of oblast subordination) and on sales of products to wholesale agents.

The third category includes enterprises and big smallholders, 100%-focused on buyers’ satisfaction and having more diversi¿ ed sales channels, including shops/supermarkets, their own sales network, processing companies, etc. The above groups are “ideal types” with some variations possible in practice; however, they enable segmentation of the producer market and determination of speci¿ c problems for certain target groups.

DISTRIBUTION CHANNELS The main emphasis of producers of the region AVERAGE SHARE OF PRODUCTS SOLD THROUGH on distribution channels is focused directly on EVERY MENTIONED CHANNEL Percentage per every type of end-buyers and wholesale agents. product per every channel Processing The common practice is for smallholders to companies 70% 98% 15% 13% Own retail 70% 95% 70% 53% sell their own products to wholesale agents chain

that have strong links with processing com- Wholesale 76% 81% 77% 40% intermediaries

panies, supermarkets and shops and accept Supermarkets 19% 56% 80% 45% risks and incur an obligation to settle all prob- Shops 29% 7% 30% 22% lematic issues, suggesting a lower price than in the case of direct communication. On the Farmers markets 42% 76% 62% 63% End retail consumers one hand, in that case we have the continu- 64% 74% 74% 70% ation of the production sales chain and, as a result, an increase in the cost from which cash dividends are not obtained by the seller. On the other hand, the existence of this segment is the result of current market self-regulation. Minimal representation of processing compa- nies in the region does not help facilitate the production of one’s own products by both the population and enterprises, the loss of large markets, the reduction in customer purchasing power, unavailability of product quality certi¿ cates and suf¿ cient conditions for its quality production – all these factors certainly require a search for ways for producers to minimize risks and get at least minimal pro¿ t. Wholesale agents are such a segment, ensuring imme- diate payment for the product, the absence of any transportation costs for product delivery

USAID Agricultural and Rural Development Support project 25 and the need for subsequent sales. In other words, this channel is faultless. However, the risk of monopoly on product purchase options and on determination of the sales price is being increased in the absence of an alternative. One more important thing is that wholesale agents are usually not of¿ cially registered busi- ness entities, making it impossible to trace the direction of export of products from the re- gion and routes of product movement within the territories.

SHARE OF SALES OF PRODUCTS The majority of horticulture, meat and dairy products produced in the oblast are sold PRODUCT SALES GEOGRAPHY Share of products sales in/outside oblast for Donetsk and Luhansk Oblasts, % within the limits thereof. The focus of other 16 13 23 100 100 100 100 Donetsk Oblast oblasts concerns primarily ¿ sh, which is 87 84 77 caused by unavailability of this product at local markets of neighboring oblasts, as well

as by a better price. 15 10 16 20 28 20 90 42 84 85 80 80 72 Berries grown in Donetsk, Luhansk and 58 Zaporizhzhya Oblasts account for the lowest sales outside of these oblasts. It Luhansk Oblast should be noted that the needs of the region

for berries is met by smallholders, however, Outside Oblast In Oblast it is not covered to the full extent. The need of the oblast for vegetables, in particular, potatoes and onions, is not fully covered either; thus, those are purchased by sales network representatives in the northern oblasts. The needs of the territories for meat and dairy products are satis¿ ed by the available producers; however, availability of national retail networks in the oblasts (supermarkets), as well as branded retail chains (Nasha Ryaba, Havrylivski Kurchata, etc.) predetermines the delivery of processed meat and dairy products from other oblasts. Having analyzed geographic distribution of sales, minimum changes should be noted in 4 regions of Zaporizhzhya Oblast. At the same time, in Donetsk and Luhansk Oblasts demonstrate new sales centers as the result of re-pro¿ ling of business and smallholders from the territories currently not controlled by the Government of Ukraine.

26 USAID Agricultural and Rural Development Support project Donetsk and Luhansk, as well as cities of oblast subordination located close to the oblast centers, in particular, used to be the key sales centers until 2014. The loss of the possibility to sell their products made producers face the needs to search for new territories. The main direction for refocusing is Mariupol, Kramatorsk, Slovyansk, Staro- bilsk, Severodonetsk. However, the capacity of these cities does not meet sales opportunities previously available in Donetsk and Luhansk; therefore, in addition to territorial refocusing, reduction of production volumes, as well as the simultaneous search for new markets in the neighboring oblasts has been underway starting from 2014.

CONCLUSIONS 1. Anal ysis of marketing channels for the formation of the local horticultural, meat and dairy products market has revealed availability of ¿ ve main models of deliv- ering products to buyers in the region. The represented models may be selected and applied at the same time by one and the same producer. On average, 70% of producers and processors are focused on one marketing channel, provid- ing one basic marketing arrangement. More options are observed among fruit producers, one fourth of which are focused on 3 or more distribution channels.

2. Production of small and medium enterprises and smallholders is focused on saturation of the local market with required products. On average, more than 75% of meat, milk, vegetables, fruits and berries produced by this category remain on local markets. This value sometimes reaches 100% for households. On the one hand, such a market structure has the highest accessibility level of producer to the end-buyer. However, on the other hand, it is characterized by a high level of dependence on the transmission capacity of certain distribution channel and is advantageous from the point of view of its fast adaptation to changes on the market. Parallel focus on several distribution channels increas- es the adaptive capabilities of producers and, as a result, reduces the risks from the consequences of losing one of them.

3. Presently, the channel focused on the distribution network, including shops, su- permarkets, and special-purpose sales outlets remains poorly applied primarily because of the following: (1) non-conformity of supply from the producer with the demand of the distribution network (in terms of volumes, quality standards, delivery speed, non-cash payment option, etc.) and (2) conditions offered by

USAID Agricultural and Rural Development Support project 27 the network, producers’ expectations, especially smallholders (deferment of payment for shipments, non-cash settlements, mechanism of acceptance of goods in sales outlets, product refund, etc.). Activation of a marketing channel providing for the direct entry of producer/processor into distribution networks (model 4), is one of the top priority areas for the researched territories. Howev- er, such activation provides for the implementation of a number of measures, including informational, focused on the formation of a positive perception of matters of improvement in product quality and product endorsement, justi¿ ca- tion of advantages from diversi¿ cation of distribution channels, etc.

4. The channel focusing on one’s own network through permanent sales outlets (model 5) is also rarely applied. A focus on the naturalness of products, local production, environmental friendliness, and limited volumes are the key advan- tage for agricultural producers compared with big enterprises.

28 USAID Agricultural and Rural Development Support project WAYS TO IMPROVE MARKETING AND LOGISTICAL CHANNELS FOR THE FORMATION OF A LOCAL MARKET BY TYPES OF PRODUCTS BY REGION

The matter of value-added elements is related to three major processes – production, processing and sales, and involves an increase in the price of products passing through each cycle. Analising meet and dairy value chains it is worth paying attention to the general problematic character of slaughterhouses. Apart from the fact that the general level of provision of corresponding premises is 40%, it is important to note that the premises provided for slaughter require renewal and repair, and currently a major part thereof fails to meet the requirements for premises of such type. Active slaughterhouses are available in processing companies. There are 6 of them in Luhansk Oblast, 3 in Donetsk Oblast and 1 in four districts of Zaporizhzhya Oblast. 8 more enterprises have situational premises accommodated for slaughtering (Donetsk Oblast – 6, Zaporizhzhya Oblast – 1 and Luhansk Oblast – 1). Concerning smallholders, talking about slaughterhouses and milk cooling rooms, we are talking about the simple availability of separate premises where it is possible to carry out slaughter and milk cooling, so in this case milk cooling is carried out in cold chambers, and slaughter is carried out in a separate hangar not designated for the purpose. Processing companies dealing with meat and dairy products in Donetsk Oblast are located in the following districts: Bakhmut, Velyka Novosilka, Maryinka, Nikolske, and Slovyansk. In the territory of Kostiantynivka district and Mariupol City, both meat and milk processing companies are present, but on the territory of Pokrovsk, only meat processing companies are available. In Luhansk Oblast, milk processing is represented in Bilovodsk, Markivka, Novoaydar, Stanychno-Luhanske, Starobilsk, Bilokurakine, Kreminna and Troyitske districts. In Zaporizhzhya Oblast in the project target territory milk processing is represented in Bilmak, Huliaypole and Berdyansk districts, and meat processing – in Berdyansk itself. Purchase of meat (beef and pork) of Kharkiv producers through a sales network (specialized shops) having their own sufficient capacities in Donetsk Oblast is a distinctive feature. A similar situation is usual for Oleksandrivka and Dobropillia districts, and relates to the insufficient quality of the products of local producing enterprises and the unavailability of local points of purchase of raw materials from smallholders. Representatives of the sales

USAID Agricultural and Rural Development Support project 29 network in these districts emphasize the lack of the technical possibility to travel around villages searching for store cattle , but if corresponding agricultural cooperatives are available they are ready to refocus to local producers. Taking into account the possibility of referring local smallholders to a retail sales network and the interest of distribution system representatives, such territories can be identified as potential for primary processing of meat. The following territories are potentially interested in milk processing: Ɣ Stanytsya Luhanska and Novoaydar districts of Luhansk Oblast. Through the period of 2014 – 2015, a sharp decrease in the livestock population was ob- served on this territory as the result of military activities, but the potential for restoration of pre-war volumes is available. However, taking into account cer- tain remoteness from traditional milk procurement centers, there is a need for mini-processing;

Ɣ Velyka Novosilka district of Donetsk Oblast (settlements located close to Mary- inka district). Geographically, the district is far away from Mariupol and Kostian- tynivka, where the closest milk processing companies are located, but has rural councils with a quite sustainable livestock population. The initiative to set up a mini-processing factory in Komar village was announced by internally displaced persons who used to have a similar business prior to military actions, and were forced to relocate the equipment from the uncontrolled part of Ukraine.

Except for cattle and pigs, it is worth paying attention to other possible options for facilitating livestock breeding development, in particular goat breeding focused on milk processing and cheese production. There is an upward trend in the number of households dealing with goat breeding (Nikolske district) and the availability of smallholders focused exclusively on the sale of their own products, as well as hand-crafted processing of raw materials (Mariupol City), which makes it possible to speak of support for non-mass forms of livestock breeding and the arrangement of conditions for representation of various proposals from local producers on the local market. Less energy consumption in the process of livestock feeding and the higher price of milk and, accordingly, of ¿ nished product are the fundamental advantages of goat breeding. Mini-farms dealing with aviculture, rabbit, nutria, and quail breeding already functioning in the region and allowing the closure of the circle of production, processing and sales within one territory, thus increasing bene¿ ts for producers and end-buyers, can become promising forms of livestock breeding.

30 USAID Agricultural and Rural Development Support project In the sphere of horticulture products it is important that the oblasts under survey have territories with historically developed forms of agricultural activity, including districts with increased employment of the population in horticulture. For example, in Luhansk Oblast such districts are Stanytsya Luhanska, Novoaydar, Starobilsk and Kreminna, and in Donetsk Oblast, Slovyansk and Velyka Novosilka. Presently, Stanytsya Luhanska, Novoaydar and Slovyansk districts are in the process of restoring pre-war volumes of lands ripe for vegetable production. At the same time, the main focus of sales in the speci¿ ed districts of Luhansk Oblast remains on the uncontrolled part of Ukraine. Sales activities were focused on the speci¿ ed territories prior to the military actions, and currently all attempts to refocus to Severodonetsk remain unsuccessful due to oversaturation of the market with similar products produced by smallholders from the neighboring districts, while there is stable demand for a products delivery system developed within the uncontrolled part of Ukraine, enabling the producers to sell their product at higher prices. We consider the speci¿ ed territories as potentially promising from the point of view of support to local producers and availability of vegetable and fruit mini- processing shops.

USAID Agricultural and Rural Development Support project 31 RECOMMENDATIONS

1. Pork processing should be lo- cated in the Velyki Novosilky district of Donetsk Oblast, as producers are located within 70 km in Maryinka, Oleksan- drivka, and Volnovakha dis- tricts in Donetsk Oblast, and Rozivka, Bilmak and Huliay- pole districts of Zaporizhzhya Oblast. Primary processing should be established in the above districts, including a slaughtering facility, meat cut- ting department, and freezing department.

2. Poultry processing should be located in Lyman ATC and Pokrovsk district due to the availability of comparatively large volumes of production (up to 3000 tons). Poultry processing should also be lo- cated in the Bilmak district of Zaporizhzhya Oblast.

32 USAID Agricultural and Rural Development Support project 3. Processing of milk should be established in Volnovakha district, as large volumes of product are produced there. In addition, the neighboring districts of Donetsk Oblast, including Maryinka and Ni- kolske, as well as Roziv- ka district of Zaporizhzhya Oblast, have large production facilities.

4. We recommend locating veg- etable processing in Velyki Novosilky, Kostyantynivka and Lyman districts; markets are nearby: Kramatorsk, Bakhmut, and Slovyansk.

USAID Agricultural and Rural Development Support project 33 5. Fruit processing should be located in Kostyantynivka and Velyki Novosilky districts of Donetsk Oblast due to the availability of large production facilities. In addition, fruit processing facilities should be located in the Bilmak district of Zaporizhzhya Oblast.

6. Pork processing should also be located in Bilovodsk dis- trict, as producers are locat- ed quite close, in particular, in Milove, Markivka, Novo- pskov, Starobilsk and No- voaydar districts. Primary processing should be estab- lished in the above districts, including a slaughtering facil- ity, meat cutting department, and freezing department.

34 USAID Agricultural and Rural Development Support project 7. Cattle processing should be located in Markivka district of Luhansk Oblast, since pro- duction facilities are available in the neighboring districts, Novopskov, Bilovodsk and Markivka, with subsequent sale of produce in the neigh- boring settlements, repre- senting large sales markets (Starobilsk, Novopskov, Ru- bizhne, Severodonetsk, and ).

8. Processing of milk should be located in Svatove district of Luhansk Oblast, as large vol- umes of milk are produced on the said territory.

USAID Agricultural and Rural Development Support project 35 9. Vegetable processing should be established in Novoaydar district, as there is presently no processing available in any of the neighboring districts. Novoaydar and Stanytsya Luhanska districts are lead- ers in vegetable production in Luhansk Oblast. Markets are also available (Starobilsk, Severodonetsk, Lysychansk, ).

10. We recommend establish- ing fruit processing in the Starobilsk district of Luhansk Oblast: it is the center of Lu- hansk Oblast, a good trans- port junction and has large production facilities.

36 USAID Agricultural and Rural Development Support project 11. We recommend establish- ment of ¿ sh processing in Kreminna district of Luhansk Oblast; markets are located nearby.

12. Honey processing in the sur- veyed region is not available at all. We suggest two proj- ects: establishment of pro- cessing facilities in Maryin- ka district of Donetsk Oblast and Bilokurakine district of Luhansk Oblast. 13. Lamb meat and rabbit meat producers should be sup- ported in the majority of dis- tricts, as this contributes to diversi¿ cation of different types of meat products. In addition, this is a niche prod- uct having a comparatively high pro¿ t margin.

USAID Agricultural and Rural Development Support project 37 CHARACTERISTICS OF INSTITUTIONAL FORMS FOR DEVELOPMENT OF FARMING IN DONETSK, LUHANSK AND FOUR DISTRICTS OF ZAPORIZHZHYA OBLAST

CHALLENGES FOR THE DEVELOPMENT OF FARMING 70% of the target group of the research project assess the current status of the development of farming in the region as “somewhat insufficient” or “absolutely insufficient” for effective activities; the same indicator for smallholders amounts to 77%, while representatives of the authorities are more optimistic in assessing the current conditions: 60% (table below).

ASSESSMENT OF THE CURRENT CONDITIONS FOR DEVELOPMENT OF FARMING/ ENTREPRENEURSHIP IN THE REGION

Producers / Authorities, Response options Total for, % PFE, % Sales, % processors, % % Available conditions are suf¿ cient enough for 5.5 7.2 3.5 4.1 10.0 entrepreneurship development

Available conditions are rather suf¿ cient for entrepreneurship 21.2 21.7 17.6 28.6 24.0 development

Available conditions are rather NOT suf¿ cient for 40.5 37.8 40.2 40.8 46.0 entrepreneurship development

Available conditions are absolutely NOT suf¿ cient for 29.9 31.9 36.6 22.4 14.0 entrepreneurship development

Dif¿ cult to say 2.9 1.4 2.1 4.1 6.0

Total 100 100 100 100 100

38 USAID Agricultural and Rural Development Support project The lack of state programs for farming support holds the leading position among the ten key challenges indicated by SMEs and smallholders. Lack of a comprehensive vision and balanced strategy for facilitating farmers’ activities both in the surveyed region and in the country in general affects the topicality of other issues related to development of SMEs and smallholders, including high national taxes and non-developed transport infrastructure. The latter is of special signi¿ cance for Luhansk Oblast, where northern districts, being less developed, experience additional problems. Support to producers, processing cooperatives, etc., will not result in high ef¿ ciency due to the lack of infrastructural possibilities for the sale of products.

FARMING PROBLEMS

TOP-10 farming problems, % across all respondents

No programs on agribusiness support on the 56,6 national level Growth of prices for production means and raw 55,9 materials No programs on agribusiness support at domestic 47,9 market

Depreciation of production means and premises 45,3 Loss of sales markets on the territories currently 44,7 not controlled by the Government High costs associated with introduction of modern / 44,4 innovative technologies

High national taxes 42,8 Lack of information on available state support and 41,8 how to obtain it

High interest rates on bank loans 36,3

Underdeveloped transport infrastructure 33,4

In addition, “non-interference” of the state authorities and local self-government in business development processes is an important issue. Besides indicating the insuf¿ ciency of the created conditions, and the lack of specialized support programs, entrepreneurs and smallholders also voice concerns regarding possible interference by the state in the process of the allocation of funds by international donors for the purposes of supporting SMEs, inÀ uencing the selection of bene¿ ciaries for ¿ nancial support, and, as a result, regarding a lack of transparency of

USAID Agricultural and Rural Development Support project 39 the mechanism for interaction between the businesses, the authorities, and the international donor. In this triangle, the authorities, as a rule, are perceived as a source for potential risks. On the one hand, all challenges relevant for more than a third of the representatives of SMEs and smallholders of the region are typical for the rest of the country as well; however, on the other hand, the lack of unique challenges does not testify to a lack of the need for action on systemic work aimed at changes in state policy to impact the source of the problem rather than a component thereof.

PRIORITY ISSUES With regard to priority issues de¿ ned by representatives of the 3 oblasts as key, loss of markets in the non-controlled territories takes the lead. In addition to tax burden, lack of a systemic character in state policy, etc., the situation worsened due to limited possibilities for sales of products, additional losses and the need to decrease volumes of production. In analyzing the challenges which were not listed among the priority issues, the following should be noted: Ɣ Staf¿ ng issues, including lack of personnel of the required level and quali¿ ca- tions on the market is more topical for medium businesses and representatives of Luhansk Oblast; Ɣ Risk of loss of production facilities due to illegal takeover is quoted more often for Donetsk and Luhansk Oblasts; Ɣ Complications with getting loans, as well as frequent changes in legislative reg- ulations, are the main challenges for representatives of Donbas rather than the neighboring Zaporizhzhya Oblast.

The situation with the assessment of the activities of farmers and entrepreneurs’ associations on the surveyed territory is controversial. The low level of engagement of businesses in such institutional forms, which presently amounts to almost 25%, is a priority element. Such a form of cooperation is more typical for medium businesses, whereas small businesses focus on self-supported resolution of problematic issues. Naturally, the situation is much worse for the smallholders: 3.5% of representatives of rural enterprises are members of farmers’ and entrepreneurs’ unions.

40 USAID Agricultural and Rural Development Support project The following should be indicated among the key reasons for unwillingness to join unions and associations: Ɣ lack of information on the institutions representing the interests of businesses and smallholders; Ɣ lack of bene¿ ts for the enterprise/ farm from such participation; Ɣ lack of awareness on the part of prospective members on the practical activities of such unions; Ɣ unavailability of proposals regarding membership from the associations, as well as lack of time to engage in such activities. Based on the low level of awareness regarding the activities and the availability of farmers’ associations and organizations, determination and assessment of activities thereof has an increased level of estimation, and, as a rule, is not substantiated by the knowledge of the subject matter. Regarding determination of the possible role of such associations in representing the interests of farmers and land owners, it is an important indicator of a lack of trust, leading to related risks: skepticism regarding ef¿ ciency, transparency of membership fees, openness of the procedure for joining the organization, doubts regarding the actual objectives for the activities thereof, etc. This is veri¿ ed by the fact that 71% of representatives of the target group are not sure that such associations can effectively protect their rights. However, major areas for the activities of such associations required by the target group include the following: Ɣ awareness raising and consultation activities; Ɣ support in sales of products; Ɣ an agent’s function, e.g., in interaction with the authorities; Ɣ support in implementation of business activities: procurement of means of pro- duction, material support, etc.; Ɣ protection of interests of enterprises and smallholders.

USAID Agricultural and Rural Development Support project 41 NEEDS OF THE TARGET GROUP OF AGRICULTURAL PRODUCERS, INCLUDING WOMEN AND SMALL FARMERS, FOR SKILLS AND KNOWLEDGE IN EFFICIENT ECONOMIC MANAGEMENT

M eans of production, and more precisely, the increase in prices for them, is listed among the top 10 challenges named by both businesses and smallholders. Major short-term needs of local producers/ processors are related to provision with speci¿ c technical means enabling increased labor productivity. At the same time, the component of focusing on the creation of cooperatives having equipment to service households is important. The issue of equipping processing lines and slaughterhouses, which relates to long-term need, as actualized by smallholders and enterprises that are currently already engaged in “home-made” processing, or have premises and suf¿ cient volumes of production. Suf¿ ciency in this case is determined based on the proportion of what stays at the smallholders for its own consumption, and what is transferred for sale. A general increase in prices for means of production, the rate of which À uctuates from 88 to 146% depending upon the types of means, affects production pro¿ tability level; however, the key factor in making the decision to increase or reduce production/ processing depends upon the assessment of market potential. A change in suppliers of means of production, although partially caused by the fact of their location on the territories not controlled by Ukraine, is not completely predetermined by this fact. The major reasons include better proposals on the market and quality of products as such. Issues of certi¿ cation of products can currently be categorized as long-term needs of the target group, proceeding from the ambiguity of determining the level of topicality of such a procedure for enterprises/ farms, as well as from the low level of awareness on the subject matter with regard to the system for quality standards.

42 USAID Agricultural and Rural Development Support project A request for new knowledge in the sphere of one’s operation is one the indicators of a business entity’s readiness for further development, and is evidence of its À exibility and adaptability. Such focus depends on the status in which business activities are performed: SMEs or smallholders. The latter are often more hesitant about the need for such training, explaining this by their own experience and a lack of problems with knowledge, focusing attention on lack of ¿ nancial resources. Such an assessment is typical for the territories focused primarily on the preservation of their own business. Actualization of the problem remains urgent, however, for producers/processing enterprises that need to get new information at the same time as solving the “principal problems”, and not afterward. Presently, there is a sense that there is perception of training, particularly among the target group of PFEs, as a knowledge assessment, which is accompanied by the reaction: “We have enough knowledge; we are the practitioners.” However, for organizations working in the informational and educational area, it is important to emphasize accessibility of new approaches to economic management and the feasibility of introducing them in Donetsk and Luhansk Oblasts. 56% of representatives of SMEs and smallholders, sales and authorities consider available opportunities for acquiring new knowledge suf¿ cient. However, at the same time, almost 30% of small businesspersons indicate that such opportunities are “rather not suf¿ cient”. The reason for such differences is that small business does not have an extended internal

USAID Agricultural and Rural Development Support project 43 organizational structure, requiring performance by an employee of the functional duties of several specialists, which, in its turn, results in a lack of resources (primarily, time) (17% of SME / smallholders consist of only 1 permanent employee, and 76% have up to 10 permanent employees), accordingly, the “loss” of this employee for the working process is equivalent to termination of business operation, which, without doubt, signi¿ cantly limits the mobility of micro and small producers/ processing entities and smallholders when we talk about acquiring new knowledge in the agrarian sphere.

Limited access to information, unavailability of information on sources for searching for available proposals, as well as the closed nature of information for a part of SMEs/ smallholders is yet another latent problem regarding real opportunities for access to new knowledge. For example, if an event is organized though the state executive authorities, information may become available to a limited number of business representatives, or be not available to the end recipient if such information has been classi¿ ed as “irrelevant” or “secondary”, etc. Bas ed on the research, participants of the agricultural market of Donetsk, Luhansk and Zaporizhzhya Oblasts see no potential for further development, are mostly satis¿ ed with the current situation and are afraid that investments in development will not have any impact.

44 USAID Agricultural and Rural Development Support project For minimization of development risks for agricultural enterprises and companies, the following ecosystem is suggested: Ɣ Personnel training and development programs (renewing the activity of advisory services by way of establishing Regional Competence Centers on key problems of AIC development in the region at the district level). Ɣ Establishment of an agricultural cooperatives network including assistance in managing cooperatives. Ɣ Promote cooperation between agricultural producers and processing factories. Ɣ Facilitate optimization of agribusinesses performance. Ɣ Product quality management. Ɣ Financial and credit programs as well as state and regional agriculture develop- ment program (f.e. the most acceptable form of support to the producers sug- gested by the survey respondents that are needed on a national basis is grants or compensations per every liter of milk or kilo of meat realized within the scope of activity of cooperatives).

USAID Agricultural and Rural Development Support project 45