Post-Reform Agriculture in Serbia

Final Report

Public Disclosure Authorized

REPUBLIC OF SERBIA

AGRICULTURE SECTOR REVIEW

Public Disclosure Authorized

Public Disclosure Authorized January 14, 2003

CURRENCY EQUIVALENTS Currency Unit = Yugoslav Dinar 1 YUD = .0154 US$ US$ 1 = 65.1 YUD

ACRONYMS

AMS Aggregate measure of support AK Agro-kombinat CAP Common Agricultural Policy (of the European Union) CEEC Central and Eastern European Countries DCR Directorate for Commodity Reserves EIU Economic Intelligence Unit EU European Union FOSC Farmers’ Organizations Support Center FRY Federal Republic of Yugoslavia GDP Gross domestic product HDI Human development indicator IARA Institute for Applied Research in Agriculture ISTA International Seed Testing Association MAFWM Ministry of Agriculture, Forestry and Water Management MCO Micro-credit organization MPNRE Ministry for Protection of Natural Resources and Environment MSTD Ministry of Science, Technology and Development NBFI Non-bank financial institution NBY National Bank of Yugoslavia O&M Operations and maintenance OM&R Operations, maintenance and rehabilitation RoS Republic of Serbia SFRY Socialist Federal Republic of Yugoslavia SME Small and medium-scale enterprises SOE State-owned enterprise SPS Sanitary and phytosanitary services SWA Srbijavode Water Authority USAID United States Agency for International Development WUA Water Users' Association WTO World Trade Organization

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TABLE OF CONTENTS

CURRENCY EQUIVALENTS...... ii

ACRONYMS ...... ii

TABLE OF CONTENTS ...... iii

FIGURES, BOXES AND TABLES ...... v

EXECUTIVE SUMMARY ...... vi The Context for Sector Development...... vi Priorities for Action...... ix I. INTRODUCTION...... 1

II. THE CONTEXT FOR SECTOR DEVELOPMENT ...... 3 POLITICAL CHANGE...... 3 THE MACRO-ECONOMIC ENVIRONMENT...... 3 AGRICULTURAL TRADE AND TRADE POLICY...... 3 DIRECT SUPPORT FOR AGRICULTURE...... 5 Agricultural Price Policy and Subsidies...... 6 The Directorate for Commodity Reserves...... 7 RURAL FINANCE AND INVESTMENT ...... 8 PRIVATIZATION ...... 9 LAND OWNERSHIP, LAND MARKETS AND LAND USE ...... 10 RURAL POVERTY ...... 12 Agricultural Policy, Budget Expenditure and Rural Poverty...... 12 LESSONS FROM REGIONAL EXPERIENCE OF REFORM...... 13 CURRENT STATE OF AGRICULTURE AND FOOD PRODUCTION ...... 15 III. INCREASING PRODUCTIVITY AND COMPETITIVENESS: PRIORITIES FOR ACTION ...... 17 REFORM TRADE AND INCENTIVE POLICIES...... 18 Continued Trade Liberalization ...... 18 Reform of Direct Support for Agriculture...... 18 STRENGTHEN FARM COMMODITY AND INPUT MARKETING SYSTEMS...... 19 Input Supply ...... 19 COOPERATIVES AND FARMER ORGANIZATIONS ...... 20 Policy and Legislation for Cooperatives and Farmer Organizations ...... 20 Old and New-Style Cooperatives and Farmer Organizations...... 21 A Transition and Support Program ...... 21 REJUVENATE THE FOOD MARKETING CHAIN ...... 22 Arrival of International Supermarkets...... 22 Constraints and Prospects for Agro-Processing ...... 23 Marketing Links and Contractual Relationships...... 24 IMPROVE ACCESS TO RURAL FINANCE...... 25 PRIVATIZE AND RESTRUCTURE STATE AND SOCIALLY-OWNED ENTERPRISES...... 26

Privatization of Agro-Industrial Enterprises ...... 26 Privatization of AKs and Land Restitution...... 27 STRENGTHEN LAND MARKETS...... 28 INSTITUTIONAL REFORM...... 29 Policy Analysis ...... 29 Sanitary and Phytosanitary Services ...... 30 Agricultural Extension...... 30 Agricultural Research...... 31 Prioritizing and Sequencing Institutional Reform...... 32 RESTORE IRRIGATION, DRAINAGE AND FLOOD CONTROL SYSTEMS ...... 33 Irrigation...... 33 Drainage and Flood Protection ...... 33 Water Management and Pricing ...... 34 Planning for the Irrigation Sub-Sector and Donor Support ...... 35 REGIONAL DEVELOPMENT...... 35 Regional Classification...... 36 Regional Priorities ...... 38 IV. LOOKING AHEAD: POST-REFORM AGRICULTURE IN SERBIA...... 40

ANNEX 1: ACTION PLAN – REPUBLIC of SERBIA ...... 43

ANNEX 2: RECOMMENDED SUPPORT FOR IRRIGATION, DRAINAGE AND FLOOD PROTECTION ...... 46

ANNEX 3. STATISTICAL INDICATORS ...... 48

FIGURES, BOXES AND TABLES

FIGURES AND BOXES

Figure 1. Trends in Aggregate Output, FRY ...... 1 Figure 2. Trends in Agricultural Terms of Trade, Republic of Serbia ...... 6 Figure 3. Regional Classification: Republic of Serbia ...... 41 Box 1. What is a Cooperative ? ...... 20 Box 2. Land Management in Serbia ...... 28

TABLES

Table 1. Comparative Statistics: Republics of Serbia and Montenegro ...... 48 Table 2. Macro-Economic Indicators: FRY...... 49 Table 3. Trends in Agricultural Trade: FRY...... 50 Table 4. Trade in Selected Agricultural Commodities: Republic of Serbia...... 50 Table 5. Tariff and Non-Tariff Trade Measures for Agricultural Products: Republic of Serbia...51 Table 6. Nominal Protection for Selected Agricultural Commodities: Republic of Serbia, 200253 Table 7. Budget Expenditure for Agriculture: Republic of Serbia...... 54 Table 8. Agricultural Price and Subsidy Policies: Republic of Serbia, 2000-2002...... 55 Table 9. Structure of Socially- and State-Owned Agro-Industrial Enterprises ...... 56 Table 10. Characteristics of Majority and Minority Privately-Owned Enterprises ...... 56 Table 11. Distribution of Land by Type of Ownership: FRY...... 57 Table 12. Characteristics of the Rural Population: FRY, 1991...... 57 Table 13. Characteristics of Household Income and Expenditure: Republic of Serbia, 2001 ...... 58 Table 14. Poverty Indicators: Republic of Serbia ...... 58 Table 15. Commodity Support and Marketed Surplus by Region ...... 59 Table 16. Trends in Agricultural Land Use: Republic of Serbia...... 59 Table 17. Crop Production: Republic of Serbia ...... 60 Table 18. Livestock Production: Republic of Serbia...... 61 Table 19. Selected Indicators of Agricultural Performance: FRY ...... 62 Table 20. Trends in Agricultural Producer Prices: Republic of Serbia ...... 62 Table 21. Regional Characteristics: Republic of Serbia ...... 63 Table 22. Land Use Characteristics by Region, 1999: Republic of Serbia...... 64 Table 23. Livestock Numbers by Region: Republic of Serbia...... 65 Table 24. Agricultural Marketing and Processing by Region: Republic of Serbia ...... 65

EXECUTIVE SUMMARY

1. Already a major component of the economy of the Republic of Serbia (RoS), agriculture also has considerable scope for increased production and efficiency. With appropriate policies and support it could become a powerful engine of economic growth. This review describes the issues and constraints which the sector faces, and outlines an action plan for recovery and growth. 2. Agriculture’s importance to the economy is both deep and diverse. Primary production from agriculture, hunting and forestry accounted for 21 percent of GDP in 1999, second only to manufacturing (24 percent). If the food and beverage processing activities associated with agriculture are added to primary production, agriculture is the largest sector in the economy with 25 percent of GDP. Approximately 44 percent of the population live in rural areas, of whom one- third rely wholly or in part on agriculture for their livelihoods. Exports of primary agricultural products, processed food, beverages and tobacco products accounted for 16-17 percent of total exports in 2000 and 2001, second only to the exports of other manufactured goods. 3. Sector development has been severely impeded during the last 20 years by socialist policies, the break-up of former Yugoslavia, and the economic distortions and political problems of the Milosevic era. Agricultural output has been far below its potential as a result. These influences have also depleted the capital base of farmers and agro-processors, and led to inefficient production and public institutions that are ill-suited to a market economy. Yet unlike the rest of the economy, agricultural output has already recovered to pre-1990 levels. This recovery is indicative of its strong underlying resource base and the considerable potential for further growth.

The Context for Sector Development

4. The broad macro-economic context for sector development has improved substantially since the end of the Milosevic era. Economic recovery has been rapid and the medium-term outlook is for continued growth. Inflation is falling and is expected to be below 15% by the end of 2003, and the exchange rate is stable. Economic recovery remains fragile nevertheless. The budget and trade deficits are high, the banking sector is weak, and RoS has substantial debt commitments. Unemployment is also high and privatization is slow. The political situation creates further uncertainty, first, associated with the newly formed entity of Serbia and Montenegro and, second, with the outcome of elections expected in 2003. The donor community remains committed to support for economic and political reform however, and eager to further the progress made to date. The general outlook is thus favorable for the agricultural sector, with increasing demand for food and agricultural commodities and greater price stability. 5. The progress with economic reform has included key initial reforms to agricultural trade policy. The maximum tariff has been reduced from 40 percent to 30 percent, and the tariff structure simplified. But most agricultural commodities continue to benefit from the maximum protection rates of 20 percent and 30 percent, and trade policy remains a major form of support for producer prices. Additional unit tariffs have been reduced, from a maximum of about 20 percent (tariff equivalent) to 15 percent. However export quotas for 31 “basic” agricultural commodities remain, including wheat, maize, flour, sugar, soybean and sunflower. Government also reintroduced export subsidies in 2002. This is not only ill-advised in its own right but also inconsistent with the use of export quotas and Serbia’s application for membership of the WTO.

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6. Serbian agricultural exports are substantial and there is considerable potential for increase. Nominal protection coefficients indicate a comparative advantage for high-value berry fruit in EU markets, and cereal and oilseed products in regional markets, particularly to neighboring countries of the former Yugoslavia. Processed food products also have established export markets in these countries. Moreover, regional trade opportunities are expanding rapidly, driven by economic recovery in the CEECs, a proliferation of bilateral trade agreements, and improved access to EU markets under the SAA. A more open trade policy is needed to respond to these opportunities. 7. Producer prices were kept at below parity levels during the Milosevic regime, in order to keep food prices low. The new Ministry of Agriculture (MAFWM) has thus placed considerable emphasis on raising producer prices, through the removal of price controls and various forms of direct support. Producer prices have risen as a consequence, without the need for public floor price schemes, and agricultural terms of trade have improved. This increase in prices has not enhanced competitiveness however, as there has been no associated increase in productivity. 8. Direct budget support for agriculture is moderate at 3-5 percent of total budget expenditure, but is rising in line with general budget expenditure. Subsidies account for almost 60 percent of the 2002 agriculture budget, with most subsidies targeted to milk, sugarbeet and tobacco. These subsidies raise the incomes of farmers with a marketed surplus, but do little to help producers to improve yields, product quality or marketing efficiency. It is also difficult to justify the weak budget allocation to the public institutions responsible for research and extension. The priorities for budget support need review. Soft budget support to state and socially-owned agricultural enterprises continues through non-enforcement of debt obligations in the banking system. 9. Further direct support to agriculture comes from the Directorate for Commodity Reserves (DCR), an independent agency responsible for price support, market stabilization and strategic food stocks. Wheat is the major commodity transacted, and the DCR buys at least half of the marketed surplus at prices slightly above border prices. Under the new government the DCR has also become actively involved in the provision of seasonal inputs and farm machinery, which are transferred to farmers on a barter basis. These activities create significant distortions and inhibit private sector activity in the markets for rural credit, farm products, machinery and farm inputs. 10. Of the 570 medium- and large-scale socially- and cooperatively-owned enterprises in the agro-industrial sector in Serbia, 60 percent are involved in primary production and the rest are agro-processing or agro-service enterprises. Many of these enterprises were involved in earlier MEBO privatization programs in 1989 and 1997, although most (90%) are still less than 50% privately owned and have yet to change substantially. The main impact of the earlier privatization programs was to disaggregate the former agro-industrial complexes into independent business entities. This disaggregation will facilitate privatization of agro-processing and agri-service enterprises as they are now more focused and transparent and less subject to land ownership disputes. A concomitant land restitution program during the 1990s, had a similar impact on the agro-kombinats, leaving them much smaller and focused on primary production. 11. Serbia’s current privatization program applies to all socially- and cooperatively-owned enterprises in the agro-industrial sector. It involves international tenders for the largest and most attractive enterprises, auctions for smaller and less attractive but still viable enterprises, and sales of the remaining enterprises after restructuring (by bankruptcy/liquidation). To minimize MEBOs, 70 percent of shares will be offered to a strategic investor, and the rest either allocated to employees (for auctions) or split between employees and the Privatization Register (for tenders). Most agro-industrial enterprises will be privatized by auction and viable agro- processing and agri-business enterprises are expected to sell quickly. AK privatisation will be

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more protracted and difficult. Government has yet to legislatively clarify the future status of AK land use and ownership rights, and a further program of land restitution is under way. 12. Deepseated problems in the factor markets for land and credit present significant medium- term constraints to agriculture sector growth. Although private farmers own most of the agricultural land, their farms are very small (2-5 ha) and fragmented. Weak land markets limit the ability to consolidate and enlarge these farms, other than through informal leasing. A disjointed property registration system, inefficient land administration, and weak private sector involvement in property markets all contribute to this situation. On-farm production efficiency is reduced as a result, and will remain constrained until land markets strengthen. 13. Rural credit markets are even weaker. The banking system collapsed during the Milosevic era and is only now beginning to re-emerge under the guidance of a World Bank support program. Credit is limited as a consequence and producers and processors have minimal access to the capital they need for seasonal finance and investment. The in-kind credit program implemented by the DCR is the only substantive institutional response to this problem thus far, a response which inhibits rather than encourages development of the private bank and non-bank financial institutions needed to resolve this constraint. 14. Both rural and urban poverty increased during the Milosevic era, although rural poverty is less pervasive. Nevertheless, 29% of the rural population, approximately one million rural people, are below the poverty line of $US2/day. Of these, 430,000 rural people live in extreme poverty. Rural poverty is highest where farmers are older, or living in remote areas; among farmers with very small farms and/or low fertility land; and in minority rural populations. It is also high in southern Serbia. Economic reform and current agricultural policies benefit wealthy, market oriented farmers. Poorer, subsistence-oriented farmers with little to sell derive little benefit from higher producer prices and subsidies. In the short-term, privatization of rural enterprises will also deepen rural poverty. Policies directed towards employment creation, improved access to social services and targeted social assistance are more appropriate responses. 15. The experience of other CEECs with agricultural sector reform can substantially inform Serbia’s response to the issues and constraints described above. To begin, it appears that the rapid, overall liberalisation and macro-economic stability achieved since reform began will do much to help Serbian agriculture avoid the initial contraction experienced by other CEECs. What other lessons can be used to guide recovery ? 16. The first is that economic liberalisation must continue and macro-economic stability be preserved. These are the pre-conditions for successful institutional reform, foreign direct investment and better access to capital and technology. Poland and Hungary met these pre- conditions and benefitted accordingly. Slow liberalization and privatization, and the maintenance of soft budget constraints predispose to weak, faltering sector recovery -- as observed in Romania and Croatia. Access to rural credit, and clearly defined, readily transferrable land use rights are also critical. Failure to achieve these latter goals inevitably slows productivity growth. 17. Where these pre-conditions are met, sector recovery is ultimately driven by productivity increases. Among socially-owned enterprises productivity increases occur through lower labor and input use, and are greatest where hard budget constraints are imposed. Productivity increases on small farms result from higher yields and more cost-effective input use. Finally, the experience of Poland and Hungary shows the importance of establishing new institutions for product exchange and contract enforcement, which are effective even when public institutions are weak. These institutions are often “imported” as a result of foreign direct investment.

Priorities for Action

18. Serbia faces a very different context for sector recovery and growth compared to other CEECs at the beginning of reform. Regional markets in the EU, Central Europe and the CIS countries are expanding rather than contracting, and regional trade is being actively promoted through the SAA. This opening up of regional markets will also lead to increased competition on domestic markets. Given the demonstrated capacity of Serbian agricultural products to compete on domestic and regional markets, immediate priority should be given to measures which strengthen the ability of private sector agents to respond to these market challenges. The emphasis should be on developing appropriate incentive structures, strengthening marketing institutions and marketing chains, and providing producers and processors with the operating and investment capital they need to increase productivity and output. Specific priorities include: (1) Continue reform of trade and incentive policies. All export quotas and export subsidies should be abolished and effective levels of protection further reduced. These policy reforms should be driven by the requirements for WTO membership rather than EU policy. Alignment with EU trade policy and the CAP should be viewed as a medium- to long-term goal, to be pursued once EU accession is more imminent. Future public expenditure should be allocated on the basis of well-defined sector objectives and priorities that are consistent with the role of government in a market economy. Direct support should be used to increase productivity rather than prices and should be more poverty oriented. Public responsibilities such as border control, plant and animal health, research, training and education should receive a high priority for support, together with the adoption of EU standards. The DCR’s role should also change. In the short term, reform should include a reduction of the number of commodities in DCR's mandate, a parallel reduction of the level of “strategic” stocks, and an increase in the transparency of DCR's activities. It should also cease to provide farm inputs and seasonal credit. The medium-term objective should be to transfer responsibility for commodity support to the MAFWM and limit the DCR's mandate to civil emergencies. (2) Strengthen farm commodity and input marketing systems. A new policy and legislative framework is needed to strengthen the role of (new-style) farmer cooperatives and organisations in commodity and farm input marketing systems, together with a support centre to assist old-style cooperatives to restructure and new farmer groups to develop. (3) Rejuvenate the food marketing chain. A support system is needed to assist agro-processors to build effective marketing links with producers and food retail outlets (including international supermarkets). In addition to restructuring and new product development, this support should include the introduction of new contractual arrangements between producers, processors and food retail outlets. (4) Improve access to rural finance. A broad-based technical assistance program is needed to develop viable investment proposals among prospective borrowers, strengthen the capacity for agricultural loan appraisal among lenders, and to support the establishment of viable bank and non-bank

financial institutions in rural areas. Where appropriate, this should be supported with donor credit lines. 19. An associated set of short-term actions is needed to begin reform of the public enterprises, institutions and infrastructure which influence the capacity of private sector agents to respond to market challenges. These measures include: (1) Complete the privatization and restructuring of agro-kombinats and agro-processors. Although privatisation lies outside the direct ambit of the MAFWM, the process can be supported by providing technical assistance to support the restructuring of state and socially-owned agricultural enterprises. (2) Strengthen land markets. A broad-based technical assistance program is needed to restructure the property registration system, develop a national real-estate cadastre and strengthen the private sector institutions involved in property markets. Initial priority shoud be given to measures which clarify land ownership and use rights for private farmers and AKs, and accelerate land restitution. (3) Initiate reform of public institutions for agricultural support. Short-term priorities include strengthening the capacity for policy analysis, alignment of SPS legislation with the acquis communautaire, upgrading and rationalization of the laboratory system, upgrading border control facilities and procedures, support for private sector extension initiatives, and the preparation of national strategies for research and AKIS (4) Rehabilitate drainage canals. A limited program to rehabilitate drainage canals would provide a cost-effective way to improve drainage, improve flood control and allow irrigation in the areas near the canals.

20. Finally, a more broad-based, medium to long-term set of actions is needed to: (1) Complete the reform of public institutions for agricultural support and land administration: Medium-term priorities include the privatization of veterinary services, the seed industry, and the commercial activities of extension and research stations; the establishment of new institutional structures for extension, research and food safety; and implementation of the national strategies for research and AKIS. (2) Promote regional development. The diverse nature of rural Serbia means that policy priorities must be regionally differentiated in order to be effective. In Vojvodina, priority should be given to privatization and land restitution. Support for private sector development should be a major focus of agricultural policy in Central Serbia. A broader policy framework, based on rural livelihoods, is needed in Southern Serbia where rural communities and municipalities should be the focus of action, and the emphasis should be on employment creation and income diversification.

(3) Restore the physical and institutional infrastructure for irrigation, drainage and flood control.

Flood protection should be undertaken by a separate agency rather than the water companies. The substantial backlog of irrigation and drainage maintenance will require major investment. It is essential that clear levels of ownership and responsibility for maintenance are defined, such as what organization is responsible for the cleaning of each level of canal. Water companies should be restructured to become fully self- financing. Future investments in new and rehabilitated irrigation and drainage facilities need to be determined on the basis of economic analysis relating water costs to returns.

Water Users' Associations should be established on a demand-driven approach rather than by imposing cooperation. Existing cooperatives should be transformed into independent organizations under farmer ownership and control.

I. INTRODUCTION

1. Already a major component of the economy of the Republic of Serbia (RoS), agriculture also has considerable scope for increased production and efficiency. With appropriate policies and support it could become a powerful engine of economic growth. This report reviews the opportunities for and constraints to growth within the agriculture sector, and identifies priorities for action. Where possible, analysis is based on data specific to RoS (excluding Kosovo). Otherwise, the analysis is based on data for the Federal Republic of Yugoslavia (FRY). As Serbia accounts for more than 90 percent of the economy of FRY (Annex 3, Table 1), this use of aggregate data does not substantially change the analysis. 2. The agriculture sector’s historical strength and resilience is evident from trends in output relative to GDP over the period 1980-1998. Unlike the rest of the economy, agricultural output has already recovered to pre-1990 levels (Figure 1), despite severely limited access to farm inputs and the collapse of traditional markets. As a result of this recovery and the collapse of other sectors of the economy (notably manufacturing), agriculture’s contribution to GDP has increased substantially. Primary production from agriculture, hunting and forestry accounted for 21 percent of GDP in 1999, second only to manufacturing (24 percent). If the food and beverage processing activities associated with agriculture are added to primary production, then agriculture is the largest sector in the economy of the former FRY, with about 25 percent of GDP.1 3. Agriculture’s contribution to the economy is as broad as it is deep. Approximately 44 percent of the population live in rural areas, of whom one-third rely wholly or in part on agriculture for their livelihoods. Large tracts of fertile land, particularly in the Vojvodina region, allow the production of most food commodities and assured an adequate food supply throughout the economic and political turmoil of the 1990s. Exports of primary agricultural products, processed food, beverages and tobacco products accounted for 16-17 percent of total exports in 2000 and 2001, second only to the exports of other manufactured goods. Some 200,000 people (10 percent of the work force) are employed in agro-processing and agricultural service industries. Food-processing enterprises are the

Figure 1. Trends in Aggregate Output: FRY

120.0

100.0

80.0

60.0

40.0 Indices (1980=100)

20.0

0.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

GDP Agricultural Output

largest single employer in the industrial sector, with 84,300 employees in 2000. 4. Sector development has been severely impeded during the last 20 years by socialist policies, the break-up of former Yugoslavia, and the economic distortions and political problems of the Milosevic era (1989-2000). Agricultural output has been and continues to be far below its potential as a result. Twenty years of mismanagement have also severely depleted the capital base of farmers and agro-processors, led to inefficient production systems divorced from trends in world commodity markets, and resulted in public institutions that are ill-suited to the operation of a market economy. 5. These constraints to sector growth and development were identified in the World Bank/EU Report Breaking with the Past (2001), which was prepared for the international community to guide initial pledges of support for recovery and reform in the former FRY. The report also identified the following axes for responding to these constraints: · Establishment of a more appropriate incentive structure for production, marketing and trade;

· Promotion of private sector activity and investment in production, processing and marketing.

· Modernization and strengthening of public agricultural institutions.

6. This review provides an in-depth analysis of these imperatives and presents recommendations as to how they should be addressed through support for policy reform, private sector investment and capacity building. Chapter II summarizes the context for sector development and identifies the issues that constrain growth in production and processing and inhibit factor and commodity markets. Regional experience of agricultural reform in other CEECs is also discussed, plus a brief review of rural poverty. The major areas for action are prioritized and discussed in Chapter III, including an analysis of regional issues. Chapter IV considers the potential impact of this action plan on post- reform agriculture in Serbia. 7. The review is intended to improve understanding of the rural economy by the government and by donor organizations. It will assist the government to formulate an effective medium-term strategy for the sector and to design a sound borrowing program, financed by the World Bank and other donors, in support of this strategy. As such, the review provides an important reference point for both public investment and donor co-ordination.

1 Data reported in this paragraph are from the Statistical Yearbook of Yugoslavia, 2001.

II. THE CONTEXT FOR SECTOR DEVELOPMENT

POLITICAL CHANGE

8. In March 2002, the governments of Yugoslavia and its two constituent parts, Serbia and Montenegro, agreed to replace the federal republic with a state to be called the Union of Serbia and Montenegro. Each republic would retain its own currency, tax and budgetary systems, customs services, banking systems and financial supervision, but the two republics would form a common market with free movement of people, goods, services and capital. The republics also agreed to harmonize their respective trade and customs policies by aligning them with the economic system of the EU. This new constitutional structure is expected to come into full effect early in 2003. FRY or its successor will then negotiate a Stability and Association Agreement with the EU, negotiating as a single entity. 9. The new constitution would have widespread implications for the policies and institutions linked to agriculture. Trade, price and subsidy policies will remain Republic-level responsibilities in the short term. But the two Republics will need to re-formulate and align these policies during the next 12-18 months, as membership of the WTO will have to be negotiated as a single entity. Similarly, the policies and procedures applied by the institutions responsible for border control, animal health, phytosanitary control, plant breeding and food safety will be unified through alignment with the EU. The new common market will also strengthen traditional trading links between the food surplus areas of the Republic of Serbia and the food-deficit Republic of Montenegro.

THE MACRO-ECONOMIC ENVIRONMENT

10. Macroeconomic conditions are reviewed in the context of aggregate trends for the two Republics. Economic recovery began in 2000 with a 6-7 percent increase in real GDP (Annex 3, Table 2). This growth continued in 2001, despite continued contraction within the industrial sector, because the agriculture and service sectors recovered strongly. The outlook for 2002-2003 is for growth of 5-6 percent. Output should continue to grow as investment increases, higher real wages strengthen domestic demand, and recovery begins in the industrial sector as obsolete capital stock is replaced. Inflation is also expected to decline, from 35-45 percent at the end of 2001 to 10-15 percent by the end of 2003. The exchange rate should also remain relatively stable. These trends favor growth of the agricultural sector by boosting domestic demand for food and agricultural commodities, reducing price instability and encouraging increased output of raw and processed agricultural goods. 11. Economic recovery remains fragile nevertheless. Despite steady progress with fiscal and monetary reform, the budget deficit is expected to increase significantly in 2002, unemployment is still high, the banking sector remains weak and privatization is slow. The trade deficit is forecast to grow from US$1.4 billion in 2000 to US$2.2 billion in 2002, before falling to an estimated US$1.9 billion in 2003 (EIU, 2001). This deficit, together with substantial debt commitments (even after debt rescheduling) means that Serbia will rely heavily on donor support and foreign direct investment to meet its foreign exchange commitments in the medium-term. The establishment of a stable, market- oriented economic policy framework conducive to foreign direct investment, active support for privatization, and sustained donor support will all be crucial for sustained growth. Measures to strengthen agriculture will reinforce growth and increase rural employment.

AGRICULTURAL TRADE AND TRADE POLICY

12. Agricultural commodities account for a significant proportion (16-17 percent) of total Serbian exports. A wide range of crop and livestock products is exported, among which berry fruit, cereals,

meat products, edible oils and processed food are the most important (Annex 3, Tables 3 and 4). There is considerable potential to increase the export of many of these commodities. Macedonia and Bosnia and Herzegovina are the largest export markets, followed by Russia, Romania and the EU (Germany, Italy, France and Austria). Much of Serbia's recent trade with Russia and Romania has involved the exchange of wheat and maize for energy and fertilizer. A wide range of food and agricultural products is imported, with the EU as the largest source of imports. 13. Nominal protection coefficients are presented in Table 6 (Annex 3), as an indicator of the competitiveness of major agricultural products. Berry fruit is the most important export commodity, with an established presence in the markets of Western Europe due to its high quality and competitive price. There is also significant potential to increase export earnings from berry fruits, particularly as it is exempt from import duties under the current EU trade agreement. As most Serbian berry fruit is currently exported in bulk or packed under Western European labels, there is ample scope to add value to what is already a high-value commodity. Output can also be increased markedly by introducing new varieties and management systems. Note also that berry fruit production is ideally suited to small-holder production in many of the hilly areas of central and Southern Serbia. 14. Cereal exports are also significant, particularly maize. While not fully competitive with major Central European exporters such as Hungary, Serbian cereals are nevertheless competitive in neighboring Macedonia, Bosnia-Herzegovina, Montenegro and Kosovo – all of which have large structural cereal deficits. An increase in on-farm productivity (higher yields, lower production costs etc) would further improve the competitiveness of wheat and maize, and is readily attainable. Oilseed crops also have considerable potential for export, although the ability to realise this potential will depend on the extent to which processing efficiency can be improved. 15. A wide range of processed meat, fruit and vegetable products are exported to neighboring countries in the former Yugoslavia. Demand for such products is increasing in response to economic recovery and growth. Relatively low costs for raw materials and labour, plus long-standing market links will help to preserve these markets in the short-term, but Serbian products will inevitably face strong pressure from EU exports. Increased attention to production efficiency, marketing and product development will be essential if these products are to retain their market share. 16. Despite its demonstrable lack of competitiveness, sugar is currently being exported to the EU. The current trade agreement with the EU does not restrict sugar exports, and EU intervention prices are well above Serbian prices. This situation is clearly anomalous however, and will be reviewed by the EU in 2006, as part of a wider review of economic relations. 17. Under its wide-ranging program of economic reform, the new government of Serbia has markedly liberalized trade policy. The maximum tariff has been reduced from 40 percent to 30 percent, and the tariff structure has been simplified to six bands (1 percent, 5 percent, 10 percent, 15 percent, 20 percent, 30 percent). Most agricultural commodities continue to benefit from the maximum rates of protection of 20 percent and 30 percent (Annex 3, Table 5), and trade policy remains a major form of support for producer prices. Additional unit tariffs have been reduced, from a maximum of about 20 percent (tariff equivalent) to 15 percent. They remain a source of trade and price instability however, as they can be changed by cabinet, and are usually reviewed annually. There is also a facility to exempt imported raw materials from customs duty if they are used to manufacture export products. Licenses are no longer required for agricultural imports or exports, and import quotas for agricultural commodities have been terminated. However export quotas for 31 “basic” agricultural commodities remain, including wheat, maize, flour, sugar, soybean, sunflower and leather products. Most of these quotas are based on food balance calculations in order to limit exports to surplus domestic production. The government also reintroduced export subsidies in 2002,2

2 These subsidies apply to all agricultural exports, with the level of subsidization ranging from 1%-7%.

funded from the Federation Budget, a policy measure that is not only ill-advised in its own right but also inconsistent with the use of export quotas and membership of the WTO. 18. While the reforms are a major improvement on pre-war trade policy, the current policy framework is still characterized by high levels of protection on most agricultural commodities and extensive non-tariff interventions. A full analysis of effective protection of Serbian agricultural production would need to take into account the comparative subsidation and taxation of agriculture vis-à-vis industry and other real sectors of the economy, but this is beyond the scope of this report. Initial focus should be on the non-tariff barriers and the variable unit tariffs, since they constrain and destabilize agricultural markets to the detriment of farmers and the broader economy. 19. “Non-policy” barriers are among the important constraints to trade in Serbia. These include limited capacity to satisfy EU phyto-sanitary and quality requirements (a result of the rundown of laboratories and agro-processors), the EU ban on livestock imports in order to control foot-and- mouth disease, and Serbia's heavy reliance on barter trade due to lack of credit. Removal of these constraints will require improved product quality, the capacity to certify that Serbia products meet EU standards, increased access to credit, and diversification into more favorable export markets. 20. Reliance on cash-strapped former trading partners in former Yugoslavia and the CIS countries is a major cause of the high level of barter trade and a further constraint to trade. Both Republics need to strengthen trade with a wide range of trading partners, beyond the existing trade agreement with Macedonia and the trade agreements now being negotiated with Croatia and Russia. Negotiation on the proposed Stability and Association Agreement with the EU, which will begin once the new constitution has been ratified by both Republics, is critical in this regard. 21. Future agricultural trade policy reform will be heavily influenced by the application for membership in the WTO, filed by Serbia in February 20023 and by the new constitution. These are important not only in their own right, but also because they will oblige the two Republics to align their respective trade policies and negotiate a joint agreement as the basis for WTO membership. Given the marked disparities between the role of agriculture in each Republic (Annex 3, Table 1), and their respective agricultural trade policies, the decisions made in this regard will have quite different impacts on producers and consumers in each Republic. This process of policy alignment will add a further level of complexity to trade reform. 22. Regrettably, the two Republics recently stated that they view alignment of their respective economic and trade policies as justification for an increase in import protection to EU levels. Reform in this direction would restrict rather than encourage trade. It would also be viewed unfavorably by the WTO, which views membership as a commitment to reduce import protection and increase market access, not vice-versa. Increasing prices without increasing productivity will reduce competitiveness and impose a high cost on consumers. On a more positive note, harmonization of the codex alimentarius with the EU has begun, as one step towards WTO membership.

DIRECT SUPPORT FOR AGRICULTURE

23. Budgetary support for agriculture in Serbia has increased significantly since 2000, albeit from a very low base. In real terms, the agricultural budget more than doubled from 2000-2002 (at 2000 prices). Total public expenditure rose more than 300 percent during the same period (Annex 3, Table 7) however, so agriculture’s share of the total budget fell from 5.3 percent in 2000 to 3.6 percent in 2002. Expenditure on agricultural subsidies accounted for approximately 60 percent of the 2002 agriculture budget, and has increased in line with the overall increase in agricultural expenditure. An export subsidy program (650 million dinars), funded by the Federation government, was introduced

3 The application was filed by Serbia alone, as it was prepared before the agreement to establish a new constitution in March 2002. The application will now have to be modified and presented as a joint application by the two republics.

in 2002. Provided that the budget for agriculture remains in its current range of 3-5 percent of total public expenditure, this overall level of expenditure is not an immediate cause for concern. The way budgetary resources are used is an important issue however, as discussed below. Soft budget support to state and socially-owned agricultural enterprises continues through non-enforcement of debt obligations accumulated in the banking sector and through subsidy payments. The cost of this support is unknown.

Agricultural Price Policy and Subsidies

24. Producer prices were kept at or below parity levels during the Milosevic regime, in order to keep food prices low, which depressed agricultural production. The current Ministry of Agriculture, Forestry and Water Management (MAFWM) has thus placed considerable emphasis on raising producer prices, through the removal of price controls and various forms of direct support. Producer prices have now risen to levels comparable to those observed elsewhere in the region, and agricultural terms of trade have improved (Figure 2). This increase in prices has not enhanced competitiveness however, as there has been no associated increase in productivity.

Figure 2. Tends in Agricultural Terms of Trade (1999=100)

300.0

250.0

200.0

150.0

100.0

50.0

0.0 1997 1998 1999 2000 2001

Ag Producer Prices Ag Input Prices

25. The form and focus of agricultural price policy and subsidies has changed considerably since 2000 (Annex 3, Table 8). The use of floor prices to support 10 “strategic” commodities was abolished in 2002, because neither government nor the agro-processing enterprises had the financial resources to support these prices. A system of de facto floor prices remains nevertheless. The Directorate for Commodity Reserves (DCR) continues to purchase significant quantities of wheat and livestock, and sugarbeet and tobacco processors are obliged to pay an “official” price in order for their suppliers to qualify for producer subsidies. But the emphasis has now shifted to subsidy of a small number of commodities (milk, sugarbeet, tobacco) and subsidy of livestock improvement and establishment of orchards and vineyards. Further changes in 2002 include the introduction of area payments for tobacco and sugarbeet in place of production subsidies; incentives and production targets to increase industrial crop output and reduce wheat production; and the re-introduction of

export subsidies, funded by the Federation government. MAFWM is also seeking to assume the DCR’s responsibility for support for wheat prices and has introduced a small allocation for this in the 2002 budget. There are no input subsidies. Controls on consumer food prices have been removed except that the price of dark bread cannot exceed 13 dinar/700 gm loaf. 26. Changes such as the abolition of government floor prices are useful reforms. Others, such as the introduction of export subsidies, support for tobacco and sugarbeet, the incentives to switch from wheat to industrial crops, and the introduction of area payments, may not be. The newly announced production targets for wheat and industrial crops are redolent of central planning. More importantly, many of the changes to price and subsidy policy have been ad hoc in nature, as opposed to a systematic introduction of new policies designed to achieve a clearly defined set of policy objectives. Pending a full analysis of the comparative subsidation and taxation of agriculture compared to manufacturing and other sectors, the best policy for the near term will be to hold the line on the level of subsidation of agriculture as a whole, and to rationalize further the supports across all agricultural subsectors. 27. Policy makers still see subsidies as the most effective form of sector support, rather than measures to increase productivity and implement institutional and structural reform. Budgetary resources are allocated accordingly, often to inappropriate subsidies and/or commodities. Public and private sector roles have also not been clarified. For example, measures to increase yields, improve product quality and strengthen marketing would have a much greater impact on competitiveness than export subsidies. And export subsidies will have to be terminated anyway as a condition of WTO membership. Subsidies for tobacco and sugarbeet are also difficult to justify. These subsidies account for 14.5 percent of the 2002 MAFWM budget, although tobacco and sugarbeet account for less than 2 percent of the total area cultivated (55,000 hectares in 2001) and are not strategically important crops. Moreover, these subsidies support agro-processors more than farmers. Instead, private-sector tobacco processors should decide tobacco prices, and support for sugar production and processing (through both subsidies and import protection) should be terminated because it imposes a very high cost on consumers. The introduction of area payments as a means to align current policy with the CAP is also misguided. The EU introduced these subsidies to compensate farmers for lower producer prices (following the Uruguay Round) and as the basis for a supply control program. Producer prices have increased in Serbia and there is no reason to limit production. The recently announced production and area targets for wheat and industrial crops are a disturbing step backwards from the initial program of liberalisation. These echoes of central planning distort the signals sent by relative and absolute prices, and do little to encourage foreign investment. 28. Ill-defined policy responses like these lead to a poor allocation of public resources, first between subsidies and institutional support, and second within the subsidy program. They are also a source of instability and a disincentive for producers and agro-processors seeking to expand and invest. In a market-oriented economy, most direct public support for agriculture should be allocated to the public institutions that assure animal health, border control, product standards, research, training and extension. Moderate tariffs provide a broader base for supporting producer prices, especially where fiscal resources are limited. Within the subsidy program there is no obvious link between the commodities and activities supported and the need to enhance sector competitiveness and growth. It makes little sense to allocate 25 percent of all subsidies to tobacco and sugarbeet, which are neither basic food commodities nor major crops. A coherent basis for agricultural price policy formulation, based on a clearly articulated sector strategy, is needed as a starting point for policy reform.

The Directorate for Commodity Reserves

29. Government supports wheat prices through the purchasing activities of the Directorate for Commodity Reserves (DCR). Typically, the DCR purchases 300,000-500,000 tons of wheat annually, equivalent to three months’ consumption, but this was increased to 600,000 tons in 2001 to

rebuild stocks after the crop failures of 2000-2001. This purchase was probably most of the marketed surplus, and incurred effective costs estimated at more than 20 million euro, including storage, losses and disposal4. A wheat purchase price of 6.0-8.0 dinar/kg has been set for 2002, and the government has stated that the DCR will purchase up to 280,000 tons of the 2002 crop. The DCR is also responsible for holding strategic stocks of maize, oilseeds, mear, sugar, powdered milk and salt. 30. The DCR’s activities distort key commodity and factor markets. In addition to buying and selling the main agricultural commodities in order to maintain strategic food stocks and stabilize prices, the DCR has also now become the major source of farm machinery, farm inputs (fuel and fertilizer) and of seasonal credit to farmers. These activities distort incentive structures and inhibit private sector activity in the markets for farm credit, farm machinery, farm inputs and agricultural output. Reform of the DCR will thus be a pre-condition for increased private sector activity in these markets and increased market efficiency.

RURAL FINANCE AND INVESTMENT

31. Reform of banking legislation and supervision and the establishment of a viable commercial banking system is a major thrust of the reconstruction program for Serbia. The banking system collapsed during the Milosevic era. Of the approximately 90 commercial banks in 20005, 39 have now been deemed fit for continued operation; eighteen have merged with other banks; four have been designated for rehabilitation; and one is under administration. The remaining 23 will be liquidated, including Serbia's four largest banks, which account for over half of total banking assets. Further consolidation of the commercial banking sector is inevitable. Increased competition, tighter supervision and new laws which require banks to increase their capital base to 10 million euros by the end of 2003, will force the smaller and less profitable banks to merge with other banks or close down. This will further strengthen the banking sector and should lead to better access to capital and lower interest rates. 32. The commercial banks licensed to operate have begun to respond to the improved economic conditions, led by the foreign banks (Raiffheizen, Societe Generale, MicroFin, National Bank of Greece, Bank of Austria). Lending has increased as a result of better access to euro capital markets and the 0.65 billion euro that flowed into deposits to convert EU currencies to euros6. Lower interest rates have also helped. Short-term interest rates of 2-3 percent per month in December 2001 have fallen to 1-2 percent per month (as of June 2002), and medium-term credit for small and medium- scale enterprises (SMEs) is now 9-11 percent per year. With core inflation still close to 15 percent, real rates of interest are now moderate. But overall lending by the commercial banks remains low, and short-term loans predominate (93 percent of all lending in June 2002). 33. Minimal progress has been made with the establishment of non-bank financial institutions (NBFIs), as pre-war experience with pyramid schemes has made the NBY very wary of non-bank institutions. An NGO was recently granted permission to establish a savings and credit association, but the NBY continues to take little interest in the establishment of micro-credit organizations (MCOs). This stance may reflect the NBY’s reluctance to accept institutions that it can not adequately supervise, rather than any aversion to the services they provide. Microfin specializes in micro-credit, but operates as a commercial bank and so is subject to conventional reporting and supervision requirements. There is also a (pre-war) legislative and supervisory framework for savings and credit associations, even though all ceased to operate during the Milosevic era. 34. A healthy, diverse financial system is critical for recovery and growth in the agriculture sector. Farmers and processors need to rebuild their capital base, obtain the technology needed to operate

4 Mission estimate. Information on expenditure by the DCR is not in the public domain. 5 Data provided by the National Bank of Yugoslavia (NBY) 6 Of the 4 billion euro exchanged, 2.65 billion was exchanged for euros in cash, 0.7 billion was exchanged for other currencies, and 0.65 billion was deposited in foreign currency accounts (NBY).

competitively, and increase their use of farm inputs. But, after 10 years of economic hardship, few can meet these needs from their own equity resources. Without access to external capital, they will be unable to adjust their factor proportions and output mix in response to new incentive structures, and will struggle to compete on domestic and export markets. The recovery of a major sector of the economy will thus be slowed to the detriment of rural incomes, employment and export earnings. 35. A coherent response to this challenge has yet to emerge. The limited rural credit available comes from the in-kind seasonal finance facility of the DCR, some 15 million euro in revolving funds created from the commoditization of emergency aid and operated on an ad hoc basis by MAFWM, and foreign commercial banks such as Raiffeizen and Microfin. Agrobanka, the socially- owned bank which was the main source of rural credit in pre-war Serbia, has recently been cleared to continue operating, but a clear picture of its future role and level of activity has yet to emerge. 36. Viable, private-sector financial institutions that lend on commercial terms are thus competing with public institutions such as DCR and MAFWM, which have no financial expertise, and with Agrobanka, which has a tradition of heavily-subsidized lending to socially-owned enterprises and old-style co-operatives. Moreover, MAFWM now plans to create an Agricultural Development Fund from the lending activities of the DCR and the revolving funds it operates (details of how this will function are unclear). These are disquieting trends, inconsistent with the broad objectives of financial sector reform and not conducive to the establishment of a sound rural credit system. Publicly funded, subsidized loans for rural activities and enterprises are not a panacea for rural development, do not result in viable financial institutions, and inhibit the activity of commercial financial institutions in rural financial markets.

PRIVATIZATION

37. There are approximately 570 medium- and large-scale socially- and cooperatively-owned enterprises in the agro-industrial sector in Serbia. About 60 percent are involved in primary production (general and specialized farming, cattle breeding, etc.), and the rest are agro-processing or agro-service enterprises (Annex 3, Table 9). Of these, about 10 percent are less than 50 percent socially or cooperatively owned7. Many of these enterprises have gone through earlier stages of privatization under the Markovic program initiated in 1989 and under a program initiated in 1997 under the Serbian Government’s Act on Ownership Transformation. 38. The Markovic program allowed workers and managers to purchase the majority of an enterprise’s shares at highly discounted prices and pay for them under an installment plan. However, the value of installments was adjusted in 1994, in line with prevailing levels of hyperinflation, and those without access to loan funds (mainly workers) found it difficult to keep up with the revalued payments. In many cases, workers found it necessary to sell some of their shares to raise cash for payment of the installments associated with their remaining shares, and enterprise managers often stepped in to buy these shares.8 Under the program initiated in 1997, enterprises were allowed to give 60 percent of their shares to employees, former employees and pensioners. In a second round, employees had preferential access to a further 30 percent of the enterprises’ shares, with prices discounted according to the buyer's length of employment with the enterprise. 39. Thus, both earlier privatization programs resulted in MEBOs (management and employee buy-outs). The impact of these programs was limited however; approximately 90 percent of medium- and small-scale agro-processing enterprises remain more than 50 percent state- or socially-owned. Moreover, the average number of empoyes in enterprises with more than 50 percent of their shares

7 For a further 10% of agro-industrial enterprises, there is inadequate information to determine the share that is socially- and state-owned. 8 Managers had access to hard currency loans, which kept their value during hyperinflation, yet were repayable at exchange rates that were fixed at the time the loans were granted. These highly concessional terms allowed managers to hold ample local currency at the moment when workers were forced to sell some of their shares.

socially or cooperatively owned tends to be larger than in enterprises which are majority privately- owned (except for grain-milling, livestock and milk-processing, vegetable and starch enterprises (Annex 3, Table 9). Hence, the majority of agro-industrial enterprises have yet be privatized and have yet to rationalize employment. 40. In addition to these privatization programs, agro-industrial enterprises were also subject to a program of land restitution during the1990s. Under this program, most vertically and horizontally- integrated agro-kombinats (AKs) were scaled down and de-integrated. Large areas of land were restituted to their former owners and the more profitable processing and trading enterprises were acquired by managers and employees under the MEBO process. As a result, most state- and socially- owned enterprises are smaller and more focused; processing, trade and agricultural enterprises now operate as separate entities. Viable trade and processing enterprises will be easier to privatize than the AKs because ownership and profitability are easier to assess and the ownership issues affecting agricultural land no longer apply. Land issues will be a major constraint to privatization of the AKs, because a further program of land restitution is to be implemented, and the legal status of current and future use and ownership rights has yet to be clarified. These issues increase the uncertainty of AK ownership and compromise their saleability, because most AK’s are now primarily engaged in farming and land is their major asset. 41. The privatization program which Serbia is now implementing applies to all socially- and cooperatively-owned enterprises in the agro-industrial sector. It involves international tenders for the largest and most attractive enterprises, auctions for smaller and less attractive but still viable enterprises, and sales of the remaining enterprises after restructuring (by bankruptcy/liquidation). To minimise MEBOs, the tender process (for larger enterprises) will allocate 15 percent of shares to employees and 70 percent to a strategic investor. Residual shares will be allocated to the Privatization Register to be distributed to citizens free of charge after a period of four years. Under the auction process (for smaller enterprises), 70 percent of shares will be offered to a strategic investor, and 30 percent given to employees if the sale to the strategic investor takes place in less than 1.5 years from the date of its initiation. If the sale takes 1.5-2.5 years, employees will get 20 percent of the shares; and if it takes more than 2.5 years, they will get 10 percent. Residual shares will be allocated to the state Share Fund and then sold off as soon as possible.

LAND OWNERSHIP, LAND MARKETS AND LAND USE

42. Land tenure in Serbia is overwhelmingly private. Private farmers own approximately 83 percent of the 3.35 million hectares of arable land and 50-60 percent of the 1.75 million hectares of pasture land. Most farm 2-5 hectares9, usually in several plots. The remaining land and livestock are farmed by 460 AKs and 400 co-operatives. More than 90 percent of co-operatives farm less than 1,000 hectares, and more than 95 percent of AKs farm less than 5,000 hectares. 43. Despite the predominance of private ownership, land markets are weak. Average land sales prior to 1999 were only 1000-3000 hectares per annum. The ability of private farmers to enlarge and consolidate their small, fragmented holdings is thus severely compromised, to the detriment of production efficiency. An active, informal leasing market partially compensates for weak land sales, but it is an incomplete response. The immediate cause of the problem is the difficulty of establishing clear ownership of land. In turn, this is the result of an incomplete and disjointed system of land registration and administration. In addition, the administrative procedures for land transfer are very slow and there is a paucity of qualified surveyors, valuers and real estate agents. The combination of unclear ownership rights and weak land markets also limits the ability of farmers to use land as collateral, and so limits their access to credit. Although solutions to these problems will not be easy,

9 Over 75% of private farms have less than five hectares; fewer than 5% have more than 10 hectares (1991 census).

a well-functioning land market is essential if production efficiency is to be increased and access to credit improved. 44. Land is also a major issue for the state- and socially-owned AKs and co-operatives, as noted above. Privatization will be slow until the use and transfer rights associated with AK land are clarified by law, and land restitution is complete. The policies and procedures developed for privatization and restitution will thus have a major impact on the AKs and on the farmers who will have access to land restored under the restitution program. 45. The reforms needed to respond to these challenges are discussed in Chapter III. As the capacity of family farms to respond to these reforms will depend in large part on their underlying characteristics, it is pertinent to review the distribution of farm size and its relation to the level and composition of household income. The most comprehensive data source is the last census in 1991, which covered all of FRY. Although outdated, these data nevertheless provide useful insight. 46. In 1991, some 43 percent of the population of FRY was rural if classified by location, and 38 percent if classified according to landholding10. Of the approximately 1 million households categorized as rural by landholding, 28 percent owned less than 1 hectare (Annex 3, Table 12). These households accounted for less than 5 percent of agricultural land used. Most (83 percent) earned their livelihoods from non-farm sources. Of the 758,000 households holding more than one hectare, 70 percent held only 1-5 hectares. Although these households accounted for 38 percent of agricultural land used, only 55 percent earned part or all of their income from agriculture. The remaining 30 percent of households (those holding more than 5 hectares) accounted for 58 percent of agricultural land used. Approximately 85 percent of these households were actively involved in agriculture, but only 45 percent were full-time farmers. In fact only one-third of all farm households with more than one hectare relied solely on farming for their livelihood. Even among households with more than 10 hectares, 38 percent had both farm and non-farm income sources. 47. National household survey data show that mixed-income households have the highest income11, followed by agricultural and then non-agricultural households (Annex 3, Table 13). While these data demonstrate the resilience of agriculture in the face of difficult economic conditions, they also suggest that a mix of farm and non-farm incomes is optimal. Access to non-farm income increases total household income and so provides access to additional capital, smooths income flows in the absence of seasonal credit, and reduces vulnerability to the vagaries of weather and farm prices. 48. This simple analysis motivates policy formulation as follows: · Measures to increase farm size through lease or sale of agricultural land will be fundamental to sector development. More leasing of land, which is already widely practiced, should be given priority in the short-term, because the constraints to increased land sales will take time to resolve.

· The diseconomies of small farm size should be addressed through the establishment of cooperatives and producer associations, particularly where these improve access to markets and marketing efficiency.

· The growth of non-farm employment in rural areas will be beneficial to all rural people. Access to non-farm income is important for most farm households, even those with farms larger than ten hectares. Growth in such employment will also facilitate the transfer of agricultural land from non-farmers to farmers.

10 As this census was boycotted by the Albanian population of Kosovo, results for Kosovo are estimates. 11 This includes income from all sources, including remittances and the value of own consumption.

· The mixed income base of most farm households is an important response to the weakness of markets for credit and insurance. It also significantly reduces credit risks for formal financial institutions, by improving the capacity of farmers to service loans irrespective of the vagaries of markets and weather.

RURAL POVERTY

49. Poverty increased dramatically during the Milosevic era. More than one third of the total population (2.8 million people) were below a relative poverty line of $US2/day in 2000, compared to 14.1 percent of the population (1.2 million) in 1990. Eighteen percent of the population (1.4 million people) live below an absolute poverty line of $US1/day. Households with large, dependent families; those in which the head is either unemployed or employed in the industrial sector; and refugees and internally displaced people are the most vulnerable. The poverty gap widened, from 1.0 percent of GDP in 1990 to 3.1 percent of GDP in 2000 (Table 14, Annex 3), although poverty remains shallow. Most of the increase in poverty is attributable to a severe drop in income, from a GDP of $US 2500/capita in 1990 to $840-$990/capita in 2000. However low, stable gini coefficients indicate that all income groups have suffered in equal measure, with no widening of the income distribution. 50. Available data show that rural areas have a much lower incidence of poverty and extreme poverty, relative to urban areas (Table 14, Annex 3). Rural poverty has also increased more slowly since 1990. Nevertheless, 29% of the rural population, approximately one million rural people, are currently below the poverty line of $US2/day. Of these, 430,000 rural people live in extreme poverty. The average income deficit gap is similar between rural and urban areas, with many rural households close to the poverty line. There are no empirical data on the characteristics of the rural poor. But they are likely to include the socio-economic groups identified above given that both urban and rural poor are vulnerable to deteriorating access to social services, falling wages, and/or loss of unemployment. Rural poverty is also likely to be high among older people who have remained in rural areas despite the deterioration of social services, farmers in more remote areas far from markets, farmers with very small farms and/or those with low fertility land, and minority rural populations such as the Sandzak muslims. Note also that despite the markedly higher incomes of mixed-income households, all household categories exhibit similarly high food budget shares (Annex 3, Table 13). This further suggests that absolute incomes are low across all household categories. Regionally, southern Serbia is likely to have higher levels of rural poverty, due to the lower historical levels of household income, greater isolation of rural communities, and less favorable conditions for agriculture.

Agricultural Policy, Budget Expenditure and Rural Poverty

51. Many rural households are just above or just below the poverty line. Rural poverty levels can thus change quite significantly in response to policy, in either direction. Additional work needs to be done to understand the impact of improved agricultural prices on poor rural residents. Commercial farmers, even small ones, clearly benefit from improved prices, and this benefit may make all the difference in rising above the poverty line. Subsistence and semi-subsistence farmers benefit from higher prices for their cash crops and are disadvantaged by higher prices for their cash purchases of, for instance, sugar and oil. Their net benefit is also affected by the demand for agricultural labor (which in the medium term at least may increase due to better agricultural prices). An interesting impact of higher prices for subsistence farm households could be the withholding of some previously traded surplus production from the market in favor of own consumption, e.g., of milk.. 52. As subsidies for commodity support account for almost 60% of the agricultural budget, it is pertiment to consider their impact on rural poverty. Farmers who potentially benefit from commodity support are those who sell produce in the market. The extent to which they actually benefit depends on the proportion of the subsidy captured by processing and marketing agents, a

proportion which has yet to be ascertained. It is nevertheless useful to compare the sectoral and regional characteristics of the marketed surplus for supported commodities, with budgeted levels of support (Annex 3, Table 15). Private farmers receive most of the direct support for milk, by far the most important budget support measure. Since larger farmers, placing larger volumes on the market, receive proportionally more than smaller producers, this is clearly not a targeted poverty measure. The limitations of milk price support as a means to reduce rural poverty are also evident in that the relatively poorer farmers of Southern Serbia receive only 12.2% of this income transfer, despite owning 41.2% of all cattle (Annex 3, Table 23). Support for tobacco has a potentally greater impact on poverty as small, private farmers produce most of the marketed surplus. The other support measures are unlikely to contribute substantially to the reduction of rural poverty. State and socially- owned agricultural enterprises produce at least half of the marketed surplus for wheat, sugarbeets, soybeans and sunflower seeds and so will receive a comensurate proportion of the income transfers which derive from public support. Note also that, regionally, most of the income transfers from public support are likely to go to farmers in the wealthiest northern region of Vojvodina. Southern Serbia, where rural poverty is highest, derives the least benefit from commodity suppport. The overall impact on rural poverty of agricultural policy in general, and budget expenditure on commodity support programs in particular, is thus low. 53. Poverty alleviation measures directed to employment creation (particularly linked to privatization), improved access to social services, targeted social assistance, pension reform and regional measures will be necessary policy responses to combat rural poverty, since not all rural residents will benefit sufficiently in the medium-term from an improved agricultural economy.

LESSONS FROM REGIONAL EXPERIENCE OF REFORM

54. As the last of the Central and Eastern European countries (CEECs) to begin economic reform, Serbia is well placed to benefit from regional experience. As the paths and outcomes of agricultural sector reform have varied widely among these countries, there is much to be learned. The experiences of Poland, Romania and Croatia are particularly instructive as these countries have important agricultural sectors, and a high proportion of small, private farms. Together with Hungary, these countries also had well-established (pre-reform) trade links with Western Europe, which have been strengthened during the reform process.

55. Throughout the CEEC, economic reform led initially to a 3-5 year period of contraction in the agriculture sector, followed by recovery. The contraction was fairly uniform in magnitude and duration, but patterns of recovery have varied widely. Research shows that a common set of factors led to the initial contraction, but differing approaches to reform have had very different effects on the subsequent pattern of agriculture sector recovery12. 56. The initial sector contraction was due in the first instance to the economy-wide institutional disruption that affected all sectors as a result of reform, but it was exacerbated by a substantial decline in the terms of trade for agriculture. Price and trade policy liberalization led to a fall in producer prices and increased input prices, agricultural subsidies fell, and traditional marketing systems broke down. Demand also fell due to overall economic contraction and the loss or breakdown of traditional export markets. The starting point for agricultural sector reform is more favorable in Serbia. The economy grew immediately in response to reform, and agricultural terms of trade have improved. Producer prices have increased substantially, farm subsidies have increased (although from a small base), domestic demand is growing in response to economic growth, and old and new export markets are opening up rapidly throughout the region. A sector-wide contraction is

12 This section draws from “Major Trends and Developments in the Agri-Business and Agricultural Sectors in CEE and NIS,” by Johan Swinnen. Presented to the EBRD/FAO conference on “Investment in Agri-Business and Agriculture in CEE and the CIS”. March 2002

thus much less likely, and would probably be mild and short-lived if it did occur. The response will vary across commodities nevertheless, and between regions. 57. The lessons to be learned from the recovery process among the CEECs are thus of more immediate interest. These lessons are summarized below, noting relevant country experience where appropriate. (a) Rapid, overall liberalization and macro-economic stability are the pre-conditions for recovery and growth, and improve the ability of institutions to protect property rights and enforce contracts. (These pre-conditions apply to all sectors, not just agriculture). In countries such as Romania, recovery has been substantially retarded by slow liberalization and macro-economic instability. In contrast, Poland and Hungary met these pre-conditions and made substantial progress with institutional reform. This led to better access to capital and technology and more effective privatization, which created a more favorable environment for agriculture sector growth.

(b) The maintenance of soft budget constraints severely retards the reform process by limiting the impact of liberalization, compromising macro-economic stability and inhibiting essential increases in productivity. Failure to impose hard budget constraints allows inefficient enterprises to continue operating, precludes the establishment of a level playing field for competition, and discourages foreign investors. Sector recovery is slowed as a consequence. The maintenance of soft budget constraints in Croatia has had significant medium-term costs in terms of employment creation and lost production.

(c) The failure to strengthen credit markets has caused major problems for farms, by limiting access to credit for both investment and working capital and so inhibiting growth. Privatization and restructuring of the banking sector has been slow in all of the CEECs, and has only quickened as foreign banks have established a stronger presence. In the absence of domestic credit, foreign investment has been the only real source of capital. The continuation of inappropriate pre-reform lending practices also preserves soft budget constraints.

(d) The nature of the land rights allocated in land reform and land redistribution programs is more important than who gets them. The establishment of clearly defined rights to the use and ownership of land, and the ability to confirm and transfer these rights with low transaction costs is the fundamental land issue. As none of the CEECs have resolved this set of issues, farm size continues to reflect factors other than the quality of farm management, and productivity growth has been slow as a consequence.

(e) Privatization is most effective where it leads to the transfer of majority ownership to a single entity, and is followed by increased access to capital, investment in new technology, and improved management. These characteristics are most widely observed in association with foreign investment, and largely explain Hungary’s successful privatization of agro-processing and agri-business. In fact, most CEECs opted for the transfer of ownership to local managers or employees. This largely led to insider privatization, an approach which has had limited success. The dispersal of ownership has weakened management, access to capital and new technology remains poor, and there is less likelihood of a significant improvement in the quality of management. Vested interests are also more influential. Slow agriculture sector privatization in Croatia, and the drag that state and socially owned enterprises continue to exert on economic growth illustrate the consequences of insider privatization.

(f) Where the necessary reforms have been implemented, agricultural sector recovery is driven by productivity increases. All of the CEECs have significantly increased crop and livestock yields. Productivity increases have occurred on state and socially owned farms as a result of lower labor

and input use, but are strongest where hard budget constraints have been imposed. There is less scope to increase productivity in this way on small, private farms as they rely on family labor and use low-input management systems. Improved management practices and higher yields offer more scope for productivity increases on small farms. But the diseconomies of small farms ultimately limit the extent to which productivity can be increased, and slow the rate of recovery.

(g) The development of institutions for information, product exchange and contract enforcement are essential for recovery and increased productivity. Agricultural sector growth has been strong in Hungary and Poland in part because they have done much to replace the vertically integrated state enterprises that performed these functions before reform. Private contracts and associated enforcement mechanisms have been encouraged as substitutes for missing or imperfect public institutions for contract enforcement. New lease contracts have been developed to improve access to land and machinery. And led by foreign investors, these countries have re-established the vertical integration of input supply-production-processing and distribution around private sector activity. Measures to link financial intermediaries to this vertical integration have also been critical to the progress made.

58. Many of these lessons are already reflected in Serbia’s approach to economic reform. A high priority has been given to macro-economic stability and liberalization, and the approach to privatization is conducive to majority ownership and foreign investment. Soft budget constraints persist and the debts of the state and socially owned AKs and agro-processors continue to accumulate in the banking system, and the subsidized public credit schemes funded by government and donors and administered by MAFWM and the DCR allow the continued operation of these inefficient enterprises. Further restructuring of the banking sector will eventually remove one source of soft-budget support by limiting the supply of commercial credit to unprofitable enterprises. But until a credible institutional base for rural credit delivery is established, it will not dissuade the government from providing highly subsidized credit for agriculture. Proposed changes to the system of direct support for agriculture also do little to enhance productivity, rewarding the least efficient elements of the sector. The risk that soft budget constraints will impede sector recovery is thus high. 59. On a more positive note, innovative measures to establish vertically integrated systems that facilitate product exchange and contract enforcement could provide a significant stimulus to sector recovery. Domestic and export markets for food commodities are expanding, and private and socially-owned agro-processors and agri-business enterprises now have the opportunity to link with foreign food processing and retail companies. Moreover, these changes are occurring at a time when foreign banks are seeking to increase their presence in Serbian financial markets. It remains to link these processing and retail elements of the food chain to producers, input suppliers and banks. 60. Note also that Serbia’s agriculture sector is a much larger component of the economy relative to the pre-reform situation in the other CEECs. Agriculture sector reform will thus have a much greater impact on recovery and growth of the economy as a whole, enhancing country-wide growth if reform is successful, impeding economic growth if it is not.

CURRENT STATE OF AGRICULTURE AND FOOD PRODUCTION

61. Although agricultural production has not declined in response to reform, it has yet to exhibit a broad-based increase in response to the significant increase in real producer prices since 1999 (Annex 3, Table 20). Output has recovered from the droughts and floods that devastated crops and impaired livestock production during 2000, but overall production in 2001 is still less than the pre- war levels of 1999 (Annex 3, Tables 17 and 18). Only wheat, raspberries and tobacco have shown consistent upward trends since 1999 in both yield and area planted. The production of important crops such as maize and soybean has declined, as has milk production. Crop yields, as well, remain very low by Western European standards (Annex 3, Table 19), particularly given the favorable conditions for crop production in areas such as Vojvodina. Livestock numbers have also continued to

decline, as has aggregate output of processed agricultural products. The index of manufactured food products fell by 1 percent during 2000 and the index of food, beverage and tobacco fell 2.7 percent in 2001.13 62. These trends highlight the need to address underlying problems in both factor and commodity markets in order to increase sector output and productivity. The increase in producer prices has had a limited impact because producers still lack access to working capital and essential farm inputs, marketing systems remain weak, and the agro-processing sector has yet to make significant progress with privatization and restructuring. In the medium term, deeper structural constraints to increased competitiveness should be addressed through measures to increase farm size, modernize production systems and raise yields and productivity.

13 Source: Economist Intelligence Unit.

III. INCREASING PRODUCTIVITY AND COMPETITIVENESS: PRIORITIES FOR ACTION

63. Without reform of the policies and institutions that influence commodity and factor markets, agricultural output and productivity growth will remain constrained and the Serbian agriculture sector will continue to perform below its considerable potential. 64. Serbia faces a very different context for sector recovery and growth compared to other CEECs at the beginning of reform. Regional markets in the EU, Central Europe and the CIS countries are expanding rather than contracting, and regional trade is being actively promoted through the SAA. This opening up of regional markets is a two-edged sword however, as it will also lead to increased competition on domestic markets. Given the demonstrated capacity of Serbian agricultural products to compete on domestic and regional markets, immediate priority should be given to measures which strengthen the ability to respond to these market challenges. The emphasis should be on developing appropriate incentive structures (price and trade policy reform), strengthening marketing institutions and marketing chains, and providing producers and processors with the operating and investment capital they need to increase productivity and output. Private sector agents should be the target of these measures, as they are most likely to respond quickly, and so catalyse sector recovery and growth. Hence, the immediate priorities for action are as follows: · Reform trade and incentive policies;

· Strengthen commodity and farm input marketing systems;

· Rejuvenate the food marketing chain;

· Improve access to rural finance.

65. An associated set of actions is needed in the short-term to begin reform of the public enterprises, institutions and infrastructure which influence the capacity of private sector agents to respond to market challenges. Experience elsewhere has shown that these changes, although essential, are often slow to implement and so need to be initiated early. These measures include: · Complete the privatization and restructuring of agro-kombinats and agro-processors;

· Strengthen land markets;

· Initiate reform of public institutions for agricultural support; and

· Rehabilitate drainage canals.

66. Finally, a more broad-based, medium to long-term set of actions is needed to: · Complete the reform of public institutions for agricultural support and land administration;

· Promote regional development; and

· Restore the physical and institutional infrastructure for irrigation, drainage and flood control

67. These actions are discussed further below. For maximum impact, they should be closely linked to the country’s overall program of stabilization and privatization.

REFORM TRADE AND INCENTIVE POLICIES

Continued Trade Liberalization

68. Continued reform of agricultural trade policy is essential for increased trade and stronger, more stable agricultural markets. All export quotas and export subsidies should be abolished and effective levels of protection should be further reduced. These policy reforms should be driven by the requirements for WTO membership rather than EU policy. Alignment with EU policy should focus initially on issues such as phyto-sanitary standards and product quality, as required by the acquis communautaire. Full alignment with EU trade policy and the CAP should be viewed as a medium- to long-term goal, to be pursued once EU accession is a more imminent prospect. 69. Given that WTO membership is the real context for trade policy reform, all import and export quotas and export subsidies should be terminated immediately. This will inevitably be a pre- condition for WTO membership, so there is no reason to delay these reforms. Attention should then focus on aligning the policies and negotiating positions of the two Republics. Alignment will probably be oriented towards the higher Serbian levels of import protection. It is unclear how the WTO will respond to this however as it will result in higher levels of protection and support than Montenegro currently applies. The importance of this issue should not be exaggerated, however. The priority should be to get negotiations moving and to focus on the real issues: reductions in both import protection and the Aggregate Measure of Support (AMS). 70. This set of issues should be addressed on the basis of a forward-looking agriculture sector strategy and a negotiating stance based on sound policy analysis, rather than a desire to maintain the status quo. It will thus be essential to co-ordinate the technical assistance program that is being implemented by the EU to prepare a sector strategy and support agriculture policy analysis, with the technical assistance program being implemented by USAID to guide and support the WTO negotiations.

Reform of Direct Support for Agriculture

71. Public support for agriculture in Serbia has evolved on an ad hoc basis, rather than as a coherent response to sector issues. Direct producer support has been inappropriately targeted, has been transferred in inappropriate forms, and has yielded little tangible production response. Producer subsidies do not remedy the underlying causes of low output and productivity. Moreover, subsidies have received a higher priority than support for the institutions and roles for which a Ministry of Agriculture should be responsible in a market economy. Future public expenditure should be allocated on the basis of well-defined sector objectives and priorities that are consistent with broad economic policy, including the need for fiscal rigor, and that support the proper role of government in a market-oriented economy. Direct support should also be transparent, predictable and well- articulated to ensure that it does not become a source of instability in agricultural markets. It should also be more poverty oriented. Preparation of a realistic, forward-looking agricultural sector strategy is the starting point for this process. This strategy should then be linked to the MAFWM budget as the basis for future direct support for agriculture. 72. Immediate attention should be given to the allocation of resources between subsidies and public institutions. Public responsibilities such as border control, plant and animal health, research, training and education should receive a higher priority for support, particularly given the need to align many of these functions with EU standards. The focus, level and form of subsidy should also be reviewed: first, to assess its economic impact; second, to ensure that it is consistent with requirements for WTO membership; and, finally, to consider the rationale for aligning these policies with the CAP.

73. Reform of the activities of the DCR is also a high priority. Although its role as a source of direct support for agriculture might be justified in an emergency context, its actual activities create significant distortions in the markets for farm inputs, rural credit and agricultural outputs, and severely inhibit private sector activity in these markets. As political and economic stability strengthens, the DCR’s role should change. In the short term, reform should include a reduction of the number of commodities in DCR's mandate, a parallel reduction of the level of “strategic” stocks, and an increase in the transparency of DCR's activities. All transactions should be conducted at market prices. Alternative, private-sector sources of farm inputs and seasonal credit should be developed, and the DCR should cease to provide either. The medium-term objective should be to transfer all responsibility for commodity support to MAFWM and limit DCR's mandate to holding commodities for civil emergencies (e.g., food rations). Many of these reforms will be required as conditions of WTO membership in any case and for alignment with EU policy. The WTO makes a clear distinction between public involvement in food security (green box measures) and market intervention (amber box), when assessing the level and form of direct support for agriculture. The EU takes this distinction even further, as these roles must be performed by separate institutions. 74. Because reform of the DCR will be politically contentious, a sequenced program of measures will be required. Preliminary technical assistance could include studies to show the nature of equivalent institutions in the EU and lessons to be learned from the evolution of equivalent institutions in Montenegro, Croatia and Slovenia. A small study to assess the “optimum” level of strategic reserves needed would also be useful. Building on this base, the legal framework for the DCR’s activities should be reformed to remove DCR's discretionary powers for market intervention, to increase the transparency of its actions, and to reduce the target level of strategic stocks.

STRENGTHEN FARM COMMODITY AND INPUT MARKETING SYSTEMS

75. The growth of private farming will depend on development of the farm support sector – material and technical input supply, agricultural services, and marketing of agricultural commodities. Without the establishment of competitive markets for inputs and outputs, private farms will remain dependent on AKs or local traders, both of which often occupy quasi-monoploy positions and provide poor services. Measures to strengthen private marketing channels should thus be an immediate priority, beginning with service and marketing cooperatives and farmer organizations. Measures to support commodity exchanges and green markets should follow.

Input Supply

76. In developed agricultual economies, input suppliers are not only sellers of inputs but also major channels for technology, farmer education and finance. Input regimes for different crops and varieties are often finely differentiated. Seeds, especially, embody not only recent advances in agrobiology but also product characteristics that can be profitably marketed in discerning supermarket and export channels. Knowledgeable suppliers, particularly large multinational ones, also often provide written and verbal instructions for farmers on input requirements for optimum productivity and disease protection and on timing of application or planting. 77. In Serbia, the private input supply industry is as yet little developed. The DCR is now the major source of farm machinery, fuel, other farm inputs and seasonal credit to farmers. It procures much of the fertilizer it provides to farmers in barter transactions with neighboring countries, including Slovakia and Romania, and receives payment from farmers also on a barter basis at harvest. None of these transactions is done transparently, so their economics is obscure. Despite its dominance, some private competition to DCR in input supply is developing. A trading company in Vojvodina, for instance, acquires fertilizer from the Ukraine by bartering wheat and corn from private farmers and cooperatives. His foreign suppliers provide up to 160 days credit which he passes on to his customers. A few other traders are also active with DCR-like business models.

78. The development of this nucleus into a vigorous, modern, private input supply sector will be aided by the abolition of import licensing, the removal of the tax and other advantages of state- enterprise quasi-monopolies not available to private firms, reduction in the burden and non- transparency of regulation, and improvement in access to credit. 79. The seed industry requires particular attention. Crop yields in Serbia are low and the seed industry relatively uncompetitive. Research, regulatory and testing services should be separated from commercial breeding activities, principally through privatization. A new, EU-harmonized seed law is required that would permit private companies and entrepreneurs to enter the market, introduce new varieties and export or import seed without unnecessary restrictions. The seed law should assure acceptance of all varieties in the EU Common Catalogues, with short-term performance tests for only a limited number of major crops. Government agencies should provide seed testing and certification services, phytosanitary certification and protection of intellectual property rights for plant varieties.

COOPERATIVES AND FARMER ORGANIZATIONS

Policy and Legislation for Cooperatives and Farmer Organizations

80. Despite considerable official support for farmers’ organizations and cooperatives, there seems to be no explicit government policy for their development or operation. Public officials nevertheless expect cooperatives to provide a significant, rapid improvement in basic services to farmers and help to link producers and consumers. 81. Cooperative law in the former SFRY gave more rights to cooperative employees and workers than to farmer members. Box 1. What is a Cooperative? These provisions violate the key criterion for a genuine cooperative, i.e. the identity between the owners (members) and A cooperative is an association of the clients of this cooperative. As a result, most existing persons who have voluntarily joined cooperatives are dominated by cooperative employees and together to achieve a common government-appointed managers intent on holding their jobs, objective through a democratically rather than providing services to farmers. A new draft Federal controlled organization in which the cooperative law redresses many of the weaknesses of this old members actively participate, make law, and the final version will hopefully adhere to the basic equitable contributions to the principles of the cooperative movement (Box 1). A standard organization's capital and accept a fair model of Cooperative Articles of Association should also be share of the risks and benefits. – The appended to the law, to provide guidance to cooperatives in International Labor Organization drafting their internal regulations. (ILO) 82. Measures are also needed to develop a policy and regulatory environment which makes it easy for farners to join Cooperative principles: (1) Open and together to set up and operate cooperative businesses. These voluntary membership; (2) democratic measures should include an explicit government policy on control by members; (3) economic cooperatives and other farmers organizations. Special attention participation by all members; (4) should be given to the following requirements: organizational autonomy and independence; (5) the provision of · to make a clear distinction between public and private education, training and information to roles and responsibilities. The legislation should reserve to all members; (6) cooperation among government only those tasks that are genuinely public in different cooperatives; and, (7) nature, such as registration and assuring legal compliance. concern for the general community. – The International Cooperative · for secondary and national structures to be developed by Alliance (ICA) and for primary societies. Any stipulation pertaining to secondary structures and a national union should be drafted in a manner that allows these bodies to be

developed voluntarily by the cooperatives rather than being imposed on them. It is essential that such structures respond to actual needs, and it is important that the cooperatives not be burdened with the costs of secondary and tertiary organizations they cannot afford.

· for a level playing field vis-à-vis other private sector businesses. Cooperatives should be able to operate in an open market economy, without special privileges or the constraints of rigid administrative procedures and regulations that do not apply to other businesses.

Old and New-Style Cooperatives and Farmer Organizations

83. FRY has about 1,200 old-style cooperatives, which were established during the socialist period. Incomplete statistics suggest that these cooperatives have some 250,000 members (versus 1.1 million farmers), employ about 20,000 staff members and workers and own some 50,000 ha of farmland. They operate much smaller farms than the AKs, and most perform very limited farmer- support functions (e.g., operating small farm supply stores). As they employ too many people, they are typically unprofitable. Most of these old-style cooperatives (about 800) are already defunct or dormant, and many of the others will only survive a few more years through asset depletion. 84. A few of the old-style cooperatives have begun to change by diversifying their activities, shedding excess labor and reactivating their farmer members. These cooperatives have the potential to survive if they become member-controlled (in contrast to the present management/employee control) and undergo comprehensive restructuring. To adjust to the new economic environment and transform themselves into private sector, member-service entities, they must also re-evaluate their objectives, focus on member needs and acquire the skills required for effective business operation. This means that farmer members must reassert their control and be committed to making their cooperatives function effectively. For many cooperative members, accustomed to years of outside control and decision making by politically appointed officials, these changes will be difficult. Successful restructuring will require effective support, and access to relevant reference cases. 85. In contrast to the decline of old-style cooperatives, hundreds of embryonic farmer organizations and cooperatives have been established throughout FRY during recent years. The farmers, or their elected representatives, in these new-style cooperatives are clearly in charge and cooperative management and employees work according to the agenda set by farmer members. These initiatives usually start with rudimentary group activities such as the joint purchase of inputs or joint preparation of produce for market. Younger, better educated and more commercially oriented farmers typically join these new groups. Many such groups have the potential to develop into agricultural business organizations like cooperatives or limited liability companies. 86. To make good use of farmer interest in new cooperatives and farmers’ organizations, these groups need support and guidance. As with other SMEs, agricultural and rural organizations will develop more rapidly if, during their first years of operation, they receive adequate business advice and support. There are already a few exceptional cases, where group activities have developed into business-like new-style cooperatives and these successes could be used as models for new groups.

A Transition and Support Program

87. In parallel to the development of a new policy and legislative framework for cooperatives and farmers’ organizations, a Farmers’ Organizations Support Center (FOSC) is being established to act as a business service provider. Such a center would:

· assist selected old-style cooperatives to restructure,14 and

· support the development of newly created farmer groups and cooperatives and similar organizations.

88. The Center would operate on an interim basis until a network of secondary (regional) and tertiary (national) cooperatives could be established and rendered operational, and could also serve as the nucleus for a new apex structure. Such an apex structure does exist in Western countries and provides services and support to cooperatives at all levels, fully paid for by member cooperatives. The Center does not need to be a separate entity as it could operate as an entity within the framework of existing and planned SME programs.

REJUVENATE THE FOOD MARKETING CHAIN

Arrival of International Supermarkets

89. The food-processing sector will face a major challenge with the arrival of several international supermarkets in Serbia in 2002 and 2003. This will be the single most significant factor affecting the food production, processing and retailing industries in the immediate future and will have a profound impact on agriculture. The first 6,000 m2 foreign supermarket will open on the outskirts of Belgrade in December 2002, and at least three hypermarkets of about 15,000m2 are planned to open by the end of 2003. It is expected that all towns with populations of more than 30,000 will have supermarkets within five years (provided that the respective local economies are sufficiently buoyant). This will pose a significant challenge to Serbian producers, processors and retailers. 90. Foreign supermarkets already have well-established supply chains, and benefit from long-term contracts and low bulk-purchase prices for huge volumes of product from their existing suppliers. Their cash-register systems are automated from the point of sale to the suppliers’ warehouses. Reordering is a largely-automatic process. The supermarkets will not buy local products unless these meet the stringent quality standards, low prices and guaranteed delivery schedules demanded by the supermarkets. Local food processors, traders and packers must meet these requirements or lose out to imports. Small batches of local products from small, risky suppliers will be competitive only in the context of high import barriers and transport costs, both of which will undoubtedly decline over time in line with bilateral agreements with the EU and regional partners and as a result of negotiations to join the WTO. 91. The Serbian retail chain C-Market, which currently has about 80 percent coverage of the Serbian market and a majority of sales, will also have to compete with these supermarkets. It will not be vulnerable to supply deficiencies, because it can source the same products outside Serbia that the new entrants can. However, it may not be able to compete with the well-developed scale economies, technology and management efficiencies of the international supermarket chains. C-Market is aware of this and is preparing its strategy to survive in the soon-to-be more-competitive food retail market. It is expected to survive and possibly to prosper, at least as a local all-hours mini-market operation. 92. The entry of foreign (initially Austrian) petrol stations with mini-markets attached will provide further competition for local retailers. The first of these will soon open on the E75 south of

14 A breakdown of old-style cooperatives by level of assistance needed or desirable is as follows: · Fully self-sufficient cooperatives – approx. 25 - no FOSC assistance needed. · Moderately successful cooperatives – approx. 100 - small amount of targeted assistance required. · Cooperatives with good potential but lacking in business skills – approx. 300 - primary target group for support services. · Non-viable or defunct cooperatives – approx. 800 -. no assistance justified.

Belgrade. As this design of combined petrol and retail food operation proliferates (which it has in most parts of Europe), foreign retailers will become interested in supplying it. This could also be an opening for local enterprises such as C-Market. 93. Agro-processors that sell mainly to the domestic market are doubly vulnerable, then, because they must compete with imported products at the supermarkets and may lose their largest domestic customer (C-Market) to imports. Even the financially sound processors with relatively modern facilities and relatively good products may not survive this challenge unless they succeed in meeting the quality, volume and reliability requirements of foreign supermarkets. To penetrate the supermarket supply chains, they will need ISO9002 and HACCP15 accreditation. 94. Multi-national food processors and dairy companies, the established suppliers of international supermarkets, may try to buy their way into domestic companies in order to set up within-country distribution centers and storage space for imported products and to secure Serbian brand names. The international dairy industry, for example, has dairy factories in Europe that are typically 10-20 times greater in capacity than the largest Serbian dairies. The economies of scale and the financial strength of the multinational companies thus pose a considerable threat to the Serbian dairy industry and other Serbian food processors. 95. Not only will prospective changes to the retail industry have a dramatic effect on the food- processing sector, they are also likely to increase food imports and inhibit domestic agriculture in the short term. In the longer term, these changes will almost certainly increase the markets for packaged fresh foods and processed foods. As comparative advantage factors work themselves out, and as Serbian processors learn how to supply this market and export markets, a major re-orientation of farming and processing will certainly take place. Not all farmers and agro-processors will be able to survive in this new market environment. 96. The response to this challenge by processors, farmers and government will determine how challenging the adjustment period will be. Government needs a strategy to help the processing industry to compete with imports of internationally-branded products (which will affect some sub- sectors more than others) and grow into a viable supplier of the modern retail industry.

Constraints and Prospects for Agro-Processing

97. The agroprocessing sector is perceived to be in a dilapidated condition, and operating considerably below its installed capacity. Most of the inventory of processing plants is also said to be outdated, requiring considerable investment to approach export standards and achieve the ISO9002 and HACCP accreditation that is a requirement for suppliers of international supermarket chains. In fact, the sector has a mix of modern and older plants, many of which could be upgraded to modern standards with moderate investment. In other cases, the plant and buildings are in poor condition, but the enterprise is still operating with respectable levels of production; that is, there is a viable (if vulnerable) business, but it needs investment. In addition, there are some private-sector food processors that export worldwide to international standards and have grown their businesses even under the difficult conditions of the past ten years. 98. Some milk and meat processors have modern plants preparing for HACCP accreditation. The milling industry has some mills constructed in the 1980s that need only modern control systems and building upgrades, because milling technology has not changed significantly since the mills were constructed. The pasta industry has some fairly large-scale modern plants. In general, these companies sell their products mainly in the Serbian market, with some exports to nearby countries. In sum, the condition of the processing industry may not be as bad as it is portrayed. Regeneration is feasible, provided investment funds are available.

15 Hazard Analysis and Critical Control Point Analysis (HACCP).

99. The main constraints to development of the sector are: (i) management failure to proactively restructure, resulting in low profitability and insufficient cash flow to provide adequate working capital; (ii) overstaffing of AK and ex-AK factories and failure to proactively downsize or close unprofitable enterprises (this is related to the first constraint); (iii) inability to access available investment funds for agroprocessing, again a result of unprofitability and ineffective management; and (v) need for product development and applied R&D for new and upgraded products. 100. Working-capital shortages prevent timely procurement of raw materials for processing, keeping the processors operating at low utilization of capacity. The persistent use of “payments-in- kind” and barter trading also contributes to cash flow problems. Rather than take effective action to restructure in a major way, some AK and ex-AK managements have resorted to selling facilities and land in small batches to maintain revenues and pay staff salaries. This strategy has a limited life- span, and management will soon reach the end of their disposable assets without having revived their aging facilities. It would be far better to focus on the most profitable core business and to invest in upgrading facilities. Disposing of peripheral parts of the company in one sell-off could generate capital for investment in the core business. 101. The availability of investment funds is improving with the entry of foreign banks to the market, and IFC/SEED and several bilateral sources have investment funds available for agroprocessors. But investment funds will not be available to unprofitable firms and firms without convincing business plans. Product development and applied R&D for development of new and upgraded products is essential to keep Serbian processors competitive in increasingly sophisticated markets. Products seen at the Novi Sad agricultural fair (May 2002) and in Belgrade stores have artisan characteristics that may have long-term niche markets but will probably not compete well in volume in the new supermarkets against less-expensive mass-produced imports. 102. Given appropriate support, these are all problems which can be resolved. Government should lead this process by insisting on effective, decisive management (in the cases where the government has a say). Management priority should be accorded to the restoration of financial health through effective restructuring and management and to preparing for intensive competition by creative business planning, product development and supply chain management. Technical assistance to commercial banks and micro-finance institutions to develop loan appraisal abilities in the agriculture sector is also required.

Marketing Links and Contractual Relationships

103. As noted in Chapter II, agricultural sector growth has been strong in Poland and Hungary, partly because they have done much to replace the vertically integrated state enterprises that were responsible for product exchange and contract enforcement, prior to reform. Alternative, private contractual relationships are especially important in post-reform environments where the public institutions responsible for contract enforcement are weak or missing. Serbia can profit from this experience by developing effective contractual links between farmer cooperatives or associations, agro-processors and food retail outlets. The international supermarket chains employ such contractual relationships widely and Serbian producers and processors should take advantage of their presence, not only to establish equivalent relationships but also to use these contractual models as a basis for linking producers, processors and domestic retail outlets. 104. An in-country survey of the current practices of supermarkets in Poland using interviews with supermarket managers was undertaken for this study, and it is understood that similar practices obtain in Hungary and are also becoming established in other parts of Eastern Europe. The main lessons for Serbia are that supermarkets have annual or multi-year contractual realtionships with most of the suppliers that they deal directly with - processors, traders, farmer associations, cooperatives and large farmers. The contractual conditions governing these relationships are similar for all types of suppliers. In order to be considered for such a relationship, suppliers of all kinds must go through an accreditation process. They are expected to meet contract terms exactly, which means

that they have to be large enough to absorb supply shocks and still deliver contractual volumes. International traders, large processors and national traders with established supply bases are in preferred positions, but farmer associations, new-style cooperatives and large farmers are able to participate in some market segments, especially fresh fruit and vegetables. Some farmers directly servicing supermarket contracts become farmer-traders, as they augment their own produce with that of neighboring farmers, for whom they provide packing services. 105. Smaller farmers have very little chance of getting directly into the supermarket supply chain. Their produce is sold in supermarkets, but not without passing through an intermediary with supermarket accreditation. Small farmers do not have the costly, advanced equipment that can guarantee various grades of produce. Thus, traders buy roughly sorted and graded produce directly from smaller farmers at the farm gate and at wholesale markets. Small traders likewise do not have the necessary advanced equipment and must sell to the larger ones that do, if their produce is to enter supermarket supply chains. Farmer associations and cooperatives often own collection centres to which small farmers can deliver produce, but these organizations are not able to access supermarket supply chains unless they can satisfy supermarket accreditation requirements. Among other things, they need to have the resources to invest in up-to-date sorting, grading and processing equipment. 106. The factors considered by supermarkets in their accreditation programmes vary, but the following are common to most. · Food safety. The supermarkets will not compromise food safety. · Modern technical equipment standards (ISO 9000 and HACCP) for consistent product quality. · Adequate logistical facilities for storage, cleaning, sorting, grading and packing. · Volume supply capacity. · Competitive pricing. · Ability to trace all products back to the producer by means of bar codes. · Financial strength so that the flow of supplies is not compromised for lack of working capital. · Insurance cover for all aspects of the operation, including failure to meet contractual deliveries. · Information technology compatible with supermarket continuous product replenishment systems that automatically convert consumer checkout data into supplier orders.

IMPROVE ACCESS TO RURAL FINANCE

107. In all sectors of the economy, preconditions for private-sector growth include access to capital for investment and guidance on how to adjust production systems and management to the rigors of a market economy. Measures to improve access to capital are critical in this regard, as noted in Breaking with the Past, which remarks, “There is little in the way of financial infrastructure to service the private sector, with the exception of small private banks. There is an absence of trade finance, micro-finance institutions, leasing companies, credit unions and private equity or venture capital.” This is especially true in the agriculture sector. The rural sector is dominated by small- and medium-scale private farms, agro-processors and agri-business enterprises that have traditionally lacked access to capital (Agrobanka lent primarily to the socially owned AKs and agro-enterprises). And agriculture has a diverse range of credit needs, which require a diverse range of financial institutions and financial instruments. 108. To assure that rural enterprises gain adequate access to financial services, a clear view of the most appropriate institutional base for rural finance must be developed, and borrower access to credit

must be improved. All measures must be consistent with the overall program for banking-sector reform and privatization. 109. A broad range of financial institutions and financial instruments is needed, including commercial banks and non-bank financial institutions such as savings and credit associations, and leasing companies. Micro-credit organizations should be added to this range once the NBY has developed an appropriate legislative and supervisory framework for MCO operation. The emphasis should be on encouraging sustainable, private sector institutions, with public sector credit viewed as a transitional measure. Donor technical assistance should be used to guide the development of an appropriate institutional framework for rural credit based on private sector activity, and to guide the transfer of interim public-sector credit programs to the private sector. Credit lines to boost agricultural lending by commercial financial institutions will further support this process. 110. The establishment of appropriate financial institutions is not enough. Incentives to lend for agriculture must also be improved. First, lending risks must be reduced by improving the ability of financial institutions to use and recover a wide range of assets held as security, including land, moveable assets and inventories. This will require new legislation and administrative procedures for moveable assets and warehouse receipts, as well as stronger land administration and land markets. Second, the financial sector's approach to agricultural lending must be changed. Agricultural lending in the past was to the wrong enterprises (socially-owned, loss-making) and guided by the wrong analyses (food self-sufficiency and employment generation rather than profit maximization), and it supported the wrong activities and investments. The capacity of financial institutions to evaluate loans from the rural sector must be re-oriented and strengthened, and the traditional emphasis on collateral-based loan appraisal should give way to greater attention to profitability and cash flow. This is especially pertinent for the small- and medium-sized farms and agricultural enterprises that have consistently demonstrated their viability, even in the most difficult economic conditions, yet were largely excluded from credit markets in the past. There is ample evidence in the region that these farmers can service loans at market interest rates, with very low default rates, when this approach is taken. 111. Finally, the returns to agriculture must be improved, beginning with reform of price and trade policy and measures to improve the efficiency of commodity markets. This is a two-way process, however. Increased access to capital will allow producers to acquire new technologies and adjust to the new incentive structures created by price and trade policy reform, and so increase farm returns. A more stable policy environment with less public intervention in agricultural markets will also improve the climate for investment. Reform of the DCR will be important in this regard, as it is a major disincentive to private sector activity in the markets for credit and for farm inputs and outputs.

PRIVATIZE AND RESTRUCTURE STATE AND SOCIALLY-OWNED ENTERPRISES

Privatization of Agro-Industrial Enterprises

112. Most of the AKs hived off their processing enterprises into separate entities during the 1990’s, the shares of which were then acquired by the managers and employees of these enterprises under MEBO privatization procedures. Processing and trade enterprises were the main targets of the de- integration process because they were generally endowed with greater assets per employee and were more profitable than the primary agricultural and livestock-breeding activities. As a result, there are now a small number of well-focused, profitable agro-processing enterprises that are prime candidates for privatization by tender, and many others which could be privatized through auction. Land ownership will not be a major constraint to privatization of these enterprises. Their separation from the AKs is already complete in most cases. Even so, it appears that about 40 percent of such enterprises must be privatized through the restructuring process, because they are either unprofitable or too small to be viable.

113. Measures to strengthen agricultural marketing systems, of which these enterprises are an important part, are an essential component of agricultural sector development. Therefore, technical assistance should be provided to support the privatization and restructuring of viable state- and socially-owned agro-processors and trading enterprises. This should be provided as part of a broader program to support the development of all small- and medium-scale agricultural enterprises, including those enterprises already in the private sector and those undergoing privatization. Under this program, selected enterprises would receive guidance on restructuring and staff rationalization, on development of business and investment plans, on measures to increase access to capital, and on marketing and new product development. This type of support should also be extended to the primary-production AKs once the legal problems associated with land ownership and land restitution are resolved, and privatization begins. 114. Given the relatively large number of agro-processing enterprises, both private- and socially- owned, privatization is unlikely to lead to monopsony in the agricultural sector. Moreover, of the approaches generally taken to demonopolization (foreign trade, break-up, regulation, and market entry), measures to encourage market entry are likely to be the most effective in Serbia. Technical assistance for agricultural SMEs is thus justified as a means to promote competition. Particular attention should be given to the entry of SMEs and large firms into areas where surpluses of raw materials exist. Existing enterprises may lack the ability to compete for these raw materials due to lack of working capital.

Privatization of AKs and Land Restitution

115. AKs and cooperatives received about two-thirds of their land from the state after World War II and purchased the other third from private farms during the period 1950-1990. Under current legislation, the land that was purchased by the AKs and cooperatives is regarded as legitimately acquired (even though the AK farms had a first right of refusal on land sold by private farmers). The rights under which the AKs use that land will remain with the farms after privatization. In contrast, the land allocated by the state was, for the most part, confiscated from large- and medium- scale private farms. While the AKs were given a perpetual use right to confiscated land, this right is not transferable and the land is considered state property. It appears that about two thirds of this confiscated land was in Vojvodina and was owned by farmers of German descent. The land confiscated from non-German nationals will be subject to restitution under the Denationalization Law now being reviewed by the Parliament of Serbia. Some of this confiscated land was seized by court order for political crimes tried under the government of the former SFRY. This portion will be restored to the descendants of former owners through individual court processes. The remaining land will be restored by administrative procedures, if it can be shown to have been confiscated by administrative procedures; for instance, the government of former Yugoslavia imposed a maximum size on private holdings of 20 hectares and seized all private holdings above this level. 116. Land confiscated from German nationals will not be restored. The SFRY and the Federal Republic of Germany concluded a post-World War II treaty by which Germany renounced all rights to this land in exchange for an exemption from paying war reparations to the SFRY. Roughly half of the land currently farmed by AKs and co-operatives falls into this category. The approach to distributing this land has yet to be determined. 117. Two issues must have priority if land restitution is to be implemented effectively. First, problems with the title registration system must be rectified if the land that was administratively seized is to be documented and returned through legislative procedures. Second, clear policies must be established for disposal of state-owned land that is not to be restored. Here, the goal should be to place this land at the disposal of the farms that are capable of using it most efficiently. This will require the formulation of policies concerning lease and sale of land that are even-handed in their treatment of private farms, AKs, cooperatives, and new entrants into the farming sector. In principle, there should be no discrimination against giving the AKs access to this land, provided they are

willing and able to pay a fair lease price. Once through the privatization process, some of these AKs may well be able to use this land effectively for their future agricultural and livestock operations. 118. In practice, government should be careful not to grant land lease rights to AKs that are unprofitable and likely to be restructured. Experience in neighboring countries shows that these AKs do not make their lease payments in a timely manner (if at all). However, this should be balanced by the consideration that privatization is a lengthy process, and profitable AKs should be allowed to maintain access to land if they can make the lease payments. By allowing this access, the state will avoid scaring off potential buyers of AKs, who might deem current access to land a prerequisite for purchase. This is an important consideration in Vojvodina, where much of the state land not subject to restitution is located, as well as many profitable AKs. 119. An optimal policy would include the Box 2. Land Administration in Serbia following short-term and medium-term components. The institutional responsibility for land First, the Denationalization Law should be approved administration spans several ministries and also expeditiously. Simultaneously, the government includes local government. should document the land seized from German The land cadastre is managed by the Government nationals as quickly as possible and cross-index Geodetic Authority (GGA). The cadastre, information on this land with information on the covering 88,167 km2, includes nearly 55 million financial situation of the AK currently using each cadastral parcels of private, social and state land parcel. Next, the government should institute a property. However it is out-of-date and needs to rate for temporary land lease by AKs (renewable be harmonised with the systems in the municipal yearly or bi-annually) that is no less than 15 percent courts; of the gross value of agricultural/livestock output The legal real property registration system, which generated per hectare on average in the region. complements the cadastre, is conducted by the Beginning in 2003, AKs that have negative net municipal courts with the oversight of the equity should be disqualified from access to state- Ministry of Justice and Local Administration; owned land and this land should be auctioned to the Rural and forestry spatial planning and land highest bidder among private farmers, new market management policy is co-ordinated by the entrants, and AKs with positive net equity and Ministry of Agriculture, Forestry and Water demonstrated profitability. In 2004-2005, the land Management; under temporary lease to AKs should be auctioned Urban planning policy and regulation is the as well, forcing these enterprises to bid to maintain mandate of the Ministry of Construction and access to the state land they have farmed. Urban Planning, which co-ordinates policies and has technical oversight of the urban planning STRENGTHEN LAND MARKETS operations in the municipalities; Property tax administration is the responsibility 120. As a market economy evolves in the rural of the Ministry of Finance and Economy; and sector, land tenure will include a mixture of small- to medium-sized family farms and variations of larger Information technology standards which are corporate farms, cooperatives, and looser critical for the harmonisation of land records are implemented by the Bureau of Information associations emerging out of the existing structure of Technology and Internet and the Serbian small farms and AKs. At present, approximately 78 Standards Office, which both work on various percent of agricultural land and 50 percent of forest aspects of property and business registration. land is privately owned. The current system of fragmented, labor-based, semi-subsistence farming Support is needed to allow these six institutions will continue to predominate for a long period. to work in a unified manner to address these issues. Family farming with a commercial orientation will emerge fairly slowly. 121. In all cases, the keys to creating an efficient structure are clarity of ownership rights, lack of restrictions on land use, and a system that efficiently transfers titles or leases to the most efficient farmers or to collateral holders. Currently, it is legal to lease and sell privately owned land, but

turnover is largely unofficial. Where turnover is legally recorded, the title registration system is incomplete and disjointed and fails to transparently document the current ownership or allocation of lease rights (or more sophisticated encumbrances, such as mortgages or state servitudes). 122. Land turnover will not increase until steps are taken to create a modern property-registration system. The property-registration offices that handle all property administration and transactions (urban and rural) in each province must be reorganized and re-equipped and their staff retrained. Without these changes, lack of clear property rights will continue to inhibit increased leasing and sale of land, mortgages will remain difficult to acquire, and the system will become more prone to conflicts over ownership and boundaries. As long as a systematic and comprehensive system for incorporating transactions in real property is lacking, farm enlargement and consolidation will be constrained and few farmers will be able to take advantage of the economies of scale and scope usually available to farms of 50-200 hectares. In addition, the secure tenure needed to facilitate access to credit will be difficult to obtain and investment will be inhibited. 123. To increase land turnover, a Land Market Action Plan should be developed to transform the current land cadastral system into a modern property registration system that records, displays and protects rights to real property. At present, only about 10 percent of Serbia is covered by a reliable real estate cadastre. In the remaining 90 percent, there is a substantial disjoint between actual land ownership and the public records, partly because of the historic separation of real estate and land registration systems and partly because of tax avoidance. The absence of any record of land market values is a further complication. Government should focus on recording all existing property rights, including leases to state land. It should also establish programs and institutions that can support the accurate valuation of real property, improve the availability of information on the supply of and demand for land, and adopt land-use zoning to guide rural as well as urban development. 124. In the short to medium-term a phased approach to the development of a national real-estate cadastre is required. This might include: · Consolidation of land laws and their harmonization with comparable EU laws and revision of the legal framework to establish the GGA as the central land registry of Serbia and to provide a state guarantee of cadastral records;

· Restructuring of the GGA to establish an autonomous, transparent organization that is people- centered and technology-capable;

· Completion of the active geodetic reference frame by establishing sufficient GPS base stations and equipping and training for GPS real-time kinematic positioning;

· Development of real-estate information software for Serbian conditions, purchase of hardware, staff training, and progressive implementation of a digital real estate cadastre across the Republic over a five-year period;

· Stimulate the real-estate market by legislating and enforcing the compulsory registration of sales, leases and mortgages of property and their values; training in land valuation; and the establishment of self-regulating bodies in real estate transactions and valuation.

INSTITUTIONAL REFORM

Policy Analysis

125. A comprehensive framework for policy analysis is already being developed. This review identifies the issues which the agriculture sector must address if it is to grow and prosper, and

recommends priorities for action. An Agricultural Development Strategy is also being prepared with the support of the European Reconstruction Agency, and should be complete early in 2003. But unless the MAFWM has a strong capacity to turn the conclusions and recommendations of this work into coherent policies and programs for sector development, its impact will be limited. 126. Much could be done to strengthen the current capacity of the MAFWM for policy analysis and to integrate policy analysis into decision-making processes. A policy analysis unit should be established within MAFWM, studies are needed on key policy and trade issues, and MAFWM and research institute staff should be sent for post-graduate training in agricultural economics and policy analysis. Initial emphasis should be given to strengthening the capacity to establish a coherent, fiscally sustainable policy for support to the agricultural sector, and to strengthen the capacity for trade analysis and negotiation (particularly with regard to the WTO).

Sanitary and Phytosanitary Services

127. Economic isolation, war, constrained budgets and constitutional and institutional confusion have stalled the development of Serbia’s veterinary, sanitary and phytosanitary regulatory and inspection systems. Currently, they no longer meet international requirements. The problems are numerous and include lack of consensus on an appropriate institutional framework; unspecific and inconsistent laws and overlapping inspection responsibilities; lack of transparent, internationally recognized standards; weak risk-assessment schemes; too many (139) un-stratified, mostly under- equipped food quality/sanitary testing laboratories; inadequate food safety monitoring programs; insufficient staff and infrastructure at border inspection points; an absence of farm and livestock identification systems; and a passive SPS system that examines rather than improves food safety. 128. National consensus is required on a future strategy for SPS, which addresses public and private sector roles. The SPS legal framework must be consolidated and harmonized with EU regulations, and the acquis communautaire adopted. A new institutional framework will be required, consistent with the strategy and relevant legislation and probably involving a national Food Safety Authority, and relevant staff will need to be trained. Inter-linked laboratory and field information management systems with trace back capacity will be required. Consultative bodies will be needed to ensure stakeholder participation in the change process. This latter role might be filled by a Food Safety Council empowered to review legislation and advise the government. 129. Laboratories should be certified and their management centralized, with some upgraded to reference laboratories and substantial privatization or closure. Laboratory methods should be standardized, documented and accredited by the EU. A national registration system for producers and importers, as is used in the EU, should be considered. A HACCP system should be legislated and institutionalized, initially certifying leading food industry companies and then undertaking phased certification of the entire industry on the basis of a map of industrial food capacities. Border inspection facilities should be significantly improved, and border inspectors provided with up-to-date national inspection guidelines and a current set of EC guidelines. 130. Government is committed to privatizing veterinary clinical services, but has not yet enacted the necessary legislation nor established the independent Veterinary Chambers necessary for privatization. Experience in Croatia and Macedonia shows that veterinary station privatization can proceed quickly, even in remote locations, if favorable terms are offered for the transfer of infrastructure and materials and if contracts for the implementation of disease surveillance and other government services are maintained in the medium term. Additional training will be required to support the transfer of veterinarians to the market economy.

Agricultural Extension

131. Agricultural extension in Serbia is delivered through the semi-autonomous Institute for Science Application in Agriculture (ISAA). The ISAA employs about 750 staff in 34 agricultural

stations across Serbia, and is partly financed by an annual budget from MAFWM (107 million dinars, or US$1.75 million, in 2002). Additional income derives from agricultural activities and fees for services to private farmers and AKs. Except in its animal-selection tasks, the ISAA works mostly with medium- to large-scale private and socially-owned farms, its activities being centrally planned and primarily commercial in nature. As such, the ISAA is a potential candidate for privatization following restructuring. 132. G17 Plus, a local NGO, has established its own support system for farmers, Agronet, with about 40 centers around Serbia. Agronet is presently supporting the implementation of farmer self- improvement and business development programs that involve as many as 15,000 farmers. Several donor-funded agriculture and rural development projects also fund technical services to farmers. Private and socially-owned input suppliers and processors are another part of the technical support mosaic; often, in the case of processors, with a view to improving product quality. 133. Better access to knowledge and information through agriculture research, extension and education is an important strategy for improving agricultural productivity; however government should proceed carefully with the provision of technical services to farmers. Public institutions should first work with industry stakeholders to develop an agricultural knowledge and information system (AKIS) strategy. This strategy should differentiate information requirements by client type, from subsistence farmers to large-scale commercial agricultural firms. Development priorities, public and private roles, social and commercial outcomes, mass media and information technology functions and cost recovery criteria and mechanisms would be integral components of the AKIS strategy. The development of an agricultural research master plan is a necessary component of an AKIS strategy. Once finalized, the strategy should lead to a logical pattern of institutional reform consistent with the desired outcomes. 134. Experience elsewhere in Eastern Europe highlights the need for a shift toward industry-based advisory services, underpinned by a farmer registration program and focused on product competitiveness, increased use of mass-media and IT communications, privatization of research/extension institute commercial programs, cost sharing and increased stakeholder participation in priority setting.

Agricultural Research

135. In Serbia, the Ministry of Science Technology and Development (MSTD) funds all research including that in agriculture, primarily focused on plant and animal selection. However, the six leading agricultural research institutes typically earn in excess of 80 percent of their income from royalties, product sales and regulatory and consulting services, with the result that little time is spent on their primary research and development mission. Each institute's Management Committee includes MSTD and institute nominees, while its Scientific Council is institute-appointed. There is little farmer representation, if any, in institute management. The capacity of Serbian universities to support research is limited by funding and resource constraints. 136. The shift from a managed to an open economy, the demise of the production-oriented AK system, a massive reduction in funding, the rise in environmental awareness and movement toward user-pays service delivery, all have effects at every level of the agricultural sector. These changes are exacerbated by over-capacity within the agricultural research system, the uneven distribution of assets and income between institutions, conflicting research/production and regulatory roles in some institutes, poorly defined sector outcomes and a lack of stakeholder participation. 137. The government must define clear agricultural research policies and needs. Prioritized, research master plans are required to define resource needs. Subject to adequate budget allocations, research policy should include privatization of the commercial production activities of research institutes, transfer of regulatory functions to appropriately constituted institutions, and management

of research funding by agricultural research councils having stakeholder participation. Several options are available for the subsequent organization of research, including: · Transfer of research responsibility to the agriculture university faculties, with the possibility of faculties also taking responsibility for agricultural extension in their regions;

· Development of multi-disciplinary regional research institutes with associated extension responsibilities; or

· Establishment of individual research institutes, with or without extension responsibilities, focused on the key sub-sectors, including livestock, food and crops, horticulture, forestry, and natural resources (land and water).

138. Given the present unevenness in agricultural faculty capacity, focus and distribution in Serbia, the faculties are unlikely leaders of research or extension in the medium term. Regional agricultural research centers may help meet the needs of Serbia’s diverse regional agricultural systems and may provide a useful base for research-linked regional extension services. Disadvantages of this approach include the absence (except in Vojvodina) of regional administrative structures to which they could be linked and the increasing sophistication of agricultural technology, which frequently demands specialization and critical scientific and laboratory “mass” for meaningful technology gains. The agricultural institutes of Serbia are primarily specific to crop groups or agricultural sub-sectors, although this largely reflects their commercial rather than scientific interests. Nonetheless, this network provides a basis for rebuilding a research-led AKIS that is based on sub-sectoral disciplines. Such a research structure would have the advantage that institutes and their staff are already established in their prime impact areas, and can build contractual links to now-commercialized former parts of the institutes under a new administrative regime. That regime should include an Agricultural Research Council, established in law, predominantly made up of elected stakeholders and responsible for allocating a mix of public and private sector funding for applied research.

Prioritizing and Sequencing Institutional Reform

139. The diversity of these institutions and the complexity of their reforms mean that attention to sequencing will be important to the success and impact of reform. Short-term priorities should be: · - Strengthening the capacity for policy analysis · - The alignment of SPS legislation with the acquis communautaire · - Upgrading and rationalization of the laboratory system · - Upgrading border control facilities and procedures · - Support for private sector extension initiatives · - The preparation of national strategies for research and AKIS

140. Subsequent medium-term actions would include: · - Privatization of veterinary services, the seed industry, and the commercial activities of ISAA and the research stations · - The establishment of new institutional structures for extension, research and food safety · - Implementation of the national strategies for research and AKIS

RESTORE IRRIGATION, DRAINAGE AND FLOOD CONTROL SYSTEMS Irrigation

141. Some 280 sites,16 most in the northern plains, are equipped with formal irrigation facilities 17, typically constructed 30 to 40 years ago. Only about 3 percent of arable land – about 118,000 hectares – is served by these systems. They predominantly supply sprinkler irrigation and are intended to overcome rainfall variability in the growing season and to supplement low levels of rainfall. In Serbia these are significant constraints to crop production. There has been no systematic approach to the development of formal irrigation. Better farm management could have a large effect on irrigation use. Many AKs use irrigation to overcome short-term water deficiencies rather than to optimize production with respect to available markets, yields, production costs and prices. Weak farm management also results in the underutilization of irrigation, such that they are only used for an estimated about 30-40 percent of the time, depending on the year. An indicator of this underutilization is the fact that most of the systems visited appear to be in relatively good condition considering their age (although others were in very poor condition). 142. Available information relates primarily to these formal systems. Limited data are available on the numerous small private farmer-built and -managed irrigation schemes, most located in Central and Southern Serbia. These small private schemes use either gravity or pumping from shallow wells and boreholes on small, 1-5 hectare parcels of land. Drip irrigation has been gaining in popularity, especially for orchard and fruit crops, but because the investment cost is high (around US$ 2000 per hectare for apples), the lack of credit available to small private farms has restricted adoption.

Drainage and Flood Protection

143. Substantial under-investment in the drainage network over the last 6–10 years has led to an accumulation of deferred maintenance, with high levels of vegetation in many channels. During normal and low discharge, the vegetation presents no problem. But with above-average rainfall or following intense rainfall, poorly-drained or flooded fields can significantly lower crop yields or, as in 1999, cause complete crop loss. O&M funding has declined in both nominal and real terms, because only limited funds are available to the water companies. Only the most pressing of maintenance works are carried out and no capital works. The most important water control and drainage structures receive some maintenance, but instead of being maintained every 4-5 years, they are now maintained every 9-12 years, depending on their location, access and importance. This substantial backlog of maintenance cannot be overcome without capital rehabilitation support. 144. Flood protection falls under the mandate of the water companies. However, budgets for the repair and maintenance of flood control structures have suffered in the last ten years in line with declines in support for the water companies' other investments. In years of extreme rainfall and runoff, considerable emergency works have been needed, primarily in lower-lying lands and in smaller, narrower catchments with steep gradients (such as the Miava river near to Pozarevac), and have accordingly been given highest priority. Such emergency works have strained the capacity of the water companies. Funds and equipment that would normally be used for routine drainage maintenance have been diverted to flood protection tasks such as repair of flood dikes, river training, bank protection and torrent control. To avoid this diversion, flood protection should be distinguished from the more-predictable requirements of the irrigation and drainage systems and undertaken by a separate agency rather than the water companies. Under the reorganization now being considered, flood control responsibilities would be assigned, for strategic planning, to the newly formed Ministry

16 The size of these irrigated areas varies from 23 sites > 1000 ha down to 61 sites < 100 ha. 17 That is, operated in cooperation with water companies, including all state or socially owned systems and private systems cooperating with water companies.

for Protection of Natural Resources and Environment (MPNRE) and, for implementation, to a separate unit of the Water Directorate of the MAFWM.

Water Management and Pricing

145. The organization of and responsibility for water development, irrigation, drainage and flood protection in Serbia are currently under review. Although MAFWM retains the mandate for water, it is anticipated that MPNRE will be responsible for water policy and regulation. Whatever happens, it is essential that clear levels of responsibility are defined, such as what organization is responsible for the cleaning of each level of canal, etc.. Ownership of drainage infrastructure also needs to be considered. Operational responsibility for water management (irrigation and drainage), exploitation of water resources, water conservation and protection of waters resides with Srbijavode Water Authority (SWA), the supervisory organization for municipal water companies. SWA operates through three water resource centres and 45 water companies employing around 4000 workers. The management capacity of the water companies varies considerably. Funding for the operation, maintenance, repair and replacement of the systems derives mainly from drainage and land revenues, but fees are insufficient to fund the full complement of works. Many water companies have sought additional funding and work to cover their overheads, particularly staff costs, which constitute over half of recurrent costs. It is now necessary to determine the future roles of local water companies and how they can become fully self-financing. 146. Drainage fees are collected from all users of infrastructure and reclaimed land – agricultural land, construction land and forestry. The level of fees and method of collection are set out in the water law. The current system of fee assessment was established in 1994 and determines fees based on the price of wheat. Also, fee levels depend upon whether they are collected from public or private companies or from individuals. The water companies are responsible for annual updates to the database that determines the various fee categories. For individuals, the drainage tax is subsumed under the income tax and is collected by the tax authorities. On the basis of the rates for 2002,18 SWA has estimated that total allocations to the water companies will be 1,693 million dinars, a 58 percent increase from 2001 but well below the funding required for normal annual maintenance, let alone to overcome the maintenance backlog accumulated over the last 8 to 10 years. 147. Many recent irrigation initiatives have failed to recognize the importance of relating water costs to returns. There is no practice of looking at the returns to units of water and preparing crop/enterprise budgets for farms. Future investments in new and rehabilitated irrigation and drainage facilities will thus need to take a new approach. In the short term, while the systems are being rehabilitated and the fee levels are being assessed, it is recommended that some work be carried out on using the drainage networks to supply irrigation water. In this way, improvement of the dual systems could be funded by additional charges levied on users of irrigation water without requiring changes to legislation. 148. It will be desirable to establish Water Users' Associations (WUAs), particularly where new or improved irrigation is planned on smallholder farms. This will take time, and must be built on a demand-driven approach rather than by imposing cooperation. But once farmers feel the need to share resources (i.e., water and equipment), the establishment of WUAs should be pursued. Because existing cooperatives are subject to government direction and pressure, they must be transformed into independent organizations under farmer ownership and control. Newly drafted cooperative laws provide the required framework for such organizations. They are also supported by provisions in the Serbian Water Law.

18 The drainage charge for 2002 has been set at 7.5 Dinars/kg.

Planning for the Irrigation Sub-Sector and Donor Support

149. MAFWM has prepared a series of documents that set out its priorities and strategies for the development of each water-related sector.19 These documents give priority to revitalization of existing systems and construction of the most appropriate types of new systems, primarily on class I and II land. That approach needs to be adjusted to recognize the constraints of development costs and availability of suitable markets. Even the proposed "modest" scenario provides for development of about 20,000 hectares annually during the plan's first years. This does not seem feasible at the moment, particularly because the government would be in charge of the primary network but users would be responsible for financing and equipping the secondary network. 150. There is, as yet, limited donor support for the irrigation and drainage sector. FAO is supporting a small program, scheduled to finish in March 2003, to help farmers switch to vegetable cultivation near to Vranje in Southeast Serbia. In this program, assistance is provided in-kind with small pumps and cultivators, and farmers are formed into growers' groups to take advantage of facilities provided to communities. 151. USAID is providing substantial support to both Serbia and Montenegro under a program for civil participation and community reform. There is scope for future cooperation on small-scale commercial agriculture, because these funds may be used for the purchase of irrigation equipment and greenhouses should this be an expressed priority of the communities. The USAID program requires a 25 percent community contribution, however, which is delaying implementation at the moment. A parallel program that enables the community to borrow from microcredit (or similar) organizations and provides technical support may be a good opportunity for farmers in the valleys of the Morava river in Serbia and similar areas in Montenegro. 152. Among the other donors, the Norwegian Government has allocated € 2 million for the reconstruction of irrigation systems in Northern Serbia. The European Agency for Reconstruction has expressed interest but has not yet made a firm commitment. A private Israeli investment group (Marhavv Investment Group) has expressed interest in developing commercial agriculture on a large scale in Vojvodina, but their objectives, time scale, rationale, requirements and level of investment have yet to be clarified. 153. Both government and donors should be aware that, in the absence of fully-functioning drainage systems, the advantage of improved yields from irrigation will be heavily counterbalanced by losses (both direct and indirect) that will result from poor drainage and flooding. The immediate focus of any support, therefore, should be on the rehabilitation of existing drainage systems. Most of this comprises public channels (the main, secondary and tertiary channel network), with some public systems located on recently privatized farms. In addition, investments will be needed for construction of additional drains in problem areas and in areas where no drainage now exists. The revitalization of the systems is necessary for the improvement and protection of agricultural production and the introduction of further irrigation systems. Once the systems have been desilted and cleared of vegetation, there is good potential for irrigation in areas near the main channels or where drainage channels can be adapted to provide dual-purpose systems. For the areas where dual systems are considered, some pump stations would require rehabilitatation and installation of reversible pump units. Recommended support for irrigation, drainage and flood protection is summarized in Annex 2.

REGIONAL DEVELOPMENT

154. The rural sector in Serbia has a diversity of agro-climatic conditions, infrastructure, access to markets, patterns of settlement, and non-agricultural resources and employment opportunities.

19 Spatial Plan of the Republic of Serbia; Water Management Planning Basis of the Republic of Serbia; Development Strategy of Agriculture, Forestry and Water Management in the Republic of Serbia by 2021.

Differences in socio-economic development, demographic trends, and culture are equally marked. Hence, not all policies and programs will favor all regions, and the response to given policies and programs will differ among regions. Therefore, many of the priorities, policies and programs designed to promote agricultural and rural development will benefit substantially from a regional focus. The ensuing discussion briefly examines regional characteristics and issues in Serbia, and identifies regional priorities for action.

Regional Classification

155. Three distinct regions were identified on the basis of geography and climate, farm production systems, socio-economic development, and political and administrative boundaries: Vojvodina, central Serbia, and the mountain region of southern Serbia (Figure 3, Page 41). While the precise delineation of these regions is somewhat arbitrary and can be debated, the broad characteristics of each region are quite distinct and provide an adequate basis for a regional differentiation of policy.

Region 1: Vojvodina

156. The Vojvodina is a distinct political and administrative entity, comprising 28 percent of the total land area of Serbia and 26 percent of the total population (Annex 3, Table 21). It is the wealthiest region, and experienced a net inward migration from 1995-1999. Fewer than 10 percent of municipalities are classified as underdeveloped according to the UN Human Development Index (HDI). There are fewer villages in the Vojvodina than in other regions, and there is a relatively low population density (94 people/km2), but villages are linked by a reasonable transport and communications network. 157. Agriculture is a major component of the Vojvodina economy, with 32 percent of Gross Social Product in 1999. Crop production predominates because of the region’s fertile soils, good growing conditions, and high proportion of arable land (76 percent of land area). In 1999, the Vojvodina accounted for 56 percent of Serbia's wheat production, 62 percent of maize production, 91 percent of sugarbeet production and 92 percent of sunflower production. Commercial vegetable production is also important. Fruit and wine have a limited role. Intensive pig and poultry production are more important sources of diversification, with 39 percent and 34 percent of total livestock numbers, respectively, in 2001. 158. Producers in this region are more strongly market-oriented than in the other two regions (Annex 3, Table 24). Vojvodina farmers account for most of the marketed surplus of grains, oilseed, sugarbeet, pigs and poultry. Milk production is also strongly market-oriented. The Vojvodina also accounts for most of Serbia's agro-processing capacity for these commodities. Its strong commercial orientation is attributable to the high proportion of agricultural land farmed by socially-owned AKs (36 percent), and to a core of relatively large (50 hectare-500 hectare) private farms. Socially-owned agro-processors are a major element of agro-processing and marketing.

Region 2: Central Serbia

159. Central Serbia accounts for 29 percent of the total land area of Serbia and 44 percent of the total population (Annex 3, Table 21). It is the most diverse and densely-populated of the three regions, due in part to the influence of Belgrade. The capital city is an important source of markets and employment, and also accounts for this region's higher levels of infrastructure. GDP/capita is slightly lower than in the Vojvodina, and there is a higher proportion (21 percent) of municipalities classified as underdeveloped according to the Human Development Index. But severe rural poverty is not widely observed. 160. Rural areas are characterized by the region’s hilly topography, small farms and diverse farm production systems. Such topography limits both the area of land suitable for agriculture (66 percent)

and the proportion of agricultural land suited for arable use (67 percent). Farms are small. In line with the region’s higher population, per capita availability of arable land is 0.29 hectare/capita. The agricultural potential of this arable land is good nevertheless, with fertile soils and favorable climatic conditions (Annex 3, Table 22). Production systems are fairly intensive as a result, and the region accounts for a large proportion of high-value fruit and vegetable crops. Ninety percent of berry fruits, which are a major export commodity, are produced in this region. There is also a high concentration of livestock, particularly cattle for milk production. Processing and marketing activities are dominated by fruit, vegetables, milk and meat, much of which is sold in Belgrade. 161. Private-sector activity is strong in this region, with almost 95 percent of agricultural land privately owned. A high proportion of agro-processing remains socially-owned, but most of these enterprises are now independent of their former AK parent companies and are likely to attract strong interest for privatization. Privatization is only the start of enterprise rejuvenation however. The enterprises involved in the marketing and processing of fruit and vegetables need to increase their operating efficiency, improve their links with producers in order to increase supply and improve product quality, and improve their access to both domestic and export markets.

Region 3: Southern Serbia

162. With 44 percent of the total land area of Serbia, Southern Serbia is the largest of the three regions, and also the poorest, least developed region. Much of the area is mountainous, with 37 percent of the total area classified as forest and only 54.9 percent classified as agricultural land. As only 55 percent of the agricultural land is arable, per capita land availability is not high (0.28 hectare/capita). The scarcity of arable land and the harsh climatic conditions in many areas limit the potential for agriculture. Communities in this region are the most isolated in Serbia. Rural communities tend to be located around pockets of arable land, and are small and highly dispersed; there are many small villages and a low overall population density. Together with the mountainous terrain these characteristics also render the provision of infrastructure very expensive, and so increase the isolation of villages from markets and each other. 163. GDP/capita is 35 percent lower than in Vojvodina, and 58 percent of municipalities are underdeveloped according to the Human Development Index (Annex 3, Table 21). A substantial proportion (19 percent) of all municipalities are classified as severely underdeveloped. The low level of socio-economic development is further illustrated by the fact that southern Serbia has the largest number of villages, but the weakest level of infrastructure. Widespread rural poverty has been a major determinant of the net out-migration recorded for Central Serbia and Southern Serbia during the period 1995-1999 (Annex 3, Table 21), of which much is from Southern Serbia. 164. Household incomes are very low, particularly in isolated areas, a consequence of the low potential for agriculture, poor access, and lack of opportunities for non-farm employment. The resulting poverty levels have been exacerbated by the out-migration of the last 50 years, which has left a predominance of older people in rural areas. Many villages have been abandoned entirely, and others face the same prospect. 165. Agriculture is dominated by livestock production, particularly cattle and sheep. Orchards and vineyards are also important. The region has over 50 percent of Serbia's area planted to grapes and over 40 percent of its orchards. But production is largely subsistence, and the region accounts for a very small proportion of marketed surplus (Annex 3, Table 24). Agro-processing capacity is relatively small as a consequence and is directed to wine, tobacco, sheep, fruit and vegetables. Given the limited potential for agriculture, low levels of socio-economic development, and poor infrastructure and access to markets, aggregate agricultural production will probably contract further in the medium term. The more marginal and isolated rural areas will continue to be abandoned, and farming in this region will increasingly concentrate in the areas of more fertile land, closer to major urban centers.

166. Not all rural communities face abandonment, however. The perimeter of mountains, national parks, historical sites and national monuments that rings southern Serbia offers considerable potential for agro- and eco-tourism. This potential is enhanced by the preservation of local traditions and the diversity of minority ethnic groups in many of these areas. There is also potential to develop niche products such as mountain fruits and herbs, many of which could be exported to neighboring countries. For many producers in this region, Sofia is much closer than Belgrade. Not all rural people have access to these opportunities, however, and a concerted effort is needed to help those who do. 167. A number of traditional agricultural activities that were economically important in the past have now declined, but may still have considerable commercial potential. Production of spring lamb was once important in the area, though today, a large-scale socially-owned sheep farm has virtually closed because of a shortage of funds and lost markets, and lamb production is now a fraction of earlier volumes. Cheese production was also important, as were fruit and vegetables. Wild boar is native to the area, and hunting and fishing is popular. Porcini fungi (Boletus) that grow in mature hardwood forests (especially oak and beech) were formerly harvested and sold to traders from Nis and Belgrade, but today, as a result of lower volumes, lack of sorting and crude packing of the harvest, they are not getting good prices. One producer of herbal tea has developed a thriving cottage industry at Suve Planina, though this is a rare example of enterprise in this area. 168. Each of these products has significant high-value export potential, particularly to Italy, where porcini, wild boar and spring lamb command premium prices. The difficulty of getting consistent quality from numerous small producers is a problem common to the region. The food industry needs produce that is cooled, sorted, graded, packed and targeted at specific markets. The need to improve logistical infrastructure in the region with assembly sheds, grading and packing equipment, transport facilities and cold stores is obvious. A relatively low investment in packing sheds in the production areas, each about 800m2, would revitalize the traditional porcini industry and support development of a quality product that could compete internationally throughout the season. Sales should be to Sofia (about 63 km distant), Skopje (120 km) and to the port of Bar on the Adriatic coast for export to Bari and Ancona in Italy. 169. These opportunities cannot be exploited without investment and technical assistance, and the local community does not have the economic base to secure such investment. A community assistance program with some grant funding is needed to catalyze such developments.

Regional Priorities

170. Implementation of privatization and land restitution are the major issues for the Vojvodina region. If implemented expeditiously and well, these measures will reinvigorate agricultural production and also agricultural processing and marketing. They will also facilitate farm enlargement and land consolidation among private farms. Support for SME development, the promotion of export markets, and cooperatives and producer associations should also receive a high priority. 171. Support for private sector development should be the focus of regional policy in central Serbia, given its demonstrated potential for the production of high value commodities, including export products. Measures to facilitate privatization of agro-processors and promote SME development, coupled with improved access to credit, will boost farm incomes and rural employment. The formation of producers' associations and modern co-operatives will also be an important means to strengthen the links between producers and processors and improve the supply and quality of raw materials. Measures to strengthen the land market should be given priority in the medium term in order to facilitate farm consolidation and enlargement. 172. Sector development in Southern Serbia will require a broader policy framework, emphasizing rural livelihoods rather than agricultural growth. Support should be targeted to communities and municipalities which have a demonstrated capacity to organize and mobilize resources as well as reasonable infrastructure and the potential to generate income and employment from agriculture or

tourism. Sector development should be implemented in parallel with the establishment of a social “safety net” for poor households, particularly in areas where there is little potential for economic development.

IV. LOOKING AHEAD: POST-REFORM AGRICULTURE IN SERBIA

173. Having reviewed the status of Serbian agriculture, and outlined an action plan to guide recovery and growth, it is also pertinent to consider where this plan will lead. If this action plan were to be implemented successfully, how would it change Serbian agriculture ? 174. Ceteris paribus, implementation of the action plan would result in a strong agriculture sector, able to provide for a domestic economy of approximately 8 million people, as well as supplying a diverse range of agricultural products to regional markets and the EU. In the northern region of Vojvodina, cereal and oilseed products would be produced for both regional and domestic markets, plus a wide range of processed crop and livestock products for the domestic market. Central Serbia would be the heart of a thriving export market for berry fruits; and supply fruit, vegetable and livestock products to Belgrade. Agriculture would contract in southern Serbia, except for specialised rural enterprises involved in agro-tourism and the production of high-value niche products for export along the southern mountain rim. Agriculture will thus remain a significant component of the Serbian economy and a major contributor to exports, employment and overall economic growth. 175. The trade policy reforms would create an open trade policy, consistent with Serbia’s membership of WTO. Serbian agriculture will also benefit from the free trade area with Montenegro and bilateral trade agreements with the EU and major trading partners in Central and Eastern Europe. Public support for agriculture would focus on the green box measures defined by WTO, including support for the public institutions responsible for phytosanitary systems, border control, food safety, research and extension. Direct commodity support will be limited, appropriately targeted, and consistent with the lower levels of support to be received by future members of the EU. The Directorate for Commodity Reserves will exist purely to respond to civil emergencies and will have no role in commodity markets or the provision of credit. Trade and price policies such as these will help to ensure that Serbian farmers and agro-processors remain competitive on regional and domestic markets. 176. The public institutions responsible for support to the agriculture sector will focus on activities which cannot be performed by the private sector. Commercial activities previously conducted within public institutions such as: clinical veterinary services, laboratory services and seed and animal breeding will operate as independent, private enterprises. Publicly funded agricultural research will respond more directly to the needs of producers and processors; and the public role in extension will shift to knowledge dissemination. Farmer cooperatives and associations, agro-processors, agri- business and farm input suppliers will increasingly assume responsibility for farm extension. But their extension activities will draw on strong, well-defined links with public research and public knowledge dissemination systems. 177. Efficient marketing systems from farm to consumer will ensure that Serbian comparative advantage in production is reflected by a high share of Serbian agricultural products in domestic and regional markets. Strong cooperatives and producer associations will assist producers to offset the diseconomies of small farm size, discern market requirements, improve product quality, and improve the bargaining position of producers relative to processors and retail outlets. A diverse, efficient agro-processing sector will add value and expand the marketing opportunities for primary produce. Competitive food retail outlets, including international supermarket chains, will drive the response to increasing consumer demand and stimulate new product development. 178. All farms, processors and agri-business enterprises will be private, and all will compete on a level playing field. Corporate farms will replace AKs. Any state-owned land they farm will be leased at market rates, and private farmers will have equal access to these leases. Soft-budget constraints will no longer pertain and all loss-making enterprises will be sold or liquidated under standard

bankruptcy procedures. A range of private, bank and non-bank financial institutions will provide credit for working capital and investment, at market interest rates. 179. Serbia’s small farms will remain small in the medium-term but will grow slowly in the northern and central regions as land markets strengthen, and more and more rural “non-farmers” sell or lease their land to farmers. Agriculture will contract in the southern region as rural people move to urban areas. The sector will continue to grow as a whole however as this contraction will be much less in aggregate terms than expansion elsewhere. These trends, together with the introduction of effective rural social safety nets, and a growing emphasis on regional development will also lead to a reduction of rural poverty. 180. The initial components of the action plan will facilitate a rapid initial increase in output, driven by a strong private sector response. However productivity is likely to remain low by modern standards, at least in the short-term. Resolution of fundamental constraints in the factor markets for land and capital is the key to increased productivity, and sustained growth. As learned elsewhere in the CEECs, the pace and effectiveness of privatization and institutional reform also has a major influence on sector growth rates. The ability to address these constraints expeditiously and well will determine the rate of medium and long-term growth. 181. Serbian agriculture is well placed to avoid the initial contraction experienced by other CEECs in the early stages of reform. The proposed framework for policy and institutional reform builds on the lessons learned from the successes and failures of other CEECs when their agriculture sectors’ began to recover. The agriculture sector thus has the advantage of a clear view of the road ahead. Given its innate strength, it has the capacity to actively follow this road and benefit significantly from the journey. The ultimate lesson of CEEC experience however is that political will determines how far the sector will travel along this road, and how fast it travels.

Figure 3. Regional Classification: Republic of Serbia

Novi Kneževac Subotica Kanjiža

Coka Sombor Backa Topola Senta Ada Kikinda Mali Idjos Novi Becej Nova Becej Kula Crnja Apatin Srbobran Žitište Odžaci Vrbas TemerinŽabalj Bac Backi Backa Petrovac Palanka Novi Sad Zrenjanin Secanj Plandište Titel Beocin Kovacica Irig Indjija Alibunar Sremska Vršac Opovo Šid Mitrovica Stara Pazova Pancevo Bela Ruma Palilula Crkva Bogatic BELGRADE Pecinci Kovin Zemun Veliko Gradište Šabac Cukarica Smederevo Obrenovac Grocka Požarevac Golubac Loznica Vladimirovci Kladovo Barajevo Malo Crnice Koceljeva Sopot Mladenovac Krupanj Smederevska Kucevo Palanka Ub Lazarevac Žabari Majdanpek Mali Arandjelovac Petrovac Zvornik Osecina Lajkovac Valjevo Topola Plana Ljig Svilajnac Žagubica Negotin Ljubovija Mionica Raca Lapovo Batocina Despotovac Bor Gornji Milanovac Jagodina Kosjeric Kragujevac Cuprija Bajina Bašta Knic Boljevac Paracin Zajecar Užice Požega Cacak Rekovac Lucani Ražanj Varvarin Sokobanja Cajetina Kraljevo Trstenik Cicevac Arilje Kruševac Knjaževac Vrnjacka Priboj Ivanjica Banja Aleksinac Nova Svrljig Varoš Aleksandrovac Niš Prokuplje Bela Pirot Prijepolje Raška Brus Merošina Palanka Doljevac Gadžin Han Žitoradja Sjenica Novi Pazar Bojnik Dimitrovgrad Leposavic Kuršumlija Vlasotinac Babušnica Zvecan Tutin Zubin Kosovska Leskovac Crna Potok MitrovicaPodujevo Lebane Trava Istok Medvedja Vladicin Vucitrn Srbica Han Surdulica ObilicPriština Kosovska Pec Kamenica Kosovo Polje Klina Glogovac Decani Lipljan Novo Brdo Vranje Orahovac Gnjilane Bosilegrad Trgovište Suva Reka Štimlje Bujanovac Djakovica Uroševac Vitina Preševo Štrpce Kacanik Prizren

Gora

ANNEX 1: ACTION PLAN – REPUBLIC OF SERBIA

Issues Recommended Measures Ultimate Objective Short-Term Medium-Term Trade and Price Policy Reform - Remove export - Develop a coherent Develop an open agricultural trade subsidies and export trade policy for the trade policy and policy and quotas and reduce Republics of Serbia widen trade relations negotiate WTO import protection and Montenegro and as the basis for membership establish a customs export growth and - Prepare a joint union competitive domestic position with markets Montenegro for WTO - Complete the negotiation negotiations for WTO membership. Broadening and Negotiate the EU Develop trade strengthening of Stability and relationships with a trade relationships Association Agreement wider range of with other trading partners countries Direct support for - Prepare a sector - Reform farm Develop a fiscally agriculture strategy with clearly- subsidies to provide responsible program defined roles for the limited, appropriate of public support for public and private support to investment agriculture that sectors, and allocate and production emphasizes support public support for the public roles - Determine the most according to sector and institutions appropriate basis and objectives required of sequencing of MAFWM in a - Increase the MAFWM measures to align market economy budget allocation for support policies with public roles and the EU institutions, especially those involved in alignment with EU regulations. Strategic reserves - Limit the mandate of - Align the legal and Remove the and market the DCR to true institutional base of distortions which the Intervention by the strategic reserves, the DCR with DCRs activities Directorate of rationalize the level of policies extant in the create in the markets Commodity reserves which it holds, EU for agricultural Reserves (DCR) and limit the number of output, farm inputs - Limit the mandate commodities in its and farm credit. of the DCR to civil mandate. emergencies - Increase the transparency of the DCR's operations - Terminate the DCR's

involvement in price support, input supply and seasonal credit. Land Tenure Development of a - Develop a Land - Implement the Develop an efficient land market Market Action Plan LMAP through and transparent land (LMAP) to unify the investment in a market to facilitate property registration unified cadastral land consolidation system that records land system and farm expansion and other property and to improve rights and transactions, access to credit and to support land market transactions Strengthen the - Provide technical - Provide technical capacity for land assistance to improve assistance to market operation the skills and training establish and of surveyors, valuers improve professional and real estate agents associations for surveyors, valuers and real estate agents Rural Finance Rural credit - Develop guidelines - Promote private Develop a diverse, institutions for a diverse, private- technical support to private-sector sector institutional base guide transfer of the institutional basis for for rural finance credit funds managed the delivery of by the DCR and financial services to - Develop guidelines to MAFWM to private rural areas, one that assist MAFWM and the sector institutions is able to meet the DCR to transfer their needs of all rural public roles in credit people. provision to viable, private-sector financial institutions Access to rural - Improve the range of - Strengthen land Increase the access finance collateral instruments to markets as a means of rural people to which financial to improve the usage available credit institutions have access and usefulness of land as collateral - Strengthen the capacity of financial - Strengthen the institutions for rural legislative and loan appraisal procedural basis for loan recovery - Introduce the use of warehouse receipts as credit mechanism

Privatization of Agro-Industry and SME Development Enterprise - Provide technical Guide and accelerate restructuring assistance to support the development of the privatization and agricultural restructuring of selected processing and agro-processors and marketing, as the marketing enterprises basis for efficient commodity markets Processing and - Provide technical and successful Marketing assistance to support competition in the development of domestic and export promising agricultural markets processing and marketing enterprises Co-operatives and - Refine and enact new Implement the new Strengthen the links farmers’ legislation on legislation on between producers organizations cooperatives cooperatives and markets, and improve product quality and supply. AK Privatization and Land Restitution AK privatization - Refine and enact - Provide technical Return viable AKs to legislation to define the assistance to support production and future ownership and the privatization and ensure that the land use rights of AK land. restructuring of used by non-viable selected AKs AKs is transferred equitably to private Land restitution - Determine the current - Implement the farmers. and former ownership restitution and status of AK land transfer of AK land, whether formerly - Develop the legal and owned by German or administrative basis for non-German farmers restitution and transfer of AK land, whether formerly owned by German or non-German farmers Public agricultural Put in place growth- services conducive legal and policy environment for agriculture, efficient public administration for agriculture Irrigation – See Annex 2

ANNEX 2: RECOMMENDED SUPPORT FOR IRRIGATION, DRAINAGE AND FLOOD PROTECTION

Immediate Future (Next 3 – 6 months) Item Description 1. Inventory/ detailed Clearer information is needed on the condition of the drainage systems and delineation assessment of the of critical areas. There is a need to define the priorities for investment and intervention. condition of all An inventory/assessment to be undertaken by each water company over its own area, to drainage networks include: a prioritised list of works to be carried out, list of canals that are below design capacity, drain slopes and areas served, urgency of works, approximately-priced bill of quantity, time schedule and estimate of funds required. 2. Inventory of all Inventory/assessment as above, but to include the main structures on the Danube gates and control tributaries, electrical and telemetry equipment and a priority list for interventions. structures. 3. Consultancy To achieve the above, it will be necessary to prepare guidelines to enable the water support (local) companies to collect data in a suitable format that will be compatible with similar data collected from other water companies. Such guidelines will also facilitate the preparation of an inventory and database on drainage systems in Serbia. Guidelines would be best prepared by a local consulting organization. Consultancy support will guide water companies in the assessment and prioritisation process and in the coordination of data collected to ensure strategic targeted assistance, prioritised to utilize funds as they come available. Support for preparation of proposals for capital rehabilitation of the drainage and irrigation systems and in determining how to achieve this. Short Term (Next 6 – 12 months) 4. Pump stations and Provision of spare parts for pumps and associated electro-mechanical equipment. water control Provision of spare parts and replacements for measuring and automatic level control equipment equipment in the drainage networks. Repair of drainage structures including pump stations, outfalls and cross drainage structures. Rehabilitation of gates and hydro-mechanical equipment that restrict the impact of backwater effect from the Djerdap hydroelectric project and/or floods. (Some of these are inoperable and need spare parts and maintenance.) 5. Maintenance Provision of spare parts for core equipment of water companies. equipment 6. Channel cleaning Desilting of channels, to include removal of vegetation, reformation of bank slopes, disposal of excavated material, spreading of material excavated, levelling of access routes for maintenance and regrading of canals to provide original or improved slopes. 7. Disposal of Because of the considerable amount of toxic materials deposited in the past in the excavated material drainage network, there is a danger that the excavated material will be unsuitable for spreading over agricultural land. Checks must be undertaken and sample testing performed on those drains that are potential risks, and suitable arrangements made for disposal of the polluted material. 8. Review of Obtain full details of the condition of each informal irrigation system to determine the informal private- status of disrepair and whether each is operating below full (design) capacity or is not sector irrigation functioning. This would cover irrigation options for small vegetable, berry and orchard farmers, including well-based irrigation and other traditional mechanisms, such as Persian- wheels, wells, pumps and tanks. Examination of the needs of small scale farmers in Morava area to identify problems, access to credit and markets, market information, technical support/ guidance, local access to a wider range of irrigation and associated equipment; investments, crops, etc. Establish incentives to encourage the private sector to invest in small-scale irrigation and greenhouse systems for the expansion of vegetable crops in the Morava river basin and other areas with small land holdings and good access to water.

Examine drainage systems that could be used for expansion of joint drainage/ irrigation, including details of additional structures for head regulation and reversible pump stations to increase the volumes of water available in the dry seasons. Identify potential sites for relatively low-cost investments such as the use of siphons to extract water from the Danube. 9. Potential for small Define areas with the greatest potential for shallow groundwater abstraction and where scale irrigation it could be utilized for irrigation. (The greatest potential exists in the Morava River and its tributaries in Central Serbia.) Undertake studies to assess the use of shallow ground water and the zoning of areas of potential in relation to availability of water and also the costs of abstraction. 10. Strategic planning Serious consideration of strategy occurs only during and shortly after periods of serious approach for drought. An irrigation strategy and priority action plan is needed to determine the role irrigation that irrigation could and should play in future food production, recognizing the development availability of cheap water supplies, the costs of the provision of water for different crops and the time needed to develop the larger systems and improve the supply channels. Short to Medium Term (Next 12 – 24 months) 11. Upgrading of Construct important new drains to connect with and improve efficiency of existing systems drains. Improve drainage network that also serves as source of irrigation water. 12. Irrigation Complete dual drainage/irrigation systems that have been started; those finished to be used as an example for the first stage of assistance to the wider provision of irrigation water in the Vojvodina area. Provide reversible pumps for those areas where drainage channels could be also used to supply additional irrigation water; Examine the potential for private-sector investment in new systems in areas newly supplied by the improved dual-purpose systems. 13. Institutional Support MAFWM in updating Serbian Water Law to bring it into line with the aspects changing environment in Serbia and to comply with European Directives. 14. Water and Examine the basis for current water charges and whether substantial changes are drainage charges required. Possible modifications such as a flat-rate charge per hectare based on physical position in the systems and a volumetric charge based upon amount of water that passes through the drainage pump stations. Linking of revenues from drainage/ land fees with the requirements for annual OM&R to determine whether revenues will be sufficient for routine support. 15. Water companies It is anticipated that analysis of water charges will reveal the need for water companies to divest themselves of some of their obligations and reduce the length of channels that they are obliged to maintain and the number of associated facilities. The smaller on- farm channels that are not of strategic importance should be handed over for maintenance to the newly privatised farms, or to groups of farmers in associations. A review of all of the water companies must be undertaken to determine whether the existing structures are suitable for their future roles. It is important that, where possible, the water companies make the change from the role of implementer to that of facilitator, with many works being undertaken directly by contractors. An assessment is needed of the extent of drainage systems to be maintained in relation to drainage and land fees that are currently levied. This should include the cost of regular maintenance following the rehabilitation in relation to annual costs, recommendations concerning adjustment/ raising of fees and recommendations on how funds should be allocated to water companies.

ANNEX 3. STATISTICAL INDICATORS

Table 1. Comparative Statistics: Republics of Serbia and Montenegro

Serbia* Montenegro Population ('000) 7722 651 Area (km2) 77474 13812 GDP, 2001 (millions of US$) 9815 715 Share of Union GDP, 2001 93% 7% GDP/Capita, 2001 (US$) 1271 1098

Agriculture Agricultural share of GDP, 1999 23% 13% Agricultural Land (ha) 5109170 517830 Arable Land (ha) 3356484 49688 Arable Land/Capita (ha) 0.43 0.08

Private Sector in Agriculture As % of Agricultural GDP, 1999 na 96% Ownership of Arable Land, 2000 83% 96% Ownership of Pasture Land, 2000 na 53% Ownership of Cattle, 2000 95.5% 99.5% *Excludes Kosovo. Sources: Statistical Yearbook of Yugoslavia, 2001; Statistical Yearbook of Montenegro, 2001; IMF

Table 2. Macro-Economic Indicators: FRY

1999 2000 2001 2002a GDPa (millions of US$) 10155 8071 10537 12078 GDP/Capitaa (US$) 1213 964 1258 1442 Real GDP Growth Ratec (%) -21.90 6.40 6.20 5.0

Agriculture as % of Gross Social Productb 22.6% na na na

Budget Deficita (cash basis) Serbia as % of FRY GDP na -0.2 -1.9 -5.6 Montenegro as % of Montenegro GDP na -10.4 -5.8 -6.6

Inflation Serbia Retail Prices (annual average) 42.4 75.7 88.9 25.9 Montenegro Retail Prices (eop) na na 24.0 8.0

Industrial Outputc (1998=100) 76.9 85.3 85.3 na Number Employedc ('000) 2298 2238 2241 na Average Net Monthly Wagea (DM) 109 99 179 na Number Unemployedc ('000) 811 806 850 na % Unemploymenta 26.5% 27.3% 27.8% na

Merchandise Importsc (millions of US$) 3296 3711 4837 4944 Food & Agricultural Importsbcd (mlns US$) 327.8 341.0 550.0 na Food & Agricultural Imports (%) 9.9% 9.2% 11.4% na Merchandize Exportsc (millions of US$) 1498 1723 1903 2234 Food & Agricultural Exportsbcd (mlns US$) 321 288 310 na Food & Agricultural Exports (%) 21.4% 16.7% 16.3% na

Current Account Balance Before Grantsa -7.5 -7.6 -10.2 -12.6 (as % of GDP)

Foreign Exchange Reservesa (months of 1.1 1.3 2.3 2.8 imports)

Exchange Ratea (YUD:US$) end of period 11.662 63.166 67.670 na Exchange Ratea (YUD:euro) end of period 11.735 58.675 59.706 na

Serbia Commercial Bank Lending Ratesc Nominal (annual) as at December 45.40 77.90 32.52 na Real (annual) as at December 35.56 40.94 11.22 na Excludes Kosovo. Data refer to aggregate for both republics unless noted otherwise. aIMF (Jan 2002), including forecasts for 2002. bStatistical Yearbook of Yugoslavia, 2001 cNational Bank of Yugoslavia dEconomist Intelligence Unit

Table 3. Trends in Agricultural Trade: FRY (in millions of US$ except where indicated)

1998 1999* 2000* 2001* Food and Agricultural Exports Food and Live Animals 334 291 255 275 Beverages and Tobacco 41 22 15 17 Animal and Vegetable Oils 23 8 17 18 Total 398 321 287 310 As % of Total Exports 13.9% 21.4% 16.7% 16.3%

Food and Agricultural Imports Food and Live Animals 492 279 279 441 Beverages and Tobacco 51 41 53 99 Animal and Vegetable Oils 10 8 9 10 Total 553 328 341 550 As % of Total Exports 11.4% 9.9% 9.2% 11.4% Source: Statistical Yearbook of Yugoslavia, 2001 * Excludes Kosovo

Table 4. Trade in Selected Agricultural Commodities: Republic of Serbia

Exports (millions US$) Imports (millions US$) 2000 2001 2000 2001 Live Animals 6.885 7.008 2.552 2.708 Meat and Meat Products 18.786 10.061 2.550 5.525 Milk and Dairy Products 4.276 4.229 5.312 4.810 Eggs 0.518 0.541 1.479 1.555 Cereal and Cereal Products 53.968 30.932 5.080 44.236 Wheat 12.257 2.753 0.0 0.01 Maize 21.091 6.999 0.02 27.288 Fresh and Preserved Fruit and 122.046 139.260 43.351 67.110 Vegetables Livestock Feed 15.828 7.027 29.137 46.573 Processed Food 13.746 14.032 22.567 33.375 Alcohol and Mineral Water 10.493 9.289 15.000 26.466 Tobacco and Tobacco Products 2.199 3.374 34.571 68.966 Oilseeds and Oilseed products 3.064 2.088 4.619 7.004 Edible Oils 12.981 13.865 4.046 4.324 *Excludes Kosovo Sources: Statistical Yearbook of Yugoslavia, 2001; Republic of Serbia Bureau of Statistics

Table 5. Tariff and Non-Tariff Trade Measures for Agricultural Products: Republic of Serbia

Import Variable Levies Commodity Quotas Tariff (%) (dinar/g) Live Animals Breeding Heifers 1 Export Breeding Cows 1 Other Breeding Cattle 1 Cattle for Slaughter (< 160 kg) 20 3.0 Cattle for Slaughter (160-300 kg) 30 3.0 Export Cattle for Slaughter (> 300 kg) 30 1.1 Export Breeding Pigs 1 Pigs for Slaughter 30 3.0 Breeding Sheep & Goats 1 Other Sheep & Goats 30 3.0 Breeding Poultry 1 Other Poultry 20 3.0 Unprocessed Meat (fresh, frozen, w/& w/o bone) Beef 30 5.6-9.0 Pork 30 5.0-11.0 Sheep and Goat Meat 30 3.6-6.0 Poultry Meat 30 7.0-12.0 Processed Meat Products 30 Milk and Milk Products Non-Concentrated Milk 20 4.0 Concentrated Milk 20 3.5-36.0 Sour Milk, Yogurt, Fermented Products 20 4.0-5.0 Butter 30 30.0 Cheese 30 5.0 Eggs 5 0.5-1.0/egg Fresh Vegetables and Tubers Seed Potatoes 5 Other Potatoes 20 1.0 Tomatoes 30 Other Vegetables 20 1.0-2.0 Seeds for Peas and Beans 10 Processed Vegetables 30 2.0-5.0 Edible Fruit, Citrus, Melons Nuts 10 Lemons 5 Other Citrus Fruit 10 Fresh Grapes 20 3.0 Dry Grapes 10 3.0 Melons 20 1.0 Apples, Pears, Quinces, Peaches, Apricots, 20 3.0 Nectarines, Plums Berry Fruit 20

Table 5 (cont'd). Tariff and Non-Tariff Trade Measures for Agricultural Products: Republic of Serbia Import Tariff Variable Levies Commodity Quotas (%) (dinar/g) Preserved and Dried Fruits 30 3.0 Concentrated Fruit Juice 30 3.0-4.0 Other Fruit Juice 5 3.0-4.0 Cereals Wheat (hard, soft) 30 2.50 Export Maize (all varieties) 30 Export Rye, Oats, Barley 20 Other Cereals (rice, millet, buckwheat) 5-10 Milled Cereal Products Wheat Flour 30 Export Corn Flour 30 Bran 20 Crushed, Rolled Cereals 20 Oilseeds Soybean 5 Export Oilseed Rape 20 2.0 Sunflower 20 2.0 Export Seed Wheat, Corn 30 1.0 Rye, Oats, Barley 20 Sugarbeets 20 Alfalfa, Clover 10 Other Grass-Seed 10 Vegetable Seed 5 Edible Oils Soy Oil (raw and refined) 30 ?? Sunflower Oil (raw and refined) 30 Rapeseed Oil (raw and refined) 15 Margarine 30 5.0 Sugar Raw Sugar (cane and sugarbeet) 20 Refined Sugar (cane and sugarbeet) 20 Wine 30 Animal Feed Meal 10 Bran 10 Soy Cakes 5 Rapeseed and Sunflower Cakes 5 ?? Concentrates 20 Raw Tobacco 10 Fertilizers Organic 10 Urea 10 Ammonium Nitrate 5 Phosphate fertilizers 10 Composite Fertilizers 10 Source: Ministry of Foreign Trade (as of December 2001).

Table 6. Nominal Protection for Selected Agricultural Commodities: Republic of Serbia, 2002

Commodity Official Average Domestic International Nominal Price Producer Price at Price at Protection Pricea Borderb Borderb Coefficient (dinar/kgc) Wheat 6.0-8.0 6.2 6.35 5.65d 1.12 Maize na 5.6 5.8 5.5 1.04 Soybean na 15.0 15.3 17.25g 0.89 Sunflower na 12.5 12.8 19.5d 0.66 Raspberry (2001) na 45.6 91.3 121.7 0.75 Pork na 85.0 (lwt) 116 (cc wt) 103 (cc wt) 1.13 Sugarbeet 2.0e 1.95 na na na Refined Sugar na na 32.0 21.0f 1.52 (ex-factory) Milkh New Zealand na 5.5i na na na Serbia na 11.2e na na na EU na 15.7j na na na Sources: Ministry of Agriculture; Republic of Serbia Bureau of Statistics; World Bank; FAO. a Republic of Serbia Bureau of Statistics, Novi Sad Commodities Exchange; bAdjusted for transport and handling costs to Serbia border; cExchange Rate: US$=65YUD; d Budapest Commodities Exchange (cif) lower Danube ports; eWithout subsidies; fex-Hungary; gex-USA; hAssumes 3.6% fat, NZ and EU prices adjusted accordingly; iIn New Zealand; j EU Intervention Price.

Table 7. Budget Expenditure for Agriculture: Republic of Serbia

Budget Categories 2000 2001 2002 2002 (millions of dinars – nominal) as % Republic of Serbia Budget Subsidies 875.0 3455.0 4698.395 58.8% Raw Milk Subsidies 650.0 2072.0 2603.0 32.6% Pasteurized Milk 0.0 242.0 0.0 0.0% Cattle Breeding 55.0 138.2 214.77 2.7% Livestock Improvement 100.0 150.0 150.0 1.9% Council for Cattle Production 0.0 0.0 0.625 0.0% Crop Subsidies 0.0 852.8 1590.0 19.9% Wheat 0.0 0.0 430.0 5.4% Sugarbeet 0.0 492.8 680.0 8.5% Tobacco 0.0 360.0 480.0 6.0% Vineyard Development 0.0 0.0 60.0 0.8% Orchard Development 0.0 0.0 80.0 1.0% Village Development Subsidy 70.0 0.0 0.0 0.0%

Non-Subsidy and Institutional Support 495.0 1645.0 3047.605 38.2% Animal Health 115.0 800.0 915.688 11.5% Agricultural Extension System (IARA) 30.0 60.0 107.25 1.3% Forestry & Hunting 115.0 130.0 140.0 1.8% Land Development 15.0 40.0 60.15 0.8% Soil Sampling 0.0 0.0 13.5 0.2% Water Management and Use 170.0 405.0 1440.0 18.0% Strategy Preparation 0.0 0.0 50.0 0.6% Other Measures (hail, reserves etc) 50.0 210.0 321.017 3.8%

Administration 156.0 156.0 242.435 3.0% Wages 133.0 133.0 219.435 2.7% Operating Costs 23.0 23.0 23.0 0.3%

Total Republic Budget for Agriculture 1526.0 5256.0 7987.4 100.0%

Total Republic Budget (all sectors) 28930.0 129369.2 219516.0 na

Memorandum: Constant prices (2000=100) 2002: 2000 Total Republic Budget 28930.0 68486.0 92311.0 3.19 Republic Budget for Agriculture 1526.0 2782.0 3359.0 2.20 Agricultural Subsidies 875.0 1829.0 1976.0 2.25 Total Agric as % of Republic Budget 5.3% 4.1% 3.6% na

Union Budget (millions of dinars – nominal) as % Expenditure for Agriculture 0.0 0.0 650.0 na Export Subsidies 0.0 0.0 650.0 na Note: Data is taken from budget forecasts. Data on actual expenditure not available. Sources: Republic of Serbia Ministry of Agriculture; IMF, January 2002.

Table 8. Agricultural Price and Subsidy Policies: Republic of Serbia, 2000-2002

2000 2001 2002 Subsidies Milk 5.5 dinar/litre 3.6 dinar/litre 4.0 dinar/litres – lowland 4.4 dinar/litre – hills Sugarbeet none 0.25 dinar/kg 12500 dinar/ha Tobacco none 24 dinar/kg 40000 dinar/ha Livestock none 5100 dinar/heifer 6000 dinar/heifer 510 dinar/ewe 600 dinar/ewe Vineyards none none 120000 dinar/ha Orchards none none 60000 dinar/ha

Prices Floor Price Floor Price DCR/Processor* Price Wheat – 1st class 7.5 dinar/kg 7.5 dinar/kg 8.0 dinar/kg – 2nd class 7.0 dinar/kg 7.0 dinar/kg 7.0 dinar/kg – 3rd class 5.8 dinar/kg 5.5 dinar/kg 6.0 dinar/kg Sugarbeet 2.0 dinar/kg 2.0 dinar/kg 2.0 dinar/kg Sunflower 15.7 dinar/kg 12.0 dinar/kg Abolished Soybean 16.5 dinar/kg 13.5 dinar/kg Abolished Milk 3.3 dinar/fat unit 2.8 dinar/fat unit Abolished Tobacco 148 dinar/kg 77-137 dinar/kg Abolished Maize 6.2 dinar/kg 5.5 dinar/kg Abolished Beef 62 dinar/kg (lw) Abolished Abolished Pork 57 dinar/kg (lw) Abolished Abolished Lamb 57 dinar/kg (lw) Abolished Abolished * Price paid by the Directorate for Commodity Reserves (DCR) or agro-processors. Source: Republic of Serbia Ministry of Agriculture

Table 9. Structure of Socially- and State-Owned Agro-Industrial Enterprises

Type of Enterprise No. of No. with >50% Average No. Workers Enterprises* Privately Owned In All In “Private” Grain Milling 49 (46) 6 226 317 Bread-Making & 27 (27) 7 242 229 Other Bakery Fruit & Vegetable 35 (32) 1 211 191 Processing Livestock 37 (27) 3 477 586 Slaughtering Milk Processing 24 (21) 8 268 292 Sugar Processing 14 (14) 0 337 na Confectionery 14 (11) 4 826 352 Vegetable Oil 9 (9) 3 602 867 Starch 10 (10) 4 285 320 Service Enterprises 14 (13) 0 79 NA General Farming 255 (235) 11 206 146 Fruit or Grape 22 (19) 2 314 134 Production Cattle Breeding 51 (46) 5 218 110 Fishing (river) 8 (7) 0 na TOTAL 569 (517) 53 na 292 *Number in parentheses indicates enterprises for which full ownership information is available.

Table 10. Characteristics of Majority and Minority Privately-Owned Enterprises

Ownership Structure Number with Negative Profitability <50% Socially and State Owned Assets 24 (of 53) >50% Socially and State Owned Assets 181 (of 464)

Table 11. Distribution of Land by Type of Ownership: FRY

Total Private Owned by AKs and Co-ops Total Socially-Owned State-Owned (in '000 ha) Arable 3406 2820.9 585.1 235.1 350 Perennial Plantations 330 310.5 19.5 19.5 0 Meadows 708 651 57.0 57.0 0 Pasture 1143 606.2 536.8 536.9 0 Ponds 39 7.5 31.5 31.5 0 (as % of total) Arable 100.0 82.8 17.2 6.9 10.3 Perennial Plantations 100.0 94.1 5.9 5.9 0.0 Meadows 100.0 91.9 8.1 8.1 0.0 Pasture 100.0 53.0 47.0 47.0 0.0 Ponds 100.0 19.2 80.8 80.8 0.0 Source: Federal Office of Statistics, 2001

Table 12. Characteristics of the Rural Population: FRY, 1991 < 1 ha 1-5 ha 5-10 ha > 10 ha Total Rural Population 997135 1869019 740392 204846 3811392 % of Total 26.2 49.9 19.4 5.4 100.0 % of Total (excl < 1 ha) 66.4 26.3 7.3 100.0 Number of Holdings 298956 524998 185023 48302 1057278 % of Total 28.3 49.7 17.5 4.6 100.0 % of Total (excl < 1 ha) 69.2 24.4 6.4 100.0 Land Owned (ha) 165423 1432509 1318713 704137 3620781 % of Total 4.6 39.6 36.4 19.4 100.0 % of Total (excl < 1 ha) 41.5 38.2 20.4 100.0 Agric Land Used (ha) 118064 1139728 1060214 704137 3022143 % of Total 3.9 37.7 35.1 23.1 100.0 % of Total (excl < 1 ha) 39.2 36.5 24.2 100.0 HH Income Sources (% HH’s, across farm size categories) Agriculture Only 56.5 34.1 9.5 100.0 Mixed 62.4 29.9 7.8 100.0 Non-Agriculture 86.6 11.0 2.4 100.0 No Income/No Data 79.9 16.4 3.7 100.0 HH Income Sources (% HH’s, within farm size categories) Agriculture Only 26.1 44.7 47.4 32.0 Mixed 28.5 38.7 38.5 31.6 Non-Agriculture 44.1 15.8 13.4 35.2 No Income/No Data 1.4 0.8 0.7 1.2 Total 100.0 100.0 100.0 100.0 Note 1: Data is that of the 1991 Census. Note 2: Rural households are those with more than 1 ha of land, or less than 1 ha of land but with a number of livestock that meets or exceeds a pre-defined minimum. Source: Statistical Yearbook of Yugoslavia, 2001.

Table 13. Characteristics of Household Income and Expenditure: Republic of Serbia, 2001

Agricultural Mixed HH’s Non- All HH’s HH’s Agricultural HH’s Number of HH’s 184534 499923 1706280 2390737 As % of Total 7.7% 20.9% 71.4% 100.0

Nominal Income (dinars) 171664 226310 167943 180435

Food Budget Share (%) 53.1 45.7 53.2 51.2 Lower Decile na na na 59.2 Upper Decile na na na 43.0 Source: Federal Office of Statistics.

Table 14. Poverty Indicators: Republic of Serbia

Indicator 1990 1995 2000 % Households Below Poverty Linea All Households 14.1 28.9 36.5 Rural Households 14.6 22.9 29.4 Urban Households 13.2 32.9 39.7 % Households below Extreme Poverty Lineb All Households 4.4 6.2 18.2 Rural Households 4.0 3.3 12.6 Urban Households 4.6 7.9 21.5 Average Income Deficitc All Households 18.7 23.2 25.4 Rural Households 16.5 16.5 25.7 Urban Households 20.8 23.5 24.5

Poverty Gapd (all households) 1.0 4.1 3.1 Gini Coefficient (all households) 28.2 25.5 28.0 Food Budget Share (%) all households 36.5 48.4 46.5 Sources: UN Human Development Report, 1997; Interim Poverty Reduction Strategy Paper, 2002. a Minimum consumer food basket as defined by the Federal Office of Statistics. b Defined as 50% of the poverty line for 1990 and 1995; WFP food basket for 2000. c Average deficit of the income of the poor as a % of the poverty line d % of GDP needed to raise the average income of the poor to the poverty line

Table 15. Commodity Support and Marketed Surplus by Region

Budget By Sectora By Regionb Support 2002 Private North Central Southern Farmers (Vojvodina) Serbia Serbia million dinar % of Total Marketed Surplus Milk 2603 70.1% 31.6% 56.3% 12.2% Wheat 430c 44.1% 85.1% 10.2% 4.7% Sugarbeet 680 36.9% 96.5% 3.3% 0.2% Tobacco 480 98.9% na na na Sunflower nad 53.5% 92.3% 5.3% 2.4% Soybean nad 15.3% Na na na Sources: Federal Office of Statistics, Statistical Yearbook 2001; Report on Rural Development in the Republic of Serbia. Economics Institute, January 2002; Budget data from MAFWM. a Average for 1996-2000; b Average for 1995-1999; c Excludes expenditure by Directorate for Commodity Reserves; d Publicly announced by the MAFWM but not yet costed in the budget.

Table 16. Trends in Agricultural Land Use: Republic of Serbia (in ha)

1999 2000 2001 Agricultural Area 5118776 5109170 na Cultivable Area 4251659 4259178 na Arable land and gardens 3352262 3356484 3355019 Cereals 2076129 2047741 2119534 Industrial Crops 376128 363216 322593 Vegetable Crops 294941 295091 293554 Forage Crops 472767 472326 472784 Orchards 245256 244239 na Vineyards 72104 71112 na Meadows 583051 586515 na Pastures 834611 815336 na Fishponds, swamps etc 32506 34656 na (Excludes Kosovo) Sources: Statistical Yearbooks of Yugoslavia, 2001 and the Republic of Montenegro, 2001

Table 17. Crop Production: Republic of Serbia

1999 2000 2001 Crop Area (ha) Maize 1263020 1202944 1216607 Wheat 616816 651197 691377 Barley 113614 107410 131056 Oats 66054 62416 61205 Sunflower 183768 146415 163155 Soybean 108163 141559 87382 Oilseed Rape 5229 6273 3222 Sugarbeet 58799 44695 43161 Tobacco 8547 9650 11706 Potatoes 96165 93897 93554 Strawberries 8457 8642 8294 Raspberries 12996 13519 14753 Plums (trees) 43242082 43103361 42596557 Apples (trees) 14138956 14265084 14175648 Sour Cherries (trees) 8320478 8336382 8428490 Production (tons) Maize 6126428 2937537 5910485 Wheat 2030746 1924385 2529934 Barley 295817 248804 423484 Oats 120638 95320 126167 Sunflower 272550 217608 317878 Soybean 293957 170593 207051 Oilseed Rape 9874 10467 5479 Sugarbeet 2427580 1070033 1806425 Tobacco 14131 11067 16586 Potatoes 780711 620923 1015017 Strawberries 39797 24910 34696 Raspberries 64680 55999 77781 Plums 379569 351307 333106 Apples 196474 197490 135374 Sour Cherries 70979 58013 63355 Yield (tons/ha) Maize 4.9 2.4 4.9 Wheat 3.3 3.0 3.7 Barley 2.6 2.3 3.2 Oats 1.8 1.5 2.1 Sunflower 1.5 1.5 1.9 Soybean 2.7 1.2 2.4 Oilseed Rape 1.9 1.7 1.7 Sugarbeet 41.3 23.9 41.9

Table 17 (cont'd). Crop Production: Republic of Serbia 1999 2000 2001 Yield (tons/ha) Tobacco 1.7 1.1 1.4 Potatoes 8.1 6.6 10.8 Strawberries 4.7 2.9 4.2 Raspberries 5.0 4.1 5.3 Plums (kg/tree) 8.8 8.2 7.8 Apples (kg/tree) 13.9 13.8 9.5 Sour Cherries (kg/tree) 8.5 7.0 7.5 Note: Excludes Kosovo Sources: Republic of Serbia, Bureau of Statistics

Table 18. Livestock Production: Republic of Serbia

Livestock (at January) 2000 2001 2002 (number, in '000) Cattle 1272 1187 1177 Sheep 1611 1489 1448 Pigs 4066 3615 3587 Poultry 20373 19290 18804 Beehives 167 179 na

Total Livestock Units (for FRY) Socially-Owned 150 na na Privately-Owned 1388 na na

Production 1999 2000 2001 Cows Milk ('000 liters) 1644319 1585427 1594441 Beef ('000 tons) 97 103 99 Pork ('000 tons) 292 283 254 Mutton ('000 tons) 17 19 17 Poultry Meat ('000 tons) 71 67 62 Eggs (million) 1466 1374 1357 Wool (tons) 2442 2264 2161 Honey (tons) 2290 2663 2317 Note: Excludes Kosovo Sources: Republic of Serbia, Bureau of Statistics

Table 19. Selected Indicators of Agricultural Performance: FRY

Unit FRY* Western Europe* Cereals Wheat mt/ha 3.3 7.5 Corn mt/ha 3.9 8.4 Barley mt/ha 2.4 5.8 Oats mt/ha 1.7 5.0 Industrial Crops Sugarbeets mt/ha 30.9 54.9 Sunflower mt/ha 1.8 2.2 Soybean mt/ha 1.9 2.7 Vegetables Potatoes mt/ha 7.7 36.8 Tomatoes mt/ha 8.2 32.1 Dairy Production Milk liters/cow 1808 5500-8500 Sheep Production Wool kg/sheep 1.7 3.0-4.0 Poultry Production Eggs # hen/yr 108 273-292 Sources: FAOSTAT; International Farm Comparison Network; Federal Office of Statistics for Yugoslavia. Data are average for 1993-1997

Table 20. Trends in Agricultural Producer Prices: Republic of Serbia

Unit 1999a 2000 2001 % Change Commodity Dinar (nominal) Wheat kg 1.50 3.58 7.34 389% Maize kg 2.00 4.74 8.99 350% Sunflower kg 2.80 4.41 10.26 266% Soybean kg 3.50 6.92 14.03 301% Oilseed Rape kg na 5.78 10.18 na Sugarbeets kg 0.40 1.03 1.75 338% Tobacco kg 12.10 40.00 na na Cattle (liveweight) kg 25.00 34.1 61.9 148% Baby beef (liveweight) kg na 46.3 84.4 na Pigs (liveweight) kg 20.0 41.9 78.6 293% Sheep (liveweight) kg na 39.1 72.0 na Lamb (liveweight) kg na 72.4 120.9 na Cow milk liter 2.46 5.32 11.48 367% Indices Agricultural Producer Price Index 100 258 439 339% Retail Price Index 100 176 332 232% aAt September (post-harvest prices) Source: Republic of Serbia, Bureau of Statistics; Chamber of Commerce (Serbia)

Table 21. Regional Characteristics: Republic of Serbia

Land and Population Vojvodina Central Serbia Southern Serbia Land Area (km2) 21536 22096 33866 As % of Total 27.8% 28.5% 43.7% % Agricultural Land 83.1% 66.5% 54.9% % Forest Land 4.8% 23.4% 37.3%

Population (1991 Census) 2013889 3429527 2739379 As % of Total 25.7% 43.8% 30.4% Population Density (per km2) 94 155 70 Socio-Economic Indicators GDP/Capita (1999) US$ 1967 1755 1232 Human Development Indicator: % of Municipalities which are Highly Developed 37.8% 43.8% 17.5% Semi-Developed 53.3% 35.1% 24.6% Under-Developed 8.9% 21.1% 38.6% Severely Under-Developed 0.0% 0.0% 19.3% Number People/Doctor (2000) 453 367 423 Net Migration (1995-1999) 23002 -40690 Average Household Income 2000 (dinar) Agricultural Households 148769 85033 Mixed Households 128629 124657 Non-Farm Households 84474 71301 Household Income Sources 2000 % Agricultural Households 10.4% 9.1% % Mixed Income Households 32.3% 15.5% % Non-Farm Income HH’s 57.3% 75.4% Infrastructure Roads (total kilometers) 6336 22096 32866 Density of modern roads(km/km2) 25 39 29 Phone Lines (clients/100 km2) 2453 4470 1545 Administration Largest City NoviSad Beograd Nis Population (1991) 179626 1168454 175391 Number of Municipalities 45 57 57 Number of Villages 466 1421 2818 Districts in Region North Backa Beograd City Bor Central Banat Macva Jablanica North Banat Kolubara Nisava South Banat Danube Pcinja West Backa Branicevo Pirot South Backa Sumadia Rasina Srem Pomoravije Raska Morava Toplica Zajecar Zlatibor Sources: Statistical Yearbook, Republic of Serbia. 2001; Report on Rural Development in the Republic of Serbia. Economics Institute, January 2002.

Table 22. Land Use Characteristics by Region, 1999: Republic of Serbia

Vojvodina Central Serbia Southern Serbia Agricultural Land (ha) 1789073 1470347 1859148 Agricultural Land/Capita (ha) 0.89 0.43 0.68 Arable Land (ha) 1646507 1318959 1286695 As % of Agricultural Land 83% 67% 55% Arable Land/Capita (ha) 0.79 0.29 0.28

Ownership of Agricultural Land % of Land Privately Owned 63.4% 94.9% 82.8%

State- and Socially-Owned Land Number of Agro-Kombinats 276 165 Average Area Farmed (ha) 1900 953 Number of Co-operatives 154 409 Average Area Farmed (ha) 593 159

Land Use by Area Hectares Agricultural Land 1789073 1470347 1859148 Cultivated Land 1584327 1009140 759395 Planted to Cereals 969790 614883 416376 Planted to Industrial Crops 164612 17158 6801 Planted to Vegetables 78372 118327 91033 Orchards 16909 123917 103965 Vineyards 11882 21046 38821 Meadows 33389 164856 384514 Pastures 114590 147109 572826 Pools, Swamps, Fish Ponds 27976 4279 227

Land Use by Region Percent of Total Area Agricultural Land 35.0% 28.7% 36.3% Arable Land 47.3% 30.1% 22.6% Planted to Cereals 48.5% 30.7% 20.8% Planted to Industrial Crops 87.3% 9.1% 3.6% Planted to Vegetables 27.2% 41.1% 31.6% Orchards 6.9% 50.6% 42.5% Vineyards 16.6% 29.3% 54.1% Meadows 5.7% 28.3% 66.0% Pastures 13.7% 17.6% 68.6% Pools, Swamps, Fish Ponds 86.1% 13.2% 0.7%

Crop Growing Conditions Temperature (oC) 10.1-11.6 10.4-12.4 6.2-11.7 Precipitation (mm) 549-934 622-967 491-1151 Sources: Federal Bureau of Statistics; Report on Rural Development in the Republic of Serbia. Economics Institute, January 2002.

Table 23. Livestock Numbers by Region: Republic of Serbia Vojvodina Central Serbia Southern Serbia Number at January 2001 Cattle 215549 482870 488513 As % of Total 18.2% 40.7% 41.2%

Pigs 1410309 1537061 667822 As % of Total 39.0% 42.5% 18.5%

Sheep 141187 670335 677951 As % of Total 9.5% 45.0% 45.5%

Poultry 6583974 7461365 5244592 As % of Total 34.1% 38.7% 27.2%

Source: Statistical Yearbook, Republic of Serbia, 2001

Table 24. Agricultural Marketing and Processing by Region: Republic of Serbia

Vojvodina Central Serbia Southern Serbia All Serbia Marketed surplus (% of total) Marketed surplus (tons) Wheat 85% 10% 5% 540,000 Maize 94% 5% 1% 300,000 Potatoes 35% 54% 11% 19,000 Plums 22% 54% 19% 4,356 Apples 70% 24% 6% 17,000 Grapes 28% 19% 53% 13,000

Milk 32% 56% 12% 320 mill litres Pigs 74% 20% 5% 84,000 Cattle 20% 54% 26% 38,000 Agro-Processing Capacity (% of total) Annual Capacity Grain 59% 21% 20% 2,6 million ton Feed Mills 46% 30% 24% 1.4 mill tons/shift Oilseed 87% 9% 4% 395,000 tons Sugarbeet 74% 26% 0% 5,440,000 tons Tobacco na na 220,000 tons na Fruit and 9 plants 16 plants 7 plants 700,000 tons Vegetable Wine 4 plants 3 plants 10 plants 17 plants Milk 30% 46% 24% 2.5 mill litres/day Pig Slaughter 69% 21% 10% 4,272,800 head Cattle Slaughter 41% 35% 24% 833,800 head Sheep Slaughter 0% 17% 83% 638,000 head Poultry Slaughter 57% 29% 24% 31.5 million head Cool Stores 33% 36% 31% 460,000 tons aAverage for 1995-1999. Source: Report on Rural Development in the Republic of Serbia. Economics Institute, January 2000.