Report No. 11880-UA Ukraine Foodand AgricultureSector Review
June30, 1994 Public Disclosure Authorized
Natural ResourceManagement Division Country Department IV Europe and Central Asia Region
FOR OFFICIALUSE ONLY Public Disclosure Authorized
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Report No: 11880 UA Type: SEC
Document of the World Bank Public Disclosure Authorized
Ttis do. umenthas a rectrictedldistribution and may be used by recipients only in the perforrmanceof their official dutivs. Its contents may not otherwise be di,slozed without WN'orldRank authorization CURRENCY EQUIVALENTS
Currency unit = karbovanets, abbrev. krb US$1 = krb 47,000 (as of June 15, 1994)
WEIGHTS AND MEASURES
feed unit oat unit ha hectare kW kilowatt oat unit 600 grams of starch q quintal t metric ton
ABBREVIATIONS
Al system of artificial insemination BU Bank of Ukraine (fornerly Ukrainian Agricultural Bank) EBRD European Bank for Reconstruction and Development EU European Union FSU Former Soviet Union GDP gross domestic product GOU Government of Ukraine IFC International Finance Corporation IFFI Association of Inter-Farm Feed Products Industries MEP Ministry for Environmental Protection MFER Ministry of Foreign Economic Relations MFP Ministry of Forest Production MPP Mass Privatization Program MOAF Ministry of Agriculture and Food NASULGC National Association of State Universities and Land Grant Colleges NEP New Economic Policy NMP Net Material Product SCFP State Committee for Food Processing UAAS Ukrainian Academy for Agricultural Sciences UAB Ukraine AgroBusiness (private input supplier) UKRMEDPROMNAB Agency in charge of procurement and distribution of veterinary products and vaccines. UKRPLEMOBIEDINENIE Ukrainian Livestock Selection and Breeding Association UKROPTITSEPROM Ukrainian State Poultry Enterprise UKRVETSPROMNAB Veterinary Department of MOAF USDA United States Department of Agriculture VAT Value Added Tax FOR OFFICIALUSE ONLY
CONTENTS
PART I: MAIN REPORT
EXECUTIVE SUMMARY ......
1. MAIN FEATURES OF THE AGRICULTURAL SYSTEM ...... 1 A. Agriculture's Role and Historical Performance ...... 1 B. The Agricultural Resource Base ...... 3 C. The Ukrainian Farming System ...... 6 D. Major Agricultural Subsectors ...... 9 E. Forestry ...... 15 F. Consumption of Food and Agricultural Products ...... 16
2. A STRATEGY FOR DEVELOPING THE FOOD SECTOR ...... 19 A. Overall Framework for Reform ...... 19 B. Implementation of Reform ...... 21 C. Securing Food Supply and Protecting the Poor During the Transition ...... 23 D. Social Policies in Support of the Rural Transition ...... 24 E. Policy Agenda for a Comprehensive Reform in Ukrainian Food and Agriculture . .. 27
3. DEVELOPMENT OF A MARKET FRAMEWORK ...... 31 A. Macroeconomic and Incentive Framework ...... 31 B. International Trade and Trade Policies ...... 43 C. Re-establishing International Trade: Agricultuaral Trade Policy ...... 48 D. Redefining the Role of Government ...... 49
4. LAND REFORM AND THE EMERGENCE OF PRIVATE FARMING ...... 53 A. Current Status of Land Reform ...... 53 B. Restructuring of Agricultural Enterprises ...... 56 C. Emerging Independent Private Farming ...... 60 D. Continuation of Land Reform and Farm Restructuring ...... 63 E. Agricultural Extension Services ...... 69
5. COMPETITIVE LINKAGES FOR PRIVATIZED AGRICULTURE ...... 73 A. Agroprocessing ...... 73 B. Input Supply and Production Services ...... 76 C. Wholesale and Retail Marketing ...... 81 D. Developing a Competitive Support and Processing System ...... 83 E. The Role of Foreign Investment ...... 86 F. Expanding Market Facilities and Services ...... 87 G. Improving Financial Services ...... 90
This documenthas a restricteddistribution and may be usedby recipientsonly in the performanceof their officialduties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. 6. MEASURESTO IMPROVE FARM PRODUCTIONAND EFFICIENCY ...... 95 A. Improvementsin Crop Production ...... 95 B. Adjustmentsin the LivestockSector ...... 100 C. Increasing Access to Agricultural Inputs and Productive Services ...... 104 D. InvestmentPriorities in the Food and AgricultureSector ...... 105 E. ModernizingHigher Education and Research ...... 107
7. EXTERNALASSISTANCE ...... 113 A. Critical Inputs for Agricultural Production ...... 113 B. TechnicalAssistance and InstitutionBuilding .113 C. New Investment .116 D. The Principles of a Bank AssistanceProgram .116
BOXES: E.1 A Reform Agenda .iv E.2 Proposed Schedule of AgriculturalPrice Reform and Subsidy Reduction. v 2.1 A Reform Agenda .20 3.1 Proposed Scheduleof AgriculturalPrice Reform and Subsidy Reduction .42 4.1 Forms of Restructuringfor State and CollectiveFarms .56 4.2 The Nizhni-NovgorodFarm PrivatizationModel .58 4.3 IndependentFarmer Profile .60 5.1 Structure of Ukrainian Food Industry .74 6.1 Major Agricultural Universitiesand their Faculties .108
FIGURES: 1.1 Net Material Product in 1992. 1 1.2 Average Precipitation. 4 1.3 Main Soil Groups ...... 5 1.4 Major Grain Area Development.11 1.5 Forest Species Distribution.16 1.6 Consumptionof Basic Foodstuffs.17 3.1 ConsumerSubsidy Equivalentin the FSU .32 3.2 Food Price Indices Compared to CPI .37 3.3 Ukraine Imports, 1992.44 3.4 Ukraine Exports, 1992 .45 3.5 Organizationof the Agro-IndustrialComplex .50 3.6 Ministry of Agriculture and Food .51 4.1 Distributionof Farm Land by Users . 55 4.2 Distributionof Private Farms by Size .61 4.3 Land Tenure on Private Farms .61 4.4 Structure of Productionby Farms .62 5.1 Comparison of Sales Area per 10,000 Inhabitants.82 6.1 Fertilizer Supply .96 TABLES: 1.1 Development of Agricultural Production ...... 1 1.2 Per Capita Agricultural Production, 1989 ...... 2 1.3 Percent Share of Soviet Agricultural Output ...... 3 1.4 Size and Composition of Rural Population ...... 3 1.5 Land Resources and Use, 1993 ...... 5 1.6 Main Characteristics of Kolkhozes and Sovkhozes ...... 7 1.7 Emerging New Farming Structure ...... 8 1.8 Role of Private Sector in Agriculture ...... 9 1.9 Basic Crops Cultivated ...... 10 1.10 Livestock Population in Numbers and Animal Units ...... 12 1.11 Production of Principal Livestock Products ...... 13 3.1 Current Trends in State Procurement Prices ...... 35 3.2 Food Retail Prices in State Shops in Ukraine and Russia ...... 36 3.3 Retail Prices in Indices in Ukraine ...... 37 3.4 Distortion in Producer Prices for Selected Agricultural Product Ratios ...... 38 3.5 Changes in Food Retail Market Structure ...... 40 3.6 Agricultural and Food Trade ...... 44 3.7 Major Agricultural Imports and Exports ...... 46 4.1 Distribution of Land Used by Private Farms ...... 54 5.1 Major Production of Food Industry ...... 75 6.1 Indicators of Farm Mechanization ...... 97 6.2 Comparison of Average Crop Yields ...... 99 6.3 Livestock Performance Compared to that of Selected EU Countries ...... 101 6.4 Decline of Productivity in the Livestock Sector ...... 101 6.5 Comparison of Livestock Performance ...... 104 6.6 The Agricultural Science System ...... 109
MAPS: IBRD #24509 IBRD #24510
PART II: STATISTICAL ANNEX PREFACE
This report is based on the findings of a World Bank mission that visited Ukraine in October 1992, and reflects developmentssince then. The mission was led by Csaba Csaki and included Ezriel Brook, Ulrich Koester, Mark Lundell (Macroeconomics- Trade), Roy L. Prosterman, Zvi Lerman (Land Reform - Privatization),Oscar Honisch (Crop Production, Input Supply, Forestry), Helmar Ochs (Livestock), Lynn Engstrand (Agro-processing),Robert Vogel (Rural Financing), Chuck Antholdt (Govermnent,Research, Education, Extension)and Arndt Uhlig (InternationalAssistance). The European Bank for Reconstructionand Developmentparticipated in the review with two experts: Jork Sellschopp(Agro-processing) and Michel Reignier (Marketing and Distribution).
The Green Cover report was completedin March - May 1993. It was discussed with the Governmentof Ukraine in September 1993. Major findings of the review were also presented to representativesof business and academicinstitutions, and foreign governmental and non- governmentalorganizations.
Based on the commentsfrom the Governmentof Ukraine and on recommendationsat the seminar and donors meeting, this report was prepared in May-June 1994 by a small team led by C. Csaki and includedM. Lundell, A. Zuschlag, S. Moury, and R. Arakelov. The detailed subsectoral analyses presented in Volume II of the Green Cover report have not been updated for inclusion in this final report. D. Greene and L. Schertz provided editorial assistance. Daniel Kaufmann, Anders G. Zeijlon, Hans Binswanger,Chandrashekar Pant, Bruce Gardner, Cees de Haan, Stanley R. Johnson, and Wilhelm Henrichsmeyerprovided valuable comments. Anna Skliarenko, Galina Voitsekhovskaya,and K. Korik assisted the review in Kiev.
Deputy Minister V.D. Grevtsov, Mr. B.I. Kirichenko and Mr. B.F. Bespalyi of the Ministry of Agricultureand Food were the main coordinatorsof the mission on the Ukrainian side. The Ministry 'of Economy, Ministry of Finance, Ministry of Forestry, State Committeeon Land Resources, State Committeeon Food Industry, State Committeeon Bread Products, State Committee on Water Economy, and State Committee on Fisheries also provided active support to the sector review. Backgroundstudies were prepared by the Ukrainian Instituteof Agricultural Economics,the Institute of Economics,and the Institute of Land Organization. Preliminary results of the Ukraine Land Reform Monitoring Project have also been used in preparing this document. EXECUTIVESUMMARY
1. With the dissolutionof the Soviet Union and the breakdownof all previouslyestablished production and trading practices, Ukraine has been forced to confront the demands of transformationto a market-based economy. In the food and agriculture sector, this redirection of production facilities towards private ownership and market-baseddecision making is still at an early stage. The adjustment needed is considerabledue to the legacy of distorted prices, governmentintervention in the production system, monopolisticinput and output marketing, and the built-in inefficienciesof the collectiveand state farm system. This report describesthe current status of the food and agriculture system and the ongoing process of transformation. The report also provides an agenda and recommendationsfor continuing sectoral reform.
AgriculturalPerformance and Structure
Il. The food and agricultural sector has greater economicpotential in Ukraine than in any other region of the Former Soviet Union (FSU). This is due primarily to its favorable agro-climatic conditions: fertile soils, adequate rainfall, and a temperateclimate. These conditionsare not only well suited to the production of grains, oilseeds, root crops, and livestock, but they are also ideal for the production of a wide variety of fruits and vegetables. Due to these ideal conditions, the country traditionally has been a net exporter of food and agricultural products. Performance of the sector, however, has been far below potential. Crop yields are only 50% to 55% of those in Western Europe, fertility yields of livestock are 33% lower, and feed conversion ratios are less than half of Western standards. Material losses are high throughout the food chain. Food processing, due to outdated technology and low capacity, is the bottleneck in this system. Despite significantproducer and credit subsidiesfor agriculture, agriculturaloutput has declined by about 22% since 1990. During 1991-92, the country had to import grain for the first time in several decades. At the same time, the level of food consumptiondeclined significantly.
III. Ukrainian agriculturestill exhibitsthe major hallmarksof the Sovietsystem. Most of the production is organized in large-scalestate farms and collectives. These also provide a comprehensive range of social and municipalservices. A large bureaucraticadministrative structure is still functioning above the farm level, and attempts to provide central control to farms and other agricultural activities. Even in 1994, the Governmenthas aimed at influencingproduction decisionsof the farms by connecting input supply with deliveriesto the state. Regional administrativestructures have been preserved almost without change, and the bureaucracy created to implementdirect administrativecontrols continues to exist.
IV. The decline in agriculturaland food processingoutput is a reflectionof the deterioration of the overall economic situation of the FSU: high inflation, worsening terms of trade for agriculture, reduced availabilityof vital inputs, overall decline of real wages and domestic demand, and the collapse of intra-regionaltrade. Predating the recent decline is a long history of policies that have produced severe structural problems. Centrally directed, collectivized agriculture, together with the routine covering of enterpriseslosses, and the cumbersomemechanisms of centralplanning and control, resulted in inefficientproduction and distributionsystems and distortedconsumer prices. High investmentlevels in the Soviet era did not improve efficiency, and growth relied increasinglyon expandingthe amount of agricultural inputs. Agriculture became an increasing financial burden, with subsidization of both ii Executive consumersand producers becomingan importantfactor in macroeconomicdestabilization. It is evident that the sector's full potential can only be realized if major structural reforms are implemented.
A Slow and CautiousReforn Process
V. The Governmentof Ukrainehas movedcautiously in reformingand restructuringthe food and agricultural sector. First, there is a considerablebody of opinion in Ukraine that the problems of the present system are transitory; that they can be overcomewith greater access to advancedtechnology and better management, and that subsidizationwill only be needed until transitory problems can be solved. Second, there is a fear that the rapid dismantlingof state and collective farms will lead to a collapse of output. Third, there is concern about the effects of rising food prices on living standards. Finally, there is a recognitionthat the physical and institutionalinfrastructure needed to support a sector of small independentfarmers is substantial, and not immediatelyavailable.
VI. Market and Price Liberalization. Despite several moves towardprice and market reform over the last few years, Government influence on price formation remains strong. Although most agricultural output and input prices are no longer formally set by the state, these measures do not represent true liberalization. All major agricultural products are covered by state contracts (grains, sunflower, and sugarbeet)or state orders (meat, milk, poultry, and potatoes), which still accountfor over half of the marketed output of these commodities.' Though the payment advances to farms carry an implicitcredit subsidy, the prices received by farms under state orders and state contracts are well below border price levels. The net result is implicit taxation of farms. Monopolisticstate trading agencies continueto exert substantialpressure on farms to sell at prices indicatedby the Governmentby making these sales a condition for supplyof otherwise-hard-to-getinputs and payment advances, which function as loans for working capital. Access of farms to foreign trade channels is restricted since sales to the state are a necessaryprecondition for granting permission to export even small quantities.
VII. Apart from relatively modest changes in the formal system as described above, the malfunctioningof the state controlled marketing system became more apparent in 1993-1994than any time before. In practice, the state procurementsystem has lost its strength. There are a growing number of commercial traders, including new private firms, commercialized former state enterprises, joint ventures and foreign traders, that operate outside of the state marketing network. Farms increasingly contract with these companiesand use the state system less and less. One estimate by a Government source was that 25% of farms no longer work with state suppliers. Explosive inflation has led to a demonetizationof agriculture and has inhibited the functioningof agricultural markets. Producers are storing an increasing proportion of output on farm. Output is often processed on a share basis, i.e., processors receive a proportion of the output rather than a cash payment, and the balance is returned to the farm. Farms use this output to barter for inputs, or sell on uncontrolled markets. Producers also barter for other domestic or importedgoods, and even pay their workers partly in kind.
VIII. Unfortunately,the most recent reaction of the Government of Ukraine to this situation in June 1994 is to try to maintain state purchasingwith a new wave of subsidizedcredits and input supply
I State orders do not differ greatly from state contracts: the difference is the source of frnancing. State orders are financed by loans from the state budget to procurement agencies which in turnmake advance payments to agricultural producers. State contracts are financed by procurement agencies' own funds and bank loans. Summary iii linked to state contracts rather than opting for genuine market liberalization demanded more and more by the farming sector. Instead, it has continued to try to work with "state contracts" and further prop up the old system through subsidization of producers and price formation restrictions to limit retail price increases. However, the issue of subsidies financed by monetizing ever-increasing budget deficits will accelerate inflation and further erode wages. This leaves consumers less able to cope with structural change in the economy and perpetuates a slow transition to higher levels of output and income.
IX. Land Reform. Privatization of land and the establishment of independent private farms has begun, yet present policies and legislative framework envisage collective land ownership as the dominant form of land ownership, and the principle of unrestricted private land ownership has not yet been fully accepted. There is a clear intention to keep private agriculture as a supplementary component of a farming structure based on large-scale units owned collectively.
X. The privatization of land is moving slowly. Uncertainty about future legislation on land ownership and the risks involved in private farming under present macroeconomic conditions and the absence of a competitive input/output marketing and credit system substantially limit interest in the establishment of independent private farms. As of April 1994, independent private farmers controlled only 1.5% of Ukraine's agricultural land. However, at the same time about 5 million ha of household plots and gardens (11.8% of total agricultural area) were given as private property to the users. There has been much more progress with the other component of land reform, namely the "denationalization" of land and its transfer to non-state ownership. As of 1993, 56% of the land is owned collectively and only 27% of the agricultural land remains in state ownership, compared to 100% in 1990.
XI. The reform of the agricultural sector is proceeding mainly through reorganization of existing collective and state farms. The majority of state farms have been restructured and privatized into collective farms, however some still remain (primarily research farms) in public ownership. The extent of formal reorganization of the traditional large-scale farm enterprises is substantial: according to recent survey results2, two-thirds of the sampled farms had decided to reorganize by the end of the first quarter in 1994. However, among the farms that decided to reorganize, 85% registered as collective enterprises, which is an organizational form essentially identical to the old kolkhoz. Of these reorganized farms, most have opted to move toward privatization of land and non-land assets by distributing conditional ownership certificates (shares) among members. Some new collective farms were also created by the division of previous kolkhozes. Nearly 90% of the reorganizing farms in fact remain collectives regardless of the form of reorganization. Among those farms which have undergone more substantial reorganization there are 355 agricultural cooperatives (lease cooperatives) and about 100 joint stock societies.
Developing a Reform Strategy
XII. The most immediate priority is for a comprehensive agricultural reform strategy (Box E.1) to be agreed within Government and promulgated. This strategy, whatever its elements, must be consistent and coordinated with the overall program of stabilization and privatization. Not all of this can be accomplished in very near term; investments in physical capital and building of institutions will take some time. Infrastructure investment will obviously be limited by fiscal constraints, but priorities can
2 Land Reform Monitoring Study: World Bank - Ukrainian Institute for Agricultural Economics. 1994. iv Executive be established relatively soon, ...... and potential sources of ... Refarm Agend funding, both domestic and external, can be identified. An agen forrefom sold inlue the foll as ast of : The implementation of a mac stabiiztion, iberalizationt(a) of domestic marketsand'kroeconomic comprehensive reform strategy d Ieontroiof pries,frei external 0trdad ai out of has to be carefully sequenced produIera consr s C t 4 and organized, selecting protecting.. living..s r.ao o ec of priorities for immediate gt pies; ( tof 3) foodm bsin actions. For example, the phasing out of state orders and (c) reform en couragingtedevelpmen nt00 A-;laa sector of' a' f-ar command economy-type managemet units byestablshng the instittion bsis for divsion and restrictions has to accompany privat iztionoflan-frIgflarmsand for au attempts to promote market - 5) . . mechanisms. Or similarly, ).... prizng anden oagen,try ..into...pdu tf p g reduction of subsidies to and marketg of agriculturalinputstan output; (Chapter 6) consumption should be ...... combined with the introduction (e) establ;is fr-amew f naia servs 'edcon, ext of targeted programs to protect (Chapter.inforationservices, 6 ad7 and.regulation consistent.with a market .economy the poor...... (tU uidnga syte ofpysicalAinrastrucure onsisftet.withAthenes of aarket- productid processing, aisbt system7
XIII. T.he m o s t important contribution of the G-.overnment to agriculture in the short run is macroeconomic stabilization and reduction or elimination of controls on domestic and international market transactions. Inflation, coupled with price controls, is a deadly combinationfor farming. Greater price stability and market liberalization would eliminate implicit taxation of farmers arising from controls that favor urban consumption. It would also result in reduced distortions in relative prices of commodities, inducing more efficient resource use. Trade liberalizationwould allow domestic farm prices to be linked more closely with world prices, expand markets for agricultural commodities, and lower input costs (Box E.2).
XIV. A program of macroeconomic stabilization, price and market liberalization would include:
* adopting a program to reduce inflation, including through fiscal policy, an especially rigorous control of expenditures designed to limit the government deficit,a an a tight monetary policy;
* freeing producer prices, replacing the system of state orders, ceasing establishment of indarktiv pric iesor regulated profit margins, and stopping the practice of linking supply of inputs to fulfillment of production quotas; Summary v
* beginning liberalizationof foreign trade, includingeasing of export quotas and licensing requirements;
* ending limitation of markups for processing and marketing, and bringing the tax on commodity exchangeincome into line with the VAT;
* phasing out producer subsidies according to a well defined program linked to restructuringefforts and cappingthe total costs of agriculturalproducer subsidiesat levels consistent with macroeconomicstabilization;
* replacing consumerprice subsidieswith targeted programs to protect specificgroups in the population;
XV. Price and market liberalizationshould be properly sequenced. These efforts should take priority over land reform and other structural reforms. BoxE.2 gives a proposed sequentialorder for reform.
iPr *OpsdSchedule.! AgWutrlPiePlicjy Reform and,Subsi y. Re d ction
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XVI. SecuringFood Supply. ProtectingVulnerable Groups. With the decline of export trade in agriculture and declining domestic demand, shortages of domestic food supplies are unlikely unless there is a collapseof production and distributionsystems. If reforms have been put in place according to the above mentioned sequencing,this risk would be minimized. Food availabilityand prices should be monitoredto spot possibleareas of shortage so that prompt responses by the market can be fostered.
XVII. There may be groups in society whose incomes have dropped to the point where their nutritional status is in jeopardy, and there will be more of them in the future. The Governmenthas an vi Executive
obligationto protect these groups, but food subsidies,especially those attached to products like beef, for which demand is income elastic, are highly inefficient. Food stamp programs, income transfers and subsidies linked to products with low income elasticity (such as bread products) are all preferable to untargeted subsidies of the kind in general use in Ukraine.
Restructuringand Privatizingthe AgriculturalDistribution and ProcessingSystem
XVIII. The successful transformation of agriculture will depend to a large extent on the developmentof a competitivefarm support sector-- material/technicalsupply, agriculturalservices, and marketingof agriculturalcommodities. Withoutthe establishmentof competitivemarkets for inputs and outputs, the private farms will remain dependenton local authorities, and an efficient pricing structure cannot develop.
XIX. Privatization and Demonopolization of Processing and Marketing. Rapid demonopolizationof agroprocessinginput supply and product marketing systems should start immediately, beginning with provision of unrestricted free entry into the market by new private enterprises and privatization of existing small shops. The creation of private wholesalers, commodity exchanges, transportand trade companies,and service and marketingcooperatives, should be encouragedby reducing currentlyhigh levels taxation. State product marketing, processing,transport and input supply services, should then be privatized. Large agrokombinats,and all other monopoliesand monopsoniesshould be divided into smaller privatized concerns to promote competition. A program of privatization should include:
* immediateelimination of all regional trading monopoliesby state enterprises and internal marketing restrictions;
* break down of monopolisticstructures such as grain and meat monopolies;
* anti-cartel legislation
Reform of the AgriculturalCredit System
XX. The Ukrainian agriculturalfinance system deservesspecial attentionbecause many of its potential clients live in hard to reach areas and are engaged in activities where prices can be volatile. Becausethe emerging transition will make most of the existingassets obsolete, potential clients will be relatively risky and costly to serve. However, this does not justify maintaining subsidized credit programswhich have proven to be-costlyand ineffectiveelsewhere. Linkageof subsidizedcredit to state orders should be ceased immediately. Subsidizedcredits should be limited in the near future to finance critical short-term operations and support private farming, and then be completelyphased out. Under no circumstancesshould the financial system be used as a convenientmechanism for rescuing insolvent enterprises, public or private, in agriculture or elsewhere. The developmentof credit unions or other forms of cooperatives, small-scalerural banks, or informal arrangementsinvolving private sector trade credit might be and effective means of reaching a broader array of rural clients. Summary vii
Land Reformand Farm Restructuring
XXI. The objective of agricultural restructuring should be the creation of a sector of independent, privately-owned and largely owner-operatedfarms that are free to change their farming methodsand output mix in responseto evolving product and productiontechnology and changesin input and output prices. The process of restructuringagricultural enterprises will be encouragedby continued progress in price liberalization,privatization and developmentof competitivestructures in the marketing of agriculturaloutput and inputs, and scalingback of producer subsidies. Nevertheless,additional actions are needed.
XXII. Restructuring and Privatizing the Collective and State Farms. The main task at this moment is to maintain the momentum of reform by amending existing legislation and creating the necessaryoverall economicand market frameworkfor restructuringlarge-scale farms. The restructuring of collective and state farms should be continued in line with the goals of creating a market-based economy and should be guided by three major principles:
* separation of production activitiesfrom social and municipal functions;
* distributionof land and other productiveassets to the membersin physicallyrecognizable form and not as anonymousshares; and
* freedom of decision to members about future organization of production after the distribution of the ownership of land and other assets.
XXIII. If Ukraine is to be a fully functioningmarket economy,people engaged in farming should have a free choice as to how they wish to conducttheir farming. The farmers themselvesshould decide whether to farm individually,in small groups, in cooperatives,in joint stock companies,or in any other form they choose. Different individualswill prefer different solutions and will choose different forms of voluntarycooperation. It is the Government'sresponsibility to ensure, throughappropriate legislation, that a true sense of private ownership of land, assets, and profits is created: division of shares must be implementedin a way that creates a direct link between the individual and the fruits of his labor, and return to owned assets. Moves from one form to another should also be free according to the rules of a market economy (trading and leasing land or shares).
XXIV. Promoting Private Farming and Farmers' Cooperatives. The internationalevidence is persuasivethat individuallyowned private farms are likely to get more output per unit of land, material inputs, and labor, than collective or state farms. Individually owned farms are more likely to ensure effective harvesting, storage, and transportation of production, since any production loss translates directly into lost incomefor the farms. Internationalevidence also suggeststhat when individually-owned farms exist beyond a certain number, individual farmers help create effective demand for new, competitivesources of supplyfor inputsand channelsfor marketing, storage, processingand distribution. The small, independentprivate, owner-operatedfarms will emerge graduallyas farmers gain experience and accumulatecapital, and as the input and output marketing systems evolve to meet their needs. To encouragethe growth of these farms, Governmentshould quickly resolve the uncertaintiescreated by the transition process, make clear its commitment to private property, specify how agriculture and agribusiness will be reorganized, delineate the rights of members of collectiveswith regard to jointly vgij Executive owned assets other than land, indicate the kinds of taxes that will be imposed and specify how existing debts and obligations will be handled.
XXV. Even with modest growth in numbers, a large proportion of the private farms created can be expectedto run into financial difficulties and fail within the first years of their formation. This will constitutea natural "weedingout" process and should not be regarded as a "waste" of resources. More importantly, it should not be considered a reason to expand governmentsubsidization of agriculture in general or newly emerging farmers in particular. This can only lead to the creation of a new class of inefficient,dependent farmers.
XXVI. StrengtheningLand Legislation. Severalnew laws are being prepared on land ownershipand land use in the framework of a new Land Code. The new legislation envisages the full privatization of agricultural land. If this draft law will be passed by the parliament, Ukraine will have one of the most progressive approachesto land privatization among the FSU republics. According to the draft, every collective farm member will receive without paymenta so-called "averageland share" with full private ownership and titles above the already increasedsize of householdplots. Private farmnerswho were not members of kolkhozes/sovkhozeswill be entitled to receive the same amount without payment. Additional, mainly reserve, land will be sold.
XXVII. The legal framework for private ownership and leasing of land should be strengthenedby:
* amendingthe Land Code to give the immediateright to sell and buy agricultural land and shares receivedby collective farm members;
* allowing rental levels for agricultural land to be freely negotiatedbetween parties;
* permitting mortgagingof land to financepurchase and/or improvement;
* defining clear and liberal lease terms for publicly owned agriculturalassets;
* ensuring timely processing and approval of applications for land; and
* consolidatingland records in each district center and computerizingrecord keeping.
XXVIII. Rural Social Services. Privatizationand the transition to a market economywill affect the existingrural social safety net and the provision of social services in the rural communities. Traditionally, the bulk of rural social services are provided by the collective and state farms, and the large scale farms provide substantialadditional benefits to their members and pensioners. In principle the transfer of their services to the local municipalitiesshould provide the solution. In Ukraine, however, the reforms to create a new municipal structure capable of running and financing the new services are at a rather early stage. There is neither the rural institutionalframework nor a financial structure to replace the collective and state farms' social services. It is not surprising that the fear of losing vital social services has an impact on farmers' decisions to stay with the collectivefarming system to a great extent, and strengthenthe argumentof those who advocateagainst the dismantlingof large scale farming system. Summary ix
XXIX. The three most critical needs in the village communitiesare: (a) developingan enabling environmentto stimulateincreased off-farm employmentin the villages; (b) safeguardingan acceptable level of rural social services during the period of restructuringand privatizinglarge scale farms; and (c) enhancing local ability to respond to social and demographicchange by providing communitieswith greater financialcontrol. Except for appropriatesteps to ensureacceptable standards of health, nutrition, and sanitationand to improve the general qualityof life in rural areas, attemptsat direct state intervention do not seem desirable because of lingering local suspicion of government motives and the lack of cost-effectivepolicy instruments. A coherent and integrated strategy should be developedto facilitate rural community development through devolving responsibility for these activities to the local communitiesthemselves. One of the most effective ways to address this requirement is to provide communitieswith greater control over their own budgets and, hence, their future.
Investingin, and Improving, Farm Productivityand Efficiency
XXX. Land reform, state and collective farm enterprise restructuring, and privatizationare important preconditionsfor the improvementof the efficiencyof primary production, processing, and distribution of food and agriculturalproducts. Increasing efficiency is the only sustainablebasis for a profitable agriculture sector in Ukraine. The natural endowments of Ukrainian farmland provides potential for Ukraine to produce competitive food and agriculturalproducts, especiallygrain and oil seed products, above and beyond domesticneeds. However, competitiveand profitable export of agriculturalproducts require substantialimprovements in product quality as well as in internationalmarketing.
XXXI. Basedon the review of current situationand the major tasks of transition, the investmentpriorities can be listed as follows:
* development of the physical facilities (wholesaling centers, farmers' markets, etc.) to support the market for agriculturalproducts and inputs for agriculture;
* focus recapitalizationof farming on the emerging new corporate and individual farms;
& reconstructionsand major modernizationof support services along decentralizedprivate and/or cooperativelines (industriessuch as seed industry, machinery maintenance);
* reconstructionand major modernizationof agroprocessing;
* introductionof environmentallyfriendly technologies;and
* developmentof education and research potentials.
XXXII. The private sector should play a decisive role in future investment in agriculture as privatization proceeds. Public investment needs to be directed at improving human and physical infrastructure, and to be linked to the implementationof a program of further reforms which set clear priorities. x Executive
Restoring International Trade
XXXIII. Export of agriculturalproducts can make a significantcontribution to sectoral growth. There are some marked differencesin potential for exports to between FSU and non-FSUcountries. The FSU countries constitute the natural market for Ukraine's agricultural exports. The Government of Ukraine should try to resolve existing difficulties (paymentproblems, etc.) in this area and attempt to increase exports to these countries in the near future.
XXXIV. Every effort shouldclearly also be made to expand exportsto convertiblecurrency areas. This includescapturing "niche" or specialtymarkets with existingproducts as opportunitiesarise, as well as developing products (perhaps as joint enterprises with companies familiar with those markets) deliberately oriented toward them. However, there are a range of excess supply problems, perceived quality problems (psychologicalimpacts of the Chernobylaccident) and, in some cases import barriers, that inhibitaccess and reduce prices for Ukraine's agriculturalproducts in Western markets. In the short run, and in the longer run as the recovery process succeeds in the region, restoring and developing markets and business relations with the other republics of the FSU may offer better opportunities. It is important to allow the developmentof commercialand private sector trading institutionsand agencies, financial and payments arrangements,and trade and exchangecontrol policiesand systemsthat facilitate trading transactionsand encouragethe integration of domestic and external markets.
New Roles and Structures of Government
XXXV. The Government's role should be to establish the general rules and facilitate the conditionsfor smoothoperation of markets and independentbusiness organizations. This role is not less important than the previous one; however, it requires a differentphilosophy, as well as differentmeans and institutions. Government's functions should be: regulationas required in market economies(e.g., environmental,public health, etc), provision of public goods such as infrastructure, and policy making and sectoral analysis. There must be a widespreadcommitment to changing the structure and scope of governmentto make it consistent with this new role. The overall principlesdriving this change should be: (a) establishingof a single locus of responsibilityinside the Governmentfor agriculture and food policy decisions; (b) dismantling of the current "agroindustrial complex" governmental management structure; and (c) simplifyingthe structure of governmentalorganizations corresponding to the reduced role of the public sector responsibilitiesin agriculture.
XXXVI. The dismantlingof the bureaucraticstructure of central planning is a very importanttask. What is needed is not merely changing the names of the various ministries, but radical modification and/or merger. Units related to central command and direct interventionsshould be dismantled, while those remaining shouldbe organizedand managedto meet the needs of a free market economic system. As transition proceeds, the whole structure can be further simplified, with fewer institutionalunits and fewer employees.
Extemal Assistance
XXXVII. Ukrainehas embarkedon an historic and courageouseffort to transform its economyfrom a centrally planned to a market-orientedsystem. This reform will be, under the best of circumstances, a long process invariablyaccompanied by economic,social, and politicaldifficulties. To ensure that this Sulmmary xi transition is efficient and effective, and to minimizethe transition problems, external assistance can be of great benefit. In the agriculture and food processingindustries the assistancemost needed in the short and medium term includes:
* balance of payment support for critical inputs in agricultural production, including improved seeds, fertilizersfor crops, and vaccinesfor livestock,and continuationof food aid deliveries by bilateral donors;
* technical assistance to the Ministry of Agriculture and Food to help implement a consistent transition program in the food and agriculture sector;
* technicalassistance and capital investmentfor the developmentof institutionsand support facilities needed for market based food and agriculture; and
* capital investments for the development of competitive production, processing, and marketing systems, and related physical infrastructure(especially the irrigation system).
SununaryMatrix
XXXVIII. A matrix summarizingthe key recommendationsof the Review is in Chapter2 on pages 9-12. xii Executive CHAPTER 1
MAIN FEATURES OF THE AGRICULTURE SYSTEM
1.1 Ukraine is renowned for its outstanding natural endowments suited for agricultural production. Traditionally, the country has been a substantial net exporter of food and agricultural products and has the potential to again becomea major food supplier. This chapterprovides an overview of the main aspectsof the food and agricultureindustry in Ukraine, beginningwith historicalperformance and the descriptionof the resource base for agriculture, followedby a brief assessmentof the structure and performance.
A. AGRICULTURE'S ROLE AND HISTORICAL PERFORMANCE
1.2 Agricultureplays an important role in the economy Net Material Product in 1992 of Ukraine and accounts for a large proportion of economic activity. In 1992 food and Other agriculture contributed 30% to 12% the Ukrainian net material product (Figure 1.1) and employed about 20% of the labor force'. It is also a significant Construction Industry contributor to external trade. 15% 43%
1.3 T h e p a s t performance of Ukrainian agriculture reflected trends in the former Soviet Union (FSU) as a whole. Output grew by about 2% annually in the first half of 30%o the 1980s, then slowed. In the Figure1.1 beginning of the 1990s, output declined significantly. Total Table1.1: Development of Agricultural Production productionin 1993 was somewhat (Indicesbased on 1983RbI) more than 20% below the 1986- 1990 average (Table 1.1). The 1986- 1990 1991 1992 1993 1993/ contraction in the livestocksector 1992 has been continuous and rather Total 100 99.7 86.6 79.4 78.1 98.3 significant, declining by more Crops 100 98.3 81.4 82.7 88.7 107.3 than 30% in 1993 from peak levels in the mid 1980s. 1993 Livestock 100 101.0 90.9 76.7 69.2 90.2 was a good year in crop Sources: Agricultureof Ukraine, 1993.Ministry of Statistics production as compared to 1992,
1 Of the 30% of Ukraine net material product associatedwith food and agriculture, the food industry accounts for a little over one quarter, 27%, and primary agricultureaccounts for 63%. 2 Chapter I yet overall crop performance still remainedbelow the level of the 1985-1990average. This decline of agricultural output was partly a reflection of the deterioration of the overall economic situation of the FSU. High inflation, worseningterms of trade for agriculture, reduced availabilityof vital inputs, falling real wages and domesticdemand, the collapseof intra-regionaltrade, and bad weather in some years all contributedto a decline in output.
1.4 Underlying the seemingly sudden deterioration of agricultural performance is a long history of inappropriate policies that produced severe structural problems. Policies that supported centrallydirected, collectivizedagriculture led to inefficientproduction and distributionsystems, distorted consumerprices and consumptionpatterns, and ultimatelyto the developmentof a sector that was unable to meet rising demand for food and fiber at constant or declining costs. This system of production was accompaniedby serious degradationof land and water quality. Over time, an ever increasing share of investmentin agriculture went to replace depreciatedcapital. Growth depended heavily on expanding the quantity of agriculturalinputs, especially feed grains for the livestocksector. Agriculturebecame an increasingfinancial burden, with subsidizationof both consumersand producers becomingan important factor in macroeconomicdestabilization.
1.5 Ukraine's legacy from the socialist era thus includes large inefficient farms with high productioncosts, high levels of food consumptionrelative to market economiesof comparableprosperity, subsidized food prices and excess demand for food at those prices, a pervasive monopoly of food processingand distribution, and macroeconomicimbalances reflected in large budget deficits and high inflation. Moreover, the growth potential of Ukrainian agriculturewas jeopardized by the low levels of investment. Agricultureis existingby consuming its natural resource base and its stock of investment. Unless incentivesfor efficient production and investmentare established, Ukraine's agricultural future will be bleak.
1.6 Despite its current problems, Ukraine was one of the most agriculturally advanced republics of the FSU, reflecting its favorable agro-climaticconditions: fertile soils, adequate rainfall conditions,and a temperateclimate. These conditionsare not only well suited for production of grains, oilseeds, root crops, and livestock, but also for production of a wide variety of fruits and Table 1.2: Per Capita Agricultural Production (kg/capita), 1989 vegetables. The most important Ukraine USA France Germany crops are wheat, sugar, maize, (West) and oil seeds. Animalhusbandry is dominated by hog, beef, and Grain 989 1149 1056 444 chicken farming. The favorable Sugar Beet 1003 93 414 329 natural endowment for agricultureand the relativelyhigh Potatoes 373 68 107 131 level of production, given the Meat (slaughter 86 120 112 96 circumstances, is demonstrated weight) by the relatively high per capita Milk 471 264 513 413 agricultural production in comparison with the developed Sugar 100 24 65 49 world (Table 1.2) Butter 8.6 2.3 9.6 6.7 Source: Ukraininan Institute for Agricultural Economics Introduction 3
1.7 The sector traditionallyproduced an exportable surplus: on average, during 1986-90, about 24% of all grain, 22% of all meat, and 44% of total sunflower production of the FSU came from Ukraine, which comprisedonly 15% Table 1.3: Percent Share of the Soviet Agricultural Output of its arable land resources (Table by Product,1990 1.3). As a result of the breakdown Products Ukraine Russia Other Republics of inter-republictrade, the decline in agricultural production and the SugarBeets 54.2 38.0 7.8 adoption of extensive trade Sunflower Seeds 41.5 52.2 6.3 restrictions, foreign trade fell to a Potatoes 26.3 48.5 25.2 fraction of its pre-independence Vegetables 25.1 38.2 36.0 level. This is underscored by the Flax 44.1 29.0 26.9 fact that Ukraine became a net Source: Narodnoe khoziastvoSSR v 1990 g. [1991],pp.358, 471. importer of grain for a few years in the early 1990's.
1.8 There is a widespreadbelief in Ukraine that acquiringWestern technologyis the key to improvingthe performance of the sector. However, the backwardnessof technology in Ukraine is a result of the way agriculture, farm machinery, and the agricultural input industries were organizedand managed by the State. Technologicalprogress depends on establishment of conditions that Table 1.4: Size and Composition of Rural Population (OOOs) provide both the incentives and the 1970 1979 1991 1992 means to increase productivity. This will require a break with past Population of Ukraine 47,126 49,755 51,690 51,802 policies and the transformation of Rural population 21,438 19,243 16,895 16,796 agricultural structures toward private ownership and % inrural areas 45 39 33 32 market-driven resource allocation. Urban population 25,688 30,512 34,795 35,006 % in urban areas 55 61 67 68
B. THE AGRICULTURAL Rural population by sex RESOURCE BASE % male 44 44 45 46
% female 56 56 55 54 Rural Populationand Settlements Rural population by age
1.9 The rural population % < than labor age 29 23 22 22 of Ukraine in 1992, was about 17 % labor age 50 53 49 49 million, or about one third of total % > than labor age 21 24 29 29 population(Table 1.4). It has been declining at a rate of about 1.2% Rural birt and death rates (per 1,000 people) per year over the past 20 years. In births 14.5 13.6 12.6 12.5 the past dozen years, migration to deaths 10.4 14.3 17.2 17.6 urban areas has been estimated to be about 200,000 persons per year. natural increase 4.1 -0.7 -4.6 -5.1 Source: Ministry ot Agriculture and Food 4 ChapterI
The migrants are mainly younger people. This has contributedto a decrease in rural inhabitantsof child bearing age and a declinein the natural increaseof the rural population. Thus, the birth rate has declined and the rural populationhas been aging. Pensioners now comprise about 29% of the rural population, comparedto about 21 % in 1970. With the decreasingnumber of younger people, the rural sector has experiencedperiodic shortagesof labor, especiallyin peak agriculturalseasons. It has become common for students and other volunteers from urban areas to be called by the Government to work in farning during such periods. The aging rural population and the low reproduction rate suggest that the labor force will decline at an increasingrate in the future.
1.10 Migration reflects the greater freedom of people to move, and better employment opportunities and living conditions in urban areas. Housing, cultural and educational opportunities, recreation, and the availability of consumer goods in most Ukrainian villages are not up to urban standards. Less than 6% of rural houses have running water, and less than 3% have central heating systems, sewers or natural gas connections. In the last two to three years, rural to urban migration has slowed considerablydue to the deterioratingurban economic situation. The employedrural population was estimated about 7.7 million in 1992. Of these, about 4.9 million worked in food and agriculture (68% of agricultural workers work on collective and state farms, 12% on private subsidiary and individualfarms, and 14% in agro-industries).
Land and Climate
1.11 T h e country is divided into Average Ree ipit ati ons three soil-climatic zones: and1rocl I rnl c Zones (a) forest zone with acid m soils developed under 7M - forest and an annual precipitationof 600 to 700 ------mm; (b) a drier forest-steppe zone with average precipitation of----- 450 to 600 mm, 45% of----- which has identified +w / boY chernozem soils; and (c) am Xm the steppe, mostly chernozem (82 %), Figure 1.2 developedunder grassland, with only 350 to 450 millimeters of precipitation. These regions generally traverse the country in belts oriented southwest to northeast;the forest zone is generally in the north and northwestand the steppe in the southand southeast (Figure 1.2).
1.12 The territory of Ukraine is 603,560 kn2, or about 60.4 million ha, of which 41.9 million ha (69.4%) is agricultural land. The share of arable areas is higher than that of any other country in Europe and well above the world average. More than 55 % of the total territory of the whole country, and more than 80% of agriculturalland, is arable and cultivatedin annual crops (Table 1.5). Much of Introduction 5
Ukraine's soils are the highly favorable "chernozems,"or black earths, and the climateis Table 1.5: LandResources and Use, 1993 especially suitable for production of wheat and other small grains (Figure 1.3). Ukraine shares Millionha. % a large part of a highly productive chernozem Agricultural Land 41.9 100 soil region with Russia. These deep black soils represent 54% of the land and have an enriched Arable Land 33.5 80.2 humus layer of 40 to 50 centimetersor more in Orchards 0.8 1.9 depth. The naturally fertile black soils and the Pastures 7.3 17.4 less fertile forest soils present few physical obstacles to cultivation. Slopes are gentle to Ot.her 0.2 0.5 moderate over wide areas, permitting many Total Land Area 60.4 -- regions to have more than 80% of the land under Source: Ministry of Agriculture and Food cultivation.
1.13 Ukraine's climate is fairly temperate. Mean July temperatureshave a relativelynarrow range, from 18 C at L'vov to 22 C at Odessa, with Harkov and Kiev averaging 21 C and 20 C, respectively. Mean January temperaturesare relativelymild for these latitudes-- -2 C in Odessa and -7 C in Harkov. The warmer Januarytemperatures permit successfulwinter grain (wheat)production. The lower annual temperatures tend to reduce moisture stress, permitting the successful MainSoil Groups production of spring sown maize and other crops in most years. Chestnut The shortest frost-free period is Podzolic 4% 150-160days in the forestedzone 12% of the northwest, which also has Meadow the highest elevation. The frost Derno-Podzolic free-period is 160-170 days in the 7% forest-steppe zone, up to 200 Dern - days in the eastern steppe zone -z - - and longer in Crimea, which benefits most from the Chernozems moderating effect of the Black Sea. Figure 1.3
Enviromnental Status
1.14 Agriculture is a significant,but probably not the leading, cause of most environmental degradation in Ukraine. Environmental problems related to agriculture, however, may be more widespreadthan industrialpollution because the latter tends to be concentratedin local areas. The main problems are soil erosion and water runoff, which contribute silt and plant nutrients to water bodies, contaminationfrom agricultural chenicals, especially those in solution, and manure storage and use, which contaminateground and surface water with bacteria and nitrates. Major contaminationof water by pesticide and fertilizer use is not likely to be severe because recent usage has been low. 6 Chapter1
1.15 Soil erosionhas negative short- and long-termconsequences. In the short term, the most easily identifiedand measured effect is the presence of silt in streams and standing water. Silt attenuates the penetration of sunlight into water and restricts the volume within which various types of autotrophic (photosynthesizing)organisms can grow satisfactorily. Nutrients added to water bodies promote the excessive growth of algae. The resulting increase in organic matter leads to a high biological oxygen demand during decompositionand this causes eutrophicationor death of the water bodies for certain species. This severely reduces the viabilityof water body use in both commerceand recreation. Silt can also cover stream beds, and in so doing, impair the breeding and rearing grounds for aquatic animals. An imperceptiblebut real immediateeffect, however, is loss of inorganic and organic nutrients from fertilizer and manure added to the soil, reducing the economic benefits, and increasing the need for replacementlater.
1.16 The long-term consequenceof erosion is the slow destruction of the soil capacity to produce crops. Althoughoften imperceptible,many soils in Ukraineare being destroyedover time: 33 % of soils are alreadyidentified as being "washedout", including44 % of the most productiveand extensive steppe soils, and 30% of those of forest-steppeorigin. This slow deteriorationrequires additional use of fertilizers to maintain production. Ultimately, productivity will decline regardless of treatment to counteracttopsoil losses. Anotherlong-term effect of soil erosion is reductionof the volume of artificial and natural standing bodies of water through silting. This leads to a need to dredge artificial lakes used for water supply to preserve the necessaryvolume.
1.17 Solutions to agriculturally derived enviromnental pollution are well known from experience elsewhere and need only to be adapted to local conditions. Although lack of agricultural machinery, chemical manufacturing capability, and skills have impeded adoption of environmentally benign practices, this is not the major problem. More important have been the signals provided to agriculture in the socialist era emphasizing maximization of production in the short term and not long-termmaintenance of naturalassets. Significantinvestment is neededto protect the environmentand reverse deterioration, as are changes in the cropping pattern and production technology, but this is unlikely to materializeunless the structure of incentives is altered.
1.18 The Chernobyl accidenthad four major adverse effects on agriculture: contaminationof soils; contaminationof ground water; contaminationof standing crops, forest products and livestock at the time of the accident; and continuingcontamination of agriculturaland forestry products growing on contaminatedsoils and/or groundwaterresources. It is estimatedthat 5.7 million ha of agriculturallands are contaminated.2 Areas contaminatedabove 40 Ci/km2 are relatively small and mostly within the 30 km exclusionzone. Only an estimated 80,000 ha of land have actually been withdrawnfrom agricultural use. There has been no effort to clean up the forest outside the 30 km zone.
C. THE UKRAINIANFARMING SYSTEM
1.19 The structure of the Ukrainian economy in general, and of its agricultural sector in particular, developedaccording to the same pattern as in the other republics of the FSU. Russia and Ukraine, the two largest republics in the original Soviet Union, provided the template for what became
2 3.1 million ha of arable land, 0.8 million ha of meadows, and 1.5 million ha of forests. Introduction 7 genericallyknown as "SovietAgriculture. " However,only "eastern"Ukraine was a SovietRepublic from the start; the western provinces, incorporated into Ukraine after World War II, began to adapt to the Soviet pattern 25 years later, at the same time as the new socialistregimes of Central and Eastern Europe.
1.20 During the Sovietregime, Ukrainianagriculture was organizedin two centrally-controlled sectors of large scale farming: kolkhozes, collective farms in which output and all assets are jointly owned by the members; and sovkhozes,state farms in which output and all assets are owned by the state. The kolkhoz/sovkhozsystem is augmentedby "interfarm enterprises," ownedjointly by several farms. An additionalset of farms serves specialpurposes (e.g., training, research). In additionto these centrally organizedsectors, an important part of agriculturalproduction originatesin individualsubsidiary farms, such as household plots of individual kolkhoz/sovkhozmembers and garden plots assigned to city workers. In 1992, the 35.5 million ha of land in the socialized sector was divided among kolkhozes, sovkhozes and interfarm enterprises. About 30 million ha is arable land, 640,000 ha is orchards, and the rest is meadows and pastures. The socialized sector produced 69% of gross agricultural product (kolkhozescontributed 48%; sovkhozes, 21 %; and interfarm enterprises, 0.8%).
1.21 Before World War II, the differencesbetween the sovkhozes and kolkhozeswere quite pronounced; sovkhozworkers were paid fixed wages, while kolkhozmembers receivedshares of residual incomefrom the harvest. These differenceswere practically eliminatedwith the adoptionof guaranteed wages for kolkhoz members and provision of credit (much of which was later written off) if the farm could not meet its wage bill or other obligations. Several kolkhozeswere actually transferredto the state farm sector. At least some of the consolidation of the kolkhozes and sovkhozes was due to heavy indebtednessincurred as a result of ill-advised investmentsundertaken in response to direction by the state. Both sovkhozes and kolkhozeswere diversified, large scale enterprises, and only a few farms are narrowly specialized. Grain production accompaniedby livestock is characteristicfor most farms.
Table 1.6: Main Characteristics of Kolkhozes and Sovkhozes before Reorganization (averages per farm)
1970 1980 1992 kolkhoz sovkhoz kolkhoz sovkhoz kolkhoz sovkhoz
Total Number 9,141 1,605 7,016 2,110 9,080 2,643 Workers 590 676 610 664 355 439 Production (million rubles)a 1.4 3.2 2.9 3.9 1.8 2.6 Productive Fixed Assets 1.4 2.6 3.8 5.7 4.6 6.3 (million rubles)'
Farmland (ha) 33,50 5,046 4,200 4,500 2,731 3,254
Cattle (heads) 1,436 1,930 2,280 2,270 1,575 1,513
Cows 460 685 730 760 474 491 Tractors N/A N/A 41 57 37 47 Trucks N/A N/A 23 34 25 30 Combines N/A N/A 9 11 9 8 a/ 1983 rubles. Source: Ministry of Agriculture and Food 8 Chapter 1
1.22 The kolkhoz subsector was larger than the sovkhoz (state farm) subsector. Kolkhozes were almostfour times as numerous as sovkhozes, and they cultivatedalmost three times as much land, had nearly four times as many cattle, and employedmore than three times as many workers. On a per farm basis, sovkhozes were larger than kolkhozes by such indicators as average production, average number of workers, and stock of productive fixed assets (see Table 1.6). The differences in land holdings and in the number of cattle per farm were not very large. The production-to-assetsratio in sovkhozes,however, is lowerthan in kolkhozes,in line with their higher capital intensity(higher number of tractors and trucks per farm). The profitability in sovkhozeswas also lower.
1.23 The reorganization of the kolhkoz/sovkhozsector began in 1992. Most of Table 1.7: Emerging New Farming Structure (Jan 94) the farms have gone through some reorganization and at least changed have changed their titles Number '000 ha % during the last two years. This process is CoIl. Farms 8,735 25,730 61 discussed in detail in Chapter 4. The basic feature of the farming structure however, has not S a changed significantly (Table 1.7). Large scale Cooperatives 355 105 0 collective and state farms still use 82% of J. Stk. Societies 77 214 1 agricultural land (about 35 million ha). The collective enterprises accounting for about 61 % Indiv. Prvt. Farms 27,739 610 2 of agriculturalland, while the state farm share is Subsid.Plots (OOOs) 10,680 5,011 11 about 21 %. The combined output of large scale eserve and others 1,871 4 farms is about 65 % of total agricultural output in e 1993, compared to 73% in 1990. Total 42,290 100 Source: Ministry of Agriculture and Food 1.24 Each large scale collective or state farm is managed by a professional team that includes the chairman or director and specialized agriculturaltechnicians, farm managementexperts, economists, accountants, and administrators. The total number of managers and professionals in the large scale farm sector is around 200,000. This represents around 4% of the total labor force on farms, or a cadre of nearly 20 professionalsper large scale farm. The professionalteam is responsible for production scheduling and for the deploymentof labor and capital on the farm. It is supposed to perform the same managerialfunctions as in any large agribusiness. The experts are graduates of agricultural, technical, and economiccolleges and, as such, they provide the know-howthat the western farmer would receive from extension services and industry. There are major differencesin the efficienciesof these farms, with some exhibiting quite different and innovative managementstructures. A review of the differencesin structure and performancecould be useful in identifyingchanges that could lead to improvementsin productivityand efficiency, even within the existing system.
1.25 The villages making up a kolkhoz or a sovkhoz were formally governed by a municipal council (sel'sovet). Their budgets were minuscule, however, and their activitieswere overshadowedby the local kolkhoz or sovkhoz. All social and municipalservices were provided by the kolkhoz or sovkhoz or directly by the state.3 Thus, cultureclubs, cafeterias, kindergartens,central heating and water supply,
3 In early 1994, 6,450 pre-school child care institutions, 360,000 apartments, 539 homes for pensioners, 1,540 clubs, and 80,000 km of piping networks were run by agricultural enterprises. The total maintenance costs for 1994 are estimated to be 8 trillion krb. Introduction 9 local roads, and street lighting (so-calledsocial assets) were actuallybuilt, financed,and operatedby the farms, while schools and medical services were provided by the state. Housing was provided by the kolkhoz or sovkhoz, often in the form of multistory brick-and-mortarbuildings. The recent trend, however, has been for rural residents to build their own housing, financed with personal savings and governmentloans. Over 15% of kolkhozand sovkhozworkers were not employeddirectly in agricultural activities--4% had managerial, administrative, and professional jobs on the farm (rukovodyashchiye rabotniki), while the rest were engaged in the provision social services.
1.26 Up to early 1990, private agriculture consisted of only "individual subsidiaryfarms." These were household plots of kolkhoz or sovkhoz members and gardens and vegetableplots allocated to urban workers. Altogether,2.8 million familiesused 2.7 million ha, or 6.2% of the total arable land. From this, they provided more than a quarter of total agriculturalproduction--30 % of livestockand 20 % of crops--inthe second half of the 1980s. Historically, there has been an intensivecooperation between the large scale farms and household farming by their members. A large proportion of their inputs, especiallyanimal feed and livestock, as well as machineryservices, is providedby the large scale farms, often without payment. As one of the first steps in land reform, the area under this type of farming has been almost doubled between 1991 and 1994. The so-calledsubsidiary, or auxiliary farms, had an area of over 5 million ha, or 11 % of total agricultural area, by the beginning of 1994.
1.27 Independentprivate farming has started to emerge, and includes farmers who are Table 1.8: Role of Private Sector in Agriculture allowed to own their own land, without being 1990 1993 Share % associatedwith the socializedsector. As of April Increase 1994, there were 29,666 individualprivate farms in Ukraine with a total area of 620,548 ha (1.5% Total Production 26.7 34.8 +30.3 of total agricultural area and 11% of land in Crop Production 20.3 32.0 +57.6 privateuse). Individualprivate farm's share in productinth non-asociatedprivatefarmersof LivestockProduction 30.1 37,8 +25.6 production of the non-associatedprivate farmers Source: Ukrainian Institute of Agricultural Eco-nomics is still negligible, but their number is growing fast.
1.28 In recent years the role of private sector farms (subsidiary and independentfarms) has increasedsignificantly in terms of overall agriculturalproduction (Table 1.8). This is mainly the result of increasesin the size of these farms and due to the fact that the livestockinventory in the private sector has not declined, but instead shown a slight increase. The share of the private sector in crop production has increasedby 58 %, while its share in total productionincreased by 30%, and now contributes34.8 % of gross agriculturalproduction.
D. MAJOR AGRICULTURALSUBSECTORS
1.29 The production of crops accountedfor about 45 % of gross agriculturaloutput in the late 80's and early 90's. Livestock production accordingly contributed about 55%. These shares have changed in favor of crop production during recent years, as the decline in livestockproduction has been greater than that in the crop subsector. In 1993, 52% of gross agriculturalproduction originatedin the crops subsector. 10 Chapter I
PrincipalCrops
1.30 Ukrainehad the reputation Table 1.9: Basic Crops Cultivated (1989-1993) of being the bread basket of the Soviet Indexes 1989 1993 1993/ Union. 80.2% of all agricultural area % % 1989% was used for annual crop production Total Arable 100 100 (Table 1.9). The cropping structure has not changed substantiallyin recent years. pure Pairs 4.2 4.3 102.4 About 45 % of arable land is used for crop Total Sowing Area: 95.8 95.7 99.9 production, 33% is occupied by forage crops, industrial crops comprise another a)Grain Crops 44.7 45.5 101.8 10 to 11%, and potatoes and vegetables Winter Crops 23.0 22.4 97.4 take up 6%. Winter Wheat 20.3 18.3 90.2
1.31 Cereals. Ukraine Spring Barley 8.3 11.0 132.5 produced an averageof 47.4 million tons Maize 5.4 4.3 79.6 of cereals per annum in 1986-90. In 1992 the harvest was only 38.6 million Pulse Crops 4.4 4.0 90.9 tons. In 1993 production improved b) Industrial crops 11.2 10.5 93.8 somewhat with 45.6 million tons Sugarbeets 4.8 4.9 102.1 harvested, an increase of 18%, but still 6% below the peak 1980s levels (Figure Sunflowers 4.7 5.2 110.6 1.4). Cereals are the key crop for both c) Potatoes and 5.7 6.4 101.6 livestock production and human Vegetables consumption. Wheat is the major grain Potatoes 4.3 4.9 114.0 crop, with production of 24 million tons per annum, or 49% of all the cereals. Vegetables 1.4 1.5 107.1 Barley was next, accounting for 19%, d) Fodder Crops 33.6 33.3 99.1 followed by maize (15%), other legumes PerennialGrss 11.2 12.1 108.0 (6%), rice (5%), millet (5%), oats (3%), Source: Ministryof Agriculture and Food and buckwheat(2 %). Yields of cereals in Ukraine are, on average, above those in other FSU countries, and are comparable to yields in other Eastern European countries, the US and Canada, but are only 50 to 55 % of the yields in Western European countries.
1.32 Barley is the most importantfeed grain in Ukraine, both in terms of production and area. With an average yield of 3 tons per ha, barley produces higher yields than any other feed grain except maize. Even though it is a spring crop and therefore competes with maize, it is more adaptable ecologicallyand does better in the colder northwest region. Although used chiefly as a feed grain and valued for its nutritive content, it is also used for human consumptionand beer production. Maize yields average 3.5 tons per ha, which is lower than in the United States (44% of average yields) or other western countries. However, with improved price incentives yields in some areas of Ukraine could approach those in Western countries. Introduction 11
Major Grain Area Development 1982-93
8 ------
6 ----- 6 ~~~~~~~~~~~~~ U--Wheat
-~Barley
-A- Maize
2 - -X- Legumes X- X- -F ~ ------02 0S 0m t U') tD r- co ) o 24 CY a)0CD )) 0 a) 0 ) -
Figure 1.4
1.33 Sugar beets and sunflowers are the most significant industrial crops; others include soybeans, rapeseed, castor oil plant, and flax fiber. However, the share of the other industrialcrops is small. Sugar beet production averaged45 million tons per annum in 1986-90, decliningto 33.7 million in 1993. Yields are the highest among the FSU countries, 22-26 tons per ha, but are less than 50% of the average in Western Europeanproducing countries, and 60% of the average in the United States. The sugar content per ton of sugar beet in Ukraine is only 70 to 80% of that in Western Europe and the United States. Ukraine produced more than twice the sugar it consumed, and was an importantsource of supply to the Soviet Union. The lower yields and sugar content have more to do with managerial aspects of production than agro-ecologicalconditions.
1.34 Yields of sunflower are relatively high, 1.7 tons per ha. Ukraine seems to have a comparativeadvantage in this crop. Sunflower is the main source of domestic production of vegetable oil. In 1986-90Ukraine produced an average of 2.7 million tons per annum of sunflower seeds, in 1993 the output was 2.1 million tons. This level of production should enable Ukraine to meet all its domestic vegetable oil needs and export. Sunflower meal, a byproduct of oil production, is used as cattle feed. However, it is deficient in an amino acid, methionine,which is in short supply in Ukraine, and must be supplemented.
1.35 Potatoes, the most important food crop after grain, are also used for animal feed and as raw material for industrialproducts. The average harvest per annum for 1986-90was 17.9 million tons, and 21 million in 1993. Yields, at 13.7 tons per ha in 1993, are low by internationalstandards. In the United States and France, yields average 32 tons/ha; in Canada, 25 tons/ha; and in Poland, 19 tons/ha. With improved management,yields in Ukraine could be increased significantly.
1.36 Vegetables. Tomatoes,cucumbers, cabbage, carrots, beets, and onionsaccount for most of the vegetable production. Approximately7.4 million tons of vegetablesper annum were harvested 12 Chapter 1 during 1986-90, with an average yield of 15.1 tons per ha. Yields declined in recent years (13 tons/ha), as well as total production (6.1 million in 1993). The absence of sweet maize, beans, and such leafy vegetables as lettuce and spinach is attributable to both cropping conditions and dietary habits.
1.37 Fruit harvests averaged 6.6 million tons per annum during 1986-90, with an average yield of 3.7 tons per ha, in 1993, the total harvest was 2.8 million tons. The main fruits produced in Ukraine are seed fruits (apples and pears), which comprise 58 % of total production; stone fruits (peaches, plums and cherries), 16%; grapes, which are grown mainly in the south, 23%; and berries, 2.5%.
Livestock
1.38 Livestock production in Ukraine is exceptionally large. It accounted for 54% of the value of gross agricultural output in the late 1980's, using two thirds of agricultural land and domestically produced grain, employing 70% of the agricultural labor force, and contributing 40% of total agricultural exports, mainly in the form of meat. Beef accounts for 45 % of total meat consumption, followed by pork (35 %), poultry (17 %) and other types of meat, including mutton (3 %). Because of the importance policy makers attached to increasing per capita consumption of livestock products and to reducing chronic inefficiencies of livestock production in the Soviet period, development of the subsector was given high priority in the 1980s. This was reflected in high levels of investment and subsidies. By the end of the 1980s, over 70% of total annual investment and operational subsidies to farms benefitted livestock production, and 80% of the annual price subsidies for food were for livestock commodities.
1.39 Livestock production grew substantially during the 1980s, peaking in 1989. Production of poultry and beef rose 30 %; pork, 25 %; milk, 20 %; and eggs, 14 %. Growth in output resulted mainly from improved productivity per animal rather than from increased livestock populations, which remained stable. This applies in particular to dairying, where the number of cows decreased slightly, while milk production per cow increased by over 30% between 1982 and 1990.
1.40 At its peak inn 1989-90, Table 1.10: Livestock Population in Numbers and Animal Units (1989-1993) Ukraine's livestock (iNions at the Beginningof Year) population was estimated at5.4mlion castited Category 1989 1990 1991 1992 1993 at 25.4 millilon cattle (and 31.5 million animal unit Cattle 25.6 25.2 24.6 23.7 23.0 equivalents). Between Cows 8.6 8.5 8.4 8.3 7.8 equivalents). Between Pigs 19.5 19.9 19.4 17.8 16.2 the beginnmg of 1990 and Sowf 1.1 1.1 1.1 1.0 0.8 the beginning of 1993, Sheep 8.8 8.5 7.9 7.2 6.0 the livestock population, Goats 0.45 0.46 0.52 0.55 0.65 counted in total animal Horses 0.78 0.75 0.74 0.72 0.68 units, declined by 16%. Poultry 254.5 255.0 246.0 243.0 188.0 Livestock populations Toto Animal Unit? 31.5 31.3 30.4 29.2 26.6 declined further during 1993. The overall cattle Rabbits 6.3 6.4 6.7 6.6 6.6 decline between 1989 and Bee Hives 2.8 3.1 3.5 3.8 4.0 1993 accounts for 10% of I/ Sowsdo not includegilts. b/ Cow or Horse = 1.0 Animal Unit (AU); Cattle other than cows = 0.6 AU; the shrinkage, while Pig = 0.3 AU; Sheep and Goats = 0.1 AU; Poultry = 0.02 AU. during the same period Source: Ministry of Agriculture and Food. Introduction 13 the number of cows fell by 10%, pigs by 17%, sheepby 17%, and poultry by 26% (Table1.10). Total livestockproduction fell by 2% in 1990, 10% in 1991, 16% in 1992 and another 10% in 1993. Total meat output dropping by over 33% during 1989-93 and milk output 28% (Table 1.11). Livestock production thus fell roughly twice as fast as livestocknumbers, indicatingsevere declinesin animal unit performance.
Table 1.11: Production of Principal Livestock Products (1989-1992)
Category Unit 1989 1990 1991 1992 1993
Beef & Veal Thousands 2,011 1,985 1,878 1,695 N/A of tons' Pork n 1,595 1,576 1,421 1,137 1,132 Mutton, Lamb & Goat n 44 46 40 36 N/A Poultry 732 708 654 499 N/A Horse 15 12 11 10 N/A Rabbit 34 30 25 24 N/A Total Meat " 4,430 4,358 4,029 3,401 2,935
Milk 24,377 24,508 22,409 19,114 17,600 Eggs millions 17,393 16,287 15,188 13,496 11,066 Raw wool tons 30,101 29,793 26,646 23,080 N/A Honey 56,447 50,858 N/A N/A N/A
a/ Expressed in carcass weight and edible offal. Source: Ministry of Agriculture and Food
1.41 Cattle. About95% of all cattle are of four major breeds, includingabout 40% Red Steppe (locatedmainly in the country's lower rainfallzones), 30% HolsteinFriesian-type, 20% Sinmmenthal-type, and 8% Brown Swiss-typecattle; the remaining 5 % consist of native dual-purposeand beef landraces, about 100,000 exotic beef breads (such as the AberdeenAngus, Charollais, Hereford, and Limousine), and no more than about 1,000 pure American/Canadian-typeHolstein Friesians. By Western standards, the overall genetic potential of the national cattle herd is low. The Red Steppe breed is a improved, relatively,low-producing landrace, while most of the other three main breeds consist mainly of first, second and third crosses with local breeds. There is thus a substantialpotential for improving genetic performancemerits.
1.42 Pjiry. The main focus of the cattle industry is on dairying, which is carried out on about 10,800 State and collective farms. These own almost 6.0 million cows distributed among 18,800 sub- farms. Averageherd size per dairy farm is thus in the order of 315 cows, with about one-thirdof all the farms having less than 300 cows, while larger farms may have between 500 and 1,000 and above cows. In addition, there are about 2.3 million cows kept by individualhousehold producers (one to two cows per household)and an increasingnumber of private farms (which have on average some 12 to 15 cows). Private milk production thus plays a major role, presently representing almost one-third of all milk production, but accounting for only about 12% of beef. Most dairy cattle, particularly on State and collective farms, are raised on zero-grazing or have only limited access to grazing during the 4 to 5 14 ChapterI month grazing period. All cows are milked and surplus progeny over herd growth and replacement requirementsis used for beef and veal.
1.43 Beef Production. There are about 5,600 Social Sector enterprises with an installed capacityto fatten over 8.0 million young bulls per year in about 8,000 feedlots. Most of these feedlots can fatten between 500 and 3,000 heads per year. About 900 feedlots have fatteningcapacities of 5,000 to 10,000 headsper year, and a few up to 15,000 heads per year. In additionabout 100 private operation fatten 50 to 200 heads per year. Beef productionis mainly a by-productof the dairy herds. Male calves are often moved to feedlotoperations within a week or two after birth. Due to lack of feed, bulls as well as cows and heifers are slaughtered at low slaughterweightsof only around 350 kg, which they reach during an 18 to 24 months fattening period, instead of the more optimal slaughterweightof 500 kg to 600 kg for the type of breeds available. With more appropriate managementand feeding practices, the optimum weights shouldbe reached within 15 months.
1.44 Pig Production. The large White, originally imported from England, is the dominant breed (with about 80% of all pigs), followedby the Ukrainian Steppebreed (about 15%), the remaining (5 %) consistingof local, improvedlandraces and some Duroc and Hampshire, the latter two breeds being used for commercialcrossbreeding. Due to attractiveprices for lard, consumerpreference for fatter pigs, the prevalence of low protein content feedstuffs,and "outdated"pig populationsby Western standards, Ukraine produces much fatter pigs (with lean meat carcass contents of 38% to 45%) than Western countries (52% to 59%). There are about 10,000 State and collectivepig farms each fatteningsome 500 to 3,000 pigs per year, and about 650 interfarm complexeswith capacitiesbetween 10,000 to 100,000 finished pigs per year. About two-thirds of all pigs on state and collective farms are kept in fully mechanized breeding/fattening farms, including mechanized feeding, and 92% of these farms have mechanizedslurry removal and mechanizedwatering facilities. The remaining 8 % of Social Sector pig farms operate without any significant investmentin mechanization. Slurry disposal often causes severe environmentalhazards, and the occurrenceof disease in the larger units can be difficultto control. Social sector pork production is presently in a deep crisis, but would respond quickly to improvedmanagement and input supply.
1.45 Sheep. Sheep breeding has concentratedon crossbreedingnative sheep with rams from major foreign breeds, with the primary breeding goals being adaptability to climate and terrain and refinementof wool quality. Meat, milk, and fertility performancereceived less attention. Merino-type sheepthus dominate,with the Azkania Merino-typebreed accountingfor about 60% of all sheep, Merino Precoce-typesheep for 35 %, and the remaining5 % consistingmainly of the local Tsigaiabreed and some Karakuls.
1.46 Almost 87% of all sheepare raised on about 5,200 social sector farms with averageherd sizesof about 1,200 sheep, the remaining 13% belongingto individualproducers. Sheepare raised under extensivegrazing systems, but need substantialamounts of expensivefeed during the long winter period. Sheepproduction thus has little comparativeadvantage. Few sheep are milked. This is quite surprising, given the long tradition of sheep milk and cheese production in most of the neighboringcountries to the West and South. Almost two thirds of all sheep are raised in Ukraine's Steppe zone, over 25% in its Forest-SteppeZone, and the remaining, about 10%, in its Woodlandszone.
1.47 Goats. With only about 600,000 goats, Ukraine's goat population is relatively small. Virtually all goats are in private hands and their numbers have been increasingby about one-third since 1989. Goats are kept in small numbers on individual household plots, often grazing in and around Introduction 15 villages. They are important contributors to improving family diets. Their expansion should be encouraged,except in ares of lower rainfall where their numbers could contribute to soil erosion. The pros and cons of more goats must be carefullyweighted according to local pasture and feeding conditions.
1.48 Poultry. The bulk of poultry production is based on integrated breeding and production programsunder the responsibilityof UKRPTITSPROM,whereby its breeding farmsusually provide eggs and day-old chicks to the large state and collectivefarms, as well as day-old clicks for the private sector. There are almost4,000 large social sector breeding and production farms with an installed capacity for about 112 million poultry. Large social sector farms can have up to 1.5 million layers or produce 6 to 10 million broilers per year in 4 to 4.5 batches. Layers, as well as about half of all broilers, are raised in fully mechanized cages on these farms. Producing broilers in cages in wasteful and needs to be corrected by expandingbroiler raising on deep litter in the future.
1.49 In the late 1980s,when poultry productionbecame uneconomic,virtually all the state and collectivepoultry complexesgot out of commercialpoultry production, leaving this field exclusivelyto UKRPTITSPROM. As a result, overall poultry production declined by over 30% since 1989, and the share of private sector poultry production increasedrapidly since then, contributingin 1992 almost75 % of chicken and duck meat, 47% of eggs, and all geese.
1.50 Other LivestockProduction Systems. Althoughon an aggregatelevel not very important, other livestock production systems, such as rabbits, fur animals, and bees are, at least locally, an important source of income and nutrition for a large number of individual producers. Increased production of these livestock species should thus be encouragedand supportedby the Government.
E. FORESTRY
1.51 Ukraine's forests were extensivelydamaged during World War II and were reduced from 40% of land area to only 12% after the war. With aggressive replanting, they have recovered to 14% of land area. Forests (the Forest "Fund")4 now cover 10 million ha, of which 85% is considered commercial. About 17% of the timber supply is in the "old" age class; alder and birch form a successionaland stable subclimax5 , and are being weededand replaced with commercialspecies (Figure 1.5).
1.52 Ukraine has been a net importer of wood. The total growing stock of 1.2 billion m3 of forest produces an annual increment of 24.4 million m3/yr, of which 12 million mn3 is logged. Most of the remainderof the 12 million m3/yr cut is not used or processedlocally. Between 1985 and 1990, total consumptionin Ukraine was 40 million mi3/yr. The balance of wood required was importedfrom Belarus and Russia, where many Ukrainians went to harvest Siberian spruce, also generating significant remittance incomes. The flow of imported wood has declineddrastically, and national consumptionfell
4 The Forest Fund, a direct translationfrom the Ukrainian, is made up of areas covered by forests and areas not covered by forests but which could be used for future forestry productionunder certain conditions. These latter areas include water reservoirs, bogs, and steep slopes.
5 A stage of forest developmentwhich is arrested before it attainsthe species compositionof a climax community. 16 Chapter 1 to 33 million m3 in 1991. Consumption was estimated to be Forest Species Distribution around 24 million m3 in 1993. Adjustments are said to have been made by reduction of waste and Alder/Birch other conservation measures. This 10% reduction is quite remarkable and whether it is due to conservation measures alone could not be verified. Pine/Fir 1.53 Export of wood is 48% mainly in the form of barter. In spite of the about 40,000 mn3 exported to Austria and to Beech/Oak Germany each year, 60% of the 42% finished product is used internally. 30% goes to other FSU countries, and 10% to foreign export. Fige 1.5
1.54 Forests are state owned, with 72% managed by the state forestry departments at the oblast level, 24% by state and collective farms, and 4% by the military and institutes of teaching and research. Operations are conducted by state forest enterprises. An autonomous Ministry of Forestry has been separated from the Ministry of Agriculture and Food. Historically, there was no control over the amount of timber cut. The incentive was to cut as much as possible as quickly as possible. Small state enterprises, responsible for most of the harvesting, transport and even processing, developed and also cut as much as possible. The need to control this unsustainable "mining" of the forests led to the establishment of the single ministry.
1.55 The new land code permits private ownership (cooperative and individual) of forest plots of up to 5 ha, in the context of a new government policy emphasizing the environmental values of the forest. The 1992 Forest Law addresses the issues of ownership, use by foreigners, and the conduct and setting of forest exploitation.
F. CONSUMPTION OF FOOD AND AGRICULTURAL PRODUCTS
1.56 Ukraine's broad agricultural potential is reflected in the more varied consumption pattern of the population (see Figure 1.6). In comparison with Russians, Ukrainians consume less meat, milk and eggs, and more vegetables, melons and potatoes. Nevertheless, Ukrainians tend to eat more livestock products than their counterparts in countries with similar levels of per capita income. This is a reflection of heavy subsidization of both production and consumption of meat.
1.57 Increasing prices and falling real wages have mainly affected the level and composition of food consumption. Ukrainians have, in general, kept their levels of food consumption up by spending a larger share of their budgets on food. The share of foodstuffs in family budgets has risen from an average of 35% in the five years before 1992 to about 55% in 1993. Consumption patterns have also Introduction 17 shifted, with Ukrainians eating more carbohydrates(bread and potatoes), less protein (meat, fish, eggs and dairy products) and somewhatless fruit (but more vegetables).
Consumptionof BamicFoodstuffs
400.0
300) -
20).0100.00 -
Meat Dairy Eggs Bread Potatoes Vege- Sugar PRod. tables
lUkraine1987-91U Avg PR Ukrdne1993 03 LintedStates1992
Figure1.6
1.58 Per capita consumptionof bread has increasedby about 8 %. Lower quality breads are highly subsidized and their prices have remained controlled. In contrast, beef consumptionhas fallen 10%, poultry and pig meat consumption20%, and fish and fish products 30-40%. In the case of dairy products, consumers have substitutedlower-priced low fat grades of milk, cheese, and butter. Sugar consumptionhas remained stable.
1.59 It appears, that, on average, nutritionallevels in Ukraine have not suffered. Per capita caloric consu-mptionremains high. With Ukrainiansconsuming over 50 kg per capita per year of meat and meat products, over 300 kg per capita per year of milk and milk products, and over 200 eggs per capita per year, protein deficiency is not an issue. Nevertheless, there may be groups in the society whose incomes have dropped to the point where their nutritionalstatus is in jeopardy, and there will be others in the future. The Goverrnmenthas an obligation to protect these groups, but food subsidies, especiallythose attachedto products like meat, for which demand is income elastic (richer people eating more), are highly inefficient. Food stamnpprograms, incometransfers, and subsidieslinked to products with low income elasticity (like coarser-grain, but more nutritious, breads), are all preferable to untargeted subsidies of the kind in use in Ukraine. 18 Chapter 1 CHAPTER2
A STRATEGYFOR DEVELOPINGTHE FOOD SECTOR
2.1 A range of policy options are available to Ukraine for directing the future course of agriculturaldevelopment. In discussingfuture strategiesfor agriculture, we assumethat the Government of Ukraine is committed to transforming the overall economy of the country, including its food and agriculture sectors, to a market-basedsystem. The changes that have already been implementedseem to be consistent with such a commitment. There have been substantialchanges in pricing policy and in the macroeconomicenvironment; land reform processes are under way, and collective and state-owned farm enterprises have begun restructuring. The program of enterprise privatizationhas been approved and preparationsare being made to begin privatizationof food processingand marketing, as well as input supply for agriculture.'
2.2 The fundamental conclusion of this report, however, is that the present agricultural marketingsystem and farming structure, even with reforms alreadycompleted, is not fully consistentwith the Government's goals for the market orientation of the economy and requires further adjustment. Leaving the agricultural system basically unchanged would create less difficulty both socially and politically in the near term, but it would have a large negative impact on the macro-economy, and the growing subsidy burden would fuel further inflation. In the longer term, the legal and institutional framework, as well as the respective roles of the public and private sector would remain blurred, efficiencyin agriculture would continue to be low and the sector would not play the positive role in the developmentof the country it could, given the strong resource endowment. The challenge is to select the most appropriatepath from the wide range of policy optionsavailable for Ukraine's future agricultural development. This chapterdiscusses the relatedstrategic issues and priorities as well as the social aspects of the required reforms.
A. OVERALLFRAMEWORK FOR REFORM
2.3 Ukraine is faced with a numberof problemsthat make the required adjustmentin the food and agriculture sector difficult. These include:
* overall macro-economicimbalance, especially high inflation;
* declining agriculturalproduction, especially in the livestock industry;
* deterioratingfinancial situationsof farm enterprises due to declining terms of trade for agriculture, and especially for livestockproducts;
* decliningdomestic demand for food due to decrease of personal income;
* difficultieswith traditionaltrading partners, especiallyRussia and other countries of the FSU; and
A detailed account of these reforms is given in Chapters 3, 4, and 5. 20 Chapter2
* continued existence of monopolized structures in food processing and marketing and in input supply for agriculture.
2.4 Successful implementation of adjustment requires a comprehensive and consistent program of actions. At this time,the Government does not have a detailed agricultural strategy; reforms that have been implemented do not constitute a consistent package; and the measures that have been taken are not always consistent with one another. Therefore a comprehensive overall reform strategy should be developed and agreed upon within the Government as soon as possible. The main directions of this reform program should be based on a consensus among all the major actors, including the Government, farm enterprises, the processing industry, and the general public.
2.5 Box 2.1 suggests some major elements of a comprehensive agricultural reform program for sectoral transition, reflecting international experience. The process of arriving at such a comprehensive reform strategy needs to be credible, and participatory, to be politically acceptable and sustainable. The strategy must be consistent and coordinated with the overall program of stabilization and privatization.
A~Reform Agenda::i
An age for ro andin food agricultureshould ide...... th. fo.lwinset.fa ......
macroecoomic Su sbilzaion, z liberalzo of markets and d trl of ries fing ofextern altae, anhaigout cnsu mer and p SoUcesusdis
bY-:g0:-:f-:Fprotectonof living:standards of vulnerablegroups in sce om the effe f ring food 0 00-;: 0000i 0prices,i;-:- :: - :i0-- --0 :--; -0. . landrefrm tat encesthe developent ofviablefabrmmanageme b establishing the institutionalbasis ifor:divisionanidprivatizaiio orge r n orthe acuio a use::of state lands...; .
dentonopotization,privatizaon, and promotonontryito pro posn inort
and mrketigofagrcutua inputsandaoutput; ; t ; t0e):pstabis hen of a of a is ation%extensio,information ef seWrvice, ...... -;;- n :ad reguaiOn cOmsiwtentwith a Marketeconpo;Qt ......
buildi....ng:a, syst tem ~of:physial: infrastructure.C1onstetwh the need. of amre-oine prodution,procesing,andditribtio' ytm :vrolesc. d llli;; i; trationalization andrestructuring of government institutions in a mannerconsistent with their ne
Box 2.1 A Strategyfor Developingthe Food Sector 21
2.6 There is substantialpotential for creating an efficientagriculture systemin Ukraine. The domesticresource endowmentand agrarian traditions favor the crop sector, though livestockproduction also offers significantopportunities. Stabilizationof grain production and better use of outstandingcrop productionpotential are the essentialfirst steps in rehabilitationof the sector. Adjustmentof the livestock sector, however, is the critical element of recovery, since it is suffering from decliningdomestic demand and stagnant export demand. Contraction, structural change, and improvementsin stock quality should be the major goals of this subsector, and improved managementof the feed base is a major precondition of success.
2.7 In the near term, crop products that can be marketed on Western markets with little processing (grain, oilseeds) or that substitute for hard currency imports (grains), offer the greatest economicadvantage for the country. Changes in prices at the farm level shouldbe allowed to reflect this advantage so that producers can respond. The FSU republics, mainly Russia, will remain the major market for grain and livestockproducts. Export of livestockproducts to the West will be limitedby the low level of efficiency and by the condition of the current capital stock in food procurement and processing. The physical design of the Ukraine meat processing industry precludes export of most products to markets in Western Europe and North America. In the near term, the Central and East European countries might offer opportunitiesfor the export of limited quantities. Prices of livestock products should reflect the higher prices of feed, however these should not exceed by much the prices in Russia or other FSU Republics where the products are sold. A supportive environmentneeds to be created for quality enhancing investmentsboth in the livestock and related food processing industry. Securing markets inside and outside the FSU must be an importantobjective in trade negotiations.
B. IMPLEMENTATION OF REFORMS
2.8 In the emergingmarket systemthe Governmentcannot, and shouldnot, directly engineer the recovery and growth of the kind needed in Ukraine agriculture, even if it were to have at its disposal more ample resources than are currently available. The Governmentshould only provide an enabling environmentand permit enterprise-leveldecision makers in the agriculture and food economyto generate growth themselves. Therefore, the key elements of a transition program in Ukraine agriculture are: (a) macroeconomic stabilization;(b) creation of an incentive framework for farms that provides proper motivation and the right to retain sizable farm profits; (c) continuationand completion of land reform; (d) reform in agroprocessinginput supply, production services, and input marketingthat creates reliable input supply and competitivemarkets for farm products; (e) further regulatory reforms establishingthe frameworkfor a working market in food and agriculture.
2.9 Political and economic conditionsin Ukraine do not appear suitable for a rapid of "big bang" approach to transformationof agriculture. The Governmenthas been following a very cautious approach to change and reform, that has brought some positive results. Food supply for the population has been secured, the decline in agricultural production has not been as dramatic as in some other countries of the FSU, and the disruption of agriculturalproduction systems has been kept under control. However, there is a tradeoff between the speedof reform and sectoralstability; delayingreform in order to avoid major sectoral disruption will be very costly to the economy in the long run. In general, while accepting the appropriateness of the Ukraine strategy of gradual transformation of agriculture, it is important to realize that speedy developmentof an agreed overall reform agenda with proper sequencing of reform actions is essential for efficient implementationof the adjustment process. Moreover, the 22 Chapter 2 minimumconditions for a working market should be establishedas quickly as possible, including land legislation,demonopolization, and the privatizationof processingand marketingindustries. Completion of this transition however, will remain a task for the medium term.
2.10 It is possibleto envision a number of alternativepaths to implementinga comprehensive program of further reforms. The proposed reform measures are categorizedin the report accordingto short and mediumterms without providingready-made prescriptions for their implementation.The report intentionallylacks precision on the "how and when" of the recommendedreform strategy. Details of implementationhave to be elaborated by those who are fully aware of the complexity of agricultural problems in Ukraine, and who will bear the political responsibilityfor both the success and failures of reform efforts.
Near-term Priorities
2.11 The most immediatepriorities, both in terms of their macroeconomicimplications and their impact on incentivesand resource allocation, would be:
continuingthe transition from commandeconomy to a market-basedsystem by further relaxation of price controls, state orders for food procurement, and restrictions on external trade;
* providing at least the minimumlegal, institutional,and physical conditionsfor a working market in agriculture, and competitionin the processing and marketing of agriculturalproducts and in the supply of inputs and servicesby demonopolizationand privatization;
* re-establishingtrade linkages with the rest of the FSU on the basis of market conforming trade and payment practices;
* continuationof land reform and supporting emergingprivate farming, creating tradable tenure rights and a functioningland market;
* creating a framework and agenda for enterprise reform and privatization; and
* providing a safety net for vulnerable groups.
Medium-termPriorities
2.12 The immediate priorities listed above must be reinforced by medium-term actions suggestedby the following objectives:
* completing enterprise reform in agriculture and food production, processing, and marketing, includingprivatization;
* improving the efficiency of production, processing, and distribution of food and agricultural products; and A Strategyfor Developingthe Food Sector 23
* increasingthe competitivenessof Ukraine agriculturalproducts in internationalmarkets.
2.13 Successfultransition requires not only policy actions, but it must also be supported by investments in physical capital, measures to increase the efficiencyof production, and the building of institutions for market-basedagriculture. The pace of investmentwill be limited by fiscal constraints, but priorities can be established relatively soon, and potential sources of funding, both foreign and/or domestic, as well as potentialforeign investmentareas, can be identified. Livestockand crop production have to adjust to new conditions, especially in the form of improvementsin production efficiency, if a competitiveeconomic environment is to be created. Institution-buildingrequires appropriatelegislation, followed by revision of existingorganizational structures, staffing, and training, and this process can be started quickly by working with existing institutionswhere possible.
C. SECURING FOOD SUPPLYAND PROTECTINGTHE POOR DURINGTHE TRANSITION
2.14 Withthe collapseof export trade in agricultureand decliningdomestic demand, shortages of domestic food supplies are unlikely, unless there is a further collapse of production and distribution systems. In order to avoid such an eventuality, the flow of essential inputs and credits for farm production has to be re-established. This may require additional imports of veterinary pharmaceuticals, fertilizers, pesticides, herbicides,and high protein feeds. Foreign assistancemay thus be required. The food distribution and marketing system needs to be strengthenedto ensure food is available in the main centers of demand. Food availabilityand prices should be monitoredto spot possible areas of shortage so that prompt remedial action can be taken.
2.15 The real incomes of many people have declined, and privatization and restructuring of industry and agriculture will lead to increased unemployment. Many urban people will need either income supplementsor food stamps to ensure that they can maintain an adequate diet. These programs shouldbe developedand instituted as a matter of highest priority.
2.16 The phasing out of consumerand producer subsidiesshould be accompaniedby improved targeting of income and consumptionsupport programs. Measures are needed to protect the most vulnerable groups from serious hardship, especially to ensure minimum consumption levels for the poorest, as prices adjust in the coming years. Because fiscal constraints are tight, politically difficult trade-offs and compromises seem to be inevitable. In the very difficult period of transition the Governmentshould, as a high priority, try to fully compensatethe poorest groups for the negativeincome impactsof food price changes. In realizing this objective, the settingof a poverty line is a crucial issue.
2.17 There are five major options to ensure adequate food supply and protect the poor:
* continuingthe subsidizationof prices of a few basic commodities;
* providing quantity-denominatedfood coupons to selected poor households;
* providing direct, in-kind assistance to poor households;
* organizingwork for food programs for unemployed;and
* providing cash compensationto the poor. 24 Chapter 2
2.18 All the above methods have advantagesand disadvantages. Price subsidies are the least compatible with a market economy. Using the cash benefit system seems to be the most desirable solution. Coupon or food stamp systemsand work for food programs may also be workable, especially under the conditionsof high inflation. Cash benefits are less effectivethan quantity-denominatedcoupons in providing social protection when prices are rising rapidly.
D. SOCIAL POLICIESIN SUPPORTOF THE RURAL TRANSITION
2.19 Decollectivization,privatization, the sharp decline in industrialproduction, and changes in the structure of agricultural production have produced profound changes in Ukrainian village communities. The transformationprocesses affect households, villages, and regions in varied ways. Significanteffects alreadyhave been experiencedwith respect to the level and structure of rural incomes. Some families have experiencedsharp increases in their farming incomes as a result of receiving land from the former collective farms. However, many rural households have suffered a decline in cash income as a result of increasedpayments in kind to cope with inflation.
2.20 There will be a significant demographic transformation. The decline of the village populationwill be halted temporarilyand possiblyreversed, and the proportionsof young people and men are likely to adjust upward toward more normal demographic patterns. The average size of rural householdswill tend to increaseas fewer householdmembers find employmentin the cities. As a result of these changes, social tensions within villages and households may increase, particularly as long as employmentprospects remain bleak. Many of the potential difficulties associatedwith changing rural demography could be mitigated by the development of appropriate policies to provide remunerative employmentto an increasinglydiverse rural occupationalstructure.
2.21 Privatizationand the transition to a market economy will affect the existing rural social safety net and the provision of social servicesin the rural communities. Traditionally,the bulk of rural social servicesare providedby the collectiveand state farms, and the large scale farms providesubstantial additionalbenefits to their members and pensioners. In principle the transfer of their services to the local municipalitiesshould provide the solution. In Ukraine, however, the reforms to create a new municipal structure capable of running and financingthe new services are at a rather early stage. There is neither the rural institutionalframework nor a financialstructure to replace the collectiveand state farms' social services. It is not surprising that the fear of losing vital social services has an impact on farmers' decisions to stay with the collective farming system to a great extent, and strengthen the argument of those who advocate against the dismantlingof large scale farming system.
2.22 The three most critical needs in the village communitiesare: (a) developingan enabling environmentto stimulateincreased off-farm employmentin the villages; (b) safeguardingan acceptable level of rural social services during the period of restructuringand privatizing large scale farms; and (c) enhancinglocal ability to respond to social and demographicchange by providing communitieswith greater financial control. Exceptfor appropriatesteps to ensure acceptablestandards of health, nutrition, and sanitationand to improve the general qualityof life in rural areas, attemptsat direct state intervention do not seem desirable because of lingering local suspicion of government motives and the lack of cost-effectivepolicy instruments. A coherent and integrated strategy should be developedto facilitate rural community development through devolving responsibility for these activities to the local communitiesthemselves. One of the most effective ways to address this requirement is to provide A Strategyfor Developingthe Food Sector 25 communitieswith greater control over their own budgets and, hence, their future.
Rural Labor and Employment
2.23 The employmentconsequences of the restructuringin industry will force the agricultural sector to assumethe role of employmentbuffer, with widespreadand increasingunder-employment. The increase in the supply of rural labor displays large regional variation, with peri-urban areas being most affected. As this phenomenonis likely to persist, it is important that this growing supply of labor be given due weight in strategies for developingagriculture and that these strategies be coordinated with overall development strategies for the country. More specifically, the past emphasis on large-scale mechanizationand labor-displacingtechnologies, with a view to release agricultural labor to meet the demand for labor in other sectors of the economy, needs to be reconsidered. The relative abundanceof cheap labor and limited employmentprospects in the non-agriculturalsectors suggests that a shift in emphasis toward more labor-intensiveproduct mixes and modes of production may be called for.
2.24 As a result of past policies, the rural economic base is oriented singularly toward agriculture. There is a virtual absence of non-agriculturaleconomic activities. This implies that the entire burden of rural employmentcreation falls on agriculture, making agricultureexcessively dependent on distant markets and sources of inputs, reducing local linkages and multiplier effects, and providing a strong incentive for the young and educatedto migrate to urban areas. Solutionsto the problems of rural unemploymentand under-employmentin agriculture, as well as the problemsof seasonalvariations in the need for labor in agriculture, must, to a large extent, be found in a general expansion and diversificationof the rural economicbase through developmentof non-farming economicactivities. In the short and medium term, special emphasis should be placed on promoting the entry and growth of private enterprises serving agriculture and providing rural services, both upstream and downstream.
2.25 Employmentand income problems in rural areas are exacerbatedby industrial decline, and require special measures in terms of employment-creationpolicies. Short-term public works programs, organized by local governmentor contracted for with local non-governmentalorganizations (NGOs), might usefully be considered to counteract emergingunemployment problems in rural areas. Suitable activities for public works programs would include reforestation and constructionof physical infrastructure. Public works programs need to be supplemented by efforts to create sustainable employmentthrough promotion of intensificationof agriculture, such as horticulture and vegetables in peri-urban areas, and high-qualitylivestock products elsewhere.
2.26 The young rural households deserve special attention with respect to education and training. Future policy measures in support of the agriculturaltransition should take into account the particular needs of women in agriculture. Agricultural research, extension, and education should be formulatedwith recognitionof these needs. During the transitionperiod, efforts to improve the position of women in the restructured collective farms should focus on their role as critical economic agents. Better access by farm women to key inputs--education,information, land, credit -- could have a positive impact on productive capacity and incomes in the sector.
2.27 The current restructuring of agriculture and the severe mismatchesof labor, land and capital underscore the need for efficient factor markets. At present, the inefficientfactor markets retard restructuring and are an important contributor to the present tendency towards subsistence farming. Strengthenedfactor markets would improve the allocationof labor and remove obstaclesto access to land 26 Chapter2
and capital, thereby providing the basis for efficiencygains in agriculturalproduction.
The Rural Social Safety Net - Rural Social Services
2.28 With some importantexceptions, rural incomes have improved relative to urban incomes over the past few years. Thus, policies aimed at poverty alleviation and income enhancementshould focus on the revitalizationof the rural economy in general and of the agricultural sector in particular, while safeguardingthe interests of particularlyvulnerable groups. The rural social safety net shouldseek to avoid a domestic deteriorationof rural social services and on a longer term to improve the quality of village life and be complementaryto the economicreform program.
2.29 Housing. A housingproblem in rural areas is to be anticipated,resulting from the return migration of industrial workers and the increasing stability of rural populations in general. Local governmentsshould be enabledto offer house plots at market prices to citizens seeking a return to their village communities. Purchase prices might be paid over long terms or by the provision of community services. Housing loans should be made available, with the housing to serve as collateral.
2.30 Education. Rural schools have long been disadvantaged compared to their urban counterpartsdue to less generous funding and by a weaker curriculum that offered in urban schools. Schoolshave suffered because of fiscal difficulties and a loosening of administrativecontrols over the schools and their teaching staffs. In order to improve the overall educationalcircumstances of the rural communities, rural and urban curricula should be standardized to remove the cultural bias against agriculture in the national educationalsystem and to encourageurban pupils to view agriculture as a potentiallyremunerative pursuit. Specifically, housingand salary incentivesmight be offered to teachers to remain in or relocate to rural areas. Successfulpupils at the general school level shouldbe identified and allowed to competefor stipends and other kinds of assistanceto attend agricultural and silvicultural high schools.
2.31 Country-widetraining programs in the fundamentalsof business administration,financial analysis, marketing, and modem commercial farming methods are needed to remedy the shortages of critical skills in these areas. Such programs would need to be pursued at two levels: a more advanced and comprehensivelevel for the specialized agricultural work force, and a second tier of training programs at a more rudimentary level targeted at the agricultural labor force at large. Evening schools should be promoted in rural areas to assist in implementingtraining programs for this target group.
2.32 Rural Nutrition. Health and Sanitation. At present, with the exception of isolated individualsand groups, rural nutritionis generallygood. However, there is the risk that householdsmost negatively affected by the change to the market economy (i.e., single, aged individuals, the landless, and/or those previously heavily dependenton wage labor) could become financiallyunable to provide a sufficient diet for their members. There have been long traditions of giving food to relatives and neighbors in need in the villages and towns. These traditions need to be encouraged and perhaps institutionalizedto ensure adequate nutrition across the entire rural population through, for example, interventionsby local churches and establishmentof community food banks. The transition has also placed the delivery of rural health care services under some pressure. Nevertheless,basic medical care seems widely available. A Strategyfor Developingthe Food Sector 27
E. POLICYAGENDA FOR A COMPREHENSIVEREFORM IN UKRAINE FOOD AND AGRICULTURE
2.33 The details of a desired strategy for the transitionin the food and agricultureUkraine are discussed in the main body of this report. However the core recommendationsfor the governmentare summarizedin the followingmatrix which provides an overview of the proposed short and mediumterm actions and ultimate policy objectives.
Recommended Measures Area/Issues Ultimate Goal Short-Term Medium-Term
1. Establish a market control system in agriculture
a) Dismantle command Reduce the role of state orders. Drop all remaining domestic Free markets, with minimum economy marketing controls. control to avoid food De-link input supply, subsidies, shortages. and state orders. Introduce market regulations necessary for health, safety, and to ensure competition.
Eliminate state order system.
b) Improve intemal price Adjust relative procurement Systematize policies on formation prices to border prices. agricultural prices and subsidies based on the principles of free Discontinue price indexing and markets and minimum give up cost based pricing. subsidies.
Limitproducer and consumer price controls to basic commodities.
Remove restrictions on markup margins.
c) Reduce subsidies Reduce price subsidies to a Dismantle fully input subsidies. narrow group of commodities.
Dismantle budget transfers to producers.
Reduce input subsidies.
d) Liberalize domestic and Remove existing restrictions of Establish ad valorem uniform intemational trade trade. tariffand tax regulation.
Eliminate quotas and licensing Create insurance schemes in foreign trade, utilizing tariffs which provide security against instead. breach of contracts.
Reduce punitive taxation on commodity exchange to manageable level.
Break up state monopoly enterprises dealing with trade.
Develop legal frameworkto improve transaction's binding.
e) Create a social safety net Reduce consumer price Replace price subsidies with tO protect low income subsidies to bread, dairy, and targeted income subsidies. groups vegetable oil. 28 Chapter 2
Recommended Measures Area/Issues lUltimate Goal l Area/Issues Short-Term Medium-Term
2. Create market facilities and Promote development of a Support completion of a Westem-European type services private system for supply of commercial network of private agricultural marketing and basic inputs and machinery input and output markets and supply system. services. provide infrastructure.
Stimulate and assist emergence Strengthen farmers' markets of wholesale marketing. and private and co-op agricultural wholesaling Create the minimum physical organizations by providing facilitiesfor farmers' markets. credit and TA.
Dismantle state procurement Improve supply of inputs and agencies except for the machinery by trade liberalization purchase of goods for the Basic and use of foreign aid. Food Basket. Develop market information systems forprivate farming and restructured enterprises.
Set up an anti-monopoly organization.
3. Establish unrestricted private Implement new land ownership Develop land cadastral system Mainlyprivate ownership of land ownership and privatize system (private agricultural land; and complete land registration. agricultural land with no other assets in agriculture. municipal ownership of village restrictions on lease or sale. land; state control over forests Distribute final land titles. and reserve land). Allowlimited foreign ownership Establish a consistent land of land. valuation system and conditions for land registry. Complete privatizationof non- land productive assets. Develop land market and issue required regulations. Establish a municipal political and service system separated Continue privatizationof non- from the production enterprise. land productive assets. Develop equitable local tax Transfer all social services and system. assets to local municipal authorities, or user cooperatives.
Privatize all rural housing.
Provide financing of social services with money collected as taxes. A Strategy for Developing the Food Sector 29
Recommended Measures Area/Issues Ultimate Goal l______J Short-Term Medium-Term
4. Continue reorganization and Accelerate restructuring of large Promote establishment of Afarming system based mainly restructuring of the large scale scale farms based on the Western-type service and on private ownership of land farming system. principles of increasing marketing cooperatives. and other productive system, individual motivation and with a multiplicity of transparent private ownership. Ensure the existence of a organizational forms. competitive market-based Establish nondiscriminatory system for input supply and Cooperatives play a major role conditions forreorganization of product marketing. in upstream and downstream l state-owned farms. marketing and processing. Provide job opportunities for the Promote creation of new surplus labor in agriculture. Efficient markets for farm individual private farms by supply and products as well as providing training, service, and for land. support facilities.
Establish voluntary frameworks for cooperation among producers in the reorganized farming sector.
Ensure effective management of the newly created entities based on transparent private ownership and avoid "workers management' schemes.
Encourage the splitting of large farms into suitably sized management units and into independent services, marketing and processing units.
5. Create conditions for viable Adjust principles for establishing Establish competitive land Individual private farming private farming. private farms. mortgage and credit system. becoming a major component of the agricultural sector. Guarantee fair conditions for Promote the emergence of new those who wish to start private farms by training and individual farming. providing service and support facilities.
Help to organize local and regional farmers cooperatives.
6. Privatize and reconstruct Break up "concerns" into state- Transfer assets to private Efficient privately owned firms agro-processing industries. owned companies, at oblast or ownership according to the in each industry which should rayon level. overall privatization strategy in be of economically optimal industry. size. Begin privatization of agroprocessing , distribution, Adopt and enforce new quality Agro-industries, which by and input supply. standards throughout the quality and acceptance of Ukraine. products, are able to compete Use technical assistance to in worldwide markets. develop new Ukrainian Food Quality/Safety Standards. 30 Chapter 2
Recommended Measures Area/Issues Ultimate Goal Short-Term Medium-Term
7. Establish a working financial Use fiscal means rather than Develop appropriate legal Efficient allocation of credit to system for agriculture. financial institutions to finance infrastructure for contacts and profitable activities undertaken loss-making enterprises that are their enforcement (e.g., by clients willingto repay deemed worthy of support. mortgages and open and loans. competitive land markets). Develop an indexed government Viable financial institutions debt instrument to be held by Create incentives and serving the agricultural sector the Savings Bank to protect the responsibilities within financial efficiently. real value of deposits. institutions for loan recovery.
Explain the importance of Bring the fiscal deficit and flexibleand higher interest rate monetary expansion under and ensuring that the loan control. values are maintained in real terms. Implement generally accepted accounting principles. Introduce interest rate policies and measures to enhance loan Implement external audits, recovery. publication of relevant information and adequate Raise capital requirements for prudential regulation and commercial banks. supervision by appropriate government agencies.
8. Define new role for Reduce government direct Reorganize and substantially Minimal government role in government in agriculture, intervention in agriculture. reduce the size of local and agriculture with primary work regional agricultural being policy development, Reorganize government administration. trade promotion, research, organizations dealing with the environmental control, and sector. Elaborate a new agricultural provision of market information. policy framework, including Begin with the reorganization of active trade policy to ensure the regional agriculture market for agricultural products. administration. Develop a nationwide system to Play an active role in developing disseminate research findings market structure and in and technological privatization. developments.
Upgrade and adjust research and education system in agriculture. CHAPTER 3
DEVELOPMENT OF A MARKET FRAMEWORK
3.1 In the first years of Ukrainian independence,the introductionof economic reforms and adoption of market policies has been hamperedby external shocks and internal lack of consensuson key stabilizationmeasures. Increasing rates of inflation (reachingover 50% per month), fueled by widening budget deficits and large jumps in energy import costs, have hampered the move away from command-economystyle policies. Liberalizationof the agricultural and food sector has been cautious, since markets are not deemed capable of providing food security to the population. Compared to most other FSU republics, administrativestate interventionin agriculture in Ukraine is more pervasive and the role of markets smaller.
3.2 Althoughconsumer food subsidieshave beenreduced substantiallyand agriculturalsupply has been allowed to adjust to the drastic demand shiftsbrought about by plummetingnational incomeand the break-up of the FSU, the Government has retarded the development of markets by retaining (or periodically re-imposing) a large role for state purchases, imposing widespread regulation of price formation in domestic trade, and restricting access to internationalmarkets for inputs and sales. The combination of high inflation and excessive restrictionshas hurt agriculture severely. The widening of price and market liberalizationand eventual establishmentof market relationsin agriculture is key to the well being of the agricultural sector and the large rural population of Ukraine. Only the further developmentof the market can provide incentives to producers to profitably restructure agriculture's specific subsectors and raise income. This chapter discusses the obstacles to market development in agriculture and offers proposals for further action in encouragingmarket institutions.
A. MACROECONOMIC AND INCENTIVEFRAMEWORK
Overall Features of CurrentPolicies
3.3 Agricultural and food pricing policy in Ukraine was characterizedby centralized price determination. Producer and consumer prices were set without reference to international prices. Producer prices of individual commoditieswere generally establishedwithout reference to each other (e.g., animal feed was not priced with reference to livestock prices), since producers responded to centrally-determinedproduction targets (state orders) and not market signals. Furthermore, consumer prices did not necessarilycover producer prices plus processingand marketing. The result was that the maintenanceof the price structure involveda costly systemof implicitand explicitsubsidies. This system of agriculturalsubsides was quitecomplex, but in general, three sets of subsidieswere involved:producer output subsidiesaimed at spurring livestockproduction; input subsidiesto producers, often in the form of artificially low prices for energy, agricultural chemicals, and feedstuffs, inputs and credit; and consumerprice subsidiesin cases where consumerprices did not cover producer prices plus normative profit margins.
3.4 As a result, Ukrainian agriculturalproduction was strongly biased in favor of livestock production. For example, in the late 1980's, the ruble prices of grains and vegetables were generally 32 Chapter3
20-30% below international prices, while those for milk ConsumerSubsidy Equivalent in the FSU and meat products were 30- 40%higher' (Figure 3.1). SunfloweE In effect, the pricing Su a regime subsidized livestock Rice production, while taxing grains. In addition to receiving procurement prices that were high relative to world prices, Pork livestock producers had to Beef .;___.______--__;_ be subsidized to cover the high marginalhiharinl costsoss off-100 -50 0 Percent50 100 t50 200 ever-increasing output _ targets, which were Figure 3.1 necessary to meet the excess demand generated by subsidized consumer meat and milk product prices.
3.5 Ukrainian agriculture still exhibits the major hallmarks of the Soviet system. A large bureaucratic administrative structure still functions above the farm levels to provide central guidance for farming decisions, allocate inputs and distribute of output. However, the disintegration of the former Soviet Union, and with it of traditional mechanisms for inter-republic exchange of agricultural inputs and products, and high rates of domestic inflation, have undermined the command system of pricing and marketing, so that it is no longer working effectively. At the same time, a market-oriented system of pricing and distribution has not yet emerged. What exists is neither an effective planned system nor a market system. This is the worst of all possible outcomes, resulting in high levels of inefficiency and losses at all levels from supply of inputs to farmers, through production, marketing, processing, to distribution of products for purchase by consumers.
3.6 Although the seeds of the present crisis lay in the inefficiencies of the planned/command economic system of the Soviet Union, its proximate cause was the collapse of the Soviet Union, the rupture of interregional trading relationships and the beginnings of movement of prices and exchange rates toward international levels. The already difficult situation was exacerbated by an inappropriate policy response. Instead of facilitating enterprise adjustment to the decline in demand for their products and higher production costs, the Government of Ukraine attempted to use administrative interventions involving physical planning and controls to maintain existing production patterns. State enterprise operations were sustained through fiscal and credit subsidies, further fueling domestic inflation. The country has been slow to liberalize its economy and allow a greater role for markets and a private sector that can respond more quickly and efficiently to changing conditions. Price and margin controls remain, the state order system has been retained, exports and foreign exchange markets are controlled, a large share of bank credit is directed by the Government, and the business environment for the emerging private sector is characterized by changing rules and discretionaiy interventions. The result has been
I According to the USDA. Developmentof a Market Framework 33
declining output, acceleratinginflation, and deterioratingliving standards.
3.7 Real GDP contracted by 18% in 1993, bringing the cumulativedecline since 1990 to 40%. The collapseof output acceleratedin the first months of 1994, with industrial output estimated to have declined by 40% in the first quarter. The annual inflation rate increasedto 5000% in 1993. The value of the karbivanetsdeclined from krb 749 per US $ at the end of 1992 to krb 40,000 per US $ at the beginning of 1994. Living standardsof most of the populationhave fallen steeply, as real wages are estimated to have declined 50% between December1993 and December 1994. The crisis that has beset the Ukrainian economy has also taken its toll on agriculture.
3.8 In recent years explicitproducer and consumersubsidies have been reduced, and a degree of liberalizationof domestic agriculturalproducer prices has been introducedthrough the reductionof state purchases. Private trading was legalized, albeit with heavy taxation of private middlemen that limits their role. In January 1992, prices applying to transactionsbetween enterpriseswere decontrolled. However, trade and price formation remained heavily influencedby government interventionsince the state is still a large buyer of agriculturalproducts and can repress prices below border price levels. Marketing through the network of state owned enterprises was put on a contractualbasis between farms and the buyers, but state trading agenciescontinued to exert substantialpressure on farms to sell at prices indicatedby the Government. The state's influenceover agriculturalmarketing stems from close control of the input supplynetwork by ministry-levelgovernment agencies and their dependententerprises. Sales of inputs are linked; the state ties the sale of inputs to delivery of agriculturaloutput at state-set prices. While marketing through private channelsby farms is not legally limited, it is restricted by the threat of inputs being withheld. In addition, produce sold through private channels does not qualify for output subsidies.
3.9 Apart from a relatively modest change in the formal system as described above, the malfunctioningof the state controlled marketingsystem becamemore apparentin 1993-1994than in any early time. In practice the state procurement system has lost its strength. There are growing numbers of commercial traders, including new private firms, commercializedformer state enterprises, joint ventures, and foreign traders. Farms increasinglycontract with these companiesand use the state system less and less. One estimate by a governmentsource was that 25 % of farms no longer work with state suppliers at all. Explosive inflation has led to a demonetizationof agriculture and has inhibited the functioning of agriculturalmarkets. Producers are storing an increasingproportion of output on farm. Output is often processedon a share basis, i.e.processors receive a proportion of the output rather than a cash payment, and the balance is returned to the farm. Farms use this output to barter for inputs, or sell on uncontrolledmarkets. Producers also barter for other domesticor importedgoods, and even pay their workers partly in kind.2
3.10 Unfortunately,the most recent reaction of the Governmentof Ukraine to this situation, in June 1994, is to try to maintain state purchasing with a new wave of subsidized credits and input supply linked to state contractsrather than opting for genuine market liberalizationdemanded more and more by the farming sector. The Government'srationale behind not allowinggreater marketliberalization is that as economy-widederegulation has led to rapid increases in agriculturalinput prices, the state does
2 In 1993/94, accordingto the Ministryof Agricultureand Food estimates,personal renumerationhas been paid up to 60-70%in kind at collectiveand state farms. 7.5 milliontons of grain, 1.7 milliontons of hay, 122,000 tons of sugar, 118,000 tons of sunflowers,20,000 tons of sunflower oil, and 40,000 tons of meat among other items, were given in kind. 34 Chapter 3
not want to allow a truly free market to develop since it claims to be responsiblefor protectingconsumers from such price rises, especially for foodstuffs. Instead, it has continued to try to work with "state contracts" and further props up the old system through subsidizationof producers and price formation restrictions to limit retail price increases. However, the issue of subsidies financed by monetizing ever-increasingbudget deficits will accelerate inflationand further erode wages. This leaves consumers less able to cope with structuralchange in the economyand perpetuatesa slow transitionto higher levels of output and income.
Farm Prices
3.11 Given the rapid rise of prices of energy and industrial inputs to agriculture, the lack of competitivemarkets for agricultural raw commodities,and the drop in demand for foodstuffs resulting from falling domesticincome, farms found themselvesin a financial squeeze after the price deregulation instituted in early 1992. Agriculture's terms of trade deteriorated significantly as its subsidies were withdrawn: part of this erosion could be overcome if domesticcommodity prices were to rise to border price levels, but this is not allowed.3 Private marketinginfrastructure has not been created: Government did not want to lose state control over either the flow of most agriculturaloutput and or the level of prices ultimately charged consumers. However, in order to keep the large socialist sector farms afloat, the Government reintroduced output and input subsidies for producers: in constant 1985 rubles producer subsidiesrose from an average of 10 billion in the late 1980's to more than 15 billion in 1992. In 1992, subsidiesto livestockproducers made up 48-67% of the total remunerationreceived (sales plus subsidy), or 100-200%more than the price paid by processors to agriculturalproducers. For grains, sugarbeet, potatoes, and vegetables, subsidiesamounted to 11% or less of total remuneration.
3.12 In Ukraine's highly inflationarymacroeconomic environment, the Governmentintroduced indicativeprices in the place of formerly fixed prices. Indicative prices were set by the Government based on formulasthat estimatedaverage costs plus normativeprofit margins. These prices are used as a benchmarkin negotiation of contract prices for state orders, includingthe input prices farms pay and the agriculturaloutput prices they receive. Sincethe middlemenare state- owned companies,they know that if farm sells to them it will receivea subsidy from the state. This enables them to offer lower prices to the farm, and allows them to capture part of the subsidy paid to the producer. The presence of a number of prices for the same good (indicativeprices, contract prices on state orders, implicit prices in barter deals, and those availableon export contractsand in free markets) makes the price systemfar from transparent.
3.13 The Governmenthas attemptedto maintain a form of parity for agricultural producers by linking agriculturalprices to indices of prices of goods and services used by agriculture (Six price indices are used: material and technical resources of industrial origin; material and technical resources of agriculturalorigin; tariffs and services; remunerationof labor; interest rates; and insurance and other obligatorypayments). In order to "protect" the agriculturalsector from inflation, an index of agricultural costs was constructed and used to adjust product prices. Using this formula, procurement prices for
3 InI 1992, farm output prices rose about 70% as much as farm input prices, attesting to the existing trade regulations and monopolypower of state input suppliersand indicativeof somemarket power in the hands of stateprocessors buying farm output. Development of a Market Framework 35
agriculturalcommodities increased by as much as 57 fold from December 1992to December1993, while prices of agriculturalinputs rose 60 fold. Financialresources were made availableto state organizations purchasing output were similarly adjusted. Preferential credit was provided at a 30% annual rate. Nevertheless, agriculturaloutput declined by 6% in 1993. The government considersthis somethingof a success in view of the 15% decline in overall output for the year. Grain procurement increasedfrom 11 million tons in 1992 to 14.1 million tons in 1993 (but was still below the 15.4 million tons procured in 1990). The successful grain procurement of 1993 is attributed to indexing. Before harvest, grain producers were promised a procurementprice of 480,000 krb/ton (equivalentto US $120).4
3.14 The state trading network is quickly deteriorating. Data for 1992 indicate that approximately 85% of state and collective farn output sales are still made through state contracts. During 1990-1992, the shares of state and collective farm field crops such as grains and potatoes marketed through private channels was much larger than for livestock products, roughly 50% as comparedto 90 %. The shares of oilseeds and sugarbeetmoving through private channelswere less than 5%. However, as the state input supply network's ability to fulfill its contracts with farms has been reduced, so has farms' willingnessto contract their output with the state. In 1993, except for grain, the role of state purchasing dramaticallydeclined. Delayed payment for sales to the state has exacerbated the situation, as the high inflation during the waiting period cuts deeply into farm remuneration. A disorderly further deteriorationof state marketingreplete with stop-gapmeasures and attempts to impose market power on farms will likely produce shortages by causing farms to hoard their storable produce in hope of better prices in the future. Instead, the state should reduce its interventionand pursue a course aimed at facilitatingthe developmentof the market.
Table 3.1: Current Trends in State Procurement Prices Indices of Farmgate Prices (%) 1983 = 100
Commodity 1985 1990 1991 September October October 1993 1992 1993 (krb / t)
All Crops 99 140 176 3531 NA
Grain 88 235 153 3066 172,658 573,800 Oilseeds 99 170 182 4301 399,634 1,718,800 Sugarbeet 92 101 195 4968 324,800 162,400
Potatoes 105 147 471 5620 196,958 472,700 Livestock Products 101 129 167 2088 NA ------
Cattle 106 139 168 1848 191,321 5,678,400 Pigs 102 147 170 2529 Poultry 101 113 160 2404 Milk 97 120 154 2011 230,704 982,800 Source: Ministry of Agriculture and Food
4 In early 1994 farrns were being offered contracts for grain at the equivalent of US $70 per ton (21 million krb per ton at 30,000 krb per US $) while prices of diesel fuel and gasoline are about US $130-195 per ton. This means farms would receive about half the world market price for their grain at pay about 80% of the world price for their energy needs. 36 Chapter 3
3.15 Still, market pressures influence price formation Table 3.2: Food Retail Prices in State Shops in Ukraine and and some shifts in the structure of Russia as of Sept. 1, 1993 farm-gate prices are evident (Table Ukraine Belarus Russia Ukrainian 3.1). The administrated nature of Prices as % price increases in 1991 is evident by Krb Rbl per Rbl per Rbl per of Russian the relatively uniform rate of increase per kg kg' kg2 kg Price across different crops and livestock Meat (Beef) 7,521 565 612 1,486 38.0 products. In 1992, some adjustment took place as livestock prices rose Milk and 814 61 43 122 50.0 only about 60% as quickly as crop Products prices. In 1993, this trend was partially reversed as all livestock Butter Oil 8,928 671 919 1,540 43.6 prices rose by more than 100 fold Vegetable Oil 1,106 83 311 584 14.2 while crop price increases ranged 40 fold to 80 fold. Over the period Eggs 2,383 179 131 275 65.1 1990-1993, farm-gate prices have Sugar 843 63 608 584 10.8 risen by 200,000 to 400,000%, while Bread 785 59 55 74 79.7 the Consumer Price Index has risen over 900,000% and retail food prices Flour 1,487 112 172 120 93.3 have increased 800,000 %. Potatoes 608 46 63 167 27.5 Government restrictions on agricultural pricing and a degree of market power by state procurers and Fruits and 689 51 252 517 9.8 processors have kept farm-gate prices Berries low but processing and marketing (Apples) I 1 Ruble = 13.3 Ukrainian karbonantsti (coupons) exchange rate. margins in the food sector have 2. 1 Russian Ruble = 2 Belarus Rubles. clearly risen. Farms have borne an Source: Ministry of Statistics and CIS State Committee for Statistics. inordinate share of the adjustment process in the food and agricultural sector: their survival is secured through state subsidies instead of allowing them to receive market prices for their output.
Consumer Prices and Food Subsidies
3.16 Consumer prices for food products marketed in the state system have also been heavily subsidized. Although as of January 1992, agricultural output and input prices were no longer formally set by the state, and some food prices were deregulated, prices of sugar, vegetable oil, margarine, liquor, bread and macaroni products, and many milk and meat products continued to be fixed. At the end of the first quarter of 1992, meat and milk prices were decontrolled. Most remaining food product prices were no longer fixed starting July 1,1992, with the exception of low quality bread. However, indirect government control of basic food prices continues via maximum markup margin regulations. In 1993, these maximum margins were periodically increased as the previous ones were eroded by higher monthly inflation rates and longer periods necessary to settle accounts. In December 1993, limits on food price rises were reduced to profitability (gross margin) limits on bread (15%), flour (10%), and babyfoods (25%). Other price increases could be made "independently" but in cases of cost increases. Thus, the Developmentof a Market Framework 37 regime of liberalized but not entirely free price increases is being continued Table 3.3: Retail prices indices in Ukraine (Figure 3.2). One step forward is the Increase over the 1993 to abolition of all explicit food subsidies at previousyear 1990 the federal level with the exception of 1991 1992 1993 sugar. All consumer goods 3.17 In addition to regulation and services at the federal level, food prices are - on the average 1.89 13.38 46.19 1168 subject to intervention by regional and over a year local governments. Regional and local - Decemberto 2.31 22.03 96.79 4926 governments can also impose December regulations and draw on other sources of revenue besides federally allocated -gaveragemonthly 7.2 29.4 46.5 26.6 subsidies to pay processors and retailers for the losses imposed by pricing Foodstuffs regulations. More often, regional and - on the average 1.89 14.26 52.05 1388 local governments impose marketing over a year restrictions without knowing where the - Decemberto 2.07 25.10 97.55 5068 source of revenue to compensate December enterprise losses. These practices severely hamper any attempt by state - averagemonthly 6.3 30.8 46.6 26.7 enterprises to become financially growth rate, % self-reliant because they prevent the Source: Ukainian Instituteof AgriculturalEconomics. formation of a link between enterprise sales receipts and expenditures. In addition, they cause these enterprises to be unable to pay their bills, acquire inputs for production, and maintain production levels. Since the private sector is not subject to the maximum processing and marketing margins set by the federal and local governments, its share of sales is slowly expanding as private enterprises manage to attract inputs. Table 3.2 shows the low cost of Ukrainian foodstuffs in comparison to other FSU republics.
Food Price Indices Comparedto CPI
1000000 J
100000 - CPI
D/ Bread Products 10000
""'- Meat Products
1000 < Milk Products
1000 1990 1991 1992 1993
Figure 3.2 38 Chapter3
3.18 The increase of retail food prices has kept pace with the speed of overall inflation and with the increase of the prices of consumer goods in retail channel (Table 3.3). The increase in food prices however, outpaced the increase in the nominal cash income of the population by 2.3 times, accordingto the estimates of UkrainianInstitute of AgriculturalEconomics, seriously reducing the actual demand for food commodities.
Sectoral Impact of AgriculturalPolicy
3.19 In view of the cost mark up price formationprocedure and state regulation thereof, the price deregulations instituted in Ukraine in 1992 did not represent real liberalization. Despite the inadequate progress made towards liberalizing prices at all market levels and allowing producers to receivemarket prices, evidencefrom 1992 and 1993 suggeststhat the divergenceof domesticagricultural price ratios from internationalprice ratios has lessened. Farm-gateprice distortions (measured relative to world market price ratios) decreasedin the 1980's, but increasedin 1992 as a result of large drops in relative livestock prices in Ukraine. These were the result of excess supply in these markets when demand contracted more quickly than supply in 1992. Table 3.4 presents wheat price relatives in Ukraine (a chosen commodityprice relative to the wheat price, divided by the same price ratios on the world market. A coefficientcloser to one indicatesless distortion.) In 1993, price distortions for sugar, milk, and cattle were reduced, but for sunflower seed and eggs it increased. Overall (as measured by the coefficient of variation) diversion from world market price ratios dropped markedly in 1993, but greater realignment of domestic prices with internationalprices cannot take place in the more or less closed economy which Ukraine's agriculturalsector faces.
Table 3.4: Distortion in Producer Prices for Selected Agricultural Products Ratios of Wheat Price Relatives in Ukraine Compared to those on the World Market'
1981 1984 1987 1990 1991 1992 1993 September October
Sugar 1.02 3.89 2.12 0.74 1.46 2.48 1.57 Sunflower Seed 0.85 0.93 0.90 0.80 1.08 1.24 1.66
Eggs 2.45 1.74 1.51 0.84 0.99 0.83 1.70 Milk 1.78 3.21 2.16 1.20 1.03 0.47 1.07 Cattle 1.34 2.01 1.12 1.08 1.09 0.65 0.99 Poultry 3.83 2.86 2.31 1.53 1.50 1.10 NA Hogs 1.99 1.99 1.27 1.08 1.45 0.83 NA
CVb/ 83.83 42.09 34.77 26.56 18.62 61.42 24.35 Source: Ministry of Agriculture and Food, FAO Trade Yearbook, and USDA Economic Research Service. a/ E.g. for sugar, equal to (Sugar Price in Ukraine/Wheat Price in Ukraine) as a ratio of (World Market Sugar Price/World Market Wheat Price). b/ Coefficient of Variation *100.
3.20 Clearly, the profitability of agriculture has fallen because input prices have been more deregulated than farm-gate output prices. On the positive side, farms are learning about alternative, Development of a Market Framework 39
private input sources and customers for their output that will allow them to more safely negotiatelower levels of sales through state contracts. Still, farm responsesto decliningprofitability have been to lobby for subsidies.Being well-organized,the agriculturalsector succeededin getting specialsubsidies in 1992 and 1993 to partially compensatefor the terms-of-tradeloss. These subsidiescontributed to the overall macroeconomicproblems of the country. On the whole, however, agriculture is most probably being indirectly taxed by price distortions.
3.21 In connectionwith pursuing greater liberalizationin agriculturalmarkets, the Government reduced the coverageof state orders to six products (grains, sunflower, oil seeds, sugar beats, beef and milk) and limitingthe number of products subject to retail price controls to milk, veal, pork, bread and eggs. These are undoubtedlysteps in the right direction. However, at the same time, the Government took more questionablesteps to ensure a positive incentiveframework for producers. It indexed the state procurement prices to the 1990 prices of a selected basket of agricultural inputs, thus preserving the distortions in the prices of inputs and products. It provided additional funds to agricultural enterprises to cover their operatingdeficits and advancedthem 25 % of the state procurementprice (at a subsidized rate of interest) to finance production.
3.22 Although the motives of the Government for taking these actions were positive and the reasons they have done so are evident, in particular the financial distress of farm enterprises, however taken as a whole, they do not further the process of liberalization. The state order system, the prevailing monopolisticmarketing and trade structure, and the linkages between price and credit subsidies, input provision and state procurementremain substantiallyunchanged for key agricultural commodities. The adopted system of producer price indexation, while ensuring survival irrespective of efficiency, fails to signal needed changes in relative prices and continued unconditional coverage of enterprise losses weakenstheir incentive to become more efficient, and forestalls adjustmentof the production system to underlying price relations.
3.23 In spite of all the obstacles to private sector growth in the food sector, slow progress is being made. In 1993, private food marketing was steady or grew for most commodities. In contrast, sales volumes in state and cooperative retail networks dropped by 20-25% (Table 3.5). This switch occurred even though prices are still 30-40% lower in the state and cooperative channels as compared to the private markets. Margin limits imposedby the Governmentappear to succeed in restrainingfood price increases in the state sector, but they prevent the processing and retailing enterprises from being able to pay their creditors, to maintain a flow of raw product, and ultimately to stabilize their sales volume. The relative expansionof private marketingwill continuein this slow, unsupportedway unless major changes in promoting commercialization,demonopolization, and further price liberalizationare made.
BudgetaryImplications of Subsidies
3.24 Subsidiespaid from the budget accruingto agriculturalproducers were equivalentto 45 % of budgetary subsidiesfor all purposes in 1992. When subsidiesto consumersvia food processors and retailers are included, the share of total subsidies accountedfor by the food and agriculturalsector was 63%. These subsidies represented 13% of the state budget, or roughly 6% of GNP. Because of the spirallinginflation during 1992, the revised governmentbudget includedadditional financingof producer and consumer subsidies. The total budgetary cost of agricultural subsidiesis estimatedto have reached 40 Chapter 3
10% of GDP in 1992. Table 3.5: Changes in Food Retail Market Structure, 1992 - 93 3.25 In addition, Prices on January 4, 1993 Sales Volume as % primary producers have been 1994. Krb/ kg of 1992 Sales Volume exempt from income tax, and the value added tax was reduced to In State & In Private In State In Private 20%. Agro-industrial firms were Coop Markets & Coop Markets also made exempt from incometax Stores Stores but a profits tax was reimposed at Meat Products 74% 99% the rate of 25%. Meat and milk Beef 34203 46616 128% productswere exemptedfrom VAT owing to the reduced demand for Pork 42122 63232 97% these products. Poultry 43302 65444 83%
3.26 The subsidization Milk Products 85% 101% of agriculture has shifted from Milk 3422 5812 107% explicit budgetary subsidies to Cheese 13851 23621 98% implicit credit subsidies. Subsidies to livestock producers Butter 69566 71252 99% constituted the bulk of explicit Eggs (Ten) 28610 29925 84% 91% agricultural producer subsidies 27810 29201 80% 113% during the Soviet era and into 1992. However, over the course of Potatoes 1370 2296 88% 88% 1993 and early 1994, these were Vegetables 80% 93% largely phased out. In 1993, budgetary subsidies for food Cabbage 1534 2479 76% 112% processing, land improvement and Carrots 1399 2554 86% 97% irrigation, cattle breeding, and seed 1127 2360 79% 92% prices amounted to about 1 % of GDP. However, credit subsidies Fruits 11226 12404 113% 79% resulting from negative real rates Source: Ministry of Statistics. of interest (nominal interest rates are about 30% per annum, with inflationrunning at 30-40% per month), amountedto another 3% of GDP. In 1994, subsidiesfor capital investmentsand inputs are budgeted at 11 trillion rubles and credit subsidiesthrough state procurement agenciesare programmedat 21 billion rubles. This is likely to result in total subsidies equivalent to 3-4% of GDP (the official estimate, based on a projection of inflation of 350% in 1994 would put subsidies at 7% of GDP, however, Bank estimates are for a substantiallyhigher rate of inflation). In June 1994, the Governmentdecided to continueto provide directed credit for agriculture. The Bank of Ukraine was authorized to finance purchases for state reserves. Commercial banks are obliged to allocate 10% of credit resources availablefor lending to food and agriculture, with 30% annual interest rates, and agroprocessingenterprises are to receive 1.7 million kbr. to repay their debts to farms.
3.27 The mechanismfor distributionof credit subsidieshas also changed. In 1993, farms were advanced half the procurement price per ton at the time the sale was contracted (in March for spring grains) and the other half, which was not indexed for inflation, was to be paid upon delivery. In some cases paymentwas delayeduntil December. The value of this payment was heavily eroded by inflation and additional credit had to be made availableto allow farms to obtain inputs for fall planting. In 1994, Development of a Market Framework 41
farms are signing contractsfor delivery providing that half the first payment would be credited to input suppliers, who would charge off input deliveries to farms as they are made. The second half of the payment will be adjusted by the amount of inflation until the harvest.
3.28 Agricultural producers are also subsidizedvia debt forgivenessand preferentialinterest rates. In early 1992, debt of 2.8 billion krb. was written off. Indirect subsidieswere provided through preferential interest rates on loans from the Agricultural Bank to agriculturalproducers of 10 to 18% (compared to commercial rates of 80 to 100% at an inflation rate in excess of 1000% per annum). Indirect subsidizationvia the credit systemweakened the financialposition of commercialbanks, and will almost certainly require budgetary funds for recapitalization at some time in the future. Merely channelingreserve bank funds through the banking system to farmers and enterprises has the exact same effect as channelingthem through the budget and then financingthe budget deficit by printing money.
Adverse Consequencesof CurrentPrice and SubsidyPolicy
3.29 Ukraine's agriculturalprices currentlyreflect a wide range of interventions,subsidies and controls, generally designedto assist or protect the finances of state and collectiveenterprises, or to shore up consumer income. They provide virtually no rational incentives to guide production decisions or longer term investment and resource allocation decisions. This system delays necessary downward adjustment in the livestock sector and supports the survival of a distorted production structure. The current systemdoes not provide intermediariesor Governmentwith a good indication of the production, storage, processing,transport and marketingcosts of particular goods, a notion of the value of such goods in alternative markets, or an idea of which commoditiesor factors of production are in short supply.
3.30 The problem is not subsidy per se; virtually all countries subsidize producers or consumers(or both) of agriculturalproducts in some way. However, it is essentialthat subsidiesdistort producer and consumerprices as little as possibleand not result in serious resource misallocation. Policy makers must know how much subsidies cost, in both financial and economic terms, and who are the beneficiaries. It is also important that subsidiesnot impede private sector entry in marketing, storage, and transport. In general, budgetary subsidiesare more likelyto meet these criteria than subsidieshidden in exchange rates, administered prices, or directed credit at below-market interest rates. In addition, producer subsidiesare more likelyto cause resourcemisallocation than well designedconsumer subsidies.
Continuationof Price Reform and Market Liberalization
3.31 The establishmentof a market-orientedagriculture will require the completionof the process of price reform. Prices received by producers should be allowed to adjust by: (a) eliminating remainingprice controls; (b) removingremaining delivery obligations and restrictionson domestictrade; (c) elimination of cost based pricing mechanisms, including the system of fixed profit margins for processing and trade; together with, (d) creating competition both in input supply and in output marketing. In order to ensure that agriculturalenterprises respond to changed price signals, it will be necessaryto stop the practice of covering their losses through budgetary subsidiesor credit at subsidized interest rates that, in most cases, will not be repaid. (Box 3.1 proposes a schedule for further price liberalizationand subsidy reduction.) 42 Chapter3
PrpsdSlhedul ofA-gricultural m.Prieolc Reform and.Subsdy .Reducio ~: ~~~ ~ ~ ~ ~ ~ ~ ~ ...... meia... .ere ...... e....d Step .. Third. tep
gStat:-,e OUrdrEandi igig g0:|0g|Eggggggg !EiReduce 'to 30% projecte 'rai :':t P-hase gou 't': ''t:'ti 't -Eti0000EE000Et: 4l -:S,:E~~ ~ f ~00 ~000000 ~0X:000000:- ~0 ~ ~.4g1 ..-..t...... :-t'y '0t;:tt 0000000002...... :4 ...... -.. WAS-Prod,ucerPr;0ice00-0-0000ks 00000Adjs reltiv prcuemn Use-0-0000stat pice sas0floo pri 00sEliminat prc intervention 0
--yInput.t.-tt-t.t0tttSEtt0iSubsidies 000-0-0-. .000t ti;t-f0t-t000...... g t :00- Reduceg --- t-tt0.0in-i- -scal t0 -i 00 .0. .t ..- ...... Ei--ConEy- fine-- to...... PhasEigEE:Egelgour:if -gi,-'-y:-'EfEEigg
Cr0000editSubs,idies; t000;00000000000000ji 0Dismatle likg1' to' sta000te i0Reduce to' inance,current:-tt0000000Reduce topvate fa - :
:00Consumr-fPrice : g'-0;-4-0'0000000400:--Reduce:to bread,-00dahy::::' and :'Cofn t high poty brad Full replac :with:0targte
t-Subsdies2 000;00-$4-S$00000000Jvfti-00-0 e0getable ol000 milk,r and introdu-ce- targeted in ome subsidies000
IntllIernationalTd e' ;-j-jij0jfl 0l0g,: tlfld 40'0- t-0Removegexport.quo a De tra....s .....
Box .
3.32 Producers are subject to a variety of regulationsthat cause substantialdistortion in the productionprocess and reduce their incentivesto produce. This includes indicativeprices and indexation of producer prices, the quota system for production, and the linking of supply of inputs at government regulatedprices and of other transfer payments to fulfillmentof the production quotas. As a result, most of the products are still delivered to state procurementand processingagencies. The Governmentshould cease its interferencewith the market price mechanismthrough the establishmentof cost based indicative prices or profit margins. It should stop linking supply of inputs at controlled prices to fulfillment of production targets. Government shouldnot interfere in wage setting, beyond the establishedguidelines for minimum wages.
3.33 The systemof state orders (productionquotes) does not conformto a market and negates market based resource flows. There is a direct linkage between state orders, governmentprocurement monopoliesand price controls. The argumentfor price controls is that the Governmentbuys most of the products. Price liberalizationwithout the eliminationof state orders and competitivemarketing will not achieve much. Therefore, the phasing out of this system is almost a precondition for the emergenceof any real market. However, one has to admit that there is not very much of a functioning market in Ukraine at the moment, there are very few private traders and producers, and most of the input supplies are state owned. In this environment, the replacement of the state order system by market relations cannot be done in one step. The role of state orders has already been decreased, and the government commitmentto the full eliminationof the state orders should be clear and the implementationcarried out as fast as possible.
3.34 The system of recommendedprices based on the cost of production is inappropriate in a stable environmentand harmful under inflationarycircumstances. Cost based pricing formulas do not take into accountchanges in demand or world prices. Moreover,under rapid inflation, cost based pricing depresses agriculturalproduct prices, since costs incurred several months prior to harvest are generally Developmentof a Market Framework 43 not adjusted to reflect real costs of inputs at the time of harvest. If cost based indicative pricing is discontinuedand trade is liberalized,the resultingpricing structure would reflectboth Russianand world market prices. Products that can be sold on the hard currency markets would tend toward the domestic equivalentof world market prices. Products sold primarily within the FSU would move toward Russian prices.
3.35 Since independence,the cost of inputs has increased faster than prices of agricultural products because the state continuedcontrol of agriculturaloutput prices, while it was unable to control the prices of improved inputs. With the exceptionof energy, prices of inputsnow approachworld market prices. The Government, however, continues to control and regulate agriculturaloutput and trade, and tries to mitigate the deteriorating terms of trade with continuous adjustment of producer (indicative) prices. This underscoresthe need for liberalizationof agriculturalprices. Withprice liberalization,farm inputs will have to be used more efficiently.
3.36 Producer subsidies should be phased out as part of a well defined program aimed at promoting private marketing operations, both domesticallyand through internationaltrade, as well as demonopolizing agricultural input supply and agroprocessing, and assisting farms to upgrade their equipment and on-farm infrastructure and shed redundant labor. The savings on foregone producer subsidies could be better used as unemploymentbenefits and for job retraining. Income subsidiesto producers should be abolished as early as possible. Real restructuring can only be expected in the kolkhoz/sovkhoz sector if hard budget constraints are imposed on these organizations. However, emergingprivate agriculture shouldbe supported, mainly in the form of preferential credit availability.
3.37 Given the magnitude of economic shocks implied by price liberalizationand increased energy/input costs, the sudden elimination of governmentsubsidies to agriculture could bring about a collapse in the sector. Some transitionalsupport for producers may be justified to increase the chance that potentiallyefficient farming operationswill be able to survive. Existingproducers need to know that subsidieswill be phased out during the transition period. However, there must be a cap on total costs of agricultural producer subsidiesin each year consistentwith the overall stabilizationprocedure.
3.38 The overall budgeting and management of the central public expenditure for the agriculture and food sector should be established. The creation of a consolidatedagriculture and food budget, involvingall agenciesworking in these sectors, is strongly recommendedin order to consolidate agriculturalbudget and credit programs. Only in this way can a real dialogue on spendingpriorities and trade-offs emerge, and budget disciplinebe strengthened.
B. INTERNATIONALTRADE AND TRADE POLICIES
Changesin Trade Patternsand Partners
3.39 Both prior to and after the break-up of the FSU, agricultural goods have been an important componentof Ukrainian foreign trade. In the period 1985-90,while Ukraine still formed part of the FSU, agriculturalexports accountedfor 18-19% of total exports to other FSU republics and rest of the world. Ukraine was the largest agriculturalexporter within the FSU of livestockproducts, sugar, canned fruits and vegetables, and bakery products. On average, Ukrainian exports held a 35 % market share of inter-republicFSU food trade and played an important role in meeting food needs in other FSU 44 Chapter 3
republics. Ukraine itself also imported a sizeable amount of agricultural goods, which Table 3.6: Agricultural and Food Trade comprised 10-12% of total imports from 1985-90 (Table 3.6). In 1990 In 1990 In 1990 3.40 In addition to comprising a rubles rubles rubles large share of agricultural food trade in the Ag. & Food Exports 9,284 8,310 3,486 FSU market, Ukrainian exports represented often large shares of Ukrainian production of As % of Total Exports 19% 18% 23% certain crops and processed products. In the Share to FSU 94% 92% 93% late 1980's, grain exports (4-5 million tons Ag. & Food Imports 6,468 5,447 1,789 annually) accounted for about 10% of A.&Fo mot ,6 ,4 ,8 production. Almost 10% of livestock Share from FSU 41% 42% 49% products was exported as well, with Source: The World Bank, Statistical Handbook - States of the production shares of vegetable oil and sugar Former USSR, No.3, Sept. 1992, Ukraine Ministry of Statistics exports reaching almost one-third of production. Thus, Ukraine relied on agriculture as a important source of export revenue, but agriculture's reliance on FSU export demand was equally strong. Agricultural imports as a share of consumption were uniformly less than 5%, except for fish products (25%).
Ukraine Imports, 1992
9% 9%
D Other Non-Ag.
Other Ag.& Food
U FSU Non-Ag.
FSU Ag.& Food
73%
Figure 3.3 Development of a Market Framework 45
3.41 The division of agricultural trade by destinationunderstandably favored the other FSU republics in the past, with 92-95% of agricultural exports sold to the FSU. Surprisinglythough, more than 50% of Ukrainian imports of food and agriculturalproducts came from outside the FSU (Figure 3.3). This share is five times higher than the share of non-agriculturalimports bought from countries outside the FSU.
3.42 Since the break-up of the FSU, commercialties with the other FSU republicshave been weakenedby both economicand institutionalfactors. The collapseof incomeacross the FSU has reduced demand for food products and affectedthe demand for Ukrainianagricultural and food exports. By 1992, these exports had fallen to about 40% of their level of the late 1980's. However, given the greater fall in nonagricultural exports from Ukraine, agriculture's export share has actually risen to almost 28% (Figure 3.4).
Ukraine Exports, 1992
El Other Non-Ag.
2% El Other Ag. & Food
* FSU Non-Ag.
* FSU Ag. & Food
52%
Figure3.4
3.43 The FSU republics still represent the main market for Ukraine's agricultural exports, accountingfor more than 90% in 1992. Since consumer incomehas fallen further in Ukraine than most other FSU republics, imports have fallen even more than exports. Even though agricultural and food imports dropped by almost 75 % from 1989 to 1992, their share in total imports doubled to almost 20% as imports of industrial raw materials and consumer goods plummeted. For all goods, the collapse of the payments system for foreign trade, includingthat with other FSU republics, has generatedvery high transactions costs for firms involved in trade: these risks and delays have contributed to the fall in agricultural trade turnover. In addition, these transactions costs (along with the policy induced 46 Chapter3 impediments to agricultural trade examined below) have caused the share of foreign trade volume executedthrough barter operationsto rise to almost one half by mid-1993. The greater acceptabilityof barter trade among FSU republics (as comparedto non-FSU trading enterprises)and the lack of policies in Ukraine which would increase the availability of hard currency foreign exchange have reduced the share of trade done with non-FSUcountries. Agriculturaland food imports from non-FSU countriesfell to only 51 % of total agriculturaland food imports in 1992.
3.44 An examination of the performance of Ukraine's main agricultural Table 3.7: Major Agricultural Imports and Exports exports in the 1990's reveals that the physical 000 tons 1988-90 1991 1992 1993 volume of all of these products has fallen by Average 50% or more comparedto base levels in the late Imports 1980's (Table 3.7). The most notable are grain Grains 4,180 NA 1,961 1,943 and sugar, the fall of which can be directly Meat and 35 8 9 1 attributable to poor harvests. (Both grain and Meat sugarbeetannual harvestswere 8-12 milliontons Products below there late 1980's levels in 1991-92). Milk and 175 19 10 153 These are both areas where FSU export markets Milk are strong and additional Ukrainian exports Products would be relatively easy to achieve with Fruits and 138 98 105 36 increased harvests. In the area of meat and Vegetables dairy products, export demand has fallen much Exports more (as these sectors are undergoing dramatic Grains 5,028 NA 267 160 down-sizingin virtually all FSU republics) and Meat and 369 227 196 99 the marketis demand-constrained.Vegetable oil Meat exports were down sharply in 1992 as domestic Products production dropped by over 30%: additional Milk and 2,031 1,300 292 459 exports appear to be constrained by supply. Milk Given Ukraine's relatively high oilseed yields, Products these exports could also be boosted at low Sugar 3,570 1,646 332 914 marginal cost. Vegetable 320 279 147 93 Oil Fruits and 503 180 47 49 Trade Policies Vegetables Source: USDA Economic Research Service, Ministry of Statistics 3.45 State enterprises still dominate external trade. However, since beginning of 1991, the private sector has been allowed to enter into trade and some private enterprises, especiallyjoint ventures, have already captureda significantmarket share. Some 24 enterprises provide marketing functions for the agriculture sector, of which the private sector share is 30%. The private sector now markets 90% of pesticides.
3.46 Over the last three years, barter trade has increased and trade based on monetary transactionshas declined. Barter trade with non-FSU countries amountedto only 19% of total trade in the first eleven months of 1991, but reached 22% in December, 1992. By mid-1993, barter accounted for almost half of total trade turnover. This is largely a result of taxation of exports and the fact that export licenses are more easily given for barter arrangements. Export taxes average 27% for all export products and 20% for exports of agricultural products. However, the export tax is lower for barter Development of a Market Framework 47 transactions -- only 5 % -- and zero if producers export their own products. Joint ventures are exempted from paying export taxes for five years if they are producersand for three years if they are pure traders.
3.47 The current trade regime strongly discriminates against exports, especially outside the FSU. The export trade regime for hard currency areas involvesa rigid licensingsystem and export taxes range from 20 to 75%, with most exportableproducts subject to rates between 35 and 50%. A quota allocationand a license are needed for export of most agriculturalproducts. Before being able to apply for a license the would be exporter must obtain an export quota. These quotas are decidedby a Council of Quotas in the Ministry of Economy taking the domesticmarket situation into account. The license is issued by the Ministry of Foreign EconomicRelations. State enterprises may receive a general license indicatingthe volume of specificproducts they may export within a given period of time. Private traders need an ordinary licensewhich will only be granted if specificconditions are met; the producer must have fulfilled his delivery commitmentand the price of the exported product has to be judged acceptableby the license issuingauthority. Licensingprocedures are cumbersome;private exporters reported that they had to spend half of their time chasing licenses. Uncertaintiesin export were further increasedin January 1993, when the Government decided to suspend all existingexport licenses, creating serious problems for most of the existingjoint ventures dealing with supply of inputs for agriculture.
3.48 Import regulations are less restrictive. A license is only needed for products that may concern health, such as pharmaceuticalproducts. Althoughthere are no import taxes, a new tax system is under review that would provide higher rates for products not consideredvital. The major constraint on imports is access to foreign exchange. The Governmentallocates as much in foreign exchangeas it receives in import taxes. The import regime strongly favors enterprises that are exporters and thus undermines specializationin trade.
3.49 Deregulationhas not encompassedforeign trade. Accessto importedinputs is not reliable and the ability to sell farm output on the export market is not a guaranteedright owing to persistenceof export licensing and other non-tariff barriers such as the practice of making sales to the state a preconditionfor granting permissionto export even small quantities. Ukraineapplies a 28 % value added tax on imports, but not on exports. However, use of the official exchangerate in calculatingthe VAT reducesthe effectiverate to about 15 %. However, importedgoods cannot be sold freely, but are limited to a 55% mark up from import cost to the consumer price. While this would seem to provide a wide margin, the effective margin is reduced if the foreign exchangeused to purchase imports was purchased at the commercialrather than the official rate.5 This regulationdiscourages the growth of intermediaries, encouragesbarter transactionsand encouragestraders to find fictitiouscosts on top of which to apply the 55% margin.
3.50 The trade restrictions encouragecapital flight. Traders can understate the value of their exports and overstatethe value of imports to increasetheir access to foreign exchange. Due to internal political uncertainty and economic volatility, trading enterprises have strong incentive to hold funds abroad rather than domestically. There are also strong incentivesfor illegal trade to take advantageof higher prices in neighboringrepublics and such trade activities have been reported.
5 At the time of writing of this report the official rate was 17,000 krb per dollar, the fee market rate was 40,000 krb and the inter-bankcommercial rate was approximately30,000 krb per dollar. 48 Chapter 3
3.51 Contract disputes have become a major problem in trade. Traders often have no experience and contracts often omit some important items, such as specificationof product quality. Disagreementsover quality of items delivered may lead breaches of contract. In addition, contractors may not be able to fulfill agreementsbecause production falls short of their expectations. In other cases, contractors may have found a better deal after the original commitment was made. This type of opportunisticbehavior is not unexpectedin a society in the early phase of transition from a commandto a market economy. Opportunismmay be more common in internationaltrade than in domestic trade, as foreign trading partners know to each other less well than domesticpartners and adverse repercussions are smaller. The fear of breach of contract has become so strong that some farm managers are only prepared to deliver their produce if they have already received their trading partner's products. Transaction costs are high because of insufficientinformation on internationalprices, high uncertainty about trade policy and macroeconomicdevelopments, and delays by farms in meeting their financial obligations(since they often receive payment for their output many months delayed).6
C. RE-ESTABLISHING INTERNATIONAL TRADE: AGRICULTURAL TRADE POLICY
Trade With Non-FSU Countries
3.52 Ukraine has significant potential for agricultural and food production and trade. The geographicallocation of the country and the access to ports makes it better suited to integration into the world economy than most of the other FSU republics. An appropriate trade policy could help remove constraintson the production, transport, storage and processingof agriculturalproducts. At this moment restrictionson trade are a major sourceof discouragementto private investmentin agriculturein Ukraine, which would bring with it improved technologiesand managementmethods along with a practitioner's approach to the understandingof market systems.
3.53 The Government does not now wish to support large scale exports of agricultural commoditiesand food because of the fear that it will result in food shortages in Ukraine itself. Trade is allowed only after the Govermnent is sure that sufficient food will be available for domestic consumption. The result is that the scale of trade is significantly lower than it might be otherwise. Instead of trying to be sure that production is sufficient to meet domestic demand year by year, the Governmentcould establish a strategic reserve, equivalentto a three to four month supply requirement.
3.54 Trade with non-FSU countries would be enhanced by abolishing export licenses and quotas; abolishing the requirement for surrender of export earnings at the official exchange rate; eliminatingthe prohibitive 20% export tax and limit the governmentto collection of income tax7; and
6 The largestjoint venture engagedin these transactionsreported that 30 % of the farmers had not settledtheir debt after the harvest as agreed in the contract.
7 Basicallythe export tax policy makes barter trade more profitable than trade based on payments. If trade is based on barter betweena producer who also import inputs, he is exempted from export tax. If the producer/exporterimport other products he is liable to pay 5% tax. If the trader is not a producer but he importsinputs the export tax is 5%. If the trader exportgoods but importgoods other than inputs, he is liable to 20% tax. Thus, this system encouragesnon specializedpeople to engage in trade and basicallycauses high trade costs. Development of a Market Framework 49
creating a tariff-basedtrade regime consistent with a market economy.
Inter-FSUTrade Perspective
3.55 There are some marked differences in potential for exports to non-FSU and FSU countries. The FSU countries constitutethe natural market for Ukraine's agriculturalexports. They are former trading partners, and Ukrainiantrading enterprises know their counterpartsin the FSU countries and the rules and regulations that govern trade. The FSU countries are familiar with the Ukrainian agricultural commodities and food products and their quality is not a constraint. The production technology in Ukraine is not inferior to that in the FSU countries and the Ukrainian products are competitive.
3.56 Nevertheless, there are important constraints that, if resolved, would allow mutually beneficial expansionof trade. Trade that involves payments has to be channeledthrough the National Bank of Ukraine (NBU). Clearing payments through the NBU is slow. This contributesto preference for barter, especially given the high rate of inflation in Ukraine. Ukrainianbanks should be authorized to handle payments between FSU countries on a letter of credit basis. Traders should be able to keep accounts in their domestic currency or in interest bearing ruble accounts.
D. REDEFINING THE ROLE OF GOVERNMENT
The Present Role of Govermnent
3.57 Government managementof agriculture still reflects the characteristic features of the commandeconomy. A large bureaucraticadministrative structure is still functioningabove the farm level to provide central control over farms and other agriculturalactivities. The Ministry of Agriculture and Food (MOAF) is responsible for the implementation of agricultural policy and the realization of agricultureproduction objectives. But, as in most governments, it is not the only governmentinstitution that affects agriculturalpolicy. Indeed in some ways it may not even be the most important ministry. The Ministries of Finance and Economy, as well as the Ministry of Foreign Economic Relations have powerful roles in agriculture as well, as they are directly in charge of price and subsidy policy as well as trade and marketing regulations.
3.58 There are also a number of central committeeswith "ministry" level status that have a strong influence on the agricultural sector. These are the State Committee for Food Industry, State Committee for Water Economy, and the State Committee for Land Resources. These entities have representativesat the oblast (province)level and often at the rayon (district)level as well. Total staffing for these committeesis estimated at 7,000.
3.59 The various levels of administration, together with the enterprise level bureaucracy, constitute an oversized administrativesystem. The MOAF, forged from seven different organizations, is a large and complexoperation (Figure 3.5). Although it has only 650 employeesat the center, it has 32 departments(e.g. land managementand environmentalprotection, village social services and livestock production and breeding). There is an additional set of organizations that also relate to the MOAF, 50 Chapter 3
including regulatorybodies such as seed inspection, higher education, scientific institutions,vocational schools, mid-career technical, educational,and training centers and voluntary organizations.
Organizationof the Agro-IndustrialComplex
Vice Prime Minister Agro-lndustrial Complex
Mnisr of Mstr tr oStState tae1State lSte Food and Forestry Committee onj ComSmtittteon | ommittee on Comte on Agriculture Water Economy Land Resources Food Industry| Fisheries
Figure 3.5
3.60 At the regional levels, the administrativestructure of the socialistera has been preserved almostwithout change. The agriculturaldepartments of the local sovietswere created to implementdirect administrative controls and they continue functioning. These organs are supposed to coordinate the activities of local agricultural and processing enterprises. Their main role is to transmit targets for production and delivery and to distribute inputs and machinery to farms.
A New Role for the Government
3.61 The transition to a market economy requires a fundamentalchange in the role of the Government in agriculture and in the economy in general. Direct government intervention in the agriculturaleconomy, such as establishingmandatory targets for production and/or deliveryof goods and central distribution of investments and inputs must be ended. The Government's role should be to establish the general rules and facilitate the conditionsfor smooth operationof markets and independent business organizations. This role is not less important than the previous one; however, it requires a different philosophy, as well as differentmeans and institutions.
3.62 The Government of Ukraine needs to make a high level commitment to changing the structure and scope of governmentorganization for managementof agriculture. The overall principles driving this change should be: (a) the establishingof a single locus of responsibility;(b) dismantlingof the current "agroindustrialcomplex" governmental management structure; and (c) a simplificationof the structure of governmental organizations corresponding to the reduced role of the public sector responsibilitiesin agriculture.
3.63 Given the uniquenessof the country, its history and politics, it is not possible to define the exact structure of a modernizedgovernment administration of food and agriculture. However, within a market driven economicsystem the Governmentshould play three sorts of roles: regulation, provision Developmentof a Market Framework 51 of supporting services, and analysis (Figure 3.6). Regulation should include such things as food inspection, seed inspection, establishmentand enforcementof grades and standards, establishmentand control of phytosanitary standards, epidemiologyand livestockdisease control. Essentialservices of a public nature should be provided. This might include domestic and foreign market information, agricultural research, farm advisory services, and higher education in agriculture. Finally, the Governmentshould monitor, review, and diagnosethe implicationof changingcircumstances and develop options for public policy.
MINISTRYOF AGRICULTUREAND FOOD
REGULATORY SERVICES _ ANALYTICAL
Plant Quarantine Agricultural Research Livestock Disease Control Agricultural Universities Agricultural Statistics Grades and Standards Market information Economic Research Food Inspection Agricultural Extension Foreign Agriculture Others as appropriate Land Survery, Titling and Information Registration Others as appropriate Others as appropriate
Figure 3.6
3.64 Details of MOAF restructuringand staffingneeds to be developedwithin this framework. A broad based task force, with sufficientstaff and budgetaryresources, needsto be establishedto develop a modernizationagenda for the MOAF and related committees. It should avail itself of international professional expertiseso that an outside perspectiveof the needs of agriculture under market conditions is immediatelyavailable.
3.65 The Government and MOAF might develop some links with counterpartorganizations in other countries to aid in this process. For example, outside assistancecould help with a wide variety of activities, e.g. setting up a cost effective quarantine systems, helping design area frame sampling techniquesfor predictive modelsof crop production, assistancewith more sophisticatedeconomic research issues.
3.66 The dismantlingof the bureaucraticstructure of central planning is a very importanttask. What is needed is not merely changing the names of the various ministries, but radical modification and/or merger. Units related to central commandand direct interventionsshould be dismantled, while those remaining should be organized and managedto meet the needs of a free market control system. Market regulation and trade policy functions should be taken over by the MOAF and other government agencies. The recent conclusionof State Committeeof Bread Products in the MOAF is a step towards the right direction. As transition proceeds, the whole structure can be further simplified, with fewer institutionalunits and fewer employees. Changesare needed in the structure of regional units as well. A large bureaucracy related to the implementationof central control still exists on the regional levels. There is no need for their further existence in the current form. A relativelysmall administrationwould 52 Chapter3 be adequate to enforce agriculturalregulations, promote development,and provide extensionand market information services.
3.67 The establishment of market agriculture requires the development of a new legal framework. New laws and the adjustmentof existing legislationwill be legal changesare needed. The most important is revision of the land law along the lines described earlier. A law on the transformation of kolkhoz/sovkhozsystem is also needed in the near future. Some componentsof the legal framework shouldbe completedover the next year or two. This includes laws that establish the basic principles for private voluntary cooperatives,and an agriculturalmarketing law that establishesthe frameworkfor fair competition,anti-cartel policy, and quality control. At a later stage, general regulationsfor agriculture, forestry, and hunting and fishing must be established according to the new ownership structure and economic managementphilosophy. It will be essential to harmonize Ukrainian legislation related to agriculturaltrade with that of the EU. CHAPTER 4
LAND REFORM AND THE EMERGENCE OF PRIVATE FARMING
4.1 The establishmentof a comprehensivemarket structure and the eliminationof direct Governmentcontrols will improve the performanceof Ukrainian agriculture. The improvementwill be limitedunless the farms can respond flexiblyand individuallyto new initiatives,are able to improve their production technologies, and are supportedby competitiveservices. This chapter reviews land reform and farm restructuringdevelopments, and recommendsfurther actions in these areas.
A. CURRENT STATUS OF LAND REFORM
4.2 Ukraine has gone through three previous "land reforms." The first two reforms were carried out when Ukrainewas part of the RussianEmpire, the third when it was part of the Soviet Union. The most importantof these was the Soviet land reform which was part of a broad economicand agrarian reform program. This reform, begun after the Bolshevik revolution, eliminated private property and involved nationalizationof the properties of landlords and wealthier peasant households. Eventually it led to the creation of large collectiveand state agriculturalenterprises.
4.3 The desired main economic objectivesof the current land reform in Ukraine are to: (a) establish the basis for a functioning land market, through suitable provisions for selling, buying and leasing ,land,and; (b) disengagethe Governmentfrom the managementand operationof agriculturalland and production assets throughtheir transfer to individualreform beneficiariesas property or under a lease arrangement. The establishmentof private ownership of land and production assets is a key element in the transformationof agriculturein the former Sovietrepublics. The first enablingUnion-level legislation was passed by the USSRSupreme Soviet betweenNovember 1989 and March 1990 (the Law on Leasing, the Law on Property, and the Law on Land). These laws permitted individualsand farnilies to hold long-termleases on land within and outsidethe collectiveand state farms, as well as allowingthe granting of individualproprietorship (vladenie) over land. Proprietorshipgave lifetime inheritablerights to work the land, but not the right to buy, sell, or mortgage it. This Union-levellegislation delegated important powers to the republics to pass additional laws on these subjects to provide essential details and mechanismsfor the legal process of establishingprivate land ownership and private peasant farms.
4.5 The first of the relevant statutes adopted by Ukraine was the Law on Peasant Farms of December20, 1991. In addition to allowing lifetime inheritable rights to an individual farm, this law also permits private ownership of land after it has been occupiedfor six years. At that point, the farmer may transfer the plot to another citizen, but only in accordancewith the "decision" of the local council and at a regulated price. The process of land reform is further regulatedby other legislation. The Law on Forms of Land Ownership, effective January 30, 1992, establishedprivate and collective forms of leased property in Ukraine on the basis of equal rights with state property. The Land Code of March 13, 1992, expanded and clarified the provisionsof the Law on Peasant Farms. It allows private owners to lease out their land for agriculturaluse for a term of up to three years. This leasing may apparently be done immediately. However, the Law on Paymentfor Land (July 3, 1992) imposed limits on lease payments. The Law on CollectiveFarm Organizations(February 14, 1992) sets out provisions relating to the distribution of land shares and shares of non-land assets to members of collective (not state) agriculturalenterprises in the process of reorganizationand privatization. 54 Chapter4
4.6 The present legislative framework and government policy envisage collective land ownership as the dominant form of land ownership and the principle of unrestricted private land ownership has not been frilly accepted. There is a clear intention to keep private agriculture as a supplementarycomponent of a farmningstructure based on large scale units owned collectively. Current legislationdoes not provide for clearly delineatedand transferableproperty rights, which are the essence of land reform. The implementationof land reform has reflected this.
4.7 As a result of the land reform laws, independentprivate farms can be establishedby farm members or by those who are not engaged in agriculture at present. A certain level of skills is required from the applicants. The upper limit for the holdings is 50 ha of arable land and the maximum arable plus non-arableholding allowed is 100 ha. Land is provided without any payment with a six year moratoriumon sale, and the hiring of labor by privatefarmers is prohibited. In 1991, a fund was created from 2.5 million ha of so-calledreserve land of questionablequality, and allocatedfor private farming (1.5 million ha of arable land and 1 million ha of pasture); a further 2.3 million ha of fully arable land of average quality was set aside in 1992. All of these lands were formerly used by sovkhozes and kolkhozes.
4.8 Land is also provided to increasethe size of householdplots and family gardens. (The new upper limits are set at 2 ha for household farms, 0.15 ha for family gardens, 0.12 ha for family orchards, and 1 ha for pastures). Allocationof additionalland for private plots is a very useful measure. First, it is a sort of safety net, allowing families to supplementtheir incomesby growing their own food and marketing some products. Second, it allows householdsto gain experience in own account farming and possibly to accumulatesome capital out of the resulting profits, without having to take the risk of losing all wage employment immediately. On April 15, 1992, 2.4 million ha of household plots and gardens becamethe private property of current users without any payment. As of January 1994, about 5 million ha, or 11 % of agriculturalareas are owned and used as householdplots and various forms of gardens.
4.9 The distribution of land to individuals as part of the land reform process is moving relatively slowly (Table 4.1); both because the authorities do not seem to be in a hurry, and because
Table 4.1: Distribution of Land Used by Private Farms
January 1992 January 1994
000 ha % of total 000 ha % of total 1994:1992 Ag. Land Ag. Land (%)
Peasant (Private) Farms 49.0 0.12 619.1 1.5 1263.5 Land in Citizen Property Use: 3,864.0 9.20 5,011.2 11.8 129.7
Subsidiary Plots, 2,589.7 6.20 3,471.1 8.2 134.0 Dacha, etc. Collective Gardening 147.8 0.35 166.9 0.4 112.9 Collective Vegetable 177.5 0.40 287.4 0.7 161.9 Gardening Total Private Land 3,913.0 9.32 5,630.3 13.3 143.8 Source: Ukrainian Institute for Agricultural Economics Land Refonn and The Emergence of PrivateFarming 55 requests for land by future farmers are limited. Uncertainty about future legislation on land ownership substantially limits interest in the establishment of independent private farms. Private farmer organizations believe that land made available for private farming has been of poorer quality and that they are discriminated against in access to inputs and markets. By October 1993, 560,000 ha had been distributed to 27,700 private farms. The establishment of private farms continued in the first quarter of 1994. As of April 11, 1994, there were 29,666 private farms registered, with a total area of 620,548 ha. This is a 7% increase in number and an 11 % increase in area during the first three months of the year, and is directly opposite the experience in Russia where the rate of private farming has declined substantially during the same period.
4.10 There has been much more progress with the other Distribution of Farm Land by Users (1993) component of land reform, namely the "denationalization" of land and its transfer to non-state ownership. StateLands PrivateLands 12% As of January 1993, only 27% of 20% Other Users 1% the agricultural land remained in state ownership, compared to L 100% in 1990. Of this amnount, Reseve nearly 14% is in state farms that are scheduled for future privatization and another 7% is in the state reserve and the local redistribution funds, which are Collectives ultimately intended for distribution 604 to individuals (Figure 4.1). Figure4-1 Although the state is no longer a monopolistic land owner in Ukraine, most of the land transferred by January 1933 had gone into collective, rather than individual ownership. The situation did not change much during 1993.
4.11 The State Land Reform Committee, later renamed the State Land Resource Conmmittee, was established in 1991 to implement land reform legislation. Its main task is the management of national land resources. The Committee works as an independent government agency under a Deputy Prime Minister. Its regional offices provide the technical facilities such as mapping, consolidation, land evaluation, and registration for the land reform, while actual land allocation decisions are made by the local Soviets.
4.12 Present land legislation does not provide a clear framework for full-fledged privatization of agricultural land beyond the areas of subsidiary and household farms. The legal status of collectively owned land, the land already distributed to individual private farrns, and future land distribution is the subject of intense political debate. New legislation is being prepared on land ownership and land use in the framework of a new land code. Many argue for the full privatization of agricultural land, including that presently being used by collective farms. Conservative forces, however, would like to limit full- scale private ownership to subsidiary household and individual private farming, leaving the bulk of agricultural land in collective ownership. This is, more or less, as was envisioned at the beginning of current land reform in Ukraine. 56 Chapter 4
B. RESTRUCTURING OF AGRICULTURAL ENTERPRISES
4.13 The restructuring of the agricultural sector is proceeding mainly through reorganization of existing collective and state farms. The organizational changes in the Ukrainian farming sector began spontaneously in mid-1980, with the promotion of lease contract groups in collective and state farms. The changes developed and deepened during the Soviet regime, when they largely followed the same pattern as in Russia and the rest of the USSR. After the dissolution of the Soviet Union, the reorganization of the collective and state farm sector continued in Ukraine virtually without active government intervention. While Russia sought to reorganize the socialized farm sector by force of Presidential decrees (in December 1991 and then again in March 1992), the Ukrainian Government did not pressure the kolkhozes and sovkhozes to reorganize and did not set out the options and the framework for reorganization until mid-1992. The lack of active support for reforming the socialized farming sector, however, did not prevent nearly one quarter of collective and state farms from reorganizing in one form or another.
4.14 The extent of formal reorganizationof the traditional large-scale farm enterprises is substantial: according to recent AF FormtofReructuring for Statand CollcFtivefEarnis survey results, two-thirds of the sampled farms a creatin -i he o s edbSC on had decided to reorganize by the end of the first condtional landand no-and aset ses quarter in 1994 (Box 4.1). Among the ...... kolkhozes, over 80% had made the decision, b)li --creation: of l74eas:e:oope rativ 0es",::-:as:. compared to only 35% among the sovkhozes. co .partively:indepMndentMsudivisions:. of This may be understandable because of the existing kolkozes and sovkhozes; potential difficulties with ownership of land and c0 conversionof E oeswadsovkhointo joint assets in state farms. However, among the farms Sftock_cpanie,s and that decided to reorganized, fully 85 % registered as collective enterprises, which is an searatiozof f-0d)individualupeasant farms or organizational form essentially identical to the old. . cooperativesfrom te kotkhozor sovkhoz kolkhoz. Most of these collective farms, .. structure.. however, decided to move toward privatization of land by distributing contractual ownership shares Box4.1 among members. Adding to this, another 3 % of farms that formally decided to retain their previous form after reorganization, we conclude that nearly 90% of the reorganizing farms in fact remain collectives under a new name. Among those farms which have undergone more substantial reorganization there are 355 agricultural cooperatives (lease cooperatives) and about 100 joint stock societies. Some new collective farms were created by the division of previous kolhozes.
Moves Toward Shared Ownership
4.15 Between 1991 to 1993, kolkhozes and sovkhozes began to move toward more formnal privatization through the division of non-land assets into "conditional shares." These represent the share of each individual in the total assets of the farm, without physical division of the assets. The shares are formed in two stages: first the state transfers all state-owned assets to the collective (this refers to all Land Reform and The Emergence of Private Farming 57 assets in sovkhozesand to land and social assets in kolkhozes);second, the collectivedivides all its assets into "conditionalshares" by balancesheet value, each share representingpartial ownershipof one worker based on seniority/tenureand actual labor contribution. These shares are non-tradeableand can be used only within the existing farm structure. The division of non-land assets, based on standard accounting values, is psychologicallyeasier to carry out than the division of land, for which, in any event, the necessarylegislation was adopted only in March, 1992. Even the division of non-land assets, however, it is easier to carry out in kolkhozesthan in sovkhozes:kolkhoz assets are owned by the collective,while the sovkhoz assets are owned by the state.
4.16 Land distributionissues within kolkhozesand sovkhozesremain largely undecided. Very few farms have actuallycompleted the distributionof land into "conditionalshares," designating the area each individual "owns." There are only a few cases where the distribution of "land shares" has been accompaniedby actual assignmentof a specificplot to an individual owner. Accordingto a 1993/1994 survey conductedby the Ukrainian Institute of Agricultural Economics, fully 55 % of land in a sample of farms is still in undividedcollective ownership, 5 % is in sharedcollective ownership, with individuals holding certificates of ownership, and only 3% in individual ownership, with physical plots actually assignedto individuals. Althoughland distributiondoes not appear to be an obstacleto internal functional reorganizationof the large scale farms, it is definitely an obstacle to free exit of individuals or groups of individualsfrom the existing farm.
4.17 The introductionof asset shares mightstrengthen the independentbusiness orientationand profit motivationof the intra-farm working groups. The workers of these groups naturally pool their shares and invest them in the "commonbusiness. " Thus, in additionto getting their wages from current proceeds, they also receive a share of the group's residual profit at the end of the year. Other individuals, in particular pensioners,may "invest"their asset shares in the productivesubdivisions of their choice and thus enjoy "dividends"while remaining "passiveshareholders." In the future, this form of organization may develop into a common stock corporation, once share tradeability and management issues are resolved.
4.18 The introduction of asset shares in their present form gives some grounds for concern. Since the conditionalshares created in this way are different for different members, occasionally the shares (paii) are replaced with an appropriate number of equal value stock certificates (aktsii), thus formally convertingthe farm into a joint stock society (aktsionernoyeobshchestvo). Neither the shares nor the stocks are tradeable or transferable outside of the farm. Future earnings are supposed to be divided among members according to a compositeindex, includingboth share value and current labor contribution. The capital representedby the conditionalshares or stock certificates is "anonymous":it is part of a collectiveasset pool and cannot be physicallyidentified by an individual. It cannot be sold and is not freely transferable. The only way for individualsto take possession of physical assets is by declaringtheir wish to leave the collectiveand to start private farming. In this case, some partitioning procedure is initiated to decide what physical assets the exiting individualshould get.
4.19 In Ukraine and other FSU republics, especiallyRussia, several methods have been tested to privatize collectiveand state farms. Amongthem, the IFC Nizhni-Novgorodproject has been the most publicized (Box 4.2) According to this method, farm members and pensioners each receive land and machinerycertificates graded accordingto job and age. The certificatesare then used in individualfarm auctions, in which only the farm's workers and pensionerscan participate. Participants are encouraged to form partnerships with other workers to bid for, and create, viable farm units. The strength of the 58 Chapter 4 scheme is that it avoids the proliferation of ...... poorly-equipped, small-scale farm holdings. :::X-:The:Nizhni-NoygordFarm Privatization Model The auctioning scheme appears to suffer from some drawbacks however. Closed participation * L nd propertyinvently in the auctions implies that an effective producer, - Cltaification-nof and and propertyentitement with land neighboringa collectivefarm, will notlst be able to expand his holdings. Also, a * Calulationuofland and propetyentitlents successful company newly investing in * Approaf the Moel Plan agricultural production will not be able to acquire Stage 1:istriion of Etitlents these lands. The pilot project has also been a The distribut 0ionoflanda rather expensive enterprise. A new decree by the ...... entitlementsto qualitiin inividuals E Prime Minister of Russia, signed in April 1994, ' Pubic infdormationcampaignototinformland andil allows state and collective farms to auction off property...etitement holdersTonthei rrights and land as private property to their workers. Theopos Nizhni-Novgorod pilot project scheme is Stage 2: C 4reatonofNew Interprises and Concldiin recommended to be used as a model, although Contra...c ts...... the farms are free to use other methods as well. * P reparati of foundation.agreementsand- registaion of e terries-- 4.20 The reorganized collective farms Concludig ontr ats. in Ukrainian agriculture so far are similar in 3tage3A Auctions concept to the labor-managed firms in Yugoslavia * Division of the land and proprty of the farm or to the companies managed by so-called intolots enterprise councils in Hungary. These labor Submimssionoofappliations for landand property managed structures, once very popular outside T distributio of land an property tru an the agricultural sector, have largely failed in East auction European countries. Although better than the Soviet administrative-command structure, the St 1ge4: Landand doperty_ Tr ansfr organization is inefficient in the long run because i The transfer of-land andeprope and issuance of pervasive free riding and lack of a real feeling o il of ownership and involvement. Also, the Box 4.2 short-run consumption preferences of the worker-owners may prevail and long-run capital investments may be neglected. The decision processes in such organizations are diffuse, it is impossible to assign individual responsibility, and the worker-owners continually press the "friendly" management for higher salaries and greater social benefits without greater personal productivity.
4.21 No major organizational changes in collectives reorganized this way are foreseen in the immediate future. The existing management structure has remained in place, but voting in the management council is weighted by the size of the individual share or the number of stocks (no longer "one man, one vote"). Experience with voting in collective and state farms indicates, however,that at least initially the general assembly will rubber stamp management proposals and the present managers will retain their positions and power. This method of reorganization should remain strictly a transitory form in the move towards the breakdown of the farms into smaller units such as lease cooperatives, individual private farms, or towards an open stock holding company with transparent ownership. Land Reform and The Emergenceof Private Farning 59
Division of Large Farms
4.22 A fairly common form of reorganization in Ukraine enabled by the asset division philosophyis the "fragmentation"of a multi- village, large-scalefarm into several smaller farms. The smaller scale of the new farms creates a more immediateinvolvement of the workers and a more direct link of the individual with the fruits of his or her labor. The fragmentationprocess also has proved conduciveto rejuvenationof previouslydormant or neglectedvillages. This mode of reorganizationmay be viewed as an extension of the division of the large scale farm into smaller productive subdivisions discussed previously. The number of collective enterpriseshas increasedmore rapidly than the decline in the number of state farms. that are slowly privatized into collective enterprises. The number of collectivesincreases not only due to the reorganizationof privatized state farms as collectiveenterprises, but also due to the fragmentationof large-scalefarms into smaller entities.
4.23 Fragmentationprocesses in large-scalefarms, however, do not extend as far as creation of large numbers of private farms. Individual members of collective and state farms do not show a particular readiness to leave the collectivein the process of reorganizationin order to establisha private farm. In a sample of farms surveyedin 1993/1994by the Ukrainian Instituteof AgriculturalEconomics, only 17% of the enterprises reported that members and workers had left to start private farms. The average number of private farms establishedby former members is less than one farm per collective enterprise.
AgriculturalCooperatives
4.24 The agriculturalcooperative is in fact a conglomerate,or so called "lease cooperative", created by a functional subdivision of the existing farm structure. The lease cooperative is a good transitionalmodel and is being chosenincreasingly. It allowssmaller farm units to emerge, that can later be changed or subdivided further if initial subunits are unsuccessful,or too large, or if the members become sufficiently confident of their abilities to want to begin own-accountfarming. It allows the gradual division of collective and state farms into independentprivate farms and/or multiple service cooperatives.
4.25 The general principle is to divide the collectivefarm into smaller functionalgroups that will assume financial responsibilityfor their operation. So far, most lease cooperativesare not legal bodies and have no independentstanding outside the main farm. They only have internal accountsin the collectiveor state farm accountingdepartment and do not keep business bank accounts outside the main farm. The old large scale farm structure is still the only organizationvisible to the outside world for purposes of product marketing, input supply, and financing.
4.26 Recent privatization legislation has been encouraging traditional lease cooperativesto incorporate. This requires decisions regarding dispositionof assets by the general meeting of collective members or by state farm management, although it can proceed on the basis of existing leasing arrangements, without actual privatization or division of collective/state assets. These arrangements automatically induce a de facto transformnationof the traditional centralized large scale farm into a "federated"structure or an "associationof enterprises," without decidingany of the ownership issues.
4.27 Privatization legislation and pressures to reorganize have also spurred the creation of independentlease cooperativesas legal entities outside the existing farm structure. These cooperatives 60 Chapter 4
are formed by a number of persons who lease some of the land and other assets of a collective or state farn. They sometimes extend their activities beyond the traditional livestock and field crop operations by establishing regional services, such as repair shops, garages, transport services, construction teams, or even road building teams.
C. EMERGING INDEPENDENT PRIVATE FARMING
4.28 Independent private farming, based on farmers who own their land and ...... produce outside the collective framework, has ndependentF er Profle begun to emerge following the liberalization of ... Acorgtoa 99199~4 srecoducte.by.... the politicalsystem (Box 4.3). The establishment theUaine institute ofAgriculturalEconomics, atypical of independent private farms is also supported by indepenent- farmerinW Ukraie ismarried with 1.7 subsidized credit. The Association of Ukrainian cldren 42 yers old, has. :lived'i arua areatsince Farmers and the State Farmers Support Fund ..-birth,fand&has hgeor secondaryeducation. Many of also play an important role in providing (%.of.them. fa..er.s.inthe survey).ar.eformeembers of collectives,m*ainlyf ticit s or farm managersi guarantees for farmners' bank loans. Financial o.10 .. neasily .. reet theski.lequirements and havego od support, credit subsidies, and loan guarantees 00batnectionscon with local authorities. AtUrii privae play an important role in the establishment of .fahnnreliesmainlyon-extended familylabor. Lessthan:4% private farms, because, as survey results of4tefarmsi-sn the sCmar ple-eploy penenthired-lb or, indicate, many farmers leave the collective with butxoverhiredlabo 20%use ar sbtanial se lage than farmPxhiredlar. nsemployin tht deen very little land (around 4 ha on average) and labor ...... without their share of assets (asset division is often delayed by the collective's failure to decide Box 4.3 on reorganization and distribution of asset shares). The private farmers are thus undercapitalized and have difficulties with providing collateral.
4.29 The most conspicuous result of the new legislation is the rapid increase in the number of private farms, which grew from around 2,000 in 1991 to nearly 30,000 in April 1994. However, the contribution of private farming to the total agricultural product is still only on the order of 1 %. The average size of a private farm in Ukraine is just under 20 ha, compared to an average size of over 3,000 ha for a kolkhoz or a sovkhoz. Private farmers may own up to 50 ha of agricultural land and up to 100 ha of all land. Land up to the district per-capita average is allocated free, while land in excess of the district average is leased and might be purchased at a later stage. However, according to 1993/94 survey data, less than 5% of farmers had plots of more than 50 ha, and nearly 50% of the farms were of less than 20 ha (Figure 4.2). Most of the land in private farms is arable. Areas under gardens, haylage, and pasture are very small on average.
4.30 Less than 20 % of the farms participating in the 1993/1994 survey own their land. In most cases, land is in traditional old forms of tenure: lifetime inheritable possession (65% of farms) and usership (20%). Only 12 of 645 farms lease land, but these farms are larger than average (56 ha) and the leased area is relatively large (41 ha on average). Collective farms in the area are a major source of leased land (in addition to the state), while leasing from private individuals or other enterprises is not practiced yet. The land tenure structure of an average farm is 60% in lifetime possession, 20% in usership, 15 % in private ownership, and 5 % leased land (Figure 4.3). Virtually all farmers in the survey (95%) report that they have a document for their land, but only 60% are confident in security of their Land Reform and The Emergence of Private Farming 61 tenure.
istribd ion d RivEdeFirms by Size(Der 93)
253
15
0-4 5-10 11- 21- 31- 41- 51- 71- > ha ha 20 30 40 50 T0 100 100 ha ha ha ha ha ha ha Hadsae per(Iam
Figure 4.2
LandTanure an FPivra Foms (t3-94 9urve Ode
Usership
Rivate Uwnrsh~ip 1 t L2i miP session
Figure 4.3
4.31 The production mix of private farmers is differentfrom the traditional Ukrainian pattern and from the traditionalpattern of household farming. Only 35 % of farmers surveyedproduce livestock products, and nearly 90% of the farmers grow crops (Figure 4.4). The two main reasons cited for not keeping animals are low prices of livestockproducts and insufficientland for growing feed. Consistently with this product mix, private farms derive around75 % of sales from crop products, 20% from livestock products, and 5% from non-farm activities. Crop yields on private farms are 20-30% below yields on the state and cooperativefarms and 30-40% below yields in Central Europe. Milk yields on private farms (3,500 kg per cow per year) are higher than the Ukrainian average. 62 Chapter4
Structureof Productionby Farms(93)
Private Farms
Households
Collectives
T otaljX_
* __ _ _ i _1 I I | ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I 0 10 20 30 40 50 60 70 80 so 100 Figure 4.4
4.32 The Ukrainian private farms participating in the survey definitely have a commercial orientation. Over 70% of total family incomederives from the farm. The main cash crops are sugar beet and sunflower (90% of the harvest sold), followed by grain (75% sold). These crops are sold mainly to the state. In livestockproducts, half the milk and 20 % of the meat is sold, but not exclusivelyto the state. Low prices of agriculturalproducts is the main marketingdifficulty mentioned by commercialproducers. Payment delays are a serious difficulty only for products sold mainly to the state (grain, sugar beet, sunflower). Half the producers complain about difficulties with transport for their products. Private farmers report that they are subject to state orders for grain, but not for other products.
4.33 Private farmers buy their farm inputs mainly from state channels and the collectivefarns in their area. Collective farms play a particularlyprominent role in providing mechanical field services to private farms. This is not surprising in view of the lack of agricultural machinery among private farmers. Emerging private suppliers play an increasing role in farm inputs, especially in seeds, farm machinery, spare parts, and fuel. Some private farmers actually act as suppliers of farm inputsto other farmers. The main categories of inputs supplied by private farmers are mechanical field services and young animals. There are no serious complaintsabout shortagesof any farm inputs.
4.34 New forms of cooperationappear to be developingamong the individualprivate farmers. Main areas of cooperation among farmers participating in the 1993/1994 survey were professional consulting(57 % of farmers), shareduse of agriculturalmachinery and equipment(32 %), joint agricultural production (29%), marketing (16%), and input purchasing (12%). More than 10% of the farmers stated that they were members of a farmers' cooperative.
4.35 On the whole, private farmers appear to be relatively well-off and optimistic. Nearly 60 % of private farmers in the survey say that family incomeis sufficientfor daily needs, althoughit does not permit purchasing durable and luxury goods. Only 10% complain that their income is insufficient to meet the minimum standardof living. Againstthis group of low-incomefarmers, there is another 10% group who say that they do not experienceany material difficulties. Only 10% of the respondentshave a pessimisticview of the future. Around 40% are optimisticand another 40% have no opinion. Land Reform and The Emergenceof Private Farming 63
D. CONTINUATION OF LAND REFORM AND FARM RESTRUCTURING
Creatinga New Farm Structure
4.36 The establishmentof market structures and the eliminationof direct governmentcontrols (even in their present form) will improvethe performanceof Ukrainian agriculture. This improvement, however, will be limitedunless combinedwith a further reforming of ownership and managementat the farm level. The ultimate objective of agriculturalrestructuring should be the creation of a sector of independent, privately-ownedand managed farms that are free to change their farming methods and output mix in response to evolvingproduct and production technologyand changes in input and output prices. The process of restructuringof agriculturalenterprises will be encouragedby continuedprogress in price liberalization, privatization, and development of competitive structures in the marketing of agricultural output and inputs, and scaling back of producer subsidies. The latter is particularly important, because continuationof what is sometimes referred to as the "soft budget constraint," or routine covering of enterprise losses by direct governmentsubsidy or loans that are not expectedto be repaid, allows enterprises to ignore market signals and continueinefficient operations.
4.37 The decisions regarding the future organizational structures should be made by the farmers, based on information and advice provided by state and independent sources. The specific implementationat the farm level shouldbe as flexible as possible and correspondto the diversity of local conditions. The newly created structures shouldremain open to amendmentor change, even dissolution, if decided by the owners. The establishmentof grassroots organizationsshould be promoted, together with the political liberation of villages. Farmers should also be allowed to hire independentconsultants to assist them in the complicateddecision process of restructuring.
4.38 It is not possible to predict what structure of agriculture will emerge and what the mix of larger and smaller enterprises will be, nor is this the key issue. In all probability, there will be a mixture of smaller, private or family farms, large corporate-typefarming and variations of cooperatives and looser associationsemerging out of the existingkolkhoz/sovkhoz structure. Western European type familyfarming will probably emergefairly slowly. However, in all cases, the key to creatingan efficient structure is the clarity of the definition of ownership rights, the lack of restrictions on use (except for environmentalregulation), and the efficienttransferability of titles or leasesto the most efficientfarmers.
4.39 The sector of small, independentprivate (family)farms will emergegradually as farmers gain experience and accumulatecapital, and as the input and output marketing systems evolve to meet their needs. The pace at which private farming emerges depends strongly on the evolutionof the supply of capital and labor. Experience has shown that shortages of either capital or labor can constrain the developmentof private farming.' There is already a shortage of capital in Ukraine in two senses: first, the weak financialpositions of most families will make it difficult to acquirephysical capital and finance inputs needed for private farming; second, the availabilityof capital goods suitable for smaller family farms is limited.Moreover, the input supplyand crop marketingsystems are likelyto remain ill-equipped to meet the needs of small farmers for some time. On the labor side, the low rural reproduction rate
I See Hans P. Binswanger,Klaus Deininger,and GershonFeder. Handbookof DevelopmentEconomics, Volume m. April 1993, World Bank. 64 Chapter 4
limits the availabilityof labor for family farming. Effective farm restructuringhowever may release a high proportionof current farm labor, therefore, negatingany labor shortage in the short term. Although labor may be released as the result of industrial restructuring, it is not clear that these workers can be induced to return to the countryside either as hired labor, or to start their own farms. The latter will require finding ways to provide land for urban to rural migrants.
4.40 Even with modest growth in numbers,a large proportion of the private farms created can be expectedto run into financial difficultiesand fail within the first years of their formation. This will constitute a natural "weeding out" process and should not be regarded as a "waste" of resources or an undue social hardship because of the institution of the family plot, which constitutesan effective safety net for the agricultural population. More important, it should not be considered a reason to expand govermnentsubsidization of agriculture in general or newly emerging farmers in particular. This can only lead to the creation of a new class of inefficient,dependent farmers.
FurtherRestructuring of Collectiveand State Fanns
4.41 The main task at this moment is to maintain the momentum of reform by amending existinglegislation and creating the necessaryoverall economicand market framework for restructuring large scale farms. In the process, state farms should get the same treatment as collective farms. The restructuring of collective and state farms should be continued in line with the goals of creating a market-basedeconomy, and should be guided by three major principles:
* separationof production activities from social and municipal functions;
* distributionof land and other productiveassets to the membersin physicallyrecognizable form and not as anonymousshares; and,
* freedom for members to decide about future organization of production after the distribution of land and other assets.
4.42 If Ukraine is to be a fully functioningdemocracy, people engaged in farming shouldhave a free choice as to how they wish to conduct their farming. The farmers themselves should decide whether to farm individually,in small groups, in cooperatives,in joint stock companies,or in any other form they choose. Different individualswill prefer different solutions and will choose different forms of voluntarycooperation. It is the Government'sresponsibility to ensure, throughappropriate legislation, that a true sense of private ownership of land, assets, and profits is created: division of shares must be implementedin a way that creates a direct link between the individual and the fruits of his labor, and return to owned assets. Moves from one form to another should also be free according to the rules of a market economy (trading and leasing land or shares).
4.43 The reorganizationof existinglarge scale farms is probably the most complextask of the reform. The overall objectivesof reorganizationand privatizationare seldom questioned, howeverthere is a widespreaddisagreement on the timing and pace of changes. There are two views concerningthe rate of change. The majority view is that change shouldbe slow and gradual. Those who hold this view refer to the human heritageof the past system,the historicallyunderdeveloped markets, the lack of capital and infrastructure, and other bottlenecks. They are concernedthat a rapid dismantling of the highly inefficient,but still functioninglarge scale farming system might lead to a sharp decline in production Land Reform and The Emergence of Private Farming 65
and to the loss of production facilities and technology. They advocate a step by step transition, which tests various forms of ownership and managementfor adoption in a 5 to 10 year agricultural reform process. The minority view favors immediateand basic reform measures. While immediatechanges are needed, especially in order to create the minimal conditions for a market economy, the experience of Cemral Eastern Europe indicates that the large scale farm restructuring cannot be fully implemented immediatelyand a full completiondoes require time and rather careful management.
4.44 An importantprecondition for the further reorganizationof farm enterprises in Ukraine is the decision concerning the future disposition of the social infrastructure in the rural sector. The production and social aspects of state and collective farming need to be separated, and managed and financed independently, thus enabling the production system to focus on efficiency and profitability, without the burden of social activities, which should be properly entrusted to a separate local authority or user associations. The linking of social benefits like housing, medical care, and education to employmentunnecessarily restricts choice of employmentand worker mobility.
4.45 Assets shouldbe classifiedinto three clearlyidentifiable categories: housing, social assets, and productiveassets. As a general guideline, all housingshould be transferred to the ownership of the permanentresidents and all social assets and servicesmust be entrusted to the local municipalauthorities or user associations,which will need to receive resourcessufficient to carry out these new functions. The new tax structure could consist of a land tax, value added tax, and incometax. These would have to be harmonizedwith the nationaltax system. The land tax could be envisionedas the major source of income for local governments, supplemented by unrestricted grants, or revenue sharing, by the central Government. The Governmentshould facilitatethe appropriateand quick changesrequired in financing and managing local municipal structures to create conditions for the transfer of social assets and to transform the level of rural social services.
Promotionof IndividuallyOwned Private Farmingand FarmersCooperatives
4.46 The internationalevidence is persuasive that individuallyowned and managed private farms achievegreater total factor productivitythan collective or state farms. That is, they are likely to get more output per total input in land, material inputs, and labor than collective or state farms. Individually-ownedfanrs are more likely to ensure effective harvesting, storage, and transportationof production, since any lost production translates directly into lost income for the farms. This will help to reduce the large on farm and post harvest losses presently suffered in the collectivized sector, and increase food availability in the cities. Evidence from other countries suggests that when individually-ownedfarms exist beyonda certainnumber, individualfarmers help create effectivedemand for new, competitivesources of supply for inputs and channels for marketing, storage, processing and distribution.
4.47 Meeting the Needs of Private Farmers. Early experience indicates that there is greater reservationabout private farming than originallyexpected. Most collectivefarm members are reluctant to become independentprivate farmers. This may be because conditionsfor the establishmentof fully independentprivate farming do not exist in most places and only a few of them have the skills for farm management.
4.48 The reasons for limited interest in individuallyowned farms are complex. New owners are asked not only to acceptthe normal risks of agriculturalactivity, but the additionalrisks of transition. 66 Chapter 4
Under present circumstances,independent farming is very risky. Individualsdo not yet have complete confidence that they will be able to keep the fruits of their labor or that reforms will be permanent. Uncoordinatedchanges in institutions, laws, market structures, barely functionalmarkets, and general stabilizationprograms have created an environmentin which real incomes fluctuate, relative prices shift strongly and exchange rate changes are large. These risks, together with low profitability make privatizationseem less attractiveto farmers. Moreover,there are indicationsthat at least some individual farmers are being allocatedmarginal and inaccessibleland by the authorities. In accepting the path of individualfarming one may risk the disapprovalof colleaguesand friends. Fear of losing social services is another reason to stay with collective farms.
4.49 Beyondprogress in economicstabilization and overall market reforms, further specific actions are required in order to promote the creation of individuallyowned farms. This would include:
* creation of a proper incentive framework with the right of retaining profit for development;
* decontrol of input and commoditymarkets and developmentof free and competitivemarkets;
* creation of a competitiveland mortgagesystem for financinginvestments, including purchase of new and used equipment;
* developmentof a competitivebank credit system for financingthe establishmentof farms;
* safeguardingan appropriatelevel of rural social services;
* strengtheninginfrastructure and transportationsystems for the rural sector; and
* establishmentof appropriateadvisory and extension services.
4.50 The growth of individually-ownedfarms will largelydepend upon the developmentof the farm support sector: material/technical supply, agricultural services, marketing of agricultural commodities. The current farm support system is designedalmost entirely to serve large scale state and collectivefarms. Without the establishmentof competitivemarkets for inputs and outputs, the private farms will remain dependenton local authorities. At present, farm restructuringand the creation of private farms appears to be proceeding faster than privatization of the input supply system or output markets. The uncompetitive input supply and product marketing systems could become serious constraintson privatizationof primary agriculture unless developmentof a private input supply system and output marketing is accelerated.
4.51 The Future of HouseholdFarms. Householdfarming, cultivationof private plots on state and collectivefarms, and urban gardenswill remain an importantelement of the systemduring the period of transformation,making a substantialcontribution to the overall productionand food supply. Enlarged household plots can serve as starting points for individual private farming specializing in production systems with labor intensivehigh output value per unit of land. Support provided to household farms shouldbe similar to that provided individualprivate farming. It shouldpromote the further development of these farms into full fledged independentprivate farms and improvementof their efficiency through better input supply and advisory services.
4.52 Farmer Cooperatives. Production cooperativesare almost unknown in the West (with Land Reform and The Emergenceof Private Farning 67 the exception of Israel). World-wide experience suggests that production cooperativesare not a very successfuland efficient form of organization. Empirical evidenceindicates that agriculturalproduction succeeds better on individually managed private farms. Service cooperatives, which specialize in provision of agricultural inputs and marketing of agricultural products, are the dominant form of cooperatives in the West. The establishment of service cooperatives relieves the farms of the responsibilityfor marketing and purchasing activities and enables them to concentrateon production. Service cooperativesoften establishprocessing facilities, that improvemembers' welfarethrough vertical integration into high value added processing. Cooperatives can also develop local and regional infrastructure. Another important function of cooperativesmay be to provide accounting,financial, and professionalservices.
4.53 Cooperativescould emerge from the former large scale farms alongthe lines of the Israeli "moshav" model. This would involve private agriculturalproduction, based both on family farms and on larger multifamily enterprises, supported by a range of service cooperatives. These cooperatives, organizedon a voluntary basis by the producerson the basis of their specificneeds, mightbe responsible for agricultural machinery, for purchase and delivery of agricultural inputs, or for shipping out and marketing of agriculturalproducts. The service cooperativescould be organized regionally by function and enterprise, as is common in Western countries, e.g. dairy, poultry, or fruit and vegetables cooperatives. New private service cooperativescould be based on the core of the existing cooperative farms, but farmers should be free to choose the forms of cooperation they prefer, and the new cooperationmust be based on private ownership and competition.
4.54 The establishment of service cooperatives should not rule out the establishment of private firms in the same lines of business. Competitionbetween the two forms of organizationwould improve the economicefficiency of the system by providing the producers with more options. Since there is no experiencewith private cooperativesand only limited informationavailable, internationalaid might be sought to provide training programs and direct technicalassistance.
ImprovingLand Legislationand Land Titling
4.55 Althoughconsiderable progress has been made towardestablishing a legal frameworkfor private ownership of land and other assets, the existing laws should be amendedif they are to support progress in land reform. The recommendationspresented below are rather close to the solutionsincluded in the recently prepared draft land code.
4.56 If this draft law is passed by the parliament, Ukraine will have one of the most progressive approaches to land privatization among the FSU republics. According to the draft, every collectivemember will receive a so called "averageland share" with full private ownership and titles above the already increased size of household plots without payment. Private farmers who were not members of collectivesor state farms will be entitled to receive the same amount without payment. Additionalland (mainlyreserve land presently used by the kolkhozes and sovkhozes, about 2.8 million hectares) will be sold. There are debates around how the size of the land shares shouldbe established, should sizable amounts of land remain in state ownership, how the land price should be set.
4.57 Nature of the Land Rightsto be Provided. In addition to providing physicallyidentified average land shares to beneficiaries,the Land Code should be amendedto give the immediate right to buy, sell, and lease agriculturalland beyondjust householdplots and private farms. Sales and purchases 68 Chapter 4
should be pennitted directly between private individuals, without the intervention of the local council, a "Land Bank," or any other state agency. Allowing land transactionswould foster creation of a land market, give land a predictablevalue upon whichprivate farmers and lenders can base businessdecisions, allow the most efficient and most highly motivatedprivate farmers to expand their land holdings, and enable prospectivefarmers with land shares to start their own private farm.
4.58 Leasing of land is seriouslylimited by the provision in the Law on Payment for Land that the rent or lease paymentscannot exceed the amount of the agriculturalland tax. This discouragesa free land-rental market, since the highest "averageland tax rate" for any region outside the City of Kiev is an unrealisticallylow 161 rubles per ha per year. The law shouldbe amendedto allow rental levels for agriculturalland to be freely negotiated between parties.
4.59 Free distribution of up to 50 (or 100) ha from the land reserve should be terminated. Land shares allocated to collective farm members in the reorganizationof their farm enterprises will average 4-5 ha nationwide(as little as 1-2 ha per share in the densely populatedWest, as much as 8-10 ha in the sparselypopulated South). It seemsinequitable to allow individualsto acquire free much larger holdings from the reserve. Instead, market transactions should be relied on to allow individuals to acquire land sufficient to start a private farm, and reserve land should henceforth be sold to peasant farmers at market prices.
4.60 Supportinga Land Market. Consistentwith the aim of encouragingthe formation of a land market, a "LandBank" with the exclusivepower to buy and sell land shouldnot be established. The exclusivityof the Land Bank would destroythe land and mortgagemarkets, as it would dictate all prices, interest rates, and loan conditions. No developedcountry has a Land Bank with such sweepingpowers. Instead, a Land Bank in Ukraine might be given very limitedpowers, such as the initial sale (and perhaps improvement)of certain categories of government owned lands, or the provision (in competitionwith other banks) of some agriculturalcredit, but mainly it should be a marketing agent for land.
4.61 Proper legal infrastructurewill be needed to support and facilitatea market in land. This should includeclear legal provisionson mortgagingof land, necessary not only to obtain credit for land improvements,but also importantfor most purchasesof land from another individual. In most developed countries, land is not purchasedprimarily with the buyer's own savings, but with the proceeds of a bank loan or other credit securedwith a mortgageor an equivalentsecurity interest on the land being acquired. Licensing of real estate brokers, a useful profession if a land market is to function well, should also be considered. The training of a cadre of such brokers may be an important area for technical assistance.
4.62 Qualityof Land. The legislationshould specify that land providedunder land shares must be of average quality, or adjusted in size in accordanceto average quality, and located as close as is practicableto the farmer's house. It should also be specifiedas to who shall be eligiblefor averageland shares and under what conditions. It shouldalso be made clear that this will not be reserve land, unless a specificpiece of land from the reserve is requested. Such a provision is important because it appears that a substantialproportion of reserve land is of less-than-averagequality. The current Land Code does not provide sufficientspecificity or protection on these issues.
4.63 The ApplicationProcess. The time needed to process and approvean applicationfor land under the Land Code varies widely from oblast to oblast and rayon to rayon, but field interviews indicate that too much time is often taken. Frustration with the applicationprocess may have been one factor in limitingthe number of applications, although there is no firm indicationthat is indeed so. Land Reform and The Emergenceof PrivateFarming 69
4.64 Three changes would help resolve the application problem:
* the time period for action on the application by the local council could be changed from the unrealistically short period of one month to a more realistic three months. In general, applications of those who want to leave the collective farms or establish independent private farms should be processed without bureaucratic delays.
* village councils should be instructed to meet every month as long as they have applications pending, instead of once every three months; and
* instructions should make clear that an applicant can settle on his land as soon as there has been a final approval from the rayon level authorities and not have to wait additional weeks while a formal title is prepared and issued.
4.65 Need for Land Titling. As more and more land and property passes into private ownership, the need for a safe and economical system to register land titles, mortgages, and leases will grow very rapidly. Less than 100,000 acts have been issued to certify private rights of ownership of land and property, or permanent use of land, but many more applications have been submitted and approved. The market in land and property is not yet operating effectively and the infrastructure required to process titles as collateral to obtain credit is also very limited. Nevertheless, the development of a private land market must be anticipated and will need to be supported by a safe, simple, and affordable system of land registration. This will be an enormous task that may take more than a decade to extend throughout the country. A national strategy should be developed as early as possible and tested and improved by local pilot projects.
4.66 Most urban areas have been mapped at scales between 1:500 and 1:2,000, and agricultural areas at 1:5,000, 1:10,000 or 1:25,000, but most of these maps have not been updated in many years. A highly developed land use cadastre is maintained annually throughout the country, but it has not yet been computerized. This cadastre has 67 categories of urban, agricultural, water, and forest land use, and about 23 categories of land users. This information and the topography mapping will provide a useful starting point for the proposed land registration system.
4.67 At present, a record of land titles issued may be kept either at the village council or at the rayon. A modern land titling and cadastral system is a critical element of the land reform process. USAID is providing substantial support concerning urban land issues while several foreign donors (Canada, France, Germany) support pilot projects in agricultural land registration. There are two options being considered in developing the land registration system: a) a complex land information system which also provides ownership information; b) developing first a simple system based on existing Ukrainian information for land titling, ownership registration, and for taxation purposes and leave the more complex elements of the land registration system for a later stage. The development of a new system should be accelerated along the lines of option (b) above. Foreign technical assistance should be continued in order to facilitate this process.
E. AGRICULTURAL EXTENSION SERVICES
4.68 The breakdown of the state order system and the transformation of the collective and state farms is increasing the need for information services and farm management advice. New private farmers 70 Chapter 4
will have to learn the skills associatedwith organizing and running market oriented farms.
4.69 To assist the multitudeof new farmers, there is an urgent need to introducean efficient agricultural extension service. Such a service, as known and understoodin the West does not exist in Ukraine. In a top down, commandeconomy, a service approach bringing new informationto farmers, helping move informationon best practicesamong farmers and helping farmers diagnosetheir operational and economicproblems was not necessary in the "agroindustrialcomplex" system. Production orders were issued, inputs supplied, and sometime later output was procured.
4.70 Agriculturalextension, as known and understoodin the West, does not exist in Ukraine. In a top down, commandeconomy, a service approachto bringing new information to farmers, helping move informationon best practices between farmers and helping farmers diagnosetheir operational and economicproblems was not viewed as necessary. In the previous system, there was no need for such a service. The large farm size allowed for on-farm expertise, or direct access to such expertise. Furthermore, to be sure that the systemfunctions accordingto planned objectives, the MOAF has some 7,000 plus employees at the rayon level and 2,000 or so at the oblast level. These officials are reasonably well qualified agricultural, livestock, and/or machinery specialists. Although it is a supply-drivensystem of extension, it neverthelesscan, when ordered, move informationout and blanket the farms of the country relatively rapidly--withina week or ten days.
4.71 There are institutionalassets in place that can be usefully built on to develop an extension service that could work effectively in a market-orientedfarming system. First, there is a cadre of relativelywell trainedprofessionals in a number of technicalareas of importanceto Ukrainianagriculture. These technicians tend to be from farm areas and identify their own futures with that of agriculture. Second, there is a tradition that places significant, although not total, financial responsibility on the recipients for advisory services from universities and research institutes.
4.72 While an extensionservice may not be in place that would operate effectivelyunder open market conditions,there are assets in place that can be usefully built upon, i.e. especially the relatively well trained professionals in a number of technical areas of importance to Ukrainian agriculture. However, informationto farmers to a large degree continuesto be seen as adjunct and supportive to the state guided production system. With the move to privatization and a market economy, the current system in place for managingagricultural information is not workable nor financiallysustainable. The breakdownof the state ordering system and the independenceof agricultural producers are giving rise to new demands for agricultural informationthat did not exist a few years ago.
4.73 The basis on which to build a modern agriculturalextension service exists. There are large numbersof well trained, experiencedagricultural specialists. In addition,there are the other formal and informal information communicationchannels such as TV and radio, farmers clubs, associations, local government institutions, and schools that play some of the traditional functions of extension. However, Ukraine needs to avoid the creation of a large cadre of governmentextension agents. The cadre of extensionistsshould be small: first, a smaller service could be more responsive;second, the big state and cooperativefarms, while transforming, will continueto have technicalpersonnel on their staffs; lastly, the Government and the farmers are financiallyable to sustain only a relatively small extension system.
4.74 Information resources are as important as the classical resources of land, labor and capital. Restructuring,government interventions in agriculture, and the privatizationof agriculture, give Land Reform and The Emergenceof PrivateFarming 71
importance to the developmentand managementof information resourcesfor agriculture. Information is needed by farmers on a wide range of topics including: new technology,such as new varieties, small scale machinery;best practices developedby farmers themselves;market and price information;practical on-farm principles, such as mixing feed ratios; and farm management.
4.75 A major responsibilityof Government is to promote and oversee the developmentof agricultural information services -- in both the public and private sectors. A grant program could be implementedwith agricultural universitiesto help. The exact parameters for an extension capacity in Ukraine need to be formulated. Over the course of the next year, a task force should be formed to develop a strategy.
4.76 An improved and reoriented extension service should be based on the following main principles: (a) the delivery system for advise should be cost effective and competitive;(b) the service should be demand driven by the potential customers; (c) in order to reach small scale farmers, extension groups need to be established, and the extension service has to work with farmers' organizationsand cooperatives;(d) the role of the MOAF is to be reduced to a minimum; and, (e) Government's financial contributionshould be tailored to the needs of lower income producers.
4.77 Since the main focus and emphasisof the extensionsystem would be on the private sector, the role of MOAF would be minimal,but it will be responsiblefor monitoringextension activities carried out by associations of farmers' organizationsand cooperative federations, provide guidance on new MOAF strategiesrelated to extension, and provide vital links with the agriculturalresearch and education establishment. MOAF would also be responsible for administeringthe state budgetary support for the service.
4.78 Ukraine requires assistancein the followingfields for the implementationof the proposed extension service: (a) support for strengtheningof MOAF's capacity to facilitatethe implementationof this service; and (b) assistanceto farmers' associationsand cooperativeswhich are potential agenciesfor the delivery of extension services. 72 Chapter 4 CHAPTER5
COMPETITIVELINKAGES FOR PRIVATIZEDAGRICULTURE
5.1 Ukrainian farms were reasonablywell suppliedin the past with variable inputs, livestock services, and machinery. The supply and procurement system was monopolisticand worked with the relativelysmall number of large state and collectivefarms that dominatedprimary agriculturalproduction. This system placed no premium on timely delivery or purchase, neglected issues of input and output quality, and on the whole, demonstratedvery little flexibilityin meetingfarms' needs for a wider variety of inputs and services. While Ukrainehas made progress in privatizing land ownershipand restructuring large scale farms, the supplyand procurementinstitutions have undergonerelatively modest change. This old input supplyand product marketingsystem is functioningwith great difficulty and is on the verge of collapse. If the emergingprivate nature of primary agriculturalproduction is to be matchedby efficient, productivity-increasingupstream and downstreamsectors, then the Governmentmust develop a coherent program of privatization, demonopolization,and promotion of competition. These tasks, discussed in this chapter, represent a more complexchallenge than the issue posed by land reform.
A. AGROPROCESSING
Current status of the sector
5.2 The agroprocessingsubsector consist of 7,600 agroindustrialplants (Box 5.1). Of these, 2,250 are primary processingplants, and the rest are secondaryprocessing plants. The main products of these plants are sugar, edible oils, meat, milk and dairy products, and canned and dried fruit and vegetables. There are also of potato and flax processing operations. Secondaryprocessing industries include bread baking, pasta making, processingof vegetableoil and the beverage industry, includingthe distilling of alcohol and spirits, wine making, beer brewing, as well as soft drinks and mineral water bottling. Full capacitiesof food processingindustry have not been utilized in recent years, and outputs in most cases are constantly declining. Declines in livestock based processing have been substantial, declining nearly 30% from 1992 to 1993 (Table5.1).
Efficiencyand technology
5.3 Most of the agroprocessingplants are old or inefficient and could not operate under competitiveconditions. In some industries(like sugar), plants are too small to compete internationally. Investmentswill eventuallyhave to be made in most plants to lower production costs, improve product quality, broaden product range and conform to environmentaland sanitary standards. Some of these investments will require that plants operate at a minimum efficient size considerablylarger than the present production level. Considerable changes in the structure of these industries will therefore be needed in the coming years. 74 Chapter 5 111.1...... 1.11 --- --.. .11.1-1.111.11-1-1- -1-1-1.-...... -.1 -- ''.... .1. - I...- -..- - . . --. 1-1.1-1--- ...... I.....-. 1...... - --- ,.-----...... - I.... -- -....- .1l.l..,..,.,.,..,. . . . ..... 'll ,.,."..' 'I." , , '.. ..... ..... ..... .. .... , . . 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Table 5.1: Major Production of Food Industry, 1992 - 1993
Products Units 1992 1993 1993/1992 (%)
Meat and meat products thousand 1624 1181 -27.3 tons Sausage 630 471 -25.2 Milk and milk products 3958 2715 -31.4
Butter " 300 310 3.5
Cheese " 112 101 -9.5
Vegetable Oil " 786 706 -10.2
Margarine " 249 173 -30.5
Fish " 404 261 -35.4
Canned products Millions 2882 2726 -5.4 of cans Granulated sugar from beets thousand 3534 3838 8.6 tons Granulated sugar from imported cane 291 550 88.9
Confectionery products 813 643 -20.9
Bread and bakery products 6192 5257 -15.1 Source: MMmistryot Statistics
Ownership and Management
5.4 Agro-industries are administered by the Ministry of Agriculture and Food (MOAF) and the State Committee for Food Processing (SCFP). The MOAF, through the milk and meat "concerns," controls all of the approximately 700 dairy and the 150 industrial meat processing plants. Through its oblast and rayon officials, the MOAF also controls any processing on the state and collective farms and in the Inter-Farm plants which constitute almost half of the country's 1000 feed mills.
5.5 The Grain Department at the MOAF, created from the former State Committee for Procurement of Grain and Distribution of Bread Products, contracts a total of 330 integrated elevators, 100 of which are large feed and flour kombinats, as well as 400 bakeries. In addition to procuring grain for bread production (which may involve the import of certain grades), the organizations under this department procure the necessary protein ingredients and other additives for all feed mixes produced in Ukraine. Most remaining processing operations, including the 192 beet sugar factories, 18 vegetable oil mills, and one third of the country's approximately 1,000 canning plants, as well as most of the secondary processing industries, are run through industry-specific "Associations" under the SCFP.
5.6 The Ministry of Trade operates the "Gastronom" chain of food stores and other outlets that are the main distribution channel for food products in urban areas. The village cooperative, CoopSoyuz, a national independent organization under the jurisdiction of SCFP, operates some food stores in the cities, but is mainly involved in distributing merchandise in rural areas. 76 ChapterS
5.7 Most of the large primary agroprocessingfacilities in Ukraine are owned directly by the State, through the Office of State Property. The exceptionsare some city-owneddairy plants, and the small processing plants owned by collectivefarms, either individuallyor as interfarm enterprises, and the substantial number of processing plants (slaughterhouses, sausage makers, bakeries and small canneries)owned by CoopSoyuz.
5.8 Plant managers,except those working for state and collectivefarms or CoopSoyuz,report directly to the respective "Association"at the oblast or rayon level, and through them indirectly to the MOAF or SCFP. Capital investmentdecisions are made by the state, and financingalso comes from the state. Labor is plentiful and its opportunitycost is low. The social effects of low wages are buffered through multipleschemes of payment-in-kindand paternalisticservices. There is, therefore, no true labor market.
5.9 The internal managementstructure of the typical Ukrainian agroprocessingenterprise is a multi-layeredpyramid. The general managerhas five to seven departmentheads or deputy directors, who normally are in charge of raw material supply, production, product storage, and distribution, "economics," and the social sector. Each of these controls half a dozen professionals, engineers or section managers, who deal with foremen or group leaders. The outlook of management is production-biased. The path to a directorshipusually starts with the job of production manager, called "chief engineer". The economistis responsible for financial transactions and for keeping track of the fulfillmentof all plans. The deputy director of the social sector is in charge of personnel but, most importantly,of all services furnished to the enterprise community--housing,food, medical care, child care, schools and, more recently, churches. Such a managementstructure would be inadequate in a market economy; it is not concerned with the market demand, developinga product acceptableto the consumer, improvementof the production efficiency, or reduction of cost.
5.10 Raw inputs to, and processed outputs of, agroprocessingindustries were traditionally allocatedthrough a system of state orders. Products were physicallyhauled, delivered, and stored by the state distributionsystem. The state orders systemis in the process of disintegration. Supplyis hampered by payment difficulties and the impact of inflation. On the whole, the procurement system is in a disarray. The old methods are not working any more while the market system is not yet fully functioning.
B. INPUT SUPPLYSYSTEM
5.11 Up until 1992, the supply and procurement of agricultural inputs was almost fully managedby state owned organizations. In 1991, 82% of the purchased inputs for crop production and 91 % for livestock were procured by state organizations. Product specific supply and procurement organizations operated nationwide as elements of the agroindustrial complex. Until 1991, these organizations(e.g., Selkhoztechnika:Agricultural Equipment Supply Organization) enjoyed monopolistic positions. Both input supply and procurementhave been administrativeprocesses, rather than trade in the traditionalsense. The farmnsupport system was designedalmost entirely to serve state and collective farms, which have also developed agro-servicefacilities for themselves. The monopoly of the state supply and procurement network has been abolished, and alternative structures have been emerging quickly.
5.12 At the present time, the distribution of agriculturalinputs in Ukraine is handled by both Competitive Linkages for Pnivatized Agriculture 77 the state supply system and private input distributors. State enterprises supply mainly inputs produced in Ukraine, includingseeds, fuel products and lubricants, nitrogenousfertilizers, agriculturalmachinery, and a limited number of agro-chemicals. The private input distributors supply some domestically produced inputs, but focus on the distributionof imported fuel, seeds, agro-chemicals,and fertilizers. The key link in the supply of inputs from foreign input producersis the distributors, who deliver market inputs to farms. The distributor role is especially important to the supply of imported inputs since the manufacturersand suppliersof these productsare not usuallyequipped or willingto execute the complete trade transactionrequired for payment in-kind contractsor barter with their customers. In other words, most foreignproducers of agriculturalinputs are in the businessof manufacturingand supplyingproduct, and not in the distributionbusiness.
5.13 UKRAGROKHIM,UKRAGROTECHSERVICE, and other state enterprises operate warehousesand distributioncenters throughoutthe country. Althoughofficial statisticswere unavailable concerningmarket share, input suppliers estimatethat these companiesare supplyingapproximately 60 - 70% of all inputs in 1994. Given the fact that these companiesusually supply the input market under state contract, which obliges farms to sell their agriculturalproducts to state procurement enterprises under pricing and payment terms which are not tied to world market prices, prices eventually received by farms are heavily eroded by paymentdelays and inflation. In June 1994, farms were still owed over 12 trillion krb. (roughly $300 million) for 1993 output. Thus, farms' purchasing power in the spring planting season was severely eroded. Farms had agricultural outputs in stock, but the state system's ability to pay was insufficientand private purchasers' operations were limited by insufficientability to export. (Otherconstraints limiting private purchasing and export activitiesare discussedin detail below). In addition, certain importedagricultural inputs were unavailablethrough state enterprise channels. As a result, there exists a large potentialmarket for private companiesto compete in the input supplymarket.
5.14 UKRAGROBUSINESS(UAB) is the largest private input supply company operating through representativeoffices throughoutthe country. It was originallyformed as a joint venture between the Ministry of Agriculture, major foreign input suppliers, and certain other Ukrainian ownership interests. In late 1992, participation of state enterprises in UAB was withdrawn after the Government took possessionof approximatelyUS $80 million of input supplies, whichhad been stored at and became the property of UKRAGROKHIM. After restructuring, the company continues to supply fuel, agro- chemicals, and seeds in return for paymentin cash, barter and forward contractingof new crop. Foreign input producers estimate that UAB is supplyingapproximately 15% of all agriculturalinputs in 1994.
5.15 There are also several other private regional companies currently in operation, which supply a variety of agricultural inputs including seed, fertilizer, chemicals, machinery, petroleum products, etc. Many have been set up as join ventures with participation of foreign firms. UAB and these private companiesdeal both directly with farm enterprisesand through farm associations. Although a reasonably sophisticateddistribution system is already in place, includingcash transactions,barter for agricultural commodities,and forward contracting of new crop production, the market share of these private suppliers is limited by the reluctanceof foreign input distributors and other sources of credit to provide pre-export finance. If such private input distributors were able to obtain reasonablepre-export financefor importedinputs, whichwould require the availabilityof necessaryexport licenses for payment in kind, a significant increase in Ukrainian agriculturalproduction could be achievedby the expansion of private distributors' activity in the market. 78 Chapter 5
Barriersto Supply of ImportedAgricultural Inputs
5.16 Ukrainianagricultural productivity is significantlyhampered owing to the lack of adequate suppliesof importedagricultural inputs, many of whichUkraine does not produce in significantquantities (phosphateand potassium fertilizers, pesticides,herbicides, fungicides, pre-mix additivesfor feed milling, and others). This shortage has been caused by a combinationof factors, which includethe following:
a) Foreign input producers are reluctant to provide inputs to state enterprises on credit because of significant payment delays practiced by state enterprises and outstandingdebts to them by the Government.
b) Farms are unable to pay cash for inputs since much of their agriculturaloutput is still purchased by state enterprises which pay price 50-70% below world market levels and which delay full paymentby several months after production is delivered. This situation is further complicated by the reluctance of foreign input producers to offer pre-export finance, since these producers have suffered large losses selling inputs to input distributors on credit for payment of crops at harvest. These losses were brought about by failures of assignmentcontracts and payment-in- kind often resulting from actions on the part of the regional level governmentwhich can delay and even prevent final execution of the contractsand payment to foreign suppliers.
c) Governmentalimposed restrictions are also manifest in the imposition of export quotas and licensing requirements on most agricultural products utilized for payment in kind (both direct barter goods as well as new crop production)and abrupt changes in export tariff levels during the duration of a contract which is based on the provision of inputs in return for exportable agriculturalcommodities at harvest. Moreover, state enterprisesoften receiveexport quota orders at the expense of private enterprises, even though the state enterprises cannot procure enough agricultural output to use the full amount of the export quota, since farms do not trust state enterprises to pay on time for agriculturalproducts delivered.
d) Lack of sufficientsupport for the developmentof private input distributors is manifestedlargely throughgovernment regulations which distinguish between differenttypes of sellers and different typesof transactions. The followingregulations can create significantdifficulties for private input distributors and marketing enterprises.
* Producers of agriculturaloutput (usually defined as having produced more than 50% of its value) are distinguishedfrom intermediarieswhich buy agriculturaloutput. The latter are subject to higher rates of tax on their profits. The former are also exempt from the practice of surrendering 50% of foreign exchange earned from export at the official exchange rate. In practice, it is impossible to receive the exemption. Moreover, agriculturalproducers engage in very little export of their own productionsince they lack expertisein foreign trade operations.
* Joint venture companies(with at least 20% foreign participation)are allowed to export that which they produce themselvesif they can show that they produced over 50 % of the final value of the goods. For joint venture companies in input supply and output marketing this is very difficult, since they are not usually engaged in production of the agriculturalgoods they export. Technically, it is possible for a joint venture to provide farms with machinery, chemicals, fertilizers, and other inputs (not for sale but as a joint Competitive Linkages for Privatized Agriculture 79
venture's input to production) and show that the joint venture supplied more than 50% of the value of final agriculturalproduction. In practice, this can be done only by large joint venture input supply companies. Thus smaller, more specialized,ventures are at a disadvantage. Lastly, the process of receiving a certificate that qualifies the joint venture as the actual producer, is subjectto approvalby regionalgovernment authorities.
Receivingexport licenses is contingenton the Ministry of Foreign Economic Relations (MFER) verifying the exporting enterprises' contracts and validating the price of the good as declared in the export contract. Normally, the MFER demands that unreasonablyhigh export prices be stipulated in export contracts since it fails to take adequateaccount of product quality and'thehigh costs of doing business in Ukraine when it compares prices in export contractswith world market prices. This makes the receipt of export licensesproblematic for small private export companies,which have relatively high overhead costs.
* Private enterprisesmust pay the high commercialrate for foreign currency but are subject to the 50% surrender of foreign currency at official exchange rates when they export. This induces many enterprises to exchangein barter transactionsand generates the high costs involved in finding a foreign seller of inputs willingto take payment in goods. For firms dealing in many different kinds of agricultural inputs purchased from a large number of different foreign firms, the costs of arranging barter transactions are very high.
- UKRAGROKHIMis in control of distributing quotas for imports of agrochemicals, though technicallyjoint ventures can freely import agro-chemicalsfor their own use without an import quota.
- Input and output storage and shipping capabilities appear to be sufficient to support existing production levels, however for the most part these facilities are controlled by state enterprises. This also applies to the railroad system. In the short term, there is not much that can be done to alleviate such lack of competition. Developmentof private input warehousing,grain storage, processing,and transportationsystems should be given high priority in the medium term.
5.17 In conclusion,the variousbarriers to trade in agriculturalinputs have made either via cash or barter of old crop. This has dramatically reduced the quantity of imported inputs delivered to the Ukrainianfarms and basicallyplaces the acquisitionof imported inputsoutside the reach of the Ukrainian farmer who has no crop inventory or cash.
MachineryServices
5.18 Each oblast has a major repair stationfor machineryand equipment, and each rayon has a smaller one. The rayon repair stations employ 300 people on average. The off-farm stations in the 26 oblasts and 480 rayons of Ukraine employ at least 1.5 million people, in addition to repair personnel on the farms.
5.19 Half the repairs (the easier ones) are done by the workshops of the collective and state 80 Chapter 5 farms. The more complex repair and adjustmentwork is carried out by specializedworkshops in the districts. For very complexwork, such as general overhaulingof engines, repair of hydraulic systems, and complexrepairs of diesel pumps, there is a network of specializedworkshops at the regional level.
5.20 The supplysystem was supposedto work from the bottom up. Collectiveand state farms prepared lists of equipment required for the next year; the lists were collectedand summarizedthrough rayon, oblast and republicadministrations, and were finallyconsolidated at the national level by the state supply agency (GOSSNAB- GosudarstvennoeSnabzhenie), and submittedto the Ministry of Industry, which was expectedto match the demand with production and supply possibilities. Since the beginning of 1992, only production of tractors, trucks, and fuel has been still regulatedcentrally; other equipment could be sold without regulation.
5.21 Ukrainehas 200 agriculturalmanufacturing firms, many of which are small. The major ones are in Kharkov (tractors, engines), Kirovograd(all types of drilling machines),Odessa (plows and other land preparation implements), Kherson (combines and irrigation equipment), and Ternopol and Dniepropetrovsk(sugarbeet harvesters). Ukraine produces27 % of its machineryrequirements and 32 % of its equipment, indicating a strong dependenceon imports.
5.22 Most fertilizerapplication is carriedout by UKRAGROKHIM,a monopolyenterprise that produces and distribute agricultural chemicals. UKRAGROKHIMis also involved in production and distributionof pesticides,even though foreign suppliershave becomeactive in recent years in marketing their own products due to the low quality of the chemicalsmarketed by UKRAGROKHIM.
LivestockServices
5.23 Veterinaryservices are managedand suppliedby the public sector. Approximately20,000 veterinarians and 32,000 veterinary technicians work in over 500 veterinary stations, animal health diagnostic laboratories,veterinary inspectionstations, veterinary laboratories, and quarantine/boundary control stations. State and collectivefarms employtheir own veterinary staff, accountingfor 30% of the country's veterinariansand veterinary technicians.
5.24 Veterinary services face severe budgetary constraints. Until recently, 75% of their budgetswere financedfrom fees and charges paid by livestockproducers under contractualarrangements with the large state and collectivefarms, and profits from the sale of pharmaceuticaland other inputs. Prophylacticvaccines are free, but the cost of applying them is paid for by the producer. Private farmers pay the full cost of veterinary services, including transport costs. Oblast and rayon administrations contributedthe remaining 25 %. Public funding has been substantiallyreduced in recent years, and so has profit from the sale of veterinary supplies. There is thus a shortfall of 40% to 50% in required operating funds, which now barely cover salaries and wages.
5.25 Livestockbreeding and artificial insemination(Al) is the responsibilityof the Livestock Departmentof the Ministry of Agricultureand UkrainianLivestock Selection and Breeding Association, UKRPLEMOBIEDINENIE,a self-financinglegal entity under the Ministry of Agriculture and Food. Each Oblast has 3 to 5 breeding farms for the different livestock species. There are 90 breed selection/artificialinsemination centers (64 of which own a total of over 4,000 breeding bulls), providing frozen semen to a large number of Al points, attached to state and collective farms. Until recently, Al coverage accounted for 88% of cattle, 40% of pig, and 60% of sheep births. This relatively high CompetitiveLinkages for PrivatizedAgriculture 81 coverage has, reportedly, shrunk quite substantially in the past two years. On average, it takes close to 4 inseminations per cow pregnancy, which is indicative of poor heat detection, nutritional and hygienic deficiencies, sloppy on-farm insemination procedures, and probably poor sperm quality.
5.26 Genetic progress has not kept pace with that in the West due to less strict sire/mother selection criteria, the absence of sincere progeny testing (particularly for milk performance), and relatively limited importation of breeding stock, frozen semen, and embryos. Increased utilization of imported semen and embryos would be a cost effective way to achieve rapid genetic progress. For example, long-term agreements with foreign cattle breeding associations for the importation of low cost semen could be reached and guaranteed, Ukraine could shut down many of its cattle breeding farms and breed selection Al centers.
5.27 There is a severe shortage of veterinary supplies. This is mainly because of drastically reduced imports, but domestic production of such supplies is also down. Until 1990/91, 18% of veterinary supplies were manufactured in Ukraine, and 52 % came from Russia and other FSU republics. The remaining 30%, (equivalent to US $45 million), per year were imported, mainly through barter arrangements. Eastern European countries and India were major suppliers, usually exporting drugs, medications, chemicals, reagents, and laboratory equipment under barter arrangements. Since Eastern European and Indian producers generally no longer accept barter trade, Ukraine must pay hard currency for veterinary supplies imported from either Eastern European or Western countries. Due to shortage of hard currency and the high domestic prices of imported drugs (depressing demand), the value of imported veterinary supplies dropped well below US $10 million in 1992. In addition, imports from Russia and other FSU republics have virtually stopped due to lack of licenses and funds. There is thus a shortfall in veterinary pharmaceuticals of 80% to 90%.
5.28 The status of vaccine availability is difficult to assess. While representatives of UKRVETSPROMNAB (the agency in charge of procurement and distribution of veterinary products and vaccines) indicated that provision of domestically produced vaccines was meeting 90% of requirements, officials of the Ministry of Agriculture's Veterinary Department estimated Ukraine's vaccine self sufficiency at less than 40%, and UKRPTITSPROM poultry specialists claimed that effective poultry vaccines (for Ghambara, for example) were in extremely short supply.
C. WHOLESALE AND RETAIL MARKETING
5.29 Marketing in the FSU was based on an administrative evaluation of consumers' needs by the central planners. The focus was on ensuring production and distribution. Demand was of lesser concern and there were often shortages and limited varieties offered. Marketing was considered by Government as merely an issue of organization and logistics. Even though the objective of the present Government is to proceed toward a market economy, marketing still operates as it had under the Soviet system.
5.30 Until 1992, marketing was the responsibility of the Ministry of Trade. Each district in Ukraine was required to estimate consumption for the coming year for every product and for each store. A specialized office of the regional Trade Authority assembled all the data before assessing local needs. The regional data were then assembled to provide a national overview. The Ministry of Trade then assigned production quotas to plants in each region to meet the estimated consumption needs of the 82 ChapterS appropriate products.
5.31 In 1992 the Governmentrestructured its control of marketing. The Ministry of Trade is no longer involvedin internalmarketing. Instead, the responsibilityfor state-ownedstores was shifted to the district governrnents,along with a specializedoffice that controls small urban stores and another specializedoffice (UNIVERSAL)that is in charge of supermarkets. However, the internaltrade situation has not improved significantlymainly due to lack of infrastructureat every level of the distributionchain, including transport, storage, processing, wholesaleand retail network.
5.32 Food is marketed through state shops, consumer cooperative stores, and kolkhoz (farmer's) markets. The approximately30% of agricultural production produced privately in urban gardens and plots of collective and state farm members is either consumed by them or sold in local farmers' markets. Factory shops and private shops have started to appear as well. In the urban centers, state stores are the primary market, whereas in the rural areas distribution is channeledthrough the consumer cooperative stores.
5.33 The entire network consists of approximately 52,000, Comparison of Sales Area per 10,000 inhabitants mostly small, stores, (there rhousand sq. meters are also 200 supermarkets), 10 T covering an area of 5.2 9 T 2 million m and employing 8- 230,000 people. There are 7 2 1,000 m of foodstuff sales 6 5- area per 10,000 inhabitants. 4 By comparison, Germany (before reunification) had 10,000 m2 of sales area per 1 10,000 inhabitants and o France's 7,700 ml per Ukraine Germary France 10,000 inhabitants. France, which has the about the same population, Figure5.1 has 539,000 people employed in the food retailing sector (Figure 5.1).
5.34 The managementof a large number of stores by Government,even with decentralization, has proven to be exceedinglycumbersome and resulted in enormous amount of food losses. Prices are set by the state and local store managers have no authority to deviate from the price guidelines. If products are not sold they are eventuallyreturned and destroyed. Investmentallocation, transportation, and other necessary expenditures are made without regard to price signals, and are therefore not consistent with market conditions. Competitive Linkages for Privatized Agriculture 83
D. DEVELOPINGA COMPETITIVESUPPORT AND PROCESSINGSYSTEM
5.35 The developmentof more efficient, competitiveservices, better attunedto the needs of private farming, and a market-orientedprocessing and retailing systemin food and agriculturewill require a strategy involvingorganizational, institutional, legal, and regulatorychanges. State-ownedenterprises must first be made to feel independentof the Ministries, which, up to the present, have appointed the enterprises' managers and intervened in their important business decisions. The first step is for the Ministries to stop centralizing an excessive share of enterprise profits, a practice which has made enterprises dependenton the Ministries for investmentfunds. In tandem with this, the practice of cost- based pricing with Government-sanctionedfixed profit margins must be eliminated. These and other measures described below will accomplishthe commercializationof state-ownedfirms.
5.36 The other changes which will catalyze the development of a market system in the agriculturaland food sector involve the demonopolizationand privatizationof the large state enterprises and trade monopoliesthat now dominateprocessing, input supply, and wholesaletrade. To develop the institutional rules to which enterprises will be subject, a supporting legal and regulatory framework encompassinganti-monopoly regulations, competitionpolicies, property law, and contract enforcement must also be establishedby the Government. In addition to setting up the new legal framework, the Governmnent'smain responsibilitywill be the provisionof essentialsupporting services, notablyprice and market information, technical assistance and training services, and financial services to assist in establishing new businesses. The Governmentwill also be charged with setting food inspection and sanitary standards.
Demonopolization - Commercialization
5.37 Commercializationof state processing and trade organizations is an essential first step toward a competitivemarket and privatization. This requires immediatelyincreasing the autonomy of the state-owned enterprises by separating the company managementfunctions from state interference through creation of corporate entities (e.g. joint stock companies)and by changing procedures for the selection of boards of directors and enterprisemanagers under corporate legislation. The Government can also improve enterprise performance by revising labor legislation to improve flexibility in the employmentof staff and compensation,and by providing managementtraining for enterprise directors and managers.
5.38 Providingmore autonomyfor operation of state enterprisesmeans ending Government's practice of siphoningoff profits from successfulfirms and underwritingunprofitable units within the same conglomerate(or set of firms under a given Ministry's purview). This would make it easier to identify and liquidate non-viable enterprises. It would also promote profitable firms' interest in separating themselvesoff from the other vertically or horizontallyintegrated units in their conglomerate. In turn, these profitable firms will pursue expansionof profitable lines of activity and establishnew connections to suppliers and customersvia the market. Fostering greater attentionto profit among state enterprises can also be pursued by creating hard budget constraintsand access to finance on commercialterms only. It has to be noted, however,that allowingdistribution between profitable and unprofitablefirms can serve as a basis for liquidationwhen prices are liberalizedand there are not any substantialdistortions. 84 Chapter5
5.39 In order to accuratelymeasure profitability,modern systemsof accountingand auditing need to be adopted. Public enterprises not yet privatized nor subject to immediateprivatization should be made to apply one of these new systems as soon as possible. Private enterprises should also be obliged to conform to the new system because their tax liability should be determined on the basis of standard accountingpractices governingall enterprises. The applicationof key accountingconcepts and asset revaluationprocedures will increasefirms' awarenessof the magnitudeof their assets' depreciation in current prices, reduce taxes on profits, and guarantee that all taxpayers are treated identically. It will also facilitate a market oriented production system and product development which will increase net profits at the firms' disposal and bolster their reliance on the market, further imposing the hard budget constraint.
5.40 In Ukraine, the Corporation Law as introducedby the Presidential Decree (June 1993) and later amendedin March 1994 provides a sufficientlegal frameworkfor acceleratingprivatization of the state enterprises. However, the experienceof the last eight months shows that implementationof the process is slow comparedwith the very ambitiousagenda of the PrivatizationProgram for 1994. Only 206 companies have been corporatized from September1993, with about 350 more enterprises in the process of corporatization. The SPF is preparing companiesfor the next wave but its existing capacity does not allow it to handle a sufficient number of enterprises in a single privatization cycle. The Government is aware of bottlenecksand has tried to streamlinethe process.
5.41 In tandem with enterprisecommercialization, actions to demonopolizethe input supply, marketing, processing, and retailing sectors must be taken to address the bulk of the system (the grain, meat, and dairy productsectors) whichcontinues to be heavilymonopolized. Large "agrokombinats"and all other monopsoniesshould be broken down into smaller concerns to promote competition. These break-ups should be done along both production and regional lines, with the end result being local enterprises functioningas individualprofit centers capable of, and allowed to, operate independently.
5.42 There are essentiallythree approachesto demonopolization:(a) activelypursuing foreign competitionthrough open trade; (b) breaking up existinglarge-scale monopolyunits; and (c) regulating the large-scalemonopoly units through legislationand financing. Breakingup large-scaleunits that enjoy monopolypower has proven to be a very significantproblem, even in Western nations. Though under present conditionsin Ukraine, this method seems to offer the fastest solution, one should not be overly optimisticabout the short-term capacity of governmentto "break up" large monopolisticprocessing and trading firms. The alternativeis to force this break up through the establishmentof competition. This could be done through attractivejoint venturing laws to encourageWestern investors. Openingof border trade and establishinghard budget constraintsfor large firms would limit the monopoly power of large enterprises.
5.43 As a case in point, the reductionof concentratedmarketing power in input supply should be accentuated by the commercializationof state owned supply networks, i.e., their removal from Ministry of Agricultureand Food control and their establishmentas independententerprises operatedby managers accountableto a board of directors. Their day-to-day activities, including importation and pricing should be removed from ministerial interference. These national enterprises should also be broken up into rayon-levelbusinesses operating independentlyand reliant on their own financial results for working capital. In the overall scope of the country's privatization program, these rayon-level enterprises could be eventually transferred from state ownership into private hands. As a first step, existing supply organizations could be demonopolized by having each regional unit operate as an independentbusiness without any territorial constraints on sales. New cooperativesemerging from the CompetitiveLinkages for PrivatizedAgriculture 85 reorganization of the kolkhoz/sovkhozsector can also become specializedinput suppliers. Over the longer term, private firms, including some foreign ones, will become more involved if appropriate measures are taken to liberalizedomestic and foreign trade.
Privatization
5.44 The entire agribusinesssubsector, and particularlythose parts most importantto farmers, such as product marketing and processing, transport, services, and input supply, should be privatized. Though there are many ways in which privatizationin processing, distribution, and input supply could be effected, certain objectives should govern privatization. First and foremost is the improvementof enterprise efficiency by creating an active market and avoiding situations where any one firm or institution has a majority of the market. In doing so, the process must be implementedas rapidly as possible since present inefficienciesresult in higher prices to consumersand low prices at the farm level, and/or state subsidiesfrom the budget via direct or indirect channels. In addition, there is the goal of equity, which as a public good, will increase support for the overall reform process.
5.45 The privatizationprocess shouldbe sufficientlysimple so as to be readily understoodby the general public. Such an approach will facilitate public support. Shares in purchased enterprises should be tradeable on the open market, which will provide new owners with transparent ownership rights. Foreign buyers shouldbe allowed to participatein the privatizationas early as possiblesince they represent the largest source of investablefunds.
5.46 Central to the transformationof the Ukrainian economywill be the rapid transfer to the private sector of assets presently ownedby the State. Progress in privatizationin Ukraine has so far been painfullyslow. Small scale privatization, which had been declared in priority in 1992 and 1993, has not gathered momentum, despite efforts to jump start the process in a number of cities with support from donors. There are more than 100,000 small state enterprises in Ukraine. The 1992 target was to complete the privatization of all small enterpriseswithin two years. But probably less than 500 have so far been transferred to private hands. In 1991 there were are around 10,000 medium and large state enterprises in Ukraine. The 1992 target was to privatize 80-90% of industry on an ad hoc case-by-case basis in the absence of a mass privatizationprogram (MPP). Probably less than 1,000 medium sized enterprises have been privatized to date, mostly by transfer to the workers' collectives. Recently, however, there have been signs that Governmentis ready to start implementinga MPP and support from the internationaldonors has been promised.
5.47 Promotion of smaller scale private enterprises should be encouraged to generate competitionwith large state enterprises. Very efficient small scale processing facilities are availableto enable the establishmentof such small companies, such as small milk and cheese plants with 10 tons of milk required per batch (From Latvia), jam and preserve manufacturing,flour milling, or specialtymeat processing. Organizationsrepresenting small-scale farmers should be encouragedto becomeproficient in providing the leadershipfor such investmentsby small farmers' cooperatives.
5.48 The privatizationof agroprocessingand supply and procurementorganization shouldbe done within the framework of overall privatization strategy. Small scale privatization needs to cover smaller units in processing and retailing, while large-scale units should be covered by the mass privatizationprogram. Complicatedprocedures to provide preferences for producers of raw materials in privatizing agroprocessingshould be avoided. 86 Chapter S
5.49 Enterprises shouldbe relievedof their social functions. Social security, such as medical coverage, insurance, pensions, etc., should be assumed at the communityor national level, and not as an adjunctto an employmentcontract, exceptfor the normal employer'sfinancial contribution. Similarly, housingshould not be a consequenceof an employmentcontract. Houses, therefore, shouldbe separated from the enterprise' assets portfolio and be distributed in full ownershipto their occupantseither free or on very favorableterms. This would increase worker support of privatizationof their enterprises. A housing distribution program would also help create a housing market and develop labor mobility in Ukraine.
5.50 Criteria for appraising investmentproposals should be developed to ensure that public sector enterprises targeted for privatization do not continue to claim public resources unless they demonstratetheir ability to use them efficiently. Access to financial resources either private or public, other than self financing, should be submitted to strict a priori controls by the financial intermediary institutions. Privatizationin processingshould be part of overall privatization strategy implementedin industry.
5.51 There are many ways to approach the complex issue of privatization, however, the principles that should govern privatizationare:
- the process should improve enterprisemanagement. Dispersion of ownership should be sufficientto create an active capital market and avoid economic concentration;
the process shouldbe as rapid as possible. The present inefficienciesof the agroindustry subsector threaten consumerswith food shortages and high prices, while imposing low prices at the farm level. Moreover, the government bears the blame for their inefficiency,and eventually has to cover their losses; and
* the privatizationprocess shouldbe equitable. If shares are transferred without payment (in part or in totality), they should be given equally to all citizens. If they are sold, buyers should pay market prices for them.
5.52 In many cases, enterpriseswill need to be restructuredprior to privatization. Enterprises should be categorized according to significant marketing potential, technical problems and economic/financialissues. Enterprises with good market potential and without serious technical or economic/financialproblems are good candidatesfor immediateprivatization. Enterpriseswithout market potential should become candidatesfor liquidation. Enterprises with good market potential but severe economic/financialproblems shouldbe restructured,because in their present conditionit is unlikelythat anyone would wish to assumeownership. Restructuringcould involve Governmentassuming or writing off debt, convertingthe debt to equity, or arranging a debt/equity swap with potential buyers. In some cases the restructuring may involve partial liquidation of the enterprise involving separation of remunerativefrom non remunerativedivisions and delineatingtheir debt as well prior to privatization.
E. THE ROLE OF FOREIGN INVESTMENT
5.53 Ukraine has adopted a rather liberal legislationon foreign investmentand joint ventures providing substantialtax preferencesas well. The impact of these laws has not been sizable as far as CompetitiveLinkages for PrivatizedAgriculture 87 food and agriculture are considered. There are only a handful of joint ventures in the sector, mainly in the area of least control by the government,such as beverages, etc. Apart from the progressive law, the conduciveframework for foreign investmentin the mainstreamof Ukraine food and agriculturedoes not seem to exist: (a) overall policy and the economic environment is still not encouragingenough; (b) grain, meat and livestocksectors remainunder direct and indirect governmentcontrol; (c) proceduresfor foreign participation in the privatization of processing and distribution are not elaborated and present practices do not favor foreign buyers; and (d) domesticmarkets are not attractiveenough.
5.54 Experience in other Central and East European countries indicates that foreign participationin privatizationof food processingand distributioncould substantiallyspeed up the creation of a competitivesector. However, foreign investors in general require majority ownership or at least a decisive role in the management of operations and much more freedom in marketing and currency transactions than those which Ukraine can offer at present. Efforts should be made to remove these obstacles, because the quick rehabilitation of processing and marketing cannot be envisaged without massive participationof the foreign private sector.
F. EXPANDING MARKETFACILITIES AND SERVICES
5.55 A private-basedcommercial system is the most suitable way for supplyingagricultural inputs and machinery services. A network of farm supply shops shouldbe created soon by privatizing the existingnetwork and by promotingthe establishmentof new firms. For the short term, the existing structure and the new type of cooperativescan be the major institutionsof supply. Over the long run, private firms, including some foreign ones, are likely to be involved if domestic and foreign trade are liberalized.
5.56 Developmentof a nationwidecommercial supply network will require several years. The Government should assist in the emergence of wholesalemarketing and distribution and to encourage retailing and processing firms to develop their own purchasing activities. It should create competing buyers by subdividingstate owned trade and processingmonopolies. The developmentof a private retail and wholesaleand input supply trading system of agriculturalproducts requires:
- a privatizationprogram, including;(a) the immediateprivatization of retail food outlets, (b) steps to authorize and encourageprivate sector entry at the wholesale level, and (c) the design of the programs and timetables to privatize or restructure and divest larger enterprises operating at the wholesaleand product assemblylevels;
* the establishmentof a compatible legal and regulatory framework, to encompass; (a) anti-monopolyregulations, (b) competitionpolicies, and (c) corporatelaw, property law, and contract enforcement;and
* the provision of essentialsupporting services, notably; (a) price and market information, (b) technical assistance and training services, (c) financial services to assist with establishingnew businessesand meeting priority investment requirements,and (d) food inspectionand phytosanitarystandards. 88 Chapter S
Market Structure
5.57 In retailing, wholesaling, and product assembly, some actions can be initiated without waiting for formal announcementof the guidelines. Existing state and municipallyowned food shops could be leased or sold to the present managers and workers. No restrictions should be placed on the resale of facilities and equipmentto interestedthird parties. Credit might be made available to provide private food retailers with initial working capital and some funds for improvementof facilities.
5.58 A key factor that needs to be addressed is the role of food retail and wholesale distribution. Clearly in Western Europe, organizing small retailers and stimulating wholesalers has resulted in the logistical advantagesof buying in bulk and cost effectivetransport to cooperative/private warehouses,thus resulting in lower cost and fresherfoods. This mechanism,called "logisticalalliances", pulls more fresh and processed foods from contract farmers who have to achieve a certain quality standard, and very often produce crop or livestockvarieties chosen by the buyer, in order for their goods to be purchased. In some cases, the entire packageof inputs, includingseeds, pesticides, herbicide, and fertilizer are determined by the contract.
5.59 It appears the Government is planning the privatization of retail distribution and warehouses. In other developing countries, private and small retail stores alone are not improvement enoughto facilitate marketing efficiency. Often the fragmentedand inefficientstructures in both state- owned and independentfood shops represent an almost insurmountableand high cost marketing problem for most primary and secondary food producers and processors. Whether it is a monopolized Governmentor state distributionsystem, or a fragmentedsystem, the results vis-a-visfood prices are the same. To privatize the existing physical distribution facilitiesand retail units without assistance to the distributionsubsector is to do the country as disservice.
5.60 A practical solution, used with fragmented food distributors in Western Europe, is to establish volume-basedprivate sector chains of food distribution. This can also take the form of a consumer co-op chain where both consumersand producersband together. Anotherexample is the type of large chain stores found in the US, which because of their volume purchasing and distribution, can sell food at prices 10% to 20% below that of independentfood shops.
5.61 Most of the state-ownedfood outlets are small. A large percentage of them could be remodeled, modernized,and operatedwith a credit systemthat was tailored to these smaller operations. Ideally, they should be privatized in groups large enough to maintain their own distribution centers, enablingthem to purchase fresh and processedfoods in volume, operate under one chain name, reduce food prices, and maximizethe profit return on capital investment. These groups would compete with each other, and through economiesof scale, reduce food prices to consumers, provide volume-based marketingoutlets for primary agriculturalproducers and processors,and maximizetheir return on capital.
5.62 Efficient wholesale marketing also will require construction of a network of easily accessible points of delivery; improving the grading of agricultural products; defining efficient standardizedmarketing rules (with settlementprocedures in case of dispute, agreement of inspections, etc.) between professionals(traders, cooperatives,processing industries); facilitating access to forward and future trading; improving access to international market information (long term agreement with internationalcompanies would provide accessto internationalmarket informationand to electronictrading of agricultural commodities);and training executivesin agriculturaland food marketing. CompetitiveLinkages for PrivatizedAgriculture 89
Legal Framework - Market Information
5.63 At a later stage, the new marketstructure shouldinclude improved physical facilitiessuch as auction halls, city markets, regional cooperative packing and grading facilities, and transportation equipment. Market informationservices for farmers should also be available, i.e., radio and television programs and farm newspapers. The more developed domestic agricultural market will require a commodityexchange. (The first commodityexchanges are alreadyoperating in Ukraine.) More efficient and coordinated international marketing for Ukrainian agriculture should be supported by commercial-basedexport marketing organizations.
5.64 One of the important vehicles to foster trade and stimulate production in a market economy is the commodityexchange. The commodityexchange is a market where producers (sellers) and consumers(buyers) meet: it plays a vital role in price formation. However, such markets need rules and regulations and supervision. This includes clearing procedures to ensure contract enforcement (delivery and payment), and the regulations which deal with the potential risk market manipulation. Assistanceshould be given to professionalsin the marketingchains to set these rules and access in terms of infrastructure and equipment.
5.65 Efficient wholesale marketing requires construction of a network of easily accessible points of delivery; improving the grading of agricultural product; defining efficient standardized marketing rules (with settlementprocedures in case of dispute, agreement of inspections, etc.) between professionals (traders, cooperatives, processing industries); facilitating access to forward and future trading; improvingaccess to internationalmarket information(long term agreementwith companieslike Reuters to give access to international market information and to electronic trading of agricultural commodities);and training of executivesin agriculturaland food marketing issues.
5.66 Improvementsin the legislation (and its enforcement)related to quality standards are greatly needed in the food sector. Ukrainian specificationsare insufficientfor export: both the standards and the inspectionprocedures need to be enhanced.
5.67 Accurateinformation is essentialto efficientoperation of markets. The public sector can play an important role in collecting and disseminating data that describe the fundamental factors influencingmarkets (e.g., areas, yield, imports, exports, etc.) and key market indicators (i.e. prices, volumes and quantities). Timely and accurate information is also necessary for policy formulation. Althoughsome rudimentarymarket informationis available, the qualityand reliabilityof informationfor business and policy decisions is inadequate. A price reporting and market information system must include accurate product descriptions (to allow standardizationof quotes and comparisons), price quotationconventions and data dissemination. An investmentin a market informationprogram may result in substantial improvementsat little cost, both in terms of governmentdecision-making and from the disseminationof informationto the private sector.
5.68 Market informationis particularlyimportant for exports. In the past, export sectorswere centrally selectedand markets were assured through the CMEA system. Today, export markets must be developedby individual firms, often facing an uncertain and, in some areas, restrictive trade policy environment. The organization of an export development service could meet the needs of trading enterprisesby: (a) collatinginformation on the markets for most major commodityand processedproduct sectors; (b) assemblingexport market intelligencethat allows traders to assess opportunitieson the basis of marketdata and relevanttrade regulatoryinformation (import restrictions, phytosanitary and veterinary 90 Chapter5
requirements); and (c) providing specific export trade assistance that helps develop the capability of individualsand organizationsconcerned with export marketing.
G. IMPROVING FINANCIAL SERVICES
5.69 The future developmentof financial intermediationin Ukraine depends on stabilization of the economyand reform of the financialsystem. The capital and reserve position of the banks is weak and they will have to be restructuredbefore they can play a major role. The banks have to be converted into autonomous institutions, operating on a profit making basis, which will involve competing for deposits and making loans based on an assessmentof client risk. Under no circumstancesshould the financialsystem be used as a convenientmechanism for rescuing insolvententerprises, public or private, in agriculture or elsewhere.
The Emerging Structure of Financial Institutions
5.70 The Ukrainian banking system has four basic components:
* the National Bank of Ukraine, which carries out most of the usual central banking functions, but also channels a substantialamount of funds to the Ukraine Agricultural Bank for on lending to the agriculturalsector;
* the SavingsBank of Ukraine, which has more than 600 branches and more than 14,000 smaller scale affiliates spreadthroughout the country, and has traditionallyspecialized in the mobilizationof deposits, but has recently begun to grant loans. It has by far the best infrastructure of any existing institution to provide financial services to rural areas, including credit for individualprivate farmers and deposit services for the entire rural population;
* the specializedstate-owned banks, includingthe Ukraine AgriculturalBank (now called Bank of Ukraine) with 600 branches, were converted to commercial banks and have begun to take deposits; and
* the 100 commercialbanks, which are joint stock companies,mostly owned by groups of state owned enterprises, provide credit and certain other services to their owners, and have only limited interest in deposit mobilization.
5.71 The Bank of Ukraine (BU) is one of the three specializedlending banks that emerged in Ukraine after the reforms of the banking system in the Soviet Union. It initially had the largest loan portfolio of the three banks, but massive write-offsof its loans during 1990 drastically reduced its size. During the process of reform, the characteristicsof the bank were redefined. It was changed to a joint stock commercialbank and was allowed to take deposits and make loans for a wider array of activities to a broader range of clients. Nonetheless,the BU, as well as the two other specializedlending banks, remains essentiallya government-controlledspecialized lender with a loan portfolio heavily concentrated in governmententerprises. CompetitiveLinkages for PrivatizedAgriculture 91
5.72 The BU is the main source of credit to the agricultural sector, including state-owned processing and storage facilitiesand input suppliers, as well as state and collectivefarms. Althoughit is no longer the largest specializedlending bank in Ukraine in terms of loans outstandingor total assets, it is larger than either of the other two specializedlending banks in terms of infrastructure, with more than 600 branches and more than 20,000 employees. Only the SavingsBank of Ukraine, with 15,000 branches and 52,000 employees,has more physical capacity to provide financial services in rural areas, including agriculturalcredit.
5.73 As a supplier of credit, the BU does not use normal banking criteria by selecting clients likely to repay. It has tended, instead, to lend to state owned enterprises to cover their losses. Many of its loans were later written down or totally written off. Funds for further lending was provided by the Central Bank. This has made it a fiscal rather than a financial institution. The current policy of the BU is to support developmentalpriorities and not to engage in further write offs, but it will probably be forced to continue to provide support to loss making state owned enterprises.
5.74 Even though the BU is being more aggressive in attractingdeposits in order to become a true financialintermediary, its deposit rates are far below the rate of inflationand thus will not protect the real value of depositors' assets. Interest rates on loans are also far below the rate of inflation, so that, even if loans are fully repaid, funds will be inadequateto maintainlending in real terms. In addition, interest rates on priority loans (i.e., long-termloans to tenants and for housing and all loans to farmers) are significantlybelow those on short-term loans to entrepreneurs,indicating that interest rate policy is governed by concepts of subsidized and directed credit rather than by the costs and risks of serving different groups of borrowers.
5.75 Two other governmentinstitutions are involvedin agriculturalfinance. The Governnent InsuranceInstitution is currentlyproviding credit insurance. Althoughproviding such insuranceappears to be a profitable activity under Ukraine's current inflationary conditions, it is unlikely to be so in the longer run. The Ministry of Agriculture and Food also has variety of plans and programs that involve directed and subsidizedcredit for the agriculturalsector.
5.76 Among the existing financial institutions, the Savings Bank currently has the best infrastructureto provide financial services in rural areas, includingcredit for individualprivate farmers and deposit services. However, to develop its potential, it will need a major program of training and technicalassistance based on the acceptanceof key reforms involvinginterest rates, client selection and loan recovery, along with modern management techniques based on incentives and decentralized assignmentof responsibilities.
5.77 The BU is currently the main supplier of funds to the agriculturalsector, but more as a fiscal agent than as a financial intermediary. If market oriented reforms proceed slowly for state enterprises in the agricultural sector and it is deemed essential to continue to support loss-making enterprises in the short run, the BU could be the most appropriate institution to provide the necessary transfers, but in this case it should cease to be a financial intermediary and become explicitly a fiscal agency.
5.78 The commercial banks encompass a wide range and rapidly growing number of institutions,many of whichprovide little in the way of traditionallending and deposit services and many of which are probably insolvent. They could potentiallyplay an important role in providing banking services to agriculture, but the first priority is to introduce generally accepted accounting principles, 92 Chapter S external audits and a comprehensive system of prudential regulation and supervision by competent governmentagencies to ascertainwhich banks are solvent and not engagingin excessiverisk taking (e.g., insider lending). For commercialbanks that are found to be viable, a program of training and technical assistancesimilar to those recommendedabove could be offered. Those commercialbanks that do not qualify should not be allowed to continue to operate as financial intermediaries.
5.79 The emergenceof new grassroots financial institutionssuch as post office banks, credit unions, and possibly credit cooperativesshould be encouragedby providing the legal, regulatory, and supervisory underpinnings,as well as technicalassistance. Farms should also be supportedby technical assistance enabling them to prepare credible restructuring, project and financial plans, and loan applications.
5.80 It will take several years until a competitive rural financial system will become operational. Its efficient operationwill also depend on substantialstabilization of the monetary system. Because the restructuringof agricultural, agro-processing,and marketingenterprises cannot be deferred until such a system becomes operational, temporary targeted public sector dependentfinancing systems may have to be used at least to initiate the restructuringprocess.
Market-based Financing of Agriculture
5.81 Ukraine is not unique in providing subsidizedcredit to agriculture. In most countries, includingdeveloped market economies, specialized public institutionsand programsprovide and subsidize credit to agriculture and rural areas. In large part, this is due to farmers' political clout, but economic reasons also justify these programs. For example, the need to compensate for distortions in the internationalprice of agriculturalcommodities due to trade restrictionsand subsidies, the need to assure access to credit to remote areas, or as a means of achievingfood security.
5.82 What makes Government intervention stand out in Ukraine is: (a) the extent of the directed credit programs (almost all credit to agriculture and many related activitiesis provided through these programs); and, (b) the degree of explicit or implicit subsidizationthat converts these credits to implicit grants (in addition to the extremely low interest rates, both borrowers and lenders expect that most loans will eventuallybe forgiven). In all developedcountries and in most developingcountries, governmentprograms play only a marginal role in the overall financing of agriculture, and the grant componentin these programs represents only a fraction of the present value of credits.
5.83 As a result of overall macroeconomicinstability, several factors complicateany attempt to reduce Governmentactivities in financingagriculture:
* The creditworthinessof most of the farmers is questionable. Agriculturalland cannot yet be used as collateral to secure loans. The only exception is some 1 million ha already allocatedto individuals. Many farms cannot borrow or demonstrateprofitability under commercialterms.
* Financingcentralized state procurementand marketing of agriculturalproducts needs to be done through directed credit programs, because the agencies in charge are too big relative to the banking system. Competitive Linkages for Privatized Agriculture 93
* There is a lack of rural banking infrastructure. In most rural areas there is no banking presence, exceptfor Scherbankwhich until recently was not involved in lending. Also, most farms do not have the "skills" needed to seek commercialloans.
* Continued uncertainty in agricultural policies, in particular prices and restrictions on trade, complicatethe creditworthinessevaluation of farms.
* Farmers view credits to farms as governmenttransfers, since they were often forgiven. These expectationswill be difficult to change for private farmers, and almost impossible to change for state and collectivefarms.
5.84 In the short run, directed credit programs may have to continueto serve as the basis for financing agriculture, at least until farms are able to borrow against their property. Furthermore, it is likelythat most state and collectivefarms (giventheir debt service record as well as their uncertain future and the low profitability of the livestock sector) could not be financed by profit-oriented commercial banks for a relativelylong time.
5.85 However, several importantchanges shouldbe made to the present programs. Directed credits should be restricted to agriculture and to small scale processingactivities that take place within farms or in adjacent farm communities. Enterprises dealingwith agriculturalinputs, such as fertilizers, like other enterprises in the agro-industrialcomplex, should receive financing from commercialbanks. Directed credits to agriculture should be reduced gradually over time, as commercial banks and capital markets take over an increasingpart of the financingof agriculture.
5.86 Credits shouldhave clear-cut terms, even if they are concessional,and authorities should enforce those terms as a means of instillingfinancial discipline. Preferably, the NBB shouldraise interest rates on loans to agricultureto the levels prevailing in the rest of the economy. Subsidieswould be more effective and cheaper if they are conveyed directly linked to the objectivesthat the Governmentwants to subsidize.
5.87 The Governmentshould encourageestablishment of a banking systemthat providesa full range of banking services, includingdeposit mobilization,trust and investmentbusiness, capital market operations, and provision of legal status and enforcementof informal financial contracts. The newly emerging rural banking institutions need to be complementedwith a competitive insurance system providing risk protection for agricultural enterprises includingprivate farmers.
5.88 The Ukrainian agriculturalfinance system deservesspecial attentionbecause many of its potential clients live in hard to reach areas and are engaged in activities where prices can be volatile. While the nature of these potential clients can make them relatively costly and risky to serve, this does not justify maintainingdirected and subsidized credit programs which have proven to be costly and ineffective elsewhere. The Ukrainian Government should not neglect opportunities to encourage developmentof the kinds of financialinstitutions and markets, includinginformal financial arrangements, that have worked well in other countries. Credit unions or other forms of cooperatives,small-scale rural banks, or informal arrangements involvingprivate sector trade credit may be effective in reaching a broader array of clients. Whether the development of new semi-formal institutions or informal arrangementsoccur spontaneouslyor with the encouragementof the Ukrainian Government,restrictions on their operations shouldbe limitedto the minimum necessaryto protect depositors and other creditors from excessive risk taking and fraud. 94 Chapter 5 CHAPTER 6
MEASURES TO IMPROVE FARM PRODUCTION AND EFFICIENCY
6.1 The successful transition to a new agriculture system requires not only changes in the present policy environmentand inventiveframework, but also support in the form of policy measures to increasethe efficiencyof production, and by investmentsin physical capital. Productiontechnologies and management of crop and livestock production have to adjust to the new conditions of private agricultureand the market system. This chapter discussesrecommendations for improvingthe efficiency of farm production as well as for the modernizationof agricultural educationand research.
A. IMPROVEMENTS IN CROP PRODUCTION
Techmologies
6.2 The level of agriculturaltechnology in Ukraine is generallybelow that in industrialized nations. Many Ukrainian agricultural scientists are world-renowned,but the gap between research findings and their applicationis large, like in most other countries. There is an increasingGovernment awarenessof the need to modernizethe farm sector and to acquire and assimilate the new technologies, especially in livestockbreeding and grain production. However, it is not well understoodthat effective diffusionand adoptionof new technologywill require basic changesin the structure of the farm economy, as well as in the habits and skills of Ukrainian farmers.
6.3 Fertilizer Use. Average fertilizerapplication in Ukraine is higher than that of the former Soviet Union, but considerablylower than in Western Europe. In pure nutrients per hectare of arable land, it averagedabout 148kg/ha in 1986-90,compared with an average of 100 kg in the former Soviet Union and 229 kg in Western Europe. Fertilizer applicationdeclined however from 1989 to 1992 by about 50 %. Overall fertilizersupply was 43.7 % of the 1986-90level, whilephosphorus supplywas only 27.8% comparedto the same time period. Ukrainian officialestimates of the optimum applicationis 180 kg per hectare.' The main deficiency is in the applicationof nitrogen and phosphorous(about 9% and 40% respectively). The ratio of nitrogen, phosphorous,and potassium (N/P/K) is also unsatisfactory; 1.0/0.6/0.6, comparedto an estimatedoptimum 2 ratio of 1.0/1.0/0.6. Phosphorousis the limitingfactor to yield improvement,since lack of phosphorous,among other factors, reducesthe effectivenessof other nutrients.
6.4 Production of nitrogen fertilizer in Ukraine is sufficient to meet domestic demand. However, all phosphorous and potassium fertilizers are imported. About 10 to 15% of fertilizer shipments are lost due to the poor physical and chemicalqualities of mineral fertilizer--excessmoisture, dusting, caking, and acidity--andthe lack of proper packagingmaterials, transport containers,and loading equipment.
i The estimatedrequired fertilizer applicationis based on the objectiveof achievinga predeterminedyield, it does not take into accountthe need to maximizeprofits.
2 The optimumis in a sense predicatedon Western countriesproduction function and technology.The "optimum"may vary if the world price relationshipof the three main ingredientsof the fertilizer will change. 96 Chapter6
6.5 One of the official explanations for the deficiency in fertilizer use is a shortage of on-farm storage Fertilizer Supply 1986-92 N capacity. The Government 6 p estimates that the storage of 6 K granulated fertilizers meets only 5 - about 70% of requirements and Total Supply storage of compost fertilizers 4- meets about 28% (see Figure c 6.1). However, it is likely that - the apparent shortage of storage 2 partly reflects market inefficiencies. Transport is not 1 S ; d *i L I available on demand; most villages do not have hard surfaceo access roads; and there is no 1986 1987 1988 1989 1990 1991 1992 retail system which can provide I fertilizer on demand. Figure 6.1
6.6 According to agriculturalscientists in the former Soviet Union, a better phosphorousbalance in the soils could increase grain yields by 20-30%. Averting losses incurred in shipment could allow an increase of grain yields by about 3 to 5 %, or approximately1.5 to 2.5 million tons per annum. Providing an optimal balance of phosphorousand other nutrients could raise grain production by 10 to 15 million tons.4
6.7 Irrigation and Drainage. About 2.6 million ha, or 6.9% of the arable land, is under irrigation. In addition, land ameliorationcovers 3.2 million ha, 8.5 % of the arable land, of which about 2.2 million ha is under drainage. Most of the irrigated land is in the Donets-Dnieper(37 %) and southern regions (49%), while most of land ameliorationand drainage is in the southwestregion (94%). Although precipitationin the Donets-Dnieperis between450 and 550 mm per year, the period between the spring and the fall is relatively dry and supplementaryirrigation is used, mainly for fodder and summer crops. Precipitationin the southwest region rangesbetween 550 and 1200 mm, and is more evenly spread over the year, so irrigation is not needed. In most of the south, precipitationranges between 300 and 400 mm per year and the summer is dry. Irrigation is, therefore, essential for summer crops and horticulture. About 84 % of the irrigated land is used for production of grain (34 %) and feed crops (50 %). Only 16% is used for productionof industrialcrops (6%) and vegetablesand fruits (10%). Since irrigationrequires pumping, costs would rise substantiallyif fuel were priced at the internationallevels. This could result
3 About 16% of the deficit between the estimated required and actual average provisions.
4 In terms of benefit: the deficiency of about 1.3 million tons of phosphorous, even at a price of US $130 per ton (which is the 1991 cost for triple superphosphate), is about US $170 million. The wheat price in 1991 was about US $140 per ton (fob Canadian), or total value of 10 to 15 million tons will amount to about US $1.4 to US $2 billion. Hence, providing the optimal balance of phosphorous would yield an estimated benefit between US $1.2 and US $1.8 billion, Measures to Improve Farm Production and Efficiency 97 in a strong shift in cropping patterns. Table 6.1: Indicators of Farm Mechanization
6.8 Mechanization. 1986/1990 1991 1992 Agriculture in Ukraine was more units ha units ha units ha mechanized than the rest of the ('000) /unit ('000) /unit ('000) /unit former Soviet Union, but Available 500.1 71 497.3 71 511.5 63 considerably less than in Tractors Western Europe. In 1992, there were 511,500 tractors in Ukraine Harvest 111.6 125 105.2 125 103.4 125 compared to 2.6 million in the entire former Soviet Union. Beet 18.6 91 19.8 83 20.1 77 This means one tractor per 63 ha Harvesting of arable land in Ukraine, Combines compared to about one per 84 ha Corn 13.8 125 15.3 83 15.3 59 in the former Soviet Union. In Harvesting addition, there were 103,400 Combines combine harvesters, or one per Potato 9.3 50 9.6 38 9.2 36 125 ha of grain crops, compared Harvesting to one per 160 ha in the FSU. Combines The average ratio in the EU is Source: Ministry of Agriculture and Food one tractor per 18 ha of arable land, and one cereal combine for 71 ha of grains. (See Table 6.1)
6.9 The quantity, mix, and quality of mechanical equipment is not entirely satisfactory. While the supply of most machinery and equipment remained relatively stable over the past six years, the number of combine harvesters declined by about 5 %. The age of the tractor fleet and other machinery is unknown, and there is probably significant variation in their effectiveness and suitability. There is a substantial shortage of medium and small cultivating tractors (between 30 and 100 HP), maize harvesting combines, potato harvesting combines, and silage harvesting combines. Field visits revealed that there is also shortage of grain drying equipment. Absence or insufficient use of grain drying equipment has a detrimental impact on the quality of animal feed and the economics of livestock production in general.
6.10 Quantity of farm machinery is not a major constraint on agricultural production, except in specific cases, such as the number of grain dryers or certain combines. The problems are more qualitative, e.g. efficiency of the combines is low, resulting in higher losses than comparable combines in the West, and spare parts are often not available, causing a significant amount of machinery and equipment to be idle at critical periods of production.
6.11 Energy Utilization. Energy use in Ukraine has decreased in recent years. In 1993, 26 million tons of fuel was used for all agricultural production, including livestock, compared with 34.2 million tons in 1980-86. Ukrainian agriculture is still more energy intensive than agriculture in developed countries. In 1990 206 kg of fuel was used to produce 1 ton of grain units, compared with 61 kg in France, 70 kg in England, and 81 kg in Germany.5
5 Ukrainian Institute for Agricultural Economics (estimates) 98 Chapter 6
6.12 Pest and Weed Control. As much as 25 % of production in the FSU may have been lost due to pests and weeds. Ukraine probably fares no better, since its pesticide and herbicide applications and quality as well as production systemshave been about the same as in the FSU. In 1991, about 80% of the arable areas of Ukraine were treated with an average of 2.7 kg/ha of pesticides, comparedwith 1.7 kg/ha of active ingredientsin the FSU, 7 to 8 kg/ha in the US, and 6.6 kg/ha in EU countries.
6.13 A quarter of the pesticidesare producedin Ukraine, while about 50% are importedfrom other FSU republics, and the rest comes from other countries. The cost of importedpesticides was about US $350 million in 1992. Herbicidesare consideredto be the most critical in terms of scarcityand about 35 % of the requirements must be imported from outside of the FSU. This compares to the need to import about 12% of the fungicides and about 11% of the insecticides.
6.14 Seeds. Ukraine producesabout 6 million tons of seed per annum, which more than meets all domestic needs in productive terms. The winter crop uses about 3.5 million tons of seed and the spring planting about 2.2 million tons. The majority of seed used by state and collective farms is produced in their own seed multiplicationfields from seeds initially obtained from seed farms. Plant breeding is the responsibilityof the MOAF, but the actual research is carried out by the Institute of Agriculture Research. The heavy seeding rate results from use of equipment that cannot seed at prescribed rates and low germination rates. Farmers compensateby over seeding to ensure adequate standards.
ImprovingLand Use / ComparativeAdvantage
6.15 Soil productivityin Ukraine has been damagedbecause of stereotypicalproblems of land use, crop rotation,fertilization, cultivation, irrigation, and soil drainage. The environmentalsustainability of Ukrainian agriculture requires maintenanceand improvement of the fertility of agricultural land. Reforestation programs should be considered for land that is deemed unsuitable for cultivation or livestockoperations. Farmers who are employedon marginal land and in marginal livestockoperations should be assistedthrough training in land preservationpractices suitable for local conditions.
6.16 Croppingpatterns will undoubtedlychange considerablyas market forces affect the agriculture sector, and farming concerns itself with optimizing returns rather than increasing production. Attention will then have to be given by farmers to soil and climatic conditions, price relationships, marketing possibilities, labor and machinery availability, and other production and economicfactors. Both researchers and farmers will need to focus on the developmentand application of appropriate low input, and sustainableagricultural practices. One practice with considerablepromise for wider applicationin Ukraine is no-tillageor minimum-tillagetechnology. Changingthe composition of fertilizers and providing more active phosphoruswould generate substantial additional yields.
6.17 At present Ukraine does not seem to have a measurable comparativeadvantage in crop productionrelative to Western European countries, or even to Central and Eastern Europe (Table 6.2). Production expensesper hectare are lower, partly because of prevailing exchange rates, while yields are substantiallylower. At the same time the crop production enjoyscomparative advantage inside FSU and in relation to North America, higher or comparable yields are reached with similar input use and expenses. In the medium and longer term, however, Ukraine is likely to develop comparative advantage if yields of its main crops increase to comparable levels or exceed those in Central-Eastern Measures to Improve Farm Production and Efficiency 99
Europe and in the industrialized countries. The ecological and Table6.2: Comparisonof AverageCrop Yields (tons/ha), 1986-1993 technical conditions definitely exist, especially in grain and oil Country Wheat Potatoes Sunflower Sugarbeets seed production, for this yield Seeds increase. Ukraine 3.0 12.5 1.6 27.0
Russia 1.8 10.2 1.3 23.3
Improvement in Farm Canada 1.8 24.8 1.4 37.8 Management USA 2.4 32.2 1.2 43.7
6.18 There is Argentina 1.9 23.6 1.4 potential for efficiency Poland 3.8 18.9 --- 35.4 improvement in labor and Romania 3.4 10.7 1.5 17.6 machineryutilization,management, and by decreasing large losses France 6.3 32.3 2.3 64.5 during planting, harvesting, and Germany 6.6 36.1 --- 53.9 storage. Source: FAO Agriculture Yearbook, Gomkomstat and Bank Internal Reports
* Labor. About 20% of the overall working population, includingtechnical staff working on farms, is engaged in agriculture. This translates into a high labor component per farm high employment of administrativestaff. Farms also employ groups of craftsmen, such as bricklayersand electricians,who work solelyon farm-relatedschemes. They accountfor up to 25 % of the agriculturallabor force. These services add an unnecessaryburden to farm expenditures and could be performed more cheaply by outside contractors in a market system. Establishingthese service as independentunits at the village level would provide employment for villagers and would contribute to the privatizationeffort.
* Management. Currently, managementis still inhibitedby lack of commercially-oriented policy planning and by a certain "subsidy mentality"that relies on the state to make up losses. There is also a social componentthat forces the manager to provide employment for rural people. The lack of market orientation in production can be solved through greater specializationin a limited number of production branches and by the closure of unproductive units. The problem of low work morale can be alleviated through performance-orientedremuneration.
* Production and Processing Losses. Government officials readily admit that losses in production and processing of agricultural products are very high. It is estimated that losses of agriculturalproducts vary between25 and 35%, and arise because of inadequate handlingduring harvesting, feeding, and processing. Losses are also causedby outdated, broken, and low quality machinery. It is estimatedthat with better seeding equipment, seed requirements could be reduced. Further losses occur in harvesting and storage. Processing machinery in the dairies and bread factories is generally well over ten years old and is in need of replacement,if for no other reason than to reduce the rapidly rising costly demand for spare parts. Another source of losses is low quality feed rations, which result in higher feed input per unit of output. Because of low quality grain and concentrateinput and difficultiesin maintainingconsistent rations, excessiveamounts of 100 Chapter6
fodder have to be fed to produce livestockproducts. An additionalsource of waste is the feeding of meal rather than pellets, which causes losses in handling.
* Application of Chemicals. Usage of potassium almost everywhere is excessive, while only about 70% of nitrogen fertilizer needs are supplied. There is a deficiencyin use of phosphoric fertilizers. Only about one third of pesticides requirements are applied. Beyondinadequate ratios, the process of applicationof chemicalsis often technologically poor.
* Over-utilizationof Machinery. Ukrainian agriculture uses 2.9 tractors and trucks per 100 ha of agriculturalare, the same level as in the former German Democratic Republic (GDR). This intensityis one of the highest in the world for this type of farming system. It is not justified by work requirements,particularly if one considersthat nearly 60% of the agricultural area is under grass and fodder crops and that the fertilizer supply enterprises do a considerableamount of fertilizer and manure spreadingfor the state and collectivefarms. The number of grain combines per 100 ha of agricultural land is 0.2, a level that is one of the highest in the world. The overcapacity of machinery was encouragedby low prices for fuel. In addition to past low fuel prices, the large amount of machinery per farm is explainedby the low quality of machinery. It is sometimes necessary to keep one tractor for spare parts to keep another one going. At the same time, machinery scaled to the needs of smaller farming units is hardly available.
6.19 These inefficienciesare not insurmountable. Most farms should be able to increase their productivitythrough: (a) better plant and animal breeding material; (b) better use of less, but higher quality, machinery; and (c) better agriculturaltechniques, including machinery able to reduce losses in production, storage, and processing. After abolishingadministrative planning, most farms should be in a position to adjust their productionprograms accordingto climatic and soil situationsin the framework of a market-orientedproduction policy, without necessarilyintensifying agricultural production through higher inputs.
B. ADJUSTMENT IN THE LIVESTOCK SECTOR
Efficiencyof LivestockProduction
6.20 Livestockproduction has generallybeen inefficient,being concentratedin large units and depending heavily on feed rather utilizing grasslands, although production practices for poultry, most pigs, and dairying are similar to those in Western countries. Production performance is much below Western standards: fertility rates are 33% lower, meat and milk production per animal unit is less than 50% (Table 6.3).
6.21 Animal mortalityrates are at least twice those for Western countries, and have increased rapidly during the past years due to shortages of medications and vaccines. Mortality rates are particularly high for young stock, with piglet mortality rates on many farms above 33%. Cow replacementrates (up to 30% to 40% in some instances) and culling rates in layers (up to 50% to 70%) are high by any standard. Major indicatorsof livestockproductivity show a substantial20-25 % decline Measures to Improve Farm Production and Efficiency 101 in recent years (Table 6.4) increasingthe gap with advancedcountries.
Table 6.3: Livestock Performance Compared to that of Selected EU Countries
Category Unit Ukrainea, EU Countries Ukraine as % of EU Countries
Commodity per Year Kg 2,200 4,800 (UK) 47
Calves weaned/cow/year % 66 90 (UK) 73 Lambs weaned/ewe/year % 75 115 (U5K) 65 Piglets weaned/sow/year % 11 20 (UK) 55 Eggs/layer % 195 268 (UK) 73 Lean meat share of pigs (110 kg. liveweight) % 40 54 (UK) 74
Feeding Efficiency"1
Cattle fattening Feed Unit 12.0 6.0 (Germany) 200 Pig fattening " 8.0 3.5 (Germany) 229 Broiler fattening " 5.0 2.5 (Germany) 200 Cow milk production 1.5 0.8 (Germany) 175 Source: Ministry of Agriculture and Food. a[ Social Sector only. b/ Oat units from manufactured feed required per kg. of animal product in addition to those from roughages; one oat unit = 600 grams of starch. 6.22 Feed conversion ratios, the most important bio-economic parameters in livestock production, are less than half those in Western countries. To some extent this reflects low levels of protein in feed. Introductionof soybeansand other oilseed crops could result in major improvementsin the productivityof the livestocksector. Consumptionof feed grains and manufacturedfeedstuffs exceed optimal levels by a third to a half. Poor quality feeds particularly affect broiler and Table 6.4: Decline of Productivity in the Livestock Sector pork production. On many 1993/1990 farms, birds of 70 to 75 days 1990 1993 Decline (%) only weigh one kg and contain large amounts of intestinal fat, per cow (in all farm 2863 2212 23 while pigs require 13 to 15 categories), kg. monthsto reach 110 kg slaughter weights, and often have lean In large scale farms 2941 2098 29 meat carcass content of no more Average weights gains per/day than 38% to 40%. - cattle 421 299 29
6.23 Shortages and - pigs 229 174 24 poor quality of feedstuffsare the Average weight of one cattle most importanttechnical reasons head, sold to the state, kg. 393 353 10 for low livestock productivity. Samefor a pig, kg. 127 115 9 In the past few years, due to shortages of feed grains and Eggs from I layer per annum 214 174 19 manufactured feed, increasing (in large scale farms) 102 Chapter 6 amountsof relativelylow density energycontent feedstuffshave been fed to monogastricanimals (poultry and pigs). There is a severe and increasingdeficit in protein feed, on the order of 4 to 5 million tons of soybeanequivalent per year, as well as in energy feedstuffs. Feedingof low quality hay, haulage, stovers and silage is widespread, and shortagesof roughageare common, especially during the long winter and spring feeding periods. Manufacturedfeed no longer contains a significantshare of protein meals and feed additives, such as micro-minerals,vitamins, antibiotics,and coccidiostat. The resulting suboptimal nutritionalvalues are causingfeed consumptionto be up to 50 % higher than averagestandards in western livestockproducing countries.
6.24 Low feedingefficiency has a negativeeffect on profitability. Under prevailing conditions of poor quality pig rations, for example, one kg of soybean meal equivalentcould replace at least 2 kg of energy feed grains. This would increase fertility rates and daily weight gains, while simultaneously lowering mortalityrates and disease incidence. Moreover, fatteningperiods for pigs and broilers could be shortened by 33% on average if optimal feed formulas were applied. Under current conditions of deficient feed supply, it would make economic sense to: (a) increase production and importation of protein meals and feed additives; (b) expand cultivationof high protein content grain and forage crops; and (c) reduce the number of livestock in order to optimize the use of limitedprotein and feed additive resources. 6
6.25 Shortages,largely due to a decline in import availabilities,and poor quality of domestic veterinary supplies, also contributeto low productivity in the livestock subsector. The most urgently needed veterinary supplies are drugs for treatment of internal and external parasites, wide spectrum antibiotics, coccidiostat, and reagents, chemicals and equipment for domestic production of effective medicines, drugs and vaccines. Increased availability of the veterinary supplies would contribute to reduction in the mortality rate and improvementin productivityby 20% per annum.
6.26 Low productivity of the livestocksubsector is also a result of the low genetic potential of the herd and the lack of modern equipmentfor livestockproduction. Althoughefforts have been made to implement sire selection programs, genetic progress has been slow. There is a lack of up-to-date milking, milk cooling, and handling equipment as well as forage harvesters and forage handling and storage equipment/facilities. Improvementin the genetic structure of the livestockand availabilitiesof up-to-datelivestock equipmentwould greatly enhancethe productivity.
6.27 The successfultransition to a new agricultural system requires not only policy actions, but also shouldbe supportedby measuresto increasethe efficiencyof production and by investmentsin physical capital. Irrigation facilities, management,and crop and livestockproduction have to adjust to the new conditionsof private agricultureand the market system, especially in the form of improvements in production efficiencyand managementpractices.
6 Including about 4 to 4.5 million ha of forage maize, 4 million ha of perennial forage crops (of which about 2 million ha alfalfa, and 2 million ha of alfalfa and other perennial forage legumes and their mixtures with grasses), 2.5 million ha annual forage crops, 600,000 to 700,000 ha of fodder beet, 50,000 to 60,000 ha of each fodder melons and sugarbeet for livestock feeding, and 80,000 to 100,000 ha of a variety of other differentfield crops for silage, such as sunflower. Measures to Improve Farm Productionand Efficiency 103
Improvements in the Livestock Subsector
6.28 Profitability of livestock operations, particularly intensive poultry, pork, dairy, and beef fattening operations, is low. High investment and operational subsidy levels and price distortions have led to production systems which: (a) overused feed grains/manufactured feed, while neglecting cheaper feed resources, such as pastures/meadows, forage field crops, and agro-industrial byproducts; (b) wasted energy and other inputs; and (c) encouraged concentration of large numbers of animals, often causing severe managerial, animal health, and environmental problems, as well as high internal and external transport costs, and difficulties in applying efficient feeding, milking, and manure/slurry removal techniques. These production systems, combined with the current low productivity levels cannot be sustained under the emerging relative price structure.
6.29 Changes in the structure of consumer and producer prices and, consequently of consumption and production costs, will require a major adjustment of the livestock sector. Production costs will be much higher under free market conditions, and domestic consumption considerable lower. Export prospects outside the FSU are not bright and other republics of the FSU, have similar problems. The size of the sector should be allowed (and assisted) to adjust downward. Efforts should concentrate on measures to improve the efficiency of the livestock subsector, but attempts to maintain or restore the size of the sector through subsidization should be ruled out. Efficiency enhancing actions might include:
'3 Subdivision of dairy farms into smaller, self-contained, and genuinely privatized units, with the land, machinery, equipment, and storage facilities required to produce the roughage they need themselves, as well as, most of the feed grains required for balancing good quality basic forage rations.
-- Improvement of beef production requires: (a) increasing the feeding of good quality roughage, namely forage maize and its silage, as is common in Western Europe; (b) reaching higher slaughter weights of both young bulls and cull cows/heifers; (c) expanding single calving systems for heifers; (d) inseminating 15 to 25% of dairy cows with semen from specialized beef breeds; (e) expanding the dual-purpose Simmenthal breed population which, in the past two decades, has proven worldwide its superior meat; and (f) increasing specialization in beef production, with breeding operations and raising of young stock on natural pastures and rangeland with little or no supplementary feeding, and finished in feedlots during a short 3 to 4 months fattening period.
* Closure or privatization of unprofitable collective and state pig farms/complexes. Vertical integration of pig production with feed mills and processing plants, providing private farmers with feed, piglets, and veterinary/technical assistance to marketing/processing their finished pigs should be encouraged.
* With depressed world market prices for wool, sheep production should become more oriented to meat- and milk-type sheep. Switching can be done relatively quickly by importing rams. However, good feeding and management in the sheep producing farms is a prerequisite to continuation of production.
* Poultry production has already to a great extent been switched to the private sector; however, further privatization will be required to change the mode of broiler production to a deep litter system as is conventionally done in most of the producing countries. 104 Chapter 6
6.30 Ukraine's comparativeadvantage in livestockproduction in relationto other FSU republicsis based on higher crop yields and cheaperfeed availability. With the relatively low conversion ratios vis-a-vis the rest of the world and lack of remunerative prices and underdeveloped processing,the livestocksector of Ukraine has no Table 6.5: Comparison of Livestock Performance, comparative advantage over the West (Table 1986-1993 6.5). However, due to its immense potential for Country Milk Pig feed Broiler feed high yielding field forage crop production Yield conversion conversion (namely forage maize) and from the large per Cow amounts of agro-industrialbyproducts available, Ukraine has ample potential to produce comparatively low cost livestock feed for Russia 2000 1:5.5 1:4.2 livestock production. This can be the basis for Canada 5908 1:3.8 1:2.3 developinga comparative advantage outside the FSU republics. In addition, as mentionedbefore, USA 6494 1:3.0 1:2.1 Ukraine has, and will have for some time, Argentina 2319 1:4.0 1:3.0 relatively low cost labor. Improvement of the Poland 3217 1:4.7 13.5 conversion ratio in livestock feeding can also be expected with the removal of trade restrictions Romania 2081 1:5.4 1:4.5 which will allow purchase of the right France 2950 1:3.5 1:2.4 concentration mix, improvement of the genetic Germany 4802 1:2.8 1:2.1 material of livestock, and adoption of better Ge: FAO 1:2.8 1:2.1 Source: FAO Agriculture Yearbook, Gomkomsiat and managementand feeding practices, all of which BankIntemal Reports are essentialfor buildinga comparativeadvantage in livestockproduction.
C. INCREASING ACCESS TO AGRICULTURAL INPUTS AND PRODUCTIVE SERVICES
6.31 The main problem of the input supply is that input providers have monopolies. They have had no incentiveto satisfythe needs of the farms, so they have often provided an inappropriatemix of low qualityinputs. With Ukrainemoving toward a market economy,the input supplysystem will have to become more competitive.
6.32 Machinery and eNuipment.Problems of agricultural machinery are chronic, from the wrong mix of machinery, low quality components, to scarcity of spare parts and rising fuel prices. Depreciationregulations for tractors stipulate a lifetime of 12-15 years, but many of them last only 6 years, and require frequentrepair. The situationfor the grain combinesand agriculturaltrucks is similar, with very high scrapping rates.
6.33 Soviet agricultural mechanizationalmost totally disregarded design and production of smaller scale machines and equipment, despite the fact that some 25-30% of all agricultural production came from small private plots. Moreover, some of the design parameters, particularly in seeding, spraying, and harvestingmachines, allowed for imprecisework. The movementtoward world prices and the establishmentof financial responsibilityfor farms and other enterprises should have a major impact on the agricultural machinery industry in Ukraine. If they are to survive, manufacturerswill have to meet the specificationsof end users for quality and applicability. Measures to Improve Farm Production and Efficiency 105
6.34 Animal feed. The combination of alternatives provided by markets and decisions based upon potential profitability will result in significant improvements in feeding efficiency. The use of high protein feeds, vitamins, minerals, antibiotics, and other pharmaceutical will increase significantly. Use of these inputs will reflect their profitability. Higher feeding efficiency will cause lower livestock production costs by significantly reducing the amount of feed required per unit of output.
6.35 Seeds. Seed production is organized in typical Eastern Europe fashion involving research institutes in genetic work, breeders' (super-super-elite) and foundation (super-elite) seed production. Specialized seed multiplication farms produce further generations and do the first cleaning. Final processing and packing is done by one or two seed processing stations in each oblast.
6.36 The seed production and supply infrastructure appears to be disintegrating. If this occurs, there may be serious disruptions in distribution of high quality seed and in crop production. Significant difficulties exist in production of high quality maize, sugarbeet, and sunflower seeds. While hybridization of the first two is to almost 100%, only 40% of sunflower seed is available in hybrid form. The quality of domestically produced seed is inferior to imported hybrids of all the three crops.
6.37 Ukraine does not have an overall seed policy or seed law. In the absence of protection of breeders rights, foreign plant breeding and seed companies will be unwilling to bring their best germ plasm or to invest in the domestic seed industry. Thus it is imperative that an appropriate overall seed policy be established and implemented to guide the development of the seed industry in both its public and private components.
6.38 Agrochemicals. Agrochemicals are limited in availability and low in quality. Because of Ukraine's dependence on imports and the shortage of foreign exchange, there has been a substantial drop in the use of agrochemicals and fertilizer since 1991. A small quantity of agrochemicals is imported on a barter basis from Western suppliers but most of the supply still comes from domestic production and imports from the FSU. This consists of rather primitive mixtures and availabilities have been falling. The continued use of chemicals from domestic sources and imports from the FSU will require regulations that will guarantee environmentally safer products.
6.39 There is a need to improve efficiency and product quality in the domestic agrochemical industry. Inspection of pesticide production and plants and the distribution network jointly with foreign experts could help to improve current practices and identify inefficient or unsafe plants and distribution facilities. The state monopoly on distribution needs to be replaced with an efficient and competitive system, but manufacturing and distribution systems must be regulated to insure that necessary safety and health standards are met.
D. INVESTMENT PRIORITIES IN THE FOOD AND AGRICULTURE SECTOR
6.40 The completion of the agricultural reform program, first of all the land reform, state and collective farm and enterprise restructuring, and privatization are important preconditions for the improvement of the efficiency of primary production, processing, and distribution of food and agricultural products. Appropriate policies are needed to support investment to introduce new technologies and methods of production. Changes are required in the structure of production and the regional production patterns. The improvements in production techniques and methods should be reflected through improved 106 Chapter 6
crop and livestock yields at a constant level of input use or alternativelyreceiving same yields at lower input use level. The natural endowmentsof the food and agriculture provide potentials for Ukraine to competitivelyproduce food and agricultural products, mainly grain and oil seed products, above and beyond domesticneeds. In the medium term Ukraine should try to exploit these potentials. However, competitive and profitable export of agriculturalproducts require substantialimprovements in product quality as well as in internationalmarketing.
6.41 Basedon the review of current situationand the major tasks of transition, the investment priorities can be listed as follows:
* developmentof the physical facilitiesfor a working market for agriculturalproducts and inputs for agriculture;
* recapitalizationof agriculture accordingthe emergingnew farming structure;
* reconstruction and major modernizationof support services (industries such as seed industry, machinery maintenance);
* reconstructionand major modernizationof agroprocessing;
- introductionof environmentfriendly technologies;and
-- developmentof education, research, and developmentpotentials
6.42 Market Facilities. At this time, the need to create a competitivemarket structure for food and agriculture in Ukraine should receive high priority. The developmentof a new market structure should include improved facilities such as auction halls, city markets, regional cooperative or private packing and storage facilities, and transportation equipment. Market informationservices for farmers should also be made available, such as radio and televisionprograms and farm newspapers. All of this requires investmentat a relatively early point in the reform.
6.43 Rehabilitationand Recapitalizationof AgriculturalProduction. Ukraine has experienced a decline both in production and demand for food. Investment, especially in machinery, is needed to stabilize production and save hard currency during the critical first period of transition. No doubt as a result of the process of farm restructuringand land privatization,a large number of farm equipmentand buildingswill become unsuitable for the new system, or will require substantialreconstruction. At this moment it is very difficultto estimate the magnitudeof new investmentrequirements created by the land reform throughout of the region. However, in the near future this process will create demand for a wide range of farming equipmentand constructionmaterial.
6.44 Reconstructionof Food Processing Industry. Food processing is the bottleneck in the food sector. The relative backwardnessof the processing of foods is an extremely serious handicap for the agriculturalsector. Not only can the level of processing be seen in exported products, but to a large extent it also determines their price, and indeed whether they can be sold at all. It cannot be overemphasizedthat the demandinginternational markets can only be satisfied with food processing at a much more developedlevel than at present. The developmentof food processing in a way that is clearly linked to export strategy is an indispensablecondition for competitivenessand the improvementof export Measures to Improve Farm Production and Efficiency 107 efficiency. Naturally, more demanding processing is also becoming increasingly important for Ukrainian consumers too.
6.45 Need for Environmentally Friendly Technologies. The increased assertion of environment protection requirements means, above all, that:
* greater scope must be given to materials- and energy-sparing technologies;
* protection of the soil and the safeguarding of its quality must become a fundamental criterion for agricultural production;
* the emphasis must be placed on environment-friendly procedures. The principal goal is the prevention of environmental pollution and the reduction of procedures and harmful by-products damaging to the environment. The renewed spread of environment-friendly packaging materials made from "natural" materials is also desirable;
* the proportion of waste-free or recyclable technologies should be increased;
* technologies preserving the original property of the basic material and foods made with these technologies must be given greater emphasis; and
* the reduction and elimination of the use of chemicals is becoming an increasingly important consideration.
6.46 Investment in Human Resources. Agricultural universities, research institutes, and the yet to be created farm advisory/extension services, i.e., the agricultural information knowledge system, will be of strategic importance. Preparing the next generation of agricultural professionals is vital. As the full effect of economic reforms plays out, it will be important to be able to identify, adapt, and/or develop technical innovations to increase factor productivity and underpin competitiveness. Therefore, investment in human capital should be a high priority.
6.47 The private sector should play a decisive role in future investment in agricultural as privatization proceeds. The Government role is to provide an enabling environment, including an incentive framework that creates the right motivation for private investment in primary agriculture as well as in agricultural processing and distribution. Public investment needs to be directed at improving human and physical infrastructure, and to be linked to the implementation of a program of further reforms which set clear priorities.
E. MODERNIZING HIGHER EDUCATION AND RESEARCH
System of Agricultural Education
6.48 Ukraine has a well developed system of agricultural education and training. Its core is a network of 20 agricultural institutes and universities (Box 6.1). All of the institutions offer regular programs and the opportunity to study through correspondence. As of October 1993, the total enrollment 108 Chapter 6 was 84,000 students. The 121 X:: ...... agricultural colleges enroll an Maj-or-- Arculura U-i ers.itiesand their Facults,(1 additional 110,000 students. On - ie. .... Odessa. r...... it.te alowerlevel are the 73 technical...... and vocationalandnalvocati school,schools, wwhich hich 0-:At:::::::::.... -Agrnmii:: ,j000:000:0;Sgmno t0t00000.0000000-00000 :Tj;00l:eg...:egeabendFruit .t...... have 280,000 students. PtOtOtKi AAgronomy 0orestry conormcs . .0000-0000000000000000000000VeterinayMedic'inet-00tt;-fl'l00.00000 Zoolog0000ii ca Eni neer ing 6.49 The traditional Economics :er Mdicine curricula for higher education ZoologicalEngineering AccountAna ysis were designed to meet the needs CybeineticsP:edgogy ecazton.P of large farmis. Science courses Coninin Eduaio and related agricultural .. Agriturllect..rpja EninerngC icals technologycourses provide more...... or less up to date knowledge,but NicholaevAn lt.ral Instfitute ...Kherson Anriura Ins. t.t. management and business A..onomy...... Agronom education and training in . Zoologigineering .. .ooogca Engineering agricultural economicsare weak. Ecic Irrigation In 1993 new educational plans ation.Mecniz CIvilEn gineerng were prepared at the institutions ..ECononlc of agriculturalhigher educationin Physcal..uctio order to adjust curricula and ...... r Ins..itute. .. teaching practices to the new.... conditions. Specialattention was Agrnm given to strengthening E.on.o.s management and business Zoologicalineergtg. disciplines. The Institute ofMehnzto International Agrobusiness was X ...... created. Box 6.1
6.50 University professors are less involved in research than in the western countries, because research is mostly conducted outside the universities. The lack of communication with the rest of the world and the lack of mobility of university professors and young scientists has negatively affected the quality of higher education. Although teaching is the primary responsibility of faculty, 20-30% of faculty time is spent on research, generally of the applied nature. Although the importance of integrating teaching and research is recognized, because of the budgetary problems of the agricultural universities, very little money is available for applied research. Attempts were made to link research with education by integrating some of the universities and research institutions. Postponement of maintenance and repair of buildings and equipment is increasingly evident. An even more serious problem is the difficulty of retaining the best faculty members. Decapitalization of the human resources to these institutions cannot be easily or quickly reversed and is perhaps the most serious problem facing the agricultural universities.
Agricultural Research
6.51 Agricultural research in Ukraine is similar to that in the other republics of the former USSR. Research is organized in independent institutions, while the main role of universities and colleges is teaching and education. The bulk of research is carried on by the network of the Ukrainian Academy Measures to Improve Farm Productionand Efficiency 109 of AgriculturalSciences (UAAS) (Table6.6). Of the 236 agriculturalresearch institutes and stations, 177 belong to the Academy network. They accountfor 7,025 of the 17,426 scientistsand 20,591 of the total staff of 50,299. The rest of the institutesoperate under the aegis of the MOAF. The level of basic research meets internationalstandards in most areas, although recent budget cuts and inflation have already had a negative impact upon the system. The least developed sector in research is the social sciences: agricultural economics and farm management research are parochial and far from the mainstream. Research in agriculturalmarketing, policy analysis, etc. are virtually nonexistent.
Table 6.6: The Agricultural Science System in Ukraine, (1993)
Ministries Doctors Candidates and Scientific of of Agencies Institutions Workers Science Science
Academyof AgriculturalScience 177 7,025 283 3,229 Ministryof Agricultureand Food (includingHigher EducationalInstitutions) 41 7,220 356 3,373 State Food Industry 15 2,887 12 237 Ministryof Forestry 2 570 12 30 State Water Management 1 95 - 30 TOTAL 236 17,426 663 6,983 Source: UkrainianAcademy of AgriculturalSciences.
6.52 Research priorities are establishedby the State Committeefor Scienceand Technology, responsible to the Cabinet of Ministers. Currently there are two umbrella "programs" covering agricultural research in Ukraine for 1991 to 1995: "Priority Direction of Fundamental Research," covering basic research; and "Food Industry - 95," with a more applied focus. Each project area is coordinated by a leader from one of the research institutes or agricultural universities. Seven "coordinationand methodologycommissions" oversee the areas in which research projects are awarded. Each commissionreviews responsesto specific requestsfor research proposals and awards grants. This appears to be a competitive grants program. However, the grants process may not be working as intended because the "commissions"also play a role in the annual budgeting process and they attempt to ensure that annual budget requests from the various research institutes are consistent with the two major program areas.
6.53 There is little outside evaluationof research progress and performance. As reported at the Genetic Selection Center in Odessa, and the Kherson Irrigation Institute, in the first instance supervisorsand professionalcolleagues of the researcher,usually from withinthe same institution,review work accomplished. No program or institute reported having been reviewed by peer scientists from outside the system. Nor was is there a process by which the ultimate clients, i.e. the farmers or agribusinesspersons evaluated the utility and relevancy of agricultural research.
6.54 The critical minimumof resourcesneeded for meaningfulresearch is now not available. The current budget crisis has led to a situationwhere little more than salaries, (severely depreciatedin real terms) of scientistscan be covered. Internationalcontacts, other than by mail, have virtually ceased. 110 Chapter 6
Repair and maintenanceof equipment and buildings are put off. Buildings such as the large phytotron in Odessa are rapidly deteriorating. Perhaps the most serious problem for the UAAS institutes is that scientistsare forced to look for other ways to earn their living; some were reported to be actively looking for internationalemployment opportunities. Unfortunately,those that do tend to be the best.
6.55 Ukraine's agriculturaleducation and research systemis in trouble. If agriculture is going to be responsiveto the country's needs it must be current with developmentsin the internationalworld of science and technology:the system is now out of touch, indeed isolated. Ukrainian scientistsare also out of touch with the evolving needs of domestic farmers. They need more contact to ensure the relevance of their work, and to develop a constituencythat will ensure long-termfinancial sustainability for the system. A premium needs to be placed on the system's abilityto be creative, promote excellence, encourageentrepreneurship, and foster agility in the use of science resources.
6.56 The agriculturaluniversities and the research institutesunder the Ukrainian Agricultural Academyof Sciences(UAAS) are undergoingan unprecedentedperiod of budgetary stress that threatens their core activities. Their most important asset, the human capital embodied in scientistsand faculty could be lost if the situation is not corrected soon. In recent years there have been a significantincrease in the area of contactswith outside mainlyWestern Universities. About 50 inter-universityexchange and cooperationagreements were signed, more facultyand even studentswere dramaticallyoffered travel than anytime in the Soviet period. Their new connections,however, are still relatively modest comparedto the needs and the size of the country.
6.57 The Government is aware of the difficulty of the situation and accepted a Program for Developmentof Agricultural Education for the period up to 2000 in October, 1993. This program envisages substantive changes in teaching methods and substance as well as the provision of modern technologysuch as computers and improved libraries. As an addition to this program, a two-phased approach to the needs of the agricultural university and research institutions is required. As a quick response, to forestall irreversible damage to the institutions, as well as initiate some of the more immediatemodernizing requirements, the first phase would aim at immediaterepair and maintenanceof instrumentation,and endingthe professionalisolation of the universitiesand research institutesfrom their internationalpeers. Resources need to be augmentedto support collaborative research, attendanceat international professional meetings, provide access to, and modernization of, information systems, develop new course offerings, and update curricula.
6.58 A second phase would focus on the institutional and policy reforms necessary to modernizethe research system. Given the importanceof realizingthe inherentsynergy between research and higher education, a strategic issue that should be confrontedis how the agriculturaluniversities and research institutionscan be integrated. Associatedwith this issue is the need to rationalizethe allocation and utilization of resources available for research and in the agricultural university system. The respectiveroles of public and private research shouldbe defined to encouragethe most cost effectiveuse of limited resources. Ultimatelythis process has to lead to some hard decisions with respect to the reallocationof research resources, includinglarge scale downsizing,privatization, and the allocationof time by faculty for research, teaching and/or extension.
6.59 Agriculturaleconomics, farm management,and marketing should receive priority both in higher educationand research. There is an urgent need for training positions for teachers as well as increasedaccess to shorter and longer study tours and training. Books and periodicals in these subjects are also needed. Ukraine agricultural economicsand other agricultural related social services such as Measures to Improve Farm Productionand Efficiency 111 rural sociologyhave to be reintegratedwith the mainstreamof internationalscience. Marketingresearch, studies on new product development to meet new market opportunities, and trade policy options for Ukraine under the new conditionsshould be supported. Likewise research and study on the social impacts of the ongoing reforms in agriculture.
6.60 Another major issue for the research system is how to develop enhancedlinkages with clients to ensure relevance of the research agendas and long-termfinancial support. Since agricultural research producesstrong returns to the agriculturalcommunity, it shouldbe responsiblefor a proportion of the cost of agriculturalresearch, particularly the more applied work.
6.61 Universitiesand research institutesshould be encouragedto establishperformance criteria and evaluate scientistsand facultyto ensure promotionbased on the quality and relevancyof their work. Recruitment criteria will need to be reviewed and updated to ensure a heterogeneityof training and research methods of faculty and prevent "inbreeding." 112 Chapter 6 CHAPTER7
EXTERNALASSISTANCE
7.1 Ukrainehas embarkedon an historic and courageouseffort to transformits economyfrom a centrally planned to a market-orientedsystem. This reform will, under the best of circumstances,be a long process accompaniedinvariably by economic,social, and political difficulties. To ensure that this transition process is efficient and effective, and to minimize the transition problems, external assistance will be essential. In the agriculture and food processingindustries the assistancemost needed in the short and medium term would include:
* critical inputs for agriculturalproduction to avoid a decline in domesticfood supplies;
* technical assistance to help to formulate and implementa consistent transition program in food and agriculture;
* technicalassistance and capitalinvestment for the developmentof institutionsand support facilities needed for market based food and agriculture; and
* capital investments for the development of competitive production, processing, and marketing.
A. CRITICALINPUTS FOR AGRICULTUREPRODUCTION
7.2 The supply of farm inputs is declining because of the lack of foreign exchange, disruptionsin the domesticsupply network, and the absence of a well-developeddistribution system for serving smaller and more numerous farms. Shortages of pesticides, herbicides, fertilizers, veterinary medicines, concentratefeed, feed additives,and spare parts for agriculturaland transport equipmentare critical. Emergencymeasures may be needed to supplementsupplies for several planting seasons.
7.3 The donor agenciesshould therefore begin to provide quick-disbursingfinancial assistance to Ukraine for imports of critical agriculturalinputs needed for economicallyviable productionsystems. In parallel, assistanceshould be provided to establish efficientarrangements for timely deliveryof inputs, whether through reliance on market mechanismsor, more likely, through a mix of market mechanisms and administrativemeans.
B. TECHNICALASSISTANCE AND INSTITUTIONBUILDING
7.4 Many difficultpolicy, technical,and institutionalissues are emergingduring the transition from a commandto a market economy, and skills generally not availablewithin the country are needed to deal with them effectively. Technical assistance and training covering broad areas of food and agriculturalsector policy are neededto facilitatethis transition. The topics identifiedbelow are indicative only for technical assistance needs in agriculture of Ukraine. In many of these areas a number of multilateral institutions, foreign governments,and private organizationsare already involved, but their support so far meets only a small fraction of the need. Also, the coordination of technical assistance activities, to ensure their relevance, usefulness, and cost effectivenessis a high priority. 114 Chapter 7
Policy Development
7.5 For the transition period and beyond there is a need for constant monitoring and evaluation of price, income, investment, and trade policies and producer and consumer subsidization consistent with the program of stabilization of the economy and the goal of economic restructuring. Technical assistance and training are critical in these areas. Foreign experts will have to play an importantrole in the strengtheningof agriculturalpolicy analysis capabilityin the country, as well as in reorganizingpublic administrationin agriculture. Internationaland bilateral organizationsshould also be prepared to provide expertise on economic policy issues generally, and support the upgrading of formal training programs in economicsand agriculturaleconomics.
Land Reform Implementation
7.6 Although Ukraine has a detailed mapping base, it has not taken any but the most basic steps toward establishinga modem cadastre and comprehensiveland informationsystem needed for land registrationand titling of individualland holdings, land market development,and for exercisingan active land and environmentalpolicy. Technical assistance in developinga comprehensiveland information system would facilitate not only the land reform, but also the development of land taxation and rural credit systems based on land as collateral.
7.7 While the land reform law provides a framework for the land tenure reform, the developmentof new productionmanagement units in agricultureand the restructuringof their production systems is impaired by the lack of knowledge and experience of the involved agricultural population. Support for an informationsystem to apprise farmers of their options for owning land, and a service to advise them on enterprise management, would substantially democratize, accelerate, and probable rationalize the enterprise restructuring. Technical assistance is needed in establishingWestern type agriculturalcooperatives, especially agriculturalservice and input/outputmarketing cooperatives.
Enterprise Privatization
7.8 Assistancemay also be neededto help design social safetynets for rural residentsas state and collective farms are restructured. Such services need to be stressed as labor is released during the restructuringof state enterprises and unemploymentincreases.
7.9 The World Bank, the European Bank for Reconstructionand Development, and the European Union are already providing extensive technicalassistance to the state property organization in Ukraine in the designand implementationof corporatizationand privatizationprograms. Agricultural processing and marketing enterprises are in particularly urgent need of plans for restructuring, demonopolization, and privatization. Assessments should be carried out to identify options for restructuringor closing inefficientfood industry plants with outdated technology. Assessmentsshould examine management in the dairy and meat subsectors and procurement, technology, and product marketing options in other subsectors.
7.10 Managers of large food enterprises and retail outlets need training in marketing, accounting,and finance. Foreign specialistsshould assist in the establishmentof new, privately operated wholesaleterminals in selectedurban areas. Pilot projects could be initiated to teach business skills and, External Assistance 115 for each major commodity group, to develop and demonstrate commerciallyoriented interactionat the retail-wholesaleinterface and at the farm product assemblylevel.
Input SupplyTechnology
7.11 Input production facilities need to be assessed with an eye to their long-term viability under market conditions. Associated investment strategies need to be developed as well. Technical assistance is needed for manufacturingenterprises at the production and distributionlevels and for input dealerships, to establish product standards, quality control, and a network for providing service and support to end-users. Input dealers also need training in business managementand technologytransfer. The developmentof farm service dealershipsor emergingservice cooperativeswould greatlyassist in this effort.
7.12 Assistanceis needed in defining the proper roles of governmentand the private sector in the development,multiplication, distribution, and marketing of seed. Areas requiring attention include protecting property development (defining the rights of foreign firms engaged in seed research), production, marketing, and upgrading national seed quality. As part of farm restructuring, a large number of veterinarians now employed by state and collective farms are likely to move into private practice. Guidance, based on foreign experience in privatizing veterinary services, would be helpful.
7.13 The viability of various types of livestock and crop production and production technologiesneeds to be evaluatedon a regionalbasis accordingto market principles. Priority areas for technical assistance are farm management, appropriate technology for smaller, more competitive production systems, and product quality considerations.
Research,Education, Extension
7.14 The agriculturalresearch system needs to be reviewedand adjustedto the country's needs. It would also benefit from exchangewith foreign scientistsand from assistance in financingequipment and supplies, and subscriptionsto foreign scientific publications. Agricultural research and education systemsneed to be integrated into a comprehensivesystem of research, education, and extension that is oriented to commercial agriculture and more attuned to the optimal use of natural resources. The growing importance of private farms creates special needs for developing new information systems (technical,market, policy), informationchannels, and research and extension programs for appropriate production technologies. Retraining of technical specialistsat the local level will be necessary.
Rural Finance
7.15 Substantialretraining in modem banking practices is one of the highest priority needs, particularly in the rural banking system. Programs should encompass seminars for policy makers and senior managers on priority issues in rural finance,retraining of instructorsin bank training institutions, on-the-jobtraining, revision of university curricula, and temporary contractingof foreign institutions as appropriate. Training is needed in virtually all aspects of financial sector reform: central bank supervision,bank restructuring,legal aspects of banking, accounting,and central and commercialbank management.Technical assistancein the design of an efficient rural credit system is essential. 116 Chapter 7
C. NEW INVESTMENT
7.16 The guiding principle for all new investmentsshould be whether they are likely to be efficientlyused, and whether deploymentis economicallyefficient. Ideally, then, investmentswould be directed toward projects that facilitate restructuringenterprises which adjust their production systemsto real factor and product market conditions.
7.17 The international community has used several means to stimulate investment and technologytransfer in the food and agriculturalsector in transforming socialist economies.Most direct financialassistance comes throughloans from multilateraland bilateral assistance programs for investment project development--securedby sovereignguarantees; equity and loan participationat the enterpriselevel in the private sector (by the InternationalFinance Corporation of the World Bank Group, for example); and technical assistance grants and credits, which are time-testedmethods for introducing advanced technologies.
7.18 Several innovativetechniques are also being used to encouragedirect private investment, and some of these could be extendedquickly to promote privatizationrehabilitation, and developmentin the Ukraine food and agricultural sector. These include financingprivate enterprise developmentfunds that enable local and joint-venture investors to acquire foreign equipment and material; underwriting credit guaranteefunds and venture capital funds, whichhave proved fairly successfulin the transportation sector; and extendinginvestment guarantees--throughinsurance and other means--to individual foreign investors and their financiers.
D. THE PRINCIPLES OF A BANK ASSISTANCEPROGRAM
7.19 The Bank's assistanceprogram in general aims at helping to realize the full potential of agriculture. In the short term (within the next 3 to 4 years) the program would focus on facilitatingthe transformationof agricultureby assistingin stabilizingdomestic food supply,designing and implementing a market oriented policy framework for agriculturalpricing, marketing and trade, building of support services for the transformation of agriculture, and developmentof reforming agricultural production, marketing, and processingenterprises.
7.20 To assist in stabilizingthe domestic food supply, the Bank would consider providing financial resourcesfor importingcritically needed recurrent inputs and crucial agriculturalequipment in order to alleviate the shortages in chemicals, food additives, and spare parts which are responsible for much of the current output decline. This input supply program would be combined with the implementationof an agreed agriculturalprice, marketing, and trade reform agenda.
7.21 To strengthen the capacity of agricultural institutions and services for supporting the agriculturalreform process, the Bank would consider providing resources for establishingand operating an agricultural facility to assist the government in the analysis of current policy issues and in the formulation of policy recommendations,rehabilitating the national seed industry, rehabilitation of the nationalagricultural research system, establishmentand operationof an agriculturalprivatization and farm business advisory system to facilitate the privatization of farm managementand the restructuring of agriculturalenterprises and modernizationof the cadastre and land informationsystem. ExternalAssistance 117
7.22 To facilitatethe productiondevelopment of suitablyrestructuring agricultural enterprises the Bank would consider the provision of resources for economically viable on-farm investments especially for export oriented production such as grains and oilseeds. The feasibilityof such support would to a large extent depend on a stable monetary system and a consistent pricing policy for agricultural inputs and outputs. 118 Chapter 7 STATISTICALANNEX
CONTENTS
TABLE 1: Administrationand Territorial System, as of January 1, 1992 TABLE 2: Structure of GovermmentAgricultural Management, 1994 TABLE 3: Structure of the Ministry of Agriculture and Food, 1994 TABLE 4: Oblast Level Managementof Agricultureand Food, AdministrationServices TABLE 5: Rayon Level Managementof Agricultureand Food, AdministrativeServices TABLE 6: Land Use as of January 1, 1993 TABLE 7: Soil Status of Agriculutral Land of State, Collectiveand Private Farms as of January 1, 1992 TABLE 8: Gross AgriculturalProduction, 1986-1993 TABLE 9: Cropped Area of Agricultural Crops, 1986-1993 TABLE 10: Average Yield of Agricultural Crops, 1986-1993 TABLE II: Change in Cropping Structure, 1985-1993 TABLE 12: Use of Organic Fertilizers in Collectiveand State Farms, 1982-1992 TABLE 13: Use of Mineral Feritlizers in Collectiveand State Farms, 1982-1992 TABLE 14: Provision of Plant Protection in Collectiveand State Farms, 1982-1992 TABLE 15: Agriculutral Machines in Ukraine, 1983-1992 TABLE 16: Availabilityof Certain Types of AgriculturalMachines, as of January 1, 1992 TABLE 17: Number of Livestockand Major LivestockProduction TABLE 18: Average Animal Productivityin State and Collective Farms by Agro-Ecological Zones, 1982-1992 TABLE 19: Livestock ProductionPerformance of Social Sector Farms TABLE 20: Number of Private Farms as of April 11, 1994 TABLE 21: Indices of Personal SubsidiaryPlots of Land at End of Year TABLE 22: Food Industry Production TABLE 23: Consumptionof Basic Foodstuffsper Capita and their Share in Family Income TABLE 24: Marketing Channels for Major AgriculturalProducts of the Socialist Sector, Collectiveand State Farms TABLE 25: ProcurementPrice for Sales to the State of Different Kinds of Produce, 1989-1992 TABLE 26: Wholesale Prices of Certain Kinds of AgriculturalInputs in State Trade and on CommodityExchanges, 1989-1992 TABLE 27: ProductionCosts in Agricultural Enterprises, 1982-1992 TABLE 28: Retail Price Indices for Foodstuffsin State and CooperativeTrade, 1990-1993 TABLE 29: Average Prices for Basic Foodstuffs, January 4, 1994 TABLE 30: Pricipal Costs of IndividualKinds of Bread in July, 1992 in Kiev TABLE 31: Area of Forest Stock, 1982-1992 TABLE 32: Production Indexesof Forest Associations,1982-1992 TABLE 1 - Ukraine: Administration and Territorial System, as of January 1, 1992
Districts Towns Administrative and Urban Village Territorial Units Republican and Settlements Settlements Rural Urban Total Regional District Subordination Subordination
Republic of the Crimea 14 3 14 10 4 55 961
Oblasts: Vinnitsa 27 3 17 4 13 30 1466
Volyn 15 -- 11 4 7 21 1048
Dnepropetrovsk 22 18 19 13 6 54 1449
Donetsk 18 21 50 25 25 134 1126
Zhitomir 23 2 9 4 5 46 1635
Transcarpathian 13 -- 10 2 8 28 562
Zaporozhye 18 6 14 5 9 23 929
Ivano-Frankovsk 14 -- 14 4 10 25 759 Kiev 25 -- 24 9 15 31 1207
Kirovograd 21 2 12 4 8 26 1019 Lugansk 18 4 37 14 23 109 797 Lvov 20 5 41 7 34 36 1856
Nikolayev 19 4 9 5 4 20 919 Odessa 26 8 17 5 12 33 1139
Poltava 25 5 15 5 10 21 1862
Rovno 15 -- 10 3 7 17 1003
Sumy 18 2 15 6 9 20 1498 Ternopol 17 -- 16 1 15 19 1001 Kharkov 26 9 17 6 11 61 1737
Kherson 18 3 9 3 6 30 675
Khmelnitsky 20 -- 13 4 9 24 1416
Cherassy 20 2 16 4 12 17 820
Chernovitsky 11 3 10 1 9 9 398 Chernigov 22 2 15 3 12 32 1518
Cities under Federal Jurisdiction: Kiev -- 14 1 1 -- 1 -
Sevastopol -- 4 2 1 1 1 28
Total 485 120 437 153 284 923 28,828
Source: Ukrainian Ministry of Economics Urban settlements - 1360 District centers in towns - 284 Total number of settlements - 30,190 District centers in urban settlements - 201 TABLE 2 - Ukraine: Structure of Government Agricultural Management, 1994
Country Executive Organizations |Regional Administration Regional District Ministry of Agricultureand 650 employees. State Agriculturemanagement District agricultural Food inspectorates,research units of the Crimea and managementunits: 457. institutions,production and regional administrations: Staff: 15 per unit. scientificassociations, 25. Average staff: 81 per Agroindustrialassociations: enterprises: 150. unit. 28. State Committeefor Food 200 employees. Research Regionaland inter-regional Industry institutions,companies, units: 79. - unions: 28 State Committee-forWater 190 employees. Advanced Water managementboard Management training institute, of the Crimea and regional engineeringcenter, others: land reclamationboards: 4. 28. Average Staff: 28 per board. Construction and operation associations: 7. Ministry of Forestry 108 employees. Production Regionalforestry associationsand the like: associations: 22. 50. Regionalboards: 3. State Committeefor Land 70 employees. Regionalboards: 24. Land resource departments: Resources Staff: 20 471. Staff: 3 per unit Administrationboards: 2.
Source: Ministry of Economics
TABLE 3 - Ukraine: Structure of the Ministry of Agriculture and Food, 1994
Total Employees: 650 PrincipalDepartments: - Ministry Administration - Legal Department - Economy - Agriculture in Chemobyl Zone
- Reforms and Market Relations - Baby Food and Formula
- Food Resources, Including State Inspectionof - Developmentand Forecast of Material Resources Procurementand Product Quality Supplies and Marketing
- Crop Production - IndividualFarms and Subsidiary Plots
- Fodder Production - State Cereal Inspection
- Livestock Production - State Inspection of AgriculturalTechnology and Machinery
- VeterinaryServices - Worker Safety
- TechnicalPolicy - Cereal Production
- Capital Construction - Mixed Food Production
- Scienceand Research - Milk Production
- Financial and Price Regulation - Meat Production
- Rural Social Development - Auditing
- External Economic Relations - Accounting
Source: Ministry of Agricultureand Food TABLE 4 - Ukraine: Oblast Level Management of Agriculture and Food, Administration Services'
Services Number of Staff Economy, Market Relations, Forecasting Degovernmentization and Privatization 5-6 Agriculture and Environmental Protection 6-7 Livestock Production and Breeding State Inspection Board 6-7 Feed and Concentrate Production 2-3 Meat and Dairy Industry 3-4 Technical Policy, Scientific and Technical Progress Implementation and Labor 4-5 Protection Investment and Capital Construction 4-5 Social Services and Provision of Specialists 5-7 Cottage Industry and Private Farming 3-4 Legal Affairs 2-3 Finance and Price Formation 4-5 Accounting 2-3 Audit 2-3 Foreign Economic Relations 1-2 Organization and Payment of Labor and Forecasting Consumption 4-5 Special Works I Administrative Support 16-18
Source: Ministry of Agriculture and Food
TABLE 5 - Ulraine: Rayon Level Management of Agriculture and Food, Administrative Services2
Service Number of Staff Administration 2 Agronomy 1-2 Livestock 1-2 Mechanization 1 Economic and Control Services 1-2 Finances, Accounting and Auditing 1-2 Labor Organization, Payment and Consumption Forecasting 1 Capital Construction Services and Investment 1 Legal Affairs 1 Personnel Management 1
Source: Ministry of Agriculture and Food
I Ncte: Sia July I, 1992,these rvkesam directedat theOblst levelby a deputymaeinw appointedby the p Wsdent.In son ca the deputynmnager k upportedby a secondappolntcc, dten from the oppoeIonpetty.
2 NoteaShiceJuly 1, 1992,theserambe s dote atthe tRayw tenl byeadepty etw appointedbythe preskdent TABLE 6 - Ukraine: Land Use as of January, 1, 1993 (thousands of hectares)
Total Including Total Area Rural Land Arable Land Meadows Pastures
Total Area 60,356 41,930 33,363 7,473'
Agricultural Enterprises and Farms, of 44,830 38,599 31,174 6,361' which:
Collective Agricultural Enterprises 29,239 24,840 20,797 1,263 2,475 State Agricultural Enterprises 10,144 8,574 6,939 285 1,040
Agricultural Coops 75 68 56 3 8
Agricultural Joint Stock Companies 186 160 134 8 15
Privately Used Land of which: 5,186 4,957 3,248 1,264' Peasant Farms 360 350 316 33-
State Land Reserves (including the land of 10,778 2,593 1,891 208 477 forest enterprises) Other Uses 4,748 738 298 97 330
Source: Ministry of Agriculture and Food Includes meadows and pastures
TABLE 7 - Ukraine: Soil Status of Agricultural Land of State, Collective and Private Farms as of January 1, 1992
Zones
National Total Steppe (%) Forest-Steppe (%) | Woodlands (%) ('000 ha) l
Total Surveyed Land Area 38,705.4 47.08 34.76 18.16
Eroded 12,829.4 6200 32.10 5.89 Deflation 19,756.1 76.47 14.52 9.01
Saline 1,771.2 54.25 35.82 9.92
Alkaline 2,779.5 75.63 22.99 38.53
Acid 11,770.5 14.97 54.09 30.93 Overconditioned 2,170.9 27.93 30.02 42.05
Boggy 1,975.3 6.23 27.27 66.50
Stony 466.5 65.14 11.81 22.96
Source: Ministry of Economics TABLE 8 - Ukraine: Gross Agricultural Production, 1986-1993 (Thousands of tons)
Of Which: Herbage for Hay Total l Root Fruits Grain Winter Winter I Maize Forage Ensile Annual Perenial and Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Grapes
1986 41506 18377 1000 8011 37970 2463 97 21410 7731 26484 84860 1064 5347 3322 738
1987 48061 19615 1374 8308 42962 2580 143 18863 8111 28654 100717 1334 6134 2105 800
1988 45369 21685 1055 8638 42112 2648 91 13510 7292 27392 91594 1237 6662 2225 662
1989 51212 27371 1298 7026 51917 2748 111 19308 7443 32580 98989 1021 6123 2500 789
1990 51009 30348 1259 4737 44246 2571 108 16732 6666 27270 98372 1104 5S11 2902 836
Average for 47431 23479 1197 7344 43845 2602 110 17965 7449 28476 94906 1152 5955 2611 765 1986-1990
1991 38674 21134 981 4747 36168 2311 106 14550 5932 22829 88463 1056 6021 1537 673
1992 38537 19473 1156 2851 28783 2127 105 20277 5310 18196 63042 844 5574 2122 657
1993 45623 21770 1180 3786 33717 2075 73 21009 6055 20050 77881 751 5287 2798 666
Average for 40945 20792 1106 3795 32889 2171 95 18612 5766 20358 76462 884 5627 2152 665 1991-1993
Source: Ministry of Statistics TABLE 9 - Ukraine: Cropped Area of Agricultural Crops, 1986-1993 (Thousands of ha)
Of Which: Total . Root Fruits Grain winter Winter IMaize Forage Ensiue Annual Perenial and Grape Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Growing
1986 16,194 5,710 571 2,783 1,647 1502 198 1,515 516 794 3,727 328 1,514 713 121
1987 15,560 5,341 622 2,424 1,665 1,543 204 1,500 516 771 4,389 369 1,587 708 124
1988 15,897 6,428 586 2,324 1,653 1,577 190 1,469 504 723 3,727 338 1,627 701 139
1989 15,256 6,945 539 1,851 1,637 1,621 191 1,468 483 699 4,306 293 1,560 693 143
1990 14,522 7,549 517 1,223 1,605 1,626 169 1,433 447 683 4,730 309 1,425 680 143
Average for 15,486 6,395 567 2,121 1,641 1,574 190 1,477 493 734 4,176 327 1,543 699 134 1986-1990
1991 14,571 6,977 487 1,459 1,549 1,585 156 1,533 464 662 4,335 308 1,511 669 141
1992 13,816 6,294 498 1,137 1,631 1,630 155 1,705 482 626 4,719 257 1,512 659 140
1993 14,221 5,726 493 1,331 1,629 1,629 127 1,534 464 591 4,291 232 1,506 648 139
Average for 14,203 6,332 493 1,309 1,603 1,615 146 1,591 470 626 4,448 266 1,510 659 140 1991-1993
Source: Ministry of Statistics TABLE 10 - Ukraine: Average Yield of Agricultural Crops, 1986-1993 (Centner per ha)
Of Which: Total . Root Fruits Grain Winter IWinterIMaize Forage Ensile Annual Perenial and Grape Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Growing
1986 26 32 17 29 230 16 5 141 150 333 228 32 35 47 61 1987 31 37 22 34 258 17 7 126 157 372 229 37 39 30 64 1988 29 34 18 37 255 17 5 92 145 379 246 37 41 32 48 1989 34 39 24 38 317 17 6 132 154 466 230 35 39 38 56 1990 35 40 24 39 276 16 6 117 149 399 206 26 39 43 58 Average for 31 36 21 35 267 17 6 122 151 390 228 33 39 38 57 1986-1990 1991 27 30 20 33 234 15 7 95 128 345 204 34 40 23 48 1992 28 31 23 25 194 13 7 119 110 291 134 33 37 32 47 1993 32 38 24 28 222 13 6 137 130 339 184 32 35 43 48 Average for 29 33 22 29 217 14 7 117 123 325 174 33 37 33 48 1991-1993
Source: Ministryof Statistics TABLE 11 - Ukraine: Change in Cropping Structure, 1985-1993 (%)
Indexes 1985 1989 1990 1991 1992 1993 1993:1989 (%)
Total arable 100 100 100 100 100 100
4.9 4.2 4.2 4.3 4.2 4.3 102.4 Fallow
Total sowing area: 95.1 95.8 95.8 95.7 95.8 95.7 99.9 including --
a) Grain crops: 46.8 44.7 43.1 43.9 41.4 45.5 101.8 winter crops 22.0 23.0 25.5 24.3 22.1 22.4 97.4 winter wheat 19.4 20.3 22.4 21.0 18.8 18.3 90.2 spring barley 8.4 8.3 6.5 7.6 8.4 11.0 132.5 corn 7.5 5.4 3.6 4.4 3.5 4.3 79.6 pulse crops 4.7 4.4 4.2 4.1 3.8 4.0 90.9
b) Industrial crops: 10.7 11.2 11.1 10.8 10.3 10.5 93.8 sugarbeets 4.8 4.8 4.7 4.4 4.4 4.9 102.1 sunflowers 4.3 4.7 4.8 4.8 4.6 5.2 110.6
c) Potatoes and Vegetables: 6.4 6.3 6.1 6.5 7.1 6.4 101.6 potatoes 4.5 4.3 4.2 4.6 5.1 4.9 114.0 vegetables 1.5 1.4 1.3 1.4 1.5 1.5 107.1
d) Fodder crops: 31.2 33.6 33.5 34.5 37.0 33.3 99.1 perennial grass 11.5 11.2 10.7 11.1 11.2 12.1 108.0
Source: Ministry of Economics TABLE 12 - Ukraine: Use of Organic Fertilizers in Collective and State Farms, 1982-1992
National Total Steppe Forest-Steppe Woodlands
1982 Tons per I ha 8.6 6.8 9.3 11.6 % of fixed norm 82.0 76.0 85.0 83.0
1983 Tons per I ha 8.9 7.4 9.4 11.6 % of fixed norm 85.0 82.0 86.0 83.0
1984 Tons per 1 ha 8.7 6.9 9.4 11.9 % of fixed norm 83.0 77.0 86.0 85.0
1985 Tons per 1 ha 8.6 6.5 9.5 12.1 % of fixed norm 82.0 72.0 86.0 86.0
1986 Tons per 1 ha 9.1 7.1 10.1 12.9 % of fixed norm 87.0 79.0 92.0 92.0
1987 Tons per 1 ha 8.5 6.2 9.6 13.2 % of fixed norm 81.0 69.0 87.0 94.0
1988 Tons per 1 ha 8.5 5.9 9.5 13.7 % of fixed norm 81.0 66.0 86.0 98.0
1989 Tons per 1 ha 8.7 6.3 9.5 13.7 % of fixed norm 83.0 70.0 86.0 98.0
1990 Tons per 1 ha 8.1 5.7 9.0 12.9 % of fixed norm 77.0 63.0 82.0 92.0
1991 Tons per I ha 7.2 4.9 8.1 11.9 % of fixed norm 69.0 54.0 74.0 85.0
1992 Tons per 1 ha 8.7 6.7 9.9 11.9 % of fixed norm 83.0 74.0 90.0 85.0
Source: Ministry of Economics TABLE 13 - Ukraine: Use of Mineral Fertilizers in Collectiveand State Farms, 1982-1992
National Total Steppe Forest-Steppe Woodlands 1982 Tons per 1 ha 116.0 85.0 134.0 163.0 % of fixed norm 68.0 54.0 69.0 101.0 1983 Tons per 1 ha 124.0 92.0 142.0 171.0 % of fixed norm 73.0 59.0 73.0 106.0 1984 Tons per I ha 135.0 101.0 164.0 180.0 % of fixed norm 79.0 64.0 85.0 111.0 1985 Tons per I ha 140.0 106.0 166.0 190.0 % of fixed norm 82.0 68.0 86.0 117.0 1986 Tons per I ha 151.0 117.0 171.01 195.0 % of fixed norm 88.0 75.0 88.0 120.0 1987 Tons per I ha 152.0 122.0 170.0 196.0 % of fixed norm 89.0 78.0 88.0 121.0 1988 Tons per 1 ha 150.0 117.0 169.0 202.0 % of fixed normn 88.0 75.0 87.0 125.0 1989 Tons per 1 ha 150.0 117.0 169.0 202.0 % of fixed norm 88.0 75.0 87.0 125.0 1990 Tons per I ha 141.0 100.0 164.0 204.0 % of fixed norm 83.0 64.0 85.0 126.0 1991 Tons per 1 ha 141.0 100.0 164.0 204.0 % of fixed norm 83.0 64.0 85.0 126.0
Source: Ministryof Economics TABLE 14 - Ukraine: Provision of Plant Protection in Collective and State Farms, 1982-1992 (in thousands of tons)
Years Needs Delivered % of Needs 1982 307 166 54 1983 350 176 50 1984 363 189 52 1985 339 195 58 1986 326 199 61 1987 298 171 57 1988 267 139 52 1989 169 117 69 1990 156 97 62 1991 133 77 57 1992 142 86 61
Source: Ministry of Agricultureand Food TABLE 15 - Ukraine: Agricultural Machines in Ukraine, 1983-1992
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Tractors (thousands) 486.5 494.8 502.2 516.4 501.6 501.4 501.4 492.6 495.1 497.3 Land per tractor (ha) 66.0 65.0 64.0 62.0 64.0 64.0 65.0 64.0 63.0 62.0 Grain Harvesters(thousands) 98.2 103.6 107.8 111.6 112.2 113.5 112.4 105.3 106.9 104.4 Land per harvester (ha) 149.0 141.0 136.0 131.0 130.0 134.0 136.0 134.0 132.0 127.0 Daily output per harvester (ha) * 7.1 6.9 6.5 6.7 5.7 5.5 ------Beet Diggers (thousands) 22.8 21.3 20.5 19.0 18.7 18.2 18.4 18.9 19.2 19.2 Land per digger (ha) 76.0 79.0 81.0 94.0 97.0 99.0 97.0 86.0 83.0 75.0 Daily output per digger (ha) * 3.9 3.6 3.7 3.9 3.7 3.7 ------Corn Harvesters (thousands) 20.5 18.2 16.5 14.9 14.2 13.4 13.4 14.0 14.4 15.1 Land per harvester (ha) 85.0 94.0 103.0 118.0 114.0 100.0 95.0 88.0 101.0 112.0 Daily output per harvester (ha) * 4.3 4.4 4.5 5.1 4.9 4.5 ------Potato Diggers (thousands) 10.4 10.2 9.9 9.4 9.6 9.6 9.8 9.7 9.7 9.7 Land per digger (ha) 30.0 30.0 31.0 34.0 33.0 31.0 46.0 41.0 36.0 34.0 Daily output per digger (ha) * 1.5 1.4 1.4 1.4 1.5 1.5 ------Silo and Fodder Harvesters (thousands) 42.8 43.6 45.2 47.4 49.4 49.9 51.4 52.7 50.9 50.5 Land per harvester (ha) 122.0 137.0 132.0 130.0 143.0 142.0 156.0 154.0 156.0 152.0 Daily output per harvester (ha) * 5.1 5.1 4.9 5.0 5.2 4.7 ------
Source: Ministry of Economics * No data for 1989-1992in the Ministryof Statisticsof Ukraine TABLE 16 - Ukraine: Availabilityof CertainTypes of AgriculturalMachines, as of January 1, 1992
Type Make Demand Available Availability
Tractors -General Purpose T-150K 61,460 55,564 90 T-150 67,348 36,360 54 T-130 1,600 1,500 94
Tractors - Universal Cultivation T-70B 6,460 2,917 45 T-70C 33,113 30,577 92 MT3-80,82 92,800 61,624 66 MT3-100 23,300 283 1 T40 (all modifications) 41,848 40,773 97 T-30, T-25 39,800 21,670 54
Self-propelled Chassis T-16 (all modifications) 38,400 21,138 55
Corn Harvesters KSKY-6 KKP-3 23.400 15,100 64
Potato Diggers KLK-3 KLK-2 11,400 9,700 85 Silo Harvesters KSK-100, E-281, KLK-2,4 KSS-2,6 Woodlands KRP-F-2 139,00 50,500 36
Source: Ministry of Economics TABLE 17 - Ukraine: Numberof Livestockand Major LivestockProduction
Units 1986 1987 1988 1989 1990 1991 1992 1993 1994'
No. of Animals (on 1 January)
Cattle of which: thousands 26,638.0 26,724.5 25,968.7 25,620.8 25,194.8 24,623.4 23,727.6 22,456.8 17,417.0 Cows 8,851.4 8,712.0 8,604.9 8,567.4 8,527.6 8,378.2 8,262.6 8,057.2 5,379.4
Pigs 20,087.8 20,138.3 19,313.0 19,471.4 19,946.7 19,426.9 17,838.7 16,174.9 9,160.9
Sheep/Lamb 8,879.3 9,004.3 8,895.5 8,794.6 8,545.4 7,896.2 7,259.1 6,596.5 4,937.6 Poultry 252,564.7 251,365.7 24,737.2 254,501.5 255,119.5 246,104.2 243,120.6 214,582.3 83,656.5
Production:
Total meat thousand 4,117.7 4,242.2 4,394.8 4,430.4 4,357.8 4,029.1 3,400.9 2,918.5 2,555.8 (carcass weight) tons of which
Beef & Veal 1,879.3 1,982.0 3,019.1 2,011.4 1,985.4 1,877.6 1,655.6 N/A N/A Pork 1,463.9 1,468.8 1,576.3 1,594.8 1,576.3 1,421.1 1,179.8 N/A N/A
Sheep meat 24.1 27.5 28.0 27.6 28.9 23.4 35.0 N/A N/A
Poultry meat 333.6 347.4 361.7 368.2 354.0 297.3 216.0 N/A N/A
Total Milk thousand 23,554.0 23,625.5 24,228.6 24,377.0 24,508.3 22,408.6 19,113.7 18,148.2 11,554.5 tons Eggs mln. 17,297.1 17,425.1 17,672.3 17,393.0 16,286.7 15,187.8 13,496.0 11,765.8 6,061.2 pieces
Source: Ministry of Agriculture and Food ' as of January 1, 1994 TABLE 18 - Ukraine: Average AnimalProductivitiy in State and CollectiveFarms by Agro-EcologicalZones, 1982-1992
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
Milk per Cow (kg)
National Average 2,238 2,468 2,538 2,607 2,730 2,756 2,918 2,918 2,941 2,668 2,215
Steppe 2,242 2,486 2,538 2,577 2,703 2,648 2,837 2,837 2,825 2,610 2,202
Forest-Steppe 2,266 2,524 2,634 2,733 2,861 2,932 3,093 3,093 3,096 2,771 2,301
Woodlands 2,286 2,488 2,567 2,654 2,782 2,840 2,941 2,941 2,914 2,640 2,218 Wool per Sheep (kg)
National Average 3.0 3.2 3.2 3.1 3.2 3.1 3.3 3.3 3.4 3.2 3.0
Steppe 3.3 3.5 3.6 3.4 3.6 3.4 3.7 3.8 3.8 3.5 3.3
Forest-Steppe 2.6 2.7 2.8 2.7 2.8 2.8 2.8 2.7 2.7 2.6 2.5 Woodlands 2.3 2.4 2.4 2.4 2.5 2.5 2.5 2.4 2.4 2.3 2.1 Eggs per Hen
National Average 196 203 205 207 216 218 221 220 214 203 194
Source: Ministry of Agriculture and Food TABLE 19 - Ukraine: Livestock Production Performance of Social Sector Farms
Category Unit 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Fertility Rates /year: No./year Calves born per 100 cows 82 85 86 86 89 86 88 88 88 86 82 79 Piglets born per 100 pigs 1,250 1,270 1,250 1,262 1,352 1,330 1,438 1,457 1,422 1,266 1,137 1,111 Lambs born per 100 Ewe 80 89 91 86 92 92 95 94 93 86 78 74 Fillies born per 100 Horses 25 31 30 30 31 30 31 31 32 31 N/A N/A Mortality Rates:- %/year Cattle 2.0 1.7 1.7 1.7 1.5 1.8 1.5 1.5 1.6 2.0 2.5 2.5 Pigs 5.0 4.5 4.5 4.3 3.9 4.2 3.8 3.8 4.3 5.9 7.6 9.2 Sheep & Goats 6.2 5.2 5.2 5.4 4.3 4.6 4.0 4.2 4.2 5.2 6.6 7.3 Horses 2.8 2.4 2.7 2.9 2.7 2.9 2.5 2.4 2.6 2.6 N/A N/A Daily WeightGain: Grams Cattle Fattening 342 377 366 364 382 380 412 421 421 365 290 N/A Pig Fatteneing 176 180 181 186 196 201 221 234 229 198 183 N/A Liveweightat Slaughter: kg Cattle 334 345 358 364 362 354 372 375 393 387 380 N/A Pigs 99 100 103 104 108 109 122 122 127 124 115 N/A Sheep & Goats 34 34 34 34 35 35 36 35 36 35 34 N/A Milk per Cow kg/year 2,238 2,468 2,538 2,607 2,730 2,756 2,870 2,918 2,941 2,668 2,175 2,098 Wool per Sheep kg/year 3.0 3.2 3.2 3.1 3.2 3.1 3.3 3.3 3.4 3.2 3.0 N/A Eggs per Layer 196 203 205 207 216 218 221 220 214 203 190 174
Source: Ministry of Agricultureand Food * Adult mortalityonly TABLE 20 - Ukraine: Number of Private Farms as of April 11, 1994
Land Area (ha) Avg. Land area per farm On January 1, 1994 Regions Quantity Agricultural incl. Agricultural incl. Plowed Quantity Agricultural Area Plowed Area Area (ha) Area Area (ha)
Total Ukraine 29,666 620,548 561,927 21 19 27739 558,175
Republic of Crimea 1,159 14,529 10,730 13 9 1094 14,122
Vinnitsa 773 16,064 14,999 21 19 691 13,614
Volyn 553 8,332 7,439 15 13 531 7,522
Dnipropetrovk 1,907 50,946 48,571 27 25 1803 47,673
Donetsk 1,828 39,086 34,575 21 19 1851 39,189
Zhitomir 257 4,756 4,223 19 16 245 4,705
Transcarpathian 751 4,317 3,866 6 5 670 3,466
Zaporizhye 1,295 39,821 37,894 31 29 1250 37,974
Ivano-Frankivsk 680 4,987 4,044 7 6 648 4,596
Kiev Oblast 744 16,903 15,503 23 21 644 14,770
Kirovograd 1,337 46,403 43,897 35 33 1204 40,904
Lugansk 1,128 41,159 33,764 36 30 1062 36,603
Lviv 1,108 11,132 10,094 10 9 1023 10,251
Mikolaiv 4,492 73,544 65,519 16 15 4505 68,977
Odessa 3,464 47,177 43,938 14 13 3038 36,480
Poltava 1,082 22,555 21,201 21 20 1019 20,404
Rivno 260 3,940 3,367 15 13 248 3,663
Sumy 855 21,980 20,569 26 24 767 18,996
Ternopil 731 10,333 10,167 14 14 717 9,942
Kharkiv 921 29,286 26,585 32 29 869 27,285
Kherson 2,373 76,373 67,451 32 28 2047 63,375
Khmelnitsky 473 10,053 9,457 21 20 398 8,636
Cherkassy 406 9,008 7,882 22 19 356 7,875
Chernivtsy 553 2,873 2,438 5 4 532 2,718
Chernigiv 536 14,991 13,754 28 26 527 14,435 Source: Ministry of Statistics TABLE 21 - Ukraine: Indices of Personal Subsidiary Plots of Land at End of Year
Indices Units of Measurement 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
Number of Personal thousands 8968.0 8,964.0 8,956.0 8,979.0 8,967.0 9,116.0 9,160.0 9,201.0 9,747.0 9,815.0 Subsidiary Plots Land Area thousands of ha 2,473.0 2,468.0 2,462.0 2,450.0 2,452.0 2,479.0 2,501.0 2,599.0 2,892.0 2,930.0 Average Plot 0.28 0.28 0.28 0.27 0.27 0.27 0.27 0.28 0.30 0.30
Livestock: Cattle thousands 3,972.0 3,902.0 3,841.0 3,682.0 3,600.0 3,617.0 3,630.0 3,540.0 3,587.0 3,585.0 Cows " 2,434.0 2,388.0 2,302.0 2,220.0 2,191.0 2,190.0 2,173.0 2,187.0 2,275.0 2,290.0 Pigs 4,966.0 4,559.0 4,559.0 4,250.0 4,475.0 4,777.0 4,958.0 5,356.0 5,276.0 5,400.0 Sheep & Goats 794.0 833.0 833.0 926.0 994.0 1,74.0 1,115.0 1,253.0 1,412.0 1,480.0 Poultry millions 108.0 108.0 107.0 107.0 110.0 112.0 113.0 113.0 115.0 116.0 Rabbits thousands 9,967.0 10,065.0 9,827.0 10,232.0 10,664.0 7,259.0 6,260.0 6,521.0 5,952.0 6,700.0
Production: Cattle and Poultry thousands of tons 1,735.0 1,735.0 1,823.0 1,831.0 1,816.0 1,816.0 1,792.0 1,756.0 1,784.0 1,810.0 (live weight) 5,798.0 5,970.0 5,930.0 5,817.0 5,880.0 5,880.0 5,810.0 5,875.0 5,931.0 6,000.0 Milk 6,143.0 6,143.0 6,135.0 6,109.0 5,871.0 6,142.0 6,281.0 6,161.0 5,948.0 6,100.0 Eggs millions 14,669.0 13,681.0 13,582.0 13,491.0 12,240.0 9,235.0 12,726.0 11,939.0 11,322.0 10,300.0 Potatoes thousands 1,724.0 1,895.0 1,868.0 1,818.0 1,979.0 1,931.0 1,848.0 1,794.0 2,300.0 2,100.0 Vegetables 1,864.0 1,820.0 2,021.0 1,736.0 1,173.0 1,218.0 1,490.0 1,555.0 1,097.0 1,250.0 Fruit and Berries 13,425.0 13,171.0 13,391.0 13,093.0 12,221.0 12,168.0 13,113.0 13,080.0 12,868.0 13,100.0
Gross Output Plant Cultivation millions of rubles 5,270.0 5,123.0 5,237.0 5,068.0 4,465.0 4,054.0 4,873.0 4,767.0 4,722.0 4,750.0 Cattle Breeding 8,155.0 8,048.0 8,154.0 8,025.0 7,756.0 8,114.0 8,240.0 8,313.0 8,146.0 8,350.0
Share of Personal Plot Gross Output in Total percentage 28.6 27.9 28.4 27.4 24.9 25.1 27.4 27.0 30.0 35.0 Agricultural Gross Output
Source: Ministry of Agriculture and Food TABLE 22 - Ukraine: Food Industry Production Page 1 of 2
Category 1980 1985 1986 1987 1988 1989 1990 1991 1992
Granulated Sugar 5302.0 6247.0 6660.0 7579.0 6131.0 7014.0 6791.0 4786.0 3647.0 (thousands of tons} from Sugar Beets 3977.0 4366.0 4485.0 5339.0 4646.0 5177.0 5388.0 3844.0 3527.0
Meat, including by-products 2074.0 2357.0 2519.0 2615.0 2731.0 2793.0 2763.0 2488.0 2050.0 of I category (thousands of tons) Beef and Veal 1112.0 1268.0 1384.0 1455.0 1473.0 1507.0 1494.0 1351.0 1214.0 Mutton 12.0 13.9 16.6 18.6 19.7 21.4 23.6 16.8 16.3 Pork 548.0 600.0 616.0 626.0 677.0 709.0 724.0 642.0 434.0 Poultry 229.0 293.0 309.0 317.0 364.0 372.0 355.0 292.0 249.0 Other kinds of meat and by- products of I category 172.1 182.1 193.4 198.4 197.3 183.6 166.4 186.2 136.7
Sausage (thousands of tons) 685.5 768.1 795.3 823.8 842.1 864.5 900.1 851.5 757.9
Meat as half-finished product 205.9 248.4 263.6 273.1 285.4 293.0 293.8 261.4 131.8 (thousands of tons)
Fish and Seafood 934.3 1083.0 1156.0 1098.0 1166.0 1139.0 1061.0 904.5 547.0 (thousands of tons)
Butter (thousands of tons) 335.5 390.2 406.8 421.2 440.4 440.8 444.1 376.4 302.9
Whole Milk Products 4888.0 5687.0 6008.0 6129.0 6293.0 6381.0 6432.0 5709.0 4112.0 (thousands of tons)
Cheese, brynza (thousands of tons) 127.8 169.7 176.3 178.2 182.8 184.0 183.5 161.5 112.7
Oil (thousands of tons) 941.3 846.3 875.7 970.9 1046.7 1077.7 1070.4 1004.0 857.5
Margarine Products 263.9 275.6 294.8 318.2 308.1 318.4 288.5 266.5 249.2 Canned Products (millions) 3488.0 3978.0 4738.0 4833.0 4808.0 4891.0 4836.0 4239.0 3760.0 Meat and Vegetables 179.6 210.3 241.0 244.6 244.5 247.1 245.8 231.2 242.9 Fish and Seafood 239.5 291.8 268.0 274.5 310.6 321.8 351.8 319.8 196.6 Vegetables 1296.0 1053.0 1009.0 1287.0 1324.0 1230.0 1184.0 1090.0 1019.0 Tomatoes without Juice 457.8 474.8 662.8 618.0 517.6 475.8 349.6 326.5 276.9
Canned Fruit without Juice 340.6 671.8 707.5 669.8 748.4 916.9 1033.4 964.1 904.2 Jam, Preserves 143.1 182.5 186.5 181.0 191.3 251.4 307.7 282.9 240.3
Canned Milk 334.7 345.9 369.2 381.2 407.3 418.4 415.3 350.2 245.5
Natural Juice 629.2 809.9 1337.4 12105.6 1140.1 1139.3 1070.7 834.0 716.1
Source: Ministry of Statistics TABLE 22 - Ukraine: Food Industry Production Page 2 of 2
Category 1980 1985 1986 1987 1988 1989 1990 1991 1992
Fruit Juice 443.3 541.2 858.8 841.0 808.0 807.3 826.1 586.9 550.8 Dried Fruit (thousandsof tons) 2.3 5.6 5.7 5.2 4.9 6.0 6.4 3.1 3.4 Frozen Vegetables(thousands of tons) 1.2 1.8 2.1 1.6 1.3 0.5 0.3 0.2 0.1 Grain (thousands of tons) 7485.0 8157.0 7820.0 7784.0 7534.0 7614.0 7671.0 7383.0 6625.0 Groats (thousands of tons) 773.4 872.5 911.9 983.3 958.8 982.6 962.4 944.4 803.8 Bread and Bread Products 7375.0 7348.0 7362.0 6834.0 6580.0 6611.0 6701.0 6685.0 6441.0 (thousandsof tons) Confectionery(thousands of tons) 802.4 923.8 950.6 991.6 1033.4 1074.6 111.2 1040.0 842.9 Made of Sugar 510.8 576.9 595.1 614.0 636.6 656.8 675.4 641.3 506.9 Noodles (thousandsof tons) 308.6 329.8 332.4 343.5 352.5 360.1 360.4 364.8 350.3 Soft Drinks (millionsof dekaliters) 90.6 97.2 124.4 125.3 143.7 149.7 150.7 114.4 58.7 Kvass 14.8 19.0 26.8 22.1 26.9 24.2 21.9 17.9 10.6 Mineral Water (millionsdekaliters) 32.7 41.3 46.8 49.4 53.5 56.8 54.5 45.9 30.4 Salt (extraction)(thousands of tons) 5968.0 8018.0 7926.0 8020.0 8186.0 8338.0 8309.0 8394.0 7409.0
Source: Ministryof Statistics TABLE 23 - Ukraine: Consumption of Basic Foodstuffs per capita and their Share in Family Income (in kIlograms, unless otherwise specified)
1987 1988 1989 1990 1991 1992 1993
Meat and Meat Products 66.9 68.9 68.6 68.2 65.5 53.4 46.3
Milk and Milk Products 357.2 366.9 366.9 373.3 345.5 284.5 275.0
Eggs (each) 284.0 286.0 280.0 272.0 256.0 227.0 193.0
Bread 141.0 137.6 137.7 141.0 142.5 142.5 146.0
Potatoes 130.6 121.7 127.5 131.0 115.5 132.9 138.0
Vegetables and Gourd Crops 126.6 124.6 107.5 102.5 102.5 88.9 94.0
Fruits, Berries, Grapes 48.0 47.0 46.0 47.0 36.5 38.0 44.0
Fish and Fish Products 18.9 18.5 18.2 17.5 12.2 7.3 NA
Sugar 52.5 49.7 46.7 50.0 50.0 45.4 39.0
Vegetable Oil 11.2 11.2 11.9 11.6 11.2 10.6 8.0
Expenses for Foodstuffs in Family 35.9 34.2 33.1 32.8 39.2 55.0' NA Budget (percent)
Source: Ministry of Economics * Estimate TABLE 24 - Ukraine: Marketing Channels for Major Agricultural Products of the Socialist Sector, Collective and State Farms (flows in thousand tons unless otherwise specified)
1990 - Amountsand Percentagesof 1991 - Amountsand Percentagesof 1992(January - June) - Amountsand Percentages of Product SocialistSector Output Sold Through: SocialistSector OutputSold Through: SocialistSector Output Sold Through: State % I Coop % Private % State % I Coop |% Private % State I % Coop % Private % Grains 14,383 80 2,472 14 1,189 7 11,081 62 4,126 23 2,651 15
Oilseeds 2,167 99 26 1 7 0 1,812 91 65 3 111 6
Potatoes 765 47 718 44 159 10 409 37 529 47 182 16 6 14 13 34 20 51
Vegetables 2,669 63 1,216 29 339 8 2,011 62 807 25 436 13 120 70 27 16 25 15 Sugarbeet 43,284 100 0 0 0 0 34,295 100 0 0 4 0 Cattle 2,629 94 137 5 41 1 2,405 88 175 6 165 6 1,047 88 74 6 65 5 Pigs 956 91 71 7. 18 2 785 84 90 10 59 6 271 82 34 10 25 8
Poultry 435 94 18 4 12 3 363 86 27 6 32 8 139 82 10 6 20 12
Other Livestock 21 41 24 47 6 12 19 51 14 38 4 11 4 24 8 47 5 29
Total Meat 4,041 93 250 6 77 2 3,572 86 306 7 260 6 1,461 86 127 7 115 7 (live weight)
Milk & Milk 17,846 99 158 1 19 0 15,321 99 186 1 45 0 5,997 99 68 1 21 0 Products
Eggs (millions) 7,616 88 944 11 110 1 6,801 82 678 8 866 10 2,669 83 212 7 353 1t
Source: Ministry of Finance State - Purchase by state procurement organization Coop - Purchase by consumer cooperativesand public catering organizations Private - Sale on market through private stores, barter, and foreign trade TABLE 25 - Ukraine: ProcurementPrice for Sales to the State of Different Kinds of Produce,1989-1992 (rubles per ton)
1992 1993
1989 1990 1991 1st 1st | Sept. Oct. quarter half
Wheat 168 276 422 10,851 545,110
Rye 201 301 469 10,815 602,490
Buckwheat 642 923 1,351 22,900 NA
Rice 567 662 995 21,200 NA
Sunflowers 484 465 862 20,000 1,718,800
Maize 459 420 728 8,900 471,600
Sugar Beets 48 50 98 2,484 162,400
Potatoes 167 240 1,099 13,489 472,700 Cabbage 97 159 780 7,796 NA
Onions 424 401 1,201 15,704 NA
Wool 8,160 8,678 37,830 799,440 NA
Cattle 2,706 2,968 4,988 21,787 21,900 54,853 5,678,400
Pigs 2,294 2,671 4,665 23,840 26,970 67,552 NA
Poultry 2,216 2,391 3,836 20,337 22,956 57,498 NA
Milk 426 426 657 4,396 4,560 8,568 982,800 Eggs 54 93 189 1,092 1,121 2,373 332,700
Source: Ministry of Agriculture and Food TABLE 26 - Ukraine: Wholesale Prices of Certain Kinds of Agricultural Inputs in State Trade and on Conmnodity Exchanges, 1989-1992
1992 (months)
lst Prices at 1 2 3 4 5 6 Half 7 8 9 12 Commodity Exchanges 1989 1990 1991 2 l l l lllllll l _
Tractors 5.95 8.28 10.80 ------399.20 399.20 399.20 399.20 399.20 460.00 455.0 410.0 500.0
Trucks 9.70 12.40 14.90 ------452.10 452.10 452.10 452.10 452.10 520.00 819.5 707.2 637.5
Harvesters 19.80 21.50 28.50 1000.00 1000.00 1000.00 1000.00 1000.00 1150.00
Beet Harvesters 16.20 17.00 20.20 350.80 330.80 350.80 350.80 350.80 400.00
Silage Harvesters 15.40 16.50 20.70 319.40 319.40 319.40 319.40 319.40 370.00
Plows 0.31 0.45 0.56 5.65 5.65 5.65 5.65 5.65 6.50
Seeders 1.03 1.75 2.20 20.40 20.40 20.40 20.40 20.40 23.50
Milking 3.41 4.27 64.00 64.00 64.00 64.00 64.00 75.00 Machines 2.34
Conveyers 0.98 1.23 1.40 60.00 60.00 80.00 80.0 80.0
Truck Fuel 0.20 0.20 0.20 2.39 3.12 7.02 10.90 9.50 10.60 7.27 11.10 20.00
Diesel Oil 0.068 0.15 0.15 2.20 2.64 6.62 10.20 8.77 9.80 6.71 11.00 18.00
Rolled Ferrous 0.13 0.13 0.21 10.50 14.00 12.30 15.20 16.60 18.00 22.00 Metal (tons)
Timber 0.039 0.039 0.059 3.00 3.00 5.00 1.00 6.00
Maintenance 2.34 2.34 9.05 9.10 21.00 15.10 42.80 50.00
Mineral 0.084 0.086 0.10 2.00 2.30 3.75 4.30 Fertilizers
Plant Proection 2.35 2.30 3.71 13.80 87.50 218.90 250.00 Means
Chemical 0.003 0.004 0.033 0.044 0.13 0.13 0.13 0.13 0.13 0.11 0.13 0.13 0.15 Reclamation Means
Source: Ministry of Agriculture TABLE 27 - Ukraine: Production Costs in Agricultural Enterprises, 1982-i992 (Millions of Rubles)
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 *
Total Production Costs 25,013 26,665 28,007 29,473 31,041 31,790 32,357 34,115 36,514 54,608 888,445
Plant Cultivation 9,542 10,228 10,883 11,297 12,274 11,839 11,824 12,703 13,335 18,890 % of Total 38.2% 38.4% 38.9% 38.3% 39.5% 37.7% 36.5% 37.2% 36.6% 34.6
Animal Husbandry 11,989 12,826 12,685 14,556 14,955 14,822 15,452 15,947 17,042 26,087 % of Total 47.9% 48.1% 45.3% 49.4% 48.2% 46.6% 47.8% 46.8% 46.6% 47.8%
Other Activities 3,482 3,611 4,439 3,620 3,812 5,129 5,081 5,465 6,137 9,631 % of Total 13.9% 13.5% 15.8% 12.3% 12.3% 16.1% 15.7% 16.0% 16.8% 17.6% Costs of Marketed Output' 17,547 21,851 23,241 24,907 26,792 27,526 28,449 30,324 32,425 47,428 723,652
Plant Cultivation 4,58S 5,075 5,675 5,624 5,945 6,292 6,137 6,657 6,862 9,908 % of Total 26.1% 23.2% 24.4% 22.6% 22.2% 22.9% 21.6% 21.9% 21.2% 20.9%
Animal Husbandry 11,502 12,933 13,657 15,073 16,469 16,684 17,378 18,180 19,231 26,347 % of Total 65.6% 59.2% 58.8% 60.5% 61.5% 60.6% 61.1% 60.0% 59.3% 55.5
Other Activities 1,460 3,843 3,909 4,210 4,378 4,550 4,934 5,487 6.332 11,173 % of Total 8.3% 17.6% 16.8% 16.9% 16.3% 16.5% 17.3% 18.1% 19.5% 23.6
Source: Ministry of Economics
* Forecast ** Excludes financial costs and depreciation Table 28 - Ukraine: Retail Price Indicesfor Foodstuffsin State and CooperativeTrade, 1990-1993
December December January 1992 December December 1990 1991 1992 1993
Consumer Price Index 100 261 920 9,745 974,470 Food Price Index 100 230 899 8,545 794,841
Bread Products 100 239 871 4,389 287,942
Meat Products 100 182 782 8,817 824,945
Milk Products 100 170 531 8,843 561,003
Potatoes 100 309 752 4,231 199,219
Vegetables 100 178 434 1,439 124,522
Butter 100 188 603 5,775 350,053
Vegetable Oil 100 155 557 2,887 319,376
Eggs 100 210 1,171 10,955 1,120,867
Source: Ministry of Statisitics, and World Bank calculationsusing data from IMF and Ministry of Agricultureand Food. TABLE 29 - Ukraine: Average Prices for Basic Foodstuffs, January 4, 1994 (Ukr. KBV per kg/I)
Prices State and Cooperative Trade Collective-farm Market
Grain Products Milled Wheat 5,190 Rye Bread 2,219 Wheat Bread 3,447 Vermicelli 7,250 Rice 18,292 Semolina 4,809 Oat Groats 6,358 Meat Products Beef & Veal 34,203 46,616 Pork 42,122 63,232 Poultry Meats Hens 43,302 91,607* Ducks 30,696 102,509' Boiled Sausage 50,380 Fat 45,176 51,395 Milk Products Milk 3,422 5,812 Cottage Cheese 13,851 23,621 Sour Cream 19,462 39,079 Cheese 61,950 Butter 69,566 71,252 Eggs (per 10) 28,610 29,925 Fish 28,278 Frozen Fish 31,824 Herring 74,375 Sugar 8,037 Vegetable Oil 27,810 29,201 Potatoes 1,370 2,296 Vegetables Cabbage 1,534 2,479 Solt Tomatoes 2,366 10;805 Solt Cucumbers 3,438 13,896 Carrots 1,399 2,554 Beets 1,127 2,360 Onions 3,789 5,789 Fruits and Berries Apples 3,336 6,091 Dry Fruits 11,826 12,404
Source: Minestry of Statistics * Prices per piece TABLE30 - Ukraine: PrincipalCosts of IndividualKinds of Bread in July, 1992 in Kiev (per ton)
lOOOg Cost Items 500g Loaf 750g White Bread Ukrainian Hearth Bread Raw Materials 10,632.81 8,442.44 6,707.37 Fuel and Power 247.57 71.47 187.04 Wages 326.24 329.91 248.68 Deductionsfor Social Insurance 120.75 114.29 88.31 Maintenancecosts 618.56 128.08 123.52 Shop costs 200.01 144.03 225.68 General ProductionExpenses 748.95 749.49 127.38 Prime ProductionCosts 12,894.99 9,979.71 7,707.98 Non-productioncosts 128.95 780.56 518.86 Full Prime Cost 13,023.94 10,760.27 8,226.84 Profit Markup 1,976.06 1,254.73 1,006.64 Profit Markup Rate 15.2% 11.7% 12.2% Wholesale Price 15,000.00 12,015.00 9,233.48 VAT 4,200.00 2,643.30 2,031.37 VAT Rate 28% 22% 22% Sub-total: 19,200.00 14,658.30 11,264.85 Trade Premium 4,800.00 2,198.75 1,689.73 (MarketingMargin) Trade Premium Rate 25% 15% 15% (MarketingMargin Rate) UnsubsidizedTotal 24,000.00 16,857.05 12,954.58 Retail Price per ton 24,000.00 8,000.00 5,000.00 Retail Price per piece 12.00 6.00 5.00 Subsidy per ton -- 8,857.05 7,954.58
Source: Ministryof Economics TABLE 31 - Ukraine: Area of Forest Stock, 1982-1992 (in thousands of ha)
by Managing Organizations Years _ Other 2 3 Ministries Minleskhoz' Ukrlesprom Mmselskozprod and Agencies Total area Forested Total area Forested Total area Forested Total area Forested Total area Forested 1982 9990 8457 5793 4853 1240 1127 2385.2 2105 571.8 372 1983 9969 8588 5924 4997 1238 1125 2391.7 2072 415.3 394 1984 9969 8588 5924 4997 1238 1125 2392.0 2072 415.0 394 1985 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1986 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1987 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1988 9942 8620 5939 5029 1236 1122 2391.7 2160 375.3 309 1989 9942 8620 5939 5029 1236 1122 2397.0 2160 370.0 309 1990 9942 8620 5939 5029 1229 1126 2441.9 2160 325.1 305 1991 9942 8620 5939 5029 1229 1126 2375.8 2160 391.2 305 1992 9942 8620 5939 5029 1229 1126 2375.8 2160 391.2 305
Source: Ministry of Economics
1. Ministry of Forestry 2. Ukrainian Forestry Industry Company 3. Ministry of Agriculture TABLE 32 - Ukraine: Production Indexes of Forest Associations, 1982-1992
Indexes 1982 1983 1984 1985 1990 1991 1992
Felling Stock 6,249.0 6,271.6 6,283.0 6,247.0 6,125.0 5,675.0 5,704.0 (thousands of M3): Minleskhoz 4,001.0 4,109.0 4,028.0 3,978.0 3,878.0 3,594.0 3,427.0 Ukrlesprom 1,929.0 1,921.6 1,929.0 1,949.0 1,877.0 1,674.0 1,788.0 Minselkhozprod 319.0 331.0 326.0 '320.0 370.0 407.0 498.0 Forest Planting 58.61 57.26 58.50 60.25 57.54 48.06 43.55 (thousands of ha) Minleskhoz 48.72 47.16 48.62 49.80 57.49 37.60 33.70 Ukrlesprom 4.98 5.20 5.18 5.45 5.05 6.06 5.65 Minselkhozprod 5.00 4.90 4.70 5.00 5.00 4.40 4.20 Value of Harvest 140,746 138,696 141,123 141,878 148,440 327,045 4,575,763 (thousands of rubles) Minleskhoz 125,045 122,624 125,202 125,988 134,412 306,810 4,477,254 Ukrlesprom 15,701 16,072 15,921 15,890 14,028 20,235 98,509 Prophylactic Fellings 634.1 634.3 609.8 599.5 508.5 426.3 430.0 (thousands of ha) Minleskhoz 539.3 540.2 515.9 506.3 434.2 365.5 370.0 Ukrlesprom 94.9 94.1 93.8 93.2 74.3 60.8 60.0
Value of Prophylactic 8,811.7 8,857.4 8,872.0 8,730.1 7,775.2 6,394.1 6,300.0 Harvest (thousands of M3) 6,698.6 6,791.8 6,747.7 6,726.2 6,070.4 5,071.3 5,000.0 Minleskhoz 2,113.1 2,065.6 2,024.3 2,003.9 1,704.8 1,322.8 1,300.0 Ukrlesprom Forest Protection Measures Ground Pest Control 203.8 194.3 202.2 203.6 228.8 211.3 - (thousands of ha) Minleskhoz 184.8 180.9 188.8 189.4 199.7 196.8 -- Ukrlesprom 19.0 13.4 13.4 14.2 23.1 14.5 -- Air Pest Control 50.7 90,7 122.2 94.1 64.5 20.3 -- (thousands of ha)
Minleskhoz 50.7 83.3 118.7 94.1 63.8 20.3 - Ukrlesprom -- 7.4 3.5 -- 0.7 --
Forest Fire Control -- -- 3,400 3,400 4,000 4,100 4,100 (thousands of ha) Minleskhoz - -- 3,400 3,400 4,000 4,100 4,100 Ukrlesprom ------
Source: Ministry of Economics I I 20 \ 25° 30'll 35'40
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