ME-WbCorrt Public Disclosure Authorized
1 73 1z1World Bank Discussion Papers The Livestock Public Disclosure Authorized Sector in Eastern Europe
Constraints
Public Disclosure Authorized and Opportunities
Cornelis de Haan, Tjaart Schilihom van Veen, and Karen Brooks Public Disclosure Authorized FiLECOPY Recent World Bank Discussion Papers
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No. 142 RestructuringSocialist Industry: Poland's Experience in 1990. Homi J. Kharas (Continued on the inside back cover.) 1 73 1=1Worldw Bak DiscussionPapers The Livestock Sector in Eastern Europe
Constraints and Opportunities
Comelis de Haan, Tjaart Schillhorn van Veen, and Karen Brooks
The World Bank Washington, D.C. Copyright O 1992 The International Bank for Reconstruction and Development/THE WORLDBANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.
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Discussion Papers present results of country analysisor research that is circulated to encourage discussion and comment within the development community. To present these resultswith the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibilityfor errors. The findings, interpretations, and conclusions expressedin this paper are entirely those of the author(s) and should not be attributed in any manner to the Wodd Bank, to its affiliatedorganizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibilitywhatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates,or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Pubhsher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Pernission to copy portions for classroom use is granted through the Copyright Clearance Center, 27 CongressStreet, Salem, Massachusetts01970, U.S.A. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabeticaltitle list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is availablefree of charge from the Distribution Unit, Office of the Publisher, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France.
ISSN: 0259-21OX
Comelis de Haan is livestock adviser in the Wordd Bank's Agriculture and Rural Development Departmnent.Tjaart Schillhom van Veen is livestock specialistin the Agriculture and Rural Development Division of the Bank's Europe and Central Asia, Middle East and North Africa Regions Shared Services Department. Karen Brooks is senior economist in the Agricultural Policies Division of the Bank's Agriculture and Rural Development Department.
Library of Congress Cataloging-in-Publication Data
Haan, C. de. The livestock sector in Eastern Europe: constraints and opportunities / Cornelis de Haan, Tjaart Schillhorn van Veen, and Karen Brooks. p. cm. - (World Bank discussionpapers; 173) Includes bibliographicalreferences. ISBN 0-8213-2202-8 1. Animal industry-Europe, Eastern. 2. Livestock-Europe, Eastern. 3. Agriculture-Economic aspects-Europe, Eastern. I. Schillhorn-van-Veen, T. W. II. Brooks, Karen McConnell. III. Title. IV. Series. HD9425.E82H3 1992 338.1'76'00947-dc2O 92-26314 CIP - Ili -
- ~~~FOREWORD
Agriculturein EastemEurope is undergoingdramatic change. Ownership of land and animalsis transferredfrom the stateto the privatesector. Consumerand prodLucer subsidiesare being phased out, and formerlyprotected internal markets are being openedup. Thesechanges have had profoundeffects on productionand rural income and employment,as intemaland exportdemand collapsed and prices plummeted. 'The wholesector now hasto adaptto theseopen market conditions.
Thecrucial livestock sector--contributing about half of agriculturalproduction and usingmore than halfthe locallyproduced grain-was severely affected by the movefrom a commandto a marketeconomy. Pastpolicies of heavyprotection and subsidieshad causedexcessive consumption, use of inappropriate--andoften polluting--technologies and inefficientproduction. The requiredadjustments are thereforethe more painful. Productionhas declined,especially in productionsystems depending on importedfeed withrespect to inputs,and extemal market with respectto output. Overallthe sectorIhas experienceda contractionof approximately20% since the late eighties.
Still,the sectorhas considerable potential. Physical conditions are generally good for livestockproduction and marketopportunities already exist and can be still further developed. Thisreport indicates how this potentialcan be furtherdeveloped. It presentsthe currentsituation as a resultof past policiesand recommendsshort and mediumterm measuresto improveefficiency, develop markets and reducesthe sector's negative environmentalimpact. Thisreport intends to guideWorld Bank staff,other donorsand EasternEuropean officials involved in the sectorin the technical,institutional and policy issuesconcerned.
HarinderS. Kohli MichelPetit Director Director TechnicalDepartment Agricultureand Rural Europe,Central Asia, Middle East DevelopmentDepartment and NorthAfrica Regions - iv -
ACKNOWLEDGEMENTS
The authors have made extensiveuse of the informationpresented at two consecutiveround tables organized by the EuropeanAssociation for AnimalProduction and FAO in respectivelyBudapest (April 1991) and Berlin (January1992). These contributionsto a betterunderstanding of the processesin the livestocksector in Eastern Europeare gratefullyacknowledged. Furthermore, the authorswish to thankthe many WorldBank colleagueswho commentedon this paper. In particular,they wouldlike to thank Mr. PremC. Garg,who reviewedseveral drafts, Mrs. Arntraud Hartmann and Mr. Odin Knudsenwho acted as peer reviewers,Mr. Rory O'Sullivanfor support and encouragementand Mr. WillemZijp who providedinput in the part on Humanresource development.As alwaysthe remainingerrors and omissionsshould be attributedto the authors. v -
TABLEOF CONTENTS
ExecutiveSummary ...... vii
Chapter 1: THE LIVESTOCKSECTOR IN THE EAST EUROPEANECONOMIES 1 General...... 1 RelativeImportance of IndividualCommodities ...... 1
Chapter 2: LEGACIESOF PREVIOUSPOLICIES ...... 2 IncentivePolicies ...... 2 OwnershipPolicies ...... 3 Equipmentand Capital Investments...... 5 Labor...... 6 EnvironmentalContamination ...... 7' Support Services...... 7
Chapter 3: INHERITEDTECHNOLOGIES ...... 9 Feed...... Animal Breeding...... 110 Animal Health...... 110 Equipmentand Installations...... 11 Marketing...... 12
Chapter 4: RESULTINGPRODUCTIVITY ...... 13 Overall Performanceof the Sector...... 13 Production Levelsin the Social and PrivateSectors ...... 14 FinancialEfficiency ...... 14
Chapter 5: LIVESTOCKSECTOR IN TRANSITION...... 15
Chapter 6: FUTUREPERSPECTIVES ...... 18 OverallPerspectives ...... 18 ImmediateMarket Prospects...... 19 Longer-TermProspects ...... 19 Future Shape of the Industry...... 20
Chapter 7: FUTUREACTIONS ...... :23 Managementof the Transition...... 23 Medium-TermPolicies ...... 24 Changesin PropertyRights and Farm Organization...... 27
Chapter8: THE ROLEOF THE WORLDBANK: PAST,PRESENT AND FUTURE29 Future Lending...... 29
References...... 32
Annexes...... 34
- vii -
EXECUTIVESUMMARY
INTRODUCTION i. The purpose of this paper is to analyze past and present developmentsin the Eastern European livestock' sector, in order to prepare for a carefully formulated and executedadjustment. The authors try to explainthe forces which shaped the sector in the past and, based on this analysis,suggests priorities for World Bank assistancein the modernizationprocess.
PAST POLICIES ii. In most East Europeancountries livestock comprises about half of total agricultural production, is the main user of cereals, and is an importantforeign exchange earner. Past policies have led to this prominent place, and largely shaped the present sector. First, as the consumption level of meat and milk was generally considered to be a barometerof the well-beingof the population,national policies pursuing self-sufficiency and low food prices through high protection and subsidy levels were considered to be fully justified. Later on it became also important as a foreign exchange earner. The livestock sector was thereforeone of the most highly subsidizedand protected sectors in agriculture. Emphasis,however, was on quantity rather than quality. Second, and in part because of its perceived importance in earning foreign exchange, policies were introduced to collectivizethe livestock sector. Still, in all Eastern European countries individualownership of livestock remained permitted and, in effect, the private sector owned relativelymore livestockthan land. Meat and milk processing,on the other hand, remained largely in the state sector. It was therefore not subjected to the intense competitionand subsequentplant sizeincrease, which shapedthe industryin the US and Western Europe in the eighties. Third, with increasing budgetary constraints in the eighties, investmentdropped to very low levels.
RESULTINGTECHNOLOGIES iii. These policies led to inefficienciesin installationsand technologies.
(a) Farm structure. Collectivizationcreated units too large to be economically efficient, except in Poland and Yugoslavia where private agriculture predominated. The large collective animal farms created an important source of environmentalpollution. On the other hand, in those countries where land was not collectivized,the privatesector and farm size remained small, with extremelyfragmented plots.
I/ This paper concentrates on the developmentsin Central and Eastern Europe, e.g., Bulgaria, Czechoslovalda, Hungary, Poland, Romania and the former Yugoslavia(EEU 6). It does not include the Commonwealth of Independent States (CIS). - viii -
(b) Feed. Subsidieson grain, fuel and interestrates led to an excessiveuse of concentratefeed in dairy production instead of the more rational use of fodder crops and grassland. In addition, grain subsidiesled to inadequate attention to overall feed quality, especiallyto the energy/protein balance. The result was an imbalanced diet and overfeeding with costly grain. Tentativelyit was estimatedthat the structural deficit of 1 million tons feed protein was compensatedby a wasteful use of 10 million tons grain.
(c) Stock quality.The policy of self-sufficiencyand the input subsidypolicies led the to developmentof breeds, that, especiallyin efficiencycharacteristics (feedconversion, fertility) and quality (carcassquality, lean-to-fat ration) can not, given the current globalization of the markets, compete with the modern American and Europeanbreeds and lines.
(d) Input and advisoryservices. Research and extensionfocussed on the social sector, and have been conditionedby the subsidy policies on feeds and3 investments.Little technology is availableon equipmentand machineryfor small-holders(milking, cooling equipment for example)or on grassland. On the other hand,the commandeconomy facilitated the impositionof the strict disciplinenecessary for good disease control. Thus, the major contagious diseaseswere well controlled. The "management" diseases (stiffnessdue to poor housing, mastitis, deficiency diseases, internal and external parasites)were less well controlledand brought substantiallosses.
(e) Equipmentand installations. Collectivization,subsidies, and the declining investment levels, brought labor intensive, energy inefficient and environmentallydangerous farm buildingsand equipment.
(f) Agro-processing.The decline in investment and the lack of competition caused stagnationof the developmentof processing (feed mills, milk and meat processing plants). Plantsremained small and equipmentoutdated. This resulted in inefficient processing and a limited product range of mediocre quality and, consequently, in an inability to compete in the internationalmarkets.
RESULTINGPRODUCTIVITIES iv. Despitesubsidies and protection,the overallperformance of the sector has been mediocre at best. Annual growth in the sector varies from a very poor 0.4%, for beef, to an acceptable3.0-4.7% for the poultry sector2. Productivityper animal has stayed even by West European standards, but was lagging in efficiency characteristicslike feed conversion,where Eastern Europe (with the exceptionof Hungary)is about 30 percent behind.The limited competitivenessin the internationalmarkets is shown by the
V Poutry, with its rapid turnover and industrial production system,is generally doing well as long as feed costs are subsidized. - ix -
low value added of exported livestockproducts (more than half of the livestockexports are in the form of live animals)and by the much lower price (up to 40 percent less) East European products obtain in the world market. Productivityin the socializedsector is generallyhigher than on privatefarms, due to privilegedaccess to higher quality inputs, such as feed, breeding stock and equipment.
THE SECTORIN TRANSITION v. The macro-economicadjustments, with the abolition of producer and consumer subsidies and the fall in real income, have led to a general decline in demand, which, together with the collapseof the Sovietmarket, resulted in excesssupply. The sector has contractedapproximately 20 percentto date, and further,albeit less drastic, adjustmients are to be expected before the industry will stabilize.These adjustmentsoften affected above all the more specialized production units that are dependent on (semi)manufacturedinputs, such as the intensive poultry farms, and the larger, more commercialprivate farms in Poland. The contraction has an impact on the current and future developmentof the sector, since returns to investmentsfacilitating consolidaition and modernizationare currentlydepressed. It is expectedthat the sector will, in the short and medium term, not reach the output achievedin the late eighties.
OVERALLPERSPECTIVES vi. While precise estimatesof EasternEurope's comparativeadvantage in producing milk and meat are not available, the overall outlook is modestly optimistic. The contractiontaking place at present may lead to a more efficientproduction system, and does not necessarilyresult, in the long-term,in major reductions in output. The region possessesa reasonableclimate, especially the southerncountries (Bulgaria, Romania and Yugoslavia) are favored with a mild climate supporting low-cost production of feed, reducing the energy cost associatedwith poultryand pig production. The geographical location of poultry productionand to a lesser extentpig production may, in the long-term, shift southwards,influenced by lowerenergy costs as well as by the availabilityof protein feeds grown in these southern areas. The region also has low-cost skilled labor and, in the countriesthat collectivized,large fieldswell suitedfor mechanizedfodder production. Finally,many of the soils of the region are either only suitable for livestock or require a regular supply of organic manure to maintain fertility, indicating a need for a mixed farming system. On the negativeside are the long winters in the northerncountries,, the dilapidated infrastructureon the farm and in the livestock processing industry (with the exceptionof Hungary),and the lack of managerialskills and motivationnecessary in the complex and demandinglivestock industry. The region has a large, albeit contracting, internalmarket and limitedpossibilities in the SovietUnion, the Middle- and Far East,and the rest of the developingworld. The region can certainlycompete for the lower end of the EEC market, but access to that market depends on politicaldecisions. x -
FUTUREACTIONS vii. In the short term, the industryhas to come to grips with (a) its approximately20% contraction, (b) the price and input supply adjustments. Of immediate concern is to maintain an efficient production base. Specific measuresmay include protection from subsidizedexternal markets, prevention from excessivefragmentation and assetstripping provisionof essentialinputs to improve efficiency(i.e. feed additives). The contraction should be targeted to marginal producers. Contractionshould not be delayeclthrough subsidies spread among all enterprises. viii. In the mediumterm, three lines of actionsare essentialto improvecompetitiveness and sustainabilityof the livestock industry in the region:
(a) increaseefficiency, including (1) a greateremphasis in ruminant production on fodder and pasture based production, and in non-ruminants(pigs and poultry) more attention to protein quality; (2) more attention in cattle breedingto efficiencyin roughageconversion, in non-ruminantproduction to betterfeed conversioncharacteristics, and for all livestockmore attention consumerto consumer preferences(less fat, protein content of milk); (3) more attention to labor and energy efficiency in farm buildings and equipment; (4) more attention to specialty products such as wild- life/livestock systems; and (5) improvementsin managementincentives, researchsystems and rationalizationand privatizationof veterinary,breeding and extensionservices.
(b) improve quality through (1) the introduction of better standards, the restructuring of pricing systems with incentives for quality, and the redirection of breeding and production methods; (2) expansion of the product line; (3) improvedpackaging; and (4) increasedmarketing efforts.
(c) clean-up of the environmental contamination caused by larger scale production units. This will require large investmentsor closure of these farms. ix. The pursuit of greater competitivenessand sustainabilitywill proceed within the context of changes in ownershipand farm structure already underway. In each of the countries of the region, new laws on land ownershiphave already been adopted and changesin land tenure and farm structurehave begun. Thesechanges are complexand shaped by social and historic factors, as well as economic changes in farm structure. Asset management,not consistentwith pursuitof greatercompetitiveness and ecological sustainabilitycannot prevail in the longer run. Although there has been much study of the relationshipbetween farm size and efficiency,research does not support the concept of a unique optimal farm size or form of organization(for examplea corporate-, or family farm). It is therefore not appropriate,nor would it be feasible in the current climate, to attempt to prescribe a particularform of organizationor farm size; for example, either - xi - retentionof the large-scalefarms of the past, or mandatoryimposition of smallfamily farms. The former privilegedaccess of largefarms to marketsand inputs shouldbe dismantledalong with the institutionsthat conveyedthe privilege.Furthermore, legal and financialconstraints on consolidationof fragmentedsmall holdings should be removed. These and similar steps facilitatea processthrough which, over time, a new farm structureconsistent with the newimperative for competitivenessand the newdistribution of propertyrights may emerge. BANKINPUTS x. The Bankcould support these trends at the policylevel by: (a) encouragingthe continuationof present policiesof liberal pricing and subsidyreduction. If necessary,internal markets may be protectedagainst dumping.Vulnerable groups can receive targeted food assistance; milk, for example,is an importantcommodity in theseprograms; (b) discouragingconstraints on landand assetuse, such as definedfarm size, restrictionson contracting,and prohibitions on hiringof laborand services, but encouragea pluralisticapproach;
(c) supportingpolicies and lendingpractices that ensure that the various enterpriseforms are subject to the samesubsidy and taxation regimes, and haveequal access to services,inputs and capital; (d) assistingin the developmentof a legislativeenvironment which fosters privateenterprise and a marketoriented economy, with respectfor human and animalwelfare;
(e) assistingin the re-orientationof the managementand laborforce, through re-trainingand re-organization;
(n) introducingstricter quality standards and qualityprice incentivesfor meat and milk,and associatedproducts;
(g) introducingstricter environmentalstandards for intensiveas well as extensiveproduction units, and encouragingmixed land use. xi. Supportat the institutionallevel could include changes, which inter alia would (a) promote,in researchand extension,a closercooperation between animal healthand animalproduction disciplines and, more generally,between livestockand crop production; - xii -
(b) establisha clearerseparation of responsibilitiesbetween animal breeding institutionsand performancerecording schemes;
(c) promote close relationshipsbetween Eastern and Western (or other) institutions,not only in research,but also betweenbreeders and other privateindustry organizations;
(d) promoteextension services, with emphasison farm management; (e) sponsor privatizationof animalhealth and productionservices, and the developmentof commoditygroups and producersassociations;
(f) assistin policyanalysis, project evaluation and funding of investmentin rural infrastructure.Considering the rapidchanging economic conditions, there would,for example,be a needfor relativelyfrequent sector analyses. xii. At the projectlevel the Bankcould support:
(a) researchon priorityareas of grasslandand fodder production, protein feed crops, adaptedfarm mechanizationand housing,and livestock/wildlife managementsystems and theireconomic evaluation;
(b) conservationof local livestockbreeds able to performwell under local conditionswith low qualitydiets; (c) the environmentalclean-up of the oversizedand excessivelypolluting productionunits; (d) wherenecessary, land consolidationprograms, and especiallythose that promotecomplimentarity between the hilly and mountainousareas and more intensivelyused areas; (e) provisionto qualifiedborrowers, through the commercialbanking sector, creditto supportconstruction and consolidation,adapted mechanization programs,quality and efficiency improvements and diversification in thefeed mill and meatand milk processingindustry; (f) in conjunctionwith the privatesector, more efficientinternal and external marketingsystems; (g) risk sharingmechanisms (partial bank guarantees)to promote joint ventureswith foreigncompanies; - xiii -
(h) support vocationaltraining for farmersand privateentrepreneurs, and consumereducation;
(i) at thefarm level most support is directedtowards the developmentof mixed farming systems;as such most Bank support in this area will be a componentof a largeragricultural-, or agro-processingproject. xiii. In additionthe Bank shouldmonitor the rapidchanges in the economiesof the Eastem Europeancountries and the expectedtechnological modernization of the agricufturaland animalproduction systems through sector analysis.
- 1 -
Chapter1. THE LIVESTOCKSECTOR IN THE EASTEUROPEAN ECONOMIE'S
General
1.01 Animal productionis a mainstayof East Europeanagriculture and warrants Figure1. MAJOROUTPUT VOLUMES OF THE RED MEAT attentiveconsideration in the formulation INDUsTRY(PERCEn) COMPARING EASTERN EUROPE, of the short term and long-termstrategies. Althoughthe contributionof agricultureto Pap overallGDP in EasternEurope is modest sLoged (8 to 20 percent [Annextable 1]), with an P estimatedoutput of about US$30 billion3, the livestocksector constitutes 50 percent of the total agricultural production. Etude. Livestockconsumes from 50-70percent of * TuIa* domestically produced cereals. Within the agricultural sector, livestock products 4 make up between24 and 50 percent of 10 agriculturalexports and are thus important Er12 Ue" uISI sourcesof export earnings.
Relative Importance of IndividualCommodities
1.02 On the basis of world market prices, pork is by far the most importantlivestock commodityin Eastern Europe,followed by beef, milk, poultry meat and eggs (table 1). qeef and milk productiontogether are only slightly more importantthan pork. Pork is especiallyimportant in Polandand Hungary. Mutton,wool and small ruminantdairying are relativelyunimportant, except for the southern countries. Animal manure Table1. RELATIVESHARES OF THE VALUE OF OUTPUT IN EASrERN EUROPE provides an essential contribution, as a OF THE LIVESrOCKINDUSTRY fertilizer substitute and to improve the structureof the poor, sandy soils in many Eastern European countries. Animal Pork 37.1 Broilers8.0 traction,using horses,oxen or buffaloes, Beef 22.4 Eggs 7.7 may locally still be important out overall Milk 20.2 Mutton 4.4 draughtanimals are increasinglyreplaced Wool 0.3 by mechanizedpower. Processedhides, skins, and leather have traditionallybeen (at internationalprices) strong components of the agro-processing industry, especiallyin Czechoslovakia.
3/ At internationalprices.
41 In some cases,however, countries sold fresh, good qualitymeat for export,and used cheaper, lower quality imported meats for the internal market, to increase foreign exchangeearnings - 2 -
Chapter 2. LEGACIESOF PREVIOUSPOLICIES
2.01 Major objectivesof past East Europeanagricultural strategies were the provision of cheap food to the population and achievementof self-sufficiencyin production.This was especiallythe case in the livestock sector. Instrumentsfor implementationof these objectivesincluded subsidized inputs, services and consumerprices, and collectivization. These two policy domainslargely definedthe structureof production,ownership of land and animals,the use of labor and capital investments,and the characteristicsof input supply (feed, services) systems and the agro-processing industry. The following paragraphs provide an overviewof these factors.
Incentive Policies
2.02 Ample meat and milk supplies were consideredto be a key barometer for the populationswell-being, and livestock production in the former East Europeancommand economies was highly protected and subsidized. For example,the producer subsidy equivalent (PSE) (the aggregate of the different subsidies)for milk and pork varied in Poland in the late eighties between50 and 70 percent, respectivelyat par or exceeding the EEC protectionlevels (Annex table 2). Overthe period 1986-1989,subsidies on meat and milk in Poland were 1.2 percent and 1.6 percent of GDP, respectively (Knudsen 1991). Milk producer prices in Poland were, during this period, on average 24 to 50 percent above world market prices. This support was supplementedby subsidieson inputs, particularlyfor animalfeed (in Polandabout 0.3 percent of GDP). Total subsidies to the Polishlivestock sector constitute60 percentof total agriculturalsubsidies, whereas the sector's contributionto agriculturalGDP was only 50 percent. Similarly, in 1986 in Hungary76 percentof the agriculturalsubsidies went to milk and meat, which contributed less than 50 percent of agriculturalproduction.
2.03 Consumersubsidies were large and, in additionto producer subsidies,led to high levelsof consumptionof meatand milk. Meatconsumption under the commandeconomy fluctuated between70 and 100 kg per capita per year (Annextable 3). These levels of meat consumption exceed those in market economieswith comparable income levels. Similarly,consumption of dairy productswas significantlyabove the averageconsumption in the EEC.
2.04 These subsidies mainly benefitted the social sector, although there was a considerablespill-over from the social sectorto privatefarms. Datafrom Hungary (1986) show that for agricultureas a whole, subsidiesconstituted 51 percent of the valueadded, compared to only 2 percent of the privatelyproduced value added. Similarly,in Poland it was estimated (Knudsen 1991) that in 1986-1987 the social sector had a 10 to 50 percent higher PSEfor pork and milk than the privatesector (Annextable 2). The Polish private sector benefitted only from higher protectionand subsidieswith beef. -3 -
Ownership policies
Land
2.05 Pastland tenure policiesgreatly affect presentfarm structure. In Albania, Bulgaria, Czechoslovakia,Hungary and Rumania,collectivization policies have made land use by privatefarmers rare, whereas in Poland and Yugoslavialand was not collectivizecdand private land ownership predominates(Annex table 4). Average farm size of the social sector varies between500 ha and 7,000 ha for the state farms and from 100 to 4,500 for the cooperatives.Yet, in all countries some form of private land ownership remained, mostly in the form of small plots of up to 0.5 ha allotted to collectivefarm workers. In Poland and Yugoslavia,with a predominantlyprivate farm sector average farm size is 3 to 6 ha, significantlybelow the 18 ha average farm size in Western Europe.
2.06 Collectivizationdid not increaseavailable land per worker. For example,there is about 6-7 ha land available per active worker on the state farms of Poland and Yugoslavia,compared with 3.5 - 6.4 ha on privatefarms there. If the larger share of part- time farmingof privatefarmers in these countriesis taken into account,available land per active full time employed laborer will be about the same in the two sectors. Similarly, availableland per active worker in the other countries is around the 7 ha. Collectivization has pooled land resources, however,erased individualboundaries and thus led to large size, well mechanizable plots. This in contrast with land holdings in Poland and Yugoslavia,where land fragmentationis a serious problem,with on average10 to 12 plots per farm. Economies of size are important in grazing and pasture management,in particular in fodder production and conservation(hay and silage making).
2.07 Land was often undervaluedor not valuedat all, and value of buildingsoverstated. In former East Germany,for example, buildings constituted nearly half of farm assets, compared to approximately 10 percent in West Germany. A re-evaluationmay be necessary, especiallywhere these overvaluedbuildings were used as collateralfor farm loans..
Livestock
2.08 Livestock ownership followed the same pattern as land tenure, i.e., in those countries with predominantlycollective land ownership,animals were mainly collectively owned,whereas in the countrieswith predominantlyprivate land ownership, logically most livestock is privately owned (Annextable 5). Still two interesting phenomena are worth noting:
(a) Privatefarmers owned relativelymore livestockthan land. For examplein Hungarywith only 12 percentof the arableland and 3 percentof grassland belonging to private farmers, they own 24 percent of the cattle. This is primarily a result of the strong contractual or informal linkages between social and privatefarmers, especially through the trade of feed to members or employeesof large farms. When politics permitted active cultivationof private plots, the large farms encouraged growth of livestock production there. Large farms marketedmuch of the output from private production -4 - of theiremployees. In some countries,tax laws promotedtransfer cf inputs from socializedfarms to their employeesor members.
(b) Privatefarmers kept a higher percentageof femaleanimals (cows, sows). This revealedthe preferenceof the privatesector for the more labor-and management-intensivebreeding and milking operations, and of the socializedsector for the more easilymechanized and managedfattening operations.
2.09 Herd size varies between 1.5 and 3 cows per farm in the private sector and exceeds200 cows in the social sector (table2). Bulgaria,Czechoslovakia and Romania in particularhave very large herds in the socialsector. This compareswith an average herd size per farm in the EC12 of 31.6 (1989),ranging from 6.3 animalsin Portugalto 82.8 in the UnitedKingdom; the herd size in nearbyAustria was 18. However,few dairy
Table 2. AVERAGE HERD SIZE (HEADS/FARM) UNDER DIFFERENT ENTERPRISE FORMS, 1989
Hungary Poland Romania Yugoslavia EC12
Dairy cattle Private 2.5 2.4 1.5 3 32 Socialized 550 255 1,000+ 200+ n.a.
farms of the sizefound in EasternEurope are found in the EEC,with only 0.5 percent of the holdings in the EC12 (7 percent of the cows) in herds of more than 300 animals, comparedwith, for example,Hungary (1985), where about 40 percentof the dairy cows are kept in holdingsof more than 300 animals. The large farms becomeinefficient due to managementand waste disposalproblems 5 . Similarly,unit size in pigs in the Eastern Europeanprivate sector is small, with a typical privatefarm involvedin pig productionin Hungary (1985) and Poland (1989) having 1 to 2 sows and 6 to 10 feeder pigs. Pig production unitsin the socializedsector are generallyvery large,with typical units of 500 to 1,000 sows, with up to 100,000fattening spaces and outputs of up to 150,000head per year. This compareswith an averageunit size in the EC12 (1988)of 68.3 animals, rangingfrom an averageof 9 animalsper holding in Portugalto 406 animalsper holding in the Netherlands;the averageholding in Austriais 25 (de Haan, 1991).
Aaro-Processing
2.10 Nearly all EasternEuropean feed mills and meat and milk processingplants are owned by the socializedsector. Most feedmillsare managed by parastatals.Dairy processing is managedentirely by cooperativesin Polandand partiallyby cooperatives in Hungaryand Yugoslavia.These cooperatives, however, have been dominatedby the government in the past, and have behaved like parastatalcompanies. State dairy
0/ A complicaing factor of the smallproduction sstems with limitedfeed resources is the seasonalityof production;in Poland for ecample 60% of the milk output was produced in spring and sununer. -5 - monopoliesprevail in the other EasternEuropean countries. Meat processing is generally managedby state monopolies.
2.11 The agro-processingindustry in EasternEurope has not been subjectto the forces that led to consolidationand subsequentincrease in plant size in the agro-processing industry in the Western Europe and the US during the eighties. As a result, East Europeanagro-processing plants are generallysmall, and often serve a single state or
Table 3. AVERAGE DAILY MILK THROUGHPUT PER DAIRY PLANTIN SELECTEDEASTERN EUROPEAN COUNTRIES AND THE NETHERLANDS
Bulgaria Hungary Poland Yugoslavia Netherlands (1990) (1985) (1990) (1985) (1987)
Milk (Ltx1OOO) 205 52 42 30 290
cooperativefarm. Forexample, the averagecapacity of EastEuropean feed mixingplants fluctuates betweenabout 8,000 ton/year in Poland (1990) and 20,000 ton/year in Yugoslavia (1991)and Hungary (1985), compared with about 50,000 ton/year in, for example,the Netherlands(de Haan,1991). Similarly,dairy plants in EasternEurope have an averagethroughput of 30,000-50,000It per day (withthe exceptionof Bulgaria,which has a much higher average size) compared with about 300,000 It per day in the Netherlands(Table 3.).
Equipment and CapitalInvestments
At Farm Level
2.12 Stateand cooperativefarms in the past had preferentialaccess to investment.For example,in Poland,state farms receivedan estimated40 percent of capitalinvestiment duringthe lasttwo decades(Polish-European Community-World Bank Task Force 1990), while accountingfor lessthan 20 percentof agriculturalGDP. It is now estimatedtheit per ha capital inputs on state farms were twice as high as average for Polish agriculture. Similarly,investments in Hungary'sprivate sector with about 35 percent of the output, amountedover the period 1980till 1985to only 1 percent(mainly in construction)of total investmentsand total capital assets of the private sector amounted (1984)to only 7 percentof total estimatedagricultural assets. Much of the investmentsin the socialized sector were used for large and unhealthybuildings that were the underlyingcause of major healthproblems leading to a low productivelifespan of the animals.Dairy cattle, for example, often lasted less than two lactations becauseof foot and leg problems or mastitiscaused by concretefloors; calf mortalitywas often20 percentbecause of poorly ventilatedbuildings.
2.13 The rate of investmenthas decreasedconsiderably in the last decades(witlh the exceptionprobably of Hungary),and equipmentand facilitiesin livestockhave become obsolete. Thus,for Czechoslovakia,Podesbraski, et.al. (1991)reports that, following the substantialinvestments in the earlyeighties, maintenance and replacementshave fallen behind, and an estimated50-55 percentof the cattleand 60 percentof the pig breeding -6 - facilities are sub-standard. Even with reduced investmentin the recent past, many cooperativeand state farms have debts that, under the new economic conditions, threatentheir survival. A brief surveyof farms in East Germany,for example,indicated an expectedsurvival of 65 percent of 133 former collectivefarms when old debt were canceled,compared to 18 percentif these debts remainin effect (Hinrichs,1991).
At Agro-ProcessingLevel
2.14 Investmentsin the feedmilland livestockprocessing industry peaked in the late seventiesand earlyeighties and substantiallydeclined over the last decade.As a result, the livestockprocessing industryhas outdated equipmentand uses generallyobsolete technology.For example,only a smallpercentage of the feed industryin EasternEurope has pelletizingand fat mixingequipment (only 5 percentof commercialfeed in Polandis provided in the form of pellets",compared with 80 to 95 percent in the EEC). Yearly investmentsin the dairy industryin Polandand Hungarynow fluctuatearound US$0.01 per liter processed, about one-fifth the investment per liter in, for example, the Netherlands.Capital investment in the meat industryshows in generala similardecline, with the possibleexception of Hungarywhich, with World Bank support, has continued to modernizeits meat processingindustry. As a result,processed livestock products are poorly competitivein the world market. Dairy plants in the former East Germanypay farmers20 percentless than in the former West Germany,because Eastern processing technologyis less efficient (Isenmeyer,1991).
Labor
At FarmLevel
2.15 Poor incentivesin the socializedsector and the lack of capital investmentin the private sectorhas led to low labor efficiencyin both. For example,in dairy production, case studiesin Hungary (1985)indicate a requirementof 3.7 to 6.0 man-hoursper 100 liters producedin the state farms,compared with about 1.2 man-hoursin modernfamily farms in NorthernEurope. The excessiveamount of managerialand servicepersonnel (30 percent)in state and cooperativefarms and the excessivespecialization of the labor force are the major reason. Still labor costs are low; in 1991,for examplethe labor cost in Polandwere less than 10 percentof the labor cost in the U.S.
2.16 Privatefarming in Eastern Europe in the past was predominantlya part time occupation,and women did mnuchof the work. If these patterns prevailin the future, it will be importantto design extension programs to reach large numbers of women engagedin part-timesmall scale livestockproduction.
At Agro-IndustryLevel
2.17 The small plant size and the lack of managementincentives has led also to low labor productivityin the agro-industry. In the feed sector,output is about 500 tons per employeeper year, about one-fourthof the West Europeanaverages. Still, meat and milk processingconstitute one of the most importantsources of off-farmemployment in the
6/ PeDcting prevents losses during milling, transportation and on the farm. rural areas. For example,the Polishmeat, egg/poultry and dairy processing induistry employs43% of all labor in agro-processing.
EnvironmentalContamination
2.18 Probably the worst legacy of past policies is the massive environmental contaminationcaused by unsoundfarming practices. The large ("mega")livestock farms are sources of soil, water, and air pollution. This pollution is exacerbated by the imbalancesin protein/energysupplies (para. 3.02) leadingto over-useof grain and cereal by-productsand, subsequently,to much higher phosphateexcretion than with a rnore balanceddiet. Similarly,anti-pollution measures in the livestockprocessing industry are generally deficient. Indirectly the sector is affected by the overall environmental contamination,locally resultingin relativelyhigh residuesof metalsor PCB's in animal products.
SupportServices
Animalhealth
2.19 The objectivesof the animalhealth services were to limitthe number of diseases through vaccinationand hygieneand in later years to adjust to the health and qujality requirementsneeded for export outsidethe East bloc.
2.20 Theseservices were generally provided by the socializedsector, although in many instancesthe statefarms and cooperativesrecruited their own veterinarians.The pricing policy for veterinarycare varied among countries. Polandand Romaniaprovided most services free of charge; in Hungary veterinary care was generally providecdby veterinariansemployed by the socializedunits; and in Yugoslaviamost of the senAces were paid for by the beneficiaries.
2.21 Theanimal health coverage is broad: in Hungary,Poland, Bulgaria and Yugoslavia (FAO-WHO-OIE1990) there are about 2,000veterinary livestock units 7 per veterinarian; in Romaniaabout 4,000. This is comparableto West Europeanstandards", with about 2,000 VLU per veterinarianin (formerly)West Germany (1988) and 3,500 VLU per veterinarianin the Netherlands.
Animalbreeding
2.22 Animal breedingwas traditionallythe responsibilityof the public sector. In most countriesartificial insemination (Al), performancerecording and herdbook functionswere carried out by the same service. Servicesremain largelyfree of charge or subsidized; Hungaryand Yugoslaviahave full cost recovery. Al is generallywidespread, espe(cially in the countrieswith subsidizedservices. In Poland,for example,Al is usedfor 80 percent of dairycows (this is comparableto WesternEuropean figures). Al in swine breediingis
2/ VLU, defined as 1 cattle, 0.5 pigs, 0.1 sheep or goat and 0.01 chickenor duck
~/ The coverageis more intensive,however, when the contnbution of veterinatytechnicians is added. In Bulgaria, for example,the ration veterinarian/technicianis 23. less frequently used, especially in those countries where smaliholder production predominates (Poland, Yugoslavia), reaching, for example, only 10 percent of the population in Poland (1990). Where large units predominatesin pigs, Al in pigs is also widespread.
2.23 The technicalAl parametersare rather poor and sire selectionand use of superior sires is suboptimal. Availabledata give on average2.6 and 3 inseminationsper calf born in Hungary(1983) and Romania(1990), respectively, and a 72 percent60-day non-return rate in Poland (1990),compared with less than two inseminationsper calf born in most countries in Western Europe. Furthermore,the number of inseminationsper bull is low, leading to slow genetic progress. Bank sector missions report figures of 1,250 from Hungary(1982) and 10,000from Polandand Romania(1990), compared with over 20,000 in most West European countries. The use of imported semen in those countries is below 20 percent of total inseminations.
Researchand Extension
2.24 Technology generation and transfer in Eastern Europe has emphasized the parastatalsector and neglectedthe privatesmallholder. Researchis fragmentedamong different institutes. There is little contact between the different disciplines, especially between health and production specialists. Furthermore, key constraints such as grassland production and conservationare not adequatelyaddressed, and there is an almost complete absence of economic evaluationsof the technical results. Finally,the macro-economicstabilization programs force staff reduction and a generaldecrease in funding for research and extension.
2.25 Extensionis (a) carriedout by the researchersthemselves, who directlyinform their "megaunit"clients (Bulgaria,Romania) of technologicaladvances; (b) organizedamong various units in the social sector on a commoditybasis (Hungary);or (c) funded partially by public funds and by eitherthe users in the social sector (Yugoslavia)or the proceeds of special production units operated by the extension service (Poland). Poland and-- partially--Yugoslavia(Habe et al. 1991)are startingto focus their livestock extensionon the privatefarmers. Urgent action in this respect is required for all the East European countries. - 9 - Chapter3. INHERITEDTECHNOLOGIES
Feed.
3.01 The policyof food self-sufficiencyhas led to excessiveattention to grain production (Poland,Romania), and the use of grains for feed, withoutadequate attention to overall feed quality. Collectivizationand mechanizationled to excessiveattention to the use of grain and neglect of fodder crop and grasslandproduction.
Table 4. ESTIMATEDPROTEIN DEFICIENCY IN SELECrEDEASTERN EUROPEAN COUNTRIES (SOYA MEAL EQtUIVALENIS)
Poland 500,000 tons (1990) Hungary 275,000 tons (1987)
Romania 1,000,000 tons (1990) Yugoslavia 250,000 tons (1986)
3.02 Eastern Europe has a structuraldeficit in high-qualityfeed protein. The deficit, mainlyfor the non-ruminantsector, was estimatedbefore the contractionat 1 milliontons of feed protein or the equivalentto almost2.5 milliontons of soybeanmeal (table 4). The relative importancecan be demonstratedby comparingthis with the total of 9 tc 10 million tons of soya cake imported in the EC12 (1988),with a much larger livestock population. This deficit leadsto inappropriateprotein/energy balances, with the result that the animal needs more feed for the same growth. Althoughexact data are not available, estimated feed conversion in pig production in Eastern Europe would be between4 and 5.5 kg feedper kg growth (comparedto 3 kg/kg growthin West Europe) and in broiler and egg productionbetween 2.5 and 3.5 kg per kg feed. Whilepart of this difference might be caused by inferior genotype and inadequatethermo-insulation of livestock housing,it can be safelyassumed that at least half the differenceis caused by the inadequateprotein feeding. Thus, for examplefor Hungary,Poland, Romania and Yugoslavia,a savingof about 10 millionton of feed9 could be made,if the deficitof about 2 million ton of soja meal equivalentswould be resolved. Furthermorethe inefficient feeding causes much greaterpollution as the higherfeed consumptionleads to higher excretionof phosphatesthan necessar, (van der Zijpp, 1991).
3.03 The deficit in high-qualityprotein is exacerbatedby poor grasslandmanagement. This is the result of earlier subsidy policies, which made concentrate fee.dingmore attractivethan grass, and of the generalneglect by researchand extensionof grassland managementtechniques. The long grazingor cuttingintervals generally used in Eastern Europelead to a sharplyreduced protein content of the pasturewhereas a more intensive grazing would be more efficient. There is a heavy relianceon hay making instead of silage,causing further lossesof the conservedproduct. Uttle use was madeof existing topographicalpotential for stratificationof the productionsystem (for instanceby raising young dairy stock in the hills and mountains).
21 Based on a savingof 1 kg feed per kg growth on the approximate6.5 million ton pork (Uveweight), .75 kg feed savingper kg growth on the approximate2 millionton of broilers (I}veweight) and .75 kg feed per kg eggs on the 1.5 million ton of eggsproduced in the four countries. - 10-
3.04 The discriminationagainst the privatesector in land tenure and subsidy policies has led to the adoptionof differentfeed technologiesin the various sectors. The much higherdegree of mechanizationin the socializedsector has led to an energycostly but technicallybetter harvestingand conservingmethods on state and cooperativefarms. Privatefarms, particularlyin Polandand Yugoslavia,have relied primarilyon weather- sensitivehay making,whereas state farms and cooperatives predominantly rely on higher- quality-yieldingsilage. For example,in Poland,private farms transformed85 percentof the total area mowed into hay and 15 percent into silage, whereas the state and cooperativefarms used40 percentof their area mowedfor hay making and 60 percent silage making (Polish-EEC-WorldBank Task Force, 1990). The state farms and cooperativesgenerally use better feed conservationtechniques (hay ventilation,grass wiltingand clamp silos)than the privatesector. Privatefarms had poor accessto high- quality concentratefeed, especiallyprotein feed. For example,of the 8.3 milliontons of concentratefeed producedin Poland,only 3 milliontons are used by privateproducers, althoughthey own 88 percentof the dairy cattle, 70 percent of the pigs, and about 66 percent of the poultry. As a result,the concentrateused by the privatefarmers often consistsmainly of cerealsand is highlydeficient in protein. Furthermore,because of the presently high overheadcost in the feed industry, most of the private sector relies stronglyon home-mixedfeed, without essential feed additivessuch as vitaminsand micro- elements.
Animal Breeding
3.05 The policy of selfsufficiency led almostall countriesto developover the last thirty years--throughcross breedingand selection--theirown adaptedbreeds, notably in dairy and swine production. Severalcountries (Hungary,Poland and Romania)have gone furtherand developedsynthetic lines and hybrids in pigs and poultry. However,breeding and selection have resultedin breeds and lines which cannot competewith the West European and North American breeds, on the basis of direct productionand quality parameters,although they may be better adapted to local conditionsand a diet low in high quality proteins. With the increasingglobalization of the sector in EasternEurope, these breeds will not be ableto withstandthe influx of West Europeanstock and could disappearcompletely in a rathershort time, bringingloss of valuablegenetic materialin the process.This is confirmedby experiencein the former East Germany,where local breeds have all but vanishedor are in the processof doing so. Some local breedshave characteristicsworth conserving, and conservation of local breeds needs to be consideredin future researchand extensionprojects in the-region.
Animal Health
3.06 The ample supplyof veterinariansand the past administrativecontrol has led to good vaccinationcoverage and good overallepidemic disease control, but poor public health and quality standards. It will be importantto maintainthe systemof vaccination and epidemicdisease control at lowercost than in the past. This is especiallyimportant for Poland,the only EasternEuropean country witha foot and mouthdisease (FMD) free status;a fact which broadensits exportopportunities. Unfortunately, there are earlysigns of a breakdownof the system.Moreover, FMD is only one of many diseaseswhich limit exports to countries with stricter disease preventionregulations. Also, the diagnostic - 11 - ability, especiallywith respectto microelementdeficiencies and toxicologicalproblems is limited.
Equipment and Installations
On Farm
3.07 The declinein capital investment,and the surplus labor led to on-farm installattions which are often:
labor intensive.Dairy cattle installations frequently are still the single standltype with bucket-typemilking machines,instead of the walk-throughmilking parlor. Swine and poultry installations frequently lack automatic feeding and de- manuringfacilities;
energy inefficient.With energy heavilysubsidized, materials chosen were not energy efficient, and energy cost per animal in the severe Eastern European winters is very high;
deficientin protectionof animalwelfare. Installationsand housing systerns,in particularfor intensivepigs and poultryproduction are almost universallyof the types now increasingly being outlawed in Western Europe (tie-on farrowing crates for sows, batteriesfor poultry);
environmentallyhazardous. Manure and silage effluentdisposal are absolutely inadequate. The ensuingenvironmental contamination is consideredthe major problem in large collectiveand state farms; and
inadequate. Milk cooling systems or storage of eggs and other produce are inadequate, often not well maintained,and frequentlynot consistentwith the production levels of the farm unit.
In the Agro-ProcessingIndustry
3.08 The last decade's decline in investmentin the agro-processingindustry, caused product diversificationfor the internal market to be limited and product quality to be mediocre.For example,in Poland(Polish-EEC-World Bank Task Force, 1990),the share of highly profitableyoghurts and other flavored liquid milk products is only 16 percent of the total liquid milk market. Ice cream is only .2 percentof the total dairy product output. In contrast, this share of further processed products is 40 percent in the Netherlands. Romaniaand Hungary have focussed on a broader export market and have a more diversifiedproduct line. Similarly,with few exceptions(Polish ham and sausagesfor the US market canned meat from Yugoslavia,and pan-readypoultry from Hungary),value added processing and packaging is limited.
3.09 In effect, most Eastern European livestock exports consist of raw products wvth little value added. For example,the ratio of live animal to beef export is nearly 3 times -12 - higher in Eastem Europe comparedto selected EEC countries10 (Annextable 7). This trend is even more obvious in the small ruminant market, where Bulgaria,Hungary, Polandand Romania'smarket share of liveanimal export was over40 percentin 1981-87 compared to around 15 percentfor lamb and mutton. In dairy, the value added milk products contribute in only a limited number of countries significantlyto agricultural output. Cheeseis the most commonlyexported product (Yugoslavia,Romania, Bulgaria, Czechoslovakiaand Poland),but the total exportof all of EasternEurope is lessthian that of, for example,France. Butter and milk powder are mainly exported by Poland and Czechoslovakia,casein by Poland.
Mlarketing
3.10 Most livestock productswere marketedthrough state channels.These channels were characterizedby:
* poor price transmissionthroughout the channel;
lack of feedback,especially in terms of qualityrequirements from the consumer to the producer;
* lack of market transparency,and increasinguse of barter trade; and
* lack of marketinfrastructure, especially in refrigerationequipment; storage, and managementskills.
For the more perishableproducts such as eggs and milk a substantialdirect farmerto consumermarket existedin many countries. For example,about 35 percentof the milk producedin Polandwas estimatedto remainoutside the formalmarketing channels and was either directlyconsumed on the farm or directlysold to consumers.
],Q/ In some csaso hower, thiswu relatedto an effort to increaseforeign exchangeearnings byseling livestodc andfresh meat for aport and us cheaper, lower quality,imported meats for the internal market. - 13 -
Chapter4. RESULTINGPRODUCTIVITY
Overall Performanceof the Sector
4.01 Growth in the livestock sector has been mediocre (table 5). Milk and beef production grew over the last twenty five years at a modest annualrate of 1.4 and 0.4 percent respectively,mainly as a result of a growth in productivityper head. Pork productiongrew overthat period 1.8percent per year, howeverexclusively as a result of an increasein the numbers.Only poultryproduction has increasedat an acceptablerate with meat productiongrowing at an annualrate of 4.7 percentand egg productionat 3.0 percent per year. The growth in the poultrysector has mainlybeen a result of an
Table 5. ANNUAL GROWTH (%) [N PRODUCnVrIY OF LVESTOCKCOMMODITES IN THE PERIOD 1961/65 TrL 1988/90 IN THE Six EASTERNEUROPEAN COUNTRIES(Source: FAO Productiondata).
Numbers Prod./Head. Output Growth
Cattle Dairy cows -0.1 1.5 1.4 Beef 0.1 0.3 0.4 Pigs 1.9 -0.1 .8
Poultry Meat 1.4 3.3 4.7 Eggs 3.0 increase in productivity per head. This better performanceof the poultry sector is, because poultry production is (i) less environmentspecific and the technology could thereforebe importedfrom the West; (ii) has a rapid turn-over,and is easyto mechanize; and (iii) depends largelyon feed grain, and thereforebenefitted strongly from subsidy policies.
Table 6. AVERAGE UVESTOCKPRODUCTIVrTY LEVELS IN EASTERN EUROPE AND THE EEC. (Source: FAO production data)
E. Europe EEC Austria USSR USA
Milk yield (It/cow/year) 2950 4790 3556 2549 6711
4.02 Productivity has lagged considerably behind the Western European levels. Averagemilk productionper cow is providedin table 6. There is a significantdifference in averageproductivity between the EasternEuropean countries (Annex table 6). In milk, the production in Poland(3,250 fts per lactation)and in particularHungary (4400 It per lactation)is approachingEEC levels, but the productionof the southerncountries reaches only half (1,800 to 2,200 liters per lactation)such levels. Differentfeeding (grassland constitutesa much smallershare in the dairy feedingsystems of the southerncountries) - 14 -
and breeding in the dairy herds, must be importantfactors explainingthis difference.In pig and poultry production the differencesare less pronounced.
ProductionLevels in the Social and PrivateSectors
4.03 Access to better feed and breeding servicescauses the milk yield per cow in the socializedsector to be about 20 to 200 percenthigher than on privatefarms (Annextable 8). These data seem to rebut the widely accepted West European theory that dis- economiesof scale (especiallyin reproductivemanagement and health care) come into play when herd size exceeds certain levels (i.e. 300 cows). This diseconomy is not corroboratedby two Hungarianstudies (1982and 1985),which show that with increasing herd size, even over 1,000 cow units, the cost of production per liter declines. It is not clear, though, whetherthis observed increasedefficiency with increasingsize is a result of preferentialaccess of the larger farms to scarce feed and equipment (an advantage which would disappearin a more liberal economy),of the low labor costs, or due to other sources. Moreover,the environmentalcosts were not consideredin these studies.
4.04 For pig production few comparativeanalyses are available. Data from Romania (1990) show an off-take of 10.9 piglets per sow in the socializedsector, compared with 11.4 on privatefarms. Comparativedata from Poland (1990)show 11.5 piglets per sow for the socializedsector and 10.5 for private farmers. Data from Hungary (1987) and Poland (1990) point to a 20 to 30 percent higher feed use in pigs fattened on private farms. This is probably a result of the feed protein deficiency on private farms (para 3.03). Averageweight at slaughteris much higher in the privatesector, reaching 144 kg for the private sector in Romania(1990), compared with 107 kg on state farms. Most poultry production is in the socializedsector.
FinancialEfficiency
4.05 Whilephysical yields have been higherin the socialsector, this does not necessary meanthat the social sector has been economicallyor financiallymore efficient. Datafrom Poland (Polish-EEC-WorldBank Task Force, 1990)and Hungary(1985) show that more than half the livestock enterprises in the social sector were producing at a loss, in particular if full cost (including land rents) were taken into consideration. Similarly, profitabilityof the dairy and meat processing industry in Eastern Europe is low. For example, in Poland the meat and dairy industry is one of the least profitable industries. Knudsen(1991) reported that of the 56 loss-makingstate enterprises(out of a sample of 500 from all sectors), 34 (60 percent),were directlyrelated to the livestock sector (meat and poultry and feed processing). - 15 -
Chapter5. LIVESTOCKSECTOR IN TRANSITION
5.01 The politicalreform process in EasternEurope has initiateda radicaltransformation of property rights. With the introductionof macro-stabilizationprograms, price controls are abolished and subsidiescut drastically. For example,the subsidiesin the dairy industry in Polandfell from US$1 billion in 1989 to zero in 1991. Consumer prices increasedand demandfell. Hungaryreports a fall in per capita consumptionof meat and milk of about 30 and 10 percent respectively.In Poland,per capita consumptionof milk dropped 10 percent between early 1989 and early 1990 followingthe completeremoval Figure2 MNARKETP HAUNGESOF AGRICULTURAL of all food subsidies in late 1989, and dropped another 8 percent in 1991 (Kowalski, Pricein FtKg;grain in FT/10Kg. 1992). Meat consumption 140 remained initially the same 130 Legnd . (Polish-EEC-WorldBank Task 120 1987 Force, 1990), but declined in 110 1988 1990-91. 100 E9 90 ~~~~~~1990 5.02 This situation is 9i 1991> aggravated by the collapse of 70 _ the Soviet market and the 60i transientdecline in 1990/91of s the Middle Eastern markets. 40 Remainingtrade in food withthe 3 s swem Bal o com former USSRis eitheron credits or grants from EEC or USA, with which East Europeangovernments can not compete. The combined USSRand MiddleEastern markets bought in 1988from for exampleHungary and Yugoslaviaabout 25 percent of their exportsof meat and milk.
5.03 The resultingoversupply is exacerbatedby institutionalchanges introduced cluring the transition,as can be demonstratedby the Polishexperiences. First, exports stagnated following the abolitionof the nationaland secondarycooperative structures responsible for dairy stock management.This led to a high degree of uncertaintyand indecision, followedby distressselling at extremelylow prices (one-thirdto one-halfthe world market price), particularlyof butter. Singlebuyers continue to dominatethe regionalmarkets. The price liberalizationand abolitionof nationaldairy and meatmonopolies have therefore led to the maintenanceof inefficientregional monopolies,which compensatefor the reduction of subsidiesby increasingoverhead margins instead of improvingefficiency (Knudsen 1991). The productivesector is thus hostageto inefficientinput supply and processing and marketingsectors. At the farm and industry level the situation is exacerbatedby high inflationand the impositionof positiveinterest rates,which led to financingcharges which the sector could not meet. This is leadingto an eliminatilonof the most inefficiententerprises as well as a generalcontraction of the sector. In some instancesespecially the more progressivefarmers are affected.For examplein Poland, hard hit by plummetingdairy prices (para 4.03), the mediumsized progressivefarms, - 16 - which are more exposedfinancially, were more severelyaffected and had to slaughter their cows.
5.04 The fall in productionand demanddirectly affects the financialviability of the agro- processingindustry. This trend was observedin Polandin mid-1990 after the introduction of the stabilizationprogram. The Polish feed mill industry experienceda drop of 60 percent in demandfollowing the stabilizationprogram and operatedat 20 to 30 percent capacity. To survive,the industry drasticallyincreased its marginsfor processingand distribution,which in turn broughtthe feed price to a levelabout doublethe raw material costs, comparedwith a processing and distributionoverhead of about 20 percent in WesternEurope. This is leadingto a strong shift toward on-farm mixing.(Polish-EEC- World BankTask Force, 1990).
5.05 After about 1-2 years of adjustments,livestock population have declined by about 5-20 percentand production by about the same amount (table7 and Annextable Al0). Some of the factorswhich explainthe differenttrends (Annextable 10) are:
(a) Countries which depended Table 7. CHANGESIN LESrOCK NUMBERSAND on externaltrade, Hungary PRODUCTION(1989-1991) IN CZECHOSLOVAKIA, and andRomania example,eampye HUNGARY,POLAND AND ROMANLA showedthe steepestdecline Livestock Livestock in livestock number and numbers production production. This was to be ------expectedwith the declining Cattle -15% Beef +5'% purchasingpower of their Pigs -4% Milk -18% majortrade partner e.g. the, Sheep -14% Pork - 2% nowformer, Soviet Union. Poultry -22% Broiler meat - 8%
(b) Countries with a strong internalmarket and a privatelivestock industry seem to be less severely affected.
(c) The reductionin consumersubsidies on milk and the subsequentdecline in milk consumption", led to surplus production and consequently a forced culling of dairy cows. The productionsurplus was exacerbatedby subsidizedimports from the EEC,especially in the more open market in Poland. This culling of dairy animalsled to the strongincrease in the beef output, althoughthis is, of course,temporary.
(d) The declinein the sheep sector was probablycaused by the, temporary, weakeningof the Middle Easternexport market,especially to Iraq, one of the main buyersof EasternEuropean sheep.
(e) The decline in the poultry industry is mainly a result of decliningexport (Hungary,Bulgaria, Romania), of the difficultyto obtain qualityfeed, and of
fl/ For example,per capita milk consumptionin Poland is estimatedto have declined from 279 liters fluid milk equivalentsover the 1984-1990period to 239 fluid milk equivalentsin 1991. - 17 - the generaldecline of the socialsector, which evenin Poland,was heavily involvedin poultryproduction.
(f) Finally,the betterperformance of the pork sector(especially in Poland)is mainlythe resuftof a stronginternal market for pork andthe low pricesfor cerealsand potatoes,leading farmers to use these products for pork production. 5.06 These adjustmentsare small in comparisonwith the changesin former East Germany,where from the winter1989/1990 to summer1991, cattle numbersdeclined by 30 percentand pig numbersdeclined by about50 percent(Isenmeyer, 1992). It is still too earlyto assumethat no furtheradjustments can be expectedin the Eastemand CentralEuropean livestock sector. However,the latesttrends in the EasternEuropean marketspoint to consolidation,now that livestocknumbers have adjusted to the 10-20 percentdrop in localdemand, as wellas to the reductionof exportto the formerUSSR. For example,the milkprices in Polandhave been rising from the low of $0.04per literto a moreattractive $0.12 per liter (Kowalski,1992). - 18 -
Chapter6. FUTUREPERSPECTIVES
OverallPerspectives
6.01 A tentativeassessment of the comparativeadvantages of EasternEurope with the main other producers active on the world marketare:
(a) For dairyand beef production,positive aspects of the physicalenvironment of EasternEurope are the predominancein severalcountries of poor soils which absolutely require organic manure, the more continental climate suitablefor high qualityfodder and grasslandproduction and conservation, and many (upland)areas suitable for ruminantlivestock production only. On the negativeside are the rather short growing season and frequent dry summers. The farm structure, with large plots in those countries with previous collective land ownership, favors efficient fodder-harvesting techniques.Many units, especially in Bulgaria,Czechoslovakia and Romania are too large,however, for efficientmanagement and sound environmental practices. On the other hand, farm size in Poland and Yugoslaviais too small to permit rational feed and animal management.Farm labor is generally low cost and skilled, although frequentlytoo specialized,and poorly motivated. Inadequateskill levels are particularlyevident in dairy production. Farminstallations are frequentlyoutdated and environmentally unsafe. In Poland and Yugoslavia,the farm size is too small to permit essentialinvestments in qualityimprovement, especially for milk.Genetically, Poland and Hungaryhave good quality stock, hardy enoughto resist the somewhatmore severewinters of EasternEurope. The animalhealth status has, so far, been good. The meat and milk processingindustry which is weak, burdenedwith poor quality raw material,has poor equipment,and has limited product diversification.
(b) Many of these factors apply also to the pig and poultry C(whitemeat") sector. The long severewinters and poorly insulatedbuildings constitute a strong handicap, in particular for poultry production, where low temperatures directly affect feed efficiency. The poultry industry will thereforeneed to concentratein the areaswith more moderatewinters. On the other hand, the warm summers in the southern countries provide excellentpossibilities for the productionof cerealsand high qualityprotein feeds. The more easilymechanized white meat sectorsuffers less from the labor deficienciessketched above, and profitsfrom the lower labor costs. As regardsfarm structure a key issue in the livestocksector is the cost of reducing the environmentalcontamination of the "mega-units".Experience in East Germanyindicates that in many instancesoutright closure is the only solution.The key technoloaicalconstraint is the structuralfeed protein deficiency in the area, although technologiesare becoming availableto address this issue. With the increasing globalizationof the livestock breedingstock supply,the currentinferior quality of pig and poultry breeds in EasternEurope needs only to be a temporarydrawback. The processing industry suffersfrom outmoded and dilapidatedequipment, and is in ts present state not competitivewith the West Europeanor North American - 19 - industry. A complete renovationwill be required. However, if slufficient capital is found, the processingindustry would benefitfrom the significant: recenttechnology advancesin food processing and could build up a very modernequipment base. With prevailingsalaries low, a renovatedindustry could thus become one of the most competitiveindustries in the world.
(c) Eastern Europe traditionally had a strong leather industry. At present the utilization of bovine hides is higher (in Czechoslovakiaand Romania approximately300 percent)than domesticproduction. Productivityis low, and improvementscan be made in quality (for examplefrom sole leatherto fine leather).
6.02 With little attention givento real production costs under the commandeconomies of the past, there are almost no data to assesshow these factors affect production costs relativeto those from other major meat and milk producing areas in the world. There is thus an urgent need to develop such comparisons. A preliminary assessrnent of production cost for meat and milk in Poland indicatesthat Polish production costs foir meat and milk are competitivewith world market prices (table 8).
Immediate Market Prospects Table 8. APPROXIMATE PRODUCTION COSTS AND 6.03 In the short term the domestic DBOARDERPRICES OF MAIN LIVESrOCK PRODJCTS IN marketfor animalproducts will continueto decline with further removal of subsidies and falling purchasing power (Annex 2). Item Production World Market Similarly,profitable export markets are Cost Price unlikely to increase substantially in the near future, although the EEC decisionto purchasemeat and milk in EasternEurope MiLk 0.12 0.14 for food aid to the CISmay provide some Pork 0.75 1.00 relief. Access to the EEC is being Poultry 0.70 0.80 regulated under so-called association Beef n.a. 1.20 treaties, which are already signed with Czechoslovakia,Poland and Hungaryand Source: Polish-EEC-WBTask Force (19S0) are being negotiated with the Albania, Bulgaria and Romania. The association treaty (Annex 2) with Czechoslovakia, Hungary and Poland allows a gradual (5-10 percent per year) increase in the reduced tariff import quota reaching 179,000ton meat and 300,000 live cattle in the year 19963 (Mortensen,1992). While important,the total quota would only cover about 3 percent of the total production and about 25 percentof the exports. Chancesfor increaseddemand from the Middle East are not very bright.
Longer-TermProspects
6.04 Long term prospects are difficult to assess. In most countries the! output contraction of 10-20%will, at least for the next five years, be permanent. Population growth has stagnated in the most of Europe and both meat and milk demand are - 20 - expected to rise between0.5 and 1 percent in both Easternand Western Europe. Key imponderablesare:
(a) Economic developmentswithin Eastern Europe. Using the consumption patterns in Italy and Austriaas an arbitrarilyselected standard (AnnexTable 3.), meat consumption in all Eastern European countries may still rise modestlyin the long term. Consumptionof milk products (cheese,yoghurt etc.), rather than fluid milk and butter, may rise significantly. These increases reflect a slight convergencetowards consumption patterns in more affluentwestern societies. At present neighboringcountries already are important trade partners, and future demand in anyone country will depend on the economic development,especially in deficit countries such as Czechoslovakia.
(b) Politicaland economic developmentin the Commonwealthof Independent State (CIS). Eastern Europe has a comparative advantage in terms of distance,familiarity with cultureand languageand experiencewith trucking of perishablegoods.
(c) Access to the EEC through the GATT negotiationsand the reduction of protection and subsidy levelsof the EEC. The outcome of these ongoing processesis difficultto assess. The increasingresistance from the Western Europeangovernments to continuethe high level subsidyto their livestock sector, and political considerationsof the EEC towards providing greater access for Eastern Europeanproducts are presently by counter balanced by strong protectionistdemands of the livestockfam lobby in the EEC.
(d) Competitivenessof Eastern Europeanlivestock products in the Far East. The major expansionin the world meat market is in Korea, Taiwan and Japan. For example poultry meat imports increased62 percent in Japan over the period 1987-1990.However, the competition is heavy from New Zealand, Australia and Thailand, who have a comparative advantage in terms of distance and quality. In addition, China has seen a very strong developmentof its production over the last decade and will be a strong competitor in the future as well.
(e) Economicdevelopment of Africaand the rest of Asia. Demandfor livestock products in other developingcountries has been increasingat a rate of 2 percent per year, and the low quality, but inexpensiveEastern European livestock products have a place in this market.
The Future Shape of the Industry
6.05 Considering these factors together, a following vision emerges of the Eastern Europeanlivestock sector in the year 2000. Overallcomposition of the sector, This will mostly be defined by the growth of the internal market and the changes in consumer preferences. - 21 -
(a) The fall in demand is expected to consolidateat about 20 percent, future annualgrowth of about 1% percent. That meansthat in the year 2005 the overallsector could be of about the same size as at the end of the eighties before transition, although this will depend to a large extent on trade performance.
(b) The increased opening to the West will bring about increased health consciousness,which will imply (i) an increased consumption of poultry meat, now at approximately 15 kg/per capita,12 (ii) a stabilization or reduction of beef consumption; (iii) a lower pork consumption, and consumer preferencefor much leaner pork (i.e. lower slaughter weight). Assumingan annual per capita increasein consumptionof 1.5 percent for poultry meat and a 0.5 percent per capita decline in pork and beef consumption,internal demand would increaseonly slowly.
6.06 Farm size and enterpriseform will depend on the pace of establishmentof land marketsand to what degree they are liberalized. Farm structure will further depend on the economic growth in other sectors (industry, services) are able to absorb surplus farming population and allow restructuring. Provided some modest restructuring is possible,three forms of farms are likely to emerge:
(a) The large enterprise, evolving from the current state farms and cooperatives, with shared ownership by the former laborers/members. Experience in former East Germany indicated that this is the preferred enterpriseform in the initial phase, one year after the unificationaboult 90 percent was still managed as a large unit. Key factors for the success of enterpriseswill be their capacity to (i) reduce surplus labor by at leasit50 percent; and (ii) persuade commercial banks to grant them loans (Isenmeyer, 1992) to upgrade installations and machinery. To avoid diseconomiesof scale,and environmentalpollution, maximum limits per unit for livestockwill probably between500-1000 cows and 1000sows, although within an enterprise severalof such units could be envisaged.
(b) A substantialpart of the large enterpriseswill break up eventuallyin medium sized farms of 100-200ha with crop and livestock production, and about 200 cows and/or 500 sows, owned and managedby small partnershipsor individualfamilies. On the other hand, many of the small farms, presently being formed (para c) in Romaniaand Bulgariamight amalgamatein such large farms as well. These farms could be the backbone of the future agricultural production in Eastern Europe, as they will combine the advantagesof adequate overall farmsize and large plots with individual management.
(c) Smallsized part-time farms will remainthe mainstayof agriculturein Poland, Albaniaand Yugoslavia. They might well become the dominant feature of the other East European countries, if surplus farm labor can not be absorbed in other sectors of the economy, and if limits continue to be
L2/ Except for Hungary and Poland with a PC consumption of respectively22.7 and 8 kg (1990). - 22 -
imposed on farm size. Such smaller units will offer good opportunitiesfor more intensivepig and poultry production, but would be less efficient in pasture based ruminant production.
6.07 In the long term the Europeanlivestock industry may see more drastic changes. The poultry industry,for example, now located close to the ports of entry of American grain and soy beans, may transfer south eastwardstowards Hungary, Romaniaand the southern FSU which are expected to be major growers of these crops in the early 21st century. These changes will also influenceconsumer preferences, major technological advances and the concerns about the environmentalaspects of intensive livestock production. - 23 -
Chapter7. FUTUREACTIONS
Managementof the Transition
7.01 Consistencyand continuationof the policiesduring the transition period are of immediateimportance. The high share of livestockproducts in the diet of the Eastand Central European population makes these adjustmentsin the livestock subsector particularlysensitive and difficultto manage.There is a danger of overreactionfrom the govemment,with reimpositionof pricecontrols, guarantees, and producerand consumer subsidies.These, if instituted,would simplydelay the inevitableconsolidation and impede the emergenceof a more efficientindustry. Still measuresmight be justifiedto conserve the most efficientoperators in the sector and maintainingits comparativeadvantages. This could includethe followingsteps:
(a) While preparing ownership transfer, the multiple activities of state and cooperativefarms needto be restructuredinto financiallyautonomous units to avoid cross subsidizationbetween these units. This implies the introductionof individualautonomy and cost recoveryfor units that supply inputs (feed mills), services (animalbreeding, health, etc.) marketingand processingand the farm proper;these activitiesare at presentfrequently carried out by a single social enterprisewithout individualcost and profit accounts. To enhance competition,this might in some cases imply a completebreaking up of the originalenterprise in independentunits. More often, however, it will, at least for the time being, imply maintainingthe financiallyautonomous enterprises within a verticallyintegrated structure;
(b) introductionof improvedfinancial and managerialcontrol to ensurethat the individualprofit centersare managedas such and to avoid assetstripping and pilfering,particularly during transition;
(c) introduction of subsidy policies for state and cooperative farms and livestockprocessing plants, with clearlyspelled out reductiontargets and time spans, to eliminatealmost immediatelythe most poorly operating enterprises.The subsidiesshould be in the form of direct transfers(and not as price or input transfers),and should aim to promote efficiency. They could be tied to agreed-upondevelopment plans on labor reductionand input usage.(as currentlydone in former EasternGermany) or subsidize investmentsin product quality or efficiencyimprovements in, for example, energy and feed utilization;
(d) improvementof the efficiencyof existingenterprises through the supply of critical inputs such as protein and other feed additivesto improve feed efficiency,and essentialvaccines and drugs,to maintainadequate animal healthstatus;
(e) introductionof measuresto promotehigher qualityproducts. This would implythe immediateintroduction of a muchhigher price differential for more hygienicmilk (lowerbacterial count) and leaner(thinner backfat) pigs. Such - 24 -
measureswould mainlybenefit better managedenterprises, which would alreadyhave a betterquality control, and could be complementedby other measuredin the longerterm (para 7.01);and
promotion of privatization,and efficiencygains in the processingindustry. This deservesthe utmost priority, as experience,for examplein Poland, clearlyshows that stagnationand poor price transmissionin the meat and milk processingindustry is one of the key causesof market collapse.
Medium-TermPolicies
7.02 Althoughmedium to long term marketopportunities exist, the volumeis difficultto predict. It is clear, however,that Easternand CentralEurope will be able to enter these marketsonly if the livestocksector producesa betterquality product at a low price. New policeswill thereforehave to be developedin the areasof:
(a) quality improvementand incentivesfor quality. Following the transition measuresinvolving milk quality and pig carcass quality, for the medium term, more elaboratecontrol and incentiveprograms at farm and industry could be developed to align local products quality to local consumer preferencesand make it morecompetitive in the internationalmarkets. For example,the dairy pricing structurein all Eastern Europeancountries is almostexclusively based on the fat content,and not on the protein content of the milk, in spite of a decreasingprice for butter fat and an increasing appreciationfor protein. Furthermore,consumers will prefer increasingly leanermeat. This, amongothers, can be improvedby usinggenetic stock producing leaner meat, and by improvedfeeding techniques, and by a pricing structurewhich rewardsquality. Similarly,regulations concerning contaminants(heavy metals, PCB's) and the use of estrogenic growth hormones need to be strengthenedand enforced. Severalparts of the region could possibly find a special niche in the Western health food markets. However,this would only be possible if the consumerhas the assurancethat a reliablequality controlsystem is in place.
(b) expansionof the product line, for Table 9. PRODUCT MIX OF MILKPRODUCTS IN example, by adding baby milk, POLAND (1989)AND SWITZERlAND. salad creams, yogurt, cheeses and industFial dairy products Prt Percentof Milk such as casein,skim milkpowder additives,and ultra-filtrationskim Poland Switzerland milk, etc. This includes more on- farm processing as done for example in Switzerland and Milkpowder/ Austria. (See Swftzerland and Butter 53 12 Poland'spresent productionmix Cheese 10 18 in table 9). With much pasture Quark 9 4 land either in hills and mountains, Cream 8 12 or on soils unsuitablefor arable Other 5 6 agriculture there are excellent - 25 -
opportunitiesfor extensivelivestock (beefcattle, sheep),home proceissing, and/or wild life production.
(c) improved packaging and marketincg.Proper packaging would decrease losses during transport and storage, and would make the products;morr. attractive to the consumer. There is a need for more open imiarket structures, especiallyof those which serve the retailtrade.
(d) increased marketing efforts through the development (in the public and private sector) of marketingbureaus, and training. Although cooperatives may have a questionable name, they are useful entitity to process and market perishablegood such as milk. Such cooperatives,however, should operate independentand be able to compete without public support with the privatesector.
(e) independentfarmer. commodity and trade organizations.There is need to foster the developmentof such organizations,and the linked information networkswhich would improvetechnological and price information..
7.03 Improvedquality has to be combinedwith increasedefficiency leading to reduced cost. The large well shaped fields of the majority in the East and Central European countries could be used for competitive,low-cost fodder production, if well managed. Specific possible technological improvementsinclude the following:
(a) a much greater emphasis in ruminant production on fodder and pasture based production, shifting away from the concentrate-based feeding practices used until now. Within the forage based production strategy, more emphasisto be given to natural pasture improvement,especially with the use of clover mixtures,to replace chemicalfertilizer;
(b) more attention to protein quantity and quality. Especiallyfor thie non- ruminantsector, better balancedrations especially in essentialamino-acids reduce cereal consumed and lowers cost. Promisingpossibilities exists in the cultivationof sunflowerand soya in the southern countries and in the! cultivationof field peas and fava beans (followingthe developmentof these crops in Austria)in the northerncountries. The rapidlychanging production technology and the present world market surplus does not favor local industrialproduction of the essentialamino-acids (lysine and methionine).
(c) more attentionin cattle breedingto produce optimal breeds, not necessarily aiming for maximum yield, but for optimum efficiency combined with hardiness, with good fodder conversion qualities,and paying attention to milk protein contentrather than fat. Forthe non-ruminantproduction. aimingi at betterfeed conversioncharacteristics, and for all livestockmore attention to economic quality aspects (slaughterquality, milk composition, etc.);
(d) more attention to labor and energy efficiency in farm buildings ancl equipment; - 26 -
(e) more attention to specific niches products including wild-life/livestock systems;
(f) stratificationof the production systems with young stock in the upland grazing areas and dairy and feeder pig production units in the more intensiveareas;
(g) the outlook on productivity enhancement using hormones and feed additives is not clear; Eastern European livestock producers should embracethese productivityenhancers if approved and used in the 'West;
(h) improvementsin managementincentives and the provision of services as describedin the following paragraphs.
7.04 The need for greater efficiencymust be combinedwith an increasedconcern for the environment. The "megaunits"of the social sector and the aging dairy and meat industry are major sources of pollution, and an increased demand for more environmentallyfriendly industry can be expected.Technical solutions are availableand enforcement mechanisms along the lines of West European countries can now be introduced. Pollution control should be an integral part of any modernization effort. Existingfacilities requiring an excessiveclean-up might haveto be closed down. All these processeslead to a substantialextensification and would reduce environmentalpollution by the sector. The greater efficiencycan also only come about if the sector is supported by effectiveservices. The required policy changes in these areas are detailed below.
7.05 In animal health care, a better division between public and private sector responsibilitiesis an essentialfirst step. It could be carried out accordingto the following principles:
(a) curativeand most preventiveveterinary health care (includingfeed analysis) can be easily privatized and fully charged to the producer, a better diagnosticservice can be developedwith support of producer groups and, if necessary,some public funds; and
(b) public goods servicessuch as sanitarycontrol, food inspection,diagnostic services,and vaccinationsagainst the main epizootic diseaseswill remain public sector responsibilities, although most of these tasks can be subcontractedto privateveterinarians (de Haan, 1991).
Key issues in most Eastern European countries are the pace of privatization, the incentives provided to private veterinariansand the fate of the veterinary technicians, whose jobs may become redundant under a private animal health care system. Key technical issues are (a) maintenanceof the prevention of epizootics and diseases of public health importance, (b) improvementthe housing and other facilities, and (c) orientation towards production diseases and (d) ensuring supplementation with microelements and vitamins where necessary. A considerable training effort will be necessaryto improvethe managementskills of the veterinariansto operate in the private sector. - 27 -
7.06 In animalbreedina, there is littlejustification for the state to carry out and provide free animal breedingservices. In countrieswhere not yet practiced, a full cost reicovery should be introduced in the short term, with a view toward medium-termprivatiization. Furthermore,increased efficiency needs to be sought to improve the pace of genetic progress in the population. This entails (a) the organizationof Al, performancetesting and herdbook servicesin separateorganizational units, and (b) substantialimprovements in the efficiencyof bull selection,particularly proven bull use. Severalcountries can make further improvementsby restructuringtheir Al stations and inseminatornetworks.
7.07 Many of the suggested actions depend on the ability of the extensionsystem and farmers to adjust to the changing circumstances.Many of the required changes are generic and do not specificallyrelate to animal production:
(a) commodity groups and producer associationsneed to be set up at the farm level and strengthenedto make research,extension and education more relevant and accountable. Farmersgroups are needed to obtain a more economic focus, a better integrationof crop and livestock production,and a higher accountabilityand efficiencyin researchand extension.Extension and education should assist male and female farmers to better formulate prioritiesand work plans. These groups and associationsshould be given the opportunityto acquirethe skillsto build up networksthat can cooperate (or compete) with the agro-industry,and identify and develop markets.
(b) at the institutional level there is a need for restructuring to make the institutionsleaner and more efficient.There is a need, upon privatizationof (part of) the service, to identifyand correct the skill gaps. A masterplanfor hiring and training should be developed.
(c) there is a need for consumer education, especially regarding human nutrition. Apart from an educational responsibilityto inform the plublic at large, a legal framework may have to be set up (by government) that balances promotional efforts by the industry with private interest, public health.
7.08 Livestockextension and educationmust focus increasinglyon the privateproducer, and more appropriate technologies need to be developed for the private sector. Farm laborers need to acquire broader skills. Technically, they need more information on improved nutritionalmanagement, and, above all, in grasslandand fodder management and conservation.
Changes In PropertyRights and Farm Organization
7.09 In Hungary, Czechoslovakia,Romania and Bulgaria, laws restoring rilghts of landownersat the time of collectivizationwere passed in 1991. These laws will bring a profound change in land management,although these changes may appear with some delay; the same applies to a lesser extent to animalownership which even traditionally was largely private. Asset ownership and use need not be synonymous if contractual relationscan be enteredinto ratherfreely. For example,fragmented ownership need not - 28 - entailfragmented use 13 if rentalsand sales can be easily negotiated. The major lesson to date to emerge from passageof these laws is that prior patterns of use appear to withstandeven radical changes in ownership. It will be importantin the futureto promote policies consistentwith efficientasset use, as prior use changes in response to new conditions. The followingfactors will be important: competitiveprovision of machinery servicesderived from the inheritedstock of machineryplus new additionsunder new ownership;rigorous evaluationof applicationsfor credit,including clear demonstration of ownership of assets offered as collateral; removal of preferentialaccess to inputs, services, and markets on the part of remainingstate enterprise; and removal of constraints on contracting, such as prohibitions on sale, mortgage, and lease, or maximumholdings.
7.10 As farms are reorganized,distribution of liabilitiesas well as assetswill haveto be addressed.For the livestocksector, the questionof who is responsiblefor environmental cleanupwill be important.
7.11 In the long-term privateownership, with free transferof the property rights of all assets (land,processing facilfties, etc.) should be the goal.
7.12 A more comprehensiveprivatization effort of the agro-industry,which also includes a major change in managementincentives at the regionallevel, is an imperativefor the developmentof the productivesector. The identificationof the type of measuresthat would lead to such crucialbehavior is one of the key questions,for which not yet all the answersexist. Both privatizationand privateentry will be important.
Xl/ Large plot size,allowing efficientutilization, was one of the few positive lgacies of the previous system. -29 -
Chapter8. THE ROLEOF THE WORLDBANK: PAST. PRESENT AND FUTIURE
8.01 World Bank lendingfor livestockto Hungary,Poland, Romania and Yugoslavia over the period 1975-90 amounted to about US$650 million. Annex table 9 provicdesan overview of the Bank's past lending in the livestock subsector to these countries. (Bulgariaand Czechoslovakiaonly recentlyjoined the World Bank and have not yet becomesubstantial borrowers for the livestocksector.) Most livestocklending covered all species,although subsector-specificprojects included pig productionand processing, poultry production (Romania)and livestock processing (Hungary). In Yugoslavia,the emphasis was on regional development projects with relatively small livestock components.
8.02 The results of these projects have in generalbeen favorable. Evaluationsafter projectcompletion showed that three of the four livestock-onlyprojects and 10 of the 13 livestockcomponent projects had been successful,that is, providedan economicreturn of 10 percent or more. Importantconstraints were (a) the lack of quality feed to fully utilizethe improvementsin buildings,equipment and animalsbrought about by the Bank- funded projects; (b) excessiveprice controls, which affectedthe adoption rate of the improvedtechnologies; and (c) limitedinstitutional capacities to implementthe projects on time.
FutureLending
8.03 The World Bankexpects to lendUS$8-9 billion to EasternEuropean countries over the next three years. This would includeabout 10 percentfor agricultureand 15 to 20 percentfor environmentalconcerns (the share of livestock-relatedactivities to be financed has not yet been determined). The focus of the lendingprogram would need to reflect the results of the sector analysis discussed above and would have the folilowing characteristics:
8.04 At the policy level:
DuringTransition
(a) encouragethe continuationof presentpolicies of liberalpricing and subsidy reduction, eventually, if necessary, preserving, through well targeted subsidies protectingthe most efficient producers and processors,and vulnerablegroups throughtargeted food (milk) subsidyprograms;
(b) discourageconstraints on land and asset use, such as definedfarm size, restrictionson contracting,and prohibitionson hiring of labor or services; but encouragea pluralisticapproach;
(c) ensure that the variousenterprise forms are subject to the same subsidy and taxationregimes, and haveequal access to services,inputs and capital;
(d) assist in the developmentof a legislativeenvironment which fostersprivate enterpriseand a marketoriented economy, with respectfor humanwelare; - 30 - (e) assistin the re-orientationof the managementand labor force,through (re-) trainingand re-organization;
(fl urgethe introducingof stricterquality standards and qualityprice incentives for meat and milk, and associatedproducts;
(g) urgethe introductionof stricterenvironmental standards for intensiveas well as extensiveproduction units, among other be encouragingmixed land use.
8.05 At the institutionallevel:
Encourageinstitutional changes, which inter alia would
(a) promote,in researchand extension,a closer cooperationbetween animal health and animal production disciplinesand, more generally, between livestockand crop production;
(b) establisha clearer distinctionbetween animal breeding and performance recordingschemes;
(c) promote close relationshipsbetween Eastern and Western (or other) institutions,not only in research,but also between breeders and other privateindustry organizations;
(d) promoteextension services, with emphasison farm management;
(e) sponsor privatizationof animal health and production services, and the developmentof commoditygroups and producersassociations;
8.06 At the projectlevel:
(a) fund researchon priorityareas of grasslandand fodder production,protein feed crops,adapted farm mechanizationand housing,and livestock/wildlife managementsystems and their economicevaluation;
(b) support conservationof local geneticstock;
(c) whereecon6mically warranted, promote the environmentalclean-up of the oversizedand excessivelypolluting production units;
(d) promote where necessary,land consolidationprograms, and especially those which promote the complimentarilybetween the hill/mountainous areas and the higher potentialareas;
(e) fund, in conjunction with the private sector, more efficient internal and externalmarketing systems including export promotionboards; (fl developcriteria for evaluationof credit risk to assistthe commercialbanks to evaluateloan applicationsfor farm buildingand consolidation,adapted - 31 -
mechanizationprograms, and quality and efficiency improvements and diversificationin the feed mill and meat and milk processing industry;
(g) sponsor extensionservices, with emphasison farm managementaspects; and complementaryto the private livestock breeding, supply and animall health services;
(h) developrisk sharing mechanisms(partial bank guarantees)to promotejoint: ventures with foreign companies.
8.07 Much of the future success of the transformationof the livestockindustry depends; on information. Farmersneed marketinginformation (e.g. prices, market transparency) and production efficiency advise (e.g. technical, economical or efficiency advise); institutionalstaff need (re) training,while educationalinstitutions need to be re-oriented. Therefore this review supports the Bank's approach to the reform of the agricultural informationsystems as proposed or implementedin Poland,Hungary and Romania.
8.08 As animal productionis often a major component of mixed farm systems,most olf the Bank support will generallybe directed through larger multi-componentagricultural, environmental,institutional, or agroprocessingprojects. The rapid change of the economies in these countries may require relativelyfrequent updates on the sector. - 32 - REFERENCES'4
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ANNEX I Page 1 of 7
TABLE Al. THE IMPORTANCEOP LIVESTOCKAND LIVESTOCKCOMMODITIES IN THE NATIONAL PRODUCnIONOF EASTERNEUROPE (perent)
Bulgaria Czech. Hungary Poland Romania Yugoslavia
Agriculturalshare GDP 19 8 16 20 16 14 Livestockshare of agric. GDP 40 57 46 50 50 50
Milk 18 27 14 28 15 24 Beef 18 27 12 20 21 25 Pork 33 33 46 38 30 25 Mutton 11 1 4 3 11 5 wool 1 0 0 0 1 0 Eggs 10 7 9 6 11 10 Poultry meat 9 5 14 5 10 9
Note:Based on FAO ProductionYearbook figures and esimated 1990average world market prices (per ton beef US$2,650,pork US$1,500,mutton US$2,560, milk US$1,600, eggs US$1,200 and poultrymeat US$950).
TABLE A2. PRODUCERSUIDY EQUIVALENISOF THE MAINLIVFSOCK PRODUCTSIN POLAND
1986 1987 Private State EEC Private State EEC
Pork 28.1 36.6 5.0 n.a. n.a. 5.0 Beef 15.7 4.0 50.0 39.1 39 46.0 Milk 57.1 77.9 73.0 22.7 41.1 68.0
Soure: Knudsen(1991) TABLE AS: PER CAPITA CONSUMPTIONPATTERNS; DAILY CALORIE ANDPROrEIN INTAKE (IN 1988) ANDANNUAL HEAT AND MILK CONSUMPTION(IN KG)
Counby Caloies Poein All redmeats Beef Pont Lamb/mutton Pouloymeat Fluid milk Cheese Butter (day) (g/day) 1984-861990 19871990 19871990 19871990 1990 19861990 19861990 1986 1990
Poland 3456 102 76 64 21A 20.8 45.8 40 0.8 0.7 7.9 153.5 153 3.3 4 9 8.9
Czechodovakia 3563 107 88 85 27.2 26A 52.9 57.8 OA OA 13.7 96.5 92.S5 8.2 9 9.7 9.6
Hungary 3599 103 101 76 8 6.7 88A 69A 0.2 0.2 21.9 93 85 3.8 3.8 3.0 3.1
Romania 3352 103 67 60 55 13.0 52.7 37.7 0.8 2.1 11.5 108 129 3.3 4 1.3 2.4
Bulgaria 3612 109 77 70 13A 14.7 45.9 46.7 10.8 8.6 15.6 na n.a na .na n.anaL
Albania 2728 84 27 na una na na n.a na n.a na na na na na Dna na
Yugodl 3501 101 68 67 13.0 155 35.7 35A 2.5 2.8 13.4 88 825 2 2 .5 5
USSR 3378 106 677 67 29.7 31.0 23.4 23.8 3.3 35 13.0 92 76 3 3 6.7 7.1
Ausra 3472 99 99 98 22.4 22 51.15 2.7 na na 12.2 160 133 7 8.5 5.3 5.1
Itay 3603 110 81 80 27.1 270 28.4 29.6 1.6 1.7 18.8 79 73 15 17 2.2 1.8
Geanuy 3338 103 104 103 225 19.3 55.1 11.9 0.8 1.0 55.1 54 60 85 10.4 7.9 7.1
Jaan 2781 90 36 36 7.2 8.7 16.2 16.7 12 1.0 142 365 405 0.9 1.1 0.7 0.7
s BPAOProducto YearbookPAO Consunwtio Yeanioo&:USDA Wodd DairySituatbo *: indudingpoultry to
°1 - 36 -
ANNEX 1 Page 3 of 7
TABLE A4. ESTIMATEDPRIVATE OWNERSHIP OF DIFFERENTLAND CATEGORIES IN EASTERNEUROPE (PERCENT)
Bulgara Czechoslovakia Hungary Poland Romania Yugoslavia 1990 1989 1988 1990 1990 1987
Arable land 16 3 17 77 9 82 Pasture n.a. 11 3 73 9 61 Farm size (ha) Private farm 0.5 0.1 0.3 6.4 0.6 3.5 State farms n.a. n.a. 7,600 2,768 5,500 694 Cooperatives n.a n.a 4,500 500 2,100 94
Source:Bank sector reports and USDA.
TABLE A5. SHAREOF THE LIVESTOCKPOPULATION OWNED BY THE PRIVATESECTOR (percent)
Hungary Poland Romania Bulgaria Yugoslavia
Cattle 24 82 34 16 90 cows 30 88 52 24 n.a Pigs 52 70 28 17 80 Sows 64 72 20 29 n.a Sheep 16 67 48 20 100 Poultry 38 67 38 42 48
TABLE A6. AVERAGEMILK YIELD IN THE DIFFERENTSECTORS (ItItactation)
Poland Hungary Romania Yugoslavia EC12 (1989) (1985) (1990) (1989) (1989)
Private 3,115 3,950 2,012 1,700 4,571 Cooperative 3,840 4,463 1,571 n.a. n.a. State 3,996 5,319 2,970 5,300 n.a. Overall 3,250 4,400 1,958 1,811 4,571 - 37 -
ANNEX I PAge4 of 7
TABLE A7. EXPORT OF LVE ANIMALS AND BEF IN SELECTED COUNTRIES
E. Europe Yugoslavia Ireland 1981-83 1986.88 1981-83 1986-88 1981-83 1986-88
'Liveanimals (1000 hd) 544.5 6293 103.5 115.9 407.2 2793 Meat (MtxlOOO) 131.5 1953 34 26.1 219.8 340.7 Live/meat ratioa .84 .64 .61 .89 37 .17 a. = Export meat/meat equivalent of live cattle export
TABLE A8. CHANGESIN SOYBEANIMPORTS IN SELECrEDEAsTERN EUROPEAN COUNrRIES
Counby Average Quantity Average Value of Imports Impoted (in MT) (US$1000) 1970-79 1980-89 1970-79 1980-89
Bulgaria 16 3,816 242 18,399 Czechoslov 1,740 2,319 3,905 6,803 Hungary 693 640 934 2,030 Poland 10,626 7,515 23,624 19,976 Romania 10,366 27,400 29,120 73,980 Yugoslavia 6,048 24,098 16,451 68,358 - 38 -
ANNEX I Page 5 of 7
TABLE A9. WORLDBANK LENDING TO EASTERN EUROPE IN THELIVEsTocK SuBsECroR, 1975-90
Hungawy Poland Romania Yugosla¢ia
Number of projects with livestockcomponent 3 1 7 13 Total project costs (millions US$) 759 135 1,972 2,754 Total livestockcosts (millions US$) 350 49 1,356 562 Total Bank lending (millions USS) 250 100 496 939 Estimated Bank lending for livestock (millions USS) 82 36 341 192 - 39 -
ANNEX, I Page 6 of 7
TABLE A10. CHANGESIN LIVESTOCKINVENTORY IN FOUR EASTERNEUROPEAN COUNrRIES(1989-1991)
Country Stock number Stock number Percent 1989 1991 date change
Czechoslovakia 5,075 4,206 (12/91) - 17 Hungary 1,690 1,540 (12/91) - 9 Poland 10,733 8,844 (06/91) - 10 Romania 5,188 4,750 - 8
Total 22,686 19,340 - 15
Czechoslovakia 7,384 6,462 (12/91) - 17 Hungary 8,327 7,000 (12/91) - 9 Poland 18,835 21,868 (06/91) - 10 Romania 14,351 11,800 (11/91) - 8
Total 48,897 47,130 - 4
Czechoslovakia 1,047 500 (12/91) - 52 Hungary 2,215 1,732 (12/91) - 22 Poland 4,409 3,234 (06/91) - 27 Romania 16,210 15,000 (11/91) - 7
Total 23,888 20,466 (11/91) - 14
Poultr
Czechoslovakia 47,000 33,929 (12/91) - 28 Hungary 57,000 42,000 (12/91) - 26 Poland 60,000 43,250 (06/91) - 30 Romania 128,000 111,800(11/91) - 13
Total 292,000 230,000 (11/91) - 22 - 40 -
ANNEX 1 Page 7 of 7
TABLEAll. CHANGESIN LuvEsrOcKPRODUCTION IN FOUREASTERN EUROPEAN COUNnRUES(1989-1991)
Country Stock number Stock number Percent 1989 1991date Change
Beef
Czechoslovakia 405 324 (12/91) - 20 Hungary 114 139 (12/91) + 22 Poland 637 687 (06/91) + 8 Romania 235 310 (11/91) + 32
Total 1,391 1,460 - 5
Cow milk
Czechoslovakia 7,101 5,133 (12/91) - 17 Hungary 2,862 2,562 (12/91) - 9 Poland 16,404 13,800 (06/91) - 10 Romania 3,439 3,110 (11/91) - 8
Total 29,806 24,605 - 17
Pork
Czechoslovakia 934 757 (12/91) - 19 Hungary 1,014 1,100 (12/91) + 8 Poland 1,854 1,875 (06/91) + 1 Romania 840 815 (11/91) - 3
Total 4,624 4,547 - 2
Poultry meat
Czechoslovakia 233 250 (12/91) + 7 Hungary 590 490 (12/91) - 17 Poland 474 465 (06/91) - 2 Romania 380 350 (11/91) - 8
Total 1,677 1,555 - 7 - 41 -
ANNEX2 Page 1 of 11
Eastern Europe Trade of Livestockand Uvestock Products
GENERAL
1. Historicallythe major objectivesof the agriculturalsector in eastern Europe were (1) self sufficiency,(2) provision of cheap (subsidized)food to the population and, to a lesser extent, (3) parity and (4) provision of sufficient meat, which was often the barometerof well-being.Export (outsideCOMECON) and qualitywere, initially,not among the main objectivesand, comparedto western Europeancountries, the market share of eastern Europe in the international livestock product market is relatively small. Still livestock and livestock products contribute in a major way to the total agri-food export package.
INTERNALTRADE
2. Self sufficiency was a major objective of agricultural policy and most Eastern Europeancountries, with the exceptionof the USSR, Czechoslovakiaand to some extent East Germany,have been self sufficientin milk and meat. Internalmarkets, especiallyin Poland,are of considerablesize and will continue to be so. The population size is, with the exceptionof Albaniaand Bulgaria,fairly stable and any major expansionof the rnarket may be haveto derive from greater per capita consumption rather than from population increases.Per capitaconsumption, however, especially of meat and butter,was fairly high already.Consumption of animal products has been decliningin the last two years when free market reforms removedsome of the subsidieson food but is still equal to that in many other developedcountries. Short term the internalmarket for animal products may declinefurther with removalof subsidiesand a decreasein purchasingpower. Demand will probably stabilizewithin the next few years and then increase.
3. The long term outlook, using Italy and Austria as an arbitrarilyselected standard, indicatesthat, afterthe short term adjustmenteffects have been corrected, consunnption in Eastern European countries may still rise modestly. Consumption of milk products (cheese, yoghurt etc.), rather than fluid milk and butter, may rise significantly.These increasesreflect a slight convergencetowards of the type animalproducts consunmedin more affluentwestern societies,and a narrowingof dietaryoptions (as affectedby eating out, fast food etc.). The developmentshould coincide with an increasedquality of food from animal origin, e.g. a declinein the consumptionof animalfats. - 42 - ANNEX 2 Page 2 of 11
4. Most eastern Europeancountries are trying to restructurethe pricing systemsof food products.The majorityof subsidieshave been removedwhich in some countrieshas led to traumatic adjustments of the agricultural sector. Many of these traumatic experiencesrelate to distorted local markets dominated by monopsonisticpatticipants and an inefficient agro-industry. New policies are still debated and few, apart from removingsubsidies, have been implemented.Apart from economic policy reform,most countries'livestock economists and techniciansare debating (1.) qualityimprovement (2.) expansionof the product line (for exampleby adding baby milk, yoghurt, cheeses), (3.) restructuringpricing systems with incentivesfor quality.
EXTERNALTRADE
Situationbefore 1988
Table 1. Total and agriculturaltrade in easternEuropean countres during 1987and 1988(in US$x 1000).
Poland Cz. slovakia Hungary Romania Bulgaria Yugoslavia
Total exports 12 500 23 500 9 500 14 800 14 600 12 000 Agric. export 1 250 675 2 000 825 1 700 1 075 Total imports 10 600 23 500 9 600 11 000 15 500 12 900 Agric. import 1 500 2 500 875 525 1 100 1 200
Source: FAO trade data
5. Agriculture contributed approximately10 % to the total exports of most eastem Europeancountries, except in Hungarywhere agriculturalexports constituted20% of the total externaltrade. All countries, except East Germanyand Czechoslovakia,also had a positivealthough decliningagricultural trade balanceduring the period 1983-1988. Most agriculturalexports went to the USSR,and to some neighboring countries in easternor westernEurope. EasternEuropean trade, especiallywith the USSR,was too some extend governedby long term bilateralagreements at fixed prices which were, with respect to the USSR,more or less peggedto the oil and gas exchangevalues (e.g.food for oil). The arrangementwith the USSRwas abolishedin 1990 and replacedby hard currency basis of trade which in the short run, and dependingon fuel prices, may be unfavorableto most eastern European countries. Export to the USSRhas declined during the 1980's. For examplethe market share of USSRin the internationalmarkets for meats has declined from 53% in 1982to around 33% in 1988;for dairy and eggs from 33% to 10%(see also - 43 - ANNEX2 Page 3 of 11 table 3). This decline has acceleratedduring 1989-1990;meat imports from Eastem Europe declined20% in 1989,in part becauseof delaysin payment and of the declining exchange rate of food/oil. Eastern Europe was looking at the EEC as a source of new markets, did sign some agreementsto facilitatetrade, but seems increasinglyfrusitrated by the piecemealdismantling of trade barriers.The EEC,traditionally animporter of meat, has becomean exporterand a competitor.Import restrictionsmake it increasinglydfflicult to penetratethe EEC market, especiallyafter 1992. Moreover,export subsidieson EEC products distort the world market and, as such, the competitive position of eastern Europe.
6. Most eastem Table 2. Market share(in %) of exports of Hungaryand Yugoslavia. Europeanexports _ consist of raw productswith little 1982 1988 valueadded. This CountrySales to Meat Dairy/eggs Meat Dairy/eggs is illustrated in Hungary table 4; the ratio EEC 29.2 12.7 42 18 USSR 53.3 33.4 33 9 live animal/beef Middle East 1.5 8.8 1.5 17.7 axport is nearly3 Neighbors 4.9 24.2 9.1 36.4 Yugostavia x higher in EEC* 33 54 62 31.7 eastern Europe USSR -4.8 - Middle East 16.8 27.6 9.7 24.9 compared to Neighbors* 32 19 44.4 32. selected EEC * = mainLyItaLy, both an EECmember country and a neighbor c o u n t r i e s . Source:National Statist. yearbooks Whereas the EasternEuropean market share of live cattle (includingcalves) during 1981-1987was around 14%, their share of the beef market is only 8%1. This trend is even more obvious in the small ruminant market where Bulgaria,Hungary, Poland and Romania'smarket share of live animalexport was over 40% in 1981-87compared to around 15%for lamb and miutton.
7. Value added milk products contributesignificantly to agriculturaloutput in only a limitednumber of countries.Cheese is the most commonlyexported product (Yugoslavia, Romania, Bulgaria, Czechoslovakiaand Poland), but the total export of all of eastern Europe is less than that of, for example,France. Butter and milk powder are mainly
I/ In some cases, however, this was related to an effort to increaseforeign exchange earningsby selling livestock and fresh meat for export and use cheaper, lower quality, imported meats for the internal market. - 44 - ANNEX 2 Page4 of 11 exported by Polandand Czechoslovakia;casein by Poland.Many of these productswere exported at discountprices becauseof poor quality;most cheese exportedto Ireland,for instance,was mainly used as pizza topping.
8. The mechanismof externaltrade was distorted by oligopolistictraders; in Poland for example the agricultural export business was dominated by only five (state) enterprises. Liberalizationof trade did, consequently,not directly result in increased competition and more efficientmarkets.
Table 3. Annualexport of live animalsand beef of selectedcountries (in MTx1000)
8 e e f Live animal** Ratio '81-83 '84-86 '86-87 81-83 '84-86 '86-87 Live/Beef (81-87) ItaLy 48.5 108.3 107.7 3.3 1.6 .4 .02 NetherLands 231.5 292.8 316.5 68.7 86.4 83.7 .28 IreLand 219.8 269.6 340.7 89.6 74.9 61.4 .27 Austria 23. 54. 63. 21.9 19. 19.9 .43. YugosLavia 34. 38.1 26.1 20.7 26.9 25.5 .74 E. Europe* 131.5 175.9 195.3 108.9 121.5 125.8 .71 Alt Europe 1727 2221 2397 827.8 874 853.8
= BBulgaria, Ronania, Hungary, Czechoslovakia and Poland. -= caLculated,assuming a sLaughterweight of 220 kg for EEC and 200 kg for EasternEuropean countries. Source: FAOtrade year book
Early changes (1988-1991)
9. The transition period, of which the timing varied slightly by country, was characterized by major changes and volatilities in the markets. The restructuring of demand, as well as of feed supplies,including a limitationof feed imports, changed the outlook of livestock production considerably,especially in the larger state farms and cooperatives,resulting in a sell-offof stock2. The number of cows kept on state ;and
The suddenly opened borders provided traders a chance to export live animals to the EEC. This loophole was closed by new EEC trade barriers which also cover exports to (eastern) Germany. - 45 - ANNEX2 PageI' of 11 cooperativefarms in Polandfor exampledropped 5% from 1989to 1990;more drastic reductionsoccurred in most eastEuropean countries in 1990-1991.
10. Insecurity,inefficient marketing and processing,decline in real wages, and increasingunemployment reduced the purchasingpower of consumers,resulting in a contractionof the internalmarkets for animalproducts. Especially in 1990and 1991most countrieswere having a seriousovercapacity problem in theirlivestock sector, and tried to reduce it by selling off stock. In some countriesthese sales were supportedby incentivepayments such as exportsubsidies. The easternEuropean output of red meat for exampledeclined nearly 10% in 1990,and cattleinventories are expectedto continue their downwardslide well into 1992.This decrease will also havean effecton the rural labor marketadding to unemployment.Unemployment, increasing cost of living and, relatively,declining pension payments may in somecountries (Poland, Yugoslavia) lead to a "retum"to the farm,and dependenceof subsistentfarm produceand income.
Future projections (Short term) 11. The politicalvolatility in easternEurope will, at leastin the shortrun, continueto affectthe trade in food. Anticipatedfood aid to the USSRin 1991-92may affect exports of mosteastern European countries somewhat. Short term projectionsare also affected by traditionalconsiderations such as demographics,by EECpolicies, the outcomeof the GATTnegotiations and, to a lesserextent, the developmentsin the MiddleEast. The new economicorder in the formerUSSR will also lead to re-arrangementsin trade,with the agriculturesurplus states (Ukraine, Belarus and the Baltics)emerging as competitorsfor the EasternEuropean countries, both in the Eastand in the West.
Demographics.The projectionof demandin Europeis influencedby population dynamicsand by changingdietary preferences. Population growth has stagnated in mostof easternand westernEurope. The growth in totalfood demand(volume) till the year2000 is estimatedto be lessthan .3% in westernEurope, slightly higher in the southernparts and around 1% in easternEurope. Milk consumptionis expectedto rise approximately.4, .9 and .5 % in respectivelythe EEC,eastern Europeand in the USSR;the expectedannual rise in meatconsumption till the year 2000is respectively.6, .9 and .7 %/3
From FAO, 1988.These data generated in 1988 may be too optimisticfor easternEurope where recent changes have depressed production and demand. However changing consumptionpatterns may have a positive affect on certain commodities(increased demand for yoghurts or pizza would affect the demand for milk, for e=xmple). - 46 - ANNEX 2 Page 6 of 11
Food aid. Short term the food aid plans of the US and Europe may affect the market for agriculturalproduce. Direct food aid to the USSRmay make in-roads into the traditional market of eastern Europe, and may well be followed by soft trade deals thereby affectingthe long term markets position4 . Indirect food aid, through purchasesfrom eastern Europeas plannedby the EEC, may alleviatethe eastem Europeancountry from surpluses and provide some cash to modernize their agriculturalinfrastructure. On the other hand this temporary relief may give wrong signals to the market.
Effect of "western"policies. Changing "western"trade policies are very relevant to eastern Europeancountries, which try to compete in the EEC/EFTAregion and in the US market,as well as in the world market.The US, Japanese,and western European farm policies have been, and will continue to be, dominated by the "family farm" issue. Consequentlythere may be limited support for large scale farming as presentlydone on eastern Europeanstate farms and cooperatives.At present there appears to be some reluctance to a rapid changeover in most eastern Europeancountries, as well as in the newlyformed Sovietbloc countries.
Convertibility.Trade opportunitieswould greatly improve eastern Europe would attain full currency convertibility.If not, they would continue to be depending on barter and counterbarterarrangements which generally is an inefficient mode of trade and may lead to distorted production systems.
Future projections(long term)
12. Many of the issues affecting short term trade development will linger. The modernizationof the livestock industry, marketing, transportation and processing will require considerable investment,a sound stratification plan and increasing flexibility. Among the factors that may influencethis process are the developmentof a competitive product line, improvement in processing, marketing and management, utilizing comparativeadvantages (mild climate, soils and topography, cheap labor).
Marketing considerations
13. To date the export from eastern Europe to the rest of the world has been small, in the middle eighties only .2 % of total production. Developingcountries will be net
4/ Short term,however, the prices are so low in eastern Europe that, apart form dumping, most western countries will not be able to penetrate the local markets in eastern Europe. - 47 -
ANNEX 2 Page 7 of 11 importers of meat with an expected growth rate of about 20/o.An important part of this demand will consist of small ruminants and poultry. This indicates that, although the overallexport marketmay be fairly depressedand, as long as EEC surplusesexist, highly competitive,there may be a niche for specialty products. Examplesmay be the Polish hams and sausage (which have some name recognition) or small ruminant products (includingcheese). There exist a relativelylarger marketfor live sheep and goats in which Hungary, Bulgariaand Turkey are the major suppliersand Italy and West Germanythe major consumers.
Potential markets:
14. Neighbors: A country's major trade partners, especially of semi perislhable products such as the majority of livestock related commodities,are its neighbors i(table 2). Any trade strategyof easternEuropean countries should includefurther development of across the border trade.
15. EEC: There has been considerableexpectation within eastern Europe that the EEC would provide easy terms of trade. Recentevents howeverhave demonstratedthe difficulty the EEC has to overcomefor any special trade deal in the agriculturalsector without an internal backlash from affected farm groups. This is demostrated by associationtreaties between the EEC and respectivelyCzechoslovakia, Hungary and Poland. For animal products the treaties specify:
(a) An increaseof the reduced tariff quota on meat from 135,000ton in 1992 to 179,000ton in 1996 (i.e. an increaseof 5.2 percent per year). WVthin these quota, tariffs and levies will be reduced by 60 percent over three years.
(b) An increase in the reduced tariff quota for live animals (180 - 300 kg liveweight)from 217,000 in 1992 to 297,000 cattlein 1996(i.e. 6 percentper year). Within this quota, the levy reduction is 25 percent. However, following a surge in export in live animalsfrom Poland in 1990 (1,000,000 head of cattle) which upset internal EEC markets, EEC imposed an irnport ceiling on the total number of live animals of 425,000 head per year.
(c) Import concessionson 4000ton cheese,2000 ton butter and 5500 ton milk powder. -48- ANNEX 2 Page8 of 11
Table4. Majorsuppliers of agriculturalcommoditis to theUSSR (1988/89).
Commodity Import volume Major suppliers nd percentageof the mrket. (MTx 1000) ...... ,. Coarsegrain 22.888 USA (76X),EEC (142),China (5X), others (5X) Soybeansand meal 4.448 USA (412),Argentina (38X), China (11X), Brazil (10X) Freshand frozen 406 China(312), France (17X), Hungary (16X), N.Zealand (9X) meat Romani(8X), oNgolia (7X), other (122) Poultry 136 Hungary(592), Bulgaria (122), Io nle (4X),other 252 Butter 247 N.Zealrnd,Notherlands, Irland (122 each), FRG (112), Finland (32), Hungary(22) other (482) Wool 128 Australia (64X), N.Zealand(22X), Uruguay(SX), Mongolia (52),other (4X)
Source USDA
The treatiesoffers possibilities for "tiangular sales(Purchase of EECfinanced food for the formerUSSR); such sales, however, will reduce the abovementioned imports quotas. Similar associationtreaties are being preparedwith the remainingEast European countries.While important, these concessions will haveonly a limitedimpact. For the threecountries together, the 1992meat and the liveanimal quota would cover only three percentof theirtotal 1989production and twenty percent of theirmeat exports. Besides, most of the meat concessionsconcern pork, which haveto gain accessto the highly competitiveEuropean market. For th EEC,they comparesomewhat meager with the reported200,000 ton meatimport quota's of, for example,New Zealand.
16. CISstates: The SovietUnion used to be the majortrade partner of mostEastern Europeancountries. Still from a Sovietviewpoint few of the eastemEuropean countries wereessential suppliers (table 5). EasternEurope has a comparativeadvantage in termsof distance,familiarity with culture andlanguage, and experience with transportation of produce(trucking etc.). On the other handthe newwestern republics (Ukraine, Baltics, Belarus, Moldavia) are alreadynet exportersof milk and meatto the rest of the formerSoviet republics, and may become potentialcompetitors as wellas importanttrade partners. 17. Far East.A majorexpansion of the marketof livestockproducts Is takingplace in Korea,Taiwan and, althoughheavily regulated, Japan. Poultry meat consumption in PR Chinafor instancehas doubledsince 1987. - 49 - ANNEX2 Page9 of 11
TabWe5. Annualexternal trade in poultrymeat of selectedEuropean countries and Eastem Europe (in MT X 1000)
EXPORT IMPORT
'84-86 '86-87 '88 '89 '90 '84-86 '86-87 '88 '89 '90
Italy 9.1 12.3 18. 19. 30 25.2 24.7 35.7 41.5 30 Netherlands 203.9 219.6 252.7 259.1 100E 24.27 31.9 48. 51.3 20 Ireland 3.0 4.2 5 5 4 7.8 8.9 8 8 8E Austria nd 44.3 56.6 63.3 11.1 15.5 14.8 16.7 15 Sweden 2.5 1.5 1 1 33.1 37.7 - - - Poland 14. 16 16.7 19.9 20E 7 - - 1 1 Czechoslovakia nd 14 16 14 10 1. 3 3 5 Hungary nd 195 236.2 178.1 174 - .1 .1 .1 - Romania 35 43 110E 120E 0 1.2 2.5 3.7 7 48 Bulgaria 24 36.5 34.6 30 30 Albania ------1. 1.7 1 Yugoslavia 17.4 16.6 15.1 15 11 .8 1 E. Europe 226.7 277.4 318.5 232.2 - 11.7 5. 8.5 8E USSR - - - - - nd 235 178.6 136.1 90
Source: FAO trade yearbook * hungary (mainly),Bulgaria, Czechoslovakiaand Romania.
Poultrymeat imports during 1987-1990 increased 72 and 63%in respectivelyHongkong and Japan. The competitionfor this market is fairly heavy. New Zealand, Australia and Thailandhave a comparativeadvantage in terms of geography,the EEC and US in terms of quality as well as in special interest5. Thailand's broiler production has doubled since 1986; over 70%/oof its exports go to Japan. Other major competitorsin the area are the United States, China and Brazil.China is a major supplier of meat to Russia and other bordering republicswhere it has a geographicalcompetitive advantage.
18. MiddleEast For some of the southerncountries such acrossthe border trade may includetrade with Middle Eastern,Central Asian and north African countries. The fairly lucrativemarket for eggs and poultry products is highly competitive (Brazil,France and other EEC countries are major suppliers)but is decliningsomewhat as these coLintries are developingtheir own production systems.The marketfor beef and live sheep will be strongerbut competitive.Especially the southerncountries in easternEurope may dlowell in this market if competing on a "no dumping"basis.
5/ Japan has increased its ownershipof farms or processing in Thailand, Australia and in the US. - 50 - ANNEX 2 Page 10 of 11
Agricultural support
19. End of state monopoly. The state will have to end its monopoly in trade in agriculturalinputs and products. The transferto a free market system may require some thought and time; there are already some indications that transfer to a few privileged private owners will neither improve the market nor the production and productivity.
20. Farmsupport. Most producersubsidies, which weresubstantial in some countries, have been removedor are being removed.In many countries, Polandfor example,this process has been fairly traumatic, and political pressures continue to consider reinstatementof at least some protection.Given the high proportionof the populationstill employed in agriculture, governmentsmay be tempted give in to demands from the agriculturalsector. This will slow the transformationprocess but may providesome social safety to a substantialpart of the rural population.
21. Border pricing. Borderlevies vary in easternEurope and, in some countries,have been lowered or removed during 1990. However some tariffs and quota's were reintroducedor increasedin 1991.The effects, internallyas well as externally,depend to some extend on the outcome of the GATT negotiations; competition in an in perfect market influencedby subsidizedgoods from the EEC is difficult.At present the pricing structure of eastern Europeancountries is so low that, from a viewpoint of price, little competitionwill occur in the internalmarket. The exports market,however, is affectedby variable border levies (of the EEC and others); unfortunatelypoor quality of eastern Europeanproducts havea far largereffect on the slow penetrationthat marketthan levies etc. If the EEC will lowertheir internalfarm produce pricing, and recent eventsmay give some credence to such a move, then low input farming may expand, and in a market based on forage-basedproduction of meat and milkthere may be some opportunitiesfor easternEuropean countries. Overall however it has to be expectedthat the volatilityof the market continuefor some time. - 51 - ANNEX2 Page 11 of 11
CONCLUSIONS
1. The internal market in the eastern Europeancountries is substantialbut will not expand much; it is more likely to contract during the next two years. In the short term littlecompetition will occur from outside the former East block, provided that the infrastructureallows an efficient market and that no dumping (by EEC,and others) occurs.
2. Competing in the world market may in the short term be difficult becauseof the generallypoor quality of products, and of the export subsidizationof the EEC for its products.There may be a narrow windowfor specialtyproducts and smallshort term opportunities when EEC allows importation of defined quota of specific products. In the long term the EECmay havesolved their over-production/sturplus problem and become and interestingtrade partner.
3. Trade with the former Soviet States will, in the future, with respect to livestock products, be mainlywith Russia.The, then also exporting,western republicssuch as the Balticstates, the Ukraineand Belarusmay have a geographicaladvantage, as has China in the east. The developmentof this market may take some tirne as the Russianmarket will, at least for the time being, continueto contract.
4. In the long run easternEuropean could be competitiveif they are able to develop a simple grasslandbased productionsystem or, in the southern areas,an efFicient production of corn and soybeans.
5. These still speculative predictions assume the development of an efficient marketing, storage and transportationsystem, and further diversificationof the product line; improving these systems requirew considerable investment and improvementin managementbefore they are ableto efficiently Umarket"the output of the livestock producers. Distributors of World Bank Publications
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No. 143 China:Industrial Policiesfor an Economyin Transition.Inderjit Singh
No. 144 ReformingPrices: The Experienceof China, Hungary,and Poland.Anand Rajaram No. 145 DevelopingMongolia. Shahid Yusuf and Shahidjaved Burki
No. 146 Sino-JapaneseEconomic Relationships: Trade, DirectInvestment, and FutureStrategy. Shuichi Ono
No. 147 The Effectsof Economic Policies on AfricanAgriculture: From PastHarm to FutureHope. William K. Jaeger
No. 148 The SectoralFoundations of China's Development.Shahid javed Burki and ShahidYusuf, editors
No. 149 The ConsultingProfession in DevelopingCountries: A StrategyforDevelopment. Syed S. Kirmani and Warren C. Baum
No. 150 SuccessfulRural Finance Institutions. Jacob Yaron
No. 151 TransportDevelopment in Southem China. ClellG. Harral,editor, and Peter Cook and EdwardHolland, principalcontributors
No. 152 The UrbanEnvironment and PopulationRelocation. Michael M. Cernea
No. 153 FundingMechanismsfor Higher Education: Financingfor Stability, Efficiency, and Responsiveness.Douglas Albrecht and AdrianZiderman
No. 154 Eamings, OccupationalChoice, and Mobilityin SegmentedLabor Markets of India.Shahidur R. Khandker
No. 155 ManagingExtemal Debt in DevelopingCountries: Proceedings of aJoint Seminar,Jeddah, May 1990. Thomas M. Klein, editor
No. 156 DevelopingAgricultural Extensionfor Women Farmers.Katrine A. Saitoand DaphneSpurling
No. 157 Awakeningthe Market: Viet Nam's EconomicTransition. D. M. Leipziger
No. 158 WagePolicy during the Transitionto a MarketEconomy: Poland 1990-91. Fabrizio Coricelli and Ana Revenga, editors
No. 159 InternationalTrade and the Environment.Patrick Low, editor
No. 160 InternationalMigration and IntemationalTrade. Sharon Stanton Russell and Michael S. Teitelbaum
No. 161 Civil ServiceReform and the WorldBank. Barbara Nunberg andJohn Nellis
No. 162 Rural EnterpriseDevelopment in China, 1986-90. Anthony J. Ody
No. 163 The Balancebetween Public and PrivateSector Activities in the Deliveryof LivestockServices. Dina L. Umali, Gershon Feder,and Comelisde Haan
No. 165 FisheriesDevelopment, Fisheries Management, and Extemalities.Richard S. Johnston
No. 166 The BuildingBlocks of Participation:Testing Bottom-up Planning. Michael M. Cemea
No. 167 Seed System Development:The AppropriateRoles of the Privateand PublicSectors. Steven Jaffee andJitendra Srivastava
No. 168 EnvironmentalManagement and UrbanVulnerability. Alcira Kreimer and Mohan Munasinghe, editors
No. 169 CommonProperty Resources: A MissingDimension of DevelopmentStrategies. N. S. Jodha
No. 170 A Chinese Provinceas a ReformExperiment: The Caseof Hainan. Paul M. Cadario, Kazuko Ogawa, and Yin-KannWen
No. 171 IssuesforInfrastructure Management in the 1990s. Arturo Israel
No. 172 JapaneseNational Railways Privatization Study: The ExperienceofJapan and LessonsforDeveloping Countries. KoichiroFukui The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'1ena Kokusai Building Z. Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Chiyoda-ku, Tokyo 100,Japan CD Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Facsimile:(202) 477-6391 Facsimile:(1) 40.69.30.66 Telephone: (3) 3214-5001 Telex: wuI 64145WORiDBANK Telex: 640651 Facsimile:(3) 3214-3657 RCA 248423 WORLDBK Telex: 26838 Cable Address: INTBAFRAD WASHINGTONDC
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