Report No. 11 880-UA Ukraine Food and Agriculture Sector Review June 30, 1994 Natural Resource Management Division Country Department IV Europe and Central Asia Region FOR OFFICIAL USE ONLY U ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ .t ~~~~~~~~~~~~~~~i F'ILE COPY Report No: 11880 UA Type: SEC Document of the World Bank Ttis do. ument has a rectrictedl distribution and may be used by recipients only in the perforrmance of their official dutivs. Its contents may not otherwise be di,slozed without WN'orld Rank authorization CURRENCY EQUIVALENTS Currency unit = karbovanets, abbrev. krb US$1 = krb 47,000 (as of June 15, 1994) WEIGHTS AND MEASURES feed unit oat unit ha hectare kW kilowatt oat unit 600 grams of starch q quintal t metric ton ABBREVIATIONS Al system of artificial insemination BU Bank of Ukraine (fornerly Ukrainian Agricultural Bank) EBRD European Bank for Reconstruction and Development EU European Union FSU Former Soviet Union GDP gross domestic product GOU Government of Ukraine IFC International Finance Corporation IFFI Association of Inter-Farm Feed Products Industries MEP Ministry for Environmental Protection MFER Ministry of Foreign Economic Relations MFP Ministry of Forest Production MPP Mass Privatization Program MOAF Ministry of Agriculture and Food NASULGC National Association of State Universities and Land Grant Colleges NEP New Economic Policy NMP Net Material Product SCFP State Committee for Food Processing UAAS Ukrainian Academy for Agricultural Sciences UAB Ukraine AgroBusiness (private input supplier) UKRMEDPROMNAB Agency in charge of procurement and distribution of veterinary products and vaccines. UKRPLEMOBIEDINENIE Ukrainian Livestock Selection and Breeding Association UKROPTITSEPROM Ukrainian State Poultry Enterprise UKRVETSPROMNAB Veterinary Department of MOAF USDA United States Department of Agriculture VAT Value Added Tax FOR OFFICIAL USE ONLY CONTENTS PART I: MAIN REPORT EXECUTIVE SUMMARY . ........................................... 1. MAIN FEATURES OF THE AGRICULTURAL SYSTEM ...................... 1 A. Agriculture's Role and Historical Performance .......................... 1 B. The Agricultural Resource Base ................................... 3 C. The Ukrainian Farming System ................................... 6 D. Major Agricultural Subsectors .................................... 9 E. Forestry . ................................................. 15 F. Consumption of Food and Agricultural Products ........................ 16 2. A STRATEGY FOR DEVELOPING THE FOOD SECTOR ..................... 19 A. Overall Framework for Reform .................................. 19 B. Implementation of Reform ..................................... 21 C. Securing Food Supply and Protecting the Poor During the Transition .... ...... 23 D. Social Policies in Support of the Rural Transition ....................... 24 E. Policy Agenda for a Comprehensive Reform in Ukrainian Food and Agriculture . .. 27 3. DEVELOPMENT OF A MARKET FRAMEWORK ....................... ... 31 A. Macroeconomic and Incentive Framework ............................ 31 B. International Trade and Trade Policies .............................. 43 C. Re-establishing International Trade: Agricultuaral Trade Policy ............... 48 D. Redefining the Role of Government ................................ 49 4. LAND REFORM AND THE EMERGENCE OF PRIVATE FARMING .... ......... 53 A. Current Status of Land Reform .................................. 53 B. Restructuring of Agricultural Enterprises ............................ 56 C. Emerging Independent Private Farming ............................. 60 D. Continuation of Land Reform and Farm Restructuring .................... 63 E. Agricultural Extension Services .................................. 69 5. COMPETITIVE LINKAGES FOR PRIVATIZED AGRICULTURE ................ 73 A. Agroprocessing ............................................ 73 B. Input Supply and Production Services .............................. 76 C. Wholesale and Retail Marketing .................................. 81 D. Developing a Competitive Support and Processing System ................. 83 E. The Role of Foreign Investment .................................. 86 F. Expanding Market Facilities and Services ............................ 87 G. Improving Financial Services ................................... 90 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 6. MEASURES TO IMPROVE FARM PRODUCTION AND EFFICIENCY .... ........ 95 A. Improvements in Crop Production ................................ 95 B. Adjustments in the Livestock Sector .............................. 100 C. Increasing Access to Agricultural Inputs and Productive Services .... ........ 104 D. Investment Priorities in the Food and Agriculture Sector ................. 105 E. Modernizing Higher Education and Research ......................... 107 7. EXTERNAL ASSISTANCE .................. ...................... 113 A. Critical Inputs for Agricultural Production .......................... 113 B. Technical Assistance and Institution Building .113 C. New Investment .116 D. The Principles of a Bank Assistance Program .116 BOXES: E.1 A Reform Agenda .iv E.2 Proposed Schedule of Agricultural Price Reform and Subsidy Reduction. v 2.1 A Reform Agenda .20 3.1 Proposed Schedule of Agricultural Price Reform and Subsidy Reduction .42 4.1 Forms of Restructuring for State and Collective Farms .56 4.2 The Nizhni-Novgorod Farm Privatization Model .58 4.3 Independent Farmer Profile .60 5.1 Structure of Ukrainian Food Industry .74 6.1 Major Agricultural Universities and their Faculties .108 FIGURES: 1.1 Net Material Product in 1992. 1 1.2 Average Precipitation. 4 1.3 Main Soil Groups .... ...................................... 5 1.4 Major Grain Area Development .11 1.5 Forest Species Distribution .16 1.6 Consumption of Basic Foodstuffs .17 3.1 Consumer Subsidy Equivalent in the FSU .32 3.2 Food Price Indices Compared to CPI .37 3.3 Ukraine Imports, 1992 .44 3.4 Ukraine Exports, 1992 .45 3.5 Organization of the Agro-Industrial Complex .50 3.6 Ministry of Agriculture and Food .51 4.1 Distribution of Farm Land by Users . 55 4.2 Distribution of Private Farms by Size .61 4.3 Land Tenure on Private Farms .61 4.4 Structure of Production by Farms .62 5.1 Comparison of Sales Area per 10,000 Inhabitants .82 6.1 Fertilizer Supply .96 TABLES: 1.1 Development of Agricultural Production ............................ 1 1.2 Per Capita Agricultural Production, 1989 ........................... 2 1.3 Percent Share of Soviet Agricultural Output ......................... 3 1.4 Size and Composition of Rural Population .......................... 3 1.5 Land Resources and Use, 1993 ................................. 5 1.6 Main Characteristics of Kolkhozes and Sovkhozes ..................... 7 1.7 Emerging New Farming Structure ............................... 8 1.8 Role of Private Sector in Agriculture .............................. 9 1.9 Basic Crops Cultivated . .................................... 10 1.10 Livestock Population in Numbers and Animal Units ................... 12 1.11 Production of Principal Livestock Products ......................... 13 3.1 Current Trends in State Procurement Prices ........................ 35 3.2 Food Retail Prices in State Shops in Ukraine and Russia ................ 36 3.3 Retail Prices in Indices in Ukraine .............................. 37 3.4 Distortion in Producer Prices for Selected Agricultural Product Ratios .... .... 38 3.5 Changes in Food Retail Market Structure .......................... 40 3.6 Agricultural and Food Trade .................................. 44 3.7 Major Agricultural Imports and Exports ........................... 46 4.1 Distribution of Land Used by Private Farms ........................ 54 5.1 Major Production of Food Industry .............................. 75 6.1 Indicators of Farm Mechanization ............................... 97 6.2 Comparison of Average Crop Yields ............................. 99 6.3 Livestock Performance Compared to that of Selected EU Countries .... ..... 101 6.4 Decline of Productivity in the Livestock Sector ..................... 101 6.5 Comparison of Livestock Performance ........................... 104 6.6 The Agricultural Science System .............................. 109 MAPS: IBRD #24509 IBRD #24510 PART II: STATISTICAL ANNEX PREFACE This report is based on the findings of a World Bank mission that visited Ukraine in October 1992, and reflects developments since then. The mission was led by Csaba Csaki and included Ezriel Brook, Ulrich Koester, Mark Lundell (Macroeconomics - Trade), Roy L. Prosterman, Zvi Lerman (Land Reform - Privatization), Oscar Honisch (Crop Production, Input Supply, Forestry), Helmar Ochs (Livestock), Lynn Engstrand (Agro-processing), Robert Vogel (Rural Financing), Chuck Antholdt (Govermnent, Research, Education, Extension) and Arndt Uhlig (International Assistance). The European Bank for Reconstruction and Development participated in the review with two experts: Jork Sellschopp (Agro-processing) and Michel Reignier (Marketing and Distribution). The Green Cover report was completed in March - May 1993. It was discussed with the Government of Ukraine in September 1993. Major findings of the review were also presented to representatives of business and academic institutions, and foreign governmental and non- governmental organizations. Based on the comments from the Government of Ukraine and on recommendations at the seminar and donors meeting, this report was prepared in May-June 1994 by a small team led by C. Csaki and included M. Lundell, A. Zuschlag, S. Moury, and R. Arakelov. The detailed subsectoral analyses presented in Volume II of the Green Cover report have not been updated for inclusion in this final report. D. Greene and L. Schertz provided editorial assistance. Daniel Kaufmann, Anders G. Zeijlon, Hans Binswanger, Chandrashekar Pant, Bruce Gardner, Cees de Haan, Stanley R. Johnson, and Wilhelm Henrichsmeyer provided valuable comments. Anna Skliarenko, Galina Voitsekhovskaya, and K. Korik assisted the review in Kiev. Deputy Minister V.D. Grevtsov, Mr. B.I. Kirichenko and Mr. B.F. Bespalyi of the Ministry of Agriculture and Food were the main coordinators of the mission on the Ukrainian side. The Ministry 'of Economy, Ministry of Finance, Ministry of Forestry, State Committee on Land Resources, State Committee on Food Industry, State Committee on Bread Products, State Committee on Water Economy, and State Committee on Fisheries also provided active support to the sector review. Background studies were prepared by the Ukrainian Institute of Agricultural Economics, the Institute of Economics, and the Institute of Land Organization. Preliminary results of the Ukraine Land Reform Monitoring Project have also been used in preparing this document. EXECUTIVE SUMMARY 1. With the dissolution of the Soviet Union and the breakdown of all previously established production and trading practices, Ukraine has been forced to confront the demands of transformation to a market-based economy. In the food and agriculture sector, this redirection of production facilities towards private ownership and market-based decision making is still at an early stage. The adjustment needed is considerable due to the legacy of distorted prices, government intervention in the production system, monopolistic input and output marketing, and the built-in inefficiencies of the collective and state farm system. This report describes the current status of the food and agriculture system and the ongoing process of transformation. The report also provides an agenda and recommendations for continuing sectoral reform. Agricultural Performance and Structure Il. The food and agricultural sector has greater economic potential in Ukraine than in any other region of the Former Soviet Union (FSU). This is due primarily to its favorable agro-climatic conditions: fertile soils, adequate rainfall, and a temperate climate. These conditions are not only well suited to the production of grains, oilseeds, root crops, and livestock, but they are also ideal for the production of a wide variety of fruits and vegetables. Due to these ideal conditions, the country traditionally has been a net exporter of food and agricultural products. Performance of the sector, however, has been far below potential. Crop yields are only 50% to 55% of those in Western Europe, fertility yields of livestock are 33% lower, and feed conversion ratios are less than half of Western standards. Material losses are high throughout the food chain. Food processing, due to outdated technology and low capacity, is the bottleneck in this system. Despite significant producer and credit subsidies for agriculture, agricultural output has declined by about 22% since 1990. During 1991-92, the country had to import grain for the first time in several decades. At the same time, the level of food consumption declined significantly. III. Ukrainian agriculture still exhibits the major hallmarks of the Soviet system. Most of the production is organized in large-scale state farms and collectives. These also provide a comprehensive range of social and municipal services. A large bureaucratic administrative structure is still functioning above the farm level, and attempts to provide central control to farms and other agricultural activities. Even in 1994, the Government has aimed at influencing production decisions of the farms by connecting input supply with deliveries to the state. Regional administrative structures have been preserved almost without change, and the bureaucracy created to implement direct administrative controls continues to exist. IV. The decline in agricultural and food processing output is a reflection of the deterioration of the overall economic situation of the FSU: high inflation, worsening terms of trade for agriculture, reduced availability of vital inputs, overall decline of real wages and domestic demand, and the collapse of intra-regional trade. Predating the recent decline is a long history of policies that have produced severe structural problems. Centrally directed, collectivized agriculture, together with the routine covering of enterprises losses, and the cumbersome mechanisms of central planning and control, resulted in inefficient production and distribution systems and distorted consumer prices. High investment levels in the Soviet era did not improve efficiency, and growth relied increasingly on expanding the amount of agricultural inputs. Agriculture became an increasing financial burden, with subsidization of both ii Executive consumers and producers becoming an important factor in macroeconomic destabilization. It is evident that the sector's full potential can only be realized if major structural reforms are implemented. A Slow and Cautious Reforn Process V. The Government of Ukraine has moved cautiously in reforming and restructuring the food and agricultural sector. First, there is a considerable body of opinion in Ukraine that the problems of the present system are transitory; that they can be overcome with greater access to advanced technology and better management, and that subsidization will only be needed until transitory problems can be solved. Second, there is a fear that the rapid dismantling of state and collective farms will lead to a collapse of output. Third, there is concern about the effects of rising food prices on living standards. Finally, there is a recognition that the physical and institutional infrastructure needed to support a sector of small independent farmers is substantial, and not immediately available. VI. Market and Price Liberalization. Despite several moves toward price and market reform over the last few years, Government influence on price formation remains strong. Although most agricultural output and input prices are no longer formally set by the state, these measures do not represent true liberalization. All major agricultural products are covered by state contracts (grains, sunflower, and sugarbeet) or state orders (meat, milk, poultry, and potatoes), which still account for over half of the marketed output of these commodities.' Though the payment advances to farms carry an implicit credit subsidy, the prices received by farms under state orders and state contracts are well below border price levels. The net result is implicit taxation of farms. Monopolistic state trading agencies continue to exert substantial pressure on farms to sell at prices indicated by the Government by making these sales a condition for supply of otherwise-hard-to-get inputs and payment advances, which function as loans for working capital. Access of farms to foreign trade channels is restricted since sales to the state are a necessary precondition for granting permission to export even small quantities. VII. Apart from relatively modest changes in the formal system as described above, the malfunctioning of the state controlled marketing system became more apparent in 1993-1994 than any time before. In practice, the state procurement system has lost its strength. There are a growing number of commercial traders, including new private firms, commercialized former state enterprises, joint ventures and foreign traders, that operate outside of the state marketing network. Farms increasingly contract with these companies and use the state system less and less. One estimate by a Government source was that 25% of farms no longer work with state suppliers. Explosive inflation has led to a demonetization of agriculture and has inhibited the functioning of agricultural markets. Producers are storing an increasing proportion of output on farm. Output is often processed on a share basis, i.e., processors receive a proportion of the output rather than a cash payment, and the balance is returned to the farm. Farms use this output to barter for inputs, or sell on uncontrolled markets. Producers also barter for other domestic or imported goods, and even pay their workers partly in kind. VIII. Unfortunately, the most recent reaction of the Government of Ukraine to this situation in June 1994 is to try to maintain state purchasing with a new wave of subsidized credits and input supply I State orders do not differ greatly from state contracts: the difference is the source of frnancing. State orders are financed by loans from the state budget to procurement agencies which in turn make advance payments to agricultural producers. State contracts are financed by procurement agencies' own funds and bank loans. Summary iii linked to state contracts rather than opting for genuine market liberalization demanded more and more by the farming sector. Instead, it has continued to try to work with "state contracts" and further prop up the old system through subsidization of producers and price formation restrictions to limit retail price increases. However, the issue of subsidies financed by monetizing ever-increasing budget deficits will accelerate inflation and further erode wages. This leaves consumers less able to cope with structural change in the economy and perpetuates a slow transition to higher levels of output and income. IX. Land Reform. Privatization of land and the establishment of independent private farms has begun, yet present policies and legislative framework envisage collective land ownership as the dominant form of land ownership, and the principle of unrestricted private land ownership has not yet been fully accepted. There is a clear intention to keep private agriculture as a supplementary component of a farming structure based on large-scale units owned collectively. X. The privatization of land is moving slowly. Uncertainty about future legislation on land ownership and the risks involved in private farming under present macroeconomic conditions and the absence of a competitive input/output marketing and credit system substantially limit interest in the establishment of independent private farms. As of April 1994, independent private farmers controlled only 1.5% of Ukraine's agricultural land. However, at the same time about 5 million ha of household plots and gardens (11.8% of total agricultural area) were given as private property to the users. There has been much more progress with the other component of land reform, namely the "denationalization" of land and its transfer to non-state ownership. As of 1993, 56% of the land is owned collectively and only 27% of the agricultural land remains in state ownership, compared to 100% in 1990. XI. The reform of the agricultural sector is proceeding mainly through reorganization of existing collective and state farms. The majority of state farms have been restructured and privatized into collective farms, however some still remain (primarily research farms) in public ownership. The extent of formal reorganization of the traditional large-scale farm enterprises is substantial: according to recent survey results2, two-thirds of the sampled farms had decided to reorganize by the end of the first quarter in 1994. However, among the farms that decided to reorganize, 85% registered as collective enterprises, which is an organizational form essentially identical to the old kolkhoz. Of these reorganized farms, most have opted to move toward privatization of land and non-land assets by distributing conditional ownership certificates (shares) among members. Some new collective farms were also created by the division of previous kolkhozes. Nearly 90% of the reorganizing farms in fact remain collectives regardless of the form of reorganization. Among those farms which have undergone more substantial reorganization there are 355 agricultural cooperatives (lease cooperatives) and about 100 joint stock societies. Developing a Reform Strategy XII. The most immediate priority is for a comprehensive agricultural reform strategy (Box E.1) to be agreed within Government and promulgated. This strategy, whatever its elements, must be consistent and coordinated with the overall program of stabilization and privatization. Not all of this can be accomplished in very near term; investments in physical capital and building of institutions will take some time. Infrastructure investment will obviously be limited by fiscal constraints, but priorities can 2 Land Reform Monitoring Study: World Bank - Ukrainian Institute for Agricultural Economics. 1994. iv Executive be established relatively soon, .. ........ and potential sources of ... R efarm Agend funding, both domestic and external, can be identified. An agen for refom sold inlue the foll as a st of : The implementation of a t(a) mac kroeconomic stabiiztion, iberalization of domestic marketsand' comprehensive reform strategy d Ieontro iof pries,frei external 0trd ad ai out of has to be carefully sequenced produIer a consr s C t 4 and organized, selecting ..protecting living.. s r.ao o ec of priorities for immediate bsin gt foodm pies; ( tof 3) actions. For example, the phasing out of state orders and (c) nt00 A-;la reform en couragingtedevelpmen a ' sector of a' f-ar command economy-type managemet units byestablshng the instittion bsis for divsion and restrictions has to accompany privat iztionoflan-frIg flarmsand for au attempts to promote market - 5) . . mechanisms. Or similarly, ..).... prizng anden oagen,try into. .. tf pdu p g reduction of subsidies to and marketg of agriculturalinputstan output; (Chapter 6) consumption should be .... .. combined with the introduction (e) est abl;is fr-am ew f naia servs 'edcon, ext of targeted programs to protect .inforationservices, and. regulation consistent.with a market .economy (Chapter 6 ad7 the poor. . . ..... (tU uidnga syte ofpysicalA inrastrucure onsisftet.withAthenes of aarket- d producti processing, aisbt system7 XIII. T.he m o s t important contribution of the G-.overnment to agriculture in the short run is macroeconomic stabilization and reduction or elimination of controls on domestic and international market transactions. Inflation, coupled with price controls, is a deadly combination for farming. Greater price stability and market liberalization would eliminate implicit taxation of farmers arising from controls that favor urban consumption. It would also result in reduced distortions in relative prices of commodities, inducing more efficient resource use. Trade liberalization would allow domestic farm prices to be linked more closely with world prices, expand markets for agricultural commodities, and lower input costs (Box E.2). XIV. A program of macroeconomic stabilization, price and market liberalization would include: * adopting a program to reduce inflation, including through fiscal policy, an especially rigorous control of expenditures designed to limit the government deficit, an a a tight monetary policy; * freeing producer prices, replacing the system of state orders, ceasing establishment of indarktiv pric ies or regulated profit margins, and stopping the practice of linking supply of inputs to fulfillment of production quotas; Summary v * beginning liberalization of foreign trade, including easing of export quotas and licensing requirements; * ending limitation of markups for processing and marketing, and bringing the tax on commodity exchange income into line with the VAT; * phasing out producer subsidies according to a well defined program linked to restructuring efforts and capping the total costs of agricultural producer subsidies at levels consistent with macroeconomic stabilization; * replacing consumer price subsidies with targeted programs to protect specific groups in the population; XV. Price and market liberalization should be properly sequenced. These efforts should take priority over land reform and other structural reforms. Box E.2 gives a proposed sequential order for reform. iPr *OpsdSchedule.! AgWutrlPiePlicjy Reform and,Subsi y. Re d ction state Ordrsad Reuce.:to4 30%prjected gai Phas out:, .6teCntr*cts: production: Poducer e -:-c Adjust relative prou:reen . se. - : state rce a. r pc E pric interventi.n prices to btirp-erto inu Susde euce in cae Confinie toluel Phawse'out :npt -SUPp -U-W ReducePh .n .. .imne ~~~~~~~~~~~~~~~~~~~~~~~~~~~. . -. . . . -. P. . .:--,..-; Credit Subsde l)ismantle linkagRe to stafte-:: Redu'Ci to ianc curret Rdcopiaefr - .b ut;- : . - C - L - - ~~~~~~~~CO t u Ima i -- ; -Redce to bead :ai an C-nDine to dig -i , -ul ::pac :i -:ar--- - -- £i'tkbss ~~~~~~~~~~~~~~~~l: :0 : . a W, Wusiie veetbl iimik.a. ntodceta'etd ncne ubide - U . . . ........ . - -g. F: .. Jr'OMS inMcome subIside ~~~~~~~~~~~~~~~(Uc tb d- - 0. U- r-- f6repa:ti.. -:- licensing bartee with bard currency taf. w-bae ade relm XVI. Securing Food Supply. Protecting Vulnerable Groups. With the decline of export trade in agriculture and declining domestic demand, shortages of domestic food supplies are unlikely unless there is a collapse of production and distribution systems. If reforms have been put in place according to the above mentioned sequencing, this risk would be minimized. Food availability and prices should be monitored to spot possible areas of shortage so that prompt responses by the market can be fostered. XVII. There may be groups in society whose incomes have dropped to the point where their nutritional status is in jeopardy, and there will be more of them in the future. The Government has an vi Executive obligation to protect these groups, but food subsidies, especially those attached to products like beef, for which demand is income elastic, are highly inefficient. Food stamp programs, income transfers and subsidies linked to products with low income elasticity (such as bread products) are all preferable to untargeted subsidies of the kind in general use in Ukraine. Restructuring and Privatizing the Agricultural Distribution and Processing System XVIII. The successful transformation of agriculture will depend to a large extent on the development of a competitive farm support sector-- material/technical supply, agricultural services, and marketing of agricultural commodities. Without the establishment of competitive markets for inputs and outputs, the private farms will remain dependent on local authorities, and an efficient pricing structure cannot develop. XIX. Privatization and Demonopolization of Processing and Marketing. Rapid demonopolization of agroprocessing input supply and product marketing systems should start immediately, beginning with provision of unrestricted free entry into the market by new private enterprises and privatization of existing small shops. The creation of private wholesalers, commodity exchanges, transport and trade companies, and service and marketing cooperatives, should be encouraged by reducing currently high levels taxation. State product marketing, processing, transport and input supply services, should then be privatized. Large agrokombinats, and all other monopolies and monopsonies should be divided into smaller privatized concerns to promote competition. A program of privatization should include: * immediate elimination of all regional trading monopolies by state enterprises and internal marketing restrictions; * break down of monopolistic structures such as grain and meat monopolies; * anti-cartel legislation Reform of the Agricultural Credit System XX. The Ukrainian agricultural finance system deserves special attention because many of its potential clients live in hard to reach areas and are engaged in activities where prices can be volatile. Because the emerging transition will make most of the existing assets obsolete, potential clients will be relatively risky and costly to serve. However, this does not justify maintaining subsidized credit programs which have proven to be-costly and ineffective elsewhere. Linkage of subsidized credit to state orders should be ceased immediately. Subsidized credits should be limited in the near future to finance critical short-term operations and support private farming, and then be completely phased out. Under no circumstances should the financial system be used as a convenient mechanism for rescuing insolvent enterprises, public or private, in agriculture or elsewhere. The development of credit unions or other forms of cooperatives, small-scale rural banks, or informal arrangements involving private sector trade credit might be and effective means of reaching a broader array of rural clients. Summary vii Land Reform and Farm Restructuring XXI. The objective of agricultural restructuring should be the creation of a sector of independent, privately-owned and largely owner-operated farms that are free to change their farming methods and output mix in response to evolving product and production technology and changes in input and output prices. The process of restructuring agricultural enterprises will be encouraged by continued progress in price liberalization, privatization and development of competitive structures in the marketing of agricultural output and inputs, and scaling back of producer subsidies. Nevertheless, additional actions are needed. XXII. Restructuring and Privatizing the Collective and State Farms. The main task at this moment is to maintain the momentum of reform by amending existing legislation and creating the necessary overall economic and market framework for restructuring large-scale farms. The restructuring of collective and state farms should be continued in line with the goals of creating a market-based economy and should be guided by three major principles: * separation of production activities from social and municipal functions; * distribution of land and other productive assets to the members in physically recognizable form and not as anonymous shares; and * freedom of decision to members about future organization of production after the distribution of the ownership of land and other assets. XXIII. If Ukraine is to be a fully functioning market economy, people engaged in farming should have a free choice as to how they wish to conduct their farming. The farmers themselves should decide whether to farm individually, in small groups, in cooperatives, in joint stock companies, or in any other form they choose. Different individuals will prefer different solutions and will choose different forms of voluntary cooperation. It is the Government's responsibility to ensure, through appropriate legislation, that a true sense of private ownership of land, assets, and profits is created: division of shares must be implemented in a way that creates a direct link between the individual and the fruits of his labor, and return to owned assets. Moves from one form to another should also be free according to the rules of a market economy (trading and leasing land or shares). XXIV. Promoting Private Farming and Farmers' Cooperatives. The international evidence is persuasive that individually owned private farms are likely to get more output per unit of land, material inputs, and labor, than collective or state farms. Individually owned farms are more likely to ensure effective harvesting, storage, and transportation of production, since any production loss translates directly into lost income for the farms. International evidence also suggests that when individually-owned farms exist beyond a certain number, individual farmers help create effective demand for new, competitive sources of supply for inputs and channels for marketing, storage, processing and distribution. The small, independent private, owner-operated farms will emerge gradually as farmers gain experience and accumulate capital, and as the input and output marketing systems evolve to meet their needs. To encourage the growth of these farms, Government should quickly resolve the uncertainties created by the transition process, make clear its commitment to private property, specify how agriculture and agribusiness will be reorganized, delineate the rights of members of collectives with regard to jointly vgij Executive owned assets other than land, indicate the kinds of taxes that will be imposed and specify how existing debts and obligations will be handled. XXV. Even with modest growth in numbers, a large proportion of the private farms created can be expected to run into financial difficulties and fail within the first years of their formation. This will constitute a natural "weeding out" process and should not be regarded as a "waste" of resources. More importantly, it should not be considered a reason to expand government subsidization of agriculture in general or newly emerging farmers in particular. This can only lead to the creation of a new class of inefficient, dependent farmers. XXVI. Strengthening Land Legislation. Several new laws are being prepared on land ownership and land use in the framework of a new Land Code. The new legislation envisages the full privatization of agricultural land. If this draft law will be passed by the parliament, Ukraine will have one of the most progressive approaches to land privatization among the FSU republics. According to the draft, every collective farm member will receive without payment a so-called "average land share" with full private ownership and titles above the already increased size of household plots. Private farmners who were not members of kolkhozes/sovkhozes will be entitled to receive the same amount without payment. Additional, mainly reserve, land will be sold. XXVII. The legal framework for private ownership and leasing of land should be strengthened by: * amending the Land Code to give the immediate right to sell and buy agricultural land and shares received by collective farm members; * allowing rental levels for agricultural land to be freely negotiated between parties; * permitting mortgaging of land to finance purchase and/or improvement; * defining clear and liberal lease terms for publicly owned agricultural assets; * ensuring timely processing and approval of applications for land; and * consolidating land records in each district center and computerizing record keeping. XXVIII. Rural Social Services. Privatization and the transition to a market economy will affect the existing rural social safety net and the provision of social services in the rural communities. Traditionally, the bulk of rural social services are provided by the collective and state farms, and the large scale farms provide substantial additional benefits to their members and pensioners. In principle the transfer of their services to the local municipalities should provide the solution. In Ukraine, however, the reforms to create a new municipal structure capable of running and financing the new services are at a rather early stage. There is neither the rural institutional framework nor a financial structure to replace the collective and state farms' social services. It is not surprising that the fear of losing vital social services has an impact on farmers' decisions to stay with the collective farming system to a great extent, and strengthen the argument of those who advocate against the dismantling of large scale farming system. Summary ix XXIX. The three most critical needs in the village communities are: (a) developing an enabling environment to stimulate increased off-farm employment in the villages; (b) safeguarding an acceptable level of rural social services during the period of restructuring and privatizing large scale farms; and (c) enhancing local ability to respond to social and demographic change by providing communities with greater financial control. Except for appropriate steps to ensure acceptable standards of health, nutrition, and sanitation and to improve the general quality of life in rural areas, attempts at direct state intervention do not seem desirable because of lingering local suspicion of government motives and the lack of cost-effective policy instruments. A coherent and integrated strategy should be developed to facilitate rural community development through devolving responsibility for these activities to the local communities themselves. One of the most effective ways to address this requirement is to provide communities with greater control over their own budgets and, hence, their future. Investing in, and Improving, Farm Productivity and Efficiency XXX. Land reform, state and collective farm enterprise restructuring, and privatization are important preconditions for the improvement of the efficiency of primary production, processing, and distribution of food and agricultural products. Increasing efficiency is the only sustainable basis for a profitable agriculture sector in Ukraine. The natural endowments of Ukrainian farmland provides potential for Ukraine to produce competitive food and agricultural products, especially grain and oil seed products, above and beyond domestic needs. However, competitive and profitable export of agricultural products require substantial improvements in product quality as well as in international marketing. XXXI. Based on the review of current situation and the major tasks of transition, the investment priorities can be listed as follows: * development of the physical facilities (wholesaling centers, farmers' markets, etc.) to support the market for agricultural products and inputs for agriculture; * focus recapitalization of farming on the emerging new corporate and individual farms; & reconstructions and major modernization of support services along decentralized private and/or cooperative lines (industries such as seed industry, machinery maintenance); * reconstruction and major modernization of agroprocessing; * introduction of environmentally friendly technologies; and * development of education and research potentials. XXXII. The private sector should play a decisive role in future investment in agriculture as privatization proceeds. Public investment needs to be directed at improving human and physical infrastructure, and to be linked to the implementation of a program of further reforms which set clear priorities. x Executive Restoring International Trade XXXIII. Export of agricultural products can make a significant contribution to sectoral growth. There are some marked differences in potential for exports to between FSU and non-FSU countries. The FSU countries constitute the natural market for Ukraine's agricultural exports. The Government of Ukraine should try to resolve existing difficulties (payment problems, etc.) in this area and attempt to increase exports to these countries in the near future. XXXIV. Every effort should clearly also be made to expand exports to convertible currency areas. This includes capturing "niche" or specialty markets with existing products as opportunities arise, as well as developing products (perhaps as joint enterprises with companies familiar with those markets) deliberately oriented toward them. However, there are a range of excess supply problems, perceived quality problems (psychological impacts of the Chernobyl accident) and, in some cases import barriers, that inhibit access and reduce prices for Ukraine's agricultural products in Western markets. In the short run, and in the longer run as the recovery process succeeds in the region, restoring and developing markets and business relations with the other republics of the FSU may offer better opportunities. It is important to allow the development of commercial and private sector trading institutions and agencies, financial and payments arrangements, and trade and exchange control policies and systems that facilitate trading transactions and encourage the integration of domestic and external markets. New Roles and Structures of Government XXXV. The Government's role should be to establish the general rules and facilitate the conditions for smooth operation of markets and independent business organizations. This role is not less important than the previous one; however, it requires a different philosophy, as well as different means and institutions. Government's functions should be: regulation as required in market economies (e.g., environmental, public health, etc), provision of public goods such as infrastructure, and policy making and sectoral analysis. There must be a widespread commitment to changing the structure and scope of government to make it consistent with this new role. The overall principles driving this change should be: (a) establishing of a single locus of responsibility inside the Government for agriculture and food policy decisions; (b) dismantling of the current "agroindustrial complex" governmental management structure; and (c) simplifying the structure of governmental organizations corresponding to the reduced role of the public sector responsibilities in agriculture. XXXVI. The dismantling of the bureaucratic structure of central planning is a very important task. What is needed is not merely changing the names of the various ministries, but radical modification and/or merger. Units related to central command and direct interventions should be dismantled, while those remaining should be organized and managed to meet the needs of a free market economic system. As transition proceeds, the whole structure can be further simplified, with fewer institutional units and fewer employees. Extemal Assistance XXXVII. Ukraine has embarked on an historic and courageous effort to transform its economy from a centrally planned to a market-oriented system. This reform will be, under the best of circumstances, a long process invariably accompanied by economic, social, and political difficulties. To ensure that this Sulmmary xi transition is efficient and effective, and to minimize the transition problems, external assistance can be of great benefit. In the agriculture and food processing industries the assistance most needed in the short and medium term includes: * balance of payment support for critical inputs in agricultural production, including improved seeds, fertilizers for crops, and vaccines for livestock, and continuation of food aid deliveries by bilateral donors; * technical assistance to the Ministry of Agriculture and Food to help implement a consistent transition program in the food and agriculture sector; * technical assistance and capital investment for the development of institutions and support facilities needed for market based food and agriculture; and * capital investments for the development of competitive production, processing, and marketing systems, and related physical infrastructure (especially the irrigation system). Sununary Matrix XXXVIII. A matrix summarizing the key recommendations of the Review is in Chapter 2 on pages 9-12. xii Executive CHAPTER 1 MAIN FEATURES OF THE AGRICULTURE SYSTEM 1.1 Ukraine is renowned for its outstanding natural endowments suited for agricultural production. Traditionally, the country has been a substantial net exporter of food and agricultural products and has the potential to again become a major food supplier. This chapter provides an overview of the main aspects of the food and agriculture industry in Ukraine, beginning with historical performance and the description of the resource base for agriculture, followed by a brief assessment of the structure and performance. A. AGRICULTURE'S ROLE AND HISTORICAL PERFORMANCE 1.2 Agriculture plays an important role in the economy Net Material Product in 1992 of Ukraine and accounts for a large proportion of economic activity. In 1992 food and Other agriculture contributed 30% to 12% the Ukrainian net material product (Figure 1.1) and employed about 20% of the labor force'. It is also a significant Construction Industry contributor to external trade. 15% 43% 1.3 T h e p a s t performance of Ukrainian agriculture reflected trends in the former Soviet Union (FSU) as a whole. Output grew by about 2% annually in the first half of 30%o the 1980s, then slowed. In the Figure 1.1 beginning of the 1990s, output declined significantly. Total Table 1.1: Development of Agricultural Production production in 1993 was somewhat (Indices based on 1983 RbI) more than 20% below the 1986- 1990 average (Table 1.1). The 1986- 1990 1991 1992 1993 1993/ contraction in the livestock sector 1992 has been continuous and rather Total 100 99.7 86.6 79.4 78.1 98.3 significant, declining by more Crops 100 98.3 81.4 82.7 88.7 107.3 than 30% in 1993 from peak levels in the mid 1980s. 1993 Livestock 100 101.0 90.9 76.7 69.2 90.2 was a good year in crop Sources: Agriculture of Ukraine, 1993. Ministry of Statistics production as compared to 1992, 1 Of the 30% of Ukraine net material product associated with food and agriculture, the food industry accounts for a little over one quarter, 27%, and primary agriculture accounts for 63%. 2 Chapter I yet overall crop performance still remained below the level of the 1985-1990 average. This decline of agricultural output was partly a reflection of the deterioration of the overall economic situation of the FSU. High inflation, worsening terms of trade for agriculture, reduced availability of vital inputs, falling real wages and domestic demand, the collapse of intra-regional trade, and bad weather in some years all contributed to a decline in output. 1.4 Underlying the seemingly sudden deterioration of agricultural performance is a long history of inappropriate policies that produced severe structural problems. Policies that supported centrally directed, collectivized agriculture led to inefficient production and distribution systems, distorted consumer prices and consumption patterns, and ultimately to the development of a sector that was unable to meet rising demand for food and fiber at constant or declining costs. This system of production was accompanied by serious degradation of land and water quality. Over time, an ever increasing share of investment in agriculture went to replace depreciated capital. Growth depended heavily on expanding the quantity of agricultural inputs, especially feed grains for the livestock sector. Agriculture became an increasing financial burden, with subsidization of both consumers and producers becoming an important factor in macroeconomic destabilization. 1.5 Ukraine's legacy from the socialist era thus includes large inefficient farms with high production costs, high levels of food consumption relative to market economies of comparable prosperity, subsidized food prices and excess demand for food at those prices, a pervasive monopoly of food processing and distribution, and macroeconomic imbalances reflected in large budget deficits and high inflation. Moreover, the growth potential of Ukrainian agriculture was jeopardized by the low levels of investment. Agriculture is existing by consuming its natural resource base and its stock of investment. Unless incentives for efficient production and investment are established, Ukraine's agricultural future will be bleak. 1.6 Despite its current problems, Ukraine was one of the most agriculturally advanced republics of the FSU, reflecting its favorable agro-climatic conditions: fertile soils, adequate rainfall conditions, and a temperate climate. These conditions are not only well suited for production of grains, oilseeds, root crops, and livestock, but also for production of a wide variety of fruits and Table 1.2: Per Capita Agricultural Production (kg/capita), 1989 vegetables. The most important Ukraine USA France Germany crops are wheat, sugar, maize, (West) and oil seeds. Animal husbandry is dominated by hog, beef, and Grain 989 1149 1056 444 chicken farming. The favorable Sugar Beet 1003 93 414 329 natural endowment for agriculture and the relatively high Potatoes 373 68 107 131 level of production, given the Meat (slaughter 86 120 112 96 circumstances, is demonstrated weight) by the relatively high per capita Milk 471 264 513 413 agricultural production in comparison with the developed Sugar 100 24 65 49 world (Table 1.2) Butter 8.6 2.3 9.6 6.7 Source: Ukraininan Institute for Agricultural Economics Introduction 3 1.7 The sector traditionally produced an exportable surplus: on average, during 1986-90, about 24% of all grain, 22% of all meat, and 44% of total sunflower production of the FSU came from Ukraine, which comprised only 15 % Table 1.3: Percent Share of the Soviet Agricultural Output of its arable land resources (Table by Product, 1990 1.3). As a result of the breakdown Products Ukraine Russia Other Republics of inter-republic trade, the decline in agricultural production and the Sugar Beets 54.2 38.0 7.8 adoption of extensive trade Sunflower Seeds 41.5 52.2 6.3 restrictions, foreign trade fell to a Potatoes 26.3 48.5 25.2 fraction of its pre-independence Vegetables 25.1 38.2 36.0 level. This is underscored by the Flax 44.1 29.0 26.9 fact that Ukraine became a net Source: Narodnoe khoziastvo SSR v 1990 g. [1991], pp.358, 471. importer of grain for a few years in the early 1990's. 1.8 There is a widespread belief in Ukraine that acquiring Western technology is the key to improving the performance of the sector. However, the backwardness of technology in Ukraine is a result of the way agriculture, farm machinery, and the agricultural input industries were organized and managed by the State. Technological progress depends on establishment of conditions that Table 1.4: Size and Composition of Rural Population (OOOs) provide both the incentives and the 1970 1979 1991 1992 means to increase productivity. This will require a break with past Population of Ukraine 47,126 49,755 51,690 51,802 policies and the transformation of Rural population 21,438 19,243 16,895 16,796 agricultural structures toward private ownership and % inrural areas 45 39 33 32 market-driven resource allocation. Urban population 25,688 30,512 34,795 35,006 % in urban areas 55 61 67 68 B. THE AGRICULTURAL Rural population by sex RESOURCE BASE % male 44 44 45 46 % female 56 56 55 54 Rural Population and Settlements Rural population by age 1.9 The rural population % < than labor age 29 23 22 22 of Ukraine in 1992, was about 17 % labor age 50 53 49 49 million, or about one third of total % > than labor age 21 24 29 29 population (Table 1.4). It has been declining at a rate of about 1.2% Rural birt and death rates (per 1,000 people) per year over the past 20 years. In births 14.5 13.6 12.6 12.5 the past dozen years, migration to deaths 10.4 14.3 17.2 17.6 urban areas has been estimated to be about 200,000 persons per year. natural increase 4.1 -0.7 -4.6 -5.1 Source: Ministry ot Agriculture and Food 4 Chapter I The migrants are mainly younger people. This has contributed to a decrease in rural inhabitants of child bearing age and a decline in the natural increase of the rural population. Thus, the birth rate has declined and the rural population has been aging. Pensioners now comprise about 29% of the rural population, compared to about 21 % in 1970. With the decreasing number of younger people, the rural sector has experienced periodic shortages of labor, especially in peak agricultural seasons. It has become common for students and other volunteers from urban areas to be called by the Government to work in farning during such periods. The aging rural population and the low reproduction rate suggest that the labor force will decline at an increasing rate in the future. 1.10 Migration reflects the greater freedom of people to move, and better employment opportunities and living conditions in urban areas. Housing, cultural and educational opportunities, recreation, and the availability of consumer goods in most Ukrainian villages are not up to urban standards. Less than 6% of rural houses have running water, and less than 3% have central heating systems, sewers or natural gas connections. In the last two to three years, rural to urban migration has slowed considerably due to the deteriorating urban economic situation. The employed rural population was estimated about 7.7 million in 1992. Of these, about 4.9 million worked in food and agriculture (68% of agricultural workers work on collective and state farms, 12% on private subsidiary and individual farms, and 14% in agro-industries). Land and Climate 1.11 T h e country is divided into Aver age Ree i pit at i ons three soil-climatic zones: and 1rocl I rnl c Zones (a) forest zone with acid m soils developed under 7M - forest and an annual precipitation of 600 to 700 --------- mm; (b) a drier forest-steppe zone with average precipitation of----- 450 to 600 mm, 45 % of----- which has identified +w / boY chernozem soils; and (c) am m X the steppe, mostly chernozem (82 % ), Figure 1.2 developed under grassland, with only 350 to 450 millimeters of precipitation. These regions generally traverse the country in belts oriented southwest to northeast; the forest zone is generally in the north and northwest and the steppe in the south and southeast (Figure 1.2). 1.12 The territory of Ukraine is 603,560 kn2, or about 60.4 million ha, of which 41.9 million ha (69.4%) is agricultural land. The share of arable areas is higher than that of any other country in Europe and well above the world average. More than 55 % of the total territory of the whole country, and more than 80% of agricultural land, is arable and cultivated in annual crops (Table 1.5). Much of Introduction 5 Ukraine's soils are the highly favorable "chernozems," or black earths, and the climate is Table 1.5: Land Resources and Use, 1993 especially suitable for production of wheat and other small grains (Figure 1.3). Ukraine shares Million ha. % a large part of a highly productive chernozem Agricultural Land 41.9 100 soil region with Russia. These deep black soils represent 54% of the land and have an enriched Arable Land 33.5 80.2 humus layer of 40 to 50 centimeters or more in Orchards 0.8 1.9 depth. The naturally fertile black soils and the Pastures 7.3 17.4 less fertile forest soils present few physical obstacles to cultivation. Slopes are gentle to Ot.her 0.2 0.5 moderate over wide areas, permitting many Total Land Area 60.4 -- regions to have more than 80% of the land under Source: Ministry of Agriculture and Food cultivation. 1.13 Ukraine's climate is fairly temperate. Mean July temperatures have a relatively narrow range, from 18 C at L'vov to 22 C at Odessa, with Harkov and Kiev averaging 21 C and 20 C, respectively. Mean January temperatures are relatively mild for these latitudes-- -2 C in Odessa and -7 C in Harkov. The warmer January temperatures permit successful winter grain (wheat) production. The lower annual temperatures tend to reduce moisture stress, permitting the successful Main Soil Groups production of spring sown maize and other crops in most years. Chestnut The shortest frost-free period is Podzolic 4% 150-160 days in the forested zone 12% of the northwest, which also has Meadow the highest elevation. The frost Derno-Podzolic free-period is 160-170 days in the 7% forest-steppe zone, up to 200 Dern - days in the eastern steppe zone -z - - and longer in Crimea, which benefits most from the Chernozems moderating effect of the Black Sea. Figure 1.3 Enviromnental Status 1.14 Agriculture is a significant, but probably not the leading, cause of most environmental degradation in Ukraine. Environmental problems related to agriculture, however, may be more widespread than industrial pollution because the latter tends to be concentrated in local areas. The main problems are soil erosion and water runoff, which contribute silt and plant nutrients to water bodies, contamination from agricultural chenicals, especially those in solution, and manure storage and use, which contaminate ground and surface water with bacteria and nitrates. Major contamination of water by pesticide and fertilizer use is not likely to be severe because recent usage has been low. 6 Chapter 1 1.15 Soil erosion has negative short- and long-term consequences. In the short term, the most easily identified and measured effect is the presence of silt in streams and standing water. Silt attenuates the penetration of sunlight into water and restricts the volume within which various types of autotrophic (photosynthesizing) organisms can grow satisfactorily. Nutrients added to water bodies promote the excessive growth of algae. The resulting increase in organic matter leads to a high biological oxygen demand during decomposition and this causes eutrophication or death of the water bodies for certain species. This severely reduces the viability of water body use in both commerce and recreation. Silt can also cover stream beds, and in so doing, impair the breeding and rearing grounds for aquatic animals. An imperceptible but real immediate effect, however, is loss of inorganic and organic nutrients from fertilizer and manure added to the soil, reducing the economic benefits, and increasing the need for replacement later. 1.16 The long-term consequence of erosion is the slow destruction of the soil capacity to produce crops. Although often imperceptible, many soils in Ukraine are being destroyed over time: 33 % of soils are already identified as being "washed out", including 44 % of the most productive and extensive steppe soils, and 30% of those of forest-steppe origin. This slow deterioration requires additional use of fertilizers to maintain production. Ultimately, productivity will decline regardless of treatment to counteract topsoil losses. Another long-term effect of soil erosion is reduction of the volume of artificial and natural standing bodies of water through silting. This leads to a need to dredge artificial lakes used for water supply to preserve the necessary volume. 1.17 Solutions to agriculturally derived enviromnental pollution are well known from experience elsewhere and need only to be adapted to local conditions. Although lack of agricultural machinery, chemical manufacturing capability, and skills have impeded adoption of environmentally benign practices, this is not the major problem. More important have been the signals provided to agriculture in the socialist era emphasizing maximization of production in the short term and not long-term maintenance of natural assets. Significant investment is needed to protect the environment and reverse deterioration, as are changes in the cropping pattern and production technology, but this is unlikely to materialize unless the structure of incentives is altered. 1.18 The Chernobyl accident had four major adverse effects on agriculture: contamination of soils; contamination of ground water; contamination of standing crops, forest products and livestock at the time of the accident; and continuing contamination of agricultural and forestry products growing on contaminated soils and/or groundwater resources. It is estimated that 5.7 million ha of agricultural lands are contaminated.2 Areas contaminated above 40 Ci/km2 are relatively small and mostly within the 30 km exclusion zone. Only an estimated 80,000 ha of land have actually been withdrawn from agricultural use. There has been no effort to clean up the forest outside the 30 km zone. C. THE UKRAINIAN FARMING SYSTEM 1.19 The structure of the Ukrainian economy in general, and of its agricultural sector in particular, developed according to the same pattern as in the other republics of the FSU. Russia and Ukraine, the two largest republics in the original Soviet Union, provided the template for what became 2 3.1 million ha of arable land, 0.8 million ha of meadows, and 1.5 million ha of forests. Introduction 7 generically known as "Soviet Agriculture. " However, only "eastern" Ukraine was a Soviet Republic from the start; the western provinces, incorporated into Ukraine after World War II, began to adapt to the Soviet pattern 25 years later, at the same time as the new socialist regimes of Central and Eastern Europe. 1.20 During the Soviet regime, Ukrainian agriculture was organized in two centrally-controlled sectors of large scale farming: kolkhozes, collective farms in which output and all assets are jointly owned by the members; and sovkhozes, state farms in which output and all assets are owned by the state. The kolkhoz/sovkhoz system is augmented by "interfarm enterprises," owned jointly by several farms. An additional set of farms serves special purposes (e.g., training, research). In addition to these centrally organized sectors, an important part of agricultural production originates in individual subsidiary farms, such as household plots of individual kolkhoz/sovkhoz members and garden plots assigned to city workers. In 1992, the 35.5 million ha of land in the socialized sector was divided among kolkhozes, sovkhozes and interfarm enterprises. About 30 million ha is arable land, 640,000 ha is orchards, and the rest is meadows and pastures. The socialized sector produced 69% of gross agricultural product (kolkhozes contributed 48%; sovkhozes, 21 %; and interfarm enterprises, 0.8%). 1.21 Before World War II, the differences between the sovkhozes and kolkhozes were quite pronounced; sovkhoz workers were paid fixed wages, while kolkhoz members received shares of residual income from the harvest. These differences were practically eliminated with the adoption of guaranteed wages for kolkhoz members and provision of credit (much of which was later written off) if the farm could not meet its wage bill or other obligations. Several kolkhozes were actually transferred to the state farm sector. At least some of the consolidation of the kolkhozes and sovkhozes was due to heavy indebtedness incurred as a result of ill-advised investments undertaken in response to direction by the state. Both sovkhozes and kolkhozes were diversified, large scale enterprises, and only a few farms are narrowly specialized. Grain production accompanied by livestock is characteristic for most farms. Table 1.6: Main Characteristics of Kolkhozes and Sovkhozes before Reorganization (averages per farm) 1970 1980 1992 kolkhoz sovkhoz kolkhoz sovkhoz kolkhoz sovkhoz Total Number 9,141 1,605 7,016 2,110 9,080 2,643 Workers 590 676 610 664 355 439 Production (million rubles)a 1.4 3.2 2.9 3.9 1.8 2.6 Productive Fixed Assets 1.4 2.6 3.8 5.7 4.6 6.3 (million rubles)' Farmland (ha) 33,50 5,046 4,200 4,500 2,731 3,254 Cattle (heads) 1,436 1,930 2,280 2,270 1,575 1,513 Cows 460 685 730 760 474 491 Tractors N/A N/A 41 57 37 47 Trucks N/A N/A 23 34 25 30 Combines N/A N/A 9 11 9 8 a/ 1983 rubles. Source: Ministry of Agriculture and Food 8 Chapter 1 1.22 The kolkhoz subsector was larger than the sovkhoz (state farm) subsector. Kolkhozes were almost four times as numerous as sovkhozes, and they cultivated almost three times as much land, had nearly four times as many cattle, and employed more than three times as many workers. On a per farm basis, sovkhozes were larger than kolkhozes by such indicators as average production, average number of workers, and stock of productive fixed assets (see Table 1.6). The differences in land holdings and in the number of cattle per farm were not very large. The production-to-assets ratio in sovkhozes, however, is lower than in kolkhozes, in line with their higher capital intensity (higher number of tractors and trucks per farm). The profitability in sovkhozes was also lower. 1.23 The reorganization of the kolhkoz/sovkhoz sector began in 1992. Most of Table 1.7: Emerging New Farming Structure (Jan 94) the farms have gone through some reorganization and at least changed have changed their titles Number '000 ha % during the last two years. This process is CoIl. Farms 8,735 25,730 61 discussed in detail in Chapter 4. The basic feature of the farming structure however, has not S a changed significantly (Table 1.7). Large scale Cooperatives 355 105 0 collective and state farms still use 82% of J. Stk. Societies 77 214 1 agricultural land (about 35 million ha). The collective enterprises accounting for about 61 % Indiv. Prvt. Farms 27,739 610 2 of agricultural land, while the state farm share is Subsid. Plots (OOOs) 10,680 5,011 11 about 21 %. The combined output of large scale eserve and others 1,871 4 farms is about 65 % of total agricultural output in e 1993, compared to 73% in 1990. Total 42,290 100 Source: Ministry of Agriculture and Food 1.24 Each large scale collective or state farm is managed by a professional team that includes the chairman or director and specialized agricultural technicians, farm management experts, economists, accountants, and administrators. The total number of managers and professionals in the large scale farm sector is around 200,000. This represents around 4% of the total labor force on farms, or a cadre of nearly 20 professionals per large scale farm. The professional team is responsible for production scheduling and for the deployment of labor and capital on the farm. It is supposed to perform the same managerial functions as in any large agribusiness. The experts are graduates of agricultural, technical, and economic colleges and, as such, they provide the know-how that the western farmer would receive from extension services and industry. There are major differences in the efficiencies of these farms, with some exhibiting quite different and innovative management structures. A review of the differences in structure and performance could be useful in identifying changes that could lead to improvements in productivity and efficiency, even within the existing system. 1.25 The villages making up a kolkhoz or a sovkhoz were formally governed by a municipal council (sel'sovet). Their budgets were minuscule, however, and their activities were overshadowed by the local kolkhoz or sovkhoz. All social and municipal services were provided by the kolkhoz or sovkhoz or directly by the state.3 Thus, culture clubs, cafeterias, kindergartens, central heating and water supply, 3 In early 1994, 6,450 pre-school child care institutions, 360,000 apartments, 539 homes for pensioners, 1,540 clubs, and 80,000 km of piping networks were run by agricultural enterprises. The total maintenance costs for 1994 are estimated to be 8 trillion krb. Introduction 9 local roads, and street lighting (so-called social assets) were actually built, financed, and operated by the farms, while schools and medical services were provided by the state. Housing was provided by the kolkhoz or sovkhoz, often in the form of multistory brick-and-mortar buildings. The recent trend, however, has been for rural residents to build their own housing, financed with personal savings and government loans. Over 15 % of kolkhoz and sovkhoz workers were not employed directly in agricultural activities--4% had managerial, administrative, and professional jobs on the farm (rukovodyashchiye rabotniki), while the rest were engaged in the provision social services. 1.26 Up to early 1990, private agriculture consisted of only "individual subsidiary farms." These were household plots of kolkhoz or sovkhoz members and gardens and vegetable plots allocated to urban workers. Altogether, 2.8 million families used 2.7 million ha, or 6.2% of the total arable land. From this, they provided more than a quarter of total agricultural production--30 % of livestock and 20 % of crops--in the second half of the 1980s. Historically, there has been an intensive cooperation between the large scale farms and household farming by their members. A large proportion of their inputs, especially animal feed and livestock, as well as machinery services, is provided by the large scale farms, often without payment. As one of the first steps in land reform, the area under this type of farming has been almost doubled between 1991 and 1994. The so-called subsidiary, or auxiliary farms, had an area of over 5 million ha, or 11 % of total agricultural area, by the beginning of 1994. 1.27 Independent private farming has started to emerge, and includes farmers who are Table 1.8: Role of Private Sector in Agriculture allowed to own their own land, without being 1990 1993 Share % associated with the socialized sector. As of April Increase 1994, there were 29,666 individual private farms in Ukraine with a total area of 620,548 ha (1.5% Total Production 26.7 34.8 +30.3 of total agricultural area and 11 % of land in Crop Production 20.3 32.0 +57.6 private use). Individual private farm's share in productin of th non-asociatedprivatefarmers Livestock Production 30.1 37,8 +25.6 production of the non-associated private farmers Source: Ukrainian Institute of Agricultural Eco-nomics is still negligible, but their number is growing fast. 1.28 In recent years the role of private sector farms (subsidiary and independent farms) has increased significantly in terms of overall agricultural production (Table 1.8). This is mainly the result of increases in the size of these farms and due to the fact that the livestock inventory in the private sector has not declined, but instead shown a slight increase. The share of the private sector in crop production has increased by 58 %, while its share in total production increased by 30%, and now contributes 34.8 % of gross agricultural production. D. MAJOR AGRICULTURAL SUBSECTORS 1.29 The production of crops accounted for about 45 % of gross agricultural output in the late 80's and early 90's. Livestock production accordingly contributed about 55%. These shares have changed in favor of crop production during recent years, as the decline in livestock production has been greater than that in the crop subsector. In 1993, 52% of gross agricultural production originated in the crops subsector. 10 Chapter I Principal Crops 1.30 Ukraine had the reputation Table 1.9: Basic Crops Cultivated (1989-1993) of being the bread basket of the Soviet Indexes 1989 1993 1993/ Union. 80.2% of all agricultural area % % 1989% was used for annual crop production Total Arable 100 100 (Table 1.9). The cropping structure has not changed substantially in recent years. pure Pairs 4.2 4.3 102.4 About 45 % of arable land is used for crop Total Sowing Area: 95.8 95.7 99.9 production, 33% is occupied by forage crops, industrial crops comprise another a)Grain Crops 44.7 45.5 101.8 10 to 11%, and potatoes and vegetables Winter Crops 23.0 22.4 97.4 take up 6%. Winter Wheat 20.3 18.3 90.2 1.31 Cereals. Ukraine Spring Barley 8.3 11.0 132.5 produced an average of 47.4 million tons Maize 5.4 4.3 79.6 of cereals per annum in 1986-90. In 1992 the harvest was only 38.6 million Pulse Crops 4.4 4.0 90.9 tons. In 1993 production improved b) Industrial crops 11.2 10.5 93.8 somewhat with 45.6 million tons Sugarbeets 4.8 4.9 102.1 harvested, an increase of 18%, but still 6% below the peak 1980s levels (Figure Sunflowers 4.7 5.2 110.6 1.4). Cereals are the key crop for both c) Potatoes and 5.7 6.4 101.6 livestock production and human Vegetables consumption. Wheat is the major grain Potatoes 4.3 4.9 114.0 crop, with production of 24 million tons per annum, or 49% of all the cereals. Vegetables 1.4 1.5 107.1 Barley was next, accounting for 19%, d) Fodder Crops 33.6 33.3 99.1 followed by maize (15%), other legumes Perennial Grss 11.2 12.1 108.0 (6%), rice (5%), millet (5%), oats (3%), Source: Ministry of Agriculture and Food and buckwheat (2 %). Yields of cereals in Ukraine are, on average, above those in other FSU countries, and are comparable to yields in other Eastern European countries, the US and Canada, but are only 50 to 55 % of the yields in Western European countries. 1.32 Barley is the most important feed grain in Ukraine, both in terms of production and area. With an average yield of 3 tons per ha, barley produces higher yields than any other feed grain except maize. Even though it is a spring crop and therefore competes with maize, it is more adaptable ecologically and does better in the colder northwest region. Although used chiefly as a feed grain and valued for its nutritive content, it is also used for human consumption and beer production. Maize yields average 3.5 tons per ha, which is lower than in the United States (44% of average yields) or other western countries. However, with improved price incentives yields in some areas of Ukraine could approach those in Western countries. Introduction 11 Major Grain Area Development 1982-93 8 ---------- --------- - ------ 6 ----- 6 ~~~~~~~~~~~~~ U--Wheat -~Barley -A- Maize 2 - -X- Legumes X- X- -F ~ ----- - - - - - - - - - - - - - - - - - - - - - - - - - - 02 0 0S m t U') tD r- co ) o 24 CY a)0CD )) 0 a) 0 ) - Figure 1.4 1.33 Sugar beets and sunflowers are the most significant industrial crops; others include soybeans, rapeseed, castor oil plant, and flax fiber. However, the share of the other industrial crops is small. Sugar beet production averaged 45 million tons per annum in 1986-90, declining to 33.7 million in 1993. Yields are the highest among the FSU countries, 22-26 tons per ha, but are less than 50% of the average in Western European producing countries, and 60% of the average in the United States. The sugar content per ton of sugar beet in Ukraine is only 70 to 80% of that in Western Europe and the United States. Ukraine produced more than twice the sugar it consumed, and was an important source of supply to the Soviet Union. The lower yields and sugar content have more to do with managerial aspects of production than agro-ecological conditions. 1.34 Yields of sunflower are relatively high, 1.7 tons per ha. Ukraine seems to have a comparative advantage in this crop. Sunflower is the main source of domestic production of vegetable oil. In 1986-90 Ukraine produced an average of 2.7 million tons per annum of sunflower seeds, in 1993 the output was 2.1 million tons. This level of production should enable Ukraine to meet all its domestic vegetable oil needs and export. Sunflower meal, a byproduct of oil production, is used as cattle feed. However, it is deficient in an amino acid, methionine, which is in short supply in Ukraine, and must be supplemented. 1.35 Potatoes, the most important food crop after grain, are also used for animal feed and as raw material for industrial products. The average harvest per annum for 1986-90 was 17.9 million tons, and 21 million in 1993. Yields, at 13.7 tons per ha in 1993, are low by international standards. In the United States and France, yields average 32 tons/ha; in Canada, 25 tons/ha; and in Poland, 19 tons/ha. With improved management, yields in Ukraine could be increased significantly. 1.36 Vegetables. Tomatoes, cucumbers, cabbage, carrots, beets, and onions account for most of the vegetable production. Approximately 7.4 million tons of vegetables per annum were harvested 12 Chapter 1 during 1986-90, with an average yield of 15.1 tons per ha. Yields declined in recent years (13 tons/ha), as well as total production (6.1 million in 1993). The absence of sweet maize, beans, and such leafy vegetables as lettuce and spinach is attributable to both cropping conditions and dietary habits. 1.37 Fruit harvests averaged 6.6 million tons per annum during 1986-90, with an average yield of 3.7 tons per ha, in 1993, the total harvest was 2.8 million tons. The main fruits produced in Ukraine are seed fruits (apples and pears), which comprise 58 % of total production; stone fruits (peaches, plums and cherries), 16%; grapes, which are grown mainly in the south, 23%; and berries, 2.5%. Livestock 1.38 Livestock production in Ukraine is exceptionally large. It accounted for 54% of the value of gross agricultural output in the late 1980's, using two thirds of agricultural land and domestically produced grain, employing 70% of the agricultural labor force, and contributing 40% of total agricultural exports, mainly in the form of meat. Beef accounts for 45 % of total meat consumption, followed by pork (35 %), poultry (17 %) and other types of meat, including mutton (3 %). Because of the importance policy makers attached to increasing per capita consumption of livestock products and to reducing chronic inefficiencies of livestock production in the Soviet period, development of the subsector was given high priority in the 1980s. This was reflected in high levels of investment and subsidies. By the end of the 1980s, over 70% of total annual investment and operational subsidies to farms benefitted livestock production, and 80% of the annual price subsidies for food were for livestock commodities. 1.39 Livestock production grew substantially during the 1980s, peaking in 1989. Production of poultry and beef rose 30 %; pork, 25 %; milk, 20 %; and eggs, 14 %. Growth in output resulted mainly from improved productivity per animal rather than from increased livestock populations, which remained stable. This applies in particular to dairying, where the number of cows decreased slightly, while milk production per cow increased by over 30% between 1982 and 1990. 1.40 At its peak inn 1989-90, Table 1.10: Livestock Population in Numbers and Animal Units (1989-1993) Ukraine's livestock (iNions at the Beginning of Year) population was estimated at5.4mlion castited Category 1989 1990 1991 1992 1993 at 25.4 millilon cattle (and 31.5 million animal unit Cattle 25.6 25.2 24.6 23.7 23.0 equivalents). Between Cows 8.6 8.5 8.4 8.3 7.8 equivalents). Between Pigs 19.5 19.9 19.4 17.8 16.2 the beginnmg of 1990 and Sowf 1.1 1.1 1.1 1.0 0.8 the beginning of 1993, Sheep 8.8 8.5 7.9 7.2 6.0 the livestock population, Goats 0.45 0.46 0.52 0.55 0.65 counted in total animal Horses 0.78 0.75 0.74 0.72 0.68 units, declined by 16%. Poultry 254.5 255.0 246.0 243.0 188.0 Livestock populations Toto Animal Unit? 31.5 31.3 30.4 29.2 26.6 declined further during 1993. The overall cattle Rabbits 6.3 6.4 6.7 6.6 6.6 decline between 1989 and Bee Hives 2.8 3.1 3.5 3.8 4.0 1993 accounts for 10% of I/ Sows do not include gilts. b/ Cow or Horse = 1.0 Animal Unit (AU); Cattle other than cows = 0.6 AU; the shrinkage, while Pig = 0.3 AU; Sheep and Goats = 0.1 AU; Poultry = 0.02 AU. during the same period Source: Ministry of Agriculture and Food. Introduction 13 the number of cows fell by 10%, pigs by 17%, sheep by 17%, and poultry by 26% (Table 1.10). Total livestock production fell by 2% in 1990, 10% in 1991, 16% in 1992 and another 10% in 1993. Total meat output dropping by over 33% during 1989-93 and milk output 28% (Table 1.11). Livestock production thus fell roughly twice as fast as livestock numbers, indicating severe declines in animal unit performance. Table 1.11: Production of Principal Livestock Products (1989-1992) Category Unit 1989 1990 1991 1992 1993 Beef & Veal Thousands 2,011 1,985 1,878 1,695 N/A of tons' Pork n 1,595 1,576 1,421 1,137 1,132 Mutton, Lamb & Goat n 44 46 40 36 N/A Poultry 732 708 654 499 N/A Horse 15 12 11 10 N/A Rabbit 34 30 25 24 N/A Total Meat " 4,430 4,358 4,029 3,401 2,935 Milk 24,377 24,508 22,409 19,114 17,600 Eggs millions 17,393 16,287 15,188 13,496 11,066 Raw wool tons 30,101 29,793 26,646 23,080 N/A Honey 56,447 50,858 N/A N/A N/A a/ Expressed in carcass weight and edible offal. Source: Ministry of Agriculture and Food 1.41 Cattle. About 95% of all cattle are of four major breeds, including about 40% Red Steppe (located mainly in the country's lower rainfall zones), 30% Holstein Friesian-type, 20% Sinmmenthal-type, and 8% Brown Swiss-type cattle; the remaining 5 % consist of native dual-purpose and beef landraces, about 100,000 exotic beef breads (such as the Aberdeen Angus, Charollais, Hereford, and Limousine), and no more than about 1,000 pure American/Canadian-type Holstein Friesians. By Western standards, the overall genetic potential of the national cattle herd is low. The Red Steppe breed is a improved, relatively, low-producing landrace, while most of the other three main breeds consist mainly of first, second and third crosses with local breeds. There is thus a substantial potential for improving genetic performance merits. 1.42 Pjiry. The main focus of the cattle industry is on dairying, which is carried out on about 10,800 State and collective farms. These own almost 6.0 million cows distributed among 18,800 sub- farms. Average herd size per dairy farm is thus in the order of 315 cows, with about one-third of all the farms having less than 300 cows, while larger farms may have between 500 and 1,000 and above cows. In addition, there are about 2.3 million cows kept by individual household producers (one to two cows per household) and an increasing number of private farms (which have on average some 12 to 15 cows). Private milk production thus plays a major role, presently representing almost one-third of all milk production, but accounting for only about 12% of beef. Most dairy cattle, particularly on State and collective farms, are raised on zero-grazing or have only limited access to grazing during the 4 to 5 14 Chapter I month grazing period. All cows are milked and surplus progeny over herd growth and replacement requirements is used for beef and veal. 1.43 Beef Production. There are about 5,600 Social Sector enterprises with an installed capacity to fatten over 8.0 million young bulls per year in about 8,000 feedlots. Most of these feedlots can fatten between 500 and 3,000 heads per year. About 900 feedlots have fattening capacities of 5,000 to 10,000 heads per year, and a few up to 15,000 heads per year. In addition about 100 private operation fatten 50 to 200 heads per year. Beef production is mainly a by-product of the dairy herds. Male calves are often moved to feedlot operations within a week or two after birth. Due to lack of feed, bulls as well as cows and heifers are slaughtered at low slaughterweights of only around 350 kg, which they reach during an 18 to 24 months fattening period, instead of the more optimal slaughterweight of 500 kg to 600 kg for the type of breeds available. With more appropriate management and feeding practices, the optimum weights should be reached within 15 months. 1.44 Pig Production. The large White, originally imported from England, is the dominant breed (with about 80% of all pigs), followed by the Ukrainian Steppe breed (about 15%), the remaining (5 %) consisting of local, improved landraces and some Duroc and Hampshire, the latter two breeds being used for commercial crossbreeding. Due to attractive prices for lard, consumer preference for fatter pigs, the prevalence of low protein content feedstuffs, and "outdated" pig populations by Western standards, Ukraine produces much fatter pigs (with lean meat carcass contents of 38% to 45%) than Western countries (52% to 59%). There are about 10,000 State and collective pig farms each fattening some 500 to 3,000 pigs per year, and about 650 interfarm complexes with capacities between 10,000 to 100,000 finished pigs per year. About two-thirds of all pigs on state and collective farms are kept in fully mechanized breeding/fattening farms, including mechanized feeding, and 92% of these farms have mechanized slurry removal and mechanized watering facilities. The remaining 8 % of Social Sector pig farms operate without any significant investment in mechanization. Slurry disposal often causes severe environmental hazards, and the occurrence of disease in the larger units can be difficult to control. Social sector pork production is presently in a deep crisis, but would respond quickly to improved management and input supply. 1.45 Sheep. Sheep breeding has concentrated on crossbreeding native sheep with rams from major foreign breeds, with the primary breeding goals being adaptability to climate and terrain and refinement of wool quality. Meat, milk, and fertility performance received less attention. Merino-type sheep thus dominate, with the Azkania Merino-type breed accounting for about 60% of all sheep, Merino Precoce-type sheep for 35 %, and the remaining 5 % consisting mainly of the local Tsigaia breed and some Karakuls. 1.46 Almost 87% of all sheep are raised on about 5,200 social sector farms with average herd sizes of about 1,200 sheep, the remaining 13 % belonging to individual producers. Sheep are raised under extensive grazing systems, but need substantial amounts of expensive feed during the long winter period. Sheep production thus has little comparative advantage. Few sheep are milked. This is quite surprising, given the long tradition of sheep milk and cheese production in most of the neighboring countries to the West and South. Almost two thirds of all sheep are raised in Ukraine's Steppe zone, over 25% in its Forest-Steppe Zone, and the remaining, about 10%, in its Woodlands zone. 1.47 Goats. With only about 600,000 goats, Ukraine's goat population is relatively small. Virtually all goats are in private hands and their numbers have been increasing by about one-third since 1989. Goats are kept in small numbers on individual household plots, often grazing in and around Introduction 15 villages. They are important contributors to improving family diets. Their expansion should be encouraged, except in ares of lower rainfall where their numbers could contribute to soil erosion. The pros and cons of more goats must be carefully weighted according to local pasture and feeding conditions. 1.48 Poultry. The bulk of poultry production is based on integrated breeding and production programs under the responsibility of UKRPTITSPROM, whereby its breeding farms usually provide eggs and day-old chicks to the large state and collective farms, as well as day-old clicks for the private sector. There are almost 4,000 large social sector breeding and production farms with an installed capacity for about 112 million poultry. Large social sector farms can have up to 1.5 million layers or produce 6 to 10 million broilers per year in 4 to 4.5 batches. Layers, as well as about half of all broilers, are raised in fully mechanized cages on these farms. Producing broilers in cages in wasteful and needs to be corrected by expanding broiler raising on deep litter in the future. 1.49 In the late 1980s, when poultry production became uneconomic, virtually all the state and collective poultry complexes got out of commercial poultry production, leaving this field exclusively to UKRPTITSPROM. As a result, overall poultry production declined by over 30% since 1989, and the share of private sector poultry production increased rapidly since then, contributing in 1992 almost 75 % of chicken and duck meat, 47% of eggs, and all geese. 1.50 Other Livestock Production Systems. Although on an aggregate level not very important, other livestock production systems, such as rabbits, fur animals, and bees are, at least locally, an important source of income and nutrition for a large number of individual producers. Increased production of these livestock species should thus be encouraged and supported by the Government. E. FORESTRY 1.51 Ukraine's forests were extensively damaged during World War II and were reduced from 40% of land area to only 12% after the war. With aggressive replanting, they have recovered to 14% of land area. Forests (the Forest "Fund")4 now cover 10 million ha, of which 85% is considered commercial. About 17% of the timber supply is in the "old" age class; alder and birch form a successional and stable subclimax5, and are being weeded and replaced with commercial species (Figure 1.5). 1.52 Ukraine has been a net importer of wood. The total growing stock of 1.2 billion m3 of forest produces an annual increment of 24.4 million m3/yr, of which 12 million mn3 is logged. Most of the remainder of the 12 million m3/yr cut is not used or processed locally. Between 1985 and 1990, total consumption in Ukraine was 40 million mi3/yr. The balance of wood required was imported from Belarus and Russia, where many Ukrainians went to harvest Siberian spruce, also generating significant remittance incomes. The flow of imported wood has declined drastically, and national consumption fell 4 The Forest Fund, a direct translation from the Ukrainian, is made up of areas covered by forests and areas not covered by forests but which could be used for future forestry production under certain conditions. These latter areas include water reservoirs, bogs, and steep slopes. 5 A stage of forest development which is arrested before it attains the species composition of a climax community. 16 Chapter 1 to 33 million m3 in 1991. Consumption was estimated to be Forest Species Distribution around 24 million m3 in 1993. Adjustments are said to have been made by reduction of waste and Alder/Birch other conservation measures. This 10% reduction is quite remarkable and whether it is due to conservation measures alone could not be verified. Pine/Fir 1.53 Export of wood is 48% mainly in the form of barter. In spite of the about 40,000 mn3 exported to Austria and to Beech/Oak Germany each year, 60% of the 42% finished product is used internally. 30% goes to other FSU countries, and 10% to foreign export. Fige 1.5 1.54 Forests are state owned, with 72% managed by the state forestry departments at the oblast level, 24% by state and collective farms, and 4% by the military and institutes of teaching and research. Operations are conducted by state forest enterprises. An autonomous Ministry of Forestry has been separated from the Ministry of Agriculture and Food. Historically, there was no control over the amount of timber cut. The incentive was to cut as much as possible as quickly as possible. Small state enterprises, responsible for most of the harvesting, transport and even processing, developed and also cut as much as possible. The need to control this unsustainable "mining" of the forests led to the establishment of the single ministry. 1.55 The new land code permits private ownership (cooperative and individual) of forest plots of up to 5 ha, in the context of a new government policy emphasizing the environmental values of the forest. The 1992 Forest Law addresses the issues of ownership, use by foreigners, and the conduct and setting of forest exploitation. F. CONSUMPTION OF FOOD AND AGRICULTURAL PRODUCTS 1.56 Ukraine's broad agricultural potential is reflected in the more varied consumption pattern of the population (see Figure 1.6). In comparison with Russians, Ukrainians consume less meat, milk and eggs, and more vegetables, melons and potatoes. Nevertheless, Ukrainians tend to eat more livestock products than their counterparts in countries with similar levels of per capita income. This is a reflection of heavy subsidization of both production and consumption of meat. 1.57 Increasing prices and falling real wages have mainly affected the level and composition of food consumption. Ukrainians have, in general, kept their levels of food consumption up by spending a larger share of their budgets on food. The share of foodstuffs in family budgets has risen from an average of 35% in the five years before 1992 to about 55% in 1993. Consumption patterns have also Introduction 17 shifted, with Ukrainians eating more carbohydrates (bread and potatoes), less protein (meat, fish, eggs and dairy products) and somewhat less fruit (but more vegetables). Consumption of Bamic Foodstuffs 400.0 300) - 20).0 0 100.0 - Meat Dairy E ggs Bread Potatoes Vege- Sugar PRod. tables U lUkraine1987-91 Avg PR Ukrdne1993 03 Linted States1992 Figure 1.6 1.58 Per capita consumption of bread has increased by about 8 %. Lower quality breads are highly subsidized and their prices have remained controlled. In contrast, beef consumption has fallen 10%, poultry and pig meat consumption 20%, and fish and fish products 30-40%. In the case of dairy products, consumers have substituted lower-priced low fat grades of milk, cheese, and butter. Sugar consumption has remained stable. 1.59 It appears, that, on average, nutritional levels in Ukraine have not suffered. Per capita caloric consu-mption remains high. With Ukrainians consuming over 50 kg per capita per year of meat and meat products, over 300 kg per capita per year of milk and milk products, and over 200 eggs per capita per year, protein deficiency is not an issue. Nevertheless, there may be groups in the society whose incomes have dropped to the point where their nutritional status is in jeopardy, and there will be others in the future. The Goverrnment has an obligation to protect these groups, but food subsidies, especially those attached to products like meat, for which demand is income elastic (richer people eating more), are highly inefficient. Food stamnp programs, income transfers, and subsidies linked to products with low income elasticity (like coarser-grain, but more nutritious, breads), are all preferable to untargeted subsidies of the kind in use in Ukraine. 18 Chapter 1 CHAPTER 2 A STRATEGY FOR DEVELOPING THE FOOD SECTOR 2.1 A range of policy options are available to Ukraine for directing the future course of agricultural development. In discussing future strategies for agriculture, we assume that the Government of Ukraine is committed to transforming the overall economy of the country, including its food and agriculture sectors, to a market-based system. The changes that have already been implemented seem to be consistent with such a commitment. There have been substantial changes in pricing policy and in the macroeconomic environment; land reform processes are under way, and collective and state-owned farm enterprises have begun restructuring. The program of enterprise privatization has been approved and preparations are being made to begin privatization of food processing and marketing, as well as input supply for agriculture.' 2.2 The fundamental conclusion of this report, however, is that the present agricultural marketing system and farming structure, even with reforms already completed, is not fully consistent with the Government's goals for the market orientation of the economy and requires further adjustment. Leaving the agricultural system basically unchanged would create less difficulty both socially and politically in the near term, but it would have a large negative impact on the macro-economy, and the growing subsidy burden would fuel further inflation. In the longer term, the legal and institutional framework, as well as the respective roles of the public and private sector would remain blurred, efficiency in agriculture would continue to be low and the sector would not play the positive role in the development of the country it could, given the strong resource endowment. The challenge is to select the most appropriate path from the wide range of policy options available for Ukraine's future agricultural development. This chapter discusses the related strategic issues and priorities as well as the social aspects of the required reforms. A. OVERALL FRAMEWORK FOR REFORM 2.3 Ukraine is faced with a number of problems that make the required adjustment in the food and agriculture sector difficult. These include: * overall macro-economic imbalance, especially high inflation; * declining agricultural production, especially in the livestock industry; * deteriorating financial situations of farm enterprises due to declining terms of trade for agriculture, and especially for livestock products; * declining domestic demand for food due to decrease of personal income; * difficulties with traditional trading partners, especially Russia and other countries of the FSU; and A detailed account of these reforms is given in Chapters 3, 4, and 5. 20 Chapter 2 * continued existence of monopolized structures in food processing and marketing and in input supply for agriculture. 2.4 Successful implementation of adjustment requires a comprehensive and consistent program of actions. At this time,the Government does not have a detailed agricultural strategy; reforms that have been implemented do not constitute a consistent package; and the measures that have been taken are not always consistent with one another. Therefore a comprehensive overall reform strategy should be developed and agreed upon within the Government as soon as possible. The main directions of this reform program should be based on a consensus among all the major actors, including the Government, farm enterprises, the processing industry, and the general public. 2.5 Box 2.1 suggests some major elements of a comprehensive agricultural reform program for sectoral transition, reflecting international experience. The process of arriving at such a comprehensive reform strategy needs to be credible, and participatory, to be politically acceptable and sustainable. The strategy must be consistent and coordinated with the overall program of stabilization and privatization. A~ Reform Agenda::i An age for ro in food and agriculture should ide...... th. .......fo.lwinset.fa Su z macroeco omic sbilzaion, liberalzo of markets and d trl of ries fing ofextern al tae, anhaigout cnsu mer and p SoUce susdis bY-:g0:-:f-:Fprotecton of living:standards of vulnerable groups in sce om the effe f ring food 0 00 -;: 0000 i 0prices,i; -:- :: - :i0-- --0 :--; -0. . landrefrm tat encesthe develo pent ofviable fabrmmanageme b establishing the institutional basis ifor:division anidprivatizaiio orge r n or the acuio a use: :of state land s...; . dentonopotization, privatizaon, and promoton ontryito pro posn inort and mrketig ofagrcutua inputsanda output; ; t ; t0e) :pstabis hen of a ef of a is ation% extensio,information seWrvice, ...... -;;- n :ad reguaiOn cOmsiwtent with a Market econpo;Qt ...... buildi....ng: a, syst em ~of t :physial: infrastructure.C1 onstetwh the . need of amre-oine prodution,procesing,and ditribtio' ytm llli;; i; trationalization and restructuring of government institutions in a manner consistent with their ne :vrolesc. d Box 2.1 A Strategy for Developing the Food Sector 21 2.6 There is substantial potential for creating an efficient agriculture system in Ukraine. The domestic resource endowment and agrarian traditions favor the crop sector, though livestock production also offers significant opportunities. Stabilization of grain production and better use of outstanding crop production potential are the essential first steps in rehabilitation of the sector. Adjustment of the livestock sector, however, is the critical element of recovery, since it is suffering from declining domestic demand and stagnant export demand. Contraction, structural change, and improvements in stock quality should be the major goals of this subsector, and improved management of the feed base is a major precondition of success. 2.7 In the near term, crop products that can be marketed on Western markets with little processing (grain, oilseeds) or that substitute for hard currency imports (grains), offer the greatest economic advantage for the country. Changes in prices at the farm level should be allowed to reflect this advantage so that producers can respond. The FSU republics, mainly Russia, will remain the major market for grain and livestock products. Export of livestock products to the West will be limited by the low level of efficiency and by the condition of the current capital stock in food procurement and processing. The physical design of the Ukraine meat processing industry precludes export of most products to markets in Western Europe and North America. In the near term, the Central and East European countries might offer opportunities for the export of limited quantities. Prices of livestock products should reflect the higher prices of feed, however these should not exceed by much the prices in Russia or other FSU Republics where the products are sold. A supportive environment needs to be created for quality enhancing investments both in the livestock and related food processing industry. Securing markets inside and outside the FSU must be an important objective in trade negotiations. B. IMPLEMENTATION OF REFORMS 2.8 In the emerging market system the Government cannot, and should not, directly engineer the recovery and growth of the kind needed in Ukraine agriculture, even if it were to have at its disposal more ample resources than are currently available. The Government should only provide an enabling environment and permit enterprise-level decision makers in the agriculture and food economy to generate growth themselves. Therefore, the key elements of a transition program in Ukraine agriculture are: (a) macroeconomic stabilization; (b) creation of an incentive framework for farms that provides proper motivation and the right to retain sizable farm profits; (c) continuation and completion of land reform; (d) reform in agroprocessing input supply, production services, and input marketing that creates reliable input supply and competitive markets for farm products; (e) further regulatory reforms establishing the framework for a working market in food and agriculture. 2.9 Political and economic conditions in Ukraine do not appear suitable for a rapid of "big bang" approach to transformation of agriculture. The Government has been following a very cautious approach to change and reform, that has brought some positive results. Food supply for the population has been secured, the decline in agricultural production has not been as dramatic as in some other countries of the FSU, and the disruption of agricultural production systems has been kept under control. However, there is a tradeoff between the speed of reform and sectoral stability; delaying reform in order to avoid major sectoral disruption will be very costly to the economy in the long run. In general, while accepting the appropriateness of the Ukraine strategy of gradual transformation of agriculture, it is important to realize that speedy development of an agreed overall reform agenda with proper sequencing of reform actions is essential for efficient implementation of the adjustment process. Moreover, the 22 Chapter 2 minimum conditions for a working market should be established as quickly as possible, including land legislation, demonopolization, and the privatization of processing and marketing industries. Completion of this transition however, will remain a task for the medium term. 2.10 It is possible to envision a number of alternative paths to implementing a comprehensive program of further reforms. The proposed reform measures are categorized in the report according to short and medium terms without providing ready-made prescriptions for their implementation. The report intentionally lacks precision on the "how and when" of the recommended reform strategy. Details of implementation have to be elaborated by those who are fully aware of the complexity of agricultural problems in Ukraine, and who will bear the political responsibility for both the success and failures of reform efforts. Near-term Priorities 2.11 The most immediate priorities, both in terms of their macroeconomic implications and their impact on incentives and resource allocation, would be: continuing the transition from command economy to a market-based system by further relaxation of price controls, state orders for food procurement, and restrictions on external trade; * providing at least the minimum legal, institutional, and physical conditions for a working market in agriculture, and competition in the processing and marketing of agricultural products and in the supply of inputs and services by demonopolization and privatization; * re-establishing trade linkages with the rest of the FSU on the basis of market conforming trade and payment practices; * continuation of land reform and supporting emerging private farming, creating tradable tenure rights and a functioning land market; * creating a framework and agenda for enterprise reform and privatization; and * providing a safety net for vulnerable groups. Medium-term Priorities 2.12 The immediate priorities listed above must be reinforced by medium-term actions suggested by the following objectives: * completing enterprise reform in agriculture and food production, processing, and marketing, including privatization; * improving the efficiency of production, processing, and distribution of food and agricultural products; and A Strategy for Developing the Food Sector 23 * increasing the competitiveness of Ukraine agricultural products in international markets. 2.13 Successful transition requires not only policy actions, but it must also be supported by investments in physical capital, measures to increase the efficiency of production, and the building of institutions for market-based agriculture. The pace of investment will be limited by fiscal constraints, but priorities can be established relatively soon, and potential sources of funding, both foreign and/or domestic, as well as potential foreign investment areas, can be identified. Livestock and crop production have to adjust to new conditions, especially in the form of improvements in production efficiency, if a competitive economic environment is to be created. Institution-building requires appropriate legislation, followed by revision of existing organizational structures, staffing, and training, and this process can be started quickly by working with existing institutions where possible. C. SECURING FOOD SUPPLY AND PROTECTING THE POOR DURING THE TRANSITION 2.14 With the collapse of export trade in agriculture and declining domestic demand, shortages of domestic food supplies are unlikely, unless there is a further collapse of production and distribution systems. In order to avoid such an eventuality, the flow of essential inputs and credits for farm production has to be re-established. This may require additional imports of veterinary pharmaceuticals, fertilizers, pesticides, herbicides, and high protein feeds. Foreign assistance may thus be required. The food distribution and marketing system needs to be strengthened to ensure food is available in the main centers of demand. Food availability and prices should be monitored to spot possible areas of shortage so that prompt remedial action can be taken. 2.15 The real incomes of many people have declined, and privatization and restructuring of industry and agriculture will lead to increased unemployment. Many urban people will need either income supplements or food stamps to ensure that they can maintain an adequate diet. These programs should be developed and instituted as a matter of highest priority. 2.16 The phasing out of consumer and producer subsidies should be accompanied by improved targeting of income and consumption support programs. Measures are needed to protect the most vulnerable groups from serious hardship, especially to ensure minimum consumption levels for the poorest, as prices adjust in the coming years. Because fiscal constraints are tight, politically difficult trade-offs and compromises seem to be inevitable. In the very difficult period of transition the Government should, as a high priority, try to fully compensate the poorest groups for the negative income impacts of food price changes. In realizing this objective, the setting of a poverty line is a crucial issue. 2.17 There are five major options to ensure adequate food supply and protect the poor: * continuing the subsidization of prices of a few basic commodities; * providing quantity-denominated food coupons to selected poor households; * providing direct, in-kind assistance to poor households; * organizing work for food programs for unemployed; and * providing cash compensation to the poor. 24 Chapter 2 2.18 All the above methods have advantages and disadvantages. Price subsidies are the least compatible with a market economy. Using the cash benefit system seems to be the most desirable solution. Coupon or food stamp systems and work for food programs may also be workable, especially under the conditions of high inflation. Cash benefits are less effective than quantity-denominated coupons in providing social protection when prices are rising rapidly. D. SOCIAL POLICIES IN SUPPORT OF THE RURAL TRANSITION 2.19 Decollectivization, privatization, the sharp decline in industrial production, and changes in the structure of agricultural production have produced profound changes in Ukrainian village communities. The transformation processes affect households, villages, and regions in varied ways. Significant effects already have been experienced with respect to the level and structure of rural incomes. Some families have experienced sharp increases in their farming incomes as a result of receiving land from the former collective farms. However, many rural households have suffered a decline in cash income as a result of increased payments in kind to cope with inflation. 2.20 There will be a significant demographic transformation. The decline of the village population will be halted temporarily and possibly reversed, and the proportions of young people and men are likely to adjust upward toward more normal demographic patterns. The average size of rural households will tend to increase as fewer household members find employment in the cities. As a result of these changes, social tensions within villages and households may increase, particularly as long as employment prospects remain bleak. Many of the potential difficulties associated with changing rural demography could be mitigated by the development of appropriate policies to provide remunerative employment to an increasingly diverse rural occupational structure. 2.21 Privatization and the transition to a market economy will affect the existing rural social safety net and the provision of social services in the rural communities. Traditionally, the bulk of rural social services are provided by the collective and state farms, and the large scale farms provide substantial additional benefits to their members and pensioners. In principle the transfer of their services to the local municipalities should provide the solution. In Ukraine, however, the reforms to create a new municipal structure capable of running and financing the new services are at a rather early stage. There is neither the rural institutional framework nor a financial structure to replace the collective and state farms' social services. It is not surprising that the fear of losing vital social services has an impact on farmers' decisions to stay with the collective farming system to a great extent, and strengthen the argument of those who advocate against the dismantling of large scale farming system. 2.22 The three most critical needs in the village communities are: (a) developing an enabling environment to stimulate increased off-farm employment in the villages; (b) safeguarding an acceptable level of rural social services during the period of restructuring and privatizing large scale farms; and (c) enhancing local ability to respond to social and demographic change by providing communities with greater financial control. Except for appropriate steps to ensure acceptable standards of health, nutrition, and sanitation and to improve the general quality of life in rural areas, attempts at direct state intervention do not seem desirable because of lingering local suspicion of government motives and the lack of cost-effective policy instruments. A coherent and integrated strategy should be developed to facilitate rural community development through devolving responsibility for these activities to the local communities themselves. One of the most effective ways to address this requirement is to provide A Strategy for Developing the Food Sector 25 communities with greater control over their own budgets and, hence, their future. Rural Labor and Employment 2.23 The employment consequences of the restructuring in industry will force the agricultural sector to assume the role of employment buffer, with widespread and increasing under-employment. The increase in the supply of rural labor displays large regional variation, with peri-urban areas being most affected. As this phenomenon is likely to persist, it is important that this growing supply of labor be given due weight in strategies for developing agriculture and that these strategies be coordinated with overall development strategies for the country. More specifically, the past emphasis on large-scale mechanization and labor-displacing technologies, with a view to release agricultural labor to meet the demand for labor in other sectors of the economy, needs to be reconsidered. The relative abundance of cheap labor and limited employment prospects in the non-agricultural sectors suggests that a shift in emphasis toward more labor-intensive product mixes and modes of production may be called for. 2.24 As a result of past policies, the rural economic base is oriented singularly toward agriculture. There is a virtual absence of non-agricultural economic activities. This implies that the entire burden of rural employment creation falls on agriculture, making agriculture excessively dependent on distant markets and sources of inputs, reducing local linkages and multiplier effects, and providing a strong incentive for the young and educated to migrate to urban areas. Solutions to the problems of rural unemployment and under-employment in agriculture, as well as the problems of seasonal variations in the need for labor in agriculture, must, to a large extent, be found in a general expansion and diversification of the rural economic base through development of non-farming economic activities. In the short and medium term, special emphasis should be placed on promoting the entry and growth of private enterprises serving agriculture and providing rural services, both upstream and downstream. 2.25 Employment and income problems in rural areas are exacerbated by industrial decline, and require special measures in terms of employment-creation policies. Short-term public works programs, organized by local government or contracted for with local non-governmental organizations (NGOs), might usefully be considered to counteract emerging unemployment problems in rural areas. Suitable activities for public works programs would include reforestation and construction of physical infrastructure. Public works programs need to be supplemented by efforts to create sustainable employment through promotion of intensification of agriculture, such as horticulture and vegetables in peri-urban areas, and high-quality livestock products elsewhere. 2.26 The young rural households deserve special attention with respect to education and training. Future policy measures in support of the agricultural transition should take into account the particular needs of women in agriculture. Agricultural research, extension, and education should be formulated with recognition of these needs. During the transition period, efforts to improve the position of women in the restructured collective farms should focus on their role as critical economic agents. Better access by farm women to key inputs--education, information, land, credit -- could have a positive impact on productive capacity and incomes in the sector. 2.27 The current restructuring of agriculture and the severe mismatches of labor, land and capital underscore the need for efficient factor markets. At present, the inefficient factor markets retard restructuring and are an important contributor to the present tendency towards subsistence farming. Strengthened factor markets would improve the allocation of labor and remove obstacles to access to land 26 Chapter 2 and capital, thereby providing the basis for efficiency gains in agricultural production. The Rural Social Safety Net - Rural Social Services 2.28 With some important exceptions, rural incomes have improved relative to urban incomes over the past few years. Thus, policies aimed at poverty alleviation and income enhancement should focus on the revitalization of the rural economy in general and of the agricultural sector in particular, while safeguarding the interests of particularly vulnerable groups. The rural social safety net should seek to avoid a domestic deterioration of rural social services and on a longer term to improve the quality of village life and be complementary to the economic reform program. 2.29 Housing. A housing problem in rural areas is to be anticipated, resulting from the return migration of industrial workers and the increasing stability of rural populations in general. Local governments should be enabled to offer house plots at market prices to citizens seeking a return to their village communities. Purchase prices might be paid over long terms or by the provision of community services. Housing loans should be made available, with the housing to serve as collateral. 2.30 Education. Rural schools have long been disadvantaged compared to their urban counterparts due to less generous funding and by a weaker curriculum that offered in urban schools. Schools have suffered because of fiscal difficulties and a loosening of administrative controls over the schools and their teaching staffs. In order to improve the overall educational circumstances of the rural communities, rural and urban curricula should be standardized to remove the cultural bias against agriculture in the national educational system and to encourage urban pupils to view agriculture as a potentially remunerative pursuit. Specifically, housing and salary incentives might be offered to teachers to remain in or relocate to rural areas. Successful pupils at the general school level should be identified and allowed to compete for stipends and other kinds of assistance to attend agricultural and silvicultural high schools. 2.31 Country-wide training programs in the fundamentals of business administration, financial analysis, marketing, and modem commercial farming methods are needed to remedy the shortages of critical skills in these areas. Such programs would need to be pursued at two levels: a more advanced and comprehensive level for the specialized agricultural work force, and a second tier of training programs at a more rudimentary level targeted at the agricultural labor force at large. Evening schools should be promoted in rural areas to assist in implementing training programs for this target group. 2.32 Rural Nutrition. Health and Sanitation. At present, with the exception of isolated individuals and groups, rural nutrition is generally good. However, there is the risk that households most negatively affected by the change to the market economy (i.e., single, aged individuals, the landless, and/or those previously heavily dependent on wage labor) could become financially unable to provide a sufficient diet for their members. There have been long traditions of giving food to relatives and neighbors in need in the villages and towns. These traditions need to be encouraged and perhaps institutionalized to ensure adequate nutrition across the entire rural population through, for example, interventions by local churches and establishment of community food banks. The transition has also placed the delivery of rural health care services under some pressure. Nevertheless, basic medical care seems widely available. A Strategy for Developing the Food Sector 27 E. POLICY AGENDA FOR A COMPREHENSIVE REFORM IN UKRAINE FOOD AND AGRICULTURE 2.33 The details of a desired strategy for the transition in the food and agriculture Ukraine are discussed in the main body of this report. However the core recommendations for the government are summarized in the following matrix which provides an overview of the proposed short and medium term actions and ultimate policy objectives. Recommended Measures Area/Issues Ultimate Goal Short-Term Medium-Term 1. Establish a market control system in agriculture a) Dismantle command Reduce the role of state orders. Drop all remaining domestic Free markets, with minimum economy marketing controls. control to avoid food De-link input supply, subsidies, shortages. and state orders. Introduce market regulations necessary for health, safety, and to ensure competition. Eliminate state order system. b) Improve intemal price Adjust relative procurement Systematize policies on formation prices to border prices. agricultural prices and subsidies based on the principles of free Discontinue price indexing and markets and minimum give up cost based pricing. subsidies. Limitproducer and consumer price controls to basic commodities. Remove restrictions on markup margins. c) Reduce subsidies Reduce price subsidies to a Dismantle fully input subsidies. narrow group of commodities. Dismantle budget transfers to producers. Reduce input subsidies. d) Liberalize domestic and Remove existing restrictions of Establish ad valorem uniform intemational trade trade. tariffand tax regulation. Eliminate quotas and licensing Create insurance schemes in foreign trade, utilizing tariffs which provide security against instead. breach of contracts. Reduce punitive taxation on commodity exchange to manageable level. Break up state monopoly enterprises dealing with trade. Develop legal framework to improve transaction's binding. e) Create a social safety net Reduce consumer price Replace price subsidies with tO protect low income subsidies to bread, dairy, and targeted income subsidies. groups vegetable oil. 28 Chapter 2 Recommended Measures Area/Issues lUltimate Goal l Area/Issues Short-Term Medium-Term 2. Create market facilities and Promote development of a Support completion of a Westem-European type services private system for supply of commercial network of private agricultural marketing and basic inputs and machinery input and output markets and supply system. services. provide infrastructure. Stimulate and assist emergence Strengthen farmers' markets of wholesale marketing. and private and co-op agricultural wholesaling Create the minimum physical organizations by providing facilities for farmers' markets. credit and TA. Dismantle state procurement Improve supply of inputs and agencies except for the machinery by trade liberalization purchase of goods for the Basic and use of foreign aid. Food Basket. Develop market information systems forprivate farming and restructured enterprises. Set up an anti-monopoly organization. 3. Establish unrestricted private Implement new land ownership Develop land cadastral system Mainly private ownership of land ownership and privatize system (private agricultural land; and complete land registration. agricultural land with no other assets in agriculture. municipal ownership of village restrictions on lease or sale. land; state control over forests Distribute final land titles. and reserve land). Allow limited foreign ownership Establish a consistent land of land. valuation system and conditions for land registry. Complete privatization of non- land productive assets. Develop land market and issue required regulations. Establish a municipal political and service system separated Continue privatization of non- from the production enterprise. land productive assets. Develop equitable local tax Transfer all social services and system. assets to local municipal authorities, or user cooperatives. Privatize all rural housing. Provide financing of social services with money collected as taxes. A Strategy for Developing the Food Sector 29 Recommended Measures Area/Issues Ultimate Goal l_____________________ J Short-Term Medium-Term 4. Continue reorganization and Accelerate restructuring of large Promote establishment of Afarming system based mainly restructuring of the large scale scale farms based on the Western-type service and on private ownership of land farming system. principles of increasing marketing cooperatives. and other productive system, individual motivation and with a multiplicity of transparent private ownership. Ensure the existence of a organizational forms. competitive market-based Establish nondiscriminatory system for input supply and Cooperatives play a major role conditions forreorganization of product marketing. in upstream and downstream l state-owned farms. marketing and processing. Provide job opportunities for the Promote creation of new surplus labor in agriculture. Efficient markets for farm individual private farms by supply and products as well as providing training, service, and for land. support facilities. Establish voluntary frameworks for cooperation among producers in the reorganized farming sector. Ensure effective management of the newly created entities based on transparent private ownership and avoid "workers management' schemes. Encourage the splitting of large farms into suitably sized management units and into independent services, marketing and processing units. 5. Create conditions for viable Adjust principles for establishing Establish competitive land Individual private farming private farming. private farms. mortgage and credit system. becoming a major component of the agricultural sector. Guarantee fair conditions for Promote the emergence of new those who wish to start private farms by training and individual farming. providing service and support facilities. Help to organize local and regional farmers cooperatives. 6. Privatize and reconstruct Break up "concerns" into state- Transfer assets to private Efficient privately owned firms agro-processing industries. owned companies, at oblast or ownership according to the in each industry which should rayon level. overall privatization strategy in be of economically optimal industry. size. Begin privatization of agroprocessing , distribution, Adopt and enforce new quality Agro-industries, which by and input supply. standards throughout the quality and acceptance of Ukraine. products, are able to compete Use technical assistance to in worldwide markets. develop new Ukrainian Food Quality/Safety Standards. 30 Chapter 2 Recommended Measures Area/Issues Ultimate Goal Short-Term Medium-Term 7. Establish a working financial Use fiscal means rather than Develop appropriate legal Efficient allocation of credit to system for agriculture. financial institutions to finance infrastructure for contacts and profitable activities undertaken loss-making enterprises that are their enforcement (e.g., by clients willing to repay deemed worthy of support. mortgages and open and loans. competitive land markets). Develop an indexed government Viable financial institutions debt instrument to be held by Create incentives and serving the agricultural sector the Savings Bank to protect the responsibilities within financial efficiently. real value of deposits. institutions for loan recovery. Explain the importance of Bring the fiscal deficit and flexible and higher interest rate monetary expansion under and ensuring that the loan control. values are maintained in real terms. Implement generally accepted accounting principles. Introduce interest rate policies and measures to enhance loan Implement external audits, recovery. publication of relevant information and adequate Raise capital requirements for prudential regulation and commercial banks. supervision by appropriate government agencies. 8. Define new role for Reduce government direct Reorganize and substantially Minimal government role in government in agriculture, intervention in agriculture. reduce the size of local and agriculture with primary work regional agricultural being policy development, Reorganize government administration. trade promotion, research, organizations dealing with the environmental control, and sector. Elaborate a new agricultural provision of market information. policy framework, including Begin with the reorganization of active trade policy to ensure the regional agriculture market for agricultural products. administration. Develop a nationwide system to Play an active role in developing disseminate research findings market structure and in and technological privatization. developments. Upgrade and adjust research and education system in agriculture. CHAPTER 3 DEVELOPMENT OF A MARKET FRAMEWORK 3.1 In the first years of Ukrainian independence, the introduction of economic reforms and adoption of market policies has been hampered by external shocks and internal lack of consensus on key stabilization measures. Increasing rates of inflation (reaching over 50% per month), fueled by widening budget deficits and large jumps in energy import costs, have hampered the move away from command-economy style policies. Liberalization of the agricultural and food sector has been cautious, since markets are not deemed capable of providing food security to the population. Compared to most other FSU republics, administrative state intervention in agriculture in Ukraine is more pervasive and the role of markets smaller. 3.2 Although consumer food subsidies have been reduced substantially and agricultural supply has been allowed to adjust to the drastic demand shifts brought about by plummeting national income and the break-up of the FSU, the Government has retarded the development of markets by retaining (or periodically re-imposing) a large role for state purchases, imposing widespread regulation of price formation in domestic trade, and restricting access to international markets for inputs and sales. The combination of high inflation and excessive restrictions has hurt agriculture severely. The widening of price and market liberalization and eventual establishment of market relations in agriculture is key to the well being of the agricultural sector and the large rural population of Ukraine. Only the further development of the market can provide incentives to producers to profitably restructure agriculture's specific subsectors and raise income. This chapter discusses the obstacles to market development in agriculture and offers proposals for further action in encouraging market institutions. A. MACROECONOMIC AND INCENTIVE FRAMEWORK Overall Features of Current Policies 3.3 Agricultural and food pricing policy in Ukraine was characterized by centralized price determination. Producer and consumer prices were set without reference to international prices. Producer prices of individual commodities were generally established without reference to each other (e.g., animal feed was not priced with reference to livestock prices), since producers responded to centrally-determined production targets (state orders) and not market signals. Furthermore, consumer prices did not necessarily cover producer prices plus processing and marketing. The result was that the maintenance of the price structure involved a costly system of implicit and explicit subsidies. This system of agricultural subsides was quite complex, but in general, three sets of subsidies were involved: producer output subsidies aimed at spurring livestock production; input subsidies to producers, often in the form of artificially low prices for energy, agricultural chemicals, and feedstuffs, inputs and credit; and consumer price subsidies in cases where consumer prices did not cover producer prices plus normative profit margins. 3.4 As a result, Ukrainian agricultural production was strongly biased in favor of livestock production. For example, in the late 1980's, the ruble prices of grains and vegetables were generally 32 Chapter 3 20-30% below international prices, while those for milk Consumer Subsidy Equivalent in the FSU and meat products were 30- 40%higher' (Figure 3.1). SunfloweE In effect, the pricing Su a regime subsidized livestock Rice production, while taxing grains. In addition to receiving procurement prices that were high relative to world prices, Pork livestock producers had to Beef .;___.__________________--__;_ be subsidized to cover the hih arinl oss f-100 -50 0 50 100 t50 200 high marginal costs of Percent ever-increasing output _ targets, which were Figure 3.1 necessary to meet the excess demand generated by subsidized consumer meat and milk product prices. 3.5 Ukrainian agriculture still exhibits the major hallmarks of the Soviet system. A large bureaucratic administrative structure still functions above the farm levels to provide central guidance for farming decisions, allocate inputs and distribute of output. However, the disintegration of the former Soviet Union, and with it of traditional mechanisms for inter-republic exchange of agricultural inputs and products, and high rates of domestic inflation, have undermined the command system of pricing and marketing, so that it is no longer working effectively. At the same time, a market-oriented system of pricing and distribution has not yet emerged. What exists is neither an effective planned system nor a market system. This is the worst of all possible outcomes, resulting in high levels of inefficiency and losses at all levels from supply of inputs to farmers, through production, marketing, processing, to distribution of products for purchase by consumers. 3.6 Although the seeds of the present crisis lay in the inefficiencies of the planned/command economic system of the Soviet Union, its proximate cause was the collapse of the Soviet Union, the rupture of interregional trading relationships and the beginnings of movement of prices and exchange rates toward international levels. The already difficult situation was exacerbated by an inappropriate policy response. Instead of facilitating enterprise adjustment to the decline in demand for their products and higher production costs, the Government of Ukraine attempted to use administrative interventions involving physical planning and controls to maintain existing production patterns. State enterprise operations were sustained through fiscal and credit subsidies, further fueling domestic inflation. The country has been slow to liberalize its economy and allow a greater role for markets and a private sector that can respond more quickly and efficiently to changing conditions. Price and margin controls remain, the state order system has been retained, exports and foreign exchange markets are controlled, a large share of bank credit is directed by the Government, and the business environment for the emerging private sector is characterized by changing rules and discretionaiy interventions. The result has been I According to the USDA. Development of a Market Framework 33 declining output, accelerating inflation, and deteriorating living standards. 3.7 Real GDP contracted by 18% in 1993, bringing the cumulative decline since 1990 to 40%. The collapse of output accelerated in the first months of 1994, with industrial output estimated to have declined by 40% in the first quarter. The annual inflation rate increased to 5000% in 1993. The value of the karbivanets declined from krb 749 per US $ at the end of 1992 to krb 40,000 per US $ at the beginning of 1994. Living standards of most of the population have fallen steeply, as real wages are estimated to have declined 50% between December 1993 and December 1994. The crisis that has beset the Ukrainian economy has also taken its toll on agriculture. 3.8 In recent years explicit producer and consumer subsidies have been reduced, and a degree of liberalization of domestic agricultural producer prices has been introduced through the reduction of state purchases. Private trading was legalized, albeit with heavy taxation of private middlemen that limits their role. In January 1992, prices applying to transactions between enterprises were decontrolled. However, trade and price formation remained heavily influenced by government intervention since the state is still a large buyer of agricultural products and can repress prices below border price levels. Marketing through the network of state owned enterprises was put on a contractual basis between farms and the buyers, but state trading agencies continued to exert substantial pressure on farms to sell at prices indicated by the Government. The state's influence over agricultural marketing stems from close control of the input supply network by ministry-level government agencies and their dependent enterprises. Sales of inputs are linked; the state ties the sale of inputs to delivery of agricultural output at state-set prices. While marketing through private channels by farms is not legally limited, it is restricted by the threat of inputs being withheld. In addition, produce sold through private channels does not qualify for output subsidies. 3.9 Apart from a relatively modest change in the formal system as described above, the malfunctioning of the state controlled marketing system became more apparent in 1993-1994 than in any early time. In practice the state procurement system has lost its strength. There are growing numbers of commercial traders, including new private firms, commercialized former state enterprises, joint ventures, and foreign traders. Farms increasingly contract with these companies and use the state system less and less. One estimate by a government source was that 25 % of farms no longer work with state suppliers at all. Explosive inflation has led to a demonetization of agriculture and has inhibited the functioning of agricultural markets. Producers are storing an increasing proportion of output on farm. Output is often processed on a share basis, i.e.processors receive a proportion of the output rather than a cash payment, and the balance is returned to the farm. Farms use this output to barter for inputs, or sell on uncontrolled markets. Producers also barter for other domestic or imported goods, and even pay their workers partly in kind.2 3.10 Unfortunately, the most recent reaction of the Government of Ukraine to this situation, in June 1994, is to try to maintain state purchasing with a new wave of subsidized credits and input supply linked to state contracts rather than opting for genuine market liberalization demanded more and more by the farming sector. The Government's rationale behind not allowing greater market liberalization is that as economy-wide deregulation has led to rapid increases in agricultural input prices, the state does 2 In 1993/94, according to the Ministry of Agriculture and Food estimates, personal renumeration has been paid up to 60-70% in kind at collective and state farms. 7.5 million tons of grain, 1.7 million tons of hay, 122,000 tons of sugar, 118,000 tons of sunflowers, 20,000 tons of sunflower oil, and 40,000 tons of meat among other items, were given in kind. 34 Chapter 3 not want to allow a truly free market to develop since it claims to be responsible for protecting consumers from such price rises, especially for foodstuffs. Instead, it has continued to try to work with "state contracts" and further props up the old system through subsidization of producers and price formation restrictions to limit retail price increases. However, the issue of subsidies financed by monetizing ever-increasing budget deficits will accelerate inflation and further erode wages. This leaves consumers less able to cope with structural change in the economy and perpetuates a slow transition to higher levels of output and income. Farm Prices 3.11 Given the rapid rise of prices of energy and industrial inputs to agriculture, the lack of competitive markets for agricultural raw commodities, and the drop in demand for foodstuffs resulting from falling domestic income, farms found themselves in a financial squeeze after the price deregulation instituted in early 1992. Agriculture's terms of trade deteriorated significantly as its subsidies were withdrawn: part of this erosion could be overcome if domestic commodity prices were to rise to border price levels, but this is not allowed.3 Private marketing infrastructure has not been created: Government did not want to lose state control over either the flow of most agricultural output and or the level of prices ultimately charged consumers. However, in order to keep the large socialist sector farms afloat, the Government reintroduced output and input subsidies for producers: in constant 1985 rubles producer subsidies rose from an average of 10 billion in the late 1980's to more than 15 billion in 1992. In 1992, subsidies to livestock producers made up 48-67 % of the total remuneration received (sales plus subsidy), or 100-200% more than the price paid by processors to agricultural producers. For grains, sugarbeet, potatoes, and vegetables, subsidies amounted to 11 % or less of total remuneration. 3.12 In Ukraine's highly inflationary macroeconomic environment, the Government introduced indicative prices in the place of formerly fixed prices. Indicative prices were set by the Government based on formulas that estimated average costs plus normative profit margins. These prices are used as a benchmark in negotiation of contract prices for state orders, including the input prices farms pay and the agricultural output prices they receive. Since the middlemen are state- owned companies, they know that if farm sells to them it will receive a subsidy from the state. This enables them to offer lower prices to the farm, and allows them to capture part of the subsidy paid to the producer. The presence of a number of prices for the same good (indicative prices, contract prices on state orders, implicit prices in barter deals, and those available on export contracts and in free markets) makes the price system far from transparent. 3.13 The Government has attempted to maintain a form of parity for agricultural producers by linking agricultural prices to indices of prices of goods and services used by agriculture (Six price indices are used: material and technical resources of industrial origin; material and technical resources of agricultural origin; tariffs and services; remuneration of labor; interest rates; and insurance and other obligatory payments). In order to "protect" the agricultural sector from inflation, an index of agricultural costs was constructed and used to adjust product prices. Using this formula, procurement prices for 3 InI 1992, farm output prices rose about 70% as much as farm input prices, attesting to the existing trade regulations and monopoly power of state input suppliers and indicative of some market power in the hands of state processors buying farm output. Development of a Market Framework 35 agricultural commodities increased by as much as 57 fold from December 1992 to December 1993, while prices of agricultural inputs rose 60 fold. Financial resources were made available to state organizations purchasing output were similarly adjusted. Preferential credit was provided at a 30% annual rate. Nevertheless, agricultural output declined by 6% in 1993. The government considers this something of a success in view of the 15% decline in overall output for the year. Grain procurement increased from 11 million tons in 1992 to 14.1 million tons in 1993 (but was still below the 15.4 million tons procured in 1990). The successful grain procurement of 1993 is attributed to indexing. Before harvest, grain producers were promised a procurement price of 480,000 krb/ton (equivalent to US $120).4 3.14 The state trading network is quickly deteriorating. Data for 1992 indicate that approximately 85% of state and collective farn output sales are still made through state contracts. During 1990-1992, the shares of state and collective farm field crops such as grains and potatoes marketed through private channels was much larger than for livestock products, roughly 50% as compared to 90 %. The shares of oilseeds and sugarbeet moving through private channels were less than 5%. However, as the state input supply network's ability to fulfill its contracts with farms has been reduced, so has farms' willingness to contract their output with the state. In 1993, except for grain, the role of state purchasing dramatically declined. Delayed payment for sales to the state has exacerbated the situation, as the high inflation during the waiting period cuts deeply into farm remuneration. A disorderly further deterioration of state marketing replete with stop-gap measures and attempts to impose market power on farms will likely produce shortages by causing farms to hoard their storable produce in hope of better prices in the future. Instead, the state should reduce its intervention and pursue a course aimed at facilitating the development of the market. Table 3.1: Current Trends in State Procurement Prices Indices of Farmgate Prices (%) 1983 = 100 Commodity 1985 1990 1991 September October October 1993 1992 1993 (krb / t) All Crops 99 140 176 3531 NA Grain 88 235 153 3066 172,658 573,800 Oilseeds 99 170 182 4301 399,634 1,718,800 Sugarbeet 92 101 195 4968 324,800 162,400 Potatoes 105 147 471 5620 196,958 472,700 Livestock Products 101 129 167 2088 NA ------ Cattle 106 139 168 1848 191,321 5,678,400 Pigs 102 147 170 2529 Poultry 101 113 160 2404 Milk 97 120 154 2011 230,704 982,800 Source: Ministry of Agriculture and Food 4 In early 1994 farrns were being offered contracts for grain at the equivalent of US $70 per ton (21 million krb per ton at 30,000 krb per US $) while prices of diesel fuel and gasoline are about US $130-195 per ton. This means farms would receive about half the world market price for their grain at pay about 80% of the world price for their energy needs. 36 Chapter 3 3.15 Still, market pressures influence price formation Table 3.2: Food Retail Prices in State Shops in Ukraine and and some shifts in the structure of Russia as of Sept. 1, 1993 farm-gate prices are evident (Table Ukraine Belarus Russia Ukrainian 3.1). The administrated nature of Prices as % price increases in 1991 is evident by Krb Rbl per Rbl per Rbl per of Russian the relatively uniform rate of increase per kg kg' kg2 kg Price across different crops and livestock Meat (Beef) 7,521 565 612 1,486 38.0 products. In 1992, some adjustment took place as livestock prices rose Milk and 814 61 43 122 50.0 only about 60% as quickly as crop Products prices. In 1993, this trend was partially reversed as all livestock Butter Oil 8,928 671 919 1,540 43.6 prices rose by more than 100 fold Vegetable Oil 1,106 83 311 584 14.2 while crop price increases ranged 40 fold to 80 fold. Over the period Eggs 2,383 179 131 275 65.1 1990-1993, farm-gate prices have Sugar 843 63 608 584 10.8 risen by 200,000 to 400,000%, while Bread 785 59 55 74 79.7 the Consumer Price Index has risen over 900,000% and retail food prices Flour 1,487 112 172 120 93.3 have increased 800,000 %. Potatoes 608 46 63 167 27.5 Government restrictions on agricultural pricing and a degree of market power by state procurers and Fruits and 689 51 252 517 9.8 processors have kept farm-gate prices Berries low but processing and marketing (Apples) I 1 Ruble = 13.3 Ukrainian karbonantsti (coupons) exchange rate. margins in the food sector have 2. 1 Russian Ruble = 2 Belarus Rubles. clearly risen. Farms have borne an Source: Ministry of Statistics and CIS State Committee for Statistics. inordinate share of the adjustment process in the food and agricultural sector: their survival is secured through state subsidies instead of allowing them to receive market prices for their output. Consumer Prices and Food Subsidies 3.16 Consumer prices for food products marketed in the state system have also been heavily subsidized. Although as of January 1992, agricultural output and input prices were no longer formally set by the state, and some food prices were deregulated, prices of sugar, vegetable oil, margarine, liquor, bread and macaroni products, and many milk and meat products continued to be fixed. At the end of the first quarter of 1992, meat and milk prices were decontrolled. Most remaining food product prices were no longer fixed starting July 1,1992, with the exception of low quality bread. However, indirect government control of basic food prices continues via maximum markup margin regulations. In 1993, these maximum margins were periodically increased as the previous ones were eroded by higher monthly inflation rates and longer periods necessary to settle accounts. In December 1993, limits on food price rises were reduced to profitability (gross margin) limits on bread (15%), flour (10%), and babyfoods (25%). Other price increases could be made "independently" but in cases of cost increases. Thus, the Development of a Market Framework 37 regime of liberalized but not entirely free price increases is being continued Table 3.3: Retail prices indices in Ukraine (Figure 3.2). One step forward is the Increase over the 1993 to abolition of all explicit food subsidies at previous year 1990 the federal level with the exception of 1991 1992 1993 sugar. All consumer goods 3.17 In addition to regulation and services at the federal level, food prices are - on the average 1.89 13.38 46.19 1168 subject to intervention by regional and over a year local governments. Regional and local - December to 2.31 22.03 96.79 4926 governments can also impose December regulations and draw on other sources of revenue besides federally allocated -gaveragemonthly 7.2 29.4 46.5 26.6 subsidies to pay processors and retailers for the losses imposed by pricing Foodstuffs regulations. More often, regional and - on the average 1.89 14.26 52.05 1388 local governments impose marketing over a year restrictions without knowing where the - December to 2.07 25.10 97.55 5068 source of revenue to compensate December enterprise losses. These practices severely hamper any attempt by state - average monthly 6.3 30.8 46.6 26.7 enterprises to become financially growth rate, % self-reliant because they prevent the Source: Ukainian Institute of Agricultural Economics. formation of a link between enterprise sales receipts and expenditures. In addition, they cause these enterprises to be unable to pay their bills, acquire inputs for production, and maintain production levels. Since the private sector is not subject to the maximum processing and marketing margins set by the federal and local governments, its share of sales is slowly expanding as private enterprises manage to attract inputs. Table 3.2 shows the low cost of Ukrainian foodstuffs in comparison to other FSU republics. Food Price Indices Compared to CPI 1000000 J 100000 - CPI D/ Bread Products 10000 ""'- Meat Products 1000 < Milk Products 1000 1990 1991 1992 1993 Figure 3.2 38 Chapter 3 3.18 The increase of retail food prices has kept pace with the speed of overall inflation and with the increase of the prices of consumer goods in retail channel (Table 3.3). The increase in food prices however, outpaced the increase in the nominal cash income of the population by 2.3 times, according to the estimates of Ukrainian Institute of Agricultural Economics, seriously reducing the actual demand for food commodities. Sectoral Impact of Agricultural Policy 3.19 In view of the cost mark up price formation procedure and state regulation thereof, the price deregulations instituted in Ukraine in 1992 did not represent real liberalization. Despite the inadequate progress made towards liberalizing prices at all market levels and allowing producers to receive market prices, evidence from 1992 and 1993 suggests that the divergence of domestic agricultural price ratios from international price ratios has lessened. Farm-gate price distortions (measured relative to world market price ratios) decreased in the 1980's, but increased in 1992 as a result of large drops in relative livestock prices in Ukraine. These were the result of excess supply in these markets when demand contracted more quickly than supply in 1992. Table 3.4 presents wheat price relatives in Ukraine (a chosen commodity price relative to the wheat price, divided by the same price ratios on the world market. A coefficient closer to one indicates less distortion.) In 1993, price distortions for sugar, milk, and cattle were reduced, but for sunflower seed and eggs it increased. Overall (as measured by the coefficient of variation) diversion from world market price ratios dropped markedly in 1993, but greater realignment of domestic prices with international prices cannot take place in the more or less closed economy which Ukraine's agricultural sector faces. Table 3.4: Distortion in Producer Prices for Selected Agricultural Products Ratios of Wheat Price Relatives in Ukraine Compared to those on the World Market' 1981 1984 1987 1990 1991 1992 1993 September October Sugar 1.02 3.89 2.12 0.74 1.46 2.48 1.57 Sunflower Seed 0.85 0.93 0.90 0.80 1.08 1.24 1.66 Eggs 2.45 1.74 1.51 0.84 0.99 0.83 1.70 Milk 1.78 3.21 2.16 1.20 1.03 0.47 1.07 Cattle 1.34 2.01 1.12 1.08 1.09 0.65 0.99 Poultry 3.83 2.86 2.31 1.53 1.50 1.10 NA Hogs 1.99 1.99 1.27 1.08 1.45 0.83 NA CVb/ 83.83 42.09 34.77 26.56 18.62 61.42 24.35 Source: Ministry of Agriculture and Food, FAO Trade Yearbook, and USDA Economic Research Service. a/ E.g. for sugar, equal to (Sugar Price in Ukraine/Wheat Price in Ukraine) as a ratio of (World Market Sugar Price/World Market Wheat Price). b/ Coefficient of Variation *100. 3.20 Clearly, the profitability of agriculture has fallen because input prices have been more deregulated than farm-gate output prices. On the positive side, farms are learning about alternative, Development of a Market Framework 39 private input sources and customers for their output that will allow them to more safely negotiate lower levels of sales through state contracts. Still, farm responses to declining profitability have been to lobby for subsidies. Being well-organized, the agricultural sector succeeded in getting special subsidies in 1992 and 1993 to partially compensate for the terms-of-trade loss. These subsidies contributed to the overall macroeconomic problems of the country. On the whole, however, agriculture is most probably being indirectly taxed by price distortions. 3.21 In connection with pursuing greater liberalization in agricultural markets, the Government reduced the coverage of state orders to six products (grains, sunflower, oil seeds, sugar beats, beef and milk) and limiting the number of products subject to retail price controls to milk, veal, pork, bread and eggs. These are undoubtedly steps in the right direction. However, at the same time, the Government took more questionable steps to ensure a positive incentive framework for producers. It indexed the state procurement prices to the 1990 prices of a selected basket of agricultural inputs, thus preserving the distortions in the prices of inputs and products. It provided additional funds to agricultural enterprises to cover their operating deficits and advanced them 25 % of the state procurement price (at a subsidized rate of interest) to finance production. 3.22 Although the motives of the Government for taking these actions were positive and the reasons they have done so are evident, in particular the financial distress of farm enterprises, however taken as a whole, they do not further the process of liberalization. The state order system, the prevailing monopolistic marketing and trade structure, and the linkages between price and credit subsidies, input provision and state procurement remain substantially unchanged for key agricultural commodities. The adopted system of producer price indexation, while ensuring survival irrespective of efficiency, fails to signal needed changes in relative prices and continued unconditional coverage of enterprise losses weakens their incentive to become more efficient, and forestalls adjustment of the production system to underlying price relations. 3.23 In spite of all the obstacles to private sector growth in the food sector, slow progress is being made. In 1993, private food marketing was steady or grew for most commodities. In contrast, sales volumes in state and cooperative retail networks dropped by 20-25% (Table 3.5). This switch occurred even though prices are still 30-40% lower in the state and cooperative channels as compared to the private markets. Margin limits imposed by the Government appear to succeed in restraining food price increases in the state sector, but they prevent the processing and retailing enterprises from being able to pay their creditors, to maintain a flow of raw product, and ultimately to stabilize their sales volume. The relative expansion of private marketing will continue in this slow, unsupported way unless major changes in promoting commercialization, demonopolization, and further price liberalization are made. Budgetary Implications of Subsidies 3.24 Subsidies paid from the budget accruing to agricultural producers were equivalent to 45 % of budgetary subsidies for all purposes in 1992. When subsidies to consumers via food processors and retailers are included, the share of total subsidies accounted for by the food and agricultural sector was 63%. These subsidies represented 13% of the state budget, or roughly 6% of GNP. Because of the spiralling inflation during 1992, the revised government budget included additional financing of producer and consumer subsidies. The total budgetary cost of agricultural subsidies is estimated to have reached 40 Chapter 3 10% of GDP in 1992. Table 3.5: Changes in Food Retail Market Structure, 1992 - 93 3.25 In addition, Prices on January 4, 1993 Sales Volume as % primary producers have been 1994. Krb/ kg of 1992 Sales Volume exempt from income tax, and the value added tax was reduced to In State & In Private In State In Private 20%. Agro-industrial firms were Coop Markets & Coop Markets also made exempt from income tax Stores Stores but a profits tax was reimposed at Meat Products 74% 99% the rate of 25%. Meat and milk Beef 34203 46616 128% products were exempted from VAT owing to the reduced demand for Pork 42122 63232 97% these products. Poultry 43302 65444 83% 3.26 The subsidization Milk Products 85% 101% of agriculture has shifted from Milk 3422 5812 107% explicit budgetary subsidies to Cheese 13851 23621 98% implicit credit subsidies. Subsidies to livestock producers Butter 69566 71252 99% constituted the bulk of explicit Eggs (Ten) 28610 29925 84% 91% agricultural producer subsidies 27810 29201 80% 113% during the Soviet era and into 1992. However, over the course of Potatoes 1370 2296 88% 88% 1993 and early 1994, these were Vegetables 80% 93% largely phased out. In 1993, budgetary subsidies for food Cabbage 1534 2479 76% 112% processing, land improvement and Carrots 1399 2554 86% 97% irrigation, cattle breeding, and seed 1127 2360 79% 92% prices amounted to about 1 % of GDP. However, credit subsidies Fruits 11226 12404 113% 79% resulting from negative real rates Source: Ministry of Statistics. of interest (nominal interest rates are about 30% per annum, with inflation running at 30-40% per month), amounted to another 3% of GDP. In 1994, subsidies for capital investments and inputs are budgeted at 11 trillion rubles and credit subsidies through state procurement agencies are programmed at 21 billion rubles. This is likely to result in total subsidies equivalent to 3-4% of GDP (the official estimate, based on a projection of inflation of 350% in 1994 would put subsidies at 7% of GDP, however, Bank estimates are for a substantially higher rate of inflation). In June 1994, the Government decided to continue to provide directed credit for agriculture. The Bank of Ukraine was authorized to finance purchases for state reserves. Commercial banks are obliged to allocate 10% of credit resources available for lending to food and agriculture, with 30% annual interest rates, and agroprocessing enterprises are to receive 1.7 million kbr. to repay their debts to farms. 3.27 The mechanism for distribution of credit subsidies has also changed. In 1993, farms were advanced half the procurement price per ton at the time the sale was contracted (in March for spring grains) and the other half, which was not indexed for inflation, was to be paid upon delivery. In some cases payment was delayed until December. The value of this payment was heavily eroded by inflation and additional credit had to be made available to allow farms to obtain inputs for fall planting. In 1994, Development of a Market Framework 41 farms are signing contracts for delivery providing that half the first payment would be credited to input suppliers, who would charge off input deliveries to farms as they are made. The second half of the payment will be adjusted by the amount of inflation until the harvest. 3.28 Agricultural producers are also subsidized via debt forgiveness and preferential interest rates. In early 1992, debt of 2.8 billion krb. was written off. Indirect subsidies were provided through preferential interest rates on loans from the Agricultural Bank to agricultural producers of 10 to 18% (compared to commercial rates of 80 to 100% at an inflation rate in excess of 1000% per annum). Indirect subsidization via the credit system weakened the financial position of commercial banks, and will almost certainly require budgetary funds for recapitalization at some time in the future. Merely channeling reserve bank funds through the banking system to farmers and enterprises has the exact same effect as channeling them through the budget and then financing the budget deficit by printing money. Adverse Consequences of Current Price and Subsidy Policy 3.29 Ukraine's agricultural prices currently reflect a wide range of interventions, subsidies and controls, generally designed to assist or protect the finances of state and collective enterprises, or to shore up consumer income. They provide virtually no rational incentives to guide production decisions or longer term investment and resource allocation decisions. This system delays necessary downward adjustment in the livestock sector and supports the survival of a distorted production structure. The current system does not provide intermediaries or Government with a good indication of the production, storage, processing, transport and marketing costs of particular goods, a notion of the value of such goods in alternative markets, or an idea of which commodities or factors of production are in short supply. 3.30 The problem is not subsidy per se; virtually all countries subsidize producers or consumers (or both) of agricultural products in some way. However, it is essential that subsidies distort producer and consumer prices as little as possible and not result in serious resource misallocation. Policy makers must know how much subsidies cost, in both financial and economic terms, and who are the beneficiaries. It is also important that subsidies not impede private sector entry in marketing, storage, and transport. In general, budgetary subsidies are more likely to meet these criteria than subsidies hidden in exchange rates, administered prices, or directed credit at below-market interest rates. In addition, producer subsidies are more likely to cause resource misallocation than well designed consumer subsidies. Continuation of Price Reform and Market Liberalization 3.31 The establishment of a market-oriented agriculture will require the completion of the process of price reform. Prices received by producers should be allowed to adjust by: (a) eliminating remaining price controls; (b) removing remaining delivery obligations and restrictions on domestic trade; (c) elimination of cost based pricing mechanisms, including the system of fixed profit margins for processing and trade; together with, (d) creating competition both in input supply and in output marketing. In order to ensure that agricultural enterprises respond to changed price signals, it will be necessary to stop the practice of covering their losses through budgetary subsidies or credit at subsidized interest rates that, in most cases, will not be repaid. (Box 3.1 proposes a schedule for further price liberalization and subsidy reduction.) 42 Chapter 3 : ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .. .. .. . ........ . . ... PrpsdSlhedul ofA-gricultural m.Prie olc Reform and.Subsdy .Reducio ..meia. .ere ..e....d Step . Third. ..tep g Stat:-,e OUrdr Eandi ig ig g0:|0g|Eggggggg !EiReduce 'to 30% projecte 'rai P :':t -hase gou 't': ''t:'ti 't -Et i0000EE000Et: 4l WAS-Prod,ucer Pr;0ice00-0-0000ks 00000Adjs reltiv prcuemn Use-0-0000 stat pice sas 0floo pri 00s Eliminat prc intervention 0 --yInput iSubsidies g : --- -i- -i - Ei-- Reduceg in -scal ConEy- --fine to PhasEigEE:Eg -gi,- elg our:if '-y:-'EfEEigg -:S,: ~ ~ ~ ~ ~ ~ ~ ~ ~. ..-0X:000000:- ..E ......f ..00 ........000000 .. ...... ... ..0 .:4 .... ... .. .... ..4g1 ..t. ..-:-t'y ..'0t;:t t 0000000002 Cr0000edit Subs,idies; t000;00000000000000ji 0Dismatle 1' likg to' sta000te Reduce i0 to ' inance,current:-tt0000000 Reduce to pvate fa - : :00Consumr- fPrice : g'-0;-4-0'0000000400:-- Reduce: to bread,-00 dahy::::' :' and Cofn t high poty brad Full rep lac :with:0 targte t-Subsdies2 vfti-00-0 000;00-$4-S$0000000 0J e0getable ol000 milk, and introdu- ce- targeted in ome r subsidies000 .t.-tt-t.t0tttSEtt0 000-0-0- . .000t ti;t-f0t-t000 t ..00- .. .....t-tt0.0 t0 .0 . 00 .t .. .. . .. .. ........... .. ........ .. IntllIernational Td e' ;-j-jij0jf l 0 l0g,: tlfld 4 0'0- t-0Removegexport.quo a De tra.. ..s ..... Box . 3.32 Producers are subject to a variety of regulations that cause substantial distortion in the production process and reduce their incentives to produce. This includes indicative prices and indexation of producer prices, the quota system for production, and the linking of supply of inputs at government regulated prices and of other transfer payments to fulfillment of the production quotas. As a result, most of the products are still delivered to state procurement and processing agencies. The Government should cease its interference with the market price mechanism through the establishment of cost based indicative prices or profit margins. It should stop linking supply of inputs at controlled prices to fulfillment of production targets. Government should not interfere in wage setting, beyond the established guidelines for minimum wages. 3.33 The system of state orders (production quotes) does not conform to a market and negates market based resource flows. There is a direct linkage between state orders, government procurement monopolies and price controls. The argument for price controls is that the Government buys most of the products. Price liberalization without the elimination of state orders and competitive marketing will not achieve much. Therefore, the phasing out of this system is almost a precondition for the emergence of any real market. However, one has to admit that there is not very much of a functioning market in Ukraine at the moment, there are very few private traders and producers, and most of the input supplies are state owned. In this environment, the replacement of the state order system by market relations cannot be done in one step. The role of state orders has already been decreased, and the government commitment to the full elimination of the state orders should be clear and the implementation carried out as fast as possible. 3.34 The system of recommended prices based on the cost of production is inappropriate in a stable environment and harmful under inflationary circumstances. Cost based pricing formulas do not take into account changes in demand or world prices. Moreover, under rapid inflation, cost based pricing depresses agricultural product prices, since costs incurred several months prior to harvest are generally Development of a Market Framework 43 not adjusted to reflect real costs of inputs at the time of harvest. If cost based indicative pricing is discontinued and trade is liberalized, the resulting pricing structure would reflect both Russian and world market prices. Products that can be sold on the hard currency markets would tend toward the domestic equivalent of world market prices. Products sold primarily within the FSU would move toward Russian prices. 3.35 Since independence, the cost of inputs has increased faster than prices of agricultural products because the state continued control of agricultural output prices, while it was unable to control the prices of improved inputs. With the exception of energy, prices of inputs now approach world market prices. The Government, however, continues to control and regulate agricultural output and trade, and tries to mitigate the deteriorating terms of trade with continuous adjustment of producer (indicative) prices. This underscores the need for liberalization of agricultural prices. With price liberalization, farm inputs will have to be used more efficiently. 3.36 Producer subsidies should be phased out as part of a well defined program aimed at promoting private marketing operations, both domestically and through international trade, as well as demonopolizing agricultural input supply and agroprocessing, and assisting farms to upgrade their equipment and on-farm infrastructure and shed redundant labor. The savings on foregone producer subsidies could be better used as unemployment benefits and for job retraining. Income subsidies to producers should be abolished as early as possible. Real restructuring can only be expected in the kolkhoz/sovkhoz sector if hard budget constraints are imposed on these organizations. However, emerging private agriculture should be supported, mainly in the form of preferential credit availability. 3.37 Given the magnitude of economic shocks implied by price liberalization and increased energy/input costs, the sudden elimination of government subsidies to agriculture could bring about a collapse in the sector. Some transitional support for producers may be justified to increase the chance that potentially efficient farming operations will be able to survive. Existing producers need to know that subsidies will be phased out during the transition period. However, there must be a cap on total costs of agricultural producer subsidies in each year consistent with the overall stabilization procedure. 3.38 The overall budgeting and management of the central public expenditure for the agriculture and food sector should be established. The creation of a consolidated agriculture and food budget, involving all agencies working in these sectors, is strongly recommended in order to consolidate agricultural budget and credit programs. Only in this way can a real dialogue on spending priorities and trade-offs emerge, and budget discipline be strengthened. B. INTERNATIONAL TRADE AND TRADE POLICIES Changes in Trade Patterns and Partners 3.39 Both prior to and after the break-up of the FSU, agricultural goods have been an important component of Ukrainian foreign trade. In the period 1985-90, while Ukraine still formed part of the FSU, agricultural exports accounted for 18-19% of total exports to other FSU republics and rest of the world. Ukraine was the largest agricultural exporter within the FSU of livestock products, sugar, canned fruits and vegetables, and bakery products. On average, Ukrainian exports held a 35 % market share of inter-republic FSU food trade and played an important role in meeting food needs in other FSU 44 Chapter 3 republics. Ukraine itself also imported a sizeable amount of agricultural goods, which Table 3.6: Agricultural and Food Trade comprised 10-12% of total imports from 1985-90 (Table 3.6). In 1990 In 1990 In 1990 3.40 In addition to comprising a rubles rubles rubles large share of agricultural food trade in the Ag. & Food Exports 9,284 8,310 3,486 FSU market, Ukrainian exports represented often large shares of Ukrainian production of As % of Total Exports 19% 18% 23% certain crops and processed products. In the Share to FSU 94% 92% 93% late 1980's, grain exports (4-5 million tons Ag. & Food Imports 6,468 5,447 1,789 annually) accounted for about 10% of A.&Fo mot ,6 ,4 ,8 production. Almost 10% of livestock Share from FSU 41% 42% 49% products was exported as well, with Source: The World Bank, Statistical Handbook - States of the production shares of vegetable oil and sugar Former USSR, No.3, Sept. 1992, Ukraine Ministry of Statistics exports reaching almost one-third of production. Thus, Ukraine relied on agriculture as a important source of export revenue, but agriculture's reliance on FSU export demand was equally strong. Agricultural imports as a share of consumption were uniformly less than 5%, except for fish products (25%). Ukraine Imports, 1992 9% 9% D Other Non-Ag. Other Ag.& Food U FSU Non-Ag. FSU Ag.& Food 73% Figure 3.3 Development of a Market Framework 45 3.41 The division of agricultural trade by destination understandably favored the other FSU republics in the past, with 92-95 % of agricultural exports sold to the FSU. Surprisingly though, more than 50% of Ukrainian imports of food and agricultural products came from outside the FSU (Figure 3.3). This share is five times higher than the share of non-agricultural imports bought from countries outside the FSU. 3.42 Since the break-up of the FSU, commercial ties with the other FSU republics have been weakened by both economic and institutional factors. The collapse of income across the FSU has reduced demand for food products and affected the demand for Ukrainian agricultural and food exports. By 1992, these exports had fallen to about 40% of their level of the late 1980's. However, given the greater fall in nonagricultural exports from Ukraine, agriculture's export share has actually risen to almost 28% (Figure 3.4). Ukraine Exports, 1992 El Other Non-Ag. 2% El Other Ag. & Food * FSU Non-Ag. * FSU Ag. & Food 52% Figure 3.4 3.43 The FSU republics still represent the main market for Ukraine's agricultural exports, accounting for more than 90% in 1992. Since consumer income has fallen further in Ukraine than most other FSU republics, imports have fallen even more than exports. Even though agricultural and food imports dropped by almost 75 % from 1989 to 1992, their share in total imports doubled to almost 20% as imports of industrial raw materials and consumer goods plummeted. For all goods, the collapse of the payments system for foreign trade, including that with other FSU republics, has generated very high transactions costs for firms involved in trade: these risks and delays have contributed to the fall in agricultural trade turnover. In addition, these transactions costs (along with the policy induced 46 Chapter 3 impediments to agricultural trade examined below) have caused the share of foreign trade volume executed through barter operations to rise to almost one half by mid-1993. The greater acceptability of barter trade among FSU republics (as compared to non-FSU trading enterprises) and the lack of policies in Ukraine which would increase the availability of hard currency foreign exchange have reduced the share of trade done with non-FSU countries. Agricultural and food imports from non-FSU countries fell to only 51 % of total agricultural and food imports in 1992. 3.44 An examination of the performance of Ukraine's main agricultural Table 3.7: Major Agricultural Imports and Exports exports in the 1990's reveals that the physical 000 tons 1988-90 1991 1992 1993 volume of all of these products has fallen by Average 50% or more compared to base levels in the late Imports 1980's (Table 3.7). The most notable are grain Grains 4,180 NA 1,961 1,943 and sugar, the fall of which can be directly Meat and 35 8 9 1 attributable to poor harvests. (Both grain and Meat sugarbeet annual harvests were 8-12 million tons Products below there late 1980's levels in 1991-92). Milk and 175 19 10 153 These are both areas where FSU export markets Milk are strong and additional Ukrainian exports Products would be relatively easy to achieve with Fruits and 138 98 105 36 increased harvests. In the area of meat and Vegetables dairy products, export demand has fallen much Exports more (as these sectors are undergoing dramatic Grains 5,028 NA 267 160 down-sizing in virtually all FSU republics) and Meat and 369 227 196 99 the market is demand-constrained. Vegetable oil Meat exports were down sharply in 1992 as domestic Products production dropped by over 30%: additional Milk and 2,031 1,300 292 459 exports appear to be constrained by supply. Milk Given Ukraine's relatively high oilseed yields, Products these exports could also be boosted at low Sugar 3,570 1,646 332 914 marginal cost. Vegetable 320 279 147 93 Oil Fruits and 503 180 47 49 Trade Policies Vegetables Source: USDA Economic Research Service, Ministry of Statistics 3.45 State enterprises still dominate external trade. However, since beginning of 1991, the private sector has been allowed to enter into trade and some private enterprises, especially joint ventures, have already captured a significant market share. Some 24 enterprises provide marketing functions for the agriculture sector, of which the private sector share is 30%. The private sector now markets 90% of pesticides. 3.46 Over the last three years, barter trade has increased and trade based on monetary transactions has declined. Barter trade with non-FSU countries amounted to only 19% of total trade in the first eleven months of 1991, but reached 22% in December, 1992. By mid-1993, barter accounted for almost half of total trade turnover. This is largely a result of taxation of exports and the fact that export licenses are more easily given for barter arrangements. Export taxes average 27% for all export products and 20% for exports of agricultural products. However, the export tax is lower for barter Development of a Market Framework 47 transactions -- only 5 % -- and zero if producers export their own products. Joint ventures are exempted from paying export taxes for five years if they are producers and for three years if they are pure traders. 3.47 The current trade regime strongly discriminates against exports, especially outside the FSU. The export trade regime for hard currency areas involves a rigid licensing system and export taxes range from 20 to 75%, with most exportable products subject to rates between 35 and 50%. A quota allocation and a license are needed for export of most agricultural products. Before being able to apply for a license the would be exporter must obtain an export quota. These quotas are decided by a Council of Quotas in the Ministry of Economy taking the domestic market situation into account. The license is issued by the Ministry of Foreign Economic Relations. State enterprises may receive a general license indicating the volume of specific products they may export within a given period of time. Private traders need an ordinary license which will only be granted if specific conditions are met; the producer must have fulfilled his delivery commitment and the price of the exported product has to be judged acceptable by the license issuing authority. Licensing procedures are cumbersome; private exporters reported that they had to spend half of their time chasing licenses. Uncertainties in export were further increased in January 1993, when the Government decided to suspend all existing export licenses, creating serious problems for most of the existing joint ventures dealing with supply of inputs for agriculture. 3.48 Import regulations are less restrictive. A license is only needed for products that may concern health, such as pharmaceutical products. Although there are no import taxes, a new tax system is under review that would provide higher rates for products not considered vital. The major constraint on imports is access to foreign exchange. The Government allocates as much in foreign exchange as it receives in import taxes. The import regime strongly favors enterprises that are exporters and thus undermines specialization in trade. 3.49 Deregulation has not encompassed foreign trade. Access to imported inputs is not reliable and the ability to sell farm output on the export market is not a guaranteed right owing to persistence of export licensing and other non-tariff barriers such as the practice of making sales to the state a precondition for granting permission to export even small quantities. Ukraine applies a 28 % value added tax on imports, but not on exports. However, use of the official exchange rate in calculating the VAT reduces the effective rate to about 15 %. However, imported goods cannot be sold freely, but are limited to a 55% mark up from import cost to the consumer price. While this would seem to provide a wide margin, the effective margin is reduced if the foreign exchange used to purchase imports was purchased at the commercial rather than the official rate.5 This regulation discourages the growth of intermediaries, encourages barter transactions and encourages traders to find fictitious costs on top of which to apply the 55% margin. 3.50 The trade restrictions encourage capital flight. Traders can understate the value of their exports and overstate the value of imports to increase their access to foreign exchange. Due to internal political uncertainty and economic volatility, trading enterprises have strong incentive to hold funds abroad rather than domestically. There are also strong incentives for illegal trade to take advantage of higher prices in neighboring republics and such trade activities have been reported. 5 At the time of writing of this report the official rate was 17,000 krb per dollar, the fee market rate was 40,000 krb and the inter-bank commercial rate was approximately 30,000 krb per dollar. 48 Chapter 3 3.51 Contract disputes have become a major problem in trade. Traders often have no experience and contracts often omit some important items, such as specification of product quality. Disagreements over quality of items delivered may lead breaches of contract. In addition, contractors may not be able to fulfill agreements because production falls short of their expectations. In other cases, contractors may have found a better deal after the original commitment was made. This type of opportunistic behavior is not unexpected in a society in the early phase of transition from a command to a market economy. Opportunism may be more common in international trade than in domestic trade, as foreign trading partners know to each other less well than domestic partners and adverse repercussions are smaller. The fear of breach of contract has become so strong that some farm managers are only prepared to deliver their produce if they have already received their trading partner's products. Transaction costs are high because of insufficient information on international prices, high uncertainty about trade policy and macroeconomic developments, and delays by farms in meeting their financial obligations (since they often receive payment for their output many months delayed).6 C. RE-ESTABLISHING INTERNATIONAL TRADE: AGRICULTURAL TRADE POLICY Trade With Non-FSU Countries 3.52 Ukraine has significant potential for agricultural and food production and trade. The geographical location of the country and the access to ports makes it better suited to integration into the world economy than most of the other FSU republics. An appropriate trade policy could help remove constraints on the production, transport, storage and processing of agricultural products. At this moment restrictions on trade are a major source of discouragement to private investment in agriculture in Ukraine, which would bring with it improved technologies and management methods along with a practitioner's approach to the understanding of market systems. 3.53 The Government does not now wish to support large scale exports of agricultural commodities and food because of the fear that it will result in food shortages in Ukraine itself. Trade is allowed only after the Govermnent is sure that sufficient food will be available for domestic consumption. The result is that the scale of trade is significantly lower than it might be otherwise. Instead of trying to be sure that production is sufficient to meet domestic demand year by year, the Government could establish a strategic reserve, equivalent to a three to four month supply requirement. 3.54 Trade with non-FSU countries would be enhanced by abolishing export licenses and quotas; abolishing the requirement for surrender of export earnings at the official exchange rate; eliminating the prohibitive 20% export tax and limit the government to collection of income tax7; and 6 The largest joint venture engaged in these transactions reported that 30 % of the farmers had not settled their debt after the harvest as agreed in the contract. 7 Basically the export tax policy makes barter trade more profitable than trade based on payments. If trade is based on barter between a producer who also import inputs, he is exempted from export tax. If the producer/exporter import other products he is liable to pay 5% tax. If the trader is not a producer but he imports inputs the export tax is 5%. If the trader export goods but import goods other than inputs, he is liable to 20% tax. Thus, this system encourages non specialized people to engage in trade and basically causes high trade costs. Development of a Market Framework 49 creating a tariff-based trade regime consistent with a market economy. Inter-FSU Trade Perspective 3.55 There are some marked differences in potential for exports to non-FSU and FSU countries. The FSU countries constitute the natural market for Ukraine's agricultural exports. They are former trading partners, and Ukrainian trading enterprises know their counterparts in the FSU countries and the rules and regulations that govern trade. The FSU countries are familiar with the Ukrainian agricultural commodities and food products and their quality is not a constraint. The production technology in Ukraine is not inferior to that in the FSU countries and the Ukrainian products are competitive. 3.56 Nevertheless, there are important constraints that, if resolved, would allow mutually beneficial expansion of trade. Trade that involves payments has to be channeled through the National Bank of Ukraine (NBU). Clearing payments through the NBU is slow. This contributes to preference for barter, especially given the high rate of inflation in Ukraine. Ukrainian banks should be authorized to handle payments between FSU countries on a letter of credit basis. Traders should be able to keep accounts in their domestic currency or in interest bearing ruble accounts. D. REDEFINING THE ROLE OF GOVERNMENT The Present Role of Govermnent 3.57 Government management of agriculture still reflects the characteristic features of the command economy. A large bureaucratic administrative structure is still functioning above the farm level to provide central control over farms and other agricultural activities. The Ministry of Agriculture and Food (MOAF) is responsible for the implementation of agricultural policy and the realization of agriculture production objectives. But, as in most governments, it is not the only government institution that affects agricultural policy. Indeed in some ways it may not even be the most important ministry. The Ministries of Finance and Economy, as well as the Ministry of Foreign Economic Relations have powerful roles in agriculture as well, as they are directly in charge of price and subsidy policy as well as trade and marketing regulations. 3.58 There are also a number of central committees with "ministry" level status that have a strong influence on the agricultural sector. These are the State Committee for Food Industry, State Committee for Water Economy, and the State Committee for Land Resources. These entities have representatives at the oblast (province) level and often at the rayon (district) level as well. Total staffing for these committees is estimated at 7,000. 3.59 The various levels of administration, together with the enterprise level bureaucracy, constitute an oversized administrative system. The MOAF, forged from seven different organizations, is a large and complex operation (Figure 3.5). Although it has only 650 employees at the center, it has 32 departments (e.g. land management and environmental protection, village social services and livestock production and breeding). There is an additional set of organizations that also relate to the MOAF, 50 Chapter 3 including regulatory bodies such as seed inspection, higher education, scientific institutions, vocational schools, mid-career technical, educational, and training centers and voluntary organizations. Organization of the Agro-Industrial Complex Vice Prime Minister Agro-lndustrial Complex Mnisr of Mstr tr oStState tae1State lSte Food and Forestry Committee onj ComSmtittte on | ommittee on Comte on Agriculture Water Economy Land Resources Food Industry| Fisheries Figure 3.5 3.60 At the regional levels, the administrative structure of the socialist era has been preserved almost without change. The agricultural departments of the local soviets were created to implement direct administrative controls and they continue functioning. These organs are supposed to coordinate the activities of local agricultural and processing enterprises. Their main role is to transmit targets for production and delivery and to distribute inputs and machinery to farms. A New Role for the Government 3.61 The transition to a market economy requires a fundamental change in the role of the Government in agriculture and in the economy in general. Direct government intervention in the agricultural economy, such as establishing mandatory targets for production and/or delivery of goods and central distribution of investments and inputs must be ended. The Government's role should be to establish the general rules and facilitate the conditions for smooth operation of markets and independent business organizations. This role is not less important than the previous one; however, it requires a different philosophy, as well as different means and institutions. 3.62 The Government of Ukraine needs to make a high level commitment to changing the structure and scope of government organization for management of agriculture. The overall principles driving this change should be: (a) the establishing of a single locus of responsibility; (b) dismantling of the current "agroindustrial complex" governmental management structure; and (c) a simplification of the structure of governmental organizations corresponding to the reduced role of the public sector responsibilities in agriculture. 3.63 Given the uniqueness of the country, its history and politics, it is not possible to define the exact structure of a modernized government administration of food and agriculture. However, within a market driven economic system the Government should play three sorts of roles: regulation, provision Development of a Market Framework 51 of supporting services, and analysis (Figure 3.6). Regulation should include such things as food inspection, seed inspection, establishment and enforcement of grades and standards, establishment and control of phytosanitary standards, epidemiology and livestock disease control. Essential services of a public nature should be provided. This might include domestic and foreign market information, agricultural research, farm advisory services, and higher education in agriculture. Finally, the Government should monitor, review, and diagnose the implication of changing circumstances and develop options for public policy. MINISTRY OF AGRICULTURE AND FOOD REGULATORY SERVICES _ ANALYTICAL Plant Quarantine Agricultural Research Livestock Disease Control Agricultural Universities Agricultural Statistics Grades and Standards Market information Economic Research Food Inspection Agricultural Extension Foreign Agriculture Others as appropriate Land Survery, Titling and Information Registration Others as appropriate Others as appropriate Figure 3.6 3.64 Details of MOAF restructuring and staffing needs to be developed within this framework. A broad based task force, with sufficient staff and budgetary resources, needs to be established to develop a modernization agenda for the MOAF and related committees. It should avail itself of international professional expertise so that an outside perspective of the needs of agriculture under market conditions is immediately available. 3.65 The Government and MOAF might develop some links with counterpart organizations in other countries to aid in this process. For example, outside assistance could help with a wide variety of activities, e.g. setting up a cost effective quarantine systems, helping design area frame sampling techniques for predictive models of crop production, assistance with more sophisticated economic research issues. 3.66 The dismantling of the bureaucratic structure of central planning is a very important task. What is needed is not merely changing the names of the various ministries, but radical modification and/or merger. Units related to central command and direct interventions should be dismantled, while those remaining should be organized and managed to meet the needs of a free market control system. Market regulation and trade policy functions should be taken over by the MOAF and other government agencies. The recent conclusion of State Committee of Bread Products in the MOAF is a step towards the right direction. As transition proceeds, the whole structure can be further simplified, with fewer institutional units and fewer employees. Changes are needed in the structure of regional units as well. A large bureaucracy related to the implementation of central control still exists on the regional levels. There is no need for their further existence in the current form. A relatively small administration would 52 Chapter 3 be adequate to enforce agricultural regulations, promote development, and provide extension and market information services. 3.67 The establishment of market agriculture requires the development of a new legal framework. New laws and the adjustment of existing legislation will be legal changes are needed. The most important is revision of the land law along the lines described earlier. A law on the transformation of kolkhoz/sovkhoz system is also needed in the near future. Some components of the legal framework should be completed over the next year or two. This includes laws that establish the basic principles for private voluntary cooperatives, and an agricultural marketing law that establishes the framework for fair competition, anti-cartel policy, and quality control. At a later stage, general regulations for agriculture, forestry, and hunting and fishing must be established according to the new ownership structure and economic management philosophy. It will be essential to harmonize Ukrainian legislation related to agricultural trade with that of the EU. CHAPTER 4 LAND REFORM AND THE EMERGENCE OF PRIVATE FARMING 4.1 The establishment of a comprehensive market structure and the elimination of direct Government controls will improve the performance of Ukrainian agriculture. The improvement will be limited unless the farms can respond flexibly and individually to new initiatives, are able to improve their production technologies, and are supported by competitive services. This chapter reviews land reform and farm restructuring developments, and recommends further actions in these areas. A. CURRENT STATUS OF LAND REFORM 4.2 Ukraine has gone through three previous "land reforms." The first two reforms were carried out when Ukraine was part of the Russian Empire, the third when it was part of the Soviet Union. The most important of these was the Soviet land reform which was part of a broad economic and agrarian reform program. This reform, begun after the Bolshevik revolution, eliminated private property and involved nationalization of the properties of landlords and wealthier peasant households. Eventually it led to the creation of large collective and state agricultural enterprises. 4.3 The desired main economic objectives of the current land reform in Ukraine are to: (a) establish the basis for a functioning land market, through suitable provisions for selling, buying and leasing ,land, and; (b) disengage the Government from the management and operation of agricultural land and production assets through their transfer to individual reform beneficiaries as property or under a lease arrangement. The establishment of private ownership of land and production assets is a key element in the transformation of agriculture in the former Soviet republics. The first enabling Union-level legislation was passed by the USSR Supreme Soviet between November 1989 and March 1990 (the Law on Leasing, the Law on Property, and the Law on Land). These laws permitted individuals and farnilies to hold long-term leases on land within and outside the collective and state farms, as well as allowing the granting of individual proprietorship (vladenie) over land. Proprietorship gave lifetime inheritable rights to work the land, but not the right to buy, sell, or mortgage it. This Union-level legislation delegated important powers to the republics to pass additional laws on these subjects to provide essential details and mechanisms for the legal process of establishing private land ownership and private peasant farms. 4.5 The first of the relevant statutes adopted by Ukraine was the Law on Peasant Farms of December 20, 1991. In addition to allowing lifetime inheritable rights to an individual farm, this law also permits private ownership of land after it has been occupied for six years. At that point, the farmer may transfer the plot to another citizen, but only in accordance with the "decision" of the local council and at a regulated price. The process of land reform is further regulated by other legislation. The Law on Forms of Land Ownership, effective January 30, 1992, established private and collective forms of leased property in Ukraine on the basis of equal rights with state property. The Land Code of March 13, 1992, expanded and clarified the provisions of the Law on Peasant Farms. It allows private owners to lease out their land for agricultural use for a term of up to three years. This leasing may apparently be done immediately. However, the Law on Payment for Land (July 3, 1992) imposed limits on lease payments. The Law on Collective Farm Organizations (February 14, 1992) sets out provisions relating to the distribution of land shares and shares of non-land assets to members of collective (not state) agricultural enterprises in the process of reorganization and privatization. 54 Chapter 4 4.6 The present legislative framework and government policy envisage collective land ownership as the dominant form of land ownership and the principle of unrestricted private land ownership has not been frilly accepted. There is a clear intention to keep private agriculture as a supplementary component of a farmning structure based on large scale units owned collectively. Current legislation does not provide for clearly delineated and transferable property rights, which are the essence of land reform. The implementation of land reform has reflected this. 4.7 As a result of the land reform laws, independent private farms can be established by farm members or by those who are not engaged in agriculture at present. A certain level of skills is required from the applicants. The upper limit for the holdings is 50 ha of arable land and the maximum arable plus non-arable holding allowed is 100 ha. Land is provided without any payment with a six year moratorium on sale, and the hiring of labor by private farmers is prohibited. In 1991, a fund was created from 2.5 million ha of so-called reserve land of questionable quality, and allocated for private farming (1.5 million ha of arable land and 1 million ha of pasture); a further 2.3 million ha of fully arable land of average quality was set aside in 1992. All of these lands were formerly used by sovkhozes and kolkhozes. 4.8 Land is also provided to increase the size of household plots and family gardens. (The new upper limits are set at 2 ha for household farms, 0.15 ha for family gardens, 0.12 ha for family orchards, and 1 ha for pastures). Allocation of additional land for private plots is a very useful measure. First, it is a sort of safety net, allowing families to supplement their incomes by growing their own food and marketing some products. Second, it allows households to gain experience in own account farming and possibly to accumulate some capital out of the resulting profits, without having to take the risk of losing all wage employment immediately. On April 15, 1992, 2.4 million ha of household plots and gardens became the private property of current users without any payment. As of January 1994, about 5 million ha, or 11 % of agricultural areas are owned and used as household plots and various forms of gardens. 4.9 The distribution of land to individuals as part of the land reform process is moving relatively slowly (Table 4.1); both because the authorities do not seem to be in a hurry, and because Table 4.1: Distribution of Land Used by Private Farms January 1992 January 1994 000 ha % of total 000 ha % of total 1994:1992 Ag. Land Ag. Land (%) Peasant (Private) Farms 49.0 0.12 619.1 1.5 1263.5 Land in Citizen Property Use: 3,864.0 9.20 5,011.2 11.8 129.7 Subsidiary Plots, 2,589.7 6.20 3,471.1 8.2 134.0 Dacha, etc. Collective Gardening 147.8 0.35 166.9 0.4 112.9 Collective Vegetable 177.5 0.40 287.4 0.7 161.9 Gardening Total Private Land 3,913.0 9.32 5,630.3 13.3 143.8 Source: Ukrainian Institute for Agricultural Economics Land Refonn and The Emergence of Private Farming 55 requests for land by future farmers are limited. Uncertainty about future legislation on land ownership substantially limits interest in the establishment of independent private farms. Private farmer organizations believe that land made available for private farming has been of poorer quality and that they are discriminated against in access to inputs and markets. By October 1993, 560,000 ha had been distributed to 27,700 private farms. The establishment of private farms continued in the first quarter of 1994. As of April 11, 1994, there were 29,666 private farms registered, with a total area of 620,548 ha. This is a 7% increase in number and an 11 % increase in area during the first three months of the year, and is directly opposite the experience in Russia where the rate of private farming has declined substantially during the same period. 4.10 There has been much more progress with the other Distribution of Farm Land by Users (1993) component of land reform, namely the "denationalization" of land and its transfer to non-state ownership. State Lands Private Lands 12% As of January 1993, only 27% of 20% Other Users 1% the agricultural land remained in state ownership, compared to L 100% in 1990. Of this amnount, Reseve nearly 14% is in state farms that are scheduled for future privatization and another 7% is in the state reserve and the local redistribution funds, which are Collectives ultimately intended for distribution 604 to individuals (Figure 4.1). Figure 4-1 Although the state is no longer a monopolistic land owner in Ukraine, most of the land transferred by January 1933 had gone into collective, rather than individual ownership. The situation did not change much during 1993. 4.11 The State Land Reform Committee, later renamed the State Land Resource Conmmittee, was established in 1991 to implement land reform legislation. Its main task is the management of national land resources. The Committee works as an independent government agency under a Deputy Prime Minister. Its regional offices provide the technical facilities such as mapping, consolidation, land evaluation, and registration for the land reform, while actual land allocation decisions are made by the local Soviets. 4.12 Present land legislation does not provide a clear framework for full-fledged privatization of agricultural land beyond the areas of subsidiary and household farms. The legal status of collectively owned land, the land already distributed to individual private farrns, and future land distribution is the subject of intense political debate. New legislation is being prepared on land ownership and land use in the framework of a new land code. Many argue for the full privatization of agricultural land, including that presently being used by collective farms. Conservative forces, however, would like to limit full- scale private ownership to subsidiary household and individual private farming, leaving the bulk of agricultural land in collective ownership. This is, more or less, as was envisioned at the beginning of current land reform in Ukraine. 56 Chapter 4 B. RESTRUCTURING OF AGRICULTURAL ENTERPRISES 4.13 The restructuring of the agricultural sector is proceeding mainly through reorganization of existing collective and state farms. The organizational changes in the Ukrainian farming sector began spontaneously in mid-1980, with the promotion of lease contract groups in collective and state farms. The changes developed and deepened during the Soviet regime, when they largely followed the same pattern as in Russia and the rest of the USSR. After the dissolution of the Soviet Union, the reorganization of the collective and state farm sector continued in Ukraine virtually without active government intervention. While Russia sought to reorganize the socialized farm sector by force of Presidential decrees (in December 1991 and then again in March 1992), the Ukrainian Government did not pressure the kolkhozes and sovkhozes to reorganize and did not set out the options and the framework for reorganization until mid-1992. The lack of active support for reforming the socialized farming sector, however, did not prevent nearly one quarter of collective and state farms from reorganizing in one form or another. 4.14 The extent of formal reorganization of the traditional large-scale farm enterprises is substantial: according to recent AF Formt ofReructuring for Stat and CollcFtivefEarnis survey results, two-thirds of the sampled farms a creatin -i he o s bSC ed on had decided to reorganize by the end of the first condtional land and no-and aset ses quarter in 1994 (Box 4.1). Among the ...... kolkhozes, over 80% had made the decision, b)li -- creation: of l74eas:e :oope rativ 0es",:: -:as:. compared to only 35% among the sovkhozes. co .partively:indepMndentM sudivisions:. of This may be understandable because of the existing kolkozes and sovkhozes; potential difficulties with ownership of land and c0 conversion of E oeswadsovkhointo joint assets in state farms. However, among the farms Sftock_ cpanie,s and that decided to reorganized, fully 85 % registered as collective enterprises, which is an f-0d) searatiozof individualupeasant farms or organizational form essentially identical to the old. . cooperatives from te kotkhoz or sovkhoz kolkhoz. Most of these collective farms, .. structure.. however, decided to move toward privatization of land by distributing contractual ownership shares Box 4.1 among members. Adding to this, another 3 % of farms that formally decided to retain their previous form after reorganization, we conclude that nearly 90% of the reorganizing farms in fact remain collectives under a new name. Among those farms which have undergone more substantial reorganization there are 355 agricultural cooperatives (lease cooperatives) and about 100 joint stock societies. Some new collective farms were created by the division of previous kolhozes. Moves Toward Shared Ownership 4.15 Between 1991 to 1993, kolkhozes and sovkhozes began to move toward more formnal privatization through the division of non-land assets into "conditional shares." These represent the share of each individual in the total assets of the farm, without physical division of the assets. The shares are formed in two stages: first the state transfers all state-owned assets to the collective (this refers to all Land Reform and The Emergence of Private Farming 57 assets in sovkhozes and to land and social assets in kolkhozes); second, the collective divides all its assets into "conditional shares" by balance sheet value, each share representing partial ownership of one worker based on seniority/tenure and actual labor contribution. These shares are non-tradeable and can be used only within the existing farm structure. The division of non-land assets, based on standard accounting values, is psychologically easier to carry out than the division of land, for which, in any event, the necessary legislation was adopted only in March, 1992. Even the division of non-land assets, however, it is easier to carry out in kolkhozes than in sovkhozes: kolkhoz assets are owned by the collective, while the sovkhoz assets are owned by the state. 4.16 Land distribution issues within kolkhozes and sovkhozes remain largely undecided. Very few farms have actually completed the distribution of land into "conditional shares," designating the area each individual "owns." There are only a few cases where the distribution of "land shares" has been accompanied by actual assignment of a specific plot to an individual owner. According to a 1993/1994 survey conducted by the Ukrainian Institute of Agricultural Economics, fully 55 % of land in a sample of farms is still in undivided collective ownership, 5 % is in shared collective ownership, with individuals holding certificates of ownership, and only 3% in individual ownership, with physical plots actually assigned to individuals. Although land distribution does not appear to be an obstacle to internal functional reorganization of the large scale farms, it is definitely an obstacle to free exit of individuals or groups of individuals from the existing farm. 4.17 The introduction of asset shares might strengthen the independent business orientation and profit motivation of the intra-farm working groups. The workers of these groups naturally pool their shares and invest them in the "common business. " Thus, in addition to getting their wages from current proceeds, they also receive a share of the group's residual profit at the end of the year. Other individuals, in particular pensioners, may "invest" their asset shares in the productive subdivisions of their choice and thus enjoy "dividends" while remaining "passive shareholders." In the future, this form of organization may develop into a common stock corporation, once share tradeability and management issues are resolved. 4.18 The introduction of asset shares in their present form gives some grounds for concern. Since the conditional shares created in this way are different for different members, occasionally the shares (paii) are replaced with an appropriate number of equal value stock certificates (aktsii), thus formally converting the farm into a joint stock society (aktsionernoye obshchestvo). Neither the shares nor the stocks are tradeable or transferable outside of the farm. Future earnings are supposed to be divided among members according to a composite index, including both share value and current labor contribution. The capital represented by the conditional shares or stock certificates is "anonymous": it is part of a collective asset pool and cannot be physically identified by an individual. It cannot be sold and is not freely transferable. The only way for individuals to take possession of physical assets is by declaring their wish to leave the collective and to start private farming. In this case, some partitioning procedure is initiated to decide what physical assets the exiting individual should get. 4.19 In Ukraine and other FSU republics, especially Russia, several methods have been tested to privatize collective and state farms. Among them, the IFC Nizhni-Novgorod project has been the most publicized (Box 4.2) According to this method, farm members and pensioners each receive land and machinery certificates graded according to job and age. The certificates are then used in individual farm auctions, in which only the farm's workers and pensioners can participate. Participants are encouraged to form partnerships with other workers to bid for, and create, viable farm units. The strength of the 58 Chapter 4 scheme is that it avoids the proliferation of .... .. poorly-equipped, small-scale farm holdings. :::X-:The:Nizhni-Noygord Farm Privatization Model The auctioning scheme appears to suffer from some drawbacks however. Closed participation * L nd property invently in the auctions implies that an effective producer, - Clt aification-nof and and property entitement with land neighboring a collective farm, will notlst be able to expand his holdings. Also, a * Calulationuof land and propetyentitlents successful company newly investing in * Approaf the Moel Plan agricultural production will not be able to acquire Stage 1:istriion of Etitlents these lands. The pilot project has also been a T he distribut 0ionofland a rather expensive enterprise. A new decree by the . .... . entitlements to qualitiin inividuals E Prime Minister of Russia, signed in April 1994, ' Pubic infdormation campaignototinformland andil allows state and collective farms to auction off property...etitement holdersTon thei rrights and land as private property to their workers. Theopos Nizhni-Novgorod pilot project scheme is Stage 2: C 4reaton of New Interprises and Concldiin recommended to be used as a model, although Con .. ... ..tra...c ts. the farms are free to use other methods as well. * P reparati of foundation.agreementsand- registaion of e terries-- 4.20 The reorganized collective farms Concludig ontr ats. in Ukrainian agriculture so far are similar in 3tage 3A Auctions concept to the labor-managed firms in Yugoslavia * Division of the land and proprty of the farm or to the companies managed by so-called into lots enterprise councils in Hungary. These labor Submimssion oof appliations for land and property managed structures, once very popular outside T distributio of land an property tru an the agricultural sector, have largely failed in East auction European countries. Although better than the Soviet administrative-command structure, the St 1ge 4: Landand doperty_ Tr ansfr organization is inefficient in the long run because i The transfer of-land andeprope and issuance of pervasive free riding and lack of a real feeling o il of ownership and involvement. Also, the Box 4.2 short-run consumption preferences of the worker-owners may prevail and long-run capital investments may be neglected. The decision processes in such organizations are diffuse, it is impossible to assign individual responsibility, and the worker-owners continually press the "friendly" management for higher salaries and greater social benefits without greater personal productivity. 4.21 No major organizational changes in collectives reorganized this way are foreseen in the immediate future. The existing management structure has remained in place, but voting in the management council is weighted by the size of the individual share or the number of stocks (no longer "one man, one vote"). Experience with voting in collective and state farms indicates, however,that at least initially the general assembly will rubber stamp management proposals and the present managers will retain their positions and power. This method of reorganization should remain strictly a transitory form in the move towards the breakdown of the farms into smaller units such as lease cooperatives, individual private farms, or towards an open stock holding company with transparent ownership. Land Reform and The Emergence of Private Farning 59 Division of Large Farms 4.22 A fairly common form of reorganization in Ukraine enabled by the asset division philosophy is the "fragmentation" of a multi- village, large-scale farm into several smaller farms. The smaller scale of the new farms creates a more immediate involvement of the workers and a more direct link of the individual with the fruits of his or her labor. The fragmentation process also has proved conducive to rejuvenation of previously dormant or neglected villages. This mode of reorganization may be viewed as an extension of the division of the large scale farm into smaller productive subdivisions discussed previously. The number of collective enterprises has increased more rapidly than the decline in the number of state farms. that are slowly privatized into collective enterprises. The number of collectives increases not only due to the reorganization of privatized state farms as collective enterprises, but also due to the fragmentation of large-scale farms into smaller entities. 4.23 Fragmentation processes in large-scale farms, however, do not extend as far as creation of large numbers of private farms. Individual members of collective and state farms do not show a particular readiness to leave the collective in the process of reorganization in order to establish a private farm. In a sample of farms surveyed in 1993/1994 by the Ukrainian Institute of Agricultural Economics, only 17% of the enterprises reported that members and workers had left to start private farms. The average number of private farms established by former members is less than one farm per collective enterprise. Agricultural Cooperatives 4.24 The agricultural cooperative is in fact a conglomerate, or so called "lease cooperative", created by a functional subdivision of the existing farm structure. The lease cooperative is a good transitional model and is being chosen increasingly. It allows smaller farm units to emerge, that can later be changed or subdivided further if initial subunits are unsuccessful, or too large, or if the members become sufficiently confident of their abilities to want to begin own-account farming. It allows the gradual division of collective and state farms into independent private farms and/or multiple service cooperatives. 4.25 The general principle is to divide the collective farm into smaller functional groups that will assume financial responsibility for their operation. So far, most lease cooperatives are not legal bodies and have no independent standing outside the main farm. They only have internal accounts in the collective or state farm accounting department and do not keep business bank accounts outside the main farm. The old large scale farm structure is still the only organization visible to the outside world for purposes of product marketing, input supply, and financing. 4.26 Recent privatization legislation has been encouraging traditional lease cooperatives to incorporate. This requires decisions regarding disposition of assets by the general meeting of collective members or by state farm management, although it can proceed on the basis of existing leasing arrangements, without actual privatization or division of collective/state assets. These arrangements automatically induce a de facto transformnation of the traditional centralized large scale farm into a "federated" structure or an "association of enterprises," without deciding any of the ownership issues. 4.27 Privatization legislation and pressures to reorganize have also spurred the creation of independent lease cooperatives as legal entities outside the existing farm structure. These cooperatives 60 Chapter 4 are formed by a number of persons who lease some of the land and other assets of a collective or state farn. They sometimes extend their activities beyond the traditional livestock and field crop operations by establishing regional services, such as repair shops, garages, transport services, construction teams, or even road building teams. C. EMERGING INDEPENDENT PRIVATE FARMING 4.28 Independent private farming, based on farmers who own their land and .... . . ...... produce outside the collective framework, has ndependent F er Profle begun to emerge following the liberalization of ... Acorgto a 99199~4 srecoducte.by.... the political system (Box 4.3). The establishment the Uaine institute of AgriculturalEconomics, atypical of independent private farms is also supported by i ndepenent- farmerinW Ukraie ismarried with 1.7 subsidized credit. The Association of Ukrainian cldren 42 yers old, has. :lived 'i arua area tsince Farmers and the State Farmers Support Fund ..-birth,f and&has hgeor secondary education. Many of also play an important role in providing .them . (%.of fa..er.s.inthe survey).ar.eforme embers of collectives,m*ainly f ticit s or farm managersi guarantees for farmners' bank loans. Financial .10 o ..n ..easily reet theski.lequirements and havego od support, credit subsidies, and loan guarantees con 00batnections with local authorities. AtUrii privae play an important role in the establishment of .fahnnreliesmainlyon- extended familylabor. Lessthan:4% private farms, because, as survey results of4te farmsi-sn the sCmar ple-eploy penenthired-lb or, indicate, many farmers leave the collective with butxover 20%use se xhiredlar. P nsemployin hired labo ar sbtanial lage than farm tht deen very little land (around 4 ha on average) and .....labor . without their share of assets (asset division is often delayed by the collective's failure to decide Box 4.3 on reorganization and distribution of asset shares). The private farmers are thus undercapitalized and have difficulties with providing collateral. 4.29 The most conspicuous result of the new legislation is the rapid increase in the number of private farms, which grew from around 2,000 in 1991 to nearly 30,000 in April 1994. However, the contribution of private farming to the total agricultural product is still only on the order of 1 %. The average size of a private farm in Ukraine is just under 20 ha, compared to an average size of over 3,000 ha for a kolkhoz or a sovkhoz. Private farmers may own up to 50 ha of agricultural land and up to 100 ha of all land. Land up to the district per-capita average is allocated free, while land in excess of the district average is leased and might be purchased at a later stage. However, according to 1993/94 survey data, less than 5% of farmers had plots of more than 50 ha, and nearly 50% of the farms were of less than 20 ha (Figure 4.2). Most of the land in private farms is arable. Areas under gardens, haylage, and pasture are very small on average. 4.30 Less than 20 % of the farms participating in the 1993/1994 survey own their land. In most cases, land is in traditional old forms of tenure: lifetime inheritable possession (65% of farms) and usership (20%). Only 12 of 645 farms lease land, but these farms are larger than average (56 ha) and the leased area is relatively large (41 ha on average). Collective farms in the area are a major source of leased land (in addition to the state), while leasing from private individuals or other enterprises is not practiced yet. The land tenure structure of an average farm is 60% in lifetime possession, 20% in usership, 15 % in private ownership, and 5 % leased land (Figure 4.3). Virtually all farmers in the survey (95%) report that they have a document for their land, but only 60% are confident in security of their Land Reform and The Emergence of Private Farming 61 tenure. istribd ion d RivEde Firms by Size (Der 93) 253 15 0-4 5-10 11- 21- 31- 41- 51- 71- > ha ha 20 30 40 50 T0 100 100 ha ha ha ha ha ha ha Hadsae per (Iam Figure 4.2 Land Tanure an FPivra Foms (t3-94 9u rve Ode Usership Rivate Uwnrsh~ip 1 L2 t i miP session Figure 4.3 4.31 The production mix of private farmers is different from the traditional Ukrainian pattern and from the traditional pattern of household farming. Only 35 % of farmers surveyed produce livestock products, and nearly 90% of the farmers grow crops (Figure 4.4). The two main reasons cited for not keeping animals are low prices of livestock products and insufficient land for growing feed. Consistently with this product mix, private farms derive around 75 % of sales from crop products, 20% from livestock products, and 5% from non-farm activities. Crop yields on private farms are 20-30% below yields on the state and cooperative farms and 30-40% below yields in Central Europe. Milk yields on private farms (3,500 kg per cow per year) are higher than the Ukrainian average. 62 Chapter 4 Structure of Production by Farms (93) Private Farms Households Collectives T otaljX_ * _ _ _ _1 _ i I I | ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I 0 10 20 30 40 50 60 70 80 so 100 Figure 4.4 4.32 The Ukrainian private farms participating in the survey definitely have a commercial orientation. Over 70% of total family income derives from the farm. The main cash crops are sugar beet and sunflower (90% of the harvest sold), followed by grain (75% sold). These crops are sold mainly to the state. In livestock products, half the milk and 20 % of the meat is sold, but not exclusively to the state. Low prices of agricultural products is the main marketing difficulty mentioned by commercial producers. Payment delays are a serious difficulty only for products sold mainly to the state (grain, sugar beet, sunflower). Half the producers complain about difficulties with transport for their products. Private farmers report that they are subject to state orders for grain, but not for other products. 4.33 Private farmers buy their farm inputs mainly from state channels and the collective farns in their area. Collective farms play a particularly prominent role in providing mechanical field services to private farms. This is not surprising in view of the lack of agricultural machinery among private farmers. Emerging private suppliers play an increasing role in farm inputs, especially in seeds, farm machinery, spare parts, and fuel. Some private farmers actually act as suppliers of farm inputs to other farmers. The main categories of inputs supplied by private farmers are mechanical field services and young animals. There are no serious complaints about shortages of any farm inputs. 4.34 New forms of cooperation appear to be developing among the individual private farmers. Main areas of cooperation among farmers participating in the 1993/1994 survey were professional consulting (57 % of farmers), shared use of agricultural machinery and equipment (32 %), joint agricultural production (29%), marketing (16%), and input purchasing (12%). More than 10% of the farmers stated that they were members of a farmers' cooperative. 4.35 On the whole, private farmers appear to be relatively well-off and optimistic. Nearly 60 % of private farmers in the survey say that family income is sufficient for daily needs, although it does not permit purchasing durable and luxury goods. Only 10% complain that their income is insufficient to meet the minimum standard of living. Against this group of low-income farmers, there is another 10% group who say that they do not experience any material difficulties. Only 10% of the respondents have a pessimistic view of the future. Around 40% are optimistic and another 40% have no opinion. Land Reform and The Emergence of Private Farming 63 D. CONTINUATION OF LAND REFORM AND FARM RESTRUCTURING Creating a New Farm Structure 4.36 The establishment of market structures and the elimination of direct government controls (even in their present form) will improve the performance of Ukrainian agriculture. This improvement, however, will be limited unless combined with a further reforming of ownership and management at the farm level. The ultimate objective of agricultural restructuring should be the creation of a sector of independent, privately-owned and managed farms that are free to change their farming methods and output mix in response to evolving product and production technology and changes in input and output prices. The process of restructuring of agricultural enterprises will be encouraged by continued progress in price liberalization, privatization, and development of competitive structures in the marketing of agricultural output and inputs, and scaling back of producer subsidies. The latter is particularly important, because continuation of what is sometimes referred to as the "soft budget constraint," or routine covering of enterprise losses by direct government subsidy or loans that are not expected to be repaid, allows enterprises to ignore market signals and continue inefficient operations. 4.37 The decisions regarding the future organizational structures should be made by the farmers, based on information and advice provided by state and independent sources. The specific implementation at the farm level should be as flexible as possible and correspond to the diversity of local conditions. The newly created structures should remain open to amendment or change, even dissolution, if decided by the owners. The establishment of grassroots organizations should be promoted, together with the political liberation of villages. Farmers should also be allowed to hire independent consultants to assist them in the complicated decision process of restructuring. 4.38 It is not possible to predict what structure of agriculture will emerge and what the mix of larger and smaller enterprises will be, nor is this the key issue. In all probability, there will be a mixture of smaller, private or family farms, large corporate-type farming and variations of cooperatives and looser associations emerging out of the existing kolkhoz/sovkhoz structure. Western European type family farming will probably emerge fairly slowly. However, in all cases, the key to creating an efficient structure is the clarity of the definition of ownership rights, the lack of restrictions on use (except for environmental regulation), and the efficient transferability of titles or leases to the most efficient farmers. 4.39 The sector of small, independent private (family) farms will emerge gradually as farmers gain experience and accumulate capital, and as the input and output marketing systems evolve to meet their needs. The pace at which private farming emerges depends strongly on the evolution of the supply of capital and labor. Experience has shown that shortages of either capital or labor can constrain the development of private farming.' There is already a shortage of capital in Ukraine in two senses: first, the weak financial positions of most families will make it difficult to acquire physical capital and finance inputs needed for private farming; second, the availability of capital goods suitable for smaller family farms is limited. Moreover, the input supply and crop marketing systems are likely to remain ill-equipped to meet the needs of small farmers for some time. On the labor side, the low rural reproduction rate I See Hans P. Binswanger, Klaus Deininger, and Gershon Feder. Handbook of Development Economics, Volume m. April 1993, World Bank. 64 Chapter 4 limits the availability of labor for family farming. Effective farm restructuring however may release a high proportion of current farm labor, therefore, negating any labor shortage in the short term. Although labor may be released as the result of industrial restructuring, it is not clear that these workers can be induced to return to the countryside either as hired labor, or to start their own farms. The latter will require finding ways to provide land for urban to rural migrants. 4.40 Even with modest growth in numbers, a large proportion of the private farms created can be expected to run into financial difficulties and fail within the first years of their formation. This will constitute a natural "weeding out" process and should not be regarded as a "waste" of resources or an undue social hardship because of the institution of the family plot, which constitutes an effective safety net for the agricultural population. More important, it should not be considered a reason to expand govermnent subsidization of agriculture in general or newly emerging farmers in particular. This can only lead to the creation of a new class of inefficient, dependent farmers. Further Restructuring of Collective and State Fanns 4.41 The main task at this moment is to maintain the momentum of reform by amending existing legislation and creating the necessary overall economic and market framework for restructuring large scale farms. In the process, state farms should get the same treatment as collective farms. The restructuring of collective and state farms should be continued in line with the goals of creating a market-based economy, and should be guided by three major principles: * separation of production activities from social and municipal functions; * distribution of land and other productive assets to the members in physically recognizable form and not as anonymous shares; and, * freedom for members to decide about future organization of production after the distribution of land and other assets. 4.42 If Ukraine is to be a fully functioning democracy, people engaged in farming should have a free choice as to how they wish to conduct their farming. The farmers themselves should decide whether to farm individually, in small groups, in cooperatives, in joint stock companies, or in any other form they choose. Different individuals will prefer different solutions and will choose different forms of voluntary cooperation. It is the Government's responsibility to ensure, through appropriate legislation, that a true sense of private ownership of land, assets, and profits is created: division of shares must be implemented in a way that creates a direct link between the individual and the fruits of his labor, and return to owned assets. Moves from one form to another should also be free according to the rules of a market economy (trading and leasing land or shares). 4.43 The reorganization of existing large scale farms is probably the most complex task of the reform. The overall objectives of reorganization and privatization are seldom questioned, however there is a widespread disagreement on the timing and pace of changes. There are two views concerning the rate of change. The majority view is that change should be slow and gradual. Those who hold this view refer to the human heritage of the past system, the historically underdeveloped markets, the lack of capital and infrastructure, and other bottlenecks. They are concerned that a rapid dismantling of the highly inefficient, but still functioning large scale farming system might lead to a sharp decline in production Land Reform and The Emergence of Private Farming 65 and to the loss of production facilities and technology. They advocate a step by step transition, which tests various forms of ownership and management for adoption in a 5 to 10 year agricultural reform process. The minority view favors immediate and basic reform measures. While immediate changes are needed, especially in order to create the minimal conditions for a market economy, the experience of Cemral Eastern Europe indicates that the large scale farm restructuring cannot be fully implemented immediately and a full completion does require time and rather careful management. 4.44 An important precondition for the further reorganization of farm enterprises in Ukraine is the decision concerning the future disposition of the social infrastructure in the rural sector. The production and social aspects of state and collective farming need to be separated, and managed and financed independently, thus enabling the production system to focus on efficiency and profitability, without the burden of social activities, which should be properly entrusted to a separate local authority or user associations. The linking of social benefits like housing, medical care, and education to employment unnecessarily restricts choice of employment and worker mobility. 4.45 Assets should be classified into three clearly identifiable categories: housing, social assets, and productive assets. As a general guideline, all housing should be transferred to the ownership of the permanent residents and all social assets and services must be entrusted to the local municipal authorities or user associations, which will need to receive resources sufficient to carry out these new functions. The new tax structure could consist of a land tax, value added tax, and income tax. These would have to be harmonized with the national tax system. The land tax could be envisioned as the major source of income for local governments, supplemented by unrestricted grants, or revenue sharing, by the central Government. The Government should facilitate the appropriate and quick changes required in financing and managing local municipal structures to create conditions for the transfer of social assets and to transform the level of rural social services. Promotion of Individually Owned Private Farming and Farmers Cooperatives 4.46 The international evidence is persuasive that individually owned and managed private farms achieve greater total factor productivity than collective or state farms. That is, they are likely to get more output per total input in land, material inputs, and labor than collective or state farms. Individually-owned fanrs are more likely to ensure effective harvesting, storage, and transportation of production, since any lost production translates directly into lost income for the farms. This will help to reduce the large on farm and post harvest losses presently suffered in the collectivized sector, and increase food availability in the cities. Evidence from other countries suggests that when individually-owned farms exist beyond a certain number, individual farmers help create effective demand for new, competitive sources of supply for inputs and channels for marketing, storage, processing and distribution. 4.47 Meeting the Needs of Private Farmers. Early experience indicates that there is greater reservation about private farming than originally expected. Most collective farm members are reluctant to become independent private farmers. This may be because conditions for the establishment of fully independent private farming do not exist in most places and only a few of them have the skills for farm management. 4.48 The reasons for limited interest in individually owned farms are complex. New owners are asked not only to accept the normal risks of agricultural activity, but the additional risks of transition. 66 Chapter 4 Under present circumstances, independent farming is very risky. Individuals do not yet have complete confidence that they will be able to keep the fruits of their labor or that reforms will be permanent. Uncoordinated changes in institutions, laws, market structures, barely functional markets, and general stabilization programs have created an environment in which real incomes fluctuate, relative prices shift strongly and exchange rate changes are large. These risks, together with low profitability make privatization seem less attractive to farmers. Moreover, there are indications that at least some individual farmers are being allocated marginal and inaccessible land by the authorities. In accepting the path of individual farming one may risk the disapproval of colleagues and friends. Fear of losing social services is another reason to stay with collective farms. 4.49 Beyond progress in economic stabilization and overall market reforms, further specific actions are required in order to promote the creation of individually owned farms. This would include: * creation of a proper incentive framework with the right of retaining profit for development; * decontrol of input and commodity markets and development of free and competitive markets; * creation of a competitive land mortgage system for financing investments, including purchase of new and used equipment; * development of a competitive bank credit system for financing the establishment of farms; * safeguarding an appropriate level of rural social services; * strengthening infrastructure and transportation systems for the rural sector; and * establishment of appropriate advisory and extension services. 4.50 The growth of individually-owned farms will largely depend upon the development of the farm support sector: material/technical supply, agricultural services, marketing of agricultural commodities. The current farm support system is designed almost entirely to serve large scale state and collective farms. Without the establishment of competitive markets for inputs and outputs, the private farms will remain dependent on local authorities. At present, farm restructuring and the creation of private farms appears to be proceeding faster than privatization of the input supply system or output markets. The uncompetitive input supply and product marketing systems could become serious constraints on privatization of primary agriculture unless development of a private input supply system and output marketing is accelerated. 4.51 The Future of Household Farms. Household farming, cultivation of private plots on state and collective farms, and urban gardens will remain an important element of the system during the period of transformation, making a substantial contribution to the overall production and food supply. Enlarged household plots can serve as starting points for individual private farming specializing in production systems with labor intensive high output value per unit of land. Support provided to household farms should be similar to that provided individual private farming. It should promote the further development of these farms into full fledged independent private farms and improvement of their efficiency through better input supply and advisory services. 4.52 Farmer Cooperatives. Production cooperatives are almost unknown in the West (with Land Reform and The Emergence of Private Farning 67 the exception of Israel). World-wide experience suggests that production cooperatives are not a very successful and efficient form of organization. Empirical evidence indicates that agricultural production succeeds better on individually managed private farms. Service cooperatives, which specialize in provision of agricultural inputs and marketing of agricultural products, are the dominant form of cooperatives in the West. The establishment of service cooperatives relieves the farms of the responsibility for marketing and purchasing activities and enables them to concentrate on production. Service cooperatives often establish processing facilities, that improve members' welfare through vertical integration into high value added processing. Cooperatives can also develop local and regional infrastructure. Another important function of cooperatives may be to provide accounting, financial, and professional services. 4.53 Cooperatives could emerge from the former large scale farms along the lines of the Israeli "moshav" model. This would involve private agricultural production, based both on family farms and on larger multifamily enterprises, supported by a range of service cooperatives. These cooperatives, organized on a voluntary basis by the producers on the basis of their specific needs, might be responsible for agricultural machinery, for purchase and delivery of agricultural inputs, or for shipping out and marketing of agricultural products. The service cooperatives could be organized regionally by function and enterprise, as is common in Western countries, e.g. dairy, poultry, or fruit and vegetables cooperatives. New private service cooperatives could be based on the core of the existing cooperative farms, but farmers should be free to choose the forms of cooperation they prefer, and the new cooperation must be based on private ownership and competition. 4.54 The establishment of service cooperatives should not rule out the establishment of private firms in the same lines of business. Competition between the two forms of organization would improve the economic efficiency of the system by providing the producers with more options. Since there is no experience with private cooperatives and only limited information available, international aid might be sought to provide training programs and direct technical assistance. Improving Land Legislation and Land Titling 4.55 Although considerable progress has been made toward establishing a legal framework for private ownership of land and other assets, the existing laws should be amended if they are to support progress in land reform. The recommendations presented below are rather close to the solutions included in the recently prepared draft land code. 4.56 If this draft law is passed by the parliament, Ukraine will have one of the most progressive approaches to land privatization among the FSU republics. According to the draft, every collective member will receive a so called "average land share" with full private ownership and titles above the already increased size of household plots without payment. Private farmers who were not members of collectives or state farms will be entitled to receive the same amount without payment. Additional land (mainly reserve land presently used by the kolkhozes and sovkhozes, about 2.8 million hectares) will be sold. There are debates around how the size of the land shares should be established, should sizable amounts of land remain in state ownership, how the land price should be set. 4.57 Nature of the Land Rights to be Provided. In addition to providing physically identified average land shares to beneficiaries, the Land Code should be amended to give the immediate right to buy, sell, and lease agricultural land beyond just household plots and private farms. Sales and purchases 68 Chapter 4 should be pennitted directly between private individuals, without the intervention of the local council, a "Land Bank," or any other state agency. Allowing land transactions would foster creation of a land market, give land a predictable value upon which private farmers and lenders can base business decisions, allow the most efficient and most highly motivated private farmers to expand their land holdings, and enable prospective farmers with land shares to start their own private farm. 4.58 Leasing of land is seriously limited by the provision in the Law on Payment for Land that the rent or lease payments cannot exceed the amount of the agricultural land tax. This discourages a free land-rental market, since the highest "average land tax rate" for any region outside the City of Kiev is an unrealistically low 161 rubles per ha per year. The law should be amended to allow rental levels for agricultural land to be freely negotiated between parties. 4.59 Free distribution of up to 50 (or 100) ha from the land reserve should be terminated. Land shares allocated to collective farm members in the reorganization of their farm enterprises will average 4-5 ha nationwide (as little as 1-2 ha per share in the densely populated West, as much as 8-10 ha in the sparsely populated South). It seems inequitable to allow individuals to acquire free much larger holdings from the reserve. Instead, market transactions should be relied on to allow individuals to acquire land sufficient to start a private farm, and reserve land should henceforth be sold to peasant farmers at market prices. 4.60 Supporting a Land Market. Consistent with the aim of encouraging the formation of a land market, a "Land Bank" with the exclusive power to buy and sell land should not be established. The exclusivity of the Land Bank would destroy the land and mortgage markets, as it would dictate all prices, interest rates, and loan conditions. No developed country has a Land Bank with such sweeping powers. Instead, a Land Bank in Ukraine might be given very limited powers, such as the initial sale (and perhaps improvement) of certain categories of government owned lands, or the provision (in competition with other banks) of some agricultural credit, but mainly it should be a marketing agent for land. 4.61 Proper legal infrastructure will be needed to support and facilitate a market in land. This should include clear legal provisions on mortgaging of land, necessary not only to obtain credit for land improvements, but also important for most purchases of land from another individual. In most developed countries, land is not purchased primarily with the buyer's own savings, but with the proceeds of a bank loan or other credit secured with a mortgage or an equivalent security interest on the land being acquired. Licensing of real estate brokers, a useful profession if a land market is to function well, should also be considered. The training of a cadre of such brokers may be an important area for technical assistance. 4.62 Quality of Land. The legislation should specify that land provided under land shares must be of average quality, or adjusted in size in accordance to average quality, and located as close as is practicable to the farmer's house. It should also be specified as to who shall be eligible for average land shares and under what conditions. It should also be made clear that this will not be reserve land, unless a specific piece of land from the reserve is requested. Such a provision is important because it appears that a substantial proportion of reserve land is of less-than-average quality. The current Land Code does not provide sufficient specificity or protection on these issues. 4.63 The Application Process. The time needed to process and approve an application for land under the Land Code varies widely from oblast to oblast and rayon to rayon, but field interviews indicate that too much time is often taken. Frustration with the application process may have been one factor in limiting the number of applications, although there is no firm indication that is indeed so. Land Reform and The Emergence of Private Farming 69 4.64 Three changes would help resolve the application problem: * the time period for action on the application by the local council could be changed from the unrealistically short period of one month to a more realistic three months. In general, applications of those who want to leave the collective farms or establish independent private farms should be processed without bureaucratic delays. * village councils should be instructed to meet every month as long as they have applications pending, instead of once every three months; and * instructions should make clear that an applicant can settle on his land as soon as there has been a final approval from the rayon level authorities and not have to wait additional weeks while a formal title is prepared and issued. 4.65 Need for Land Titling. As more and more land and property passes into private ownership, the need for a safe and economical system to register land titles, mortgages, and leases will grow very rapidly. Less than 100,000 acts have been issued to certify private rights of ownership of land and property, or permanent use of land, but many more applications have been submitted and approved. The market in land and property is not yet operating effectively and the infrastructure required to process titles as collateral to obtain credit is also very limited. Nevertheless, the development of a private land market must be anticipated and will need to be supported by a safe, simple, and affordable system of land registration. This will be an enormous task that may take more than a decade to extend throughout the country. A national strategy should be developed as early as possible and tested and improved by local pilot projects. 4.66 Most urban areas have been mapped at scales between 1:500 and 1:2,000, and agricultural areas at 1:5,000, 1:10,000 or 1:25,000, but most of these maps have not been updated in many years. A highly developed land use cadastre is maintained annually throughout the country, but it has not yet been computerized. This cadastre has 67 categories of urban, agricultural, water, and forest land use, and about 23 categories of land users. This information and the topography mapping will provide a useful starting point for the proposed land registration system. 4.67 At present, a record of land titles issued may be kept either at the village council or at the rayon. A modern land titling and cadastral system is a critical element of the land reform process. USAID is providing substantial support concerning urban land issues while several foreign donors (Canada, France, Germany) support pilot projects in agricultural land registration. There are two options being considered in developing the land registration system: a) a complex land information system which also provides ownership information; b) developing first a simple system based on existing Ukrainian information for land titling, ownership registration, and for taxation purposes and leave the more complex elements of the land registration system for a later stage. The development of a new system should be accelerated along the lines of option (b) above. Foreign technical assistance should be continued in order to facilitate this process. E. AGRICULTURAL EXTENSION SERVICES 4.68 The breakdown of the state order system and the transformation of the collective and state farms is increasing the need for information services and farm management advice. New private farmers 70 Chapter 4 will have to learn the skills associated with organizing and running market oriented farms. 4.69 To assist the multitude of new farmers, there is an urgent need to introduce an efficient agricultural extension service. Such a service, as known and understood in the West does not exist in Ukraine. In a top down, command economy, a service approach bringing new information to farmers, helping move information on best practices among farmers and helping farmers diagnose their operational and economic problems was not necessary in the "agroindustrial complex" system. Production orders were issued, inputs supplied, and sometime later output was procured. 4.70 Agricultural extension, as known and understood in the West, does not exist in Ukraine. In a top down, command economy, a service approach to bringing new information to farmers, helping move information on best practices between farmers and helping farmers diagnose their operational and economic problems was not viewed as necessary. In the previous system, there was no need for such a service. The large farm size allowed for on-farm expertise, or direct access to such expertise. Furthermore, to be sure that the system functions according to planned objectives, the MOAF has some 7,000 plus employees at the rayon level and 2,000 or so at the oblast level. These officials are reasonably well qualified agricultural, livestock, and/or machinery specialists. Although it is a supply-driven system of extension, it nevertheless can, when ordered, move information out and blanket the farms of the country relatively rapidly--within a week or ten days. 4.71 There are institutional assets in place that can be usefully built on to develop an extension service that could work effectively in a market-oriented farming system. First, there is a cadre of relatively well trained professionals in a number of technical areas of importance to Ukrainian agriculture. These technicians tend to be from farm areas and identify their own futures with that of agriculture. Second, there is a tradition that places significant, although not total, financial responsibility on the recipients for advisory services from universities and research institutes. 4.72 While an extension service may not be in place that would operate effectively under open market conditions, there are assets in place that can be usefully built upon, i.e. especially the relatively well trained professionals in a number of technical areas of importance to Ukrainian agriculture. However, information to farmers to a large degree continues to be seen as adjunct and supportive to the state guided production system. With the move to privatization and a market economy, the current system in place for managing agricultural information is not workable nor financially sustainable. The breakdown of the state ordering system and the independence of agricultural producers are giving rise to new demands for agricultural information that did not exist a few years ago. 4.73 The basis on which to build a modern agricultural extension service exists. There are large numbers of well trained, experienced agricultural specialists. In addition, there are the other formal and informal information communication channels such as TV and radio, farmers clubs, associations, local government institutions, and schools that play some of the traditional functions of extension. However, Ukraine needs to avoid the creation of a large cadre of government extension agents. The cadre of extensionists should be small: first, a smaller service could be more responsive; second, the big state and cooperative farms, while transforming, will continue to have technical personnel on their staffs; lastly, the Government and the farmers are financially able to sustain only a relatively small extension system. 4.74 Information resources are as important as the classical resources of land, labor and capital. Restructuring, government interventions in agriculture, and the privatization of agriculture, give Land Reform and The Emergence of Private Farming 71 importance to the development and management of information resources for agriculture. Information is needed by farmers on a wide range of topics including: new technology, such as new varieties, small scale machinery; best practices developed by farmers themselves; market and price information; practical on-farm principles, such as mixing feed ratios; and farm management. 4.75 A major responsibility of Government is to promote and oversee the development of agricultural information services -- in both the public and private sectors. A grant program could be implemented with agricultural universities to help. The exact parameters for an extension capacity in Ukraine need to be formulated. Over the course of the next year, a task force should be formed to develop a strategy. 4.76 An improved and reoriented extension service should be based on the following main principles: (a) the delivery system for advise should be cost effective and competitive; (b) the service should be demand driven by the potential customers; (c) in order to reach small scale farmers, extension groups need to be established, and the extension service has to work with farmers' organizations and cooperatives; (d) the role of the MOAF is to be reduced to a minimum; and, (e) Government's financial contribution should be tailored to the needs of lower income producers. 4.77 Since the main focus and emphasis of the extension system would be on the private sector, the role of MOAF would be minimal, but it will be responsible for monitoring extension activities carried out by associations of farmers' organizations and cooperative federations, provide guidance on new MOAF strategies related to extension, and provide vital links with the agricultural research and education establishment. MOAF would also be responsible for administering the state budgetary support for the service. 4.78 Ukraine requires assistance in the following fields for the implementation of the proposed extension service: (a) support for strengthening of MOAF's capacity to facilitate the implementation of this service; and (b) assistance to farmers' associations and cooperatives which are potential agencies for the delivery of extension services. 72 Chapter 4 CHAPTER 5 COMPETITIVE LINKAGES FOR PRIVATIZED AGRICULTURE 5.1 Ukrainian farms were reasonably well supplied in the past with variable inputs, livestock services, and machinery. The supply and procurement system was monopolistic and worked with the relatively small number of large state and collective farms that dominated primary agricultural production. This system placed no premium on timely delivery or purchase, neglected issues of input and output quality, and on the whole, demonstrated very little flexibility in meeting farms' needs for a wider variety of inputs and services. While Ukraine has made progress in privatizing land ownership and restructuring large scale farms, the supply and procurement institutions have undergone relatively modest change. This old input supply and product marketing system is functioning with great difficulty and is on the verge of collapse. If the emerging private nature of primary agricultural production is to be matched by efficient, productivity-increasing upstream and downstream sectors, then the Government must develop a coherent program of privatization, demonopolization, and promotion of competition. These tasks, discussed in this chapter, represent a more complex challenge than the issue posed by land reform. A. AGROPROCESSING Current status of the sector 5.2 The agroprocessing subsector consist of 7,600 agroindustrial plants (Box 5.1). Of these, 2,250 are primary processing plants, and the rest are secondary processing plants. The main products of these plants are sugar, edible oils, meat, milk and dairy products, and canned and dried fruit and vegetables. There are also of potato and flax processing operations. Secondary processing industries include bread baking, pasta making, processing of vegetable oil and the beverage industry, including the distilling of alcohol and spirits, wine making, beer brewing, as well as soft drinks and mineral water bottling. Full capacities of food processing industry have not been utilized in recent years, and outputs in most cases are constantly declining. Declines in livestock based processing have been substantial, declining nearly 30% from 1992 to 1993 (Table 5.1). Efficiency and technology 5.3 Most of the agroprocessing plants are old or inefficient and could not operate under competitive conditions. In some industries (like sugar), plants are too small to compete internationally. Investments will eventually have to be made in most plants to lower production costs, improve product quality, broaden product range and conform to environmental and sanitary standards. Some of these investments will require that plants operate at a minimum efficient size considerably larger than the present production level. Considerable changes in the structure of these industries will therefore be needed in the coming years. 74 Chapter 5 111.1 . .... .. .1.11   --- --.. .11.1-1.11 1.11-1-1- -1-1-1.-........-.1 --  ''.... . 1.   - I...- -..- - .  . --.1-1.1-1- -- .... ..I..... -.1 .. .. .. .. ..... .. .. .. .. .- ---,.-----.......- I.... -- -....- .1l.l..,..,.,.,..,.........'ll,.,."..''I.",,'.......................,..''1.,''.....,.....,..,..,....,..,....,.",.,."l.,,.,,,,,.,........,I'll.I.I .... ....-.-: .------....l..   .... .... --- .--l-l- I -1-1 ...............-.. .. .. .. -....,-..''... - - 111.1 ... 1. -- -, ''. .. 1. -11 .. .. .. .. 1. -.. ..... -- --  - -.. .. ... -.- . . .............. ..... ........ --. -  -11...., ..... 11 ''..''... 1. - 1 -1-1-1- 1. - I --.. II-- .... . - --- I. 1.11-11.1 .. .. ..... --- -.. ..............I......I. 1. --- . ..... ..  --.. - . ..... ..... .. .  - 1. I. . .. .. ..... .      - "..'. , . .. .. .  .- . .. ......................... I.''. 1. -, - -1-1-1-  ...... . -........ .. - I -.--l. I II - I 11 11 ..''...- 1. - - I . 1.11.1. -- .................. - 1. ... 1.  1. 1-1-1. -........... .. .. -  -.. . . 11.1. .  1, I............ - . - - -.. ..... .. 1. ---- -.1 ............. ..- ''...''...'.. -1- , -- . . - - , -. ..... .. . I  1. 1. . -- - I 11 ... - - I --  ''. -1-1 ........ I-- - 1. I I - -1-1- .......... .. .. 1. I.. .............. .. .. - I ''. I-- 1. I--  - -.1....-  ,.... .  -"........'. 11 1. ...... ,.,.     I..",.,.,.,,.......'........,.,''I"..,.,,,s..... ...... ...-f- im ....... ...............l. I I I-- . ---  11 -.1-1-1.  I - .  I -I.-.. .I.''... - . .. ........ .. I.. I - .1 .. .. ..... - - 11 .. . .  . - - -....-  -- 1. " , "-lawf I dt, .1- -''....'. . --- I... --.1-1-1  --- .Rm re..O:::Jt romiI.., n us r., . --::: I: 1-1.1- ' 992 .:- ,. II. .6.ad .11 ........ - -  -.- - . - - -- 1.  - - I.- 1. I. '' . . .. -  I I 11 - - .1 ...... .-I - . - ..  . ..... - , , .. .. -  -.l . " I." .:::X::X::X::I::... I I. . . -I......I...... -.-.- I - I - --.-....... ---.----l - .11 ..... I-- 1. j::It__ 1, -  . -  11.1 11 ''', - ...   11 - - -.1 ........ .. 1. 1-1- ..... .. - .... .    .. - . ....-..... .. 1. . .11.1 .. .. ..--- -I'll ...-.. 1. 11 -11 1. 1. - -. ''''. ... - .1.1 I. - .- --- --- 11 111.1 ... ........ .. .. I ....'...'...- - - .. - - I..... 1. .  I  -I......,  .  - . I , ,.. . - -  - -........ ... .I I ---. . ---- .. .. ... ....I..... ..- ''...''..'.... II  .1 -.. ..-. --.1-1- 11-    I  -  , - , -. .. .....I-1- - .I -1-1 . ...........-. .. . . ...... .. -  --...    .. ,.I... . .   I. .........I .,.,.  .I I  . .1 ........... .. .-1-1- -... - .1--.- - - --- ..... --.. . 1. .- --- .... I...   I --.- I 11 -- II I -  -.. .. ..... .,.1 .... .. .. . . -- . -------.- -... I.. .. -  1. I... - -.. 1. 1. I  --- I .1.1-I-- I  - .- '', -.. ..... I-- 1. I - - 1-1. 1. .-   - . ........ -.1. , -.1 ........ .. - I - -.1-  I ,. , ...  . - --...... 1- -..... I...-I II .....-  - I -.1-1 .. .. ....... .- ......... 1- ''... . . - , ---.- ,   --- .. .. .. .. -- II..... I . 1. .  .. .  .  1. ''. ,. I.... .. .. . 1. - , - - - .... -- -  11.1 ........... .. 11.1 I I . .  11 ..... .. -  -. I.. ..... .. . I -11 .''...., I... 1. 1.1-1 -1.'.......- . ........... ..... .. I'll ....  -.. ..... .. .- ---- 1''... -I II ---- ... .. .. I - .''..... . 1. --- ... ..... .. .. .. - I...., ..... .. 11.1 . - -  1. .1 .. .. .. -  - 11 ''....  I.. .I.... -.11.11 .. .... .. 1. I I 11.11.11 . I  -1- - --.. ----- I . ........ .. ... , 1.11.1. .  . . ...... .. .. .-  -......I.- I..........  II I I... 1. 1. ---. - , -.11 .... .. .. 1. - I-- "", -.....--- 11.1'....-I.. 11 . -  II-. --  ...- ''. ...''  ... - . I .. - ''.. -.. .. .. .. .. I-- I I I.  --- ....... .. ........... - - I...   . . .. ..... I.... - - .1. -''.... I--.- --.-.- .. .. .. .. .. .. . .. ..... ....  , 1-1.1  11.1 .. .. .. .... I .1. 1. - I I  .11 ..... I..'' . - -11 ... . 1. I,.,.,. . I .- ... .-I....''.1-1. - - 1. - - - I--  -, -....-.... .I.''...'' I. .. ..... .. .-1- ...  1, ll.- II.- 1. I ---- . ...'' .... ........ .. .. . , -- , 1. --- --.. --...--11 . 11 ... .... 11  - -.1 .. ..... .. 1. --.1 ........ I.. 1. -1. 1. 1. I... -- , - - --.-.. ''..., ........ 1- - 1. -..- - I...... - --- I... 1. --- ....I..................... .. .. .. .. - --.-   -- -. ........... .- . --l-l-I.. 1. - - . .1. I 11 .  .. .. .. ..-- ... - -.1 .. ..... .. I.... 1. I.. I.. I.. I.... I . 1. 1. I  I  - . I... -   , -.1 ........ ..... --- - .. .. ........ .. ......I .1 .1.1.1 ,. I-... 1. I- -. .. .. ..... --- ,.''.. -...,.............-- ;r.::::::::::::::::: I ::::I::::.: - --,........C....,....,.".,.,...,.'','''I.,I.I....,....,.."..''".,..' ..- I -.1. .. I... I...., ...... .  . II:: I Se,C ,::::i:Nuib,e, I  - ''. - - -,::al)at1W.:::'.......,. -- -l- .......... 11'',I-. I.- -,-- -1-1 -.1  - -r,.V,I;:::!::::::::::::,,:,:,:,:,:, -1-1-. .- - I....- -  - -  .1  .-   I I.. I.. I.. .- - 1. I I....... .- 11  - 1-11 ..... .. 1-111. -.-- - II. ,I ---..... . -... - --- - ---- -........ .. ..... .- 1---.- - --l- . .... 1.1.11 .-I.... 1. -II-- I.. .. .. 1. .- - -11 - I.---- . .1.1-1 .............. .11. ''.. 1. 1. I-- ''. . 1.-,. ,. ,. .-......I I .1 .... I - -, - . .. ........ 1- - - . -- - - - -..... .. ''. ---II-- .I .. I.. I. .--.. - - 1. -,,. . -. ........ 11 ,. 11 ..- ,.... . --... I I.-....- 11.  - I.--- 11.11 ........... I.. 1. -. ....-I .1 .....-I I I.. I..  I11.11 .. . .... -  . I .-- .. .. ..... ..... .. .1.11.1.. 1. 1. 1. I-- . .. ..... .. .. I - . -   . .. .11,I , .. ''. I .. .. 1. I-- I - 1,  I I  I - I I : : :] ] i:: .. - ..-.-- . - ,"...............,........,...,.I - I .-...l.-.-..-- l   .. I  I .. -.......-, . I - ., .1 . . . . .    . I I . 1 1. .l..l.. . . . I .-. ..-.,- . 1. I --',  1. 1. - ".... I..E-,-------.'1.1 . .. .. ... ...-- ... ... "..,...."..,..,..,..,.."...,. -----.--, ......'......'".   --..'-.. 1-1, .  - -.1 .. .- 1. I I-.. .. ..  -.. --- , -.1 ............. . . .,. . 1. - - - I -...- - 1. . . - - I1. ,. . - .. I.. ........ .. .. 1. - 1. I..., .. .. .. .. ..1:- - I.- . .. -- - I --- ........ - I---- , --- -,.-1..I1. I1-1. .. 1. - , --  .1- ---  I -....... ....... - I... I-- 1. I-.1-11 .I - - I1, -II .. .. .. I.. ,. ,  II .- ..... - -   .11.1-1-- - 1. I --. , -- ''. --.-. -- -I .1 II -.-.. .. .. I... I- --- ..... ..''.-,  1. I-- - - - - -  - I .... .. --. - ..l.. ... 1. I  ---- 1. I..  . -..... I.. - -' .11.11I.... .-- , -. ...... .... .. I.. I . I 1. - ... . . - . -  -.. -- I I-- ..... I.. , ,. - -. . - -.1 ..... .. -  -,  -.1- ....... -- - I.. ..... .. .-.l... . .1-1--l-1-1- -..-.- . . ..... ..... I....I- - I'll., .. .. ... .I. . 1. . -- , - ",  -..''. -.1 .,.,. I. - ---1. . .. I.. I.. I..... I-- - - - .I. -- I.''.... -- 11 .. ..... 11.II  I . -.... .-  ,, , '', ....... .. I-- -- :::I::: ::: :::,,.............''I I.." .... . ...........-- " -1  I...-........  , -.....-11.1 ''''.. -  - 11 --, ..... .. .. .- 1. ..1 .. ..... - 11 I-...  -.1-1.... --........... I.... .. .  - I. . .... ... . 1. 11 ... I..'', 0 ugm::::: j::::::] II:., l  I 1, - 1.1..,..,..,................. : ... 1-1-1 - ,. . .. -. . .. ..... .. .. . -.. I I] ::] :: j::::::  Wi I::::I::st. 192'.....lvbutp ldfIdI ::50 696 (ifithdI -1 -.l.,...--- - I-- ...:ora ate :sugar : : I. : ousan s  flon -.. .. .. -..,:, - I  1.11,,................'... -............. 11 _ :  I JRU ..... .111,I1. - - -.. .. .. ..  -.... 1.11.11 ---.. I --. ....,.-....,........,.,.'',,,,l'........,.,.'',......,,,,."".....,..,.... -I1. 1. --. --.- . . .....I..... .. ..... 1''..., .. .. .. 1. - - - - .--.- -.....I..... I .- I...- -.1 ..... I-- I  1.1- - 11I.l....'..''.......- --- ...-........... 1. .1.11.11 .... .. .. .. ....-- - - --- ..... .. 1. 1.11 I.. ... - 11.11 ..........- --I 1, ".1-1 .. ..... .. .. .. . .. . - --, -..--..-- ---...., ... 1.11.11 -1. I.''. .  - -  , - - ---- .. ..... .. .- . ................. .1.11 -- I1. --, .. .. .. .- I --------... . I. .................... 1. -.... . - -- - - -.. -- .. I - 11.1 ...... . I. -111. 11 "....- .. .. .. --- I , .... .. .. .. .. -- , --- .....I..... -1- .. 1.1-1.1'...'. - - - - ---- ....-I.... 1. - ............. . -....-,. 11   I.--- -1- .--- -I-.. ........ .... , I... . .- I.''. I -.1--.11. 11 1. I.- 1, I 11  . ---.... , 1. 1.11-1.   -. -  -I..... ..I..... ..l.. I .. - ,.,..,.,..,.,.,...''.1,',,,  -- -- -. ........ .. 11 - - .... .. ..... .I . - I . -I- -. --.. I - - -1-1 .1 - - ..  1-1-1 ..... ..--... I .-.1- - I I . 1..I -I 1, , ---- .. .. .. - - I 1, ".1- .-.- -- ., --1- .. .. .. .. - -1-1-1.... - .I :: I ::I:I1:-.. .1-ii-I...., - -. I  - - -,   I   .... , I... ... 1., -1.1..-.... 1. -1-1.,II ...1. , : .-  a: Y:0. '.- ......... --,-- I I  I  . . .  .........uI-.1 aii&o ',:.1:1:.:I. 7: I - D Hfebb .57 .1 ''"..-. ... 1.. A. ::: ::::::: , vot.46:6iF-M I I::(!b.o san&oftba): 1.I -. I .1 I I ". I I I I 1. I --... -...,.....,......-....-- I I  I  , " -1. ....- - .  .  . I -.pI -v - I-- I I..... - ---I. 1..- - -.1. .1 . .... 1-1... 1. . - --.1... - II- 1. . ....I...I ,I 1. I'll. 1. I....... ...l.. .. I 1. I... I... - 11 -  -....--.. - I.. -..... I..''. I I-. I... 1. 1. - - 11-1-1--I - . --- 11.1..I I--.'.........-I......-.. ..... .. .. .-... ..... ......-- . ..................I. .. ..... .. -   ..-.- -. -- I ''...I - - I. .. .. .. .. .. . .. .........1. '....11.1-11.1- -II-1-1 . ... I...,I:   I   :]: ---. - --...'....'... I.. I... .. - ::: :  - V: an I: '.Olvp ants -. -, ..--- I -:- .... . .].11.1. 9  "... Annu,al::Outfitle8ds: Of tohs)lil]:- .- ...... I . -.1 ,I .. .. .. ...-l-': il pvtv:Oamar .... I i4IMU. i(sF 1. - . .--- -  -  -.. ........... I..  1. I , ,. - - 1-1--I - 11 1.I . ......---  ..... 1.11 .. .. .. -1-II I 1. .. 1. - -, -'....-- -........ -- I - - - - I1. I . I.. I: I: I- .1. .- .. .. .. - 1. .--.. ..... .. --..I. .. .. ..... .. .- - - - -..- -  --- ..... I.... I I'll ...-... I . --   -.. .. 1..- -.... ,.--, --   , , , , , , "....-.- . 18,::  I- - -. .11. I -.d 1. . -..... ..I I...I:ua .out. ,::, .. margarimpf . ... . .....  . I II:: :i.:Ann I,f IdIl 1134 8 ( siiiftd 6 Adm.)   :    i i i ::I I 1. djjtsl]]  -- ::::::::::::-: II. I. I --..  - -.,'. -..... put 0,  AUA, WYSoap t .....I.- ,   I  ".....'.....".1. I- - 1. 1. ..... I-- 1-1....I.-.1-1. 11 - 1. 1. 1. 1. 1. II III -II-. - .... . - . . ..... .. ........ .. .. ..... .. .. ..I  -  .1- --I11 .. ...... 11.1.I .1 -.1 ... 1. -........... --- 1-1. 1. 1. I... 1. - I  .-- -. .. .. .. ..-- --..... I.... - 1.... 1. .. 11 - ...I-1-11-11 .. ........... --l- ........ ..... I.. 1. 1.11.1. -1-1. ,.. ... ..I. I .:.:.:::::-  5:1 -".,.-.,.........I I .I A II R. 3 : k m d : l6lisV . ,- I II:IIIIII iIIIIsozp vqrk§ I::'...'.., I -..,.,.. -- I.", 1: :I: I:: -toftOnetsoml).I 46A,  :::i: IIII  . 1.. - I-- I 1. I - I.. .. I I. ,I I...II.....-  . .- 1. 1. -- , ........... I .-.-.1 .- 11 1. -- I:::. .: ..... .. .: 1: II: X: F::: ]I--.. .. .. .. ..- ''',I.-: ,. ,. ,. , ...I... I...I  I ..'.....................'l- 1. . I-,..... ..... I.. - I, - .I.''. - ,-. . 1. . 1.11.1.... - - -.....- .. 1. . 1. ......-.-- --II.... 1. I... - -.......... .- I.. ..I.... I I.. - ----- - -.. .. 1.- , ''.... - ..''. . .-.1, ..  ,-,. .. .- ,. , ,-......... .. .. .. ''I''.., ...I..... .. ... I.. I.. I.. ,. I.. I I  -.11 . ........... .. - ----.- I ''.... 1.I .. 1. ... 1. I --- - -1-1 ..... 11   - 1. .. .. .    I . .. I.. I..I. -- .. .. .. - -11.1 .. ..... ..I.1 -1....'....'' ... .. .. .II ..'' - . , -,I- . .. .. ..... .. .. ., , - - - -- I'll .. .. ..... I..''. -..... .. .. .. .-, -..... 1. 1. . . ..... .. 1.-.l.. .-- I . -I -11 .1 ..... 1. - - 1-1-1 -.. .-- -.1-1 .... I -- .- 1. .. .-''..... I- -1. 1. ... -  ,. -. ... , --..--. . .. ..... ....., -1--.- .. .. ....... .. .. .. .. .. ''... .. I , ,.... ... -- . .....- -. 1. 1.I I1. -- - - 1. I-. 1. - -  I - --....-l- ... .. .. I.. .. I.. - - II....... . - -I .. I.. .. ,. . - -. .. 1. 1. 1. .-- - - -,-.. ..... .. .. . - - ---.-  . ...., .. ..... ..- ,. ...., .............. 1. -..... - -I I-... 11 -.11 .. ..... I...---l-I.I.. - I.''. 1. ---- -.1 ..... -...- I.. I.. I.. .. I.. 1.  I  I ----.... , 1, ''......--.1 .. .. .. . I: ::: -, -1. .-...- ..... .. .. . ---- -... -.----- -.1 ... I:f,,I I -1--l'.........l....I.-I --l... --- l.,.,.,..,.....,....'....... -..",..........,..., ..... - I I I  , I - 1".. -.-." .. .. .. -  .  .. -1 - "  --.. ..... 1.  I,. . C b h e c tio h d rv I: "I  -     I .. I I I I.. - 1. 1.  , I I   I  I - -  .        I  " .."'...".... I... .. .. .. . . I.. - - - .   -       I  I . . - - .. .. .. I I I I  I I I I ". ., '.. . . . 1, I  . -. . -- -I -.11..11 .......... ..  -11 I .1-.. .. .. 1. -  ,  - -.-l- - 111.1 ..... .. .-- , -.''... I... .-- , -- . ......, ----I .-II ,I, -...  - .... : ::.'.  .. ..I.I..., .. .. .. .. -, 2 I - "  - 1.   , . . .  . - - - - - .,....'... . -  , . I I.. I........ I."... 1. ..'. 1, 2 I   1, I I 1. I .. I............ .  .   I -1-1-l".  -......". 2I I... -.. ..-II , I  ............ -  -I I I- .1 .. ..... .. .--I -.. ..... I..'' -1- ...  I  .1 - . ---- - I I... ..I........ I... - I111.11''.. 1. I  - I I . 1. -.....-1. .1. I I - I , " -  . ... .. .  .. ,::: :::::I: I Innuaffl-Iji'm.OisIt6&) .. .:: . .  planl& :  l I . %-.... - . . .  : :: ::  28:1.- : :AIIVUWUUO:Wn ectwnerids -::  Athou andsvf:::1.1 .. -I  11 - .- -..l.....l..,.....,..l...-. II,... '--:---  ... - - - - I II...P....''. 1. .1..1 .1 1. 1. I... - - - ..I. I 1. .- 1. - I".---- - .... .- 1. . .. .. ....  I.11.1 , . II  1-1IIIII -1. I I..... -  -.1-1 ..... .. .. . .1.11 .. .. ..... . .-- -- - - ,- 1.. .. ........ I  -,- -....... ....... .. .. .......... .. .. .. .- , - -  - . --- -. .... .. ........ .. . -- .. .. .. , - - -- . ..... -.- .. . ..... .. .. .. .-, - -- ...... .---  -.- . .. ..... ..-. - -,, - -.- .. - I:: :::::::: Works s:Atbakeri :::::: ::::  : 5.I-.. .  I ''....'..'..'.....'........ I .. I.. I .- I- -.-- . ..........,..,.-- - I .- . . .. . -1,1 .::::I: I II- - 1. I... 1. 1. -  -- I... -.1'..... I - -I--.... I.. OS ..::.  .  -.1-1 .....I...... .- .11'.... . 1. 1. I---I....... .. 1. .11.-. 1. - I-- 1. I.. .. -.11- ..--. -I.. ..... ............ ,. , 11 ... .. ...... -- , , - - -1-1 ..... ..... .. --  - -.. .. .. .. ..... .. --I -.111, ..... . ........... ....''.- ,. - -.- - - - -..... .. .. .. .. . ..111-  I...... 1. I.. - 1.11 1. 1. -II -.-. ...- .. .. .. .- 11 .. ..... ... -- ...-.. .. ....... .I---....- 1-1. .-I.- . ........... - -  ,- -1-1-1.. ..... .. - -. 1. -.. ..... .....-... - .''I'll.-I.11.1-1.1....- 1. I I.......I..... 1. -- 1. -.1 . ......... I II- 1. I . .. .....- --  I. .. - .. .. --  -  .-.- .I-........... ., .. -11''. . - .- ........ ., ,- 1. I. . .....I.. .. .. ..-1. ....''.- . -  - --- .1 11.1 . I - I.. .. 1.- --- . -.1-1 .... 1. ''....''. 1. I... .....--.. I-1-1  I--.-..... 1. - - -- .. .. 1. 11 1.-   - ,...'' .. ........ .. .. -  -- - - -. ........... I-- . ........ .. - . , -- . . .. ..... .....I........ I . II1. I..- I... -..... I.. I.. .- ---''....-I .... - 1. .. I . I.. I..  ---II I .-.-  -.11- - ,I. 1. -  -- . . . .. ........ .. .. 1. , - - - - --- . ...... ....... .. 1. -. . ...... .. 1. 1. . . --  .I1, 1, .1.11 .. .1. - I. 1. I.. ....  -1-I ....-I.... - - 1. .1 -.1 --- .11.1-1 ..... ... 1. ..''.. II II -.1 --- -- - -- ..-.. 1- ......-.- . - - - ----- -.. .. ..... ..... .. .. I  ,. I.. I.. I.. .. .. I .---- -- -.11. -.- ....  I-. 1. .....I.. .....I---I... :::: I: :Akohol : :: I I: l l l l - .1 ........ ..--.--. 1. I...... .- 1. 1-1. -, - 1. I I.. . ...... .. ... -....,.....,.....,........ .. .. .. .   -. . - I-- .... .. ..I ...-., --1-1. I.... . --.. - ---.....-.- .1 .. ................. .. .. -  .. .. .. ... .. ..... .. -.- I... --  - - ----.1. 1. 1. 1. 1. .- , - -,.......---- .....I... -:::::::::: I ..., ..... I... I -- - - -........-.--l-..--. - -- - - ----  ''.1-1 .. ........ :,:.:: ::-I--..... 1. .......- - ,I-.. .. ''.. I - -- - ---- - -------.- I.. ..-... I .I -.1'.. . .. ,    I -.11.1..... 1. - I-- ''.1 ........ .. .. - I - - ..1. -  ---- ,.... .- , .. -..1. .1II- I I . ,I.. I.. I.. I... . ....- -1- "  ". I ,- --- ..... I II- ....- .-..., 1. - - 11 ... .. - :   :II',I Al h. (,- 1.  :  :  V ants::::::::::: ,. ,    , .. ...... .. ..  ..7.6:iii] AnnuqaLout f, th,,:6 ulitergl::::  -., 1. 1. I 1. I I I,- -1 -1 -1. . ...    I . I .. I..... I .- ,- mutpft yx :co oF4:64.4 illiolas .... f deII .  . -: . I " ..."....'.... . I .. I.. .  .  -. . . . . . . . . . ........... - ,""'.'"'....- - . - , -- -.1 .. .. ..... ..... I.. I-- . I.''. ..........-,.-.-. 1-1- I11 :: -.-. . I "I'll",II 11.1 1. I.I.I.I.11.1.11,11.11.1.1-1.1-1.1.I.I"..,......,...,.,.,.,.,:"",-,,.,- ., I, - -1-11-1-11-11.1-  1-11-111111111111111-1 11 I',.".,.",.,"".,,,,,.-""""...............''.,,  11 I ". .  -.- :::xl::::I:x:x2 :::: :::: .::: ::::::.: AfifiUA I, .. ., , quo - . .- ., ... 1111 :]I : str6. diiiiks.  . ........8 I6fly.odki nd likd I''2 .1 . II'l- I  - I , 1. -- . . . .............. .If33.21 libris::of -- l.qg..".................. ..,..'........,,. I--..1 0, I- __ ,a 1. ...-. :.. . - , . I1.  1. 1. 1. 1.I........... 1. I....''. I-- 1.,....-....- 1. - -1-1.... 1. .... - 1. 1. .. .. ....---- .. .. . .-- 1. -1-1-1-1 ................. .1.11-1 ..... .. .. ..... . -, I, '... ,.- -- --.... I... ---', .I. 1. --- -- -. ., .:I:: I:::::::I:: I:::::: 1:I: , ...I . 1. - - ... -- - - --,, .. 1. 11.1-.-.... I-- -.1 .. 1 .. . ,: Ye - I1. 1. I  I  I I    20Ii -::alit6r)]: ::: , - 1.  I-,  -......  , , , , , , ". .'.....'..., .....l.......... . ...-.I.l , .. .  I  . .. .1 .. .. .. I , . " , - , ". 1". - I  I .. ..... 11. 1 -  .11. . .. . 0 .  4 - . - ....... ..... . ..... I I I..., '..l..,- .. - . ... . . ..,- --1  I I - .1.1 ... . ....,... I.. - .  ,  I .-I-- ..... I .I 1.11.1.  - - - -.1 ........I...-,..  ... .. .. I .-.- .. .. .. ..I.. .. ..... ..I..... I I..... I.. I---- -..------ ,. . . ,. ", -- ............ . - - 1. 1.  -1-1-1 ----.- -.1 ..... .. .. . -......- ...... .. ..... ... ..... ..-.....-.. ,, -- --- 1. - - - 1. -.11---l. 1. - I-- I-- - -  - - ------- I. .....-.- I... .-- 1. .- -.11. 1. .... I.. .--. 1.I I-- - I--- 1. 1, , ''. - "", -- ........-. .. ..... .... . .I.1.... .. 1, .........-II I 11..1 .. ........ .I11 -. .. .. I. -,.. . . -- ,It:of,b k tltiVtAsVn:I,..::(I" -11'' -I..--. ,. -1. 1,  -.............. .11I. ..... ,- ..., ,.. -.111, . - -- .11 .. ..... I.. - :: I::::. .:A157: iW f to.. -., ...... I.. I..... 11.11.1. I I.........I...... .-:: III: I, A ..,., "I''......, I.I.. '.....,..l..,..l...,...-. .... .. .. .. ...... olwa OutPu - O. Q...: ... I.. O." I   - "....... II 1- .. ..... I.... .- - - - . .. .. ........ I . I.. I'll. - I..... - - -................ .1 -........ ... ..... ..  ---I. ...... ....I-I .I..... ----l .. . .....I..... I.. I.. -.1-1- 1.1- 1-1. .- . .. . ..... Y............'...- - - -1....1-1 .. .....I.. .. ... 1.11 .1 . -1 11 ...... II..... .. I-- 1. 1. -- - --- ........ ..... 11.11.1 ... . ..... .. .1. 1. 1. --- - - - . .............. I.''. - - , ....- -..... I.... .. 1. -- ...I-. . .. ..... .. ..I... -- 1-1.1 ...I........ I..-- - --- ........... --- - -..... - I - .. I.. .-.- - '', 11.-. I  I.. I.. I.. . I.... -- .. ........ ........... 11.111''... 1. ---... 1. 1. I-. --., . .. .............. 1. -........ ..... .. ..... ... .. .... .- 1.11 .. .. .. ..11 I II .1- .............. .. .-I-1 ............. .. 1. 11 .. I..., .. .. .. .. 1. - - -1- I--, ........... --- ,- 11 -..... .. ..... .. - - -- .... .............. .. .. ..I.. .. ..... .......... 1-1- .1. ::::::::::::: .: :::X:: - .... .. .. .. .. .I I ...., ........ .. 1.11.1- - - -.1-1 .. ..... .... -  .. .. ......'' 1. 1. - -1.1. -- I.. .. I.. .  .. .. I...  --. I  I -.. 1.. 1 1 I  .1 - .1 .. .. .. .. .... .. .. .. . - .., ....... .- - ,. 1. I.. I.. .. I.. .. .. .. - . , " ,   - - . -,..... ..   . . -. III, - --.- ..... .. 1. - - - 1.1-1 ........ -- - - I 1.11 -1.11'' 1-11-1-1...'..l.....'..... .:i:::::::::::::::'::::::I:A:::::: . .. , ,,..,.....,..l.-.  ... ......-. '- " ---.............:::::::: ::::: - .,::::.:I---... .:: x: :: salt.,". ''. I.". -.,..,........ AiuiU4l:outv.U,t Ofsaft 4I 8. 992. (SI: 0., ................l. ,-- -   I I I I 1. I . ".1 ..... :::::::::::::::::::::::.: ..... 1. - .1.-1-1- .. .. .. 1. .. 1. I - -.. .. .......... 1. 1. .---.-l---.- 11 - .l. . 11 1. -- -.1'....- .. .. .. ,. ,. ,-, - . .. .. .......... .. 1.  - '- v -, . 1. I.... ---. - , 1 , .1 ..... :::::In :: :: :::::: ..--.--.--- ............... --.. 1. -...,-'I.l - .1I. ... . ..... .- .. .. .  .. I  I    I .. .. - .. .. .. .. .. ,,- ---- I I.1 -.1 ......I.. .. ..... ---l- - .. .. I.. .. .. .. . - . I  I . I .. .. .. .. .. .. I.. I. I- -- . .. . .11 .. ................. 1. .. . 11 .. -  - -1. 1. I 1. - 1. - .. ..... . . .. .. ........ 1. .. .. I .I .. I-- -I- , ., .. .. .. .. .. .. .... 1-1. 1. ,. - - -- - .... I - I.. I.. . .. .. .  ,.I.. .....I........ - - . - - .1-1 ........ . -... 1.  . . I 1. 1. 1. . . . - .,. 1. 1. - - - - - - - - - ....... .. .. .. .  .. ..... I.. .- - 1. . .11.11.1 ...... I.. - - --  .. . .. .. . - - - -  .1 ''.. .. - .. ,. . -  - -1- 1 ..... .. .   1. - -1. - 1. -  -I I. - - ..--- - -, ''.1- .. . ..... .. ....... . .. .. I.. I.. .. .. ,. .   .  ,. .. ,. .11 ...... 1. 1.--I- ..''. -.. .. 11I --, -, - - - - .---. ,. -.,. . - - - - -- -1-1 - -.. ..... .. .. . .11.1-1 . ..11 1.I.. ..... I.. 1.  .. . I II 1. .1 .. 1. .- ..--II - I  I - - .. .. .. .. .. .  . I  I -.I--- --. ......-..... .. .. .  .. 1.11.1-1- .-.. .. .. .11 ...... ........ ...- -1-1. - .l.. .. -. - - .. ..I,. .- - ., .. .. .. .. ........ .. ... .. .. ..I. . .I-- -  . .1-1 - .l.. --. -..1 ........ I.. .. 1. - .--- .1. 1. - .1 -..... 1. -- .1 - -.1... . -. 11 :::---B--.lI  .1,.,......................", I. .- ----'A  U 7f dekwfto.,OY   :::::      .. I: I: rewe ]i]il&i: iI :il : bI :: .4:: ....   , TYX: :: 1: 1:  I: : .]:::::-:: I  I  I .. I............ .- I .1-1. 1. 1. .. I:OutDU(:O.f. .0 165 (Hions.:0 I... 11 1.1- .. . ........''..'.., -  I I I " - I'- - ,,,,'.....,........,..,....,...". --, 1 1. .- ... .. .I.... .....-.- 2-   --'. - - I - .. .  .1. 1. --. , , , - ..'....'...'.. -.....%, , -.I.- - - - . .. . ': I::::: . .---.1... -- -.11 .. .. .. -.1-1- .- I.- . "I'l.-l-   --.-:::::X::::: I: .::::::::",1,1"".",.,......................,..,.  1.1-11.1-1.1.1.1"........ ...1-1-1-1  -    I -  .. .  . . 1. . I I ..-l-l -1-  I - - ..... I-- -.. 1. -..... I--.. -............. - 11 . I.''. -..--  - - - -..-::::::::::::I::: :::I::I:::::- I II .I .. ..'.. .. I. .. 1. I - - , ,  ..................I.. . .. .. ..... 1. I . - I.''.11 1. 1. 1. I... . 1. ----.--.l..l ........... I 1. I I I I ----,.". I: I: : I:: I:  I: :: :: I : I: ................... .---- -..... 1. I .. .. I.. I .   - 1. 1. I - -.,.....-'. 1. .. .. ...- -- 1. I - - - 1. 1. 1. 1. 1. 1. --. .................I...... .......'. I . ----. . . ---l-11.1 ........... .-.11.11 .... -..... 1. 1. I  -I -1-1-1 .. ........ I.... ........ .-- -- 1. 1. :I:: I vI'll ---l- 1. 1. - - -  . . ...................... -- "'..''.'..... . I-- - - - -- . .............. .. 1-1-1 -........ 1. --.- ....,..- ...- - . .. .. 11 -2-2- --l. - - II  . Z.: ::,.. ... I . . 1-1.I... -.11-1- ... .I.....,". - 21, , ,'- - -72 - Ions,'of ,d Wit :: :: s6t dtWks'-" , -, " -1. AAAW1 oUl Vefsofti*ias:  1974:1OI, e) : i   ::II II...,..l..,. ....%-%.,., I I I w I - ., '-'.-,-.... .. - . . .- ,I:: I:: :::: :X: .. ......... ::....  'o - -- -I I.. .-Ae ........ .Ts  , . - 1, .. -.1-1-1-1 ......... - -.1-1- : ,  .. .. .. , , - .. .. .. .. .. ..... ..- I. -. 1. I- - 1. 1.-.. .................. .. I 1.11.1-11 .... I.. .. I II .. ......I.. 1. II- ---- II I -..,.,.,..--..l....l..l... I. - I , - ", -1-1  .--- 11 - -.....I..... .. -1. 1-1. II - I -.. . ..... 11 .............  1. - - ...... ---. . .. .. .............. I.. I.. I . ........-... .-- .. 1. 1. .- ..II-..''. --. 11 II ...... . -  -. . .. ........ .............. - - - - ". . '- ........-. ..... .... ..... .I, I... I.......... .   .    I  I .. 1".."......,.....,.....,..,..,.....,....,...,.. .- .... ,-..-. ..  . , I,: :::: :: . .. I.." I.,  I  - ,'.,.....,... -.. .. .. " ,  ".'.....'........... .. .. .....I.. 1. - : ---- I...., ..... ..... I... - II  I'- - -,.. .. ..... .. - I-- . ..... I.. 1. .-- - - --...  - 11 I.... .]:,I-2::-- .::::: .......... ... ----.-..-- -- .............. ........-... - "1. .-----...- - . ... .... -- -.. .. .. .. ........- Il 11 - I - . ... .. .. -.. " 1011.5.. - --- - 1 -1-1 ....... . - -.. .1-1.  -.... - -.1-11 -... 11 I, .. . .1 I  -I..."..'..l..I . I rUits  aI.. -I..... .... 't etibld§: , . :::F'w ,tbl Ahh Lox f ft - iid -: 4:495: (M I' ,..,..l..,............l II:: ....4:0.1. 7'. I  .: 14  ::Yegl' ... Pt ns: ofzanO.....'". N., :VeRe ,. es ::I::I: . 1 -I -1:-:I:: :I 04: .1 1. . . ..::::::::: ,, , ,. ::......I -.1 .... ... .. .  --.- ........ -1- - . 1. 1. I. -1-1-...... ------ .I ".. -- -, -  . .. ......... . . ,-.. ..... 1. I-- -  -- - -.. 1---- ---.... 1-1-1--l-I.. I-- ..... - - --- . -  II I. .. ..... .-I .1 ..... .. - I I1.11 ....1-1. - -----...-.- - --..- ....''. .- I......  - -.-.. 1.- I,..1 .. ........ I.. - 1. I-- - -.1-1--....,-...-.. .. .. .....-.. ..... , . ..... .. .--- .. ..... .. 1. --- .. .. .. 1.. ..........  - "'...'. ,.1 1, . ..... .. .. ..... .. . . - -1-1-1 ................. ..I. ........... .. .. .. -- 1-1-1- - ---- -  I. .....I..... .. -  . .. ..... --..- - - -.1- --- I- -.1 ..... I.. I.''. - I 11 .......... ..l..... ...''.,....- 1. I-- -.--....--- . .. .. - --- I..''. .  1-.11.1- . - -  -.1-1. - - 1. - -1-1 ........... 1. .- I..... .. 11 11 - - 1-1-1 - ---- I 11 1-1..''....- --. .- I.... - -.1.1- 1. - II, - -.1-1 ..... .. .. .- - -1- .. ..............I.. .. . ........... .. .. ..... .--l-1-1- . ---- . ........ .. ..  - ".'' ... ..-..... .. .- , .. -- .. .. .. .. .. 1. --. . ..... .. -.1-- , -... -- ................-.. . ..... - I.. I.. I.. ... .1. , ,. - -111 -- ---- .. .'',  - ...........- --.. 1. '- 11 - -.-.. . - - - - -1-1 ............ 1. I-. I-- .11. - ---- I ---.. ...-I ....l.. -1---l.  ...... .. .. .. .. .. .. I.. ,I I I .. - .. . 1. .. 1. I   I::I:::::I::::I:.,2-..7 ..... .. .. 1-11 1. t... .WW61- .T.  i..''. . .. .... ..... . .- ,, , I:::::: ::::::::::::::::::-.1 ,,. .... --- ''''..""","".''.....".'"',, .-- , ''. .. .. .. .. :1 : : wihe::II   ". -....,......,..... I", , :,:::::::,:,:,:::::,:::,,.,:,::,::,:,:::::,::::::::..::Ann1. tf ., .1 '.. I:( iltio, 0:4kite I ..... I I I 1.   I .. I.. I..... I I   - I".,.,'.1,,......,..,.... . ...URU,Qu,pb: 1. ::37 .. O$I:  O al.. rsX.- I 1. 1. 1. . .. .. . 1.1.111.... .-l- - - - -1-11 ..... .. . - - I.. . I-1.1 -1. . .. I.. .. .. .. ..-, .......... -- - I.. ..... .. 1. . -- .. ..... I.. I........ I.. I... - ,  - ---..- -.1 ....... ....... --.- .......... - , -- 1. - .1- I... - .- - ...... - :,, - - . .. I... 1. , I. .11. I - -- -  -1-11 .. ........... .. . I .- All... --ffi 6-., f . ..... 1. ::::::::::::::::::::::::::::::::::I  1. .l.....- -1-1 ....I..... I.. I..  "I I - .,.-..-.......... .......... -'-- -::: ::] ::] :::: Skl' I11 -  - - -.. ........ I I:: III X: ,If,k: :5 .061MAllowd boW i:::: II ::: : :::: ,p4r .MgMme.'.. I II'- - I.,'I.I.....,............::::,7. , . U2 ]Ou"t us r .mg..wI .l.-.l....l....l.-- -.... --- 1-1. 1. ... --- - -O.: . Pa. I..., ...... ---- .1. 1. ...:],'...e$).:::::::::::].'"'I- ---1-1-1-1 .. ........ --- -1. I--...,-..... I.. I.. --- . , ,.. III I- -.1 ..... 11.11. I-- , - -- ............. ... .. .. .....- -1-  -.1-11-1-1-- ..... ... . 1. I.''. ..--- - -.1 ..... .- --- I 1-1.  -.- .. - II.. .. ..I..... I..'', - - I----.... - .11.1'... . -1. - - -.- - -.. ........ 1. -.. -111- I...:::::::C::::::::::::::::::::::::::]::::::::::k..   I    , I I l  I I  I - .. .. . .. : : .,: Brd.. 1. -  ...".1--i".: I I..: ., IMI fbrandyv-A 32 .: AM iidfWitersT i: i::     i .a n . ". I "..........::::::::::::I::::: ImI M ..o u.*  . ,.,.,..,. ,: : I: I: :::: :::,., .::: ::I0 sa : Q I- ..... ,.  - ....... 1.-I.''.....,1.-,. .. .. .- , ,  - --.... -... I.. .. . .  I....... I... - .- I -1-1-1 ..... . . ........ .II: I. - :I: I: I:.:........ I  . I I . 1.1-1-1. - --.  .1.1-1.1 -..-..,...-. -, 1, 1 I..... I .1 1. I... -  11 I...''. -.. .. .. 1. 1-1-1-1 - -..... ..... I.. II I .-..... 1. 1. - - - ----.... I - I - ....... , - - .. .. 1. -- - - ..'...........-.- ................... 1. , 1, 1.11 .... 1. 1. 1. - I.. I.. I.......... .. .. ... ... ---. 1. - -, -.-.... --.11.  11 .. .. 1. . . I I.''.. ,. -1. ... -.... I 1- .. . ..... .---- - . ..... - 1.I. -  1.  - .. I I. . .II ''.1-1 .. .. .. -- , 11 . .. ..... .. I.. 1. - ... - -..... .....- I. ........ .. .. 1.1-1.1. -..-...---- .111.1 .. .. .. 1. - --.... 1.  .-- I,. I . -...l.. 1. - - I I--' ....... .. .. 1-11- - - -.- ......I 1. I.. .. 1. - - I - -  . -.. ,I.. ..... .  -.. . . .. .. .. .... .. .. .. I. . ..... I.. I... 1. .. 1. .---  I I 1. I 1.11.1..--  .1. 1.-I ''..'... .--- .. , I:: :: :: I: :I::I: :X:1 ... ..... -- II-- ..... .. .. 11.11 I  1. --.-.-.-. ''...'' ..... .. . -  . ---. --- I . 11.1 1. II I- - " -11-au,'%-,  ,--- . ----- ...   . uco: macarppriI:i 1-dw. sandsf ]iI::I:::: .. .. .. II. acarottf --- . . I 1. ... .......,..%-. I .I.-  :lttl:]:::]::::]:::::::A, :  I M.---,- . I.. - -I:  I: I:: III: v::f350 ,Io   ]  ., I- I,. -..  ...-  I I .,....,::::::::::...,.:,.:..:.I :::I::--I.: IU1040 -.... . ., I.''...,.... 1. - I - -.1-1--.- . 1. ... 111.1 --1. ., -I .. - -,..,..,..,..... ...l..  -,  ,- -.,....,...,..... .   I I.., .. ...... I.. I.. I. .... 1. 1. I.:::::::I: I::I:::::I::. I I :::::::::............- - .. I I - . --:: ::. --- 1''... .. 1.I. -1.-. ..... .. ..I.... .. I--.-........... I.. 1. II. . -..... -. -.11 - I . .... --.. I 11 I-- ..... I.... -.1-1-1 -.--- ............. 1. 1. .. . ..... .-1. .. I.. .. .- -- 1.11-I.. -.. -- -. .. .. ..... .. .. .--- 1. ...---.1 -1. .......... . I.. - .1 -.11 ..... I..''. - --.. .. .. 1. . -- I I " - - I-- .. I I-- ..... ....''.- -----. -. .. ........... I... -..''. 1. - ..--.... ........ .. .. . -.. .. ,. I -- 11.1.1.-1. 1. - ---- I...... ....... ........ - 1-1- . ...-  -. -..... ...- I ''. I.... .--I1-1.1-I.. 1. . --II .. 1. 1. - - I.... -- I .... .............. .. ... .. .. ..... -- - -- ,.- ....... --.- I '- . 1. -- - -.. I.. I..... I.. - - I - .. I I......I-....  I -.............. -1.1-1- - I..... ..- - -- -...I... .. .. 1. .1.11 ...... - -I-- ..... .. .. - -.''..... . - 1. ........I1.11 . -- -1-1 -1-1 ...I.......... 1. . --1111- -.-- - I --- . -- - , -1-1 ................ . .. - ".11 .. ..... 1. -.. .. I..   - .. .. .. .. - 1-  " , - - ............. - - - .1 .. .. .. .. - - - - - .,- - .. - . . . . ............ .. 11 I I.. 1., .,-.....I..... I ..- I I I.. I.. I..  I--. :::: I Our:Ian , - ", -... .l..., . , -'.-..--.....-.-. --, - - -. ---... .. .  .  I.. .. ..... .. .. --- - ............. ..''.11- " . .. ..... I.. - - -.1-1-  Fl d'. atg.II:.. ..  .: --.-..........-- I .....,...............,.,,-,.,.I., I',,l',.".,.,..,....... I ''...'.. I.. .. .. .. ..,.......-..,--. .1 '--l -'..l............... I.. 1. .  I I - I I..,- I...... I..  - - - I.. I'll-- .. .. .. 1. -....  .....-- I.. I..... .. 1. - -- I -.1 .. ..... I..'',''-.. ..... 1. 11 - 1 11.1. .. ...-..- I - I,  - .. gro. ,.,  II  , "  - - I.. ........ . ............. ..... .. .. .. I-- .11. ... -  --- ........ .. .. .. .- - . ..........  ,-1-1 .. . ..... .. ., ''. . - -  -.-- I I 11 ........... I....,..''. 1, - --..---- I -.1 ........ I.. I.. - I1. 11  -1--.. I - II... .. .. 1.11 I -... ...... , I- -1. I........ 1-  , ''. ---- . .. .............. .. .. . ..... -.-.- -- . - -............. .. .. 11 . - .'......- -. ... .. .. ..... .- -, - ., -- -.1 .... I... I I. - 1. . -.--- .1 ........... - .- - . 1.1- 1-1. -- -  -.1-1 ........ .- I II-- . ..... .-- 1. - - -.-.. 1. 1. - - 1. ."". -...l....l..... .I I... ..... ..... 17 81.1 (ffi §AWOf II'll, :::   our  ,.i. Amn I Out . 2 9-I  :: In-i]]ii]1:57, ...I..... ...I. al] I ::: - -....-.-.-- 1. 1.11.11. --- ---l-1. p uvpf- nuu4:: , !:: A Qu. ..  .  .. -11I  - 11 I  --...-..-  .1 - --::::::::: . .. .. ..... I. .. 1-1-1-1-1 -.1 -.--  It.--- - .- - I.  .1. . ----   11 ..'.....'. 1. I--  - -.. ... I..... - 1. - -, -11------ II-- I... --. --.1. 1.  ---I. ..... .. .. .-- I -1-1-1 ....... .. I.. -........I -  -1-1 - - - I-- - I ''. ''. . ...- I1. - I....-I.III I --,. . .--- , ,I.  . ... ...,-, - - ...... -.. .. ... 11 ..----- 11 I 1. 1. I... jl: j::::Ij 6:I:: :x:x::] ::::::. .... ''. ,. -".. 1. I.. .. 1.    1. I  I 1.  I . - -. . .- .1 - ..  iI   : ::    . .1 .I -. .. I.. I.. .. I .I,. -- . ,8. Ivrbats ]  ]     ..  I I I I..... :::::::::::]:::::::]:::::.7.:]:::]::: : -:,,Mal r.2fOI  Itp tofgroatg8 .11thbusaWd. ton.. I- ''.. - . . --. .. .... : - I -  -..... I.. kv .. -1- I. .I .-  -111- . ...  I.- - - I- -1-1-1 ........ .1 .. ...: I: : -. .. .... ..:,:.:.:,:..::.I.::-::,  :  :- _. 7.:,:..::-:: . .     I .11'. 1. 11 11  , .1 .. .. .......... .. ..... I-- ., - - 1. .. . -- ., - , -- ..... I.. - I''. 1.I. .I.1 ...-.............. 11I- . - -I -111 .1 ........ .. - I. ..... .. . . - - -- . 11 -......... 1. 1.-.11 ........ .. - - 11 1. I. . . ., ,. .l.. 1. -- I. ... .............. .. 1. I'll. 1. .  - .- - . .. ...-.... .. ..  1.11.1-11 . .. 1. .1 11 .. ........ .. .. .-. ........... .. ..-1. .. ,. II II 1. .1 ...... 1. 1. - -........... I I. 1-1-1 ......... ..- - ,. . -..... ..... 1. - ,, - 1, .1 .. .- ..-.. ..... .- - I ..--., . . ,.. .. - -,- .1 -- ........  1, - .. 1. .1-1- - - .................  . .. .. I .. I-- ..... 1. 1. - - - .1 - .1 --. -1- -- - . .. ..... I.. ,. ,  I., ,. 1. 11 11 I .1 ........I. - - 1''.. .. I 1. .. .. 1. 1-1-I11 -1-1 ........... .. . ,. ........ .. ..I11 11 ..... I.. - .... 1. -1. 11 .I-,, .. .. ,. 1.---- . ........ I..''.I ,. .. . . - -.... ...........-..... - I-.. .. .. .. - -, - . .11.11 ........... 1-1- - - -........ .. . - .11. ,. . 11 I.II. .1 .. .- I1.1-1-1 ........ 1. . 1-1. .. ..-. -1-1-1 ..... --..  . I.... .. .. .. .,. ,.-I.. .. ........... . - , . .......... .. ...... .. ..... I-- ,- - -- .. ..,, . , - '', , . " , - , , 11 Ipoit .1.-.- -1., " ,  1. I I.   R od ''. . -I: , .... .. - . ...... .:: .::::::::::::: XI: :  ua Outvutv . tb,.,. entrates.......... ..   .   ::X :.:::::.:.:.55 I...., .Ann If .ncefitrates I  77,4::.( usaiidk of Ons) III I     I. 11 . ...I .....,.,...,........l...l-  --- . --.-- . . ..... .....''.1- - -.. .1111 --.... I- - - - I 1. .... -- ---1. 1. 1. ---- .. I.''. I. - - 1. -.1 - --11 ........ .. I.. I . - -1-1 .1 .......... I .. .11-  , - -.1'.. .. .. 1. 1.I, ..... .. .I ,. ,. -  -... ..-..... I....''. 1. - - ----.-.-- - -........... .. .. .. - -.... ................. .1-1-1- ....I.. .. .. 1, . .. . 1. -- .1.1'... . -- . . . ................. . - ---. . ---- -.. .............. I.. I I I I  I I  I   I:: .-.,....,... I... I  , I , .. .. .....-.- .  .. .  ,  1. I .. 1. ....1-1. 11.. ........ 1. :: I: . - ......-  .  . :::::: ;:::I::I: :::: :: ,. , - ...-- 11.1'... - 1--l.. 1. - , ---. ''... .. 1. -- -...... .. .. - - --- ....... I.. . I . - - I.. .. 1. 1. I I 1. -.. .. .. .. ..  I I.. I... .. .. .-I. - .. I 1, --... -  - --. II - - -.1- -111 .1 ........ I.... - ,1. I-- 1-1. .l.. - - -I.-11 I.... I-- - ,- . ........ ..  1. -- ............. .-. .....I.. .. .. .. .. .. ........ ---. ..- - . --.... 1. 1.  .- -..... ..... .. .-- - 1. 1. - - - II - . --.- . - --.---- .. ........... .. .. 1. 1::1, 1-11-1 ...  .-- - .,...,..,...,..,.......,...,.., -.. .. .. .. 1. ---  1-1-1  .- I I "Imi'll.-...-I 11-1-1,11I.I....- 1. - - - -  - -.-..- . .. ........ ..... .. I "I  1. 1. I .1 - I.- I.- I.I.-. . .. I", - I..",.-'-., I.,., - 1, -.1 -   . I I I.., 1.1.1".1.1 - I  1.  1-1 .. 11.1".,'I.Ill.111.1,,,,,I .1 I: I: eat::-.... I........ --- -........ I....  I  -- '- "". ,,.'..,..................I , I --.....-....,.....-.- 1, l   I I  - - -.. .. .. ............  1. I ,  ".  I - - ... ... ..l. 1. I , I ...  -,.........,.--  -I I-. I.... ..     :- - ::::::: :: : :: : ..... I.. I - --.. I.. I.. .. .....  . - .1 %1.1- 1.1 ... .. .. .. .. .,.,.,.,.,..,. ..,.......,....'.......,..,...,.",,'ll,,,.............."..,.,. I i: I.. I. 1. I-  - - - --- ..... .. 1. I .- I.. .. .. - II ,--... I -I.- ........ .. - -  , - -.....---  , ,..., .. ..... .. .. ..   - I-, - - -.- .. -I'll  .1 .. .. .. .. , .1 I-....- 1... 1. 1-1. .11 I - -- ... -- -.....I.. .. .. 1. 1. - - I -.. --- .. .. .. I I-- .11.1--.- - 1,  --- 1. I.. III-I. .. .. .. ..... -1111 ........ ..-- - - . .--- I - - -.. ..... .. ..- - ..-- .... t.. .1- . ... . . , I...- ,. O.....,e , :"I :I  ,::  1 1: 11 ifteat lylafltsl]]]]]]:] ]   ]:: I ':]:::::::]:]::I:] :]  ,::1:1044 l0f be f, -r:fiiift::-:: 4369 9 ftdtwsl I]] ::    : " --- -....- I1. - - ::-i,)Iw . .-..... .. - - I-.,I - - : ::: I: . 1. - . 1. - _ __ " . .... . ..... .. .. , .1, P, .. .. .. ..I-.1 ..... -.... 1-1-1-1- . -  1. 1..  -.,'.. I-...  I   I.. .. .. 1. .:.  .. .. I... - I.... .... ... .. I......... I -1-1-1 ........ I-- . ..... .,. .. 1. -  - - -.. I-, . .1 ... 1. 1. --- I I1. 1. ,.1. 1. .. 1.  - - - -1- 1-11.1 ........ ..- 1. ....................... I.. - -- -- . .. ........ 1. - - - -.1-1- 1.-1. .. 1.I- ..., -.. ..... 1. I  I::::: :: :XX :: :: I.: .Po Y-----,--. ,, 6: ''. 1. .-I I  I - -...-..- I- 1. .It ...1-1. - ... ... ... I I.11. I.. :]I:II,I.j touvoft: :n:. ,&'O.Ii .... - II , I  1"... "..........'.  I-1 I: uII I: :: ::::::::::::-::: ouI,shift 1. -....1-1. - I......,....1.1-  ...  ..1. I. -....-I-1. I -.. .....I..... ......:-.. ...... ...  . -,ll I . poulry]M . Per ..... ... .. ..... .. 0044...-...,......-  I .. ...'..... 11  ... 11- I I- -........ 1. -  - -.1 ........ .. 1-11. -  - 1. -  -.-- --.- ........... , - . 1.1-1 -1--.1-1-1- - - -..... I.. . - ---.- I. -.. .. ..--  -..... I -... . .- ,  ''... .- -  - - -1-1 ..... ....... .. -- . 1. .- --- I. ..... .. ...- .. .... ,.  - .. .. .. ,. . I. . ..... . .. - - - - . .. --1- ..... 1. ,. .:.:.J, A:::]::::::::::':::::::::::::: I, -.... -.- ,","",.".,..............,.... -., .. ..- ..... -1-1-    -..... I.. -I -.... . 1. - 11 I... 1. I........ ..I. -.. .. ........... - ...''.- ---- . :::SI#4ghterhouses. 11.1'..I.-I.I....2::::::::::::: I:: X: I:I::::::I:;:: :::::::.l..,..l.....-.l..l ,   I.. I...............,... I.. I   -'-- ---..- I ''.. --- -1-1. 1.11 ... I-- - - 1-1-1 - -- ..... I... --.1 ..... I..  I I.. .. ..I . . .. .... . -- I..'' ....I..... I.. 1.I-....- - 1-1-1-1 ........... .... - ''. - .. .. .. .. .....  . ........ .. - - ........ .- - - - --.11- . - -. . . . ....... ..... I-- I- 1. -1----- . ......... ....''. 1. - - 1. ---.... I1. -  --- I ... I... . .-  11 ... . 1. ---.. -........ I....''. I....... - -1-1 ........ .. .. ...... -.-- 1.1-. ........ I..    I.. ..... .. , ''. - --  Ill.l......'.- - . . .............. .. ............. I... 1. - - -- - - . ....... .. 1. - 1. .. .. .. . I.. ........ I.. I -.1 .. ..... ..I  .-.1- . I - I-- ..... I.. I -1-1-1 ........... I .1.11.11.1. .- - 1.11.1 ------..-...l ..... .. ..  -- .. .... -.... .--- ,- - .. .. . I I - I.I....I.- -- -........... .. 11 --l'. ....... - - I.. ........ .. .. I-- . - - - -......  I 1''..''. - -- ..... .. I.. I-- 1. . .  -- I . . .. ..... ..- -.11 ........ .--11-1-1-1 ..... ...- . I.- 1-1  - -.1---.- .. .. ........ .. I-- .............. .. - -,. I...- II I''.. .. , -- . .. ..... . 1. I...... - .... .. .. .. , .. .. ........ I.. I.. I . ,. -.1. --- .. I.. I.. 1-1- 1-1 ..... .. -11- -.1- 1. 1. --- ''..11 II ..... I.  .--.- 11 I.''... .------.l .................... .-11. I... -- - -- -1-1.1 ............ I..''.. - ....... ..... .-  - ..- .- - ,... 1.. .-. -... - .. ..... .. .. --- .. ....................... ... ,.... ...- - -1-1 ........... I.. - .1-1 -..... -.1- - -1-1 ..... I..I I-- --- 1. I..... I.. I..... .. -.- - --- .......... I .- ..... I.. .. .. ,.- ,  ............. .. ..- .. .. .. .-- .. ..... ... .. .......-- -.. .. .. II.- -1-1 .............. ..-I  --. - - --.... I  ,: w ,:: .. .. .. .. ...-- - -  , 1. -,Itbat:.. ..,:s I :  . 8 .. .. 0 - -..... .. .  I I ..l... .. Competitive Linkages for Privatized Agriculture 75 Table 5.1: Major Production of Food Industry, 1992 - 1993 Products Units 1992 1993 1993/1992 (%) Meat and meat products thousand 1624 1181 -27.3 tons Sausage 630 471 -25.2 Milk and milk products 3958 2715 -31.4 Butter " 300 310 3.5 Cheese " 112 101 -9.5 Vegetable Oil " 786 706 -10.2 Margarine " 249 173 -30.5 Fish " 404 261 -35.4 Canned products Millions 2882 2726 -5.4 of cans Granulated sugar from beets thousand 3534 3838 8.6 tons Granulated sugar from imported cane 291 550 88.9 Confectionery products 813 643 -20.9 Bread and bakery products 6192 5257 -15.1 Source: MMmistry ot Statistics Ownership and Management 5.4 Agro-industries are administered by the Ministry of Agriculture and Food (MOAF) and the State Committee for Food Processing (SCFP). The MOAF, through the milk and meat "concerns," controls all of the approximately 700 dairy and the 150 industrial meat processing plants. Through its oblast and rayon officials, the MOAF also controls any processing on the state and collective farms and in the Inter-Farm plants which constitute almost half of the country's 1000 feed mills. 5.5 The Grain Department at the MOAF, created from the former State Committee for Procurement of Grain and Distribution of Bread Products, contracts a total of 330 integrated elevators, 100 of which are large feed and flour kombinats, as well as 400 bakeries. In addition to procuring grain for bread production (which may involve the import of certain grades), the organizations under this department procure the necessary protein ingredients and other additives for all feed mixes produced in Ukraine. Most remaining processing operations, including the 192 beet sugar factories, 18 vegetable oil mills, and one third of the country's approximately 1,000 canning plants, as well as most of the secondary processing industries, are run through industry-specific "Associations" under the SCFP. 5.6 The Ministry of Trade operates the "Gastronom" chain of food stores and other outlets that are the main distribution channel for food products in urban areas. The village cooperative, CoopSoyuz, a national independent organization under the jurisdiction of SCFP, operates some food stores in the cities, but is mainly involved in distributing merchandise in rural areas. 76 Chapter S 5.7 Most of the large primary agroprocessing facilities in Ukraine are owned directly by the State, through the Office of State Property. The exceptions are some city-owned dairy plants, and the small processing plants owned by collective farms, either individually or as interfarm enterprises, and the substantial number of processing plants (slaughterhouses, sausage makers, bakeries and small canneries) owned by CoopSoyuz. 5.8 Plant managers, except those working for state and collective farms or CoopSoyuz, report directly to the respective "Association" at the oblast or rayon level, and through them indirectly to the MOAF or SCFP. Capital investment decisions are made by the state, and financing also comes from the state. Labor is plentiful and its opportunity cost is low. The social effects of low wages are buffered through multiple schemes of payment-in-kind and paternalistic services. There is, therefore, no true labor market. 5.9 The internal management structure of the typical Ukrainian agroprocessing enterprise is a multi-layered pyramid. The general manager has five to seven department heads or deputy directors, who normally are in charge of raw material supply, production, product storage, and distribution, "economics," and the social sector. Each of these controls half a dozen professionals, engineers or section managers, who deal with foremen or group leaders. The outlook of management is production-biased. The path to a directorship usually starts with the job of production manager, called "chief engineer". The economist is responsible for financial transactions and for keeping track of the fulfillment of all plans. The deputy director of the social sector is in charge of personnel but, most importantly, of all services furnished to the enterprise community--housing, food, medical care, child care, schools and, more recently, churches. Such a management structure would be inadequate in a market economy; it is not concerned with the market demand, developing a product acceptable to the consumer, improvement of the production efficiency, or reduction of cost. 5.10 Raw inputs to, and processed outputs of, agroprocessing industries were traditionally allocated through a system of state orders. Products were physically hauled, delivered, and stored by the state distribution system. The state orders system is in the process of disintegration. Supply is hampered by payment difficulties and the impact of inflation. On the whole, the procurement system is in a disarray. The old methods are not working any more while the market system is not yet fully functioning. B. INPUT SUPPLY SYSTEM 5.11 Up until 1992, the supply and procurement of agricultural inputs was almost fully managed by state owned organizations. In 1991, 82% of the purchased inputs for crop production and 91 % for livestock were procured by state organizations. Product specific supply and procurement organizations operated nationwide as elements of the agroindustrial complex. Until 1991, these organizations (e.g., Selkhoztechnika: Agricultural Equipment Supply Organization) enjoyed monopolistic positions. Both input supply and procurement have been administrative processes, rather than trade in the traditional sense. The farmn support system was designed almost entirely to serve state and collective farms, which have also developed agro-service facilities for themselves. The monopoly of the state supply and procurement network has been abolished, and alternative structures have been emerging quickly. 5.12 At the present time, the distribution of agricultural inputs in Ukraine is handled by both Competitive Linkages for Pnivatized Agriculture 77 the state supply system and private input distributors. State enterprises supply mainly inputs produced in Ukraine, including seeds, fuel products and lubricants, nitrogenous fertilizers, agricultural machinery, and a limited number of agro-chemicals. The private input distributors supply some domestically produced inputs, but focus on the distribution of imported fuel, seeds, agro-chemicals, and fertilizers. The key link in the supply of inputs from foreign input producers is the distributors, who deliver market inputs to farms. The distributor role is especially important to the supply of imported inputs since the manufacturers and suppliers of these products are not usually equipped or willing to execute the complete trade transaction required for payment in-kind contracts or barter with their customers. In other words, most foreign producers of agricultural inputs are in the business of manufacturing and supplying product, and not in the distribution business. 5.13 UKRAGROKHIM, UKRAGROTECHSERVICE, and other state enterprises operate warehouses and distribution centers throughout the country. Although official statistics were unavailable concerning market share, input suppliers estimate that these companies are supplying approximately 60 - 70% of all inputs in 1994. Given the fact that these companies usually supply the input market under state contract, which obliges farms to sell their agricultural products to state procurement enterprises under pricing and payment terms which are not tied to world market prices, prices eventually received by farms are heavily eroded by payment delays and inflation. In June 1994, farms were still owed over 12 trillion krb. (roughly $300 million) for 1993 output. Thus, farms' purchasing power in the spring planting season was severely eroded. Farms had agricultural outputs in stock, but the state system's ability to pay was insufficient and private purchasers' operations were limited by insufficient ability to export. (Other constraints limiting private purchasing and export activities are discussed in detail below). In addition, certain imported agricultural inputs were unavailable through state enterprise channels. As a result, there exists a large potential market for private companies to compete in the input supply market. 5.14 UKRAGROBUSINESS (UAB) is the largest private input supply company operating through representative offices throughout the country. It was originally formed as a joint venture between the Ministry of Agriculture, major foreign input suppliers, and certain other Ukrainian ownership interests. In late 1992, participation of state enterprises in UAB was withdrawn after the Government took possession of approximately US $80 million of input supplies, which had been stored at and became the property of UKRAGROKHIM. After restructuring, the company continues to supply fuel, agro- chemicals, and seeds in return for payment in cash, barter and forward contracting of new crop. Foreign input producers estimate that UAB is supplying approximately 15% of all agricultural inputs in 1994. 5.15 There are also several other private regional companies currently in operation, which supply a variety of agricultural inputs including seed, fertilizer, chemicals, machinery, petroleum products, etc. Many have been set up as join ventures with participation of foreign firms. UAB and these private companies deal both directly with farm enterprises and through farm associations. Although a reasonably sophisticated distribution system is already in place, including cash transactions, barter for agricultural commodities, and forward contracting of new crop production, the market share of these private suppliers is limited by the reluctance of foreign input distributors and other sources of credit to provide pre-export finance. If such private input distributors were able to obtain reasonable pre-export finance for imported inputs, which would require the availability of necessary export licenses for payment in kind, a significant increase in Ukrainian agricultural production could be achieved by the expansion of private distributors' activity in the market. 78 Chapter 5 Barriers to Supply of Imported Agricultural Inputs 5.16 Ukrainian agricultural productivity is significantly hampered owing to the lack of adequate supplies of imported agricultural inputs, many of which Ukraine does not produce in significant quantities (phosphate and potassium fertilizers, pesticides, herbicides, fungicides, pre-mix additives for feed milling, and others). This shortage has been caused by a combination of factors, which include the following: a) Foreign input producers are reluctant to provide inputs to state enterprises on credit because of significant payment delays practiced by state enterprises and outstanding debts to them by the Government. b) Farms are unable to pay cash for inputs since much of their agricultural output is still purchased by state enterprises which pay price 50-70% below world market levels and which delay full payment by several months after production is delivered. This situation is further complicated by the reluctance of foreign input producers to offer pre-export finance, since these producers have suffered large losses selling inputs to input distributors on credit for payment of crops at harvest. These losses were brought about by failures of assignment contracts and payment-in- kind often resulting from actions on the part of the regional level government which can delay and even prevent final execution of the contracts and payment to foreign suppliers. c) Governmental imposed restrictions are also manifest in the imposition of export quotas and licensing requirements on most agricultural products utilized for payment in kind (both direct barter goods as well as new crop production) and abrupt changes in export tariff levels during the duration of a contract which is based on the provision of inputs in return for exportable agricultural commodities at harvest. Moreover, state enterprises often receive export quota orders at the expense of private enterprises, even though the state enterprises cannot procure enough agricultural output to use the full amount of the export quota, since farms do not trust state enterprises to pay on time for agricultural products delivered. d) Lack of sufficient support for the development of private input distributors is manifested largely through government regulations which distinguish between different types of sellers and different types of transactions. The following regulations can create significant difficulties for private input distributors and marketing enterprises. * Producers of agricultural output (usually defined as having produced more than 50% of its value) are distinguished from intermediaries which buy agricultural output. The latter are subject to higher rates of tax on their profits. The former are also exempt from the practice of surrendering 50% of foreign exchange earned from export at the official exchange rate. In practice, it is impossible to receive the exemption. Moreover, agricultural producers engage in very little export of their own production since they lack expertise in foreign trade operations. * Joint venture companies (with at least 20% foreign participation) are allowed to export that which they produce themselves if they can show that they produced over 50 % of the final value of the goods. For joint venture companies in input supply and output marketing this is very difficult, since they are not usually engaged in production of the agricultural goods they export. Technically, it is possible for a joint venture to provide farms with machinery, chemicals, fertilizers, and other inputs (not for sale but as a joint Competitive Linkages for Privatized Agriculture 79 venture's input to production) and show that the joint venture supplied more than 50% of the value of final agricultural production. In practice, this can be done only by large joint venture input supply companies. Thus smaller, more specialized, ventures are at a disadvantage. Lastly, the process of receiving a certificate that qualifies the joint venture as the actual producer, is subject to approval by regional government authorities. Receiving export licenses is contingent on the Ministry of Foreign Economic Relations (MFER) verifying the exporting enterprises' contracts and validating the price of the good as declared in the export contract. Normally, the MFER demands that unreasonably high export prices be stipulated in export contracts since it fails to take adequate account of product quality and'the high costs of doing business in Ukraine when it compares prices in export contracts with world market prices. This makes the receipt of export licenses problematic for small private export companies, which have relatively high overhead costs. * Private enterprises must pay the high commercial rate for foreign currency but are subject to the 50% surrender of foreign currency at official exchange rates when they export. This induces many enterprises to exchange in barter transactions and generates the high costs involved in finding a foreign seller of inputs willing to take payment in goods. For firms dealing in many different kinds of agricultural inputs purchased from a large number of different foreign firms, the costs of arranging barter transactions are very high. - UKRAGROKHIM is in control of distributing quotas for imports of agrochemicals, though technically joint ventures can freely import agro-chemicals for their own use without an import quota. - Input and output storage and shipping capabilities appear to be sufficient to support existing production levels, however for the most part these facilities are controlled by state enterprises. This also applies to the railroad system. In the short term, there is not much that can be done to alleviate such lack of competition. Development of private input warehousing, grain storage, processing, and transportation systems should be given high priority in the medium term. 5.17 In conclusion, the various barriers to trade in agricultural inputs have made either via cash or barter of old crop. This has dramatically reduced the quantity of imported inputs delivered to the Ukrainian farms and basically places the acquisition of imported inputs outside the reach of the Ukrainian farmer who has no crop inventory or cash. Machinery Services 5.18 Each oblast has a major repair station for machinery and equipment, and each rayon has a smaller one. The rayon repair stations employ 300 people on average. The off-farm stations in the 26 oblasts and 480 rayons of Ukraine employ at least 1.5 million people, in addition to repair personnel on the farms. 5.19 Half the repairs (the easier ones) are done by the workshops of the collective and state 80 Chapter 5 farms. The more complex repair and adjustment work is carried out by specialized workshops in the districts. For very complex work, such as general overhauling of engines, repair of hydraulic systems, and complex repairs of diesel pumps, there is a network of specialized workshops at the regional level. 5.20 The supply system was supposed to work from the bottom up. Collective and state farms prepared lists of equipment required for the next year; the lists were collected and summarized through rayon, oblast and republic administrations, and were finally consolidated at the national level by the state supply agency (GOSSNAB - Gosudarstvennoe Snabzhenie), and submitted to the Ministry of Industry, which was expected to match the demand with production and supply possibilities. Since the beginning of 1992, only production of tractors, trucks, and fuel has been still regulated centrally; other equipment could be sold without regulation. 5.21 Ukraine has 200 agricultural manufacturing firms, many of which are small. The major ones are in Kharkov (tractors, engines), Kirovograd (all types of drilling machines), Odessa (plows and other land preparation implements), Kherson (combines and irrigation equipment), and Ternopol and Dniepropetrovsk (sugarbeet harvesters). Ukraine produces 27 % of its machinery requirements and 32 % of its equipment, indicating a strong dependence on imports. 5.22 Most fertilizer application is carried out by UKRAGROKHIM, a monopoly enterprise that produces and distribute agricultural chemicals. UKRAGROKHIM is also involved in production and distribution of pesticides, even though foreign suppliers have become active in recent years in marketing their own products due to the low quality of the chemicals marketed by UKRAGROKHIM. Livestock Services 5.23 Veterinary services are managed and supplied by the public sector. Approximately 20,000 veterinarians and 32,000 veterinary technicians work in over 500 veterinary stations, animal health diagnostic laboratories, veterinary inspection stations, veterinary laboratories, and quarantine/boundary control stations. State and collective farms employ their own veterinary staff, accounting for 30% of the country's veterinarians and veterinary technicians. 5.24 Veterinary services face severe budgetary constraints. Until recently, 75% of their budgets were financed from fees and charges paid by livestock producers under contractual arrangements with the large state and collective farms, and profits from the sale of pharmaceutical and other inputs. Prophylactic vaccines are free, but the cost of applying them is paid for by the producer. Private farmers pay the full cost of veterinary services, including transport costs. Oblast and rayon administrations contributed the remaining 25 %. Public funding has been substantially reduced in recent years, and so has profit from the sale of veterinary supplies. There is thus a shortfall of 40% to 50% in required operating funds, which now barely cover salaries and wages. 5.25 Livestock breeding and artificial insemination (Al) is the responsibility of the Livestock Department of the Ministry of Agriculture and Ukrainian Livestock Selection and Breeding Association, UKRPLEMOBIEDINENIE, a self-financing legal entity under the Ministry of Agriculture and Food. Each Oblast has 3 to 5 breeding farms for the different livestock species. There are 90 breed selection/artificial insemination centers (64 of which own a total of over 4,000 breeding bulls), providing frozen semen to a large number of Al points, attached to state and collective farms. Until recently, Al coverage accounted for 88% of cattle, 40% of pig, and 60% of sheep births. This relatively high Competitive Linkages for Privatized Agriculture 81 coverage has, reportedly, shrunk quite substantially in the past two years. On average, it takes close to 4 inseminations per cow pregnancy, which is indicative of poor heat detection, nutritional and hygienic deficiencies, sloppy on-farm insemination procedures, and probably poor sperm quality. 5.26 Genetic progress has not kept pace with that in the West due to less strict sire/mother selection criteria, the absence of sincere progeny testing (particularly for milk performance), and relatively limited importation of breeding stock, frozen semen, and embryos. Increased utilization of imported semen and embryos would be a cost effective way to achieve rapid genetic progress. For example, long-term agreements with foreign cattle breeding associations for the importation of low cost semen could be reached and guaranteed, Ukraine could shut down many of its cattle breeding farms and breed selection Al centers. 5.27 There is a severe shortage of veterinary supplies. This is mainly because of drastically reduced imports, but domestic production of such supplies is also down. Until 1990/91, 18% of veterinary supplies were manufactured in Ukraine, and 52 % came from Russia and other FSU republics. The remaining 30%, (equivalent to US $45 million), per year were imported, mainly through barter arrangements. Eastern European countries and India were major suppliers, usually exporting drugs, medications, chemicals, reagents, and laboratory equipment under barter arrangements. Since Eastern European and Indian producers generally no longer accept barter trade, Ukraine must pay hard currency for veterinary supplies imported from either Eastern European or Western countries. Due to shortage of hard currency and the high domestic prices of imported drugs (depressing demand), the value of imported veterinary supplies dropped well below US $10 million in 1992. In addition, imports from Russia and other FSU republics have virtually stopped due to lack of licenses and funds. There is thus a shortfall in veterinary pharmaceuticals of 80% to 90%. 5.28 The status of vaccine availability is difficult to assess. While representatives of UKRVETSPROMNAB (the agency in charge of procurement and distribution of veterinary products and vaccines) indicated that provision of domestically produced vaccines was meeting 90% of requirements, officials of the Ministry of Agriculture's Veterinary Department estimated Ukraine's vaccine self sufficiency at less than 40%, and UKRPTITSPROM poultry specialists claimed that effective poultry vaccines (for Ghambara, for example) were in extremely short supply. C. WHOLESALE AND RETAIL MARKETING 5.29 Marketing in the FSU was based on an administrative evaluation of consumers' needs by the central planners. The focus was on ensuring production and distribution. Demand was of lesser concern and there were often shortages and limited varieties offered. Marketing was considered by Government as merely an issue of organization and logistics. Even though the objective of the present Government is to proceed toward a market economy, marketing still operates as it had under the Soviet system. 5.30 Until 1992, marketing was the responsibility of the Ministry of Trade. Each district in Ukraine was required to estimate consumption for the coming year for every product and for each store. A specialized office of the regional Trade Authority assembled all the data before assessing local needs. The regional data were then assembled to provide a national overview. The Ministry of Trade then assigned production quotas to plants in each region to meet the estimated consumption needs of the 82 Chapter S appropriate products. 5.31 In 1992 the Government restructured its control of marketing. The Ministry of Trade is no longer involved in internal marketing. Instead, the responsibility for state-owned stores was shifted to the district governrnents, along with a specialized office that controls small urban stores and another specialized office (UNIVERSAL) that is in charge of supermarkets. However, the internal trade situation has not improved significantly mainly due to lack of infrastructure at every level of the distribution chain, including transport, storage, processing, wholesale and retail network. 5.32 Food is marketed through state shops, consumer cooperative stores, and kolkhoz (farmer's) markets. The approximately 30% of agricultural production produced privately in urban gardens and plots of collective and state farm members is either consumed by them or sold in local farmers' markets. Factory shops and private shops have started to appear as well. In the urban centers, state stores are the primary market, whereas in the rural areas distribution is channeled through the consumer cooperative stores. 5.33 The entire network consists of approximately 52,000, Comparison of Sales Area per 10,000 inhabitants mostly small, stores, (there rhousand sq. meters are also 200 supermarkets), 10 T covering an area of 5.2 9 T million m2 and employing 8- 7 230,000 people. There are 1,000 m2 of foodstuff sales 6 5- area per 10,000 inhabitants. 4 By comparison, Germany (before reunification) had 10,000 m2 of sales area per 1 10,000 inhabitants and o France's 7,700 ml per Ukraine Germary France 10,000 inhabitants. France, which has the about the same population, Figure 5.1 has 539,000 people employed in the food retailing sector (Figure 5.1). 5.34 The management of a large number of stores by Government, even with decentralization, has proven to be exceedingly cumbersome and resulted in enormous amount of food losses. Prices are set by the state and local store managers have no authority to deviate from the price guidelines. If products are not sold they are eventually returned and destroyed. Investment allocation, transportation, and other necessary expenditures are made without regard to price signals, and are therefore not consistent with market conditions. Competitive Linkages for Privatized Agriculture 83 D. DEVELOPING A COMPETITIVE SUPPORT AND PROCESSING SYSTEM 5.35 The development of more efficient, competitive services, better attuned to the needs of private farming, and a market-oriented processing and retailing system in food and agriculture will require a strategy involving organizational, institutional, legal, and regulatory changes. State-owned enterprises must first be made to feel independent of the Ministries, which, up to the present, have appointed the enterprises' managers and intervened in their important business decisions. The first step is for the Ministries to stop centralizing an excessive share of enterprise profits, a practice which has made enterprises dependent on the Ministries for investment funds. In tandem with this, the practice of cost- based pricing with Government-sanctioned fixed profit margins must be eliminated. These and other measures described below will accomplish the commercialization of state-owned firms. 5.36 The other changes which will catalyze the development of a market system in the agricultural and food sector involve the demonopolization and privatization of the large state enterprises and trade monopolies that now dominate processing, input supply, and wholesale trade. To develop the institutional rules to which enterprises will be subject, a supporting legal and regulatory framework encompassing anti-monopoly regulations, competition policies, property law, and contract enforcement must also be established by the Government. In addition to setting up the new legal framework, the Governmnent's main responsibility will be the provision of essential supporting services, notably price and market information, technical assistance and training services, and financial services to assist in establishing new businesses. The Government will also be charged with setting food inspection and sanitary standards. Demonopolization - Commercialization 5.37 Commercialization of state processing and trade organizations is an essential first step toward a competitive market and privatization. This requires immediately increasing the autonomy of the state-owned enterprises by separating the company management functions from state interference through creation of corporate entities (e.g. joint stock companies) and by changing procedures for the selection of boards of directors and enterprise managers under corporate legislation. The Government can also improve enterprise performance by revising labor legislation to improve flexibility in the employment of staff and compensation, and by providing management training for enterprise directors and managers. 5.38 Providing more autonomy for operation of state enterprises means ending Government's practice of siphoning off profits from successful firms and underwriting unprofitable units within the same conglomerate (or set of firms under a given Ministry's purview). This would make it easier to identify and liquidate non-viable enterprises. It would also promote profitable firms' interest in separating themselves off from the other vertically or horizontally integrated units in their conglomerate. In turn, these profitable firms will pursue expansion of profitable lines of activity and establish new connections to suppliers and customers via the market. Fostering greater attention to profit among state enterprises can also be pursued by creating hard budget constraints and access to finance on commercial terms only. It has to be noted, however, that allowing distribution between profitable and unprofitable firms can serve as a basis for liquidation when prices are liberalized and there are not any substantial distortions. 84 Chapter 5 5.39 In order to accurately measure profitability, modern systems of accounting and auditing need to be adopted. Public enterprises not yet privatized nor subject to immediate privatization should be made to apply one of these new systems as soon as possible. Private enterprises should also be obliged to conform to the new system because their tax liability should be determined on the basis of standard accounting practices governing all enterprises. The application of key accounting concepts and asset revaluation procedures will increase firms' awareness of the magnitude of their assets' depreciation in current prices, reduce taxes on profits, and guarantee that all taxpayers are treated identically. It will also facilitate a market oriented production system and product development which will increase net profits at the firms' disposal and bolster their reliance on the market, further imposing the hard budget constraint. 5.40 In Ukraine, the Corporation Law as introduced by the Presidential Decree (June 1993) and later amended in March 1994 provides a sufficient legal framework for accelerating privatization of the state enterprises. However, the experience of the last eight months shows that implementation of the process is slow compared with the very ambitious agenda of the Privatization Program for 1994. Only 206 companies have been corporatized from September 1993, with about 350 more enterprises in the process of corporatization. The SPF is preparing companies for the next wave but its existing capacity does not allow it to handle a sufficient number of enterprises in a single privatization cycle. The Government is aware of bottlenecks and has tried to streamline the process. 5.41 In tandem with enterprise commercialization, actions to demonopolize the input supply, marketing, processing, and retailing sectors must be taken to address the bulk of the system (the grain, meat, and dairy product sectors) which continues to be heavily monopolized. Large "agrokombinats" and all other monopsonies should be broken down into smaller concerns to promote competition. These break-ups should be done along both production and regional lines, with the end result being local enterprises functioning as individual profit centers capable of, and allowed to, operate independently. 5.42 There are essentially three approaches to demonopolization: (a) actively pursuing foreign competition through open trade; (b) breaking up existing large-scale monopoly units; and (c) regulating the large-scale monopoly units through legislation and financing. Breaking up large-scale units that enjoy monopoly power has proven to be a very significant problem, even in Western nations. Though under present conditions in Ukraine, this method seems to offer the fastest solution, one should not be overly optimistic about the short-term capacity of government to "break up" large monopolistic processing and trading firms. The alternative is to force this break up through the establishment of competition. This could be done through attractive joint venturing laws to encourage Western investors. Opening of border trade and establishing hard budget constraints for large firms would limit the monopoly power of large enterprises. 5.43 As a case in point, the reduction of concentrated marketing power in input supply should be accentuated by the commercialization of state owned supply networks, i.e., their removal from Ministry of Agriculture and Food control and their establishment as independent enterprises operated by managers accountable to a board of directors. Their day-to-day activities, including importation and pricing should be removed from ministerial interference. These national enterprises should also be broken up into rayon-level businesses operating independently and reliant on their own financial results for working capital. In the overall scope of the country's privatization program, these rayon-level enterprises could be eventually transferred from state ownership into private hands. As a first step, existing supply organizations could be demonopolized by having each regional unit operate as an independent business without any territorial constraints on sales. New cooperatives emerging from the Competitive Linkages for Privatized Agriculture 85 reorganization of the kolkhoz/sovkhoz sector can also become specialized input suppliers. Over the longer term, private firms, including some foreign ones, will become more involved if appropriate measures are taken to liberalize domestic and foreign trade. Privatization 5.44 The entire agribusiness subsector, and particularly those parts most important to farmers, such as product marketing and processing, transport, services, and input supply, should be privatized. Though there are many ways in which privatization in processing, distribution, and input supply could be effected, certain objectives should govern privatization. First and foremost is the improvement of enterprise efficiency by creating an active market and avoiding situations where any one firm or institution has a majority of the market. In doing so, the process must be implemented as rapidly as possible since present inefficiencies result in higher prices to consumers and low prices at the farm level, and/or state subsidies from the budget via direct or indirect channels. In addition, there is the goal of equity, which as a public good, will increase support for the overall reform process. 5.45 The privatization process should be sufficiently simple so as to be readily understood by the general public. Such an approach will facilitate public support. Shares in purchased enterprises should be tradeable on the open market, which will provide new owners with transparent ownership rights. Foreign buyers should be allowed to participate in the privatization as early as possible since they represent the largest source of investable funds. 5.46 Central to the transformation of the Ukrainian economy will be the rapid transfer to the private sector of assets presently owned by the State. Progress in privatization in Ukraine has so far been painfully slow. Small scale privatization, which had been declared in priority in 1992 and 1993, has not gathered momentum, despite efforts to jump start the process in a number of cities with support from donors. There are more than 100,000 small state enterprises in Ukraine. The 1992 target was to complete the privatization of all small enterprises within two years. But probably less than 500 have so far been transferred to private hands. In 1991 there were are around 10,000 medium and large state enterprises in Ukraine. The 1992 target was to privatize 80-90% of industry on an ad hoc case-by-case basis in the absence of a mass privatization program (MPP). Probably less than 1,000 medium sized enterprises have been privatized to date, mostly by transfer to the workers' collectives. Recently, however, there have been signs that Government is ready to start implementing a MPP and support from the international donors has been promised. 5.47 Promotion of smaller scale private enterprises should be encouraged to generate competition with large state enterprises. Very efficient small scale processing facilities are available to enable the establishment of such small companies, such as small milk and cheese plants with 10 tons of milk required per batch (From Latvia), jam and preserve manufacturing, flour milling, or specialty meat processing. Organizations representing small-scale farmers should be encouraged to become proficient in providing the leadership for such investments by small farmers' cooperatives. 5.48 The privatization of agroprocessing and supply and procurement organization should be done within the framework of overall privatization strategy. Small scale privatization needs to cover smaller units in processing and retailing, while large-scale units should be covered by the mass privatization program. Complicated procedures to provide preferences for producers of raw materials in privatizing agroprocessing should be avoided. 86 Chapter S 5.49 Enterprises should be relieved of their social functions. Social security, such as medical coverage, insurance, pensions, etc., should be assumed at the community or national level, and not as an adjunct to an employment contract, except for the normal employer's financial contribution. Similarly, housing should not be a consequence of an employment contract. Houses, therefore, should be separated from the enterprise' assets portfolio and be distributed in full ownership to their occupants either free or on very favorable terms. This would increase worker support of privatization of their enterprises. A housing distribution program would also help create a housing market and develop labor mobility in Ukraine. 5.50 Criteria for appraising investment proposals should be developed to ensure that public sector enterprises targeted for privatization do not continue to claim public resources unless they demonstrate their ability to use them efficiently. Access to financial resources either private or public, other than self financing, should be submitted to strict a priori controls by the financial intermediary institutions. Privatization in processing should be part of overall privatization strategy implemented in industry. 5.51 There are many ways to approach the complex issue of privatization, however, the principles that should govern privatization are: - the process should improve enterprise management. Dispersion of ownership should be sufficient to create an active capital market and avoid economic concentration; the process should be as rapid as possible. The present inefficiencies of the agroindustry subsector threaten consumers with food shortages and high prices, while imposing low prices at the farm level. Moreover, the government bears the blame for their inefficiency, and eventually has to cover their losses; and * the privatization process should be equitable. If shares are transferred without payment (in part or in totality), they should be given equally to all citizens. If they are sold, buyers should pay market prices for them. 5.52 In many cases, enterprises will need to be restructured prior to privatization. Enterprises should be categorized according to significant marketing potential, technical problems and economic/financial issues. Enterprises with good market potential and without serious technical or economic/financial problems are good candidates for immediate privatization. Enterprises without market potential should become candidates for liquidation. Enterprises with good market potential but severe economic/financial problems should be restructured, because in their present condition it is unlikely that anyone would wish to assume ownership. Restructuring could involve Government assuming or writing off debt, converting the debt to equity, or arranging a debt/equity swap with potential buyers. In some cases the restructuring may involve partial liquidation of the enterprise involving separation of remunerative from non remunerative divisions and delineating their debt as well prior to privatization. E. THE ROLE OF FOREIGN INVESTMENT 5.53 Ukraine has adopted a rather liberal legislation on foreign investment and joint ventures providing substantial tax preferences as well. The impact of these laws has not been sizable as far as Competitive Linkages for Privatized Agriculture 87 food and agriculture are considered. There are only a handful of joint ventures in the sector, mainly in the area of least control by the government, such as beverages, etc. Apart from the progressive law, the conducive framework for foreign investment in the mainstream of Ukraine food and agriculture does not seem to exist: (a) overall policy and the economic environment is still not encouraging enough; (b) grain, meat and livestock sectors remain under direct and indirect government control; (c) procedures for foreign participation in the privatization of processing and distribution are not elaborated and present practices do not favor foreign buyers; and (d) domestic markets are not attractive enough. 5.54 Experience in other Central and East European countries indicates that foreign participation in privatization of food processing and distribution could substantially speed up the creation of a competitive sector. However, foreign investors in general require majority ownership or at least a decisive role in the management of operations and much more freedom in marketing and currency transactions than those which Ukraine can offer at present. Efforts should be made to remove these obstacles, because the quick rehabilitation of processing and marketing cannot be envisaged without massive participation of the foreign private sector. F. EXPANDING MARKET FACILITIES AND SERVICES 5.55 A private-based commercial system is the most suitable way for supplying agricultural inputs and machinery services. A network of farm supply shops should be created soon by privatizing the existing network and by promoting the establishment of new firms. For the short term, the existing structure and the new type of cooperatives can be the major institutions of supply. Over the long run, private firms, including some foreign ones, are likely to be involved if domestic and foreign trade are liberalized. 5.56 Development of a nationwide commercial supply network will require several years. The Government should assist in the emergence of wholesale marketing and distribution and to encourage retailing and processing firms to develop their own purchasing activities. It should create competing buyers by subdividing state owned trade and processing monopolies. The development of a private retail and wholesale and input supply trading system of agricultural products requires: - a privatization program, including; (a) the immediate privatization of retail food outlets, (b) steps to authorize and encourage private sector entry at the wholesale level, and (c) the design of the programs and timetables to privatize or restructure and divest larger enterprises operating at the wholesale and product assembly levels; * the establishment of a compatible legal and regulatory framework, to encompass; (a) anti-monopoly regulations, (b) competition policies, and (c) corporate law, property law, and contract enforcement; and * the provision of essential supporting services, notably; (a) price and market information, (b) technical assistance and training services, (c) financial services to assist with establishing new businesses and meeting priority investment requirements, and (d) food inspection and phytosanitary standards. 88 Chapter S Market Structure 5.57 In retailing, wholesaling, and product assembly, some actions can be initiated without waiting for formal announcement of the guidelines. Existing state and municipally owned food shops could be leased or sold to the present managers and workers. No restrictions should be placed on the resale of facilities and equipment to interested third parties. Credit might be made available to provide private food retailers with initial working capital and some funds for improvement of facilities. 5.58 A key factor that needs to be addressed is the role of food retail and wholesale distribution. Clearly in Western Europe, organizing small retailers and stimulating wholesalers has resulted in the logistical advantages of buying in bulk and cost effective transport to cooperative/private warehouses, thus resulting in lower cost and fresher foods. This mechanism, called "logistical alliances", pulls more fresh and processed foods from contract farmers who have to achieve a certain quality standard, and very often produce crop or livestock varieties chosen by the buyer, in order for their goods to be purchased. In some cases, the entire package of inputs, including seeds, pesticides, herbicide, and fertilizer are determined by the contract. 5.59 It appears the Government is planning the privatization of retail distribution and warehouses. In other developing countries, private and small retail stores alone are not improvement enough to facilitate marketing efficiency. Often the fragmented and inefficient structures in both state- owned and independent food shops represent an almost insurmountable and high cost marketing problem for most primary and secondary food producers and processors. Whether it is a monopolized Government or state distribution system, or a fragmented system, the results vis-a-vis food prices are the same. To privatize the existing physical distribution facilities and retail units without assistance to the distribution subsector is to do the country as disservice. 5.60 A practical solution, used with fragmented food distributors in Western Europe, is to establish volume-based private sector chains of food distribution. This can also take the form of a consumer co-op chain where both consumers and producers band together. Another example is the type of large chain stores found in the US, which because of their volume purchasing and distribution, can sell food at prices 10% to 20% below that of independent food shops. 5.61 Most of the state-owned food outlets are small. A large percentage of them could be remodeled, modernized, and operated with a credit system that was tailored to these smaller operations. Ideally, they should be privatized in groups large enough to maintain their own distribution centers, enabling them to purchase fresh and processed foods in volume, operate under one chain name, reduce food prices, and maximize the profit return on capital investment. These groups would compete with each other, and through economies of scale, reduce food prices to consumers, provide volume-based marketing outlets for primary agricultural producers and processors, and maximize their return on capital. 5.62 Efficient wholesale marketing also will require construction of a network of easily accessible points of delivery; improving the grading of agricultural products; defining efficient standardized marketing rules (with settlement procedures in case of dispute, agreement of inspections, etc.) between professionals (traders, cooperatives, processing industries); facilitating access to forward and future trading; improving access to international market information (long term agreement with international companies would provide access to international market information and to electronic trading of agricultural commodities); and training executives in agricultural and food marketing. Competitive Linkages for Privatized Agriculture 89 Legal Framework - Market Information 5.63 At a later stage, the new market structure should include improved physical facilities such as auction halls, city markets, regional cooperative packing and grading facilities, and transportation equipment. Market information services for farmers should also be available, i.e., radio and television programs and farm newspapers. The more developed domestic agricultural market will require a commodity exchange. (The first commodity exchanges are already operating in Ukraine.) More efficient and coordinated international marketing for Ukrainian agriculture should be supported by commercial-based export marketing organizations. 5.64 One of the important vehicles to foster trade and stimulate production in a market economy is the commodity exchange. The commodity exchange is a market where producers (sellers) and consumers (buyers) meet: it plays a vital role in price formation. However, such markets need rules and regulations and supervision. This includes clearing procedures to ensure contract enforcement (delivery and payment), and the regulations which deal with the potential risk market manipulation. Assistance should be given to professionals in the marketing chains to set these rules and access in terms of infrastructure and equipment. 5.65 Efficient wholesale marketing requires construction of a network of easily accessible points of delivery; improving the grading of agricultural product; defining efficient standardized marketing rules (with settlement procedures in case of dispute, agreement of inspections, etc.) between professionals (traders, cooperatives, processing industries); facilitating access to forward and future trading; improving access to international market information (long term agreement with companies like Reuters to give access to international market information and to electronic trading of agricultural commodities); and training of executives in agricultural and food marketing issues. 5.66 Improvements in the legislation (and its enforcement) related to quality standards are greatly needed in the food sector. Ukrainian specifications are insufficient for export: both the standards and the inspection procedures need to be enhanced. 5.67 Accurate information is essential to efficient operation of markets. The public sector can play an important role in collecting and disseminating data that describe the fundamental factors influencing markets (e.g., areas, yield, imports, exports, etc.) and key market indicators (i.e. prices, volumes and quantities). Timely and accurate information is also necessary for policy formulation. Although some rudimentary market information is available, the quality and reliability of information for business and policy decisions is inadequate. A price reporting and market information system must include accurate product descriptions (to allow standardization of quotes and comparisons), price quotation conventions and data dissemination. An investment in a market information program may result in substantial improvements at little cost, both in terms of government decision-making and from the dissemination of information to the private sector. 5.68 Market information is particularly important for exports. In the past, export sectors were centrally selected and markets were assured through the CMEA system. Today, export markets must be developed by individual firms, often facing an uncertain and, in some areas, restrictive trade policy environment. The organization of an export development service could meet the needs of trading enterprises by: (a) collating information on the markets for most major commodity and processed product sectors; (b) assembling export market intelligence that allows traders to assess opportunities on the basis of market data and relevant trade regulatory information (import restrictions, phytosanitary and veterinary 90 Chapter 5 requirements); and (c) providing specific export trade assistance that helps develop the capability of individuals and organizations concerned with export marketing. G. IMPROVING FINANCIAL SERVICES 5.69 The future development of financial intermediation in Ukraine depends on stabilization of the economy and reform of the financial system. The capital and reserve position of the banks is weak and they will have to be restructured before they can play a major role. The banks have to be converted into autonomous institutions, operating on a profit making basis, which will involve competing for deposits and making loans based on an assessment of client risk. Under no circumstances should the financial system be used as a convenient mechanism for rescuing insolvent enterprises, public or private, in agriculture or elsewhere. The Emerging Structure of Financial Institutions 5.70 The Ukrainian banking system has four basic components: * the National Bank of Ukraine, which carries out most of the usual central banking functions, but also channels a substantial amount of funds to the Ukraine Agricultural Bank for on lending to the agricultural sector; * the Savings Bank of Ukraine, which has more than 600 branches and more than 14,000 smaller scale affiliates spread throughout the country, and has traditionally specialized in the mobilization of deposits, but has recently begun to grant loans. It has by far the best infrastructure of any existing institution to provide financial services to rural areas, including credit for individual private farmers and deposit services for the entire rural population; * the specialized state-owned banks, including the Ukraine Agricultural Bank (now called Bank of Ukraine) with 600 branches, were converted to commercial banks and have begun to take deposits; and * the 100 commercial banks, which are joint stock companies, mostly owned by groups of state owned enterprises, provide credit and certain other services to their owners, and have only limited interest in deposit mobilization. 5.71 The Bank of Ukraine (BU) is one of the three specialized lending banks that emerged in Ukraine after the reforms of the banking system in the Soviet Union. It initially had the largest loan portfolio of the three banks, but massive write-offs of its loans during 1990 drastically reduced its size. During the process of reform, the characteristics of the bank were redefined. It was changed to a joint stock commercial bank and was allowed to take deposits and make loans for a wider array of activities to a broader range of clients. Nonetheless, the BU, as well as the two other specialized lending banks, remains essentially a government-controlled specialized lender with a loan portfolio heavily concentrated in government enterprises. Competitive Linkages for Privatized Agriculture 91 5.72 The BU is the main source of credit to the agricultural sector, including state-owned processing and storage facilities and input suppliers, as well as state and collective farms. Although it is no longer the largest specialized lending bank in Ukraine in terms of loans outstanding or total assets, it is larger than either of the other two specialized lending banks in terms of infrastructure, with more than 600 branches and more than 20,000 employees. Only the Savings Bank of Ukraine, with 15,000 branches and 52,000 employees, has more physical capacity to provide financial services in rural areas, including agricultural credit. 5.73 As a supplier of credit, the BU does not use normal banking criteria by selecting clients likely to repay. It has tended, instead, to lend to state owned enterprises to cover their losses. Many of its loans were later written down or totally written off. Funds for further lending was provided by the Central Bank. This has made it a fiscal rather than a financial institution. The current policy of the BU is to support developmental priorities and not to engage in further write offs, but it will probably be forced to continue to provide support to loss making state owned enterprises. 5.74 Even though the BU is being more aggressive in attracting deposits in order to become a true financial intermediary, its deposit rates are far below the rate of inflation and thus will not protect the real value of depositors' assets. Interest rates on loans are also far below the rate of inflation, so that, even if loans are fully repaid, funds will be inadequate to maintain lending in real terms. In addition, interest rates on priority loans (i.e., long-term loans to tenants and for housing and all loans to farmers) are significantly below those on short-term loans to entrepreneurs, indicating that interest rate policy is governed by concepts of subsidized and directed credit rather than by the costs and risks of serving different groups of borrowers. 5.75 Two other government institutions are involved in agricultural finance. The Governnent Insurance Institution is currently providing credit insurance. Although providing such insurance appears to be a profitable activity under Ukraine's current inflationary conditions, it is unlikely to be so in the longer run. The Ministry of Agriculture and Food also has variety of plans and programs that involve directed and subsidized credit for the agricultural sector. 5.76 Among the existing financial institutions, the Savings Bank currently has the best infrastructure to provide financial services in rural areas, including credit for individual private farmers and deposit services. However, to develop its potential, it will need a major program of training and technical assistance based on the acceptance of key reforms involving interest rates, client selection and loan recovery, along with modern management techniques based on incentives and decentralized assignment of responsibilities. 5.77 The BU is currently the main supplier of funds to the agricultural sector, but more as a fiscal agent than as a financial intermediary. If market oriented reforms proceed slowly for state enterprises in the agricultural sector and it is deemed essential to continue to support loss-making enterprises in the short run, the BU could be the most appropriate institution to provide the necessary transfers, but in this case it should cease to be a financial intermediary and become explicitly a fiscal agency. 5.78 The commercial banks encompass a wide range and rapidly growing number of institutions, many of which provide little in the way of traditional lending and deposit services and many of which are probably insolvent. They could potentially play an important role in providing banking services to agriculture, but the first priority is to introduce generally accepted accounting principles, 92 Chapter S external audits and a comprehensive system of prudential regulation and supervision by competent government agencies to ascertain which banks are solvent and not engaging in excessive risk taking (e.g., insider lending). For commercial banks that are found to be viable, a program of training and technical assistance similar to those recommended above could be offered. Those commercial banks that do not qualify should not be allowed to continue to operate as financial intermediaries. 5.79 The emergence of new grassroots financial institutions such as post office banks, credit unions, and possibly credit cooperatives should be encouraged by providing the legal, regulatory, and supervisory underpinnings, as well as technical assistance. Farms should also be supported by technical assistance enabling them to prepare credible restructuring, project and financial plans, and loan applications. 5.80 It will take several years until a competitive rural financial system will become operational. Its efficient operation will also depend on substantial stabilization of the monetary system. Because the restructuring of agricultural, agro-processing, and marketing enterprises cannot be deferred until such a system becomes operational, temporary targeted public sector dependent financing systems may have to be used at least to initiate the restructuring process. Market-based Financing of Agriculture 5.81 Ukraine is not unique in providing subsidized credit to agriculture. In most countries, including developed market economies, specialized public institutions and programs provide and subsidize credit to agriculture and rural areas. In large part, this is due to farmers' political clout, but economic reasons also justify these programs. For example, the need to compensate for distortions in the international price of agricultural commodities due to trade restrictions and subsidies, the need to assure access to credit to remote areas, or as a means of achieving food security. 5.82 What makes Government intervention stand out in Ukraine is: (a) the extent of the directed credit programs (almost all credit to agriculture and many related activities is provided through these programs); and, (b) the degree of explicit or implicit subsidization that converts these credits to implicit grants (in addition to the extremely low interest rates, both borrowers and lenders expect that most loans will eventually be forgiven). In all developed countries and in most developing countries, government programs play only a marginal role in the overall financing of agriculture, and the grant component in these programs represents only a fraction of the present value of credits. 5.83 As a result of overall macroeconomic instability, several factors complicate any attempt to reduce Government activities in financing agriculture: * The creditworthiness of most of the farmers is questionable. Agricultural land cannot yet be used as collateral to secure loans. The only exception is some 1 million ha already allocated to individuals. Many farms cannot borrow or demonstrate profitability under commercial terms. * Financing centralized state procurement and marketing of agricultural products needs to be done through directed credit programs, because the agencies in charge are too big relative to the banking system. Competitive Linkages for Privatized Agriculture 93 * There is a lack of rural banking infrastructure. In most rural areas there is no banking presence, except for Scherbank which until recently was not involved in lending. Also, most farms do not have the "skills" needed to seek commercial loans. * Continued uncertainty in agricultural policies, in particular prices and restrictions on trade, complicate the creditworthiness evaluation of farms. * Farmers view credits to farms as government transfers, since they were often forgiven. These expectations will be difficult to change for private farmers, and almost impossible to change for state and collective farms. 5.84 In the short run, directed credit programs may have to continue to serve as the basis for financing agriculture, at least until farms are able to borrow against their property. Furthermore, it is likely that most state and collective farms (given their debt service record as well as their uncertain future and the low profitability of the livestock sector) could not be financed by profit-oriented commercial banks for a relatively long time. 5.85 However, several important changes should be made to the present programs. Directed credits should be restricted to agriculture and to small scale processing activities that take place within farms or in adjacent farm communities. Enterprises dealing with agricultural inputs, such as fertilizers, like other enterprises in the agro-industrial complex, should receive financing from commercial banks. Directed credits to agriculture should be reduced gradually over time, as commercial banks and capital markets take over an increasing part of the financing of agriculture. 5.86 Credits should have clear-cut terms, even if they are concessional, and authorities should enforce those terms as a means of instilling financial discipline. Preferably, the NBB should raise interest rates on loans to agriculture to the levels prevailing in the rest of the economy. Subsidies would be more effective and cheaper if they are conveyed directly linked to the objectives that the Government wants to subsidize. 5.87 The Government should encourage establishment of a banking system that provides a full range of banking services, including deposit mobilization, trust and investment business, capital market operations, and provision of legal status and enforcement of informal financial contracts. The newly emerging rural banking institutions need to be complemented with a competitive insurance system providing risk protection for agricultural enterprises including private farmers. 5.88 The Ukrainian agricultural finance system deserves special attention because many of its potential clients live in hard to reach areas and are engaged in activities where prices can be volatile. While the nature of these potential clients can make them relatively costly and risky to serve, this does not justify maintaining directed and subsidized credit programs which have proven to be costly and ineffective elsewhere. The Ukrainian Government should not neglect opportunities to encourage development of the kinds of financial institutions and markets, including informal financial arrangements, that have worked well in other countries. Credit unions or other forms of cooperatives, small-scale rural banks, or informal arrangements involving private sector trade credit may be effective in reaching a broader array of clients. Whether the development of new semi-formal institutions or informal arrangements occur spontaneously or with the encouragement of the Ukrainian Government, restrictions on their operations should be limited to the minimum necessary to protect depositors and other creditors from excessive risk taking and fraud. 94 Chapter 5 CHAPTER 6 MEASURES TO IMPROVE FARM PRODUCTION AND EFFICIENCY 6.1 The successful transition to a new agriculture system requires not only changes in the present policy environment and inventive framework, but also support in the form of policy measures to increase the efficiency of production, and by investments in physical capital. Production technologies and management of crop and livestock production have to adjust to the new conditions of private agriculture and the market system. This chapter discusses recommendations for improving the efficiency of farm production as well as for the modernization of agricultural education and research. A. IMPROVEMENTS IN CROP PRODUCTION Techmologies 6.2 The level of agricultural technology in Ukraine is generally below that in industrialized nations. Many Ukrainian agricultural scientists are world-renowned, but the gap between research findings and their application is large, like in most other countries. There is an increasing Government awareness of the need to modernize the farm sector and to acquire and assimilate the new technologies, especially in livestock breeding and grain production. However, it is not well understood that effective diffusion and adoption of new technology will require basic changes in the structure of the farm economy, as well as in the habits and skills of Ukrainian farmers. 6.3 Fertilizer Use. Average fertilizer application in Ukraine is higher than that of the former Soviet Union, but considerably lower than in Western Europe. In pure nutrients per hectare of arable land, it averaged about 148 kg/ha in 1986-90, compared with an average of 100 kg in the former Soviet Union and 229 kg in Western Europe. Fertilizer application declined however from 1989 to 1992 by about 50 %. Overall fertilizer supply was 43.7 % of the 1986-90 level, while phosphorus supply was only 27.8% compared to the same time period. Ukrainian official estimates of the optimum application is 180 kg per hectare.' The main deficiency is in the application of nitrogen and phosphorous (about 9% and 40% respectively). The ratio of nitrogen, phosphorous, and potassium (N/P/K) is also unsatisfactory; 1.0/0.6/0.6, compared to an estimated optimum2 ratio of 1.0/1.0/0.6. Phosphorous is the limiting factor to yield improvement, since lack of phosphorous, among other factors, reduces the effectiveness of other nutrients. 6.4 Production of nitrogen fertilizer in Ukraine is sufficient to meet domestic demand. However, all phosphorous and potassium fertilizers are imported. About 10 to 15% of fertilizer shipments are lost due to the poor physical and chemical qualities of mineral fertilizer--excess moisture, dusting, caking, and acidity--and the lack of proper packaging materials, transport containers, and loading equipment. i The estimated required fertilizer application is based on the objective of achieving a predetermined yield, it does not take into account the need to maximize profits. 2 The optimum is in a sense predicated on Western countries production function and technology. The "optimum" may vary if the world price relationship of the three main ingredients of the fertilizer will change. 96 Chapter 6 6.5 One of the official explanations for the deficiency in fertilizer use is a shortage of on-farm storage Fertilizer Supply 1986-92 N capacity. The Government 6 p estimates that the storage of 6 K granulated fertilizers meets only 5 - about 70% of requirements and Total Supply storage of compost fertilizers 4- meets about 28% (see Figure c 6.1). However, it is likely that - the apparent shortage of storage 2 partly reflects market inefficiencies. Transport is not 1 ; S d *i L I available on demand; most villages do not have hard surface o access roads; and there is no 1986 1987 1988 1989 1990 1991 1992 retail system which can provide I fertilizer on demand. Figure 6.1 6.6 According to agricultural scientists in the former Soviet Union, a better phosphorous balance in the soils could increase grain yields by 20-30%. Averting losses incurred in shipment could allow an increase of grain yields by about 3 to 5 %, or approximately 1.5 to 2.5 million tons per annum. Providing an optimal balance of phosphorous and other nutrients could raise grain production by 10 to 15 million tons.4 6.7 Irrigation and Drainage. About 2.6 million ha, or 6.9% of the arable land, is under irrigation. In addition, land amelioration covers 3.2 million ha, 8.5 % of the arable land, of which about 2.2 million ha is under drainage. Most of the irrigated land is in the Donets-Dnieper (37 %) and southern regions (49%), while most of land amelioration and drainage is in the southwest region (94%). Although precipitation in the Donets-Dnieper is between 450 and 550 mm per year, the period between the spring and the fall is relatively dry and supplementary irrigation is used, mainly for fodder and summer crops. Precipitation in the southwest region ranges between 550 and 1200 mm, and is more evenly spread over the year, so irrigation is not needed. In most of the south, precipitation ranges between 300 and 400 mm per year and the summer is dry. Irrigation is, therefore, essential for summer crops and horticulture. About 84 % of the irrigated land is used for production of grain (34 %) and feed crops (50 %). Only 16 % is used for production of industrial crops (6%) and vegetables and fruits (10%). Since irrigation requires pumping, costs would rise substantially if fuel were priced at the international levels. This could result 3 About 16% of the deficit between the estimated required and actual average provisions. 4 In terms of benefit: the deficiency of about 1.3 million tons of phosphorous, even at a price of US $130 per ton (which is the 1991 cost for triple superphosphate), is about US $170 million. The wheat price in 1991 was about US $140 per ton (fob Canadian), or total value of 10 to 15 million tons will amount to about US $1.4 to US $2 billion. Hence, providing the optimal balance of phosphorous would yield an estimated benefit between US $1.2 and US $1.8 billion, Measures to Improve Farm Production and Efficiency 97 in a strong shift in cropping patterns. Table 6.1: Indicators of Farm Mechanization 6.8 Mechanization. 1986/1990 1991 1992 Agriculture in Ukraine was more units ha units ha units ha mechanized than the rest of the ('000) /unit ('000) /unit ('000) /unit former Soviet Union, but Available 500.1 71 497.3 71 511.5 63 considerably less than in Tractors Western Europe. In 1992, there were 511,500 tractors in Ukraine Harvest 111.6 125 105.2 125 103.4 125 compared to 2.6 million in the entire former Soviet Union. Beet 18.6 91 19.8 83 20.1 77 This means one tractor per 63 ha Harvesting of arable land in Ukraine, Combines compared to about one per 84 ha Corn 13.8 125 15.3 83 15.3 59 in the former Soviet Union. In Harvesting addition, there were 103,400 Combines combine harvesters, or one per Potato 9.3 50 9.6 38 9.2 36 125 ha of grain crops, compared Harvesting to one per 160 ha in the FSU. Combines The average ratio in the EU is Source: Ministry of Agriculture and Food one tractor per 18 ha of arable land, and one cereal combine for 71 ha of grains. (See Table 6.1) 6.9 The quantity, mix, and quality of mechanical equipment is not entirely satisfactory. While the supply of most machinery and equipment remained relatively stable over the past six years, the number of combine harvesters declined by about 5 %. The age of the tractor fleet and other machinery is unknown, and there is probably significant variation in their effectiveness and suitability. There is a substantial shortage of medium and small cultivating tractors (between 30 and 100 HP), maize harvesting combines, potato harvesting combines, and silage harvesting combines. Field visits revealed that there is also shortage of grain drying equipment. Absence or insufficient use of grain drying equipment has a detrimental impact on the quality of animal feed and the economics of livestock production in general. 6.10 Quantity of farm machinery is not a major constraint on agricultural production, except in specific cases, such as the number of grain dryers or certain combines. The problems are more qualitative, e.g. efficiency of the combines is low, resulting in higher losses than comparable combines in the West, and spare parts are often not available, causing a significant amount of machinery and equipment to be idle at critical periods of production. 6.11 Energy Utilization. Energy use in Ukraine has decreased in recent years. In 1993, 26 million tons of fuel was used for all agricultural production, including livestock, compared with 34.2 million tons in 1980-86. Ukrainian agriculture is still more energy intensive than agriculture in developed countries. In 1990 206 kg of fuel was used to produce 1 ton of grain units, compared with 61 kg in France, 70 kg in England, and 81 kg in Germany.5 5 Ukrainian Institute for Agricultural Economics (estimates) 98 Chapter 6 6.12 Pest and Weed Control. As much as 25 % of production in the FSU may have been lost due to pests and weeds. Ukraine probably fares no better, since its pesticide and herbicide applications and quality as well as production systems have been about the same as in the FSU. In 1991, about 80% of the arable areas of Ukraine were treated with an average of 2.7 kg/ha of pesticides, compared with 1.7 kg/ha of active ingredients in the FSU, 7 to 8 kg/ha in the US, and 6.6 kg/ha in EU countries. 6.13 A quarter of the pesticides are produced in Ukraine, while about 50% are imported from other FSU republics, and the rest comes from other countries. The cost of imported pesticides was about US $350 million in 1992. Herbicides are considered to be the most critical in terms of scarcity and about 35 % of the requirements must be imported from outside of the FSU. This compares to the need to import about 12% of the fungicides and about 11% of the insecticides. 6.14 Seeds. Ukraine produces about 6 million tons of seed per annum, which more than meets all domestic needs in productive terms. The winter crop uses about 3.5 million tons of seed and the spring planting about 2.2 million tons. The majority of seed used by state and collective farms is produced in their own seed multiplication fields from seeds initially obtained from seed farms. Plant breeding is the responsibility of the MOAF, but the actual research is carried out by the Institute of Agriculture Research. The heavy seeding rate results from use of equipment that cannot seed at prescribed rates and low germination rates. Farmers compensate by over seeding to ensure adequate standards. Improving Land Use / Comparative Advantage 6.15 Soil productivity in Ukraine has been damaged because of stereotypical problems of land use, crop rotation, fertilization, cultivation, irrigation, and soil drainage. The environmental sustainability of Ukrainian agriculture requires maintenance and improvement of the fertility of agricultural land. Reforestation programs should be considered for land that is deemed unsuitable for cultivation or livestock operations. Farmers who are employed on marginal land and in marginal livestock operations should be assisted through training in land preservation practices suitable for local conditions. 6.16 Cropping patterns will undoubtedly change considerably as market forces affect the agriculture sector, and farming concerns itself with optimizing returns rather than increasing production. Attention will then have to be given by farmers to soil and climatic conditions, price relationships, marketing possibilities, labor and machinery availability, and other production and economic factors. Both researchers and farmers will need to focus on the development and application of appropriate low input, and sustainable agricultural practices. One practice with considerable promise for wider application in Ukraine is no-tillage or minimum-tillage technology. Changing the composition of fertilizers and providing more active phosphorus would generate substantial additional yields. 6.17 At present Ukraine does not seem to have a measurable comparative advantage in crop production relative to Western European countries, or even to Central and Eastern Europe (Table 6.2). Production expenses per hectare are lower, partly because of prevailing exchange rates, while yields are substantially lower. At the same time the crop production enjoys comparative advantage inside FSU and in relation to North America, higher or comparable yields are reached with similar input use and expenses. In the medium and longer term, however, Ukraine is likely to develop comparative advantage if yields of its main crops increase to comparable levels or exceed those in Central-Eastern Measures to Improve Farm Production and Efficiency 99 Europe and in the industrialized countries. The ecological and Table 6.2: Comparison of Average Crop Yields (tons/ha), 1986-1993 technical conditions definitely exist, especially in grain and oil Country Wheat Potatoes Sunflower Sugarbeets seed production, for this yield Seeds increase. Ukraine 3.0 12.5 1.6 27.0 Russia 1.8 10.2 1.3 23.3 Improvement in Farm Canada 1.8 24.8 1.4 37.8 Management USA 2.4 32.2 1.2 43.7 6.18 There is Argentina 1.9 23.6 1.4 potential for efficiency Poland 3.8 18.9 --- 35.4 improvement in labor and Romania 3.4 10.7 1.5 17.6 machineryutilization,management, and by decreasing large losses France 6.3 32.3 2.3 64.5 during planting, harvesting, and Germany 6.6 36.1 --- 53.9 storage. Source: FAO Agriculture Yearbook, Gomkomstat and Bank Internal Reports * Labor. About 20% of the overall working population, including technical staff working on farms, is engaged in agriculture. This translates into a high labor component per farm high employment of administrative staff. Farms also employ groups of craftsmen, such as bricklayers and electricians, who work solely on farm-related schemes. They account for up to 25 % of the agricultural labor force. These services add an unnecessary burden to farm expenditures and could be performed more cheaply by outside contractors in a market system. Establishing these service as independent units at the village level would provide employment for villagers and would contribute to the privatization effort. * Management. Currently, management is still inhibited by lack of commercially- oriented policy planning and by a certain "subsidy mentality" that relies on the state to make up losses. There is also a social component that forces the manager to provide employment for rural people. The lack of market orientation in production can be solved through greater specialization in a limited number of production branches and by the closure of unproductive units. The problem of low work morale can be alleviated through performance-oriented remuneration. * Production and Processing Losses. Government officials readily admit that losses in production and processing of agricultural products are very high. It is estimated that losses of agricultural products vary between 25 and 35%, and arise because of inadequate handling during harvesting, feeding, and processing. Losses are also caused by outdated, broken, and low quality machinery. It is estimated that with better seeding equipment, seed requirements could be reduced. Further losses occur in harvesting and storage. Processing machinery in the dairies and bread factories is generally well over ten years old and is in need of replacement, if for no other reason than to reduce the rapidly rising costly demand for spare parts. Another source of losses is low quality feed rations, which result in higher feed input per unit of output. Because of low quality grain and concentrate input and difficulties in maintaining consistent rations, excessive amounts of 100 Chapter 6 fodder have to be fed to produce livestock products. An additional source of waste is the feeding of meal rather than pellets, which causes losses in handling. * Application of Chemicals. Usage of potassium almost everywhere is excessive, while only about 70% of nitrogen fertilizer needs are supplied. There is a deficiency in use of phosphoric fertilizers. Only about one third of pesticides requirements are applied. Beyond inadequate ratios, the process of application of chemicals is often technologically poor. * Over-utilization of Machinery. Ukrainian agriculture uses 2.9 tractors and trucks per 100 ha of agricultural are, the same level as in the former German Democratic Republic (GDR). This intensity is one of the highest in the world for this type of farming system. It is not justified by work requirements, particularly if one considers that nearly 60% of the agricultural area is under grass and fodder crops and that the fertilizer supply enterprises do a considerable amount of fertilizer and manure spreading for the state and collective farms. The number of grain combines per 100 ha of agricultural land is 0.2, a level that is one of the highest in the world. The overcapacity of machinery was encouraged by low prices for fuel. In addition to past low fuel prices, the large amount of machinery per farm is explained by the low quality of machinery. It is sometimes necessary to keep one tractor for spare parts to keep another one going. At the same time, machinery scaled to the needs of smaller farming units is hardly available. 6.19 These inefficiencies are not insurmountable. Most farms should be able to increase their productivity through: (a) better plant and animal breeding material; (b) better use of less, but higher quality, machinery; and (c) better agricultural techniques, including machinery able to reduce losses in production, storage, and processing. After abolishing administrative planning, most farms should be in a position to adjust their production programs according to climatic and soil situations in the framework of a market-oriented production policy, without necessarily intensifying agricultural production through higher inputs. B. ADJUSTMENT IN THE LIVESTOCK SECTOR Efficiency of Livestock Production 6.20 Livestock production has generally been inefficient, being concentrated in large units and depending heavily on feed rather utilizing grasslands, although production practices for poultry, most pigs, and dairying are similar to those in Western countries. Production performance is much below Western standards: fertility rates are 33% lower, meat and milk production per animal unit is less than 50% (Table 6.3). 6.21 Animal mortality rates are at least twice those for Western countries, and have increased rapidly during the past years due to shortages of medications and vaccines. Mortality rates are particularly high for young stock, with piglet mortality rates on many farms above 33%. Cow replacement rates (up to 30% to 40% in some instances) and culling rates in layers (up to 50% to 70%) are high by any standard. Major indicators of livestock productivity show a substantial 20-25 % decline Measures to Improve Farm Production and Efficiency 101 in recent years (Table 6.4) increasing the gap with advanced countries. Table 6.3: Livestock Performance Compared to that of Selected EU Countries Category Unit Ukrainea, EU Countries Ukraine as % of EU Countries Commodity per Year Kg 2,200 4,800 (UK) 47 Calves weaned/cow/year % 66 90 (UK) 73 Lambs weaned/ewe/year % 75 115 (U5K) 65 Piglets weaned/sow/year % 11 20 (UK) 55 Eggs/layer % 195 268 (UK) 73 Lean meat share of pigs (110 kg. liveweight) % 40 54 (UK) 74 Feeding Efficiency"1 Cattle fattening Feed Unit 12.0 6.0 (Germany) 200 Pig fattening " 8.0 3.5 (Germany) 229 Broiler fattening " 5.0 2.5 (Germany) 200 Cow milk production 1.5 0.8 (Germany) 175 Source: Ministry of Agriculture and Food. a[ Social Sector only. b/ Oat units from manufactured feed required per kg. of animal product in addition to those from roughages; one oat unit = 600 grams of starch. 6.22 Feed conversion ratios, the most important bio-economic parameters in livestock production, are less than half those in Western countries. To some extent this reflects low levels of protein in feed. Introduction of soybeans and other oilseed crops could result in major improvements in the productivity of the livestock sector. Consumption of feed grains and manufactured feedstuffs exceed optimal levels by a third to a half. Poor quality feeds particularly affect broiler and Table 6.4: Decline of Productivity in the Livestock Sector pork production. On many 1993/1990 farms, birds of 70 to 75 days 1990 1993 Decline (%) only weigh one kg and contain large amounts of intestinal fat, per cow (in all farm 2863 2212 23 while pigs require 13 to 15 categories), kg. months to reach 110 kg slaughter weights, and often have lean In large scale farms 2941 2098 29 meat carcass content of no more Average weights gains per/day than 38% to 40%. - cattle 421 299 29 6.23 Shortages and - pigs 229 174 24 poor quality of feedstuffs are the Average weight of one cattle most important technical reasons head, sold to the state, kg. 393 353 10 for low livestock productivity. Same for a pig, kg. 127 115 9 In the past few years, due to shortages of feed grains and Eggs from I layer per annum 214 174 19 manufactured feed, increasing (in large scale farms) 102 Chapter 6 amounts of relatively low density energy content feedstuffs have been fed to monogastric animals (poultry and pigs). There is a severe and increasing deficit in protein feed, on the order of 4 to 5 million tons of soybean equivalent per year, as well as in energy feedstuffs. Feeding of low quality hay, haulage, stovers and silage is widespread, and shortages of roughage are common, especially during the long winter and spring feeding periods. Manufactured feed no longer contains a significant share of protein meals and feed additives, such as micro-minerals, vitamins, antibiotics, and coccidiostat. The resulting suboptimal nutritional values are causing feed consumption to be up to 50 % higher than average standards in western livestock producing countries. 6.24 Low feeding efficiency has a negative effect on profitability. Under prevailing conditions of poor quality pig rations, for example, one kg of soybean meal equivalent could replace at least 2 kg of energy feed grains. This would increase fertility rates and daily weight gains, while simultaneously lowering mortality rates and disease incidence. Moreover, fattening periods for pigs and broilers could be shortened by 33% on average if optimal feed formulas were applied. Under current conditions of deficient feed supply, it would make economic sense to: (a) increase production and importation of protein meals and feed additives; (b) expand cultivation of high protein content grain and forage crops; and (c) reduce the number of livestock in order to optimize the use of limited protein and feed additive resources. 6 6.25 Shortages, largely due to a decline in import availabilities, and poor quality of domestic veterinary supplies, also contribute to low productivity in the livestock subsector. The most urgently needed veterinary supplies are drugs for treatment of internal and external parasites, wide spectrum antibiotics, coccidiostat, and reagents, chemicals and equipment for domestic production of effective medicines, drugs and vaccines. Increased availability of the veterinary supplies would contribute to reduction in the mortality rate and improvement in productivity by 20% per annum. 6.26 Low productivity of the livestock subsector is also a result of the low genetic potential of the herd and the lack of modern equipment for livestock production. Although efforts have been made to implement sire selection programs, genetic progress has been slow. There is a lack of up-to-date milking, milk cooling, and handling equipment as well as forage harvesters and forage handling and storage equipment/facilities. Improvement in the genetic structure of the livestock and availabilities of up-to-date livestock equipment would greatly enhance the productivity. 6.27 The successful transition to a new agricultural system requires not only policy actions, but also should be supported by measures to increase the efficiency of production and by investments in physical capital. Irrigation facilities, management, and crop and livestock production have to adjust to the new conditions of private agriculture and the market system, especially in the form of improvements in production efficiency and management practices. 6 Including about 4 to 4.5 million ha of forage maize, 4 million ha of perennial forage crops (of which about 2 million ha alfalfa, and 2 million ha of alfalfa and other perennial forage legumes and their mixtures with grasses), 2.5 million ha annual forage crops, 600,000 to 700,000 ha of fodder beet, 50,000 to 60,000 ha of each fodder melons and sugarbeet for livestock feeding, and 80,000 to 100,000 ha of a variety of other different field crops for silage, such as sunflower. Measures to Improve Farm Production and Efficiency 103 Improvements in the Livestock Subsector 6.28 Profitability of livestock operations, particularly intensive poultry, pork, dairy, and beef fattening operations, is low. High investment and operational subsidy levels and price distortions have led to production systems which: (a) overused feed grains/manufactured feed, while neglecting cheaper feed resources, such as pastures/meadows, forage field crops, and agro-industrial byproducts; (b) wasted energy and other inputs; and (c) encouraged concentration of large numbers of animals, often causing severe managerial, animal health, and environmental problems, as well as high internal and external transport costs, and difficulties in applying efficient feeding, milking, and manure/slurry removal techniques. These production systems, combined with the current low productivity levels cannot be sustained under the emerging relative price structure. 6.29 Changes in the structure of consumer and producer prices and, consequently of consumption and production costs, will require a major adjustment of the livestock sector. Production costs will be much higher under free market conditions, and domestic consumption considerable lower. Export prospects outside the FSU are not bright and other republics of the FSU, have similar problems. The size of the sector should be allowed (and assisted) to adjust downward. Efforts should concentrate on measures to improve the efficiency of the livestock subsector, but attempts to maintain or restore the size of the sector through subsidization should be ruled out. Efficiency enhancing actions might include: '3 Subdivision of dairy farms into smaller, self-contained, and genuinely privatized units, with the land, machinery, equipment, and storage facilities required to produce the roughage they need themselves, as well as, most of the feed grains required for balancing good quality basic forage rations. -- Improvement of beef production requires: (a) increasing the feeding of good quality roughage, namely forage maize and its silage, as is common in Western Europe; (b) reaching higher slaughter weights of both young bulls and cull cows/heifers; (c) expanding single calving systems for heifers; (d) inseminating 15 to 25% of dairy cows with semen from specialized beef breeds; (e) expanding the dual-purpose Simmenthal breed population which, in the past two decades, has proven worldwide its superior meat; and (f) increasing specialization in beef production, with breeding operations and raising of young stock on natural pastures and rangeland with little or no supplementary feeding, and finished in feedlots during a short 3 to 4 months fattening period. * Closure or privatization of unprofitable collective and state pig farms/complexes. Vertical integration of pig production with feed mills and processing plants, providing private farmers with feed, piglets, and veterinary/technical assistance to marketing/processing their finished pigs should be encouraged. * With depressed world market prices for wool, sheep production should become more oriented to meat- and milk-type sheep. Switching can be done relatively quickly by importing rams. However, good feeding and management in the sheep producing farms is a prerequisite to continuation of production. * Poultry production has already to a great extent been switched to the private sector; however, further privatization will be required to change the mode of broiler production to a deep litter system as is conventionally done in most of the producing countries. 104 Chapter 6 6.30 Ukraine's comparative advantage in livestock production in relation to other FSU republics is based on higher crop yields and cheaper feed availability. With the relatively low conversion ratios vis-a-vis the rest of the world and lack of remunerative prices and underdeveloped processing, the livestock sector of Ukraine has no Table 6.5: Comparison of Livestock Performance, comparative advantage over the West (Table 1986-1993 6.5). However, due to its immense potential for Country Milk Pig feed Broiler feed high yielding field forage crop production Yield conversion conversion (namely forage maize) and from the large per Cow amounts of agro-industrial byproducts available, Ukraine has ample potential to produce comparatively low cost livestock feed for Russia 2000 1:5.5 1:4.2 livestock production. This can be the basis for Canada 5908 1:3.8 1:2.3 developing a comparative advantage outside the FSU republics. In addition, as mentioned before, USA 6494 1:3.0 1:2.1 Ukraine has, and will have for some time, Argentina 2319 1:4.0 1:3.0 relatively low cost labor. Improvement of the Poland 3217 1:4.7 13.5 conversion ratio in livestock feeding can also be expected with the removal of trade restrictions Romania 2081 1:5.4 1:4.5 which will allow purchase of the right France 2950 1:3.5 1:2.4 concentration mix, improvement of the genetic Germany 4802 1:2.8 1:2.1 material of livestock, and adoption of better Ge: FAO 1:2.8 1 :2.1 Source: FAO Agriculture Yearbook, Gomkomsiat and management and feeding practices, all of which Bank Intemal Reports are essential for building a comparative advantage in livestock production. C. INCREASING ACCESS TO AGRICULTURAL INPUTS AND PRODUCTIVE SERVICES 6.31 The main problem of the input supply is that input providers have monopolies. They have had no incentive to satisfy the needs of the farms, so they have often provided an inappropriate mix of low quality inputs. With Ukraine moving toward a market economy, the input supply system will have to become more competitive. 6.32 Machinery and eNuipment. Problems of agricultural machinery are chronic, from the wrong mix of machinery, low quality components, to scarcity of spare parts and rising fuel prices. Depreciation regulations for tractors stipulate a lifetime of 12-15 years, but many of them last only 6 years, and require frequent repair. The situation for the grain combines and agricultural trucks is similar, with very high scrapping rates. 6.33 Soviet agricultural mechanization almost totally disregarded design and production of smaller scale machines and equipment, despite the fact that some 25-30% of all agricultural production came from small private plots. Moreover, some of the design parameters, particularly in seeding, spraying, and harvesting machines, allowed for imprecise work. The movement toward world prices and the establishment of financial responsibility for farms and other enterprises should have a major impact on the agricultural machinery industry in Ukraine. If they are to survive, manufacturers will have to meet the specifications of end users for quality and applicability. Measures to Improve Farm Production and Efficiency 105 6.34 Animal feed. The combination of alternatives provided by markets and decisions based upon potential profitability will result in significant improvements in feeding efficiency. The use of high protein feeds, vitamins, minerals, antibiotics, and other pharmaceutical will increase significantly. Use of these inputs will reflect their profitability. Higher feeding efficiency will cause lower livestock production costs by significantly reducing the amount of feed required per unit of output. 6.35 Seeds. Seed production is organized in typical Eastern Europe fashion involving research institutes in genetic work, breeders' (super-super-elite) and foundation (super-elite) seed production. Specialized seed multiplication farms produce further generations and do the first cleaning. Final processing and packing is done by one or two seed processing stations in each oblast. 6.36 The seed production and supply infrastructure appears to be disintegrating. If this occurs, there may be serious disruptions in distribution of high quality seed and in crop production. Significant difficulties exist in production of high quality maize, sugarbeet, and sunflower seeds. While hybridization of the first two is to almost 100%, only 40% of sunflower seed is available in hybrid form. The quality of domestically produced seed is inferior to imported hybrids of all the three crops. 6.37 Ukraine does not have an overall seed policy or seed law. In the absence of protection of breeders rights, foreign plant breeding and seed companies will be unwilling to bring their best germ plasm or to invest in the domestic seed industry. Thus it is imperative that an appropriate overall seed policy be established and implemented to guide the development of the seed industry in both its public and private components. 6.38 Agrochemicals. Agrochemicals are limited in availability and low in quality. Because of Ukraine's dependence on imports and the shortage of foreign exchange, there has been a substantial drop in the use of agrochemicals and fertilizer since 1991. A small quantity of agrochemicals is imported on a barter basis from Western suppliers but most of the supply still comes from domestic production and imports from the FSU. This consists of rather primitive mixtures and availabilities have been falling. The continued use of chemicals from domestic sources and imports from the FSU will require regulations that will guarantee environmentally safer products. 6.39 There is a need to improve efficiency and product quality in the domestic agrochemical industry. Inspection of pesticide production and plants and the distribution network jointly with foreign experts could help to improve current practices and identify inefficient or unsafe plants and distribution facilities. The state monopoly on distribution needs to be replaced with an efficient and competitive system, but manufacturing and distribution systems must be regulated to insure that necessary safety and health standards are met. D. INVESTMENT PRIORITIES IN THE FOOD AND AGRICULTURE SECTOR 6.40 The completion of the agricultural reform program, first of all the land reform, state and collective farm and enterprise restructuring, and privatization are important preconditions for the improvement of the efficiency of primary production, processing, and distribution of food and agricultural products. Appropriate policies are needed to support investment to introduce new technologies and methods of production. Changes are required in the structure of production and the regional production patterns. The improvements in production techniques and methods should be reflected through improved 106 Chapter 6 crop and livestock yields at a constant level of input use or alternatively receiving same yields at lower input use level. The natural endowments of the food and agriculture provide potentials for Ukraine to competitively produce food and agricultural products, mainly grain and oil seed products, above and beyond domestic needs. In the medium term Ukraine should try to exploit these potentials. However, competitive and profitable export of agricultural products require substantial improvements in product quality as well as in international marketing. 6.41 Based on the review of current situation and the major tasks of transition, the investment priorities can be listed as follows: * development of the physical facilities for a working market for agricultural products and inputs for agriculture; * recapitalization of agriculture according the emerging new farming structure; * reconstruction and major modernization of support services (industries such as seed industry, machinery maintenance); * reconstruction and major modernization of agroprocessing; - introduction of environment friendly technologies; and -- development of education, research, and development potentials 6.42 Market Facilities. At this time, the need to create a competitive market structure for food and agriculture in Ukraine should receive high priority. The development of a new market structure should include improved facilities such as auction halls, city markets, regional cooperative or private packing and storage facilities, and transportation equipment. Market information services for farmers should also be made available, such as radio and television programs and farm newspapers. All of this requires investment at a relatively early point in the reform. 6.43 Rehabilitation and Recapitalization of Agricultural Production. Ukraine has experienced a decline both in production and demand for food. Investment, especially in machinery, is needed to stabilize production and save hard currency during the critical first period of transition. No doubt as a result of the process of farm restructuring and land privatization, a large number of farm equipment and buildings will become unsuitable for the new system, or will require substantial reconstruction. At this moment it is very difficult to estimate the magnitude of new investment requirements created by the land reform throughout of the region. However, in the near future this process will create demand for a wide range of farming equipment and construction material. 6.44 Reconstruction of Food Processing Industry. Food processing is the bottleneck in the food sector. The relative backwardness of the processing of foods is an extremely serious handicap for the agricultural sector. Not only can the level of processing be seen in exported products, but to a large extent it also determines their price, and indeed whether they can be sold at all. It cannot be overemphasized that the demanding international markets can only be satisfied with food processing at a much more developed level than at present. The development of food processing in a way that is clearly linked to export strategy is an indispensable condition for competitiveness and the improvement of export Measures to Improve Farm Production and Efficiency 107 efficiency. Naturally, more demanding processing is also becoming increasingly important for Ukrainian consumers too. 6.45 Need for Environmentally Friendly Technologies. The increased assertion of environment protection requirements means, above all, that: * greater scope must be given to materials- and energy-sparing technologies; * protection of the soil and the safeguarding of its quality must become a fundamental criterion for agricultural production; * the emphasis must be placed on environment-friendly procedures. The principal goal is the prevention of environmental pollution and the reduction of procedures and harmful by-products damaging to the environment. The renewed spread of environment-friendly packaging materials made from "natural" materials is also desirable; * the proportion of waste-free or recyclable technologies should be increased; * technologies preserving the original property of the basic material and foods made with these technologies must be given greater emphasis; and * the reduction and elimination of the use of chemicals is becoming an increasingly important consideration. 6.46 Investment in Human Resources. Agricultural universities, research institutes, and the yet to be created farm advisory/extension services, i.e., the agricultural information knowledge system, will be of strategic importance. Preparing the next generation of agricultural professionals is vital. As the full effect of economic reforms plays out, it will be important to be able to identify, adapt, and/or develop technical innovations to increase factor productivity and underpin competitiveness. Therefore, investment in human capital should be a high priority. 6.47 The private sector should play a decisive role in future investment in agricultural as privatization proceeds. The Government role is to provide an enabling environment, including an incentive framework that creates the right motivation for private investment in primary agriculture as well as in agricultural processing and distribution. Public investment needs to be directed at improving human and physical infrastructure, and to be linked to the implementation of a program of further reforms which set clear priorities. E. MODERNIZING HIGHER EDUCATION AND RESEARCH System of Agricultural Education 6.48 Ukraine has a well developed system of agricultural education and training. Its core is a network of 20 agricultural institutes and universities (Box 6.1). All of the institutions offer regular programs and the opportunity to study through correspondence. As of October 1993, the total enrollment 108 Chapter 6 was 84,000 students. The 121 .. X:: . .. ........ .. . agricultural colleges enroll an Maj-or- - Arculura U-i ers.ities and their Facults,(1 additional 110,000 students. On - ie. .... Odessa . r.... . . .it.te alower level are the 73 technical................. and vocational schools, which -Agrnm egeabendFruit and vocati nal school, w hich 0-:At::::::::: .... ii:: ,j000:000:0;Sgmno eg...: .t .. ... ...t0t00000.0000000-00000 :Tj;00l: have 280,000 students. A PtOtOtKi Agronomy 0orestry conormcs . .0000-000000000000000 0000000VeterinayMedic'inet-00tt;-fl'l00.00000 Zoolog0000i i ca Eni neer ing 6.49 The traditional Economics :er Mdicine curricula for higher education Zoological Engineering Account Ana ysis were designed to meet the needs Cybeinetics P:edgogy ecazton.P of large farmis. Science courses Coninin Eduaio and related agricultural Agriturl C icals .. lect.. rpja Eninerng technology courses provide more........ or less up to date knowledge, but Nicholaev An ...lt.ral Instfitute Kherson Anriura Ins. t.t. management and business A..onomy ... .. .. Agronom education and training in .. . Zoologigineering .ooogca Engineering agricultural economics are weak. Ecic Irrigation In 1993 new educational plans .Mecniz ation CIvil En gineerng were prepared at the institutions ..ECononlc of agricultural higher education in Physcal..uctio order to adjust curricula and . .. ... ..r Ins..itute. teaching practices to the new.... conditions. Special attention was Agrnm given to strengthening E.o n.o.s management and business Zoological ineergtg. disciplines. The Institute ofMehnzto International Agrobusiness was . .. . X .... . . ..... .. .. created. Box 6.1 6.50 University professors are less involved in research than in the western countries, because research is mostly conducted outside the universities. The lack of communication with the rest of the world and the lack of mobility of university professors and young scientists has negatively affected the quality of higher education. Although teaching is the primary responsibility of faculty, 20-30% of faculty time is spent on research, generally of the applied nature. Although the importance of integrating teaching and research is recognized, because of the budgetary problems of the agricultural universities, very little money is available for applied research. Attempts were made to link research with education by integrating some of the universities and research institutions. Postponement of maintenance and repair of buildings and equipment is increasingly evident. An even more serious problem is the difficulty of retaining the best faculty members. Decapitalization of the human resources to these institutions cannot be easily or quickly reversed and is perhaps the most serious problem facing the agricultural universities. Agricultural Research 6.51 Agricultural research in Ukraine is similar to that in the other republics of the former USSR. Research is organized in independent institutions, while the main role of universities and colleges is teaching and education. The bulk of research is carried on by the network of the Ukrainian Academy Measures to Improve Farm Production and Efficiency 109 of Agricultural Sciences (UAAS) (Table 6.6). Of the 236 agricultural research institutes and stations, 177 belong to the Academy network. They account for 7,025 of the 17,426 scientists and 20,591 of the total staff of 50,299. The rest of the institutes operate under the aegis of the MOAF. The level of basic research meets international standards in most areas, although recent budget cuts and inflation have already had a negative impact upon the system. The least developed sector in research is the social sciences: agricultural economics and farm management research are parochial and far from the mainstream. Research in agricultural marketing, policy analysis, etc. are virtually nonexistent. Table 6.6: The Agricultural Science System in Ukraine, (1993) Ministries Doctors Candidates and Scientific of of Agencies Institutions Workers Science Science Academy of Agricultural Science 177 7,025 283 3,229 Ministry of Agriculture and Food (including Higher Educational Institutions) 41 7,220 356 3,373 State Food Industry 15 2,887 12 237 Ministry of Forestry 2 570 12 30 State Water Management 1 95 - 30 TOTAL 236 17,426 663 6,983 Source: Ukrainian Academy of Agricultural Sciences. 6.52 Research priorities are established by the State Committee for Science and Technology, responsible to the Cabinet of Ministers. Currently there are two umbrella "programs" covering agricultural research in Ukraine for 1991 to 1995: "Priority Direction of Fundamental Research," covering basic research; and "Food Industry - 95," with a more applied focus. Each project area is coordinated by a leader from one of the research institutes or agricultural universities. Seven "coordination and methodology commissions" oversee the areas in which research projects are awarded. Each commission reviews responses to specific requests for research proposals and awards grants. This appears to be a competitive grants program. However, the grants process may not be working as intended because the "commissions" also play a role in the annual budgeting process and they attempt to ensure that annual budget requests from the various research institutes are consistent with the two major program areas. 6.53 There is little outside evaluation of research progress and performance. As reported at the Genetic Selection Center in Odessa, and the Kherson Irrigation Institute, in the first instance supervisors and professional colleagues of the researcher, usually from within the same institution, review work accomplished. No program or institute reported having been reviewed by peer scientists from outside the system. Nor was is there a process by which the ultimate clients, i.e. the farmers or agribusiness persons evaluated the utility and relevancy of agricultural research. 6.54 The critical minimum of resources needed for meaningful research is now not available. The current budget crisis has led to a situation where little more than salaries, (severely depreciated in real terms) of scientists can be covered. International contacts, other than by mail, have virtually ceased. 110 Chapter 6 Repair and maintenance of equipment and buildings are put off. Buildings such as the large phytotron in Odessa are rapidly deteriorating. Perhaps the most serious problem for the UAAS institutes is that scientists are forced to look for other ways to earn their living; some were reported to be actively looking for international employment opportunities. Unfortunately, those that do tend to be the best. 6.55 Ukraine's agricultural education and research system is in trouble. If agriculture is going to be responsive to the country's needs it must be current with developments in the international world of science and technology: the system is now out of touch, indeed isolated. Ukrainian scientists are also out of touch with the evolving needs of domestic farmers. They need more contact to ensure the relevance of their work, and to develop a constituency that will ensure long-term financial sustainability for the system. A premium needs to be placed on the system's ability to be creative, promote excellence, encourage entrepreneurship, and foster agility in the use of science resources. 6.56 The agricultural universities and the research institutes under the Ukrainian Agricultural Academy of Sciences (UAAS) are undergoing an unprecedented period of budgetary stress that threatens their core activities. Their most important asset, the human capital embodied in scientists and faculty could be lost if the situation is not corrected soon. In recent years there have been a significant increase in the area of contacts with outside mainly Western Universities. About 50 inter-university exchange and cooperation agreements were signed, more faculty and even students were dramatically offered travel than anytime in the Soviet period. Their new connections, however, are still relatively modest compared to the needs and the size of the country. 6.57 The Government is aware of the difficulty of the situation and accepted a Program for Development of Agricultural Education for the period up to 2000 in October, 1993. This program envisages substantive changes in teaching methods and substance as well as the provision of modern technology such as computers and improved libraries. As an addition to this program, a two-phased approach to the needs of the agricultural university and research institutions is required. As a quick response, to forestall irreversible damage to the institutions, as well as initiate some of the more immediate modernizing requirements, the first phase would aim at immediate repair and maintenance of instrumentation, and ending the professional isolation of the universities and research institutes from their international peers. Resources need to be augmented to support collaborative research, attendance at international professional meetings, provide access to, and modernization of, information systems, develop new course offerings, and update curricula. 6.58 A second phase would focus on the institutional and policy reforms necessary to modernize the research system. Given the importance of realizing the inherent synergy between research and higher education, a strategic issue that should be confronted is how the agricultural universities and research institutions can be integrated. Associated with this issue is the need to rationalize the allocation and utilization of resources available for research and in the agricultural university system. The respective roles of public and private research should be defined to encourage the most cost effective use of limited resources. Ultimately this process has to lead to some hard decisions with respect to the reallocation of research resources, including large scale downsizing, privatization, and the allocation of time by faculty for research, teaching and/or extension. 6.59 Agricultural economics, farm management, and marketing should receive priority both in higher education and research. There is an urgent need for training positions for teachers as well as increased access to shorter and longer study tours and training. Books and periodicals in these subjects are also needed. Ukraine agricultural economics and other agricultural related social services such as Measures to Improve Farm Production and Efficiency 111 rural sociology have to be reintegrated with the mainstream of international science. Marketing research, studies on new product development to meet new market opportunities, and trade policy options for Ukraine under the new conditions should be supported. Likewise research and study on the social impacts of the ongoing reforms in agriculture. 6.60 Another major issue for the research system is how to develop enhanced linkages with clients to ensure relevance of the research agendas and long-term financial support. Since agricultural research produces strong returns to the agricultural community, it should be responsible for a proportion of the cost of agricultural research, particularly the more applied work. 6.61 Universities and research institutes should be encouraged to establish performance criteria and evaluate scientists and faculty to ensure promotion based on the quality and relevancy of their work. Recruitment criteria will need to be reviewed and updated to ensure a heterogeneity of training and research methods of faculty and prevent "inbreeding." 112 Chapter 6 CHAPTER 7 EXTERNAL ASSISTANCE 7.1 Ukraine has embarked on an historic and courageous effort to transform its economy from a centrally planned to a market-oriented system. This reform will, under the best of circumstances, be a long process accompanied invariably by economic, social, and political difficulties. To ensure that this transition process is efficient and effective, and to minimize the transition problems, external assistance will be essential. In the agriculture and food processing industries the assistance most needed in the short and medium term would include: * critical inputs for agricultural production to avoid a decline in domestic food supplies; * technical assistance to help to formulate and implement a consistent transition program in food and agriculture; * technical assistance and capital investment for the development of institutions and support facilities needed for market based food and agriculture; and * capital investments for the development of competitive production, processing, and marketing. A. CRITICAL INPUTS FOR AGRICULTURE PRODUCTION 7.2 The supply of farm inputs is declining because of the lack of foreign exchange, disruptions in the domestic supply network, and the absence of a well-developed distribution system for serving smaller and more numerous farms. Shortages of pesticides, herbicides, fertilizers, veterinary medicines, concentrate feed, feed additives, and spare parts for agricultural and transport equipment are critical. Emergency measures may be needed to supplement supplies for several planting seasons. 7.3 The donor agencies should therefore begin to provide quick-disbursing financial assistance to Ukraine for imports of critical agricultural inputs needed for economically viable production systems. In parallel, assistance should be provided to establish efficient arrangements for timely delivery of inputs, whether through reliance on market mechanisms or, more likely, through a mix of market mechanisms and administrative means. B. TECHNICAL ASSISTANCE AND INSTITUTION BUILDING 7.4 Many difficult policy, technical, and institutional issues are emerging during the transition from a command to a market economy, and skills generally not available within the country are needed to deal with them effectively. Technical assistance and training covering broad areas of food and agricultural sector policy are needed to facilitate this transition. The topics identified below are indicative only for technical assistance needs in agriculture of Ukraine. In many of these areas a number of multilateral institutions, foreign governments, and private organizations are already involved, but their support so far meets only a small fraction of the need. Also, the coordination of technical assistance activities, to ensure their relevance, usefulness, and cost effectiveness is a high priority. 114 Chapter 7 Policy Development 7.5 For the transition period and beyond there is a need for constant monitoring and evaluation of price, income, investment, and trade policies and producer and consumer subsidization consistent with the program of stabilization of the economy and the goal of economic restructuring. Technical assistance and training are critical in these areas. Foreign experts will have to play an important role in the strengthening of agricultural policy analysis capability in the country, as well as in reorganizing public administration in agriculture. International and bilateral organizations should also be prepared to provide expertise on economic policy issues generally, and support the upgrading of formal training programs in economics and agricultural economics. Land Reform Implementation 7.6 Although Ukraine has a detailed mapping base, it has not taken any but the most basic steps toward establishing a modem cadastre and comprehensive land information system needed for land registration and titling of individual land holdings, land market development, and for exercising an active land and environmental policy. Technical assistance in developing a comprehensive land information system would facilitate not only the land reform, but also the development of land taxation and rural credit systems based on land as collateral. 7.7 While the land reform law provides a framework for the land tenure reform, the development of new production management units in agriculture and the restructuring of their production systems is impaired by the lack of knowledge and experience of the involved agricultural population. Support for an information system to apprise farmers of their options for owning land, and a service to advise them on enterprise management, would substantially democratize, accelerate, and probable rationalize the enterprise restructuring. Technical assistance is needed in establishing Western type agricultural cooperatives, especially agricultural service and input/output marketing cooperatives. Enterprise Privatization 7.8 Assistance may also be needed to help design social safety nets for rural residents as state and collective farms are restructured. Such services need to be stressed as labor is released during the restructuring of state enterprises and unemployment increases. 7.9 The World Bank, the European Bank for Reconstruction and Development, and the European Union are already providing extensive technical assistance to the state property organization in Ukraine in the design and implementation of corporatization and privatization programs. Agricultural processing and marketing enterprises are in particularly urgent need of plans for restructuring, demonopolization, and privatization. Assessments should be carried out to identify options for restructuring or closing inefficient food industry plants with outdated technology. Assessments should examine management in the dairy and meat subsectors and procurement, technology, and product marketing options in other subsectors. 7.10 Managers of large food enterprises and retail outlets need training in marketing, accounting, and finance. Foreign specialists should assist in the establishment of new, privately operated wholesale terminals in selected urban areas. Pilot projects could be initiated to teach business skills and, External Assistance 115 for each major commodity group, to develop and demonstrate commercially oriented interaction at the retail-wholesale interface and at the farm product assembly level. Input Supply Technology 7.11 Input production facilities need to be assessed with an eye to their long-term viability under market conditions. Associated investment strategies need to be developed as well. Technical assistance is needed for manufacturing enterprises at the production and distribution levels and for input dealerships, to establish product standards, quality control, and a network for providing service and support to end-users. Input dealers also need training in business management and technology transfer. The development of farm service dealerships or emerging service cooperatives would greatly assist in this effort. 7.12 Assistance is needed in defining the proper roles of government and the private sector in the development, multiplication, distribution, and marketing of seed. Areas requiring attention include protecting property development (defining the rights of foreign firms engaged in seed research), production, marketing, and upgrading national seed quality. As part of farm restructuring, a large number of veterinarians now employed by state and collective farms are likely to move into private practice. Guidance, based on foreign experience in privatizing veterinary services, would be helpful. 7.13 The viability of various types of livestock and crop production and production technologies needs to be evaluated on a regional basis according to market principles. Priority areas for technical assistance are farm management, appropriate technology for smaller, more competitive production systems, and product quality considerations. Research, Education, Extension 7.14 The agricultural research system needs to be reviewed and adjusted to the country's needs. It would also benefit from exchange with foreign scientists and from assistance in financing equipment and supplies, and subscriptions to foreign scientific publications. Agricultural research and education systems need to be integrated into a comprehensive system of research, education, and extension that is oriented to commercial agriculture and more attuned to the optimal use of natural resources. The growing importance of private farms creates special needs for developing new information systems (technical, market, policy), information channels, and research and extension programs for appropriate production technologies. Retraining of technical specialists at the local level will be necessary. Rural Finance 7.15 Substantial retraining in modem banking practices is one of the highest priority needs, particularly in the rural banking system. Programs should encompass seminars for policy makers and senior managers on priority issues in rural finance, retraining of instructors in bank training institutions, on-the-job training, revision of university curricula, and temporary contracting of foreign institutions as appropriate. Training is needed in virtually all aspects of financial sector reform: central bank supervision, bank restructuring, legal aspects of banking, accounting, and central and commercial bank management. Technical assistance in the design of an efficient rural credit system is essential. 116 Chapter 7 C. NEW INVESTMENT 7.16 The guiding principle for all new investments should be whether they are likely to be efficiently used, and whether deployment is economically efficient. Ideally, then, investments would be directed toward projects that facilitate restructuring enterprises which adjust their production systems to real factor and product market conditions. 7.17 The international community has used several means to stimulate investment and technology transfer in the food and agricultural sector in transforming socialist economies. Most direct financial assistance comes through loans from multilateral and bilateral assistance programs for investment project development--secured by sovereign guarantees; equity and loan participation at the enterprise level in the private sector (by the International Finance Corporation of the World Bank Group, for example); and technical assistance grants and credits, which are time-tested methods for introducing advanced technologies. 7.18 Several innovative techniques are also being used to encourage direct private investment, and some of these could be extended quickly to promote privatization rehabilitation, and development in the Ukraine food and agricultural sector. These include financing private enterprise development funds that enable local and joint-venture investors to acquire foreign equipment and material; underwriting credit guarantee funds and venture capital funds, which have proved fairly successful in the transportation sector; and extending investment guarantees--through insurance and other means--to individual foreign investors and their financiers. D. THE PRINCIPLES OF A BANK ASSISTANCE PROGRAM 7.19 The Bank's assistance program in general aims at helping to realize the full potential of agriculture. In the short term (within the next 3 to 4 years) the program would focus on facilitating the transformation of agriculture by assisting in stabilizing domestic food supply, designing and implementing a market oriented policy framework for agricultural pricing, marketing and trade, building of support services for the transformation of agriculture, and development of reforming agricultural production, marketing, and processing enterprises. 7.20 To assist in stabilizing the domestic food supply, the Bank would consider providing financial resources for importing critically needed recurrent inputs and crucial agricultural equipment in order to alleviate the shortages in chemicals, food additives, and spare parts which are responsible for much of the current output decline. This input supply program would be combined with the implementation of an agreed agricultural price, marketing, and trade reform agenda. 7.21 To strengthen the capacity of agricultural institutions and services for supporting the agricultural reform process, the Bank would consider providing resources for establishing and operating an agricultural facility to assist the government in the analysis of current policy issues and in the formulation of policy recommendations, rehabilitating the national seed industry, rehabilitation of the national agricultural research system, establishment and operation of an agricultural privatization and farm business advisory system to facilitate the privatization of farm management and the restructuring of agricultural enterprises and modernization of the cadastre and land information system. External Assistance 117 7.22 To facilitate the production development of suitably restructuring agricultural enterprises the Bank would consider the provision of resources for economically viable on-farm investments especially for export oriented production such as grains and oilseeds. The feasibility of such support would to a large extent depend on a stable monetary system and a consistent pricing policy for agricultural inputs and outputs. 118 Chapter 7 STATISTICAL ANNEX CONTENTS TABLE 1: Administration and Territorial System, as of January 1, 1992 TABLE 2: Structure of Govermment Agricultural Management, 1994 TABLE 3: Structure of the Ministry of Agriculture and Food, 1994 TABLE 4: Oblast Level Management of Agriculture and Food, Administration Services TABLE 5: Rayon Level Management of Agriculture and Food, Administrative Services TABLE 6: Land Use as of January 1, 1993 TABLE 7: Soil Status of Agriculutral Land of State, Collective and Private Farms as of January 1, 1992 TABLE 8: Gross Agricultural Production, 1986-1993 TABLE 9: Cropped Area of Agricultural Crops, 1986-1993 TABLE 10: Average Yield of Agricultural Crops, 1986-1993 TABLE II: Change in Cropping Structure, 1985-1993 TABLE 12: Use of Organic Fertilizers in Collective and State Farms, 1982-1992 TABLE 13: Use of Mineral Feritlizers in Collective and State Farms, 1982-1992 TABLE 14: Provision of Plant Protection in Collective and State Farms, 1982-1992 TABLE 15: Agriculutral Machines in Ukraine, 1983-1992 TABLE 16: Availability of Certain Types of Agricultural Machines, as of January 1, 1992 TABLE 17: Number of Livestock and Major Livestock Production TABLE 18: Average Animal Productivity in State and Collective Farms by Agro-Ecological Zones, 1982-1992 TABLE 19: Livestock Production Performance of Social Sector Farms TABLE 20: Number of Private Farms as of April 11, 1994 TABLE 21: Indices of Personal Subsidiary Plots of Land at End of Year TABLE 22: Food Industry Production TABLE 23: Consumption of Basic Foodstuffs per Capita and their Share in Family Income TABLE 24: Marketing Channels for Major Agricultural Products of the Socialist Sector, Collective and State Farms TABLE 25: Procurement Price for Sales to the State of Different Kinds of Produce, 1989-1992 TABLE 26: Wholesale Prices of Certain Kinds of Agricultural Inputs in State Trade and on Commodity Exchanges, 1989-1992 TABLE 27: Production Costs in Agricultural Enterprises, 1982-1992 TABLE 28: Retail Price Indices for Foodstuffs in State and Cooperative Trade, 1990-1993 TABLE 29: Average Prices for Basic Foodstuffs, January 4, 1994 TABLE 30: Pricipal Costs of Individual Kinds of Bread in July, 1992 in Kiev TABLE 31: Area of Forest Stock, 1982-1992 TABLE 32: Production Indexes of Forest Associations, 1982-1992 TABLE 1 - Ukraine: Administration and Territorial System, as of January 1, 1992 Districts Towns Administrative and Urban Village Territorial Units Republican and Settlements Settlements Rural Urban Total Regional District Subordination Subordination Republic of the Crimea 14 3 14 10 4 55 961 Oblasts: Vinnitsa 27 3 17 4 13 30 1466 Volyn 15 -- 11 4 7 21 1048 Dnepropetrovsk 22 18 19 13 6 54 1449 Donetsk 18 21 50 25 25 134 1126 Zhitomir 23 2 9 4 5 46 1635 Transcarpathian 13 -- 10 2 8 28 562 Zaporozhye 18 6 14 5 9 23 929 Ivano-Frankovsk 14 -- 14 4 10 25 759 Kiev 25 -- 24 9 15 31 1207 Kirovograd 21 2 12 4 8 26 1019 Lugansk 18 4 37 14 23 109 797 Lvov 20 5 41 7 34 36 1856 Nikolayev 19 4 9 5 4 20 919 Odessa 26 8 17 5 12 33 1139 Poltava 25 5 15 5 10 21 1862 Rovno 15 -- 10 3 7 17 1003 Sumy 18 2 15 6 9 20 1498 Ternopol 17 -- 16 1 15 19 1001 Kharkov 26 9 17 6 11 61 1737 Kherson 18 3 9 3 6 30 675 Khmelnitsky 20 -- 13 4 9 24 1416 Cherassy 20 2 16 4 12 17 820 Chernovitsky 11 3 10 1 9 9 398 Chernigov 22 2 15 3 12 32 1518 Cities under Federal Jurisdiction: Kiev -- 14 1 1 -- 1 - Sevastopol -- 4 2 1 1 1 28 Total 485 120 437 153 284 923 28,828 Source: Ukrainian Ministry of Economics Urban settlements - 1360 District centers in towns - 284 Total number of settlements - 30,190 District centers in urban settlements - 201 TABLE 2 - Ukraine: Structure of Government Agricultural Management, 1994 Country Executive Organizations |Regional Administration Regional District Ministry of Agriculture and 650 employees. State Agriculture management District agricultural Food inspectorates, research units of the Crimea and management units: 457. institutions, production and regional administrations: Staff: 15 per unit. scientific associations, 25. Average staff: 81 per Agroindustrial associations: enterprises: 150. unit. 28. State Committee for Food 200 employees. Research Regional and inter-regional Industry institutions, companies, units: 79. - unions: 28 State Committee-for Water 190 employees. Advanced Water management board Management training institute, of the Crimea and regional engineering center, others: land reclamation boards: 4. 28. Average Staff: 28 per board. Construction and operation associations: 7. Ministry of Forestry 108 employees. Production Regional forestry associations and the like: associations: 22. 50. Regional boards: 3. State Committee for Land 70 employees. Regional boards: 24. Land resource departments: Resources Staff: 20 471. Staff: 3 per unit Administration boards: 2. Source: Ministry of Economics TABLE 3 - Ukraine: Structure of the Ministry of Agriculture and Food, 1994 Total Employees: 650 Principal Departments: - Ministry Administration - Legal Department - Economy - Agriculture in Chemobyl Zone - Reforms and Market Relations - Baby Food and Formula - Food Resources, Including State Inspection of - Development and Forecast of Material Resources Procurement and Product Quality Supplies and Marketing - Crop Production - Individual Farms and Subsidiary Plots - Fodder Production - State Cereal Inspection - Livestock Production - State Inspection of Agricultural Technology and Machinery - Veterinary Services - Worker Safety - Technical Policy - Cereal Production - Capital Construction - Mixed Food Production - Science and Research - Milk Production - Financial and Price Regulation - Meat Production - Rural Social Development - Auditing - External Economic Relations - Accounting Source: Ministry of Agriculture and Food TABLE 4 - Ukraine: Oblast Level Management of Agriculture and Food, Administration Services' Services Number of Staff Economy, Market Relations, Forecasting Degovernmentization and Privatization 5-6 Agriculture and Environmental Protection 6-7 Livestock Production and Breeding State Inspection Board 6-7 Feed and Concentrate Production 2-3 Meat and Dairy Industry 3-4 Technical Policy, Scientific and Technical Progress Implementation and Labor 4-5 Protection Investment and Capital Construction 4-5 Social Services and Provision of Specialists 5-7 Cottage Industry and Private Farming 3-4 Legal Affairs 2-3 Finance and Price Formation 4-5 Accounting 2-3 Audit 2-3 Foreign Economic Relations 1-2 Organization and Payment of Labor and Forecasting Consumption 4-5 Special Works I Administrative Support 16-18 Source: Ministry of Agriculture and Food TABLE 5 - Ulraine: Rayon Level Management of Agriculture and Food, Administrative Services2 Service Number of Staff Administration 2 Agronomy 1-2 Livestock 1-2 Mechanization 1 Economic and Control Services 1-2 Finances, Accounting and Auditing 1-2 Labor Organization, Payment and Consumption Forecasting 1 Capital Construction Services and Investment 1 Legal Affairs 1 Personnel Management 1 Source: Ministry of Agriculture and Food I Ncte: Sia July I, 1992, these rvkes am directed at the Oblst level by a deputy maeinw appointed by the p Wsdent. In son ca the deputy nmnager k upported by a second appolntcc, dten from the oppoeIon petty. 2 Notea ShiceJuly 1, 1992, theserambe s dote at the tRayw tenl bye adepty etw appointedby the preskdent TABLE 6 - Ukraine: Land Use as of January, 1, 1993 (thousands of hectares) Total Including Total Area Rural Land Arable Land Meadows Pastures Total Area 60,356 41,930 33,363 7,473' Agricultural Enterprises and Farms, of 44,830 38,599 31,174 6,361' which: Collective Agricultural Enterprises 29,239 24,840 20,797 1,263 2,475 State Agricultural Enterprises 10,144 8,574 6,939 285 1,040 Agricultural Coops 75 68 56 3 8 Agricultural Joint Stock Companies 186 160 134 8 15 Privately Used Land of which: 5,186 4,957 3,248 1,264' Peasant Farms 360 350 316 33- State Land Reserves (including the land of 10,778 2,593 1,891 208 477 forest enterprises) Other Uses 4,748 738 298 97 330 Source: Ministry of Agriculture and Food Includes meadows and pastures TABLE 7 - Ukraine: Soil Status of Agricultural Land of State, Collective and Private Farms as of January 1, 1992 Zones National Total Steppe (%) Forest-Steppe (%) | Woodlands (%) ('000 ha) l Total Surveyed Land Area 38,705.4 47.08 34.76 18.16 Eroded 12,829.4 6200 32.10 5.89 Deflation 19,756.1 76.47 14.52 9.01 Saline 1,771.2 54.25 35.82 9.92 Alkaline 2,779.5 75.63 22.99 38.53 Acid 11,770.5 14.97 54.09 30.93 Overconditioned 2,170.9 27.93 30.02 42.05 Boggy 1,975.3 6.23 27.27 66.50 Stony 466.5 65.14 11.81 22.96 Source: Ministry of Economics TABLE 8 - Ukraine: Gross Agricultural Production, 1986-1993 (Thousands of tons) Of Which: Herbage for Hay Total l Root Fruits Grain Winter Winter I Maize Forage Ensile Annual Perenial and Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Grapes 1986 41506 18377 1000 8011 37970 2463 97 21410 7731 26484 84860 1064 5347 3322 738 1987 48061 19615 1374 8308 42962 2580 143 18863 8111 28654 100717 1334 6134 2105 800 1988 45369 21685 1055 8638 42112 2648 91 13510 7292 27392 91594 1237 6662 2225 662 1989 51212 27371 1298 7026 51917 2748 111 19308 7443 32580 98989 1021 6123 2500 789 1990 51009 30348 1259 4737 44246 2571 108 16732 6666 27270 98372 1104 5S11 2902 836 Average for 47431 23479 1197 7344 43845 2602 110 17965 7449 28476 94906 1152 5955 2611 765 1986-1990 1991 38674 21134 981 4747 36168 2311 106 14550 5932 22829 88463 1056 6021 1537 673 1992 38537 19473 1156 2851 28783 2127 105 20277 5310 18196 63042 844 5574 2122 657 1993 45623 21770 1180 3786 33717 2075 73 21009 6055 20050 77881 751 5287 2798 666 Average for 40945 20792 1106 3795 32889 2171 95 18612 5766 20358 76462 884 5627 2152 665 1991-1993 Source: Ministry of Statistics TABLE 9 - Ukraine: Cropped Area of Agricultural Crops, 1986-1993 (Thousands of ha) Of Which: Total . Root Fruits Grain winter Winter IMaize Forage Ensiue Annual Perenial and Grape Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Growing 1986 16,194 5,710 571 2,783 1,647 1502 198 1,515 516 794 3,727 328 1,514 713 121 1987 15,560 5,341 622 2,424 1,665 1,543 204 1,500 516 771 4,389 369 1,587 708 124 1988 15,897 6,428 586 2,324 1,653 1,577 190 1,469 504 723 3,727 338 1,627 701 139 1989 15,256 6,945 539 1,851 1,637 1,621 191 1,468 483 699 4,306 293 1,560 693 143 1990 14,522 7,549 517 1,223 1,605 1,626 169 1,433 447 683 4,730 309 1,425 680 143 Average for 15,486 6,395 567 2,121 1,641 1,574 190 1,477 493 734 4,176 327 1,543 699 134 1986-1990 1991 14,571 6,977 487 1,459 1,549 1,585 156 1,533 464 662 4,335 308 1,511 669 141 1992 13,816 6,294 498 1,137 1,631 1,630 155 1,705 482 626 4,719 257 1,512 659 140 1993 14,221 5,726 493 1,331 1,629 1,629 127 1,534 464 591 4,291 232 1,506 648 139 Average for 14,203 6,332 493 1,309 1,603 1,615 146 1,591 470 626 4,448 266 1,510 659 140 1991-1993 Source: Ministry of Statistics TABLE 10 - Ukraine: Average Yield of Agricultural Crops, 1986-1993 (Centner per ha) Of Which: Total . Root Fruits Grain Winter IWinter IMaize Forage Ensile Annual Perenial and Grape Crops Wheat Rye Sugarbeets Sunflower Flax Potatoes Vegetables Crops Maize Grass Grass Berries Growing 1986 26 32 17 29 230 16 5 141 150 333 228 32 35 47 61 1987 31 37 22 34 258 17 7 126 157 372 229 37 39 30 64 1988 29 34 18 37 255 17 5 92 145 379 246 37 41 32 48 1989 34 39 24 38 317 17 6 132 154 466 230 35 39 38 56 1990 35 40 24 39 276 16 6 117 149 399 206 26 39 43 58 Average for 31 36 21 35 267 17 6 122 151 390 228 33 39 38 57 1986-1990 1991 27 30 20 33 234 15 7 95 128 345 204 34 40 23 48 1992 28 31 23 25 194 13 7 119 110 291 134 33 37 32 47 1993 32 38 24 28 222 13 6 137 130 339 184 32 35 43 48 Average for 29 33 22 29 217 14 7 117 123 325 174 33 37 33 48 1991-1993 Source: Ministry of Statistics TABLE 11 - Ukraine: Change in Cropping Structure, 1985-1993 (%) Indexes 1985 1989 1990 1991 1992 1993 1993:1989 (%) Total arable 100 100 100 100 100 100 4.9 4.2 4.2 4.3 4.2 4.3 102.4 Fallow Total sowing area: 95.1 95.8 95.8 95.7 95.8 95.7 99.9 including -- a) Grain crops: 46.8 44.7 43.1 43.9 41.4 45.5 101.8 winter crops 22.0 23.0 25.5 24.3 22.1 22.4 97.4 winter wheat 19.4 20.3 22.4 21.0 18.8 18.3 90.2 spring barley 8.4 8.3 6.5 7.6 8.4 11.0 132.5 corn 7.5 5.4 3.6 4.4 3.5 4.3 79.6 pulse crops 4.7 4.4 4.2 4.1 3.8 4.0 90.9 b) Industrial crops: 10.7 11.2 11.1 10.8 10.3 10.5 93.8 sugarbeets 4.8 4.8 4.7 4.4 4.4 4.9 102.1 sunflowers 4.3 4.7 4.8 4.8 4.6 5.2 110.6 c) Potatoes and Vegetables: 6.4 6.3 6.1 6.5 7.1 6.4 101.6 potatoes 4.5 4.3 4.2 4.6 5.1 4.9 114.0 vegetables 1.5 1.4 1.3 1.4 1.5 1.5 107.1 d) Fodder crops: 31.2 33.6 33.5 34.5 37.0 33.3 99.1 perennial grass 11.5 11.2 10.7 11.1 11.2 12.1 108.0 Source: Ministry of Economics TABLE 12 - Ukraine: Use of Organic Fertilizers in Collective and State Farms, 1982-1992 National Total Steppe Forest-Steppe Woodlands 1982 Tons per I ha 8.6 6.8 9.3 11.6 % of fixed norm 82.0 76.0 85.0 83.0 1983 Tons per I ha 8.9 7.4 9.4 11.6 % of fixed norm 85.0 82.0 86.0 83.0 1984 Tons per 1 ha 8.7 6.9 9.4 11.9 % of fixed norm 83.0 77.0 86.0 85.0 1985 Tons per 1 ha 8.6 6.5 9.5 12.1 % of fixed norm 82.0 72.0 86.0 86.0 1986 Tons per 1 ha 9.1 7.1 10.1 12.9 % of fixed norm 87.0 79.0 92.0 92.0 1987 Tons per 1 ha 8.5 6.2 9.6 13.2 % of fixed norm 81.0 69.0 87.0 94.0 1988 Tons per 1 ha 8.5 5.9 9.5 13.7 % of fixed norm 81.0 66.0 86.0 98.0 1989 Tons per 1 ha 8.7 6.3 9.5 13.7 % of fixed norm 83.0 70.0 86.0 98.0 1990 Tons per 1 ha 8.1 5.7 9.0 12.9 % of fixed norm 77.0 63.0 82.0 92.0 1991 Tons per I ha 7.2 4.9 8.1 11.9 % of fixed norm 69.0 54.0 74.0 85.0 1992 Tons per 1 ha 8.7 6.7 9.9 11.9 % of fixed norm 83.0 74.0 90.0 85.0 Source: Ministry of Economics TABLE 13 - Ukraine: Use of Mineral Fertilizers in Collective and State Farms, 1982-1992 National Total Steppe Forest-Steppe Woodlands 1982 Tons per 1 ha 116.0 85.0 134.0 163.0 % of fixed norm 68.0 54.0 69.0 101.0 1983 Tons per 1 ha 124.0 92.0 142.0 171.0 % of fixed norm 73.0 59.0 73.0 106.0 1984 Tons per I ha 135.0 101.0 164.0 180.0 % of fixed norm 79.0 64.0 85.0 111.0 1985 Tons per I ha 140.0 106.0 166.0 190.0 % of fixed norm 82.0 68.0 86.0 117.0 1986 Tons per I ha 151.0 117.0 171.01 195.0 % of fixed norm 88.0 75.0 88.0 120.0 1987 Tons per I ha 152.0 122.0 170.0 196.0 % of fixed norm 89.0 78.0 88.0 121.0 1988 Tons per 1 ha 150.0 117.0 169.0 202.0 % of fixed normn 88.0 75.0 87.0 125.0 1989 Tons per 1 ha 150.0 117.0 169.0 202.0 % of fixed norm 88.0 75.0 87.0 125.0 1990 Tons per I ha 141.0 100.0 164.0 204.0 % of fixed norm 83.0 64.0 85.0 126.0 1991 Tons per 1 ha 141.0 100.0 164.0 204.0 % of fixed norm 83.0 64.0 85.0 126.0 Source: Ministry of Economics TABLE 14 - Ukraine: Provision of Plant Protection in Collective and State Farms, 1982-1992 (in thousands of tons) Years Needs Delivered % of Needs 1982 307 166 54 1983 350 176 50 1984 363 189 52 1985 339 195 58 1986 326 199 61 1987 298 171 57 1988 267 139 52 1989 169 117 69 1990 156 97 62 1991 133 77 57 1992 142 86 61 Source: Ministry of Agriculture and Food TABLE 15 - Ukraine: Agricultural Machines in Ukraine, 1983-1992 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Tractors (thousands) 486.5 494.8 502.2 516.4 501.6 501.4 501.4 492.6 495.1 497.3 Land per tractor (ha) 66.0 65.0 64.0 62.0 64.0 64.0 65.0 64.0 63.0 62.0 Grain Harvesters (thousands) 98.2 103.6 107.8 111.6 112.2 113.5 112.4 105.3 106.9 104.4 Land per harvester (ha) 149.0 141.0 136.0 131.0 130.0 134.0 136.0 134.0 132.0 127.0 Daily output per harvester (ha) * 7.1 6.9 6.5 6.7 5.7 5.5 - -- -- -- Beet Diggers (thousands) 22.8 21.3 20.5 19.0 18.7 18.2 18.4 18.9 19.2 19.2 Land per digger (ha) 76.0 79.0 81.0 94.0 97.0 99.0 97.0 86.0 83.0 75.0 Daily output per digger (ha) * 3.9 3.6 3.7 3.9 3.7 3.7 -- -- -- -- Corn Harvesters (thousands) 20.5 18.2 16.5 14.9 14.2 13.4 13.4 14.0 14.4 15.1 Land per harvester (ha) 85.0 94.0 103.0 118.0 114.0 100.0 95.0 88.0 101.0 112.0 Daily output per harvester (ha) * 4.3 4.4 4.5 5.1 4.9 4.5 -- -- -- -- Potato Diggers (thousands) 10.4 10.2 9.9 9.4 9.6 9.6 9.8 9.7 9.7 9.7 Land per digger (ha) 30.0 30.0 31.0 34.0 33.0 31.0 46.0 41.0 36.0 34.0 Daily output per digger (ha) * 1.5 1.4 1.4 1.4 1.5 1.5 -- -- -- - Silo and Fodder Harvesters (thousands) 42.8 43.6 45.2 47.4 49.4 49.9 51.4 52.7 50.9 50.5 Land per harvester (ha) 122.0 137.0 132.0 130.0 143.0 142.0 156.0 154.0 156.0 152.0 Daily output per harvester (ha) * 5.1 5.1 4.9 5.0 5.2 4.7 -- -- - -- Source: Ministry of Economics * No data for 1989-1992 in the Ministry of Statistics of Ukraine TABLE 16 - Ukraine: Availability of Certain Types of Agricultural Machines, as of January 1, 1992 Type Make Demand Available Availability Tractors -General Purpose T-150K 61,460 55,564 90 T-150 67,348 36,360 54 T-130 1,600 1,500 94 Tractors - Universal Cultivation T-70B 6,460 2,917 45 T-70C 33,113 30,577 92 MT3-80,82 92,800 61,624 66 MT3-100 23,300 283 1 T40 (all modifications) 41,848 40,773 97 T-30, T-25 39,800 21,670 54 Self-propelled Chassis T-16 (all modifications) 38,400 21,138 55 Corn Harvesters KSKY-6 KKP-3 23.400 15,100 64 Potato Diggers KLK-3 KLK-2 11,400 9,700 85 Silo Harvesters KSK-100, E-281, KLK-2,4 KSS-2,6 Woodlands KRP-F-2 139,00 50,500 36 Source: Ministry of Economics TABLE 17 - Ukraine: Number of Livestock and Major Livestock Production Units 1986 1987 1988 1989 1990 1991 1992 1993 1994' No. of Animals (on 1 January) Cattle of which: thousands 26,638.0 26,724.5 25,968.7 25,620.8 25,194.8 24,623.4 23,727.6 22,456.8 17,417.0 Cows 8,851.4 8,712.0 8,604.9 8,567.4 8,527.6 8,378.2 8,262.6 8,057.2 5,379.4 Pigs 20,087.8 20,138.3 19,313.0 19,471.4 19,946.7 19,426.9 17,838.7 16,174.9 9,160.9 Sheep/Lamb 8,879.3 9,004.3 8,895.5 8,794.6 8,545.4 7,896.2 7,259.1 6,596.5 4,937.6 Poultry 252,564.7 251,365.7 24,737.2 254,501.5 255,119.5 246,104.2 243,120.6 214,582.3 83,656.5 Production: Total meat thousand 4,117.7 4,242.2 4,394.8 4,430.4 4,357.8 4,029.1 3,400.9 2,918.5 2,555.8 (carcass weight) tons of which Beef & Veal 1,879.3 1,982.0 3,019.1 2,011.4 1,985.4 1,877.6 1,655.6 N/A N/A Pork 1,463.9 1,468.8 1,576.3 1,594.8 1,576.3 1,421.1 1,179.8 N/A N/A Sheep meat 24.1 27.5 28.0 27.6 28.9 23.4 35.0 N/A N/A Poultry meat 333.6 347.4 361.7 368.2 354.0 297.3 216.0 N/A N/A Total Milk thousand 23,554.0 23,625.5 24,228.6 24,377.0 24,508.3 22,408.6 19,113.7 18,148.2 11,554.5 tons Eggs mln. 17,297.1 17,425.1 17,672.3 17,393.0 16,286.7 15,187.8 13,496.0 11,765.8 6,061.2 pieces Source: Ministry of Agriculture and Food ' as of January 1, 1994 TABLE 18 - Ukraine: Average Animal Productivitiy in State and Collective Farms by Agro-Ecological Zones, 1982-1992 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Milk per Cow (kg) National Average 2,238 2,468 2,538 2,607 2,730 2,756 2,918 2,918 2,941 2,668 2,215 Steppe 2,242 2,486 2,538 2,577 2,703 2,648 2,837 2,837 2,825 2,610 2,202 Forest-Steppe 2,266 2,524 2,634 2,733 2,861 2,932 3,093 3,093 3,096 2,771 2,301 Woodlands 2,286 2,488 2,567 2,654 2,782 2,840 2,941 2,941 2,914 2,640 2,218 Wool per Sheep (kg) National Average 3.0 3.2 3.2 3.1 3.2 3.1 3.3 3.3 3.4 3.2 3.0 Steppe 3.3 3.5 3.6 3.4 3.6 3.4 3.7 3.8 3.8 3.5 3.3 Forest-Steppe 2.6 2.7 2.8 2.7 2.8 2.8 2.8 2.7 2.7 2.6 2.5 Woodlands 2.3 2.4 2.4 2.4 2.5 2.5 2.5 2.4 2.4 2.3 2.1 Eggs per Hen National Average 196 203 205 207 216 218 221 220 214 203 194 Source: Ministry of Agriculture and Food TABLE 19 - Ukraine: Livestock Production Performance of Social Sector Farms Category Unit 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Fertility Rates /year: No./year Calves born per 100 cows 82 85 86 86 89 86 88 88 88 86 82 79 Piglets born per 100 pigs 1,250 1,270 1,250 1,262 1,352 1,330 1,438 1,457 1,422 1,266 1,137 1,111 Lambs born per 100 Ewe 80 89 91 86 92 92 95 94 93 86 78 74 Fillies born per 100 Horses 25 31 30 30 31 30 31 31 32 31 N/A N/A Mortality Rates:- %/year Cattle 2.0 1.7 1.7 1.7 1.5 1.8 1.5 1.5 1.6 2.0 2.5 2.5 Pigs 5.0 4.5 4.5 4.3 3.9 4.2 3.8 3.8 4.3 5.9 7.6 9.2 Sheep & Goats 6.2 5.2 5.2 5.4 4.3 4.6 4.0 4.2 4.2 5.2 6.6 7.3 Horses 2.8 2.4 2.7 2.9 2.7 2.9 2.5 2.4 2.6 2.6 N/A N/A Daily Weight Gain: Grams Cattle Fattening 342 377 366 364 382 380 412 421 421 365 290 N/A Pig Fatteneing 176 180 181 186 196 201 221 234 229 198 183 N/A Liveweight at Slaughter: kg Cattle 334 345 358 364 362 354 372 375 393 387 380 N/A Pigs 99 100 103 104 108 109 122 122 127 124 115 N/A Sheep & Goats 34 34 34 34 35 35 36 35 36 35 34 N/A Milk per Cow kg/year 2,238 2,468 2,538 2,607 2,730 2,756 2,870 2,918 2,941 2,668 2,175 2,098 Wool per Sheep kg/year 3.0 3.2 3.2 3.1 3.2 3.1 3.3 3.3 3.4 3.2 3.0 N/A Eggs per Layer 196 203 205 207 216 218 221 220 214 203 190 174 Source: Ministry of Agriculture and Food * Adult mortality only TABLE 20 - Ukraine: Number of Private Farms as of April 11, 1994 Land Area (ha) Avg. Land area per farm On January 1, 1994 Regions Quantity Agricultural incl. Agricultural incl. Plowed Quantity Agricultural Area Plowed Area Area (ha) Area Area (ha) Total Ukraine 29,666 620,548 561,927 21 19 27739 558,175 Republic of Crimea 1,159 14,529 10,730 13 9 1094 14,122 Vinnitsa 773 16,064 14,999 21 19 691 13,614 Volyn 553 8,332 7,439 15 13 531 7,522 Dnipropetrovk 1,907 50,946 48,571 27 25 1803 47,673 Donetsk 1,828 39,086 34,575 21 19 1851 39,189 Zhitomir 257 4,756 4,223 19 16 245 4,705 Transcarpathian 751 4,317 3,866 6 5 670 3,466 Zaporizhye 1,295 39,821 37,894 31 29 1250 37,974 Ivano-Frankivsk 680 4,987 4,044 7 6 648 4,596 Kiev Oblast 744 16,903 15,503 23 21 644 14,770 Kirovograd 1,337 46,403 43,897 35 33 1204 40,904 Lugansk 1,128 41,159 33,764 36 30 1062 36,603 Lviv 1,108 11,132 10,094 10 9 1023 10,251 Mikolaiv 4,492 73,544 65,519 16 15 4505 68,977 Odessa 3,464 47,177 43,938 14 13 3038 36,480 Poltava 1,082 22,555 21,201 21 20 1019 20,404 Rivno 260 3,940 3,367 15 13 248 3,663 Sumy 855 21,980 20,569 26 24 767 18,996 Ternopil 731 10,333 10,167 14 14 717 9,942 Kharkiv 921 29,286 26,585 32 29 869 27,285 Kherson 2,373 76,373 67,451 32 28 2047 63,375 Khmelnitsky 473 10,053 9,457 21 20 398 8,636 Cherkassy 406 9,008 7,882 22 19 356 7,875 Chernivtsy 553 2,873 2,438 5 4 532 2,718 Chernigiv 536 14,991 13,754 28 26 527 14,435 Source: Ministry of Statistics TABLE 21 - Ukraine: Indices of Personal Subsidiary Plots of Land at End of Year Indices Units of Measurement 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Number of Personal thousands 8968.0 8,964.0 8,956.0 8,979.0 8,967.0 9,116.0 9,160.0 9,201.0 9,747.0 9,815.0 Subsidiary Plots Land Area thousands of ha 2,473.0 2,468.0 2,462.0 2,450.0 2,452.0 2,479.0 2,501.0 2,599.0 2,892.0 2,930.0 Average Plot 0.28 0.28 0.28 0.27 0.27 0.27 0.27 0.28 0.30 0.30 Livestock: Cattle thousands 3,972.0 3,902.0 3,841.0 3,682.0 3,600.0 3,617.0 3,630.0 3,540.0 3,587.0 3,585.0 Cows " 2,434.0 2,388.0 2,302.0 2,220.0 2,191.0 2,190.0 2,173.0 2,187.0 2,275.0 2,290.0 Pigs 4,966.0 4,559.0 4,559.0 4,250.0 4,475.0 4,777.0 4,958.0 5,356.0 5,276.0 5,400.0 Sheep & Goats 794.0 833.0 833.0 926.0 994.0 1,74.0 1,115.0 1,253.0 1,412.0 1,480.0 Poultry millions 108.0 108.0 107.0 107.0 110.0 112.0 113.0 113.0 115.0 116.0 Rabbits thousands 9,967.0 10,065.0 9,827.0 10,232.0 10,664.0 7,259.0 6,260.0 6,521.0 5,952.0 6,700.0 Production: Cattle and Poultry thousands of tons 1,735.0 1,735.0 1,823.0 1,831.0 1,816.0 1,816.0 1,792.0 1,756.0 1,784.0 1,810.0 (live weight) 5,798.0 5,970.0 5,930.0 5,817.0 5,880.0 5,880.0 5,810.0 5,875.0 5,931.0 6,000.0 Milk 6,143.0 6,143.0 6,135.0 6,109.0 5,871.0 6,142.0 6,281.0 6,161.0 5,948.0 6,100.0 Eggs millions 14,669.0 13,681.0 13,582.0 13,491.0 12,240.0 9,235.0 12,726.0 11,939.0 11,322.0 10,300.0 Potatoes thousands 1,724.0 1,895.0 1,868.0 1,818.0 1,979.0 1,931.0 1,848.0 1,794.0 2,300.0 2,100.0 Vegetables 1,864.0 1,820.0 2,021.0 1,736.0 1,173.0 1,218.0 1,490.0 1,555.0 1,097.0 1,250.0 Fruit and Berries 13,425.0 13,171.0 13,391.0 13,093.0 12,221.0 12,168.0 13,113.0 13,080.0 12,868.0 13,100.0 Gross Output Plant Cultivation millions of rubles 5,270.0 5,123.0 5,237.0 5,068.0 4,465.0 4,054.0 4,873.0 4,767.0 4,722.0 4,750.0 Cattle Breeding 8,155.0 8,048.0 8,154.0 8,025.0 7,756.0 8,114.0 8,240.0 8,313.0 8,146.0 8,350.0 Share of Personal Plot Gross Output in Total percentage 28.6 27.9 28.4 27.4 24.9 25.1 27.4 27.0 30.0 35.0 Agricultural Gross Output Source: Ministry of Agriculture and Food TABLE 22 - Ukraine: Food Industry Production Page 1 of 2 Category 1980 1985 1986 1987 1988 1989 1990 1991 1992 Granulated Sugar 5302.0 6247.0 6660.0 7579.0 6131.0 7014.0 6791.0 4786.0 3647.0 (thousands of tons} from Sugar Beets 3977.0 4366.0 4485.0 5339.0 4646.0 5177.0 5388.0 3844.0 3527.0 Meat, including by-products 2074.0 2357.0 2519.0 2615.0 2731.0 2793.0 2763.0 2488.0 2050.0 of I category (thousands of tons) Beef and Veal 1112.0 1268.0 1384.0 1455.0 1473.0 1507.0 1494.0 1351.0 1214.0 Mutton 12.0 13.9 16.6 18.6 19.7 21.4 23.6 16.8 16.3 Pork 548.0 600.0 616.0 626.0 677.0 709.0 724.0 642.0 434.0 Poultry 229.0 293.0 309.0 317.0 364.0 372.0 355.0 292.0 249.0 Other kinds of meat and by- products of I category 172.1 182.1 193.4 198.4 197.3 183.6 166.4 186.2 136.7 Sausage (thousands of tons) 685.5 768.1 795.3 823.8 842.1 864.5 900.1 851.5 757.9 Meat as half-finished product 205.9 248.4 263.6 273.1 285.4 293.0 293.8 261.4 131.8 (thousands of tons) Fish and Seafood 934.3 1083.0 1156.0 1098.0 1166.0 1139.0 1061.0 904.5 547.0 (thousands of tons) Butter (thousands of tons) 335.5 390.2 406.8 421.2 440.4 440.8 444.1 376.4 302.9 Whole Milk Products 4888.0 5687.0 6008.0 6129.0 6293.0 6381.0 6432.0 5709.0 4112.0 (thousands of tons) Cheese, brynza (thousands of tons) 127.8 169.7 176.3 178.2 182.8 184.0 183.5 161.5 112.7 Oil (thousands of tons) 941.3 846.3 875.7 970.9 1046.7 1077.7 1070.4 1004.0 857.5 Margarine Products 263.9 275.6 294.8 318.2 308.1 318.4 288.5 266.5 249.2 Canned Products (millions) 3488.0 3978.0 4738.0 4833.0 4808.0 4891.0 4836.0 4239.0 3760.0 Meat and Vegetables 179.6 210.3 241.0 244.6 244.5 247.1 245.8 231.2 242.9 Fish and Seafood 239.5 291.8 268.0 274.5 310.6 321.8 351.8 319.8 196.6 Vegetables 1296.0 1053.0 1009.0 1287.0 1324.0 1230.0 1184.0 1090.0 1019.0 Tomatoes without Juice 457.8 474.8 662.8 618.0 517.6 475.8 349.6 326.5 276.9 Canned Fruit without Juice 340.6 671.8 707.5 669.8 748.4 916.9 1033.4 964.1 904.2 Jam, Preserves 143.1 182.5 186.5 181.0 191.3 251.4 307.7 282.9 240.3 Canned Milk 334.7 345.9 369.2 381.2 407.3 418.4 415.3 350.2 245.5 Natural Juice 629.2 809.9 1337.4 12105.6 1140.1 1139.3 1070.7 834.0 716.1 Source: Ministry of Statistics TABLE 22 - Ukraine: Food Industry Production Page 2 of 2 Category 1980 1985 1986 1987 1988 1989 1990 1991 1992 Fruit Juice 443.3 541.2 858.8 841.0 808.0 807.3 826.1 586.9 550.8 Dried Fruit (thousands of tons) 2.3 5.6 5.7 5.2 4.9 6.0 6.4 3.1 3.4 Frozen Vegetables (thousands of tons) 1.2 1.8 2.1 1.6 1.3 0.5 0.3 0.2 0.1 Grain (thousands of tons) 7485.0 8157.0 7820.0 7784.0 7534.0 7614.0 7671.0 7383.0 6625.0 Groats (thousands of tons) 773.4 872.5 911.9 983.3 958.8 982.6 962.4 944.4 803.8 Bread and Bread Products 7375.0 7348.0 7362.0 6834.0 6580.0 6611.0 6701.0 6685.0 6441.0 (thousands of tons) Confectionery (thousands of tons) 802.4 923.8 950.6 991.6 1033.4 1074.6 111.2 1040.0 842.9 Made of Sugar 510.8 576.9 595.1 614.0 636.6 656.8 675.4 641.3 506.9 Noodles (thousands of tons) 308.6 329.8 332.4 343.5 352.5 360.1 360.4 364.8 350.3 Soft Drinks (millions of dekaliters) 90.6 97.2 124.4 125.3 143.7 149.7 150.7 114.4 58.7 Kvass 14.8 19.0 26.8 22.1 26.9 24.2 21.9 17.9 10.6 Mineral Water (millions dekaliters) 32.7 41.3 46.8 49.4 53.5 56.8 54.5 45.9 30.4 Salt (extraction) (thousands of tons) 5968.0 8018.0 7926.0 8020.0 8186.0 8338.0 8309.0 8394.0 7409.0 Source: Ministry of Statistics TABLE 23 - Ukraine: Consumption of Basic Foodstuffs per capita and their Share in Family Income (in kIlograms, unless otherwise specified) 1987 1988 1989 1990 1991 1992 1993 Meat and Meat Products 66.9 68.9 68.6 68.2 65.5 53.4 46.3 Milk and Milk Products 357.2 366.9 366.9 373.3 345.5 284.5 275.0 Eggs (each) 284.0 286.0 280.0 272.0 256.0 227.0 193.0 Bread 141.0 137.6 137.7 141.0 142.5 142.5 146.0 Potatoes 130.6 121.7 127.5 131.0 115.5 132.9 138.0 Vegetables and Gourd Crops 126.6 124.6 107.5 102.5 102.5 88.9 94.0 Fruits, Berries, Grapes 48.0 47.0 46.0 47.0 36.5 38.0 44.0 Fish and Fish Products 18.9 18.5 18.2 17.5 12.2 7.3 NA Sugar 52.5 49.7 46.7 50.0 50.0 45.4 39.0 Vegetable Oil 11.2 11.2 11.9 11.6 11.2 10.6 8.0 Expenses for Foodstuffs in Family 35.9 34.2 33.1 32.8 39.2 55.0' NA Budget (percent) Source: Ministry of Economics * Estimate TABLE 24 - Ukraine: Marketing Channels for Major Agricultural Products of the Socialist Sector, Collective and State Farms (flows in thousand tons unless otherwise specified) 1990 - Amounts and Percentages of 1991 - Amounts and Percentages of 1992 (January - June) - Amounts and Percentages of Product Socialist Sector Output Sold Through: Socialist Sector Output Sold Through: Socialist Sector Output Sold Through: State % I Coop % Private % State % I Coop |% Private % State I % Coop % Private % Grains 14,383 80 2,472 14 1,189 7 11,081 62 4,126 23 2,651 15 Oilseeds 2,167 99 26 1 7 0 1,812 91 65 3 111 6 Potatoes 765 47 718 44 159 10 409 37 529 47 182 16 6 14 13 34 20 51 Vegetables 2,669 63 1,216 29 339 8 2,011 62 807 25 436 13 120 70 27 16 25 15 Sugarbeet 43,284 100 0 0 0 0 34,295 100 0 0 4 0 Cattle 2,629 94 137 5 41 1 2,405 88 175 6 165 6 1,047 88 74 6 65 5 Pigs 956 91 71 7. 18 2 785 84 90 10 59 6 271 82 34 10 25 8 Poultry 435 94 18 4 12 3 363 86 27 6 32 8 139 82 10 6 20 12 Other Livestock 21 41 24 47 6 12 19 51 14 38 4 11 4 24 8 47 5 29 Total Meat 4,041 93 250 6 77 2 3,572 86 306 7 260 6 1,461 86 127 7 115 7 (live weight) Milk & Milk 17,846 99 158 1 19 0 15,321 99 186 1 45 0 5,997 99 68 1 21 0 Products Eggs (millions) 7,616 88 944 11 110 1 6,801 82 678 8 866 10 2,669 83 212 7 353 1t Source: Ministry of Finance State - Purchase by state procurement organization Coop - Purchase by consumer cooperatives and public catering organizations Private - Sale on market through private stores, barter, and foreign trade TABLE 25 - Ukraine: Procurement Price for Sales to the State of Different Kinds of Produce,1989-1992 (rubles per ton) 1992 1993 1989 1990 1991 1st 1st | Sept. Oct. quarter half Wheat 168 276 422 10,851 545,110 Rye 201 301 469 10,815 602,490 Buckwheat 642 923 1,351 22,900 NA Rice 567 662 995 21,200 NA Sunflowers 484 465 862 20,000 1,718,800 Maize 459 420 728 8,900 471,600 Sugar Beets 48 50 98 2,484 162,400 Potatoes 167 240 1,099 13,489 472,700 Cabbage 97 159 780 7,796 NA Onions 424 401 1,201 15,704 NA Wool 8,160 8,678 37,830 799,440 NA Cattle 2,706 2,968 4,988 21,787 21,900 54,853 5,678,400 Pigs 2,294 2,671 4,665 23,840 26,970 67,552 NA Poultry 2,216 2,391 3,836 20,337 22,956 57,498 NA Milk 426 426 657 4,396 4,560 8,568 982,800 Eggs 54 93 189 1,092 1,121 2,373 332,700 Source: Ministry of Agriculture and Food TABLE 26 - Ukraine: Wholesale Prices of Certain Kinds of Agricultural Inputs in State Trade and on Conmnodity Exchanges, 1989-1992 1992 (months) lst Prices at 1 2 3 4 5 6 Half 7 8 9 12 Commodity Exchanges 1989 1990 1991 2 l l l lllllll l _ Tractors 5.95 8.28 10.80 -- -- -- 399.20 399.20 399.20 399.20 399.20 460.00 455.0 410.0 500.0 Trucks 9.70 12.40 14.90 -- -- -- -- -- 452.10 452.10 452.10 452.10 452.10 520.00 819.5 707.2 637.5 Harvesters 19.80 21.50 28.50 1000.00 1000.00 1000.00 1000.00 1000.00 1150.00 Beet Harvesters 16.20 17.00 20.20 350.80 330.80 350.80 350.80 350.80 400.00 Silage Harvesters 15.40 16.50 20.70 319.40 319.40 319.40 319.40 319.40 370.00 Plows 0.31 0.45 0.56 5.65 5.65 5.65 5.65 5.65 6.50 Seeders 1.03 1.75 2.20 20.40 20.40 20.40 20.40 20.40 23.50 Milking 3.41 4.27 64.00 64.00 64.00 64.00 64.00 75.00 Machines 2.34 Conveyers 0.98 1.23 1.40 60.00 60.00 80.00 80.0 80.0 Truck Fuel 0.20 0.20 0.20 2.39 3.12 7.02 10.90 9.50 10.60 7.27 11.10 20.00 Diesel Oil 0.068 0.15 0.15 2.20 2.64 6.62 10.20 8.77 9.80 6.71 11.00 18.00 Rolled Ferrous 0.13 0.13 0.21 10.50 14.00 12.30 15.20 16.60 18.00 22.00 Metal (tons) Timber 0.039 0.039 0.059 3.00 3.00 5.00 1.00 6.00 Maintenance 2.34 2.34 9.05 9.10 21.00 15.10 42.80 50.00 Mineral 0.084 0.086 0.10 2.00 2.30 3.75 4.30 Fertilizers Plant Proection 2.35 2.30 3.71 13.80 87.50 218.90 250.00 Means Chemical 0.003 0.004 0.033 0.044 0.13 0.13 0.13 0.13 0.13 0.11 0.13 0.13 0.15 Reclamation Means Source: Ministry of Agriculture TABLE 27 - Ukraine: Production Costs in Agricultural Enterprises, 1982-i992 (Millions of Rubles) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 * Total Production Costs 25,013 26,665 28,007 29,473 31,041 31,790 32,357 34,115 36,514 54,608 888,445 Plant Cultivation 9,542 10,228 10,883 11,297 12,274 11,839 11,824 12,703 13,335 18,890 % of Total 38.2% 38.4% 38.9% 38.3% 39.5% 37.7% 36.5% 37.2% 36.6% 34.6 Animal Husbandry 11,989 12,826 12,685 14,556 14,955 14,822 15,452 15,947 17,042 26,087 % of Total 47.9% 48.1% 45.3% 49.4% 48.2% 46.6% 47.8% 46.8% 46.6% 47.8% Other Activities 3,482 3,611 4,439 3,620 3,812 5,129 5,081 5,465 6,137 9,631 % of Total 13.9% 13.5% 15.8% 12.3% 12.3% 16.1% 15.7% 16.0% 16.8% 17.6% Costs of Marketed Output' 17,547 21,851 23,241 24,907 26,792 27,526 28,449 30,324 32,425 47,428 723,652 Plant Cultivation 4,58S 5,075 5,675 5,624 5,945 6,292 6,137 6,657 6,862 9,908 % of Total 26.1% 23.2% 24.4% 22.6% 22.2% 22.9% 21.6% 21.9% 21.2% 20.9% Animal Husbandry 11,502 12,933 13,657 15,073 16,469 16,684 17,378 18,180 19,231 26,347 % of Total 65.6% 59.2% 58.8% 60.5% 61.5% 60.6% 61.1% 60.0% 59.3% 55.5 Other Activities 1,460 3,843 3,909 4,210 4,378 4,550 4,934 5,487 6.332 11,173 % of Total 8.3% 17.6% 16.8% 16.9% 16.3% 16.5% 17.3% 18.1% 19.5% 23.6 Source: Ministry of Economics * Forecast ** Excludes financial costs and depreciation Table 28 - Ukraine: Retail Price Indices for Foodstuffs in State and Cooperative Trade, 1990-1993 December December January 1992 December December 1990 1991 1992 1993 Consumer Price Index 100 261 920 9,745 974,470 Food Price Index 100 230 899 8,545 794,841 Bread Products 100 239 871 4,389 287,942 Meat Products 100 182 782 8,817 824,945 Milk Products 100 170 531 8,843 561,003 Potatoes 100 309 752 4,231 199,219 Vegetables 100 178 434 1,439 124,522 Butter 100 188 603 5,775 350,053 Vegetable Oil 100 155 557 2,887 319,376 Eggs 100 210 1,171 10,955 1,120,867 Source: Ministry of Statisitics, and World Bank calculations using data from IMF and Ministry of Agriculture and Food. TABLE 29 - Ukraine: Average Prices for Basic Foodstuffs, January 4, 1994 (Ukr. KBV per kg/I) Prices State and Cooperative Trade Collective-farm Market Grain Products Milled Wheat 5,190 Rye Bread 2,219 Wheat Bread 3,447 Vermicelli 7,250 Rice 18,292 Semolina 4,809 Oat Groats 6,358 Meat Products Beef & Veal 34,203 46,616 Pork 42,122 63,232 Poultry Meats Hens 43,302 91,607* Ducks 30,696 102,509' Boiled Sausage 50,380 Fat 45,176 51,395 Milk Products Milk 3,422 5,812 Cottage Cheese 13,851 23,621 Sour Cream 19,462 39,079 Cheese 61,950 Butter 69,566 71,252 Eggs (per 10) 28,610 29,925 Fish 28,278 Frozen Fish 31,824 Herring 74,375 Sugar 8,037 Vegetable Oil 27,810 29,201 Potatoes 1,370 2,296 Vegetables Cabbage 1,534 2,479 Solt Tomatoes 2,366 10;805 Solt Cucumbers 3,438 13,896 Carrots 1,399 2,554 Beets 1,127 2,360 Onions 3,789 5,789 Fruits and Berries Apples 3,336 6,091 Dry Fruits 11,826 12,404 Source: Minestry of Statistics * Prices per piece TABLE 30 - Ukraine: Principal Costs of Individual Kinds of Bread in July, 1992 in Kiev (per ton) lOOOg Cost Items 500g Loaf 750g White Bread Ukrainian Hearth Bread Raw Materials 10,632.81 8,442.44 6,707.37 Fuel and Power 247.57 71.47 187.04 Wages 326.24 329.91 248.68 Deductions for Social Insurance 120.75 114.29 88.31 Maintenance costs 618.56 128.08 123.52 Shop costs 200.01 144.03 225.68 General Production Expenses 748.95 749.49 127.38 Prime Production Costs 12,894.99 9,979.71 7,707.98 Non-production costs 128.95 780.56 518.86 Full Prime Cost 13,023.94 10,760.27 8,226.84 Profit Markup 1,976.06 1,254.73 1,006.64 Profit Markup Rate 15.2% 11.7% 12.2% Wholesale Price 15,000.00 12,015.00 9,233.48 VAT 4,200.00 2,643.30 2,031.37 VAT Rate 28% 22% 22% Sub-total: 19,200.00 14,658.30 11,264.85 Trade Premium 4,800.00 2,198.75 1,689.73 (Marketing Margin) Trade Premium Rate 25% 15% 15% (Marketing Margin Rate) Unsubsidized Total 24,000.00 16,857.05 12,954.58 Retail Price per ton 24,000.00 8,000.00 5,000.00 Retail Price per piece 12.00 6.00 5.00 Subsidy per ton -- 8,857.05 7,954.58 Source: Ministry of Economics TABLE 31 - Ukraine: Area of Forest Stock, 1982-1992 (in thousands of ha) by Managing Organizations Years _ Other Ministries Minleskhoz' Ukrlesprom2 Mmselskozprod3 and Agencies Total area Forested Total area Forested Total area Forested Total area Forested Total area Forested 1982 9990 8457 5793 4853 1240 1127 2385.2 2105 571.8 372 1983 9969 8588 5924 4997 1238 1125 2391.7 2072 415.3 394 1984 9969 8588 5924 4997 1238 1125 2392.0 2072 415.0 394 1985 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1986 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1987 9969 8588 5924 4997 1238 1125 2397.0 2072 410.0 394 1988 9942 8620 5939 5029 1236 1122 2391.7 2160 375.3 309 1989 9942 8620 5939 5029 1236 1122 2397.0 2160 370.0 309 1990 9942 8620 5939 5029 1229 1126 2441.9 2160 325.1 305 1991 9942 8620 5939 5029 1229 1126 2375.8 2160 391.2 305 1992 9942 8620 5939 5029 1229 1126 2375.8 2160 391.2 305 Source: Ministry of Economics 1. Ministry of Forestry 2. Ukrainian Forestry Industry Company 3. Ministry of Agriculture TABLE 32 - Ukraine: Production Indexes of Forest Associations, 1982-1992 Indexes 1982 1983 1984 1985 1990 1991 1992 Felling Stock 6,249.0 6,271.6 6,283.0 6,247.0 6,125.0 5,675.0 5,704.0 (thousands of M3): Minleskhoz 4,001.0 4,109.0 4,028.0 3,978.0 3,878.0 3,594.0 3,427.0 Ukrlesprom 1,929.0 1,921.6 1,929.0 1,949.0 1,877.0 1,674.0 1,788.0 Minselkhozprod 319.0 331.0 326.0 '320.0 370.0 407.0 498.0 Forest Planting 58.61 57.26 58.50 60.25 57.54 48.06 43.55 (thousands of ha) Minleskhoz 48.72 47.16 48.62 49.80 57.49 37.60 33.70 Ukrlesprom 4.98 5.20 5.18 5.45 5.05 6.06 5.65 Minselkhozprod 5.00 4.90 4.70 5.00 5.00 4.40 4.20 Value of Harvest 140,746 138,696 141,123 141,878 148,440 327,045 4,575,763 (thousands of rubles) Minleskhoz 125,045 122,624 125,202 125,988 134,412 306,810 4,477,254 Ukrlesprom 15,701 16,072 15,921 15,890 14,028 20,235 98,509 Prophylactic Fellings 634.1 634.3 609.8 599.5 508.5 426.3 430.0 (thousands of ha) Minleskhoz 539.3 540.2 515.9 506.3 434.2 365.5 370.0 Ukrlesprom 94.9 94.1 93.8 93.2 74.3 60.8 60.0 Value of Prophylactic 8,811.7 8,857.4 8,872.0 8,730.1 7,775.2 6,394.1 6,300.0 Harvest (thousands of M3) 6,698.6 6,791.8 6,747.7 6,726.2 6,070.4 5,071.3 5,000.0 Minleskhoz 2,113.1 2,065.6 2,024.3 2,003.9 1,704.8 1,322.8 1,300.0 Ukrlesprom Forest Protection Measures Ground Pest Control 203.8 194.3 202.2 203.6 228.8 211.3 - (thousands of ha) Minleskhoz 184.8 180.9 188.8 189.4 199.7 196.8 -- Ukrlesprom 19.0 13.4 13.4 14.2 23.1 14.5 -- Air Pest Control 50.7 90,7 122.2 94.1 64.5 20.3 -- (thousands of ha) Minleskhoz 50.7 83.3 118.7 94.1 63.8 20.3 - Ukrlesprom -- 7.4 3.5 -- 0.7 -- Forest Fire Control -- -- 3,400 3,400 4,000 4,100 4,100 (thousands of ha) Minleskhoz - -- 3,400 3,400 4,000 4,100 4,100 Ukrlesprom -- -- -- -- -- - Source: Ministry of Economics I I 20 \ 25° 30'll 35'40 '. X j ~~~~~~~~ ~ ~ ~~~~~~~~~~BELARUS TH d -1,5aG_ T. B-t~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,ITA, k~ RUSSIAN FEDERATION |pOLAND KRe ev Jr Smy l -504 To K-ow| 50 pi K,m iel t To S To ho M D To RO |AGRICULTURAL SECTOR REVIEW I& ^TCij .. MAINCAGROECOLOGCAL REGIONS AG01 ROECMAN5 EION KreopRSSA UKRAINE~~~~~~~~~~~~~~~~~~~~~~~~~EDRTO | O~~~~~~WO NEEDOTNADIE 0 f LO tt\__ AGRICULTURAL SECTOR REVIETOREST SEPPE OR O FOETSTEPPE ROADS _____RAILROADS mo 0 SELECTED TOWNS AND CIT ES NATIONAL CAPITAL ----AUTONOMTOUS REPUPL COR OBLASTRBOUNDAR ES KLMTR | INTERNATONALEOUNDARIES 0 50 100 150 \ | PETRlERS ________B_LACK S_E_A_ BULGARIA 35 0 MLES 1. JL0 JULY I WAu IBRD 245fOYR 20 , 25' ~~~~~~~~~~~~~~~~~~~~~~~~30 ' 35°'0 J ~~~BELARUS \pvs&,iGr { _,_e ,-\, j >52 ~~~~~~~~~~RUSSIAN FEDERATION POLAND to '_ k UNGARY ffi y _~~~~~~L.k OSu S_ ; ~ ~~~~ ~ ~~~~ 2s Ri- iP/r jOryyRkiuOkOO;ZZG UKRQN T el>sy 0ZO') oMi°i REPUBL PRCPTTO LlOHIOES Ckray Ru6i.,ne , OMS r S } -.e _0 PRE~,cPIAINOE r s 'L. USA 500 N0rmY ¢* kUma iloc p- 4' c 180HYETS0mm) \ >0 50°2 )~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ HUNGARY"-~~~~ ~~~~~~~ 1LPhr.teAe f59ritZ O / eroir O SELECTEDTO\MNSANDCTIES X i- Da abeDelta ' \l nrj)fi~ ~ ~ ~ ~ * NATIONA~~~~~~~~~~L.CPTL_>nSss°io\ ' ' ~~ AUTONOtdOUS REPUBLC OR OELAST 80UNDARIES (// \$, KMi i YrJ 70IDahpi _._ ITROMNAIOAL NykDopi. lOtlE 25,' o o 5 ' MOLDOVAAK EA^ | l _ BULGARIA9*-; 300 354 ° MILES . l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ari.i UKRAINE 0 M. itpi~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...A