INTERNATIONAL AGRICULTURE AND TRADE (Former USSR)--SUMMARY May 24, 1996 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. The complete text of INTERNATIONAL AGRICULTURE is available 2-3 working days following release of this summary. ----------------------------------------------------------------------------- May 24, 1996 As Consumer-Ready Imports Rise, Trade Barriers Grow U.S. agricultural exports to the countries of the former Soviet Union (FSU) are projected to increase for the first time in 5 years to $1.5 billion in fiscal 1996. Expanding exports of high-value products (HVPs) are driving the growth. The persistent contraction of the FSU livestock sector continues to keep the region's grain imports at record lows. Russia, the primary FSU food importer, was the top destination for U.S. poultry meat for the second straight year in 1995, with poultry purchases totaling over $600 million. Russia is also a growing market for other U.S. animal products, fruits and vegetables, and beverages. Although U.S. exports account for 10-15 percent of total Russian HVP imports, the U.S. market share could expand through increased product promotion and investment in the country. Russian agriculture appears to suffer from a price/cost disadvantage vis-a-vis most imported foodstuffs. In the near to medium term, Russia is likely to remain uncompetitive in price-- and thereby a net importer--for many commodities, especially livestock products, assuming it does not adopt strongly protectionist policies. In recent years, Russia (as well as Ukraine and certain other FSU nations) has been expanding controls on agricultural imports, using tariffs and nontariff measures. In most FSU countries (except the Baltic States) institutional reform in the production side of the agricultural economy has moved very slowly. The official "reorganization" of farms in Russia and other FSU nations in the early 1990s did little to change their organization, managerial behavior, or internal incentive structure. Land reform remains stifled. Farms have been able to avoid institutional reform largely because state subsidies continue to buttress them. The subsidies often take the indirect form of the state not calling in, or canceling, loans to farms. By propping up farms, the continued subsidization has two negative consequences for the economy. First, agriculture does not shed resources with low productivity that could be better used elsewhere. For example, although most Russian farms specializing in livestock production are unprofitable, few have ceased functioning. Second, the subsidies reduce pressure on farms to reform their managerial and work incentive practices, which would increase the productivity of resources used. By helping to keep productivity in agriculture low, the subsidies work to keep production costs high. This hurts farms' ability to compete with foreign output. The subsidies, and accompanying lack of farm institutional reform, are thereby part of the reason Russia and other FSU countries are imposing more restrictions on agricultural imports. Market reform, particularly price liberalization, has motivated some improvement in farm productivity. By hurting agriculture's terms of trade, price liberalization has reduced farms' purchases of inputs (such as machinery, fuel, fertilizer, and pesticides). This has stimulated farms to use those inputs they do buy more productively. In 1995, the livestock sector continued to contract, with output falling more than 10 percent due to declining productivity and inventories. At the same time, meat imports from non-FSU countries grew to 1 million tons. One reason is that the real appreciation of the ruble against the dollar increased the competitiveness of imports vis-a-vis high-cost domestic output, despite rising tariffs. However, a significant rebound in 1996/97 grain output could lower currently high grain prices and improve FSU producers' terms of trade, resulting in a temporary lift for the livestock sector and possibly reducing imports. Over the long term, the FSU livestock sector should stabilize and grow slowly, as economic recovery spurs demand. However, long-term FSU meat imports are projected to remain near 1995 levels, with purchases of poultry declining slightly as those of beef and pork grow. Total FSU grain imports are forecast to decline 20 percent in 1996/97 to a record low for the third straight year. Also, domestic production is projected by USDA to increase more than 25 million tons from 120 million in 1995/96. The higher output is based on rising production in Russia and Ukraine, where increased area planted to winter grains and lower winterkill point to an improved crop. A reduction in the state's role (at the national level) in grain marketing has caused producer grain prices to approach world levels, most noticeably in Russia and the Baltics, where market reforms have made the most progress. Farmers have responded by expanding area to those grains (and crops) for which returns are highest. Over the long term, FSU grain output is forecast to increase due to higher yields and growing demand for feed. As a result, FSU grain imports should remain minimal, with intra-FSU flows accounting for most of the region's grain trade. Printed copies of Former USSR: International Agriculture and Trade Report will be available in about 2 weeks. For further information, contact William Liefert (202) 219-0656 or Sharon Sheffield (202) 219-0019. Text of the full report will also be available electronically. For details, call (202) 219-0515. END-END-END