INTERNATIONAL AGRICULTURE AND TRADE (Newly Independent States & the Baltics) May 28, 1997 Approved by the World Agricultural Outlook Board ============================================================================== INTERNATIONAL AGRICULTURE AND TRADE (Name of issue) is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. WRS-97-1. Please note that this release contains only the text of INTERNATIONAL AGRICULTURE AND TRADE (Newly Independent States & the Baltics) -- tables and graphics are not included. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #WRS, $26/year. ERS-NASS accepts MasterCard and Visa. ============================================================================== Economic Editors Christian J. Foster William M. Liefert Statistics Coordinator Olga Liefert Authors Britta S. Bjornlund Christian J. Foster Roger L. Hoskin Olga Liefert William M. Liefert Jay K. Mitchell David J. Sedik Sharon S. Sheffield Technical Editor Diane Decker Student Interns Michael J. Auten Sybylle de Geoffre Deniz Muslu Matthew Stevens Cover Photo Christian J. Foster Contents Summary Status of Agricultural Reforms in the NIS/B Countries in 1997 NIS/B Farm Sector Continues Adjustment to Market Forces; U.S. Agricultural Exports to Region Post Recovery Box 1: Meat Producers Bypass Processors Box 2: Market Forces Alter Marketing Bill for Meat Trade Highlight: Agricultural Trade Outlook to 2005 Agricultural Issues Figure Prominently in Russia's WTO Accession Ukrainian Land Reform and Farm Privatization: Still a Long Road Ahead List of Text Tables List of Text Figures Statistical Annex: List of Tables Map Preface The term "Newly Independent States" (NIS) used throughout this report refers to the 12 countries that comprised the former Soviet Union. The "Baltic" countries (Estonia, Latvia, Lithuania) are not included in the NIS as they were not recognized by the United States as part of the then Soviet Union. The 12 NIS countries are the Russian Federation, Ukraine, Belarus, Kazakstan, Moldova, Armenia, Azerbaijan, Georgia, Uzbekistan, Turkmenistan, Kyrgyzstan, and Tajikistan. "NIS/B" refers to the 12 NIS countries and the 3 Baltic nations. The phrase "terms of trade" referred to throughout the report means the terms, or prices, at which agricultural producers "exchange" output for inputs. It is measured by comparing agricultural output prices to input prices, such that if input prices rise relative to output prices, the producers' terms of trade worsen, or deteriorate. The concept of terms of trade can apply to any situation in which there is exchange of goods, such as the terms (prices) at which a country trades its exports for imports. However, unless otherwise indicated, the phrase is used in this report as defined above. Throughout the report, "economic reform" in the NIS/B countries is defined as changes in institutions and polices that help foster the development of a market economy. Institutional reform includes privatization and the creation of market infrastructure, such as systems of market information, banking and finance, and commercial law. Macroeconomic reform polices include reducing inflation, tightening monetary and fiscal policy, and stabilizing the exchange rate. Trade liberalization is defined as reducing direct state management of trade, as well as specific trade controls, such as tariffs and quotas. Acknowledgments Appreciation for review of the contents of the report is extended to: F. Surls, B. Coyle, E. Allen, T. Crawford, D. Kelch, K. Gray, and P. Liapis of ERS; P. Sheik, C. McKinnell, B. Sellers, and A. Avidor of FAS; and G. Bange, G. Rector, D. Stallings, and J. Nix of the WAOB. The U.S. Agricultural Counselor, Mary Revelt, and staff in Moscow facilitated our work with their timely reporting. Appreciation is extended to Vic Phillips and Sue DeGeorge for design assistance, and to Yuri Markish for statistical support. Summary Meat Imports To Remain Robust Over Long Term Reform-based changes have transformed the Newly Independent States and the Baltics (NIS/B) region, once a major grain importer, into a top meat importer. Total meat imports from outside the region in 1997 are estimated to remain near last year's record 2 million tons, due mainly to a continued lack of competitiveness by most domestic producers. Since 1992, extra-NIS/B meat imports have about quintupled. More than half the region's meat imports consist of poultry, primarily leg quarters from the United States, which satisfy a large demand in Russia's major cities for a less expensive source of protein. Poultry meat production in Russia has declined 60 percent since reforms began, as the cost of producing and marketing domestic poultry continues to exceed prices of competing imports. NIS/B net grain imports in 1997/98 are again projected at a record low of under 4 million tons, as total grain use continues to fall while output remains stable or increases slightly. In the 1980s the region imported over 30 million tons a year. The United States, having adjusted to the collapse in grain sales to the region, has now positioned itself as the NIS/B's largest meat supplier, accounting for $1 billion in poultry meat sales alone in calendar 1996. Poultry meat is the single largest U.S. export to the NIS/B region, non-agricultural products included. Total U.S. agricultural sales to the NIS/B region are projected to grow over 10 percent from a year earlier in fiscal 1997, as exports of meat and other consumer-ready products (fresh and processed fruits and vegetables, nuts, and beverages) rise. USDA's long-term trade outlook for the region assumes slow recovery of real GDP to 2005, resulting in some increased meat consumption. Although projected modest increases in animal productivity should help NIS/B producers satisfy most of the rising demand, the region's comparative disadvantage in meat is forecast to continue, with net imports remaining at about 2 million tons. The region is not expected to return to the large grain imports of the pre-reform period, or to become a major grain exporter. Net grain imports in 2005 are projected at 2-3 million tons, primarily wheat, while in certain years there could be small net exports of coarse grains. USDA's long-term projections assume no significant changes in Russia's trade policy. Russia's ongoing accession into the WTO and its likely compliance with WTO regulations are expected to limit its ability to increase trade barriers and use trade- distorting internal support to protect its farm sector. After 5 years of market reforms that have spurred significant restructuring of NIS/B agricultural production, grain output may now be stabilizing. NIS/B grain production has fallen 35 percent since 1992/93, with coarse grains declining the most, reflecting reduced feed demand from shrinking livestock inventories. In 1997 the region's livestock inventories will contract for the eighth consecutive year. Since reforms began, NIS/B total meat output has fallen 45 percent, as producers have faced diminishing consumer demand for livestock products, worsening terms of trade, and high transaction costs due to underdeveloped marketing infrastructure. Since the breakup of the USSR, the NIS/B countries have differed in their degree of agricultural reform, falling into three groups. The most reformist have been Armenia and Georgia (in the Caucasus region) and the three Baltic countries--Estonia, Latvia, and Lithuania. Uzbekistan, Turkmenistan, and Belarus have reformed the least. Russia, Ukraine, Moldova, and the other NIS/B countries fall between the two extremes. The fast-reforming countries have adopted two general types of policies that affect agriculture: macroeconomic-related reforms, such as price deregulation, substantial reduction of subsidies to agriculture, and liberalization of domestic and foreign trade; and, at the microeconomic level, privatization of agriculture (though Armenia and Georgia have made more progress with privatization than the Baltic countries). Reform appears to be paying off. Agricultural production has grown for 4 straight years in Armenia, and 2 years in Georgia. Russia, Ukraine, and Moldova, pursuing middle of the road policies, have generally implemented the macroeconomic-type reforms cited above, but have done little to privatize agriculture. Although agricultural production in these countries continues to fall, mainly in the livestock sector, it will probably stabilize in the near term. Uzbekistan, Turkmenistan, and Belarus have been the least reformist NIS/B countries not only in agriculture but economywide. They have retained many policies of the previous Soviet regime, such as price controls, subsidies, and state procurement, and have done almost nothing concerning land reform and privatization. Since 1991, agricultural production in these countries has fallen less than in the moderately reforming nations such as Russia and Ukraine, but such statistics are misleading. The continuation of Soviet-type policies has shielded agriculture from the restructuring, and in many cases contraction, of agricultural output (especially in the livestock sector) that these countries will inevitably experience if they move towards market-driven and open agricultural economies. Status of Agricultural Reforms in the NIS/B Countries in 1997 Six years after the breakup of the Soviet Union, land reform has progressed furthest in the Baltic countries, Armenia and Georgia. However, the main change in NIS/B agriculture--the decline of the livestock sector--is due to changes in relative prices and income, not to land reform. Land reform and farm restructuring in Armenia, Georgia, and the Baltic countries has improved the financial performance of agriculture there, because private farms generally have performed better financially than former state and collective farms. But the lack of land reform has limited the productive use of resources in the other NIS/B countries. [David J. Sedik] Six years after the breakup of the Soviet Union, a definite pattern can be discerned in the extent of agricultural reform in the NIS/B states. The economies in which general and agricultural reform have advanced furthest are those of the Baltic countries and two Caucasus countries, Armenia and Georgia. Reform has lagged the most in two Central Asian nations, Uzbekistan, and Turkmenistan, as well as in Belarus. Agriculture in countries such as Russia, Ukraine and Moldova stands between these two extremes, incompletely reformed. Reform of the agricultural sector has led primarily to a restructuring of production and consumption away from livestock in each NIS/B country. Macroeconomic policy changes, such as price liberalization and the elimination of many agricultural subsidies, have eliminated the implicit subsidies to livestock production and consumption that existed in the Soviet era due to fixed consumer and producer prices. Producers and consumers now base decisions more on actual costs of production and demand, and, accordingly, produce and consume less livestock products. Liberalization of both foreign trade and internal markets has led to considerable price competition from imported food. The fall in consumer income of the past 5 years has also contributed to a decline in meat demand. Economic restructuring has been deepest in the countries where these reform policies have gone furthest. The largest disappointment in NIS/B agriculture is the continued lack of an institutional environment that encourages the productive use of resources. We refer to this as the lack of land reform, though this is a shorthand for a much broader problem, which deserves some explanation. Land markets perform three important functions, which make them the foundation of yield performance, as well as of well-functioning markets for capital and management. First, without land markets, land appears as a (nearly) free good for managers of former state/collective farms. Thus, by Western standards, land is grossly overused in farming in the countries of the NIS/B region. This results in sowing crops on a lot of rather low-yielding land, since the cost of sowing on an extra hectare of land is quite low. The near zero cost of land also makes for exceptionally large farms, compared to those in the United States. Second, land is the primary asset of a farm, and thus functions as collateral for loans used to fund capital investment. If land is essentially an inalienable asset, farms can use only their future crop as collateral for loans. Though farms often finance working capital for spring plowing by pledging to deliver part of their crop to the state in the fall,the value of crops is too small and uncertain to generate much capital investment. The result is low farm capital investment. Third, since land is the primary asset of a farm, the possibility of losing that asset should act as an incentive for management to avoid insolvency. Once again, if that asset is inalienable, management may find it more attractive either to enrich itself through rent seeking, or maintain worker employment while neglecting claims of creditors, actions inconsistent with long- run profit maximization. The end result is poor managerial performance, viewed from the productive use of resources, and the lack of a hard budget constraint. This is not to say that improvements in agriculture cannot come without land privatization. For instance, construction of better commercial infrastructure, storage facilities, better roads, and market information systems, as well as improvements in downstream food industries, could improve agricultural performance. However, the lack of functioning land markets in the NIS/B countries, except for Armenia and Georgia, limits the ability to improve the productivity of resource use, because land is unable to perform the functions mentioned above. For this reason crop yields are lower than they could be, investment is low, and management does not face the market pressures that it would if unpaid creditors could seize farm assets. Because farming on former state and collective farms is unproductive and unprofitable, private agriculture in the NIS/B countries has increased its share of total agricultural output in the past few years. According to official statistics, private plots and private farms constitute virtually the only financially viable part of farming. We expect this trend to continue, because of the limitations on productivity that lack of land markets engenders. Armenia and Georgia: Macroeconomic Reforms and Privatized Agriculture Armenia and Georgia stand out as the countries with the most reformed agriculture in this study. These are the only countries that have introduced both macroeconomic reforms (price deregulation and liberalization of domestic and foreign trade) and have effectively privatized agriculture. The combination of price liberalization and privatization of agriculture is responsible for the best record of growth in NIS/B agriculture. Armenian agricultural production has grown for 4 consecutive years, while Georgia's agricultural production has risen for 2 years. The livestock sectors in Armenia and Georgia turned around in 1994 and 1995, and have been expanding since. This growth is remarkable given the continued decline of the sector in most of the other NIS/B countries, and suggests that, despite great difficulties (such as absence of financing and poor land quality), private farms can be financially viable, even when former state and collective farms perform poorly. In Armenia, agricultural and consumer prices were deregulated in 1992. State commodity procurement was ended in 1995. Subsidies to agriculture, except for irrigation, have been substantially discontinued. In Georgia, state orders were eliminated in 1995, and agricultural prices are market-determined, though some retail price controls exist for bread and milk. External trade liberalization of agricultural markets has lagged behind liberalization of domestic markets. In Armenia, the export of grain and grain products is prohibited, and there are minimum export prices. Moreover, imports of food products from outside the NIS region cannot exceed 50 percent of total consumption. In Georgia, the export of meat, meat products, dairy products, grain and grain products, sugar, and mixed feed is prohibited. There is a 12-percent uniform duty on extra-NIS imports. The two Caucasus countries have seen the most thorough, rapid, and comprehensive land privatizations in the NIS/B area. Armenian agriculture was decollectivized in 1991, and now all but 20 percent of arable land has been distributed to private farms. In Georgia, private farms hold only 49 percent of cultivated land. However, the rest of land held by collective and state farms lies virtually unused, because those farms have essentially ceased production. The typical farm size in Armenia and Georgia is about 1.5 and 0.75 hectares, respectively. These are essentially enlarged private plots. They are predominantly mixed farms, producing corn, vegetables, fruits, and grapes, as well as milk, meat, and eggs. Crop yields on private farms in Armenia and Georgia have been, on the whole, comparable to historical yields on former state and collective farms (table 1). Livestock productivity indicators on private plots have always been better than those on state and collective farms, and, despite their small size, farms in Armenia and Georgia are not aimed at self-sufficiency. These farms tend to market 30 to 40 percent of their main products, mostly directly to consumers. Baltic Countries: Macroeconomic Reforms, Slower Land Reform The Baltic countries have liberalized prices, eliminated consumer subsidies, and liberalized domestic and foreign trade. These changes have caused the restructuring of agricultural production. However, land reform in the Baltic countries has proceeded more slowly than in Armenia and Georgia. Thus, agricultural production continues to shrink in these countries (except Lithuania, where there are support prices for agricultural products). Prices in Estonian agricultural markets are freely determined. There are no government price supports or government procurement. In Latvia, agricultural prices are freely determined and there is no government procurement. However, there exist minimum guaranteed prices (close to market prices) for a small quantity of grain for government purchase for state reserves. Liberalization of agricultural markets in Lithuania is least complete of the Baltic countries. The Lithuanian government has introduced a system of minimum prices for a number of livestock products and crops. The government purchases meat and butter to maintain these prices. In addition, there are direct subsidies for a specified quantity of agricultural commodities. Estonia currently has the most liberal trade policies in the NIS/B region with neither non-tariff nor tariff barriers on agricultural imports. Import of agricultural products into Latvia faces an average tariff of 40 percent ad valorem. Import tariffs for butter and cheese can be as high as 55 percent. Licenses are required to import or export grain. Lithuania continued to have a temporary export ban on wheat and flour in 1996. Moreover, food exports face high tariffs of up to 60 percent. Import tariffs range from 10 to 30 percent, although the government agreed with the IMF to reduce these in 1997. Macroeconomic reforms have been particularly effective in restructuring Baltic agricultural output away from livestock products. In the Soviet period, the Baltic countries produced considerable quantities of livestock products in large complexes. Many livestock products were then exported to other NIS/B areas. The large complexes depended upon huge quantities of subsidized grain and meal imports from the Soviet Union in the 1970s-80s. After independence, agriculture's share of GDP has shrunk substantially, with livestock production falling faster than crop production. In Estonia, production agriculture as a portion of GDP has dropped from 17.8 percent in 1989 to 6 percent in 1996. In 1996, meat production in Estonia was 32 percent of its level in 1989. In Latvia, the portion of livestock production in total agricultural production (in current prices) fell from 66 percent in 1990 to 55 percent in 1995. This trend has been arrested in Lithuania in 1996, where agricultural production rose 15 percent. This is due to the introduction of support prices for agricultural commodities in 1995-96, as well as to the fact that crop production in that country is more concentrated in grains, compared to Estonia and Latvia. Grain production increased markedly in all three Baltic countries in 1996, mostly due to weather-related yield increases. In matters of land reform, the Baltic countries have progressed further than other countries of the region, except for Armenia and Georgia. State and collective farms in the Baltic countries have been transformed into joint stock companies, and painstaking efforts have been made to restitute land to its pre-Soviet period owners. Farms in the Baltic countries are considerably larger than in the Caucasus. The average size of a private farm in Estonia and Latvia is 23.1 and 20 hectares, respectively. These farms produce primarily livestock products, wheat, and barley. Lithuania lags behind the other Baltic countries in matters related to privatization of agricultural land. In 1996, the Lithuanian parliament suspended the enabling legislation for restitution. Yields on private farms are comparable to those on former state or collective for crops, but rather better for livestock products. Table 2 shows the share of agricultural output (by commodity) which is produced on either private farms or on private plots. Tables 3 and 4 show that, except in sugarbeets, crop yields on private farms and private plots in the Baltic countries are generally comparable to those on former collective and state farms. A comparison of milk yields in Estonia shows the better results that are obtained from cows in private plots, versus those on state farms and joint stock companies. Similar results can be expected for meat yields. Uzbekistan, Turkmenistan and Belarus: Lagging Macroeconomic and Land Reforms The agricultural economies of Uzbekistan, Turkmenistan, and Belarus stand out as the region's least reformed. Both domestic and foreign trade remain largely unreformed in these countries. Moreover, economic restructuring of collective and state farms, as well as agricultural privatization, remain relatively undone. For instance, overall agricultural production in Turkmenistan and Uzbekistan has declined since 1991, as expected, but crop production has fallen faster than livestock production. Moreover, agricultural output in these countries has not fallen as much as in, for instance, Russia or Ukraine, largely due to lack of reform. Internal markets for agricultural commodities are considerably less free in Uzbekistan, Turkmenistan, and Belarus, than, for instance, in Russia. These countries have essentially preserved the Soviet system of state procurement for agricultural commodities, though procurement prices have risen lately. For instance, in Belarus, recommended procurement prices are based on costs of production estimates, and nearly the entire marketed grain crop is procured by the state. In Uzbekistan and Turkmenistan, nearly all marketed grain and cotton are procured at less than free market prices. The trade regimes in Belarus, Uzbekistan, and Turkmenistan have changed least of all the NIS/B countries from Soviet times. In Belarus, there are export quotas for many crops, particularly grains and rapeseed, as well as minimum export prices for many products. A customs union with Russia abolished border controls with Russia, but import tariffs for non-NIS agricultural commodities were raised to correspond to Russian levels. In Belarus, Turkmenistan, and Uzbekistan agricultural land also remains the least reformed in all the NIS/B region. There are few private farms, though subsidiary plots exist, as they did in the Soviet period. In Turkmenistan and Uzbekistan, private farms occupied a mere 1.5 and 2 percent of total agricultural land at the beginning of 1996. Most importantly, a consistent legal framework for the transformation of state and collective farms into joint-stock companies does not yet exist. Since 1991, agricultural production in Belarus has declined 21 percent, less than in most other NIS/B countries. This is because Belarus has managed to maintain many of the Soviet era producer subsidies for former state and collective farms, as well as the procurement system. On the other hand, Belarus agriculture has followed the pattern of decline observed in other NIS/B countries. Meat and milk production there have declined considerably faster than crop production, by 40 and 30 percent, respectively. Turkmenistan, Uzbekistan, and Belarus have followed another pattern of agricultural restructuring seen in the other NIS/B states. The share of livestock and crop production traditionally raised on private plots (such as meat, milk, wool, fruits, vegetables, and potatoes) has increased since 1991, although the principal field crops have remained on former state and collective farms. Russia, Ukraine, Moldova: Macroeconomic Reforms, Paralyzed Land Reform The majority of NIS/B countries lie somewhere in the middle between the nearly exclusively private agriculture of Armenia and Georgia and the nearly unreformed state agriculture of Uzbekistan and Turkmenistan. With the exception of Tajikistan, which continues to suffer from political and military turmoil and is not considered here, the countries of the middle have reduced inflation to double digits, liberalized domestic and foreign trade, begun restructuring former state and collective farms, and allowed the expansion of private agriculture. Macroeconomic reforms have restructured Russian, Ukrainian, and Moldovan agricultural production, just as they have in the other countries of the NIS/B region. Price liberalization and liberalization of domestic and foreign trade in Russia, Ukraine, and Moldova have resulted in a diminution of the share of agricultural output from livestock products since 1991. For example, in Russia, the portion of livestock output in total agricultural production (in current prices) fell from 63 percent in 1990 to 48 percent in 1995. However, genuine farm restructuring and land reform, leading to financially viable farms, has eluded these nations. The majority of former state and collective farms are loss makers and yet they are not liquidated by their creditors. Domestic commodity market liberalization in Russia, Ukraine, and Moldova has been substantial, though not as thorough as in Estonia or the Caucasus. Table 5 shows the share of commodities marketed to state procurement organizations. In Russia, while agricultural commodity prices are freely determined, local and federal procurement still exists for a limited number of crops, usually at market prices. Moreover, local governments often block export of commodities until local procurement quotas have been fulfilled. Federal and local subsidies continue to exist for livestock products, fertilizer, fuel, electricity, farm machinery and some crops. However, the size of these subsidies (as a portion of GDP) has diminished considerably in the past 3 years. In Ukraine, fixed producer prices were eliminated in 1994. Local and federal commodity procurement still exist, though state purchases are supposed to be made on commodity exchanges and by tender. However, the state exerts a great deal of control over the prices of the limited quantity of grain marketed through exchanges. Moreover, in the past few years the state has banned grain exports (to keep procurement prices low) either formally or informally. In Moldova, most producer prices were liberalized in 1993-95. However, government intervention remains strong in the markets for grain, milk, and bread. State grain procurement was reintroduced in 1996, though the grain procurement price is set near the market level. The state controls bread milling and baking margins, so that bread prices are regulated. Milk procurement prices are kept low by informal price controls, and retail milk prices are thereby kept low. In return, dairy farms receive subsidies for milk production in the form of tax reductions. Agricultural producers receive input subsidies through energy tariff reductions and input supply schemes. Ukraine has relatively liberal trade policies for agricultural commodities. Agricultural export quotas have been removed, though grain exports were informally prohibited in 1996. There is currently no licensing of agricultural imports, import tariffs average 15 percent, and there is a VAT on imports. Russian trade policies for agricultural commodities are relatively liberal as well. There are currently no significant non-tariff barriers to imports or exports of agricultural products. Import tariffs on foods range from 0 to 30 percent (for poultry), and there are no federal export tariffs on agricultural commodities. Import tariffs for alcoholic beverages are much higher. In Moldova, exports of agricultural products require registration, and are subject to minimum prices. Grain exports are restricted to government-controlled organizations. Food imports from outside the NIS/B region face tariffs of 10 to 50 percent. Grain and fertilizer are imported by the government, which distributes them. Farming in Moldova, Russia, and Ukraine is still predominantly on former state and collective farms (collectively owned as joint stock companies). In Moldova, private farms and household plots occupied only 18 percent of agricultural land in 1996. In Ukraine, private farms comprise a mere 2 percent of total agricultural land. Private subsidiary plots occupy another 16 percent of agricultural land. In these countries the legal structure for land privatization has been enacted, and former state and collective farms have been transformed into joint-stock companies. Private plots have been allowed to expand, and now account for an even larger portion of the crops and livestock products that have been raised there traditionally. For instance, in Russia, 96 percent of potatoes, 89 percent of vegetables, 55 percent of pork, and 45 percent of beef are now produced either on private plots or farms (see annex). However, land reform is immobilized. The number and area of private farms have stopped growing in Russia, largely because land earmarked for private farms has been distributed, and any further land must come from former state and collective farms. Three quarters of former collective and state farms in Russia are unprofitable (many of those hopelessly in debt), yet bankruptcy proceedings are generally not used to distribute farm assets and land to creditors. Instead, nearly every year the Russian government forgives or reschedules loans to these farms. The Results of Macroeconomic Reform Without Land Markets Macroeconomic policy changes have caused economic restructuring, the primary reform affecting agriculture in the NIS/B countries. Changes in specifically agricultural policies, such as land reform, seem to have been peripheral to this structural change. The decline of the livestock sector has occurred in countries with such diverse agriculture as Belarus (still dominated by state and collective farms) and Armenia (with completely private farming). The lack of land reform in the NIS/B countries limits potential improvements to the productivity of resource use. Lack of land markets does not allow land to perform three functions fundamental to productive use of resources in agriculture. First, by assigning a positive price to land, markets curtail its wasteful overuse. Second, markets allow land to be used as collateral for investment loans; their lack limits investment in agriculture. Third, markets for land and provisions for bankruptcy provide an incentive to management to avoid insolvency. Without this credible threat, management may find it more in its interest to pursue private enrichment or maintain employment, neither of which is consistent with the long term productive use of resources. NIS/B Farm Sector Continues Adjustment to Market Forces; U.S. Agricultural Exports to Region Post Recovery After 5 years of market reforms, NIS/B grain production now appears to be stabilizing, and the region is no longer a significant destination for grain exporters. The United States, having adjusted to the collapse in grain sales to the region, has now positioned itself as the NIS/B region's largest meat supplier. [C. Foster--Coordinator, O.Liefert--Livestock, J. Mitchell--Grains and Trade, R. Hoskin--Other Crops] U.S. Agricultural Exports Adjust to Region's Restructuring U.S. agricultural exports to the NIS/B region are forecast to rise over 10 percent from fiscal 1996 (October/September) to fiscal 1997, to just under $2 billion. While a marked recovery from the fiscal 1995 low of $1.2 billion, export value is still well below the 1989 peak when sales totaled more than $3 billion (table 6). U.S. fiscal 1997 agricultural exports to the region are expected to rise for the second year after a sharp downturn that followed the breakup of the USSR and the region's introduction of economic reforms. The increase in U.S. farm sales has, however, been far outstripped by dramatic growth in non-agricultural exports, such as machinery and transport equipment (figure 1). U.S. agricultural exports, which made up over 80 percent of total U.S. exports to the region throughout the 1980's, now account for about a third of total sales. Poultry meat, the single largest U.S. export to the region (farm and non-farm exports included), accounting for more than one-half of total agricultural exports, has fueled this growth. The value of U.S. poultry meat shipments to the NIS/B countries almost doubled from fiscal 1995 to fiscal 1996, to nearly $1.0 billion, with Russia absorbing more than 85 percent. Other than the dramatic rise in meat exports to the NIS/B region, U.S. sales of consumer-ready products such as fresh and processed fruits and vegetables, nuts, and beverages have shown the most growth since the introduction of market reforms. LIVESTOCK OUTLOOK Meat To Remain Region's Primary Import As Russia and the other NIS/B countries have moved from centrally planned to market-driven economies, direct meat imports have replaced the massive imports of grain that supplied an overexpanded, inefficient, and highly subsidized livestock sector. In 1996 extra-NIS/B meat imports to the region reached 2 million tons, roughly half of them poultry. Russia accounts for about 95 percent of extra-NIS/B meat imports. Extra-NIS/B meat imports have risen about five times from 1992 imports, while intra-NIS/B meat trade has decreased, as producers are less able to compete with foreign suppliers. Until NIS/B producers are able to compete with exporting countries, in both price/cost and quality, the NIS/B region is likely to remain one of the world's largest meat importing areas. Uncompetitiveness, resulting from high domestic production and marketing costs, and a steep decline in consumers' real income, have been mainly responsible for the severe downsizing of the NIS/B's livestock sector. In 1996, aggregate NIS/B animal inventories and meat production were both down for the seventh straight year. Since 1991, total NIS/B cattle inventories have decreased 34 percent (with cows down 16 percent), hogs 47 percent, and poultry 45 percent (see annex). Due to reduced inventories and a decline in animal productivity (output per animal), meat production dropped sharply in all NIS/B states. Since 1991, total meat (beef, pork, and poultry) output has dropped almost 45 percent (see annex). Poultry meat production has declined the most at 60 percent, followed by pork at almost 50 percent, and beef at nearly 40 percent. Though the livestock sector in the NIS/B region as a whole is still contracting, the outlook for the sector varies widely among countries. Major Livestock Producers Have Not Hit Bottom Yet In Russia and Ukraine, livestock producers' terms of trade started to improve in 1994 and 1995 and are likely beginning to stabilize (figures 2, 3). However, as state-controlled energy and fuel prices are further raised toward world market prices, some additional changes in the price-cost squeeze may occur. There are also some indications that both feed productivity (feed conversion rates--the amount of feed used per kilogram of animal weight gain) and animal productivity in Russia and Ukraine are stabilizing and starting to improve in some cases (figure 4). With relative prices no longer moving against them, producers will not be compelled to continue to substitute inferior, though less expensive, feeds for the higher quality but more expensive types, thereby helping to stabilize animal productivity. Significant efficiency growth in the animal sector, however, will likely require more substantial institutional reforms within the agricultural and food economy to strengthen incentives for former state and collective farms to use inputs more efficiently and lower costs. Given the political conservatism of the agricultural establishment in Russia and other NIS countries, major structural reforms are not likely in the foreseeable future. Begin Box 1 Meat Producers Bypass Processors Inefficiencies in the region's meat processing industry are a major factor contributing to the uncompetitiveness of NIS/B meat products. Relative to its high production costs, the industry has added little quality and economic value to its output (as measured by consumers' desire for the final product). The processing sector's output has been inferior to that of many imports in terms of packaging and appearance, shelf-life, and ease of preparation. Since reform began, the percent decline in output of the meat processing industry has been about twice the percent drop in both primary production and consumption of meat products. Since 1991, aggregate NIS/B output of processed meat products has fallen nearly 75 percent (table 7). In the Caucasus countries, the industry has almost ceased operations, with output down nearly 95 percent. The smallest decline in processed meat output in the region has been in Russia and Belarus (around 65 percent). One way processors have responded to growing foreign competition has been to lower the prices paid to domestic producers of primary output. Given the lower prices offered by the processing sector, along with delays in payment, livestock producers are increasingly marketing or bartering meat directly to consumers. In Kazakstan, Kyrgyzstan, Moldova, Armenia, Georgia, and Azerbaijan, the share of meat either sold in farmers' markets or bartered now exceeds 70 percent of total marketed production. In Russia, the share rose from 30 percent in 1994 to 44 percent in 1996, while the share in Belarus in 1996 was 38 percent, the lowest among the NIS/B countries. The direct marketing of output from producers to consumers is evidence of market reforms, as producers find alternative marketing channels in place of selling output solely to former state processing enterprises, as was required during the Soviet period. On the other hand, a livestock economy in which the bulk of meat output does not pass through a processing industry will never be technologically and commercially developed. The perishability of meat limits the amount of unprocessed product that can be marketed directly to consumers. Small processing enterprises have recently emerged to meet this need, generally producing higher quality output than the large processing plants. Although small processors face high production costs and therefore charge higher prices for their output, they usually serve small rural markets, and do not face as much competition from imports. An increase in the number of small-scale processors could expand the amount of meat processed and marketed, competing with the large-scale former state processing industry. In the face of declining purchases from domestic producers, large Russian processors have turned to imports of unprocessed product to fill their processing capacity (currently less than 50 percent in use). Not only is imported meat often less expensive (when all transaction costs are accounted for), but imports are generally more reliable in terms of delivery and uniformity. Since 1992, Russian imports of beef and pork, used mainly for processing, have increased by roughly 150 percent. [Olga Liefert] End Box 1 Several factors may lessen, although not halt, the contraction of Russia's livestock sector in 1997. An increased 1996 Russian grain harvest, and an anticipated 1997 crop of similar size, should contribute to stable feed costs. Larger reported forage supplies per animal head going into the year should also benefit producers. Additionally, the growing pressure of competition and other market forces should further motivate producers to increase efficiency. In Ukraine, meat output in 1997 could contract more than in 1996, as producers face high feed prices caused by 1996's near record-low grain crop, while consumers' real per capita income continues to fall, trailing the decrease in GDP. Although Kazakstan's livestock sector could benefit somewhat from the 15-percent increase in 1996 grain output, animal inventories are likely to decline further due to low profitability of livestock farms and falling demand. Limited Gains in Productivity Point to Continued Imports Foreign meat suppliers, particularly of poultry meat, are unlikely to lose their market share even as economic recovery begins in the region. In 1996, real income in Russia grew 2 percent, despite an official decrease in GDP of 6 percent. Forecasts show that real GDP could stop falling in the next 1-2 years, and by 2000 the Russian economy could be annually growing in real terms by 3-4 percent, further boosting real incomes. (Ukraine and Kazakstan tend to follow Russia in terms of macroeconomic performance with a few years delay.) As demand for meat is fairly sensitive to changes in income, real income growth should disproportionately stimulate demand for meat relative to other foods. However, Russia has been uncompetitive in meat production vis-a-vis the world market in terms of both price and quality. The most uncompetitive meat has been poultry, which has led to surging imports (figures 5, 6, 7). After poultry, domestically produced pork has increasingly become less competitive vis-a-vis imports. Higher prices for domestic meat products result from lower productivity and much higher transaction costs due to poorly developed processing and marketing infrastructure. Quality differences primarily involve the inferior packaging, shelf-life, and ease of preparation of domestically produced meat products. While Russian meat consumption has fallen substantially since reform began due to falling real incomes, meat imports have increased, not only as a share of total Russian meat consumption, but also in absolute volume (figure 8). From 1992 to 1996, total Russian meat imports have more than tripled, while their share in domestic meat consumption is estimated to have increased from about 8 to 35 percent (reaching more than 50 percent for poultry) (figures 9, 10). When consumer demand for livestock products increases due to rising incomes, projected growth in domestic meat production probably will still be insufficient to meet total demand, resulting in steady meat imports. One development that may improve the price competitiveness of Russian meat production in 1997 is that the ruble at the end of 1996 had stopped appreciating in real terms vis-a-vis Western currencies, mainly because the inflation rate has fallen substantially, to only 20 percent in 1996. In most other NIS/B countries currencies continue to appreciate in real terms, but to a diminishing degree, thereby reducing the effect of exchange rate movements on the relative prices between imports and domestic output. Russia's near- to medium-term meat imports from extra-NIS/B sources are projected to remain around 2 million tons. At least half of these imports are forecast to be poultry, with the bulk (around 80 percent) coming from the United States (table 8). The European Union (EU), which held a nearly 20-percent share of the poultry market in 1996, continues to slowly increase its position. The EU dominates Russian extra-NIS/B imports of beef (more than 80 percent in 1995 and 1996), while China's share rose to about 10 percent in 1996. China is the primary pork exporter to Russia, accounting for nearly half of extra-NIS/B supplies, with Eastern Europe in second place with about a quarter of the market. Begin Box 2 Market Forces Alter Marketing Bill for Meat Market reforms in the NIS/B region have caused a significant shift in the meat marketing bill (the share of the retail price for meats received by processors, wholesalers, retailers). The primary producers' share of the retail meat price has fallen, while the share held by downstream enterprises (processors, etc.) has risen. In response, primary producers have argued that downstream enterprises act as monopsonies, using their market power to obtain a higher share of the total return from production and distribution within the food economy, while farmers receive a less than fair share. During the Soviet period, downstream activities in the food economy were undervalued. Prices were centrally determined and reflected the belief that only primary production added substantial value to goods. Since trade and distribution do not involve "physical production," it was believed that their contribution to the creation of value was marginal. As a result, farms received a disproportional share (estimated at about 80 percent) of the retail price of food products in aggregate, compared to about 25 percent in the United States. Downstream activities received such a low share in the retail price that they could only function with large state subsidies, which increased their real share of the total income generated within the food economy. Market reforms have changed the distribution of revenue earned within the food economy, such that it better reflects the contribution of various activities to their real value added. In 1995 the farmers' share of retail meat prices had fallen to about 50-60 percent, but it remained much higher than the 35 percent received by meat producers in the United States. Market reform changed not only the distribution of revenue based on real value added, but also the nature of the real value added. In responding to market incentives, the underdeveloped processing and, especially, trade sectors have begun gradually to improve the range and quality of their activities, in areas such as packaging, product variety, advertising, marketing, and customer service. The share of these operations in the retail price has risen. Throughout the world the meat processing industry has tended to be highly concentrated, which gives individual processors potential market power. Market economies deal with this problem mainly through anti-trust legislation and free trade, which creates competition for domestic producers. During the early reform years, NIS/B processors, which during the Soviet period were state monopolies, likely had a significant amount of market power (particularly at the local level) and used it to their advantage at the expense of farms. Market reform, however, is increasing competition for processors, because of an increase in the number of domestic smaller-scale processing enterprises and growing foreign trade. Current data appear to indicate that Russian processing enterprises do not necessarily wield excessive market power. For example, the share of processing in the retail meat price is still below that in many market countries. Moreover, it is retailers', not the processors', share in the Russian marketing bill that is increasing (figure 11). The continuation of market reforms in the NIS/B region is likely to further reduce the share of primary meat producers in revenue generated by the food economy, as distribution comes to better reflect real value added. [Olga Liefert] End Box 2 During the Soviet period, about 40 percent of Russia's meat imports came from other parts of the USSR--that is, from what are now other NIS/B countries. However, by 1996 these nations were supplying only 15 percent of Russia's meat imports. In 1996, meat exports by both Kazakstan and Belarus to Russia fell 45 percent from the previous year, while those of Ukraine stayed flat. These countries are losing market share in Russia to extra-NIS/B suppliers for the same reasons that Russian domestic producers are losing market share. While not currently likely, increased protectionism in the future could alter the outlook for meat exports to the region. Russia currently levies import duties of 15 percent on red meats and 30 percent on poultry (minimum per unit tariffs on meat are also administered), but there are no federal quotas or other federal quantitative controls on meat imports. While pressure by domestic producers to raise trade barriers remains strong, significantly higher protectionism is not expected. The largest consumers of imported meat, the politically powerful cities of Moscow and St. Petersburg, remain opposed to import restrictions. Another restraint on protectionist pressure is Russia's interest in joining the World Trade Organization. It is also possible that the newly formed (April 1997) reformist government in Russia will not be as willing to protect agriculture from import competition, realizing that protection reduces domestic industry's incentives to improve efficiency and quality of production. Caucasus Countries Begin Recovery Foreign trade in meat in the Caucasus republics of Georgia, Armenia, and Azerbaijan is comparatively modest, relative to even these countries' small size. Net meat imports from beyond the region are about 25,000-35,000 tons (compared to total domestic output of 250,000 tons). Trade in meat between these nations is also low. For the second straight year, the three Caucasus countries, and especially Armenia and Georgia, showed growth in GDP and agriculture, in particular the livestock sector. During 1991-94 the countries were in political and ethnic turmoil, such that GDP in Georgia fell 75 percent, and in Armenia and Azerbaijan about 60 percent. Agricultural output fell less, though still 50 percent, in Georgia. The main reasons why the economic indicators are improving for these countries are the return to relative political and social stability and implementation of major economic reforms, such as large-scale privatization of agriculture. To a much greater degree than in the large meat producing NIS/B countries, the livestock sectors in Georgia and Armenia have been dominated by private production (mainly cattle and sheep) for both subsistence needs and direct marketing of livestock products. Even before the collapse of the former Soviet Union, a large share of livestock in these countries was slaughtered and consumed on farms, or marketed/bartered directly, rather than sold to processors. Currently, nearly all output bypasses large-scale processing, and is marketed/bartered either unprocessed, or is processed at local small enterprises and then sold directly to consumers. Mainly for this reason, privatization and related restructuring in the sector have been implemented without major disruptions to production (except for the hog industry, where the bulk of inventories was held in big state-owned complexes). The contraction of the livestock sector in these countries has bottomed out ahead of other NIS/B states. In 1997 meat output is forecast to grow around 20 percent in Georgia, and 5-10 percent in Azerbaijan and Armenia. Poultry production in these countries has by now become almost exclusively concentrated in the private sector, and is rebounding. Least Reformist Countries Put Off Inevitable After Russia, Uzbekistan and Turkmenistan are the biggest meat importers in the NIS/B region. In 1996, imports accounted for 10 percent of meat consumption in Uzbekistan, and about 30 percent in Turkmenistan. Except for their hog sectors, which prior to the breakup of the USSR were dependent on subsidized feed from other NIS countries, these two countries have experienced very little downsizing of their livestock sectors. In fact, since 1991, cattle inventories in the two republics have increased. By not pursuing significant market reforms, these countries have shielded the livestock sector (as well as the rest of the economy) from both the demand and supply side shocks (mainly falling consumer demand, worsening terms of trade from price liberalization, and exposure to foreign competition) that have caused restructuring in the more reformist NIS/B countries. Given little likelihood that the pace of reforms will pick up in these countries in the near term, significant changes in inventories or output are not expected. Belarus, one of the major livestock producers and exporters among the NIS/B countries, follows a pattern similar to that of Turkmenistan and Uzbekistan. Belarus' GDP, agricultural production, and livestock output have all contracted less than that of Russia, Ukraine, Kazakstan, Moldova, and the Baltics. One reason is that Belarus has resisted introducing market reforms, choosing instead to maintain price controls, support to agriculture, and delivery quotas. However, Belarus' livestock sector has contracted more than that in Uzbekistan and Turkmenistan, as its meat production was geared to exports to Russia, where it is no longer as competitive. GRAIN OUTLOOK NIS/B Grain Output Stabilizing; Grain Imports To Remain Marginal While centrally planned, non-market policies helped make the NIS/B region a major world grain importer in the 1970s and 1980s, market-oriented reforms in the 1990s have reduced these imports to record low levels. Reduction in policy and physical infrastructure barriers in the coming decade could boost grain exports, keeping regional net grain imports at less than 5 million tons per year. Production, which may have stabilized after declining sharply during the adjustment to market price reforms of the mid-1990s, is expected to recover only gradually. Even slower recovery in use, which continues to contract owing to weak demand from a downsizing livestock sector, will likely restrain growth in regional grain imports in coming years, keeping them at just a fraction of the more than 30 million tons imported by the USSR annually during the 1980s. Net grain imports by the NIS/B countries are estimated down from about 5.5 million tons in 1995/96 (July/June) to below 4 million tons in 1996/97, and are unlikely to change significantly in 1997/98 (table 9). Net wheat imports from the world market fell to a record low of under 3 million tons estimated for 1996/97 in the wake of a strong Russian harvest and higher wheat production in most other countries as well. A large estimated increase in Ukrainian wheat area in 1997, as well as relative prices that continue to favor wheat over coarse grains, should keep the NIS/B region's net wheat imports at 3 million tons or less in 1997/98. Net coarse grain imports, which have averaged less than 1 million tons over the past 3 years, are unlikely to change significantly in 1997/98 given continued contraction of the livestock sector. In the grain-deficit countries of the Caucasus and Central Asia, import demand (most of which is satisfied by wheat purchases outside the NIS/B region) is likely to remain stable in 1997/98 at around 1.5 and 3 million tons, respectively. Commercial imports, which have become cheaper since prices eased in late 1996, will likely replace at least part of the reduction in planned 1997/98 food assistance to the NIS/B region. U.S. wheat exports to the NIS/B region, which have found niches in the Uzbek and Russian Far Eastern markets, increased from about 0.7 million tons in 1994/95 to around 0.9 million in 1995/96. After losing a very large but volatile former Soviet market following the breakup of the Soviet Union and the 1992 introduction of reforms, U.S. feed grain producers are indirectly recovering some of their sales through large U.S. meat exports. An estimated 2 million tons of U.S. corn is being "exported" to Russia annually in the form of poultry and pork shipments to that country. Continued Russian demand for U.S. poultry meat should keep these indirect grain imports steady in the near to medium term. Gradual recovery of the region's livestock sector could lead to increased corn imports, but with no return to the high levels typical of the 1970s and 1980s. While the NIS/B region is likely to remain a modest net grain importer in the foreseeable future, reduced policy barriers to free grain flows and investment in transport and infrastructure to lower grain marketing costs could boost future NIS/B grain exports. Grain exports outside the region, negligible during the Soviet era, averaged nearly 1 million tons annually between 1994/95 and 1996/97. These exports consisted mainly of feed grains (wheat and barley) sold by Russia and Ukraine to Europe and the Middle East, though Kazakstan exported food wheat to Afghanistan. NIS grain exports are primarily driven by higher prices on the world market, since average farmgate wheat prices in Russia, Ukraine, and Kazakstan were estimated in late 1996 to be 30-40 percent below the U.S. f.o.b. Gulf price (figure 12). Even with existing infrastructural and policy barriers to exporting grains, NIS feed grains have proven competitive in certain markets in recent years. Another factor is the sharp contraction of state grain purchases allowing emerging private traders to earn higher profits from exporting grain (see annex). These factors are expected to raise NIS grain exports outside the region, though exports are unlikely to total more than 1-2 million tons in 1997/98. Even though further price liberalization will likely raise internal NIS grain prices closer to world levels, grain exports outside the region have prospects for growth in the long term for several reasons. First, official policies that currently discourage exports, ranging from the Ukrainian ban on grain exports following the 1995 and 1996 harvests to Russian regional controls on grain movement and the Kazak government's grain export registration requirement, are likely to diminish as these countries seek WTO membership and liberalize their trade regimes. Second, investment in improved transport and other infrastructure would make NIS/B grain more competitive on world markets by reducing marketing costs from their current high levels. Third, NIS/B farmers, increasingly responsive to international price signals, are switching production to wheat and other grains that are more heavily traded on the world market, and away from less-traded grains such as oats. Ukraine has the greatest potential to become a significant future exporter, with wheat and corn sales to extra-NIS/B markets possibly reaching several million tons annually in the medium to long term. Kazakstan could benefit from strong demand for wheat in countries such as China, Afghanistan, Iran and Iraq. In years of favorable harvests, Russia might become a swing supplier of coarse grains such as barley to the Middle East and rye to Central Europe. A key factor affecting the magnitude of future NIS/B grain exports is likely to be market access. With several Central European countries, including the Baltic nations, likely to become members of the European Union in the coming decade, NIS/B grain exporters may be forced to focus on more distant markets in the Middle East, North Africa, and Asia. Existing transportation networks, concentrated on European markets, would have to be expanded to accommodate exports to markets outside Europe. Outlook for Grains Generally Improved for 1997 Higher grain prices and slower growth in input costs helped stabilize NIS/B grain output in 1996 after 3 years of steep decline. However, future output recovery is likely to depend on further reform progress, including farm restructuring and privatization of related upstream and downstream sectors. Modestly improved yields likely due to higher fertilizer use, and better overwintering and moisture conditions, could lead to a modest recovery in 1997 NIS/B grain output, after production stabilized at around 125 million tons in 1995 and 1996 (table 10). Total 1997 NIS/B grain production (including pulses, buckwheat, and miscellaneous) was forecast in May 1997 to rise 6 percent to 132 million tons, mainly due to higher Ukrainian production after last year's drought-afflicted crop. In both Ukraine and Russia, winterkill was significantly below a year earlier, as less severe frosts were accompanied by generally adequate snow cover in key regions. Significantly improved moisture conditions and a 7-percent increase in winter grain sowings could substantially boost Ukrainian grain production in 1997. In Russia, yield increases supported by higher input use, as a result of lower input costs relative to output (grain) prices, could offset moderate area contraction to keep production near last year's level. While Kazak grain yields are likely to rise in 1997 owing to better moisture conditions, further removal of unprofitable lands from cultivation will likely limit growth in grain output. Price liberalization and opening of markets have led to greater transmission of international prices to domestic NIS/B markets, though the pace of reform has been faster in Russia than in Ukraine or Kazakstan (figure 13). Following price reforms, faster growth in wheat prices relative to coarse grains has led to an increase in the share of wheat in total NIS/B grain area from 43 percent in 1993/94 to 51 percent in 1996/97, and a forecast 52 percent in 1997/98. In particular, Russian wheat and barley area were closely correlated with relative prices (figure 14). Total NIS/B grain area, which decreased more than 10 percent from 1992 to 1996 as worsening producers' terms of trade made some grain lands unprofitable to cultivate, could contract further in 1997 as additional unprofitable lands are removed from grains in Russia and Kazakstan. In Russia, more land might be taken out of production in the North, Central, Far East, and Siberian regions because grain farming is less profitable there (figure 15). NIS/B grain area is likely to stabilize in the near term at slightly below current levels, as grain use stops contracting. Although increased input use should raise NIS/B grain yields in coming years, any significant increase will likely depend on further structural reform of the grain sector. Key among these reforms will be the degree to which existing farms are privatized and restructured, since the continued dominance of collective farming in most NIS/B countries (excluding the Baltic and Caucasus nations) maintains inflexible management structures. Inflexible management fails to take advantage of opportunities to reduce costs and increase productivity through better seeds, improved cultivation techniques, new crop technologies, and other innovations. Also important is upgrading the physical infrastructure, which currently "taxes" farmers through means such as high transport costs, and creating necessary financial institutions, the absence of which denies farmers vital services such as seasonal financing for buying fertilizer and crop insurance. Finally, further privatization of both the upstream and downstream sectors is necessary if farmers are to realize their full potential as grain producers. Progress to date has involved mainly the downstream sector, where the rapid growth of small, private mills and bakeries has created competition for large, formerly state-owned enterprises, though elevators and other upstream entities are increasingly being sold to private owners. Grain Demand To Remain Low The low competitiveness of NIS/B livestock products and continued decline in meat consumption have weakened grain demand through downsizing of livestock inventories, typically the largest user of grain. Total 1997/98 grain consumption in the NIS/B region was forecast (in May 1997) to fall slightly, to 127 million tons, following nearly a 10-percent drop the previous year. Most of the decline will likely be in feed use, projected to decline to 57 million tons, while food, seed, and industrial use should stabilize or increase slightly. Demand for grain used as feed has been halved over the past 5 years as falling incomes have led to sharply lower demand for meat and other livestock products, higher prices have reduced waste, and cheaper non-grain feeds such as forage crops have been substituted for grain. Growing animal product imports, especially of meat into Russia, have further depressed demand for feed grains in recent years as countries such as the United States benefit from the inefficiency of the region's livestock sector. Food grain demand has remained fairly steady as higher per capita bread consumption, stimulated by falling average incomes, was roughly offset by reduced bread waste. While official data for some countries indicate a large increase in food grain use over the past 3-4 years, alternative household survey consumption data suggest a less dramatic rise, keeping annual regional demand at around 40 million tons annually. OUTLOOK FOR OTHER CROPS Sunflowerseed Production Responded Early to Liberalization; Now Stabilizes Already producing the most profitable field crop before reform, the Russian sunflowerseed sector responded quickly to removal of export quotas in 1994 (table 11). As prices approached world levels, Russian sunflowerseed exports nearly doubled from 1992/93 to 1994/95. By 1995 production reached a near-record 4.2 million tons. Now the period of rapid growth may be over. Exports for 1996/97 will decline to an estimated 1 million tons from 1.2 million last year. This is still a high forecast given the one-third smaller 1996 crop. Export destinations remain Western Europe, Turkey, and the Middle East. Even though world prices have fallen, the need to repay private creditors will help maintain exports this season and beyond. The entry of private capital into the oilseeds sector is one of the results of reform. Over the last two seasons, sunflowerseed production, especially in Russia, has been financed, at least partly, by both foreign and domestic private interests that have contracted for a portion of the crop before planting. The sharp rises in sunflowerseed exports in recent years are largely over because production is expected to stabilize. While the Russian government's 1997 production target for sunflowerseed is 4.3 million tons, meeting this target will require yields near 1995's highs and greater planted area. A slightly smaller crop seems more likely for the following reasons. While yields could easily recover from 1996's drought- reduced lows, they are unlikely to reach 1995 highs, which were due in part to good weather. Plantings declined in 1996 after rising strongly in 1994 and 1995. The reason area rose initially was that sunflowerseed profitability soared both absolutely and relative to grain in those years (figure 16). By 1996, sunflowerseed profitability fell both absolutely and relative to grain. This change helped shift producer interest to grain in 1996 and 1997, especially after 1996's severe weather and a drop in international sunflowerseed prices. These same price fundamentals also apply in Ukraine where, as in Russia, sunflowerseed production is a major hard currency earner. Because pricing fundamentals are now affecting production, import, and export decisions in NIS/B countries, world oilseed prices are more likely to be affected by supply and demand in the region. A factor contributing to planting decisions in the recent past is that high profits for sunflowerseeds had prompted producers to plant successive crops more frequently than good rotational practice recommends. Higher profits in the grain sector, could encourage a return to better rotational practices and would limit expansion in sunflower area by reducing successively planted sunflowerseed crops. In the longer term, projections are for sunflowerseed planted area in both Russia and Ukraine to hold near current levels, but yields could climb slightly as outside financing provides working capital to purchase hybrid seed, chemicals, and fertilizer. Higher real domestic prices for vegetable oil in Russia and Ukraine both this season and last are limiting consumption growth and consequently vegetable oil imports. Russia's 1996/97 sunflowerseed oil imports were projected (in May 1997) at 100,000 tons, down from 1995/96's 277,000-ton peak, the highest since 1989/90. Another factor restraining imports is the quantities of sunflowerseed not being crushed but listed as "other use" (see annex). Much of this represents payment-in-kind for wages or other goods and services. Sunflowerseeds entering this channel are in all likelihood crushed privately and the products sold in the private and informal markets that have arisen since reform began. These markets are likely satisfying an increasing proportion of domestic demand and competing with imported oil. That Russia is an exporter of sunflowerseeds and an importer of sunflowerseed oil implies that the country is an importer of processor services. The nominally privatized state sector is still beset with overstaffing and high overhead costs, making it uncompetitive with either the informal private domestic market or foreign processors. The pace of development in the private processing sector will determine NIS/B sunflowerseed exports and vegetable oil imports over the longer run. Sugarbeet Profits Trail Those of Other Crops Russia and Ukraine together account for 90 percent of NIS/B sugar production and more than 75 percent of NIS/B sugar consumption (see annex). Russia has traditionally been an importer of both raw and refined sugar and Ukraine an exporter. Since 1991/92, the last year before reform, Russia's total sugar imports have declined from 3.9 million tons to a projected 3.0 million in 1997/98, which still represents 60 percent of total consumption. While these changes would seem modest in light of the dramatic changes observed in Russian consumption of other foodstuffs, there have been substantial changes in NIS/B sugar trade. Both consumption and production have declined in both countries since reform. Russia now imports more raw sugar from Cuba and elsewhere and refines it domestically. Before reform, Russian refined imports came almost exclusively from other Soviet republics, mostly Ukraine. Since reform, a rising proportion of refined imports come from extra-NIS sources, mainly Brazil and Western Europe. It is becoming apparent that per capita consumption of sugar in Russia and Ukraine has stabilized at a new lower post-reform level. The 1997/98 sugar consumption projections for Russia and Ukraine are 5 million and 2.1 million tons, respectively, both down nearly 1 million tons from 1991/92, but virtually unchanged from last year. Total NIS/B sugar consumption for 1997/98 is projected at 9.5 million tons, down from 12.6 million in pre- reform 1991/92. While higher real prices and falling real incomes contributed to previous drops, changes in consumer behavior have also made it unlikely that consumption will ever return to pre-reform levels, despite expected modest rises in income. Less home production of alcoholic beverages and hoarding, and increased imports of confections, have been the basis of change. Longer term forecasts suggest that consumption in Russia and Ukraine could rise 8 to 10 percent by 2005. Domestically, the industries in both Russia and Ukraine continue to be hampered by the decline in consumption and by poor profitability. Because of production and consumption declines, the sugar producing sectors of both countries have excess refining capacity. Short production runs boost already high per unit costs. Russian policy has been to increase imports of raw sugar, mostly from Cuba, to keep plants running. Ukraine also imported raw sugar, and exported the refined sugar to Russia, depressing prices there. Russia has responded with a planned but as yet unimplemented quota of 1 million tons on Ukrainian refined and 1.5 million tons on total refined imports. In mid-May 1997, Russia extended its 25-percent customs tariff on white sugar to all countries outside its regional Customs Union. Ukraine, not a member of the Customs Union, was particularly affected by this new policy. The practice of exporting the excess refining capacity to one's trade partners impedes reform in the processing industries of both countries by delaying the closing of refining capacity that must ultimately occur before the industry can recover. The Russian and Ukrainian governments' efforts to subsidize their refining industries by importing low priced raw sugar depress farmgate prices for sugarbeets. Consequently, sugarbeets remain among the least profitable of major field crops (table 11). Unless sugarbeet production becomes more profitable, the crop will loose ground to more lucrative crops such as grains and sunflowerseeds, and the domestic industry will rely even more on refining imported raw sugar. Cotton Production Flat Despite Strong Global Demand Uzbek cotton exports have been near 1 million tons in recent years and are projected at 930,000 tons for 1996/97, a 17-percent drop from pre-reform 1991 (see annex). Uzbekistan exports are second only to the United States and in recent years have been about 15 percent of world trade. Stagnant production, a result of government policy, is forecast to keep Uzbek exports near current levels in coming years. Russia, the second largest market for Uzbek cotton after Italy last year, is projected to import 200,000 tons for 1996/97. With gradual recovery in the Russian textile industry, imports could rise over the next few years. Given increasing Russian demand and without market liberalization in the Central Asian republics, an increasing share of Russian cotton imports could come from extra-NIS/B sources. Because Uzbekistan accounts for 70 percent of NIS/B cotton production and is among the least reformed of the NIS/B states, the outlook is for little change in cotton production. Over the next few years, cotton area will likely change little from 1997 because Uzbekistan has embarked on a program of grain self-sufficiency, which plans to limit cotton area to 1.5 million hectares a year. Production increases are expected to come from rising yields with government-subsidized inputs. In the long term, the net effect of subsidized inputs on production is not likely to be significant. It is unlikely that Uzbekistan will be able to maintain its grain self-sufficiency policy indefinitely because expanding grain production in neighboring NIS/B countries will make holding land in grain production increasingly inefficient. With reform, cotton area could expand, but yield increases could be limited because of the scarcity and corresponding costliness of irrigation water. Trade Highlight Agricultural Trade Outlook to 2005 According to USDA forecasts, the NIS/B region will in the long run remain a major importer of meat, but will be only a small net importer of grain. By the middle of the next decade, NIS/B net imports of meat (from outside the region) are forecast to be about 2 million tons, while net imports of grain are projected at only around 2.5 million tons. About half of the projected net meat imports will be poultry, and most of the net grain imports wheat. The region could become a small net exporter of coarse grains. Russia alone should account for almost all of the net meat imports (about half again being poultry), and also for the bulk of extra-NIS/B grain imports. The projections are from an ERS model of the world agricultural economy, the Country-Link System, which generates forecasts for agricultural production, consumption, and trade. The Country- Link System consists of 46 individual country or regional models, all of which are partial equilibrium and dynamic in nature, covering 22 commodities. The main assumptions behind the long term NIS/B forecasts are: (1) after a couple more years of either decline or no growth, real GDP in Russia and the other main NIS/B countries begins to grow, at about 3 percent annually during 2000-2005; (2) productivity growth in the livestock sector is slight; (3) area for most grains either remains unchanged or falls somewhat more; (4) yields in the grain sector generally rebound, though by 2005 to only pre-reform levels (crop yields are determined partly by assumption, and partly by relationships within the model); and (5) commodity-specific trade policies remain unchanged, which means import tariffs continue at their current levels, and no import quotas are established. The main reason for the pessimistic view of productivity growth, particularly in livestock operations, is that institutional reform in agriculture has barely begun, and evidence does not suggest that major reform will soon be attempted. Yet, institutional reform (involving such matters as land reform and privatization) is needed to improve producers' incentives to use inputs more productively. One reason yields for certain grains are assumed to increase is that area for these crops is expected to continue to fall, and the land taken out of production is the least productive. The retiring of marginal land should increase average yield for the superior land that remains in use. Tables 12 and 13 present USDA's forecasts for production and trade of meat and grain in the NIS/B region in the aggregate, and also for Russia. The forecasts for meat are for calendar 2005, and for grain, marketing year 2005/2006 (July/June). The base year from which the model generates forecasts is calendar 1998 (for crops, marketing year 1997/98). The figures given for 1998 are therefore estimates (not generated by the model) for production and trade in that year. The assumed rise in real GDP in the NIS/B region over the projection period increases consumer demand, and therefore consumption, for meat (as indicated in the tables by summing production and net imports in 2005). The anticipated modest increase in productivity in the livestock sector helps stimulate production to satisfy most of the increased demand. However, without substantial productivity growth, the NIS/B's comparative disadvantage in meat (resulting from high costs of primary production, processing, and marketing) continues. Net imports remain at about 2 million tons. Poultry's dominant position in meat imports persists, and Russia continues to account for almost all of the region's net meat inflows. Grain consumption is stimulated mainly by rising demand for feed grain resulting from modest growth in the livestock sector. Increasing grain yields raise projected production sufficiently that all of the expanded demand for grain is met by rising output within the NIS/B region. This is indicated by the fact that NIS/B net imports of grain fall slightly over the projection period, to about 2.6 million tons. The region is forecast neither to return to the large grain imports of the pre-reform period, nor to become a major grain exporter (as some Western observers predicted at the beginning of reform). Net grain imports continue to be primarily wheat. The region (and Russia even more so) could become a small net exporter of coarse grains. The forecast changes in NIS/B agricultural production, consumption, and trade over the projection period are much less dramatic than those that have occurred from the beginning of reform to the present. The main reason for the restructuring of NIS/B agricultural production and trade has been major reform- induced changes in real prices (of both inputs and output) and consumer incomes. The policy changes responsible for altering real prices and incomes have been price liberalization, economy- wide reduction or elimination of subsidies to both producers and consumers, and integration of the domestic economy into the world economy. Price liberalization fundamentally changed prices by having them move to reflect real costs of production, while integration into the world economy (with only modest trade controls) caused prices moving toward world market levels. Price liberalization also severely reduced consumers' real incomes, as prices rose by a greater percentage than wages and salaries. Since consumers' and producers' market decisions on buying and selling depend mainly on prices and incomes, major changes in these economic variables will substantially change the structure of any economy's production and trade. In most NIS/B countries, price and trade liberalization began sufficiently long ago (the early 1990s) that the major adjustments in real prices and incomes have had enough time to play out, and are now ending. Evidence is that consumer incomes in Russia and most other NIS/B nations have generally stopped falling, and in some countries are rising modestly. The extreme deterioration in agricultural producers' terms of trade has also stopped, and at least for some producers the terms will probably soon improve. As reflected in the ERS modeling study, future changes in agricultural production and trade within the region will most likely have to come from two main developments: (1) changes in consumer demand resulting from growing real incomes; and (2) productivity growth, which would increase output, lower production and distribution costs, and thereby improve the competitiveness of domestic output vis-a-vis the world market. By 2000 the major NIS/B economies should be growing in real terms, thereby increasing consumer purchasing power. Whether the rise in consumer demand for foodstuffs is satisfied mainly by expansion of domestic production or of imports will depend largely on the pace of cost-reducing productivity growth within NIS/B agriculture. If costs do not fall and improve price competitiveness, not only in primary production but also in processing and distribution, most of the growth in consumer demand will be satisfied by rising imports. The key to productivity growth is institutional reform in agriculture, the prospects for which do not look promising over the projection period. Without such reform, the NIS/B region likely will remain a major importer of meat, and a small net importer of grain. [William M. Liefert and David J. Sedik] References USDA, ERS, International Agricultural Baseline Projections to 2005, forthcoming in 1997. Agricultural Issues Figure Prominently in Russia's WTO Accession As negotiations for Russia's accession to the World Trade Organization (WTO) progress, discussion on agriculture will focus on market access, export subsidies, and internal support. Compliance with WTO regulations should limit Russia's ability to increase trade barriers and use trade-distorting internal support to protect its farm sector, thus bolstering market reform. Moreover, WTO membership will likely benefit Russia (and its trading partners) by requiring conformity with international trade law, increasing Russia's attractiveness for foreign investment, and providing most-favored nation treatment and access to trade dispute mechanisms. [Sharon S. Sheffield and William M. Liefert] As part of the process of WTO accession, member countries will scrutinize Russia's agricultural trade and internal support policies for conformity with the organization's regulations. Although the specific modalities (such as base periods and specific reduction commitments) of the Uruguay Round negotiations do not apply to acceding countries, the spirit of trade liberalization and reduction of trade-distorting support embodied in the Uruguay Round Agreement on Agriculture and other related agreements will set the tone for the accession negotiations. Tariffs are Russia's primary means of restricting agricultural imports. However, WTO accession negotiations will also focus on less transparent types of protection, such as state trading, sanitary and phytosanitary (SPS) measures, or technical barriers to trade (TBTs) (table 14). Important issues for state trading are how former foreign trade organizations and procurement agencies operate, and to what degree concessional credit and other privileges are provided to Russian organizations and regions. Russia's evolving standards and certification systems will also be closely monitored to ensure consistency with WTO rules on SPS and TBTs. Measuring Russian internal support to agriculture involves special challenges. The two most serious areas are adjusting yearly values because of the high inflation that existed during the first half of the 1990s in order to have constant year values, and adjusting for the rapid change in the real exchange rate of the ruble vis-a-vis the U.S. dollar (as well as other Western convertible currencies). Two other issues tied closely to Russia's economic transformation that are relevant to WTO accession are (1) regional controls on agricultural flows and (2) trade agreements with other NIS countries. Many regional governments (oblasts) have restricted agricultural outflows, largely through their continued power of procurement, and some oblasts are also now turning to import constraints. The controls create the problem that Russia lacks a country-wide uniform trade regime. Much of Russia's NIS agricultural trade is conducted through inter-state trade agreements that specify trade volumes, raising questions of state trading and trade discrimination. Despite Attempts, No Quantitative Restrictions on Food Imports Have Been Created to Date Russia currently has relatively moderate import tariffs (5-30 percent) on most agricultural products (although tariffs on alcoholic beverages are higher). However, for certain sensitive products, such as meat, dairy, fruits, vegetable oil, and other processed foods, minimum per unit tariffs were introduced last year in addition to the existing ad valorem rate. (The tariff is expressed as an ad valorem tariff, "or no less than" a certain per unit tariff in European Currency Units per kilogram.) For some of these products, the per unit tariff appears to increase the effective ad valorem rate, which may not be consistent with WTO rules (table 15). At the very least, mixed tariffs of this type are not entirely transparent, and can result in different effective tariff rates, depending on the import price. The tariff on poultry meat imports is a good example of how the effective ad valorem rate differs depending on the import price. In 1996, the average c.i.f. import price for poultry meat, according to Russian customs committee data, was $659 per ton. However, the average f.o.b. export price of U.S. poultry meat (which makes up over 80 percent of total Russian imports) was around $900 per ton. If an average import price based on the U.S. export price (plus transportation costs) of $1,100 is used, the effective tariff rate is closer to the ad valorem rate of 30 percent. For imports of food and agricultural products, Russia has so far not officially used quantitative restrictions. The Law on State Regulation of Trade, passed in 1995, provides for the introduction of quantitative trade restrictions on imports, and a 1996 presidential decree also recommended the use of quantitative restrictions to stem the flow of agricultural imports and protect domestic producers. In 1996, attempts were made to introduce import quotas on two types of products: ethyl alcohol and vodka, and sugar. Although the efforts have so far failed, nonautomatic licensing was established for imports of ethyl alcohol and sugar. The WTO does not allow members to use quantitative restrictions on agricultural products as a barrier to trade. Also, although the Uruguay Round Agreement on Safeguards contains provisions allowing quantitative restrictions in cases where import levels cause serious injury (or the threat thereof) to domestic producers, specific criteria must be met to justify a safeguard measure. Fewer Transparent Trade Barriers Could Grow When Russia joins the WTO, it will have to bind its import tariff rates at a negotiated level, and agree not to introduce quantitative restrictions or other nontariff barriers. Given these policy constraints, it is possible that Russia may turn to less transparent means to regulate trade. One possible way, which raises questions of state trading, is through the government's influence over foreign trade operations. Most of the state agencies that handled the USSR's foreign trade under central planning have been converted to joint-stock companies, in which the government continues to hold (sometimes majority) shares. Moreover, the government has granted tax exemptions, exclusive buying/selling rights, and concessional credit tied to specification of import sources to certain organizations, which may influence the direction or level of trade. The concessions and privileges granted to these organizations have probably increased, rather than decreased, Russian imports of foodstuffs. However, as the array of policy instruments to protect domestic producers declines, the relationship between the state and these organizations, as well as other state trading type of activity, could be used as an indirect way to reduce imports (or subsidize exports). Sanitary and phytosanitary (SPS) issues and technical barriers to trade (TBTs) are other areas of concern, in large part due to the transitional nature of Russian laws and institutes that regulate these issues. SPS measures include all policies protecting animal, plant, or human health or life, while TBTs include technical regulations and standards. In February 1996, Russia raised several issues concerning sanitary requirements for U.S. poultry meat in an attempt to restrict imports. Also in 1996, Russia banned the import of certain livestock products (ground beef and pork, mechanically deboned beef, ground meat hamburger patties, uncooked partially processed meats, and table eggs), in large part due to concerns over the outbreak of BSE ("mad cow disease") in Europe. A new labeling requirement for imported food products, which was scheduled to go into effect in May, could constitute a technical barrier to trade due to inadequate instruction on how it will be enforced. According to the new regulations, all food products imported into Russia must contain information (in Russian) on the label concerning the product type, manufacturer, country origin, weight, main ingredients, nutritional value, use instructions, shelf life, and storage conditions. The government resolution introducing these regulations did not indicate how they would be enforced, nor did it include a definitive list of products subject to the requirement. It is also unclear whether Russian products will be held to the same standard in terms of the amount of detailed information required on imported food labels. High Inflation, Exchange Rate Movements Make It Difficult to Measure Russia's Internal Support As part of its accession country schedule, Russia will be required to quantify the level of support provided to agriculture, by calculating the aggregate measurement of support (AMS), and commit to reduce the base AMS over a set number of years. The Uruguay Round Agreement on Agriculture established the AMS as the method for quantifying support to agriculture. The AMS calculation includes all trade-distorting policies, except those identified as exempt in the Agreement on Agriculture. These policies include direct price support, measured by the difference between the world market price and an administered support price for a product, multiplied by the quantity of output eligible for the administered price. Other examples include acreage payments, input subsidies, payments based on livestock numbers, and certain subsidized loan programs. Green policies, excluded from the AMS calculation, are programs that do not provide price support, directly affect production levels, or involve transfers from consumers. The total AMS aggregates product-specific support if it accounts for more than 5 percent of the value of a commodity, and nonproduct-specific support that exceeds 5 percent of total agricultural production. The AMS is expressed as an absolute monetary value. The WTO Secretariat has defined the base period for acceding countries as the 3 most recent years of available data. As a country in the process of market reform, Russia (as well as other NIS/B countries) faces special challenges in using the methodology established in the Agreement on Agriculture to calculate the AMS. Many of the problems arise because the economy retains features of the previous centrally planned system, while new market-oriented policies and institutions are being created. One example is the Federal Food Corporation (FFC), which was supposed to act as an intervention-type organization, but in reality functions more or less like a Soviet-style procurement agency that buys for certain state needs (instead of intervening in the market only when prices fall). The FFC receives budget funds to purchase commodities to supply urban areas, the far North, and the military, and to build stocks. The prices producers receive from the FFC are often lower than market levels (due to payment delays and insufficient budget funding). In addition, Russian producer prices for many commodities have been below world levels. The main reason is deficient physical and institutional infrastructure for marketing output. Poor infrastructure creates high distribution and marketing costs that keep domestic producer prices below world prices. The isolated effect of state procurement at administered prices and deficient infrastructure has often been to "tax" Russian agriculture by keeping domestic prices below world levels. To take these policies into account when calculating the AMS would lower the total estimate. Because the general spirit of the AMS is to measure price support, should any apparent taxation from state policy be ignored in computing the AMS? Another reason for the price gap is that during the early years of reform the Russian ruble was severely undervalued from a purchasing power parity point of view. (This means that a U.S. dollar, or the currency of any Western country, bought a lot more in terms of a standard basket of consumer goods in Russia than in the currency's home nation.) The undervaluation occurred mainly because high inflation and general economic uncertainty hurt confidence in the ruble, resulting in massive capital flight. As Russia has reduced inflation and stabilized its macroeconomy, the ruble has appreciated greatly in real terms. From January 1993 to December 1996 the ruble rose about 450 percent against the U.S. dollar. This is probably the strongest argument, in computing the AMS, for ignoring the fact that Russian domestic producer prices have been below world prices--that Russia's negotiated AMS should not be lowered because of conditions peculiar to transition. Thus, the ERS calculation of the Russian AMS presented in this article ignores any possible taxation that could occur when domestic producer prices are under world levels. Another serious problem in calculating the AMS arises because of high Russian inflation during the early 1990s. Inflation in 1993, 1994, and 1995 equaled 840, 215, and 130 percent, respectively. If the AMS is expressed in rubles, high inflation requires that all annual AMS values be expressed in constant rubles of a given year. One option is to calculate the AMS in 1995 rubles, using the GNP deflator. An ERS estimate of Russia's average AMS over 1993-95, expressed in 1995 constant rubles, equals 35 trillion rubles, or $8 billion (table 16). This compares to the total value of Russian agricultural output in 1995 of about $30-$35 billion. Regional Trade Policies and NIS Trade Arrangements Require Attention Two other issues involving Russia's economic transition relevant to WTO accession are (1) regional controls on agricultural flows and (2) trade agreements with other countries of the former USSR. Many regional governments have restricted agricultural flows, to a large degree through their continued power of procurement. While most controls have been on the export side, some oblasts also appear to be turning to import restrictions. For example, the Sverdlovsk oblast legislature included a 50-percent import tariff on poultry meat in the oblast's 1996 budget, while the Magadan region recently introduced its own quotas and licensing for vodka imports. Regional trade policies are a serious problem for Russian WTO membership. First, the fact that regional governments have the power to set their own trade policies means that the Russian federal government will not know the specific practices in operation throughout the country. Second, even if the federal government did know, its current weakness vis-a-vis the regions could make correction and compliance with established rules difficult. In recognition of this problem, the Russian Duma passed a law at the end of April declaring the Russian constitution and federal legislation to be supreme on all Russian Federation territory. However, the Russian newspaper Kommersant-Daily reported that the law would upset the "truce" between Moscow and the regions, because the power-sharing agreements would be suspended until the adoption of special federal laws. Moreover, the newspaper predicted that the Federation Council, the upper chamber of parliament, will reject the law, which illustrates the difficulty in addressing this issue. Russia's agricultural trade with other NIS countries raises questions of state trading. Much of this trade was conducted through inter-state agreements that specify trade volumes. As recently as 1995, the federal contract corporation, Roskontrakt, was designated as the sole Russian agent to fulfill Commonwealth of Independent States (CIS) inter-state trade agreements. The use of a sole agent to trade on a noncommercial basis appears to constitute state trading, while inter-state barter trade agreements raise questions of trade discrimination. WTO Membership Will Benefit Russia Although the process of WTO accession can take up to several years as member countries review and evaluate acceding countries' trade policies and legislation, WTO membership should prove highly beneficial for both Russia and its trading partners. Russian producers should benefit because membership would help bolster market reforms in the agriculture and food sector, making it more efficient, competitive, as well as more attractive for investment. Reduced protectionism would also benefit Russian consumers through lower food prices and a greater variety of foodstuffs. Another advantage of WTO membership is that it would provide multilateral most-favored nation treatment, as well as access to the WTO dispute resolution mechanism, which would help put Russian exports on a more level playing field, and give Russia the ability to remedy trade disputes in a multilateral forum with established rules. In addition, Russia would obtain a "seat" at the negotiating table, allowing participation in future negotiating rounds and a say in how new WTO rules are formulated. Russia's trading partners would also benefit from the country's accession. First, WTO membership would make it difficult for Russia to increase trade barriers. Second, it would draw Russia into a multilateral, rule-based trade framework. This would make the country more accountable for its trade policy behavior and possibly reduce its involvement in regional trade arrangements with other countries of the former USSR, which are often based more on political rather than economic considerations. Ukrainian Land Reform and Farm Privatization: Still a Long Road Ahead Land reform, agricultural enterprise privatization, and farm restructuring are important components of a successful transition to a market economy. The process in Ukraine, however, as in many countries of the NIS/B region, has proven difficult and slow. Declarations from President Kuchma and other policymakers appear to suggest a commitment to speeding up the process. Ukraine has accelerated its distribution of land shares within collective farms and set a schedule for further reforms. Nonetheless, land ownership rights remain unclear. Piecemeal legislation and conservative attitudes within the agricultural sector continue to impede progress in land reform. [Britta S. Bjornlund] Land Reform Could Prove Essential to Sustainable Agricultural Growth For Ukrainian agriculture to reach its full potential, it must go through an extensive restructuring process to cut costs and increase profitability. Given that the government is unable to enforce hard budget constraints on farms and agribusinesses, land privatization might provide the impetus for farm restructuring and management changes (see also discussion on page __). First, land privatization would strengthen the profit motive. Ukrainian statistics indicate that private land ownership would raise productivity. Data show, for example, that while private household plots in Ukraine occupied only about 12 percent of agricultural land in 1996, they produced over 47 percent of total agricultural output. Second, land privatization would foster the development of a functioning land market, whereby labor and other resources could enter or exit farms. Land plots could be freely bought, sold, or rented, allowing the most efficient use of available resources. Without land reform in Ukraine, labor remains immobile. Third, privatized land would prove an invaluable asset for farmers as collateral against loans. Under current conditions, farm operators are left with little choice but to barter their future production for inputs offered by the state. Ukraine Reorganizes State and Collective Farms yet Stalls in Support for Private Agriculture Ukraine has not yet shown a commitment to private agriculture. Although the majority of Ukraine's farms, as in Russia, have been officially transformed into joint-stock companies called collective agricultural enterprises, they have undergone little change in management, production choices, or resource allocation. While many restructured farms received paper certificates confirming members' rights to land and property shares, these entitlements have not created a real relationship between farmer and farmland and have done little to strengthen the profit motive. Ukraine does have the beginnings of a private farming sector with two distinct classifications: household plots and private (peasant) farms. First, many Ukrainians farm small subsidiary or household plots. Produce from these plots is then kept for personal use or sold for personal profit. The share of agricultural output from household plots is growing and these plots could be the foundation for an expanded and successful private sector. Second, in the last few years, a small number of private farms has emerged. Difficult economic conditions, unclear legislation, and inexperience, however, have hindered their growth and importance in Ukraine's agriculture. Legislation Allows for Land Ownership but Ambiguities Thwart Functioning Land Markets Despite the fact that private farms occupy only 2 percent of agricultural land and household plots account for 12 percent, Ukraine possesses a basic legal framework for land ownership. Ukraine's Land Code of 1992 gave individuals the right to obtain land for family and private farms, private plots, gardening, and dacha (summer home) construction. Presidential decrees in 1994 and 1995 outlined the free transfer of land from the state into collective and private ownership. The Constitution of Ukraine, passed in June 1996, guaranteed the right to private property and land plots. In January 1997, government officials called for an acceleration in land reform and agricultural privatization. Whether they can adhere to such promises, however, remains to be seen. Land reform in Ukraine encompasses three stages. First, land is denationalized and ownership is given to the transformed collective farms. The farm receives a state deed reclassifying the farm into collective ownership. In addition, the farm receives an official list of its members, who have land and property rights to its land and property. With the approval of the raion (district) administration, this list can be amended, to include, for example, workers in the social sphere (such as kindergarten teachers, medical workers, etc). In the second stage, farm members receive their right to land and property shares. The allocation of property shares is handled differently than for land. Property shares are calculated based on the individual's tenure and salary level. In terms of land, however, the Land Code states that each individual is entitled to an equal share of land. The raion administration issues certificates, guaranteeing the right to land, to each member of the list. The third stage of land reform envisions new collective enterprises evolving into joint-stock, reformed collective, or other ownership enterprises that operate on the basis of private land ownership. There are numerous ambiguities in the current notion of private land ownership in Ukraine. Farm members receive a certificate guaranteeing their right to a share of land rather than title to the land itself. The farm worker, having received a land share certificate, faces two common options: take the land share in kind and exit the collective to start a private farm, or remain a general shareholder in the collective. Although the majority of farm workers have chosen the latter option, most remain unaware that their right to a land share can be legally sold, gifted, exchanged, leased, or inherited. In addition, leasing and contractual rights, estimation of the value of a land share in the collective charter stock, and rights to dividends are complex and unclear. In essence, land reform policy, rather than creating a class of landowners, is creating a class of shareholders who have little understanding of their rights and options. Those who choose to exit the collective agricultural enterprise can return their certificate and receive a plot of land from the collective. Few choose this option, perhaps due to the high degree of risk. A farmer might receive an unproductive lot or one distant from local infrastructure. Furthermore, because farmers have yet to receive legal title to the land, they face the risk that the land might one day be confiscated. The owner's right to lease or sell the land is also unclear. Currently the sale of agricultural land inherited from the state is subject to a 6-year moratorium. Ukraine's parliament imposed the moratorium in 1995. Some argue that the new landowners do have the right to sell their land, due to the fact that the land was inherited from the collective agricultural enterprise rather than from the state. Yet in practice, the moratorium serves to obstruct land sales and impedes the transition to a functioning land market. Certainly, the land reform program has reduced the amount of state-owned land. Some estimates show that over 64 percent of land is currently in some form of non-state ownership. As of August 1, 1996, land was distributed to over 9,500 collectives and other forms of non-state ownership. Approximately 21.9 million hectares, or 60 percent of agricultural farm land, were transferred from state to collective ownership, and about 0.8 million hectares are located in private farms (table 17). In the collective agricultural enterprises, more than 2.5 million citizens have received land share certificates. In addition, other Ukrainian citizens had the opportunity to receive land from the State Reserve Fund to start or expand private household plots or private farms. Western Ukraine Implements Progressive Land Reform Measures Despite Lack of Central Support Ambiguities in Ukraine's land reform policies have allowed some local governments to pursue different courses of action. The oblasts of Lviv and Ivano-Frankivsk provide an interesting example due to the progressive nature of their privatization endeavors. The leaders of these two oblasts took a radical position toward the Land Code and farm reorganization. They oriented local policy on the idea that there could be only two types of ownership: state and private. The oblasts decided that private plots attached to collective agricultural enterprises should not be distributed to collective ownership. Instead the oblasts divided the land into equal plots and distributed them among individual owners. They disbursed local certificates that guaranteed individuals private ownership of specific land parcels. While this plan did not comply with land legislation, there have been no official criticisms from Kiev. In fact, when in 1994 a presidential decree changed the language to specify the right to a land share rather than private ownership itself, Lviv and Ivano-Frankivsk had already distributed all of the agricultural land in their oblasts. Currently, many of these new landowners lease their land to other farmers. Data from these oblasts show that production declines were significantly less than the Ukrainian average. Ukrainian production declined an average of 29 percent from 1992-93 to 1994-95, whereas output in Lviv and Ivano-Frankivsk declined 18 and 11 percent, respectively. Private Agriculture Emerges, Accounting for Increasing Share of Agricultural Output Closely tied to the need for functioning land markets is the need for financially viable farming units and private agriculture. While officials boast that as of January 1, 1997, 75 percent of state farms and 99 percent of collective farms have been reformed or privatized, much of the transformation is in name only. Most large-scale farms continue to operate without restructuring, are unprofitable, and are falling deeper into debt. Management, for the most part, has remained unchanged. The paper reorganization has provided little economic or other stimuli for collectives to restructure into profitable production units. While the number of private farms grew notably from 2,000 in 1990 to 32,000 in 1995, it has not increased significantly during the last 2 years. In fact as of January 1, 1997, there were 35,400 private farms, up less than 2 percent from 1996. Private farms occupy 835,000 hectares of land, or only about 2 percent of total agricultural land. There are numerous obstacles to private farming, including lack of initial capital, difficulties getting credit, uncertain legislation, non-receipt of land titles, official limitations on farm size, and little access to social services once provided by the collective. Private farms cannot rely on stable input or output markets, which remain underdeveloped. In addition, most private farmers have little access to credit. Household plots, however, play a crucial role in Ukraine's agriculture. In 1990 they accounted for only 6 percent of total agricultural land yet produced about 26 percent of total value of output. As of July 1, 1996, land holding and production by household plots had increased significantly to 12 percent and 47 percent, respectively. Data from 1996 show that household plots proved particularly important in a few key crops, as they produced 95 percent of the total volume of potatoes, 82 percent of vegetables, 51 percent of milk, and 59 percent of eggs. (table 18). Private and household plot farmers, for the most part, market their goods themselves through channels such as farmers' markets and trade organizations. These channels will likely grow in importance as Ukraine phases out its state procurement system and moves toward a market economy. Agro-industrial Privatization Progresses Slowly Privatization in Ukraine's downstream (processing, wholesaling, and retailing) and upstream (input) industries is moving even more slowly than in farming. As of January 1, 1997, only about 42 percent of agricultural processing, service, and construction enterprises had been privatized or reformed (table 19). As with farm privatization, the transformation is often in name only. The process has developed faster in the livestock processing industry, as 93 percent of processing enterprises for meat, and 53 percent for dairy, have been "privatized" or reformed. Similar to Russia and Kazakstan, a controlling packet of shares in Ukraine's agricultural processing plants is offered to primary producers free of charge or at highly discounted prices. Although President Kuchma repeatedly vetoed this legislation, a slightly amended version was finally allowed to stand. Such legislation severely limits the autonomy of processors. Because farmers hold a controlling packet of shares, there is a strong incentive to offer the farmer higher prices for produce or to charge farmers a reduced price for processing. As a result, processors encounter difficulties maintaining or increasing profits. Lack of Functioning Land Markets and Incomplete Farm Privatization Hinder Growth Despite initial reform measures and recent plans for acceleration, Ukraine's policymakers remain unable to reach a consensus concerning land ownership. The parliament, in opposition to the president, has not passed requisite legislation that would ensure land ownership rights. To date, much of reform has been implemented through presidential decree, a method unlikely to survive if Ukraine moves toward democracy. Western oblasts such as Lviv and Ivano-Frankivsk, however, demonstrate the possibilities for privatization in spite of legislative and institutional obstacles. Nonetheless, because of Ukraine's deep roots in collective farm ownership, many farmers regard private entrepreneurship with apprehension. Rather than strengthening the relationship between effort and reward, collective agriculture will more likely continue to lobby the state for direct and indirect subsidies. Regardless of their production behavior, Ukraine's former state and collective farms may find they can create or increase profits by removing the social welfare burden and reallocating it to local budgets. In the spring of 1997 there were some potentially positive signs for agricultural reform. In April 1997, the president issued a decree legalizing the leasing of land. In May 1997, plans were discussed to restructure and streamline the Ministry of Agriculture, and to abolish the state committees for bread, food processing, and wine production. Plans to privatize grain elevators and agricultural processing plants were also noted. With regard to land sales, the Ukrainians asserted that the Ministry of Justice issued a statement certifying that the moratorium applies to only about 2 percent of Ukraine's total land mass. In addition, Minister of Agriculture Zubets indicated that Ukraine was working on a new land law. Yet it is unlikely that Ukraine will have fully functioning land markets in the near term. Pressure from international institutions and donor agencies may convince Ukraine to clarify and remove the moratorium on agricultural land sales. As in Russia, however, landowners in Ukraine may be too cautious to begin buying or selling land plots. In addition, if they remain insulated from market pressures, farms may prove sluggish in attempts to restructure or reorganize. Without major land reform, prospects for improving agricultural productivity in Ukraine will remain poor. List of Text Tables Table Page 1. Mean crop yields in private sector, Armenia and Georgia 2. Share of private sector in agricultural output, Baltics 3. Mean yields in private and state/collective farms, Estonia 4. Mean crop yields in private and former state/collective farms, Latvia 5. Changes in food marketing: Share of goods marketed by state procurement agencies, NIS countries 6. U.S. agricultural exports to NIS/B region and Russia, fiscal 1993-97 7. Processed meat output, NIS countries 8. Meat imports by origin and type, Russia 9. Supply and use of grain, NIS/B countries 10. Area, yield, and production of total grain, NIS/B countries 11. Production costs, producer prices, export unit prices, and profitability of selected crops, Russia 12. Production and trade for meat and grain, NIS/B region 13. Production and trade for meat and grain, Russia 14. Russia's accession to the WTO: the main issues for agriculture 15. Effective ad valorem tariff rates, Russia 16. Aggregate measurement of support, Russia 17. Ownership of agricultural land, Ukraine 18. Private share of total output, including farmers and household plots, Ukraine 19. Reformed enterprises, Ukraine List of Text Figures Figure 1. U.S. exports to NIS/B region 2. Input and output price changes, livestock sector, Russia 3. Input and output price changes, livestock sector, Ukraine 4. Annual meat output per cattle, Russia and Ukraine 5. Beef prices in Russia 6. Pork prices in Russia 7. Russian poultry price gap widens 8. Per capita meat consumption falls as income declines, Russia 9. Total meat imports, Russia 10. Share of imports in Russian consumption 11. Farmers' share in retail price is declining, as well as processors', Russia 12. NIS wheat prices lagged behind U.S. export price in late 1996 13. NIS markets become more responsive to world price trends 14. Relative wheat and barley prices affect area sown in Russia 15. Grain profitability varied among Russian regions in 1996 16. Sunflowerseed area responds to relative prices, Russia Statistical Annex List of Tables Table 1. Economic indicators, NIS/B countries 2. National currencies exchange rates, NIS countries 3. Monthly average exchange rate, Russia 4. U.S. agricultural exports to NIS/B region, calendar 1990-1996 5. U.S. meat exports to NIS/B region, and major countries (by type of meat) 6. Extra-NIS agricultural imports, Russia 7. Annual per capita consumption of selected food products, NIS/B countries 8. Private farms, NIS countries 9. Share of private sector in total agricultural output, NIS countries 10. Share of private sector in agricultural output, by commodity, Russia 11. Share of private sector in livestock inventories, NIS countries 12. Livestock inventories, all farms, January 1, NIS/B countries 13. Production of livestock products, all farms, NIS/B countries 14. Input and output price changes, livestock sector, Russia 15. Input and output price changes, livestock sector, Ukraine 16. Livestock sector, financial indicators, former state enterprises, Russia 17. Livestock productivity and feed conversion indicators, selected NIS countries 18. Private trade food grain prices, Russia, Ukraine, and Kazakstan 19. Private trade feed grain prices, Russia, Ukraine, and Kazakstan 20. Supply and use of grain, NIS/B countries 21. Supply and use of grain, Russia 22. Supply and use of grain, Ukraine 23. Supply and use of grain, Kazakstan 24. Supply and use of grain, Belarus 25. Supply and use of grain, Uzbekistan 26. State grain procurement, NIS countries 27. Supply and use of major oilseeds, NIS/B region 28. Supply and use of major oilseeds, Russia 29. Supply and use of major oilseeds, Ukraine 30. Supply and use of major oilseeds, Kazakstan 31. Supply and use of major oilseeds, Moldova 32. Supply and use of major oilseed meals, Russia 33. Supply and use of major oilseed meals, Ukraine 34. Supply and use of major oilseed meals, Kazakstan 35. Supply and use of major oilseed meals, Moldova 36. Supply and use of major vegetable oils, Russia 37. Suppy and use of major vegetable oils, Ukraine 38. Supply and use of major vegetable oils, Kazakstan 39. Supply and use of major vegetable oils, Moldova 40. Area, yield, and production of sunflowerseed, selected NIS countries 41. Potato and vegetable production, NIS countries 42. Sugar balances, NIS/B countries (raw value) 43. Cotton balances, NIS/B countries 44. Production of mineral fertilizers, selected NIS countries 45. Supply, use, and application rates of mineral fertilizers, Russia END_OF_FILE