Restocking the Breadbasket

Cooperative development efforts in Ukraine are helping farmers rebuild their agricultural system

Jerry C. Namken
Senior Resource Economist
USDA Natural Resources Conservation Service

Editor's note: Namken spent nearly two months in late 1998 in Ukraine working on a project for USDA's Cooperative State Research, Education, and Extension Service. Following is his report on Ukraine's transition from the Communist system to a new market economy.

Project member Lewis Beckham inspects the wheelhouse of a Ukrainian tractor.
USDA Photos by Jerry Namken

        International agricultural cooperative development in the former Soviet Union is not just an exciting field to work in but a challenging one as well. Differences in tastes, production methods, government interventions, taxation, infrastructure and market diversity make improvements difficult enough by themselves. Add the language barrier and distrust from years of Soviet government rule and the task becomes nearly impossible.
        However, some farmers seem to prevail in spite of such obstacles. Slowly but surely, countries in the former Soviet Bloc are entering into market-style economies. Ukraine is one of these. In the dynamic process following perestroika (major economic reforms), marketing trends among private farmers in production, marketing and retailing are becoming clearer in the Oblast (state) of Odessa.
        Part of this process involves USDA’s Commercial Agriculture Development Program, a cooperative development project funded by the Agency for International Development and implemented by USDA's Foreign Agricultural Service and Cooperative State Research, Education, and Extension Service (CSREES). This pilot effort is educating privatized farmers about Western-style cooperative principles and helping them organize and run their own businesses.
        This is an important addition to Odessa Oblast. Part of the breadbasket of the former Soviet Union, the area enjoys a moderately continental and comparatively dry climate. The deep-black loamy soil is noted for its wheat, sunflower, and wine production. The Oblast also has a port terminal on the Black Sea at Odessa, making it an ideal region for the transition of the land from government ownership to private ownership.

        Although the 1986 Chernobyl nuclear disaster took place in the extreme western part of the country, conserving Ukraine's important resources has been a priority. Askanyia-Nova, Ukraine's first nature preserve, was established in 1921 and endangered species are bred there. A Ministry of Environment has been established to levy taxes on air, water emissions and solid waste disposal. The revenues are to be used for environmental protection activities. The system, however, is somewhat lax.
        The conservation of natural resources is expected to become more important as more lands go into private hands. Under the old system, the government directed and applied conservation to the agricultural lands operated by the large collective farms. Production, rather than profit, was maximized on these farms.
        Newly private farmers, however, are more concerned with profits. Conservation efforts that might have taken place under the old system are often discontinued in order to save money. There is a need, though, for Ukraine's very productive agricultural lands to retain their sustainability for economic, social and environmental reasons.

A large variety of products are available for sale or barter at the Co-op in Belgorod.

Four types of producers are taking root to secure their future in the emerging Ukrainian economy. The state-owned collective farms still enjoy the lion's share of the government's support, while some private businessmen have developed large-scale agribusinesses that include farms in their corporate structures. Those most in need of help are the medium-scale private farmers, who produce much more than they consume. The fourth type are the small-scale private farmers (or dacha owners), who are mainly subsistence producers.

        While many agricultural collectives were physically or economically raided into non-functioning shells following the early days of perestroika, others simply quit producing because they lacked inputs or capital for operating, or could not sell their products for cash. However, a good many agricultural collectives survive. Government taxation practices keep these businesses in place, but only by not following up on bad debt. These collectives still suffer from the inefficiencies of the old system, with no cash to pay labor, purchase inputs or cover the costs of production. In addition, managers often have little experience in marketing their commodities.
        The justification for the government's continued support of these large collectives follows a countrywide plan for privatization of state-owned lands. It would be impossible to change overnight from state owned and directed agricultural production to privately owned and directed production without a catastrophic loss in production and a terrible effect on the population.
        Also, while the collectives are often inefficient, they still produce the largest amounts of the country's agricultural commodities. Distribution and marketing channels are in place to ensure commodity supply to the urban areas. Many people are employed in providing these services.
        People continue to work on the collectives, often without being paid. Having no cash, collective managers often pay employees with bartered inputs or production from the collective. Still other collective members pilfer these inputs and act as pipelines to supply themselves and friends. (The going rate for a small bottle of vodka is one tankful of diesel.) Bartering government supplies of such inputs as diesel, fertilizer and pesticide from collectives is widespread throughout the Odessa Oblast.

A new sunflower oil press is examined by sales staff at a co-op store.

        Collectives run up huge debts, which are written off by the government. To offset the lack of sufficient funding, the government taxes heavily (20 percent) for value-added sales in all sectors of the economy. It imposes a 30-percent service tax, in addition to the cost of operation, for anyone using a service business such as milling, crushing, etc. There is even a 10 percent tax on the depreciation of capital goods.
        Such taxes afford no incentives for this agriculturally based country to move to a cash economy. The government uses revenue accountants to tax cash and value-added transactions. Great creativity as well as different sets of books are sometimes employed by private citizens to circumvent these "tax police."
        The government bureaucracy is not, however, set up to tax bartered goods. Bartering is a complex art of knowing where current supplies and demand exist. There are big winners as well as big losers. Some Ukrainian economists estimate that 30-40 percent of a commodity's value is lost through barter transactions.
        It is not uncommon to hear of complicated turnarounds. For example, a large-scale producer might receive tractor parts on credit as payment from a collective. He will then trade the tractor parts to other farmers for their wheat. He will then mill the grain into flour, with part of the grain given to the miller as payment. The flour then will be shipped to the Chernobyl Oblast in western Ukraine and traded for building materials. Eventually, the materials will be backhauled to the Odessa Oblast, where building supplies are in short supply. These are then sold for cash on a piecemeal basis to pay off the debt for the tractor parts.

Small packets of vegetable seeds are in big demand by dacha owners.

        Many of today's large-scale farm producers were, in the past, managers of collectives that have ceased to exist. Opportunistic and hugely entrepreneurial in spirit, many of them were able to secure loans from the government during perestroika to buy land and purchase equipment from bankrupt collectives. They paid off these loans at accelerated rates during the period of high inflation following perestroika. These producers estimate that it usually takes 300-400 hectares (about 740-990 acres) to farm profitably.
        These large-scale producers are often more like agribusiness managers than they are large landholders. Unusually inventive of ways to circumvent government taxation, they put in their own processing and value-adding facilities and open retail stores in order not to pay taxes up front.
        Using wheat as an example, costs of producing one metric ton might be about 120 hrivnas. The hrivna is the Ukrainian currency; it takes about 4.25 hrivnas to equal $1. At the farm gate, one ton of wheat would sell for 200 hrivnas. The 20 percent value-added tax is paid on the 200 hrivnas, not the 80 hrivnas. Milling would produce enough flour for about 2,000 loaves of bread, plus some waste that could be fed to hogs. A loaf of bread can sell for about 1 hrivna.
        A producer, then, would rather pay 20 percent of 2,000 hrivnas in taxes rather than 20 percent of 200 hrivnas, even though there would be some added costs from milling and baking. If the producer owned his own mill and bakery, he would not incur the 30-percent service tax.
        Representing the probable future of Ukrainian farming, these producers are going to great lengths to establish retail stores. The final consumers are the holders of cash in the country. But the amount of money transacted in each sale is very low, and it takes some time and many transactions to accumulate sufficient working capital.

        Owning anywhere from 10-100 hectares (about 25-250 acres), these landowners represent many of the newly "privatized" farmers. Many are highly educated and were trained during the days of the Soviet Union, and are the professionals on whom the former collectives depended. Now, disgruntled with the old system, and as new farmers, they often express the desire to remain independent of the collective system and place high value on making their own decisions.
        These farmers represent the group of producers with the greatest needs. While they have developed their own sources for seed, pesticides, fertilizers and farm equipment in the last six years, their ability to improve crop and animal production has been reduced by limited access to high-quality genetic seeds, reliable farm inputs, and modem planting, cultivation and harvesting techniques and machinery. Because many do not have farming backgrounds, their level of education relating to crop genetics, production practices, and farming economics is also lacking.
        The size of their operations is also a factor. While many have farms that are too small to provide a good living, they persist in the hope of growing larger in the future. Many of these farmers have developed their own informal cooperative arrangements to share planting, cultivation and harvesting equipment. Because of the tax situation, access to cash markets at post-harvest time is not deemed important. Rather, what they want is access to value-adding processes such as storage, processing, milling, packaging, distribution and, finally, to retail markets where the cash is available.

Farm equipment ranges from the old to the new at a museum of agriculture outside the capital city of Kiev.

        The fourth type of producers are the small-scale dacha owners. In Ukraine, private citizens are entitled to two hectares (five acres) on which to build a home. Many citizens build their homesteads on the outskirts of rural villages and grow a variety of garden produce to supplement their income. Usually they pickle, smoke and store enough from the two hectares to see themselves through the year.
        Even these small plots of land are used for agricultural production. Some estimate that 5 percent of the population is involved this way. Yet, these private farmers account for 20 percent of the country's agricultural production.
        Unlike subsistence farmers in some Third World countries who consume about 80 percent of what they produce and market the other 20 percent, these producers consume about 20 percent and market the rest. Their plots receive intensive care throughout the production cycle. By saving seed from year to year, planting vineyards or orchards and cultivating and harvesting by hand, they reduce the need for farm inputs. Furthermore, inputs require cash, which is hard to come by.
        These farmers need markets - preferably markets that are nearby because they can't afford the cost of transportation for even small amounts of their production. They need markets that are easily accessible by the general population and by the entrepreneurial traders and distributors that travel the public roads.

        The development of the Commercial Agriculture Development Program has been dynamic. Initial surveys among private farmers indicated that education of cooperative principles, agronomy and marketing knowledge were what was needed.
        Before long, however, producers felt that lowering their input costs would result in increasing their net profit and, thus, put money in their pockets. Also, large multinational companies arrived on the scene and it was felt that they represented a source of credit for producer-owned cooperatives.
        With this in mind, three groups of farmers in three different riones (counties) were assisted in organizing cooperatives to start farm input stores. These private farmer groups were identified by the Ukrainian government. A fourth group was identified by the National Farmers Union and also received assistance.
        These four groups are located in Belgorod Dnistrovski, Ivanovski, Lubashovski and Artsiski. The first three groups share some of the same characteristics. Each board of directors is primarily made up of a few producers (8-15) who worked together under the old collective system. Trust, or rather a lack of trust for those they don't know, has kept membership numbers small.
        A second trait is that few of the members of the boards were actually farmers in the old system. Some were accountants or economists, chemists or machinists. However, at least one agronomist sits on each board.
        As each board began to organize, four different strategies emerged in response to the lack of working capital. Credit relationships with the multinationals were slow to become established because of the taxation situation. Still, all four cooperatives were able to open the doors to their stores during the first crop production year.
        Belgorod Dnistrovski chose to ally itself with a large producer and agribusiness manager. Unable to secure a building or put enough working capital together to purchase inputs, the board turned to the producer. He gave the cooperative use of one of his buildings, then put his own barter goods there as inputs for cash sale, with a sales commission going to the cooperative.
        The process is not without its growing pains. Ivanovski changed executive directors in midstream. Because the cooperative is small and located in a small town, selling farm inputs is hard. The business environment is further complicated by Ivanovski's relative closeness to Odessa and its many stores. Without a track record, the cooperative found it hard to attract any one supplier willing to provide credit and merchandise, even on commission. The new executive director has numerous contacts in the trading community and has used these relationships to help the store start to fill its shelves.
        In Lubashovski, the board has put itself in the hands of a large agribusinessman who owns several retail stores. The cooperative chose to sell only tractor parts and not compete with his other stores, which sell the usual Ukrainian farm inputs.
        In yet another strategy, Artsiski organized itself differently. Unwilling to hire an outside executive director, the board directed the chairman to fill that spot. The odd arrangement has produced very good results. Although the inventory is small by American standards, it is the largest among the four stores and the only one where the inventory is paid for. Even better, the value of the cooperative's inventory has been growing at 5-6 percent per month as it continues to use profits for inventory purchases.

Farm inputs and tractor parts line the shelves of the cooperative at Artoiski.

        As the project evolved, and each of these cooperatives struggled to solve its own problems, it became apparent that access to inputs was not the solution to putting cash into the pockets of producers. Sourcing inputs from the old collective system has developed some sophistication during the last five years. In addition, cash for inputs has almost been non-existent.
        Forming cooperatives with Western principles has been hard also. Attitudes and idealism left from the old collective system still pervade the business environment because farmers haven't seen with their own eyes how Western systems work. One very positive step in this project has been to send each of the chairmen to the United States to view the cooperative system in place here.
        For example, agreement in the old collective system was often reached by consensus among the leadership rather than by democratic voting. While the current boards of the project cooperatives are small and trust each other because members worked together in the past, new membership growth will necessitate the need for ballot voting.
        Another lesson learned is the need for members of a cooperative to be somewhat homogeneous with respect to size of operation, crops grown, economic levels and marketing needs. The boards of directors of those cooperatives that have a large agribusinessman as a member often experience disagreement in developing solutions to membership problems. In the United States, proportional voting is used in limited situations. However, Ukrainian cooperatives have yet to develop this type of voting or trust.
        In the United States, the uniqueness of cooperatives as user-owned, user-controlled and user-benefited businesses is recognized in law through single taxation and a limited anti-trust exemption for farmers acting through cooperatives. USDA also provides support for cooperatives through a multi-faceted program of research, technical assistance, education and help in organizing cooperatives into new cooperatives.
        No such environment for cooperatives exists in Ukraine, but cooperatives are forming on their own merit to obtain services that are otherwise unobtainable. However, there is little, if any, working capital available in Ukraine to purchase the capital goods that can be used to provide such services.

        There is promise for Western-style cooperatives to exist in Ukraine. With support from this project, the National Farmers Union, the National Agricultural Cooperative Union and the Center of Reforms in Agriculture have recognized the need to provide incentives for cooperatives in Ukraine. Their efforts have resulted in the Ukrainian president signing a decree exempting almost all of agriculture from the value-added tax. This still has to be approved by the Rada (congress), and will be a first step in moving the country to a cash economy.
        Given the history of the people and the country and the high value of its productive lands, the newly formed cooperatives also present opportunities for the Western world as conduits for continued resource conservation efforts. Already organized with highly visible stores in their town areas, these progressive farmers represent the leading edge of agricultural thinking and often act as examples for the rest of the farming population to follow.
        Still, the greatest asset of the country is its own people. With a tireless work ethic, they have set about rebuilding their agricultural system. In doing so, they are feeding themselves and their neighbors. As they enjoy more successes, new opportunities for private farmers will surely come their way.