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November 14, 2001
Russia's grain harvest rose to an estimated 82.0 million tons this year, the third consecutive year of increased production. Ukraine harvested an estimated 39.3 million tons, up 60 percent from last year. Weather remains the largest single factor in determining crop yield in these countries, but some recent changes in the agricultural sector also have contributed to the improved harvests:
increased operating capital, resulting from the involvement of investment companies in the operation of former State and collective farms;
modest increases in fertilizer application;
improved fuel supplies, especially during the harvest campaign;
increased efficiency in farm operations, including reduced post-harvest grain loss.
Production Potential Improving, But There's a Long Way To Go
Some of these changes enabled farms to take advantage of the high yield potential resulting from the favorable weather. Production potential, however, is still severely constrained by problems stemming from an overall shortage of money. Most farms in Russia and Ukraine are not associated with an investment company and still operate under severe cash constraints. The fleet of harvest machinery remains woefully inadequate and Russian agricultural experts estimate that machinery-related grain losses amount to roughly 15 million tons every year. The application of fertilizer and plant-protection chemicals, despite marginal increases, is still far below optimum levels in both countries. Many observers, though, cautiously suggest that the decade-long slide in productivity has at last bottomed out. The elements are in place for possible steady improvement in the performance of the agricultural sectors of Russia and Ukraine, but the change will be gradual and will likely be marked by occasional weather-related setbacks.
Increased Liquidity Prompts Turnaround
The most significant development of the past few years has been the increased participation of investment companies in the agricultural sectors of Russia and Ukraine. The process began slightly earlier in Russia than in Ukraine, with large companies with abundant cash reserves (oil companies or commodity-trading firms, for example) establishing long-term leases with joint-stock companies (former State and collective farms). The companies set up vertically-integrated organizations capable of controlling most aspects of crop production, from input acquisition to processing and marketing of the crops. In April 2000, Ukraine followed suit: the agricultural sector was restructured by presidential decree, and State and collective farms were liquidated, with each farm worker receiving a title for a parcel of land. Many of the former farms resurfaced as private associations comprised largely of former farm workers who elected to lease their small plot of land rather than attempt to farm it individually. Some of the newly formed associations entered into agreements with investment companies that could provide market expertise and operating capital. In return, the investment company typically insists on maintaining full control of the means of production and oversees all aspects of farm management.
The positive aspects of investment companies' involvement in agriculture are that it increases farms' technological capacity, largely through increased access to capital, and enhances productivity by introducing the element of fiscal responsibility. The inevitable result of increased efficiency, however, is that the new vertically-oriented companies and private associations employ only a limited number of former State farm workers and it is difficult for workers to find new jobs. Furthermore, individuals are still forbidden to buy or sell property, and the guaranteed lease payment that Ukraine agricultural associations are required by law to pay to title holders typically amounts to less than twenty dollars per year. (See full report of June 2001 crop-assessment travel by USDA/FAS personnel to Ukraine and Russia.)
Input Use Remains Marginal
The slight increase in fertilizer application rates in Russia and Ukraine is perhaps largely symbolic, in that it signals a reversal in the decline of fertilizer use rather than a return to sound farm-management practices. Even considering that mineral fertilizer application increased by an estimated 20 percent this year, the rate remains extremely low. The current average application rate is estimated at 14 to18 kilograms of active ingredient per hectare, only one-tenth of what some experts would recommend as the optimum rate. The average rate is somewhat misleading, as application rates vary widely from farm to farm, and from region to region. On farms operating under agreements with investment companies, more money is available for the purchase of fertilizer and application rates are higher. Many farms, meanwhile, continue to struggle with chronic cash shortages which began when State support of agriculture dissipated following the breakup of the Soviet Union in 1991.
One persistent input-related problem which has not yet been resolved, and which could impede improvement in crop yield, is the low quality of planting seed. Due to the higher cost of certified seed, most farms continue to use non-certified seed. This reduces the likelihood of achieving the maximum benefit from increased fertilizer use, not unlike attempting to boost gasoline mileage by installing new spark plugs on a car with four flat tires. Increasing fertilizer rates on fields planted with poor quality, non-certified seed frequently results in longer stems and increased lodging. Some analysts indicate that improving seed quality should be the first step on the road to raising yields, followed by increasing the use of plant-protection chemicals, and -- finally -- increasing the rates of fertilizer application.
Surge in Area Also Contributed to Improved Harvest
Ukraine's huge rebound in grain production for 2001/02 was driven in part by the largest year-to-year jump in sown area in forty years. Typically, winter wheat and spring barley area are inversely related. If winter wheat area falls due to either lower sown area or high winterkill, for example, more barley will be sown the following spring. The 2001/02 crop broke from tradition: a 40-percent increase in winter wheat area, driven largely by high wheat prices, was accompanied by a 10-percent increase in spring barley area, and total grain area increased by 2.6 million hectares to an estimated 15.2 million. (Ukraine officials have set the target area for 2002/03 winter wheat at 7.1 million hectares, but final sown area data will not likely be released until December.) The estimated 2001/02 area of Russian wheat and coarse grains increased also. Over the past ten years, a reduction in livestock inventories -- driven in part by lower consumer demand for meat products -- fueled a decline in coarse grain area in Russia and Ukraine. Between 1990 and 1999, cattle herds dropped by 52 percent, hogs by 57 percent, and sheep and goats by 75 percent. Inventories have continued to drop since 1999, but at a much lower rate. The future trend in grain production will depend to some degree on the livestock sector and the demand for feed grains. Some analysts and officials in Russia and Ukraine indicate that restoring livestock herds to previous levels is a priority, which suggests a gradual increase in feed-grain area. Producers also recognize the value of coarse grains and feed-quality wheat as export crops: following Ukraine's bumper 2001/02 grain harvest, estimated exports of wheat and barley increased to 6.0 million tons. Both factors (feed-grain demand and export potential) suggest a potential for continued area growth.
