TRIP REPORT

Crop Assessment Travel to Ukraine and Russia, May 26 - June 10, 2001

Analysts from USDA/FAS traveled to Ukraine and Moscow to assess 2001/02 grain harvest prospects for both countries and examine the impact of the recent restructuring of Ukraine’s agricultural sector. The team met with local and republic-level agricultural officials, independent analysts, and private farmers. Interviews and observations indicated that Ukraine grain production will rebound sharply from last year’s disappointing level and that restructuring, which involved the dissolution of State and collective farms and the establishment of private agricultural associations, could have a significant beneficial impact on Ukraine’s agricultural sector by introducing the element of fiscal responsibility. Russia is on course for a second consecutive year of above-average grain yield.

Prospects for Ukraine’s 2001/02 grain harvest are good. The USDA forecasts total grain production at 32.3 million tons (including roughly 1.0 million of pulses and buckwheat), up 7.5 million or 30 percent from last year. Wheat production is forecast at 19.0 million tons, up 8.8 million or a whopping 86 percent from last year. The increase will be the result of several factors:

• a 30-percent jump in winter wheat area;

• favorable weather throughout the growing season;

• modest increase in the amount of fertilizer and herbicide application;

• increased efficiency in farming operations resulting from last year’s restructuring of former State and collective farms.

Estimated wheat area for 2001/02 grew to 7.0 million hectares from 5.3 million last year. The increase was driven by high wheat prices last fall and low winterkill. Despite the higher winter grain area, which typically results in a reduction in spring grain planting, estimated 2001/02 spring grain area dropped relatively little from the 2000/01 level as demand for feed grains remains strong. Forecast area for spring barley, Ukraine’s chief spring grain, fell from 3.7 million to 3.2 million hectares, not a large drop considering the 1.8 million hectare increase in estimated winter wheat area. Forecast total grain area increased by 0.7 million hectares, to 13.5 million. Weather has been unusually good for both winter and spring grains. Establishment conditions for winter grains were excellent, winterkill was a fraction of last year’s level, and spring precipitation has been plentiful.

The use of fertilizers and plant-protection chemicals increased this year, although the amount of active ingredients applied remains below optimal levels. Current application rates are only about 25 percent of the rates of ten years ago, during the so-called intensive technology period prior to the breakup of the Soviet Union. Wheat remains the priority grain crop in Ukraine; most fertilizer is applied to wheat fields while spring barley receives virtually none.

Despite the increased input use, most observers forecast that the percentage of milling-grade wheat will decrease this year, since the wet conditions that contribute to high yield also tend to reduce grain quality. A near doubling of total wheat production may translate to a relatively slight increase in milling-grade wheat output: according to a report from UkrAgroConsult, a Kiev-based firm specializing in commodity-market analysis, the amount of milling wheat (1^st, 2^nd, and 3^rd grade) will increase from 2.5 million tons in 2000/01 to 3.6 million this year.

In April 2000, Ukraine’s agricultural sector was restructured by presidential decree. State and collective farms were liquidated and each farm worker was issued a title for approximately four hectares (ten acres) of land, plus a share of the property of the State farm such as machinery and physical structures. The title holder can choose between farming the land independently, forming an association with other title holders, or leasing the land to someone else. The sale of land is prohibited. Many title holders have elected to lease their land back to the former State farms, which have been re-established as private agricultural associations. If the title holder chooses this option, he or she is entitled by State law to receive annual lease payments of at least one percent of the value of the land. The value of each four-hectare plot is determined by the Land Cadaster Institute using methodology developed by the Ministry of Economics based on the productivity of the land, grain prices, and other factors.

Some of the newly formed associations have entered into agreements with investment companies that 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 director of the association, who is frequently but not always the former State farm director, is accountable to the investment company for the performance of the farm. If the association is not linked to an investment company, the director stands to benefit directly from efficient farm management, in the form of potential profits. One association in Cherkassy oblast in central Ukraine, for example, has not entered into an agreement with an investment company, but has been able to increase efficiency chiefly through shrewd management. The higher yield potential of wheat fields on this farm, compared to the fields of neighboring farms enjoying the same favorable weather, suggests that output can be increased without the benefit of a sudden infusion of cash from an investment company.

Although most government and independent observers maintain that associations’ opportunity to earn profits will lay a foundation for modest but steady improvement in Ukraine’s agricultural output, the impact of improved farm management clearly cannot be isolated from other factors contributing to the higher estimated grain output for 2001/02. Farmers have benefited from two consecutive years of relatively high grain prices, and weather has been good thus far this season. The benefits of restructuring come at a price, however, if one considers the potential social impact of increased efficiency on a village whose existence has for generations been inextricably linked with a large collective farm. A farm that used to employ 300 workers may now employ less than half that number. In rural areas, few employment opportunities exist besides farm work, and it is difficult for workers to find new jobs given the lack of training programs or financial resources with which to relocate.

A local agricultural official in Kominternovsky raion in Odessa oblast cited an example by which farms, encouraged by the local administration, try to provide a safety net of sorts. Sugar beets are planted, not so much to make money – the nearest sugar processing plant in 100 kilometers away – but to provide work chiefly for older women, weeding the fields. A family may be responsible for weeding a specific section of a field and the workers in turn receive 20 percent of the sugar processed from the beets harvested from its section. Sugar also frequently serves as part of farm workers’ salaries.

The involvement of investor groups in agricultural production also has had an impact on the structure of livestock inventories. Many farms who entered agreements with investment firms killed off their herds because livestock is not quickly profitable and not as attractive to investors. Meanwhile, increasing inventories on smaller, private enterprises are balancing out to some degree the decline on the larger farms. Some observers forecast gradual growth in Ukraine's livestock inventories and indicate that the poultry sector will be the first to grow, because producers can receive the most rapid return on their investment, followed by hogs, then cattle.

Russia’s grain production outlook is largely similar to Ukraine’s, except that Russia is not coming off a disastrous harvest last year. Winter wheat area increased by over one million hectares, weather has been favorable, and fertilizer application increased marginally. Total grain production for 2001/02 is forecast at 67.6 million tons (including roughly 2.2 million of pulses and buckwheat), up 2.0 million from last year. Wheat production is forecast at 37.0 million tons against 34.5 million last year. Winterkill losses were relatively low, but the mild winter could have a negative impact on grain quality in the form of increased insect infestation. Furthermore, some observers indicate that supplies of plant-protection chemicals are down slightly from last year. As in Ukraine, fertilizer applications are still only a fraction of the level applied ten years ago, but materials are being applied more efficiently and with less waste. The consensus of most analysts is that progress in fertilizer and chemical application will be gradual. The low quality of planting seed remains a major problem for grain producers. An independent commodity analyst in Moscow maintains that poor quality seed is the major impediment to significantly increasing both yield and quality of grain, and in order to maximize the beneficial effects of increased pesticide and fertilizer use, farms must first expand the use of certified seed.

Conditions can vary widely from region to region in terms of farm efficiency, financial resources, access to agricultural inputs, and State support at the local level. Roughly half of all fertilizers and plant-protection chemicals sold in Russia last year were reportedly purchased by farms in Krasnodar Krai, an administrative unit in the North Caucasus region that contains only 4 percent of Russia’s total grain area and 15 percent of the winter wheat area.

Although yield potential of this year’s grain crop is high, final Russian output will depend on harvest weather. Even in a relatively good year, 3 million hectares of grain can remain unharvested due to inclement weather, usually in Siberia. Yield losses are compounded by a chronic shortage of harvest machinery. According to some estimates, the current fleet of working combines stands at only 30 percent of the number needed to complete the harvest in a timely manner. Experts estimate that machinery-related losses totaled roughly 15 million tons in 2000/01, and the situation is unlikely to improve this year.

For more information, contact Mark Lindeman with the Production Estimates and Crop Assessment Division on (202) 720-0888.