Agricultural trade and trade policy : a multi-country analysis - Moldova technical report

. I~~S9 61 THE WORLD | ~BANK AGRICULTURAL TRADE AND TRADE POLICY A MULTI-COUNTRY ANALYSIS MOLDOVA TECHNICAL REPORT Natural Resource Management Division Country Deparbnent IV Europe and Central Asia Region The World Bank February 26, 1996  I  PREFACE L. If agriculture is to reach its potential and contribute to the success of economic and political reforms in EC4 Countries', strategies that reflect realistic assessments of the domestic capacities and international markets for agricultural products will be required. EC4NR has initiated a study to provide an accurate and timely analysis of agricultural potentials of Ukraine, Belarus, and Moldova for both domestic and international markets. The two major objectives of the study are: a) to provide initial information and background for identification of projects to be funded by the World Bank or other donors; b) to assist the government in design of policies and initiatives that can contribute to agricultural growth and trade. ii. 'Agricultural Trade and Trade Policy for EC4 Countries: a Multi-Country Analysis" includes country studies focused on domestic policies and analysis of important commodities, as well as an overall report summarizin conclusions and recommendations at the regional level. The statistical information presented in the Moldovan country study was collected by the Moldovan Institute of Agrarian Economics. The information system in Moldova which monitors agriculture sector developments has not yet adapted to the rise of private agriculture. Thus, reliable information on private sector agricultural production are not yet available. A significant portion of the information for private agricultural production in 1992-1994 is based on estimates and must be treated accordingly. iii. The study has been an undertaking of EC4NR under the management of C. Csaki, supported by K. Moeller and A. Zuschlag, AGRAP assisted with administrative arrangement for the study and provided comments on the earlier drafts. G. Fox and G. Feder provided overall guidance and valuable comments throughout this study. Valuable comments were also received from B. Berman, F. Grohs, and several others. iv. The country studies were prepared at the Center for Agricultural and Rural Development, Iowa State University under the leadership of Professor S.R. Johnson, supported by Professor K. Choi. The field work, data collection, and drafting of the country reports was done by S. Sotnikov (Belarus), Y. Yermakov (Ukraine), and C. Murnssen (Moldova). v. The cooperation and support of the Moldovan Ministry of Food and Agriculture, as well as those of Victor Moroz, Director of the Moldovan Institute of Agrarian Economy, and Mr. Alexander Murovsky, economist and Member of Parliament (Moldova), is acknowledged. 1/ Ukraine. Belarus, Moldova. Armenia. Georgia and the Baltics Counties.  Contributors: Christian Mummsen, Research Associate, International Bank, Washington, DC, USA Yuri Y. Yermakov, Graduate Assistant, Iowa State University, Ames, Iowa, USA Sergei Sotnilov, Graduate Assistant, Iowa State University, Ames, Iowa, USA Csaba Csaki, Senior Policy Advisor, EC4, International Bank, Washington, DC, USA Stanley R. Johnson, Director, Center for Agricultural and Rural Development, Iowa State University, Ames, IA, USA E. Kwan Choi, Professor of Economics, Iowa State University, Ames, Iowa, USA The cooperation and support of Dr. Victor Moroz from the Moldova Institute for Agrarian Economy and Mr. Alexander Murovsky, Economist and member of the Moldova Parliament is acknowledged. Abbreviations: CARD: Center for Agricultural and Rural Development CPI Consumer Price Index CIS: Commonwealth of Independent States FSU: Former Soviet Union GDP: Gross Domestic Product IMF: Interational Monetary Fund NMP: National Material Product VAT: Valued-Added Tax  Contents Preface Executive Summary i CHAPTER 1. RECENT TRENDS IN AGRICULTURE 1 CHAPTER 2. POLICY IN TRANSMON 9 CHAPTER 3. COMMODITY ANALYSIS 13 A. SUGARBEET AND SUGAR 13 B. SUNFLOWER AND VEGETABLE OIL 19 C. WHEAT, FLOUR, AND BREAD 23 D. CORN 28 E. PIGS AND PORK 31 F. POULTRY AND EGGS 37 G. FRUITS AND VEGETABLES 43 H. GRAPES AND WINE 49 I. TOBACCO 52 CHAPTIER 4. CONCLUSION 53 Appendix A: Inflation and Exchange Rates 57 Appendix B: Data Sources 59 Appendix C: Methods of Adjusting Costs for Subsidies 60 Appendix D: Foreign Trade Data 62 Appendix E: Basic Dataset for Moldova 79   List of Tables Table 1.1. National product and trade in Moldova in comparable prices (in billion 1991 rubles). 2 Table 1.2. Trade destinations as percentages of total trade in 1994 (1992 in brackets). 2 Table 1.3. Moldova foreign trade summary for the 1990s (in million 1991 rubles). 3 Table 1.4. Moldova trade with the CIS, 1,000 tons. 4 Table 1.5. Terms of trade with CIS and non-CIS countries, 1994, S/ton. 6 Table 1.6. Real input prices and real international prices. 6 Table 2.1. Subsidies in billion current rubles. 9 Table 2.2. Tariff structure for foreign imports in 1994. 12 Table 3.1. Production and use of sugarbeet and sugar. 13 Table 3.2. Sugarbeet sales in public farms. 14 Table 3.3. Physical coefficients for sugarbeet production, major inputs. 15 Table 3.4. Production cost of sugarbeet in public sector farms. 15 Table 3.5. Unit costs of storage and transport of sugarbeet. 16 Table 3.6. Production costs for sugar. 16 Table 3.7. Adjusted costs and implicit subsidies in the sugar chain. 17 Table 3.8. Region comparison of real production costs of sugarbeet and sugar. 18 Table 3.9. Production and use of sunflower and vegetable oil. 19 Table 3.10. Physical production coefficients for sunflower and production. 20 Table 3.11. Production cost of sunflower. 21 Table 3.12. Cost structure of sunflower oil processing at Beltsy Oil Enterprise. 22 Table 3.13. Costs of production of refined sunflower oil in 1994 (per ton). 22 Table 3.14. Real unit cost of sunflower production in regional comparison. 23 Table 3.15. Production and trade of wheat, flour, and bread. 24 Table 3.16. Consumer price index (based on July 1994 = .70) and the price of bread, lei/lcg. 25 Table 3.17. Technological coefficients for winter wheat production. 25 Table 3.18. Cost of wheat production on public farms. 26 Table 3.19. Flour production cost at Cereale mills. 26 Table 3.20. Reported versus adjusted costs of producing winter wheat. 27 Table 3.21. Comparison costs and prices for wheat. 28 Table 3.22. Supply and use for corn. 29 Table 3.23. Physical production coefficients for corn. 29 Table 3.24. Production costs of corn. 30 Table 3.25. Comparison of corn costs and prices in Moldova and Ukraine. 30 Table 3.26. Production of trade, pigs, pork, and meat. 31 Table 3.27. Physical coefficients for pig production in public enterprises. 33 Table 3.28. Pork production cost for public farms. 33 Table 3.29. Pork produciton cost, in pig complexes. 33 Table 3.30. Cost of rail transport for meat, lei (=$0.25) per ton in 1994. 34 Table 3.31. Costs of processing pork in public abattoirs. 34 Table 3.32. The adjusted cost chain for pork in comparison with actual prices. 36 Table 3.33. Three-country comparison of unit costs and prices. 36 Table 3.34. Production and sales of poultry. 38 Table 3.35. Production, trade, and use of eggs. 38  iv . List of Tables Table 3.36. Physical coefficients in public sector poultry production. 39 Table 3.37. Physical coefficients for egg production, public farms. 40 Table 3.38. Poultry production costs for public farms. 40 Table 3.39. Egg production cost for public sector farms. 40 Table 3.40. Poultry meat processing cost in public abattoirs. 41 Table 3.41. Adjusted total per kg cost of producing poultry meat. 42 Table 3.42. Real cost and price of poultry in Belarus, Moldova, and Ukraine. 42 Table 3.43. Production and trade in fruit and fruit products. 44 Table 3.44. Vegetable production and trade, 1990-1993. 45 Table 3.45. Technological coefficients for fruits and vegetables production. 45 Table 3.46. Cost structure of fruits and vegetables production on public sector farms. 46 Table 3.47. Transport cost for fresh fruits and canned fruit to major export destinations, 1994. 46 Table 3.48. Cost structures for concentrated apple juice and tomato paste. 47 Table 3.49. Cost structure for apples and tomatoes for Moldova, 1994. 48 Table 3.50. Production and trade in grapes and wine. 50 Table 3.51. Production costs for grapes in public sector farms. 51 Table 4.1. Summary of transidonary changes in Moldova agriculture in 1991-1993. 55 Table 4.2. Measures of govermnent intervention in Moldova, 1991-1993. 56 Table Al. Inflation and exchange rates in Moldova. 57 Table C1. Adjusdng input costs per unit of output to internadonal prices. 60 Table DI. Moldova foreign trade, 1994 (in mnil. US$). 62 Table D2. Moldova agricultural trade by product and region, 1994, in 1,000 lei (S1 = 4.06 lei). 63 Table D3. Moldova food and agricultral export by product and nation, 1994. 64 Table El. Inflation rates for Moldova, 1992-1994. 79 Table E2. Exchange rates for Moldova, 1992-1994. 80 Table E3. Summary of unit costs in rubles. 81 Table E4. Summary of unit costs in dollars. 81 Table E5. Sunmmary of unit costs in 1991 rubles. 81 Table E6. Summary of unit costs in current and 1991 rubles. 82 Table E7. Average annual consumer prices in rubles. 83 Table E8. Average annual consumer prices in lei. 83 Table E9. Average annual consumer prices in dollars. 84 Table EIO. Total mineral fertilizer application by crop, 1991-1993 (1,000 tons). 85 Table El l. Mineral fertilizer application per ton of harvest. 85 Table E12. Mineral fertilizer application per hectare. 85 Table E13. Calculated adjustment ratios for fertilizer expenses: mineral fertilizer applications. 86 Table E14. Calculated adjustment ratios for fertilizer expenses: kg per ton of harvest. 86 Table E1S. Calculated adjustment ratios for fertilizer expenses: implied cost per ton 87 Table E16. Calculated adjustment rations for fertilizer expenses: price per kg. 87 Table E17. Fuel and energy adjustment ratios, 1991-1993. 88 Table El 8. Fuel and energy at processing level (assumption: expenses equal in 1993). 88 Table El9. Cost adjustments, 1992-1993. 89 Table E20. Foreign trade: sugar, 1991-1994. 90  Trade Issues and Opportunites: Moldova ReDort v Table E21. Foreign trade: confectionery items, 1991-1994. 91 Table E22. Foreign trade: vegetable oil, 1991-1994. 92 Table E23. Foreign trade: sunflower seeds, 1991-1994. 93 Table E24. Foreign trade in grain, 1991-1993. 94 Table E25. Foreign trade: wheat flour, 1991-1993. 95 Table E26. Foreign trade: meat and meat products, 1991-1993., 1991-1994. 96 Table E27. Foreign trade: eggs and egg products, 1991, 1991-1994. 97 Table E28. Foreign trade: fruits and berries, 1991-1994. 98 Table E29. Foreign trade: canned fruit, 1991-1994. 99 Table E30. Foreign trade: tomatoe products, 1991-1994. 100 Table E31. Foreign trade: fresh vegetables, 1991-1994. 101 Table E32. Foreign trade in wine, 1991-1994. 102 Table E33. Foreign trade: grapes, 1991-1994. 103   I. EXECUTIVE SUMMARY 1.1 This report provides an evaluation of Moldova's potential competitiveness for trade of key agricultural commodities. Predicting future patterns of trade is, of course, not a simple task, especially with the economic restructuring. The structure of agricultural production and exports for Moldova that developed under central planning was heavily distorted by a rigid pricing system, subsidies to both producers and consumers, monopoly and strict administrative regulation of hard currency and the exchange rate. The economic transition stimulated in part by the price liberaliztion and the economic reforms after the break-up of the forner Soviet Union (FSU) will result in a new production and trade structure for Moldovan agriculture. 1.2 With the onset of the reforms, differences between international and domestic input and output prices and increased responsibility for their economic condition will become less pronounced. Domestic producers, faced with the new input and output prices will increase efficiency to meet competition in international markets. With a more open trading regime, Moldova will specialize in commodities that have it can produce at comparatively lower cost. Producers of commodities that benefitted from subsidies and/or trade restraints under the previous economic regime will face increased pressure for change. Information on the present agricultural policy, changes in production costs for major commodities and adjustments in production and consumption patterns can help to guide the reforms are leading to a more efficient, competitive, export-oriented agriculture for Moldova. 1.3 Chapters 2 and 3 of this report are devoted to an analysis of recent trends in Moldova macroeconomic and agricultural policy, and the associated restructuring of agriculture, while Chapter 4 contains a more detailed description of these trends and patterns for selected commodities. The analysis of these trends and patterns is based on two key assumptions. First the changes in production costs since 1990 will help to understand the evolution of domestic production, use, and trade patterns that will occur as the market reforms progress. Second, the available production cost estimates adjusted and compared to other countries can provide an indication of competitiveness and future export opportunities. For each commodity, data were collected on the following aspects of the production, processing, and distribution systems: * Trends in supply, use, and trade * Policy issues and changes * Production costs for farms and processing enterprises * Capacities based on historical through-put = Production costs net of input subsidies - Prices and costs adjusted for international comparisons An emphasis of the report is to provide information that can be used to anticipate the consequences of more closely linking Moldova agriculture to international markets. 1.4 The macroeconomic environment is important to an understanding of the present situation for agriculture in Moldova. In August 1991, Moldova declared its independence from the former Soviet Union. Three years later, real GDP had more than halved. Two major shocks were primarily responsible for this sudden decline: the hyperinflation brought on by financial imbalances and a disruption of the domestic allocation and distribution system; and a breakdown of Moldova's trade relations due to the collapse of the state trading and payments systems within the FSU. This decline has continued, despite moves to liberalize prices and trade and improve the financial balance. The reasons for the continued decline are related to costs of adjustment and the fact that Moldova has not adequately addressed the deeper institutional reforms necessary for a successful market economy. The latter include legal and regulatory measures to support efficient exchange of goods and services, the regulation of monopoly, land reform, and the establishment of asset markets.  ii Executive 1.5 Moldova is a small, densely populated agricultural economy. In the Soviet period it depended on energy and grain imported from other republics, while it exported meat, fruits and vegetables, wine, and tobacco. Independence coincided with a breakdown of the historic trade ties with the other republics of the FSU that had guided Moldova's economy. During 1991-1993 real exports declined at about the same rate as that of decline of GDP (50%). The rate of decline of agricultural exports was even higher (70%). In fact, the export shock and the adjustment to foreign input prices have been argued as major reasons for the fall of national output. In the short tern, the path to recovery and growth will almost surely depend on the performance of agriculture. The leaders of Moldova and the donor organizations require information for use in identifying opportunities for stimulating growth in agriculture and associated export possibilities, if the new policy initiatives are to be effective. 1.6 The movement of key input prices to international levels has already led to considerable change in production, use, and export patterns. Changes in real input prices have been substantial. For example, during 1991-1993 real agricultural wages decreased by 88%, while the real price of fertilizer increased by 116%, formula feeds by 222%, fuel by 430%, natural gas by 628%, and electricity by 650%. Although domestic energy prices have yet to reach international levels, these changes have resulted in significant increases in the cost of production for energy-intensive commodities. Alternatively, the producers of labor-intensive commodities have benefitted. Labor has been an important component of the production cost for crops, with the share ranging from 33% for wheat to 57% for sugarbeet in 1991. In contrast, animal products have been feed intensive; the 1991 feed cost shares were 58% for poultry, 63% for pigs, and 64% for eggs, respectively. Hence, the fall in real wages has favored crop more than animal production. 1.7 The pace of the adjustment by producers to the new set of input prices has been modified by the domestic agricultural policy. The total resources devoted by the government of Moldova to agriculture during 1992-1993 increased from 10 to 60 billion rubles in current prices. Due to high inflation, however, real subsidies declined by two times (prices in 1993 were 12 times higher than in 1992). The approach to the subsidization for agriculture has also become more complex. Direct subsidies have been reduced. The producer subsidies, with the liberalization of prices, have tended to take the form of low-interest or forgivable credits. The specific commodity analyses suggest, however, that large hidden subsidies for agriculture remain. In most cases, these indirect subsidies have shifted from favoring consumers to favoring producers. Input and consumer subsidies are less important currently than during the 1991-1993 period. In 1994, Fertilitatea (a state-owned fertilizer and pesticide distribution monopoly) was restructured. In previous years, it had been a major institution for delivering subsidized credits and inputs. 1.8 The full imnpact of the two potentially largest distortions are, however, difficult to measure: the slow pace of privatization and the availability of credit. The most serious threat to the future of Moldovan agriculture is not subsidies or taxes, but the high price or unavailability of credit. Progress in reducing the interest rate for credit, requires macroeconomic stability, achieved in 1994. Collateral is another factor important to securing lower cost credit for agriculture. Without viable collateral, the price of credit to agriculture will likely remain high. Progress in land reform and in privatization are thus essential for not only providing incentives for improvements in efficiency but as well for assuring availability of lower cost credit to agriculture and agribusiness. 1.9 Foreign trade and hard currency regulations have been relatively unimportant determinants of the trade volume compared, for example, to local supply and demand conditions. Most of the declines in exports were due simply to the contraction of domestic production. Exceptions are fruits, the production of which increased by 49% during 1991-1993, but for which exports declined by 22%; apple juice concentrate and grapes (18% and 59%, respectively). In contrast to most other commodities, export of sugar increased substantially from 1991 to 1993. At the same time, production of sugar actually fell slightly. This asymmetry  Summary iii between production and export is common for many of the major agriculture products. Another example is meat, where production fell dramatically while export remained stable. The sharp decline in domestic purchasing power or per capita income, along with the liberalization of prices led to marked decreases in domestic demand. Partly due to government subsidies and other interventions, supply did not respond quickly to the domestic demand changes, and surpluses emerged and were exported. Commodity-Specific Results 1.10 Fruit production has been altered only modestly by the transition and is now the most promising export for the agricultural sector. The harvest in 1993 was 49% higher than in 1991. Data on canning and juice processing are not reliable, but it appears that these industries did not contract (at least until 1994). The real unit production cost for fruit halved from 1991 to 1994. The main reasons were falling real wages and a higher yields. Also, fruit producers appear to have behaved rationally in response to the price changes. They increased labor use by 78% following an 88% decrease in real wages. Higher yields reduced real unit expenses for fuel and pesticides. Exports of fresh and canned fruit have shown decreases perhaps due to informal trade, but have stayed at relatively high levels. In 1994, due to the drought, these trends were not so pronounced. Trade restrictions that may have played a role involve the issuance of export licenses and the limited number of exporting agents. 1.11 Although vegetables are important to agricultural export, the situation here appears not as promising as for fruit. Yields had been around the FSU average and have fallen during the transition. Exports have also dropped considerably. Real unit production costs for vegetables have been falling in the 90's, although by 1994 they have almost leveled up. The reasons are lower real wages and reduced input applications (pesticides, fertilizer, and probably fuel). Fertilizer use was sharply reduced in vegetable production (by 82% during 1991-1993). As with other crops, the reduction in physical input use was greater than the real price increase. The relative share for fertilizer in the unit production cost has fallen. Labor use per ton of output has fluctuated, mainly reflecting yields. The increase in man-hours per ton of vegetables produced has not affected real unit labor costs due to the fall in real wages. 1.12 Grapes and wine were among the most important and promising export commodities. In 1993, these products generated 16% of all revenue from agricultural export to the FSU nations. In 1991 they accounted for 10% of all Moldovan export earnings. Due to a low labor cost and to fertile soils, grape production has a relatively low unit cost, around $50 per ton. The real unit production cost for grapes fell 54% from 1991 to 1994. The production of grapes increased 18%, while exports dropped by 59%, indicating unrealized opportunity due to low foreign demand and perhaps export restrictions (and informal trade and barter). There is an potential for exporting table grapes to the West, if the growers can establish reliable trading partners. 1.13 Production costs for wine are also low, around 6 cents per liter. Retail prices have been around 20 cents for a liter of dry red wine. At wineries an unbottled liter costs 15 cents. But, the international wine market and that in the FSU is highly distorted. In 1993, for example, Spain was selling subsidized wine for I I cents an unbottled liter in Moscow. Of course, wine is not a homogeneous product. Moldova is capable of producing high quality wine. Success in the European market could be an important source of hard currency for Moldova. The major problem appears to be packaging and marketing. Moldovans have a reputation as being good wine makers. But, there is a lack of processing technology and marketing. Thus, as with fruits and vegetables, Moldova's current competitive edge appears to be in raw produce rather than final consumption goods. The recent decision (September 1, 1995) to impose 15 lei per bottle excise duty  iv Executive on imported spirits may be, unfortunately for the development of this sector, a indicator of more protectionist policy for domestic producers of wine and other spirits. 1.14 The grain sector in Moldova is a prime example of the failed command system. The state enterprise Cereale has sufficient storage and processing capacity for all grains. However, it has created a major problem for the flour and bread industry as well as for the livestock sector, especially during the reform. Foreign trade and storage for domestic trade were monopolized by Cereale, and prices were set by the state. Thus, Cereale's pricing policy was governed by political motives rather than forces of supply and demnand. Cereale's financial difficulties and the ability to pass on high financing charges inflated raw material costs for flour and feed production, inducing farms to produce their own feeds and putting added stress on the concentrated livestock enterprises. Much of the storage and processing capacity was idled. The breakup of Cereale was initiated in 1994, along with the liberalization of grain export and import. If these actions are sustained, domestic grain prices will soon approximate boarder prices. 1.15 Still grain production has been constantly adjusting to changing input prices. The real production cost of wheat, for example, fell continuously during the transition period (by 33% during 1991-1993). Real grain processing cost (excluding raw material) increased fourfold in two years. There were four reasons for this asymmetric real cost adjustment in primary production and processing. The first was the higher energy cost of grain processing. The second was the monopoly of domestic and foreign trade in grains by Cereale. While the real production cost of wheat fell, the state procurement price remained at a constant level in comparable prices. This meant in turn that the reduced cost of primary production benefitted only the farms and was not passed through to producers of flour and bread and to consumers. Third, the debt problem of Cereale, especially in 1993, also contributed. Raw wheat costs to processors were artificially inflated by changes of Cereale to reduce high interest payments. Fourth, most of the wheat processed into flour was imported and the official exchange rate depreciated significantly in 1992. The 1994 real production cost of winter wheat and corn appears low even after calculation at the intemational input prices. Thus, Moldova, similar to Ukraine, in the short run will be competitive in the intemational market of wheat. However, to exercise this option Moldova must consolidate the major adjustments in government involvement in agricultural production, and address the problems of monopoly in assembly, storage, and processing. 1.16 The real cost of sunflower production also fell during 1991-1993 (by 27%). This trend was mainly due to changes in input prices and technology. The decline in fuel and fertilizer use was dramatic (89% and 55%, respectively). Labor man hours increased in 1992, again probably due to lower wages and reduced use of machinery. In 1994, however, production costs of sunflower increased almost ,back to the level of 1991, partly due to protectionist trade policy. In 1994, the Moldovan government imposed an import duty of 10% on sunflower seed, and a 50% duty on imported vegetable oil. If scale economies are important in oil processing, this move could reduce the cost at domestic plants (if they produce at a higher scale). However, processing costs are less than 20% and gains due to large-scale processing may be small. The oil and fat industry in Moldova is a duopoly with two large processing enterprises. Thus, privatization of these plants must go hand in hand with monopoly regulation. Sunflower seed appears to be more costly to produce in Moldova than in Ukraine. The real production cost in 1993 was about 25% higher than in Ukraine. The difference is not large enough to lead to the conclusion that the Moldovan sunflower seed and oil industry cannot be competitive, especially since both the Moldovan and Ukrainian unit production costs of sunflower seed and oil were only a small fraction of the international market price. 1.17 The unit production cost for sugarbeet is low compared to Ukraine and Belarus. Production costs of sugarbeets remained almost unchanged throughout the 90's. It appears that Moldova has for opportunity in the FSU sugar market, and even in the international market. However, to increase sugar  Summary v export, Moldova must first reestablish trade ties with Russia and the other countries of the FSU. Much of the future of the Moldova sugar industry will rely on the short run demand in Russia. Export and import of sugar are heavily regulated in western Europe, the other natural customer. In a reported attempt to secure the domestic food supply, the government imposed export quotas in 1991 by issuing licenses. The reversion of this policy resulted in a surge of exports in 1993. In 1994, Moldova implemented a complex tariff scheme for sugar imports from outside the CIS. In generl, the tariff on sugar and sugar products was 1000/o. These tariffs will not promote export-led growth in the sugar sector. Instead, consumers suffer and producers are given incentives to produce import substitutes, e.g., high-quality sugar. The high tariffs in Moldova, which are to be reduced to 25% under the IMF agreement, most likely will benefit only illegal traders. I.18 Similar to other FSU nations, Moldova has experienced a massive decline in its livestock industry. Paradoxically, this has not affected Moldova's position as a net exporter of meat. The reason is the sharp decline in domestic purchasing power. Demand has fallen even more rapidly than supply. Private farm production has remained stable. This difference between the private and larger enterprises has been mainly due to a feed problem. While private farmers and other public farms (the former kolkhozes and sovkhozes) could use their own crops for feed, the pig complexes (meshkhozes), for example, rely primarily on state supplies. The state enterprise Cerale drastically reduced grain imports and increased the feed price, in part to recover the cost of financing its debt. Pig and othe livestock complexes could purchase less feed and were compelled to reduce their production. 1.19 The modest decline in exports of meat, 11% from 1991 to 1993, should not be interpreted as an indication of strength in the Moldova livestock sector. The relative success of meat export has been mainly due to the fall in domestic income. To assess Moldova's cost position in an international context while controlling for subsidies, it is best consult adjusted (to international input prices) cost for 1993 ($1.42 per kg). Since 1993, Moldova's real exchange rate has appreciated, increasing the unit production cost in dollars. Including mark-ups and marketing costs, a realistic estimate for a Moldovan border price is about $2 per kg of pig meat. 1.20 When domestic demand recovers, it is likely that Moldova be a net importer of meat. Thus, how long Moldova will export meat depends on the pace of the economic recovery and domestic demand. Poor meat quality makes the Western market unaccessible, and the import demand of the other FSU countries has been volatile. The domestic cost of pork adjusted for the international price is not much below the Western level. Future livestock feed and energy prices will most likely be detennined by the international prices. Moldova is a net importer of both inputs. There is a current labor cost advantage. But the major inputs for livestock production are feed and energy. Thus, Moldova's livestock industry is not a likely candidate for export growth. Subsidization of the livestock sector will contribute to economic waste in the short run, and incentives for investment that are difficult to maintain. For the same reasons, preferential export subsidies and import tariffs are not likely to be sustained in the longer run. 1.21 The collapse of state-owned poultry enterprises was due mainly to two developments. First, real input prices rose rapidly. The liberalization of energy prices made production more expensive for all farms. The sharp increase in real feed prices in 1992, however, affected the state poultry farms most, since other farms were able to use their own grains for feed. Second, there is clear evidence that the 1992 and 1993 procurement prices were well under real unit production costs. State farms had large losses from poultry production, even accounting for underestimation of cost due to high inflation. In 1991, most farms almost broke even. However, in the following year, real cost increased 60% while the real procurement price decreased by 35%. Despite the low procurement price, the government sold the poultry to state processing enterprises at an even lower price. Abolition of consumer subsidies and retail price controls has resulted in termination of these practices.  vi Executive 1.22 The patterns of real production cost for poultry and eggs during 1991-1993 were almost identical. Both rose continuously (by 108% and 80%, respectively). The only difference was that the real unit poultry cost increased steeply in 1993 and 1994, while the real unit egg cost did not increase as much. Egg production was more labor intensive. The main reason for the poultry cost increase was the higher feed cost. While production costs for live weight pork and pouhry have remained almost identical during the last four years, there were differences in their cost structures. Feed was a larger cost comnponent for pigs than poultry. Labor costs were higher for pig production. This could make poultry production relatively cheaper if real wages rise. Alternatively, fuel and energy costs were higher for poultry. Livestock production costs include 80% for inputs that Moldova must import, feed and energy. Thus, cost advantages for livestock, in the sense that they exist, are largely due to low labor costs. 1.23 Moldova was historically the largest tobacco producer in the FSU. Due to favorable climatic conditions and the availability of labor in rural areas, this labor-intensive crop also has been important to Moldovan agriculture during the transition. On average Moldova has produced about 50,000 tons of tobacco per year. However, due to a decrease in FSU demand and bad weather conditions, the production of tobacco has decreased. In 1994, Moldovan farms produced about 38,000 tons of tobacco (80