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

* THE 1I563 WORLD | t BANK AGRICULTURAL TRADE AND TRADE POLICY A MULTI-COUNTRY ANALYSIS UKRAINE TECHNICAL REPORT Natural Resource Management Division Country Department IV Europe and Central Asia Region The World Bank October 12, 1995  CURRENCY EQUIVALENT Currency unit = karbovanets, abbrev. krb US$1 = 59 (average for 1991) US$1 318 (average for 1992) US$1 = 9,749 (average for 1993) US$1 = 72,063 (average for 1994) US$1 = 130,000 (as of March 1995) WEIGHTS AND MEASURES feed unit oat unit ha hectare kW kilowatt mt metric ton ABBREVIATIONS CARD Center for Agricultural and Rural Development CPI Consumer Price Index FSU Former Soviet Union F.O.B. Free on Board HS Harmonized System GDP Gross Domestic Product GNP Gross National Product IMF International Monetary Fund L/C Letter of Credit NIS Newly Independent States MOAF Ministry of Agriculture and Food SCBP State Committee of Bread Products SCFI State Committee for Food Industry UKRMASLOZIRPROM Ukrainian Association of Oil Seed Processing Plants UKRSUKAR Ukrainian Association of Sugar Mills UKRPTAKHOPROM Ukrainian Association of Poultry Producers UIAE Ukrainian Institute of Agricultural Economics USD US Dollar VAT Value Added Tax  Contents PREFACE iv EXECUTIVE SUMMARY v BACKGROUND 1 2. RECENT TRENDS IN AGRICULTURAL PRODUCTION AND TRADE 3 A. Macroeconomic Conditions 3 B. Monetary and Exchange Rate Policy 5 C. Agricultural Production 7 D. Agricultural Policy 8 E. Procurement and Procurement Prices 10 F. Agricultural Input Prices and Use 11 G. Production Cost of Major Agricultural Commodities 16 H. Agricultural Trade and Trade Policy 17 3. COMMODITY ANALYSIS 23 A. Methodology, Method, and Data 23 B. Sugar Beet and Sugar 24 C. Sunflower Seed and Sunflower Oil 32 D. Winter Wheat and Wheat Flour 40 E. Corn and Formula Feeds 46 F. Hogs and Pork Meat 51 G. Poultry 56 4. CONCLUSIONS 63 ANNEX 1. STATISTICAL ANALYSIS 67 ANNEX 2. APPROACH 87  I  TABLES IN TEXT 1.1 Ukrainian Share of Agricultural Production 1985-1990 ......................... 1 2.1 Macroeconomic Indicators for the Ukrainian Economy and Agriculture .............. 4 2.2 Official Monhtly Cumulative and Annual Average CPI in Ukraine, 1991-1994 .... ...... 5 2.3 Official Average Monthly and Average Annual Exchange Rate for Ukraine, 1991-1994 ... . 6 2.4 Output Price/Production Cost Ratios for Major Agricultural Commodities in Ukraine ... . 10 2.5 Agricultural Inputs Prices, Ukraine 1991-1994 ............................. 13 2.6 Agricultural Inputs Annual Average Price Index ............................ 13 2.7 International/Domestic Input Price Ratios in Ukraine ......................... 14 2.8 Input Use In Production of Major Agricultural Conmmodities in Ukraine ............. 15 2.9 Unit Production Cost of Major Agricultural Commodities in Ukraine .............. 16 2.10 Role of Agriculture and Food in Trade in Goods and Services in Ukraine .17 2.11 Export Duties in Ukraine in 1993 ..................................... 20 2.11 Import Tariffs, Ukraine,1993 ....................................... 22 3.1 Production and Use of Sugarbeet and Sugar, Ukraine, 1991-1994 ................. 25 3.2 Input Use Per Ton of Sugarbeet in Ukraine, 1991-1994 ....................... 27 3.3 Production Cost of Sugarbeet in Ukraine, 1991-1994 ......................... 29 3.4 Cost of Sugarbeet Processing in Ukraine, 1991-1994 ......................... 30 3.5 Simulation Results: Unit Cost of Sugar Production in Ukraine, 1991-1994 .... ....... 31 3.6 International Comparison of Sugarbeet and Sugar Unit Cost .................... 32 3.7 Production and Use of Sunflower Seed and Oil in Ukraine, 1991-1994 .............. 33 3.8 Input Use per Ton of Sunflower Seed in Ukraine, 1991-1994 ................... 35 3.9 Production Cost of Sunflower Seed in Ukraine, 1991-1994 ..................... 36 3.10 Production Cost of Sunflower Oil in Ukraine, 1991-1994 ...................... 37 3.11 Simulation Results: Production Cost of Sunflower Oil in Ukraine, 1991-1994 ... ...... 39 3.12 International Comparison of Sunflower Seed and Oil Cost .39 3.13 Production and Use of Winter Wheat, Ukraine, 1991-1994 .... . ............... 40 3.14 Input Use per Ton of Winter Wheat Production in Ukraine, 1991-1994 ............ 43 3.15 Production Cost of Winter Wheat in Ukraine, 1991-1994 ...................... 43 3.16 Production Cost of Wheat flour in Ukraine, 1991-1994 ....................... 44 3.17 Simulation Results, Production Cost of Winter Wheat in Ukraine, 1991-1994 ... ...... 45 3.18 International Comparison of Winter Wheat Cost .......... .................. 46 3.19 Production and Use of Corn in Ukraine, 1991-1994 ......................... 46 3.20 Input Use per Ton of Corn Production, Ukraine, 1991-1994 .................... 47 3.21 Production Cost of Corn for Grains in Ukraine, 1991-1994 ..................... 48 3.22 Production Cost of Formula Feeds, Ukraine, 1991-1994 ....................... 49 3.23 Simulation Results: Production Cost of Corn in Ukraine, 1991-1994 ............... 50 3.24 International Comparisonof Corn Cost ............................... 50 3.25 Pork Production and Use in Ukraine, 1990-1994 ........................... 51 3.26 Input Use per Ton of Pork Production in Ukraine, 1991-1994 ................... 53 3.27 Production Cost of Pork in Ukraine, 1991-1994 ............................ 53 3.28 Production Cost of Pork Meat in Ukraine, 1991-1994 ........................ 54 3.29 Simulation Results: Production Cost of Pork in Ukraine, 1991-1994 ............... 55 3.30 International Comparison of Pork Meat Cost . ............................. 55 3.31 Poultry and Eggs Production and Use in Ukraine, 1991-1994 ................... 56 3.32 Input Use per Ton of Poultry Meat Production in Ukraine, 1991-1994 .............. 57 3.33 Production Cost of Poultry Meat in Ukraine, 1991-1994 ...................... 58 3.34 Input Use per 1,000 Eggs in Ukraine, 1991-1994 ........................... 59 3.35 Production Cost of Eggs in Ukraine, 1991-1994 ............................ 59  3.36 Simulation Results: Production Cost of Poultry Meat in Ukraine, 1991-1994 .... ..... 60 3.37 Simulation Results: Production Cost of Eggs in Ukraine, 1991-1994 .............. 60 3.38 International Comparison of Poultry Meat Cost ............................ 61 4.1 International Price/Calculated Cost Ratios in Ukraine in 1991-1994 ................ 63 4.2 International Price/Reported Cost Ratios in Ukraine in 1991-1994 ................ 64 4.3  PREFACE i. Strategies that reflect realistic assessments of the domestic capacities and international markets for agricultural products will be required if agriculture is to reach its potential and contribute to the success of economic and political reforms in EC4 Countries'. 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 summarizing conclusions and recommendations at the regional level. 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. 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. Mumssen (Moldova). Valuable comments were received by M. Lundell. v. The Ukrainian Institute of Agricultural Economics (UIAE) was a major collaborator in this study. The Ministry of Agriculture and Food also provided active support for the study. Dr. Peter Subluk and Dr. A. Shpichak were the main coordinators of this study. Dr. L. Khudoliy, Dr. V. Bilash, Dr. R. Boyko provided the core of the statistical data extensively used in this study from the UIAE. We are also indebted to Dr. A. Shpichak, who provided valuable comments and assisted in reviewing earlier drafts of the report. 1Belarus, Moldova, Armenia, Georgia and the Baltics Countries.   Executive Summary 1. This report is part of a broader Agricultural Trade Issues and Opportunities Study for Ukraine, Belarus, and Moldova that has been prepared by a team supported by the World Bank. This report is a joint effort of the World Bank, the Center for Agricultural and Rural Development (CARD), and the Ukrainian Institute of Agricultural Economics (UIAE). 2. The purpose of this report is to assess the issues and opportunities for expanded agricultural trade. Ukraine is a nation with a significant endowment of agricultural resources, and under the FSU exported agricultural commodities to the other republics. Ukraine has traditionally produced an exportable surplus of grains (mainly winter wheat), sugar, sunflower and meats. The question raised in this report relates to what might be expected in foreign trade potential as reforms in Ukraine evolve. The objective was accomplished by analysis of production, unit costs and output prices trends for six major agricultural commodities: winter wheat, corn, sunflower, sugar beet, pork, poultry, eggs and related processed products since the initiation of the economic reform (focusing on the period 1991-1994). 3. The assessment of agricultural trade potential is made using two methods. The first method involves converting domestic prices at prevailing exchange rates to Russian rubles and U.S. dollars and comparing them to international commodity prices and those in Russia. This provides an indication of the price at which Ukraine could "profitably" sell commodities in the Russian or international market, given the prevailing domestic prices. The domestic prices, of course, reflect the continual heavy intervention of the government. 4. The second approach is to convert the prices to a 1991 basis. In 1991, Ukraine, Moldova, and Belarus were all on the ruble standard. Thus, by adjusting for inflation and using 1991 prices, there is an opportunity to compare real prices of major agricultural commodities among these three countries and Russia without any reference to the exchange rates of domestic currencies to the US dollar. If foreign exchange markets were perfect, one would expect these comparisons to be similar to those generated by the first approach, and they are generally. 5. The comparisons of relative prices calculated in US dollars or 1991 rubles must be carefully interpreted. Government is heavily involved in Ukraine agriculture and in the agriculture of neighboring countries. Although, the relative prices indicate "competitiveness" in international markets, it could be existent on the basis of unsustainable low-interest credit and other agricultural input subsidies. To the extent possible, adjustments have been made for the subsidies in the comparisons of relative costs and prices. Thus, the study presents a variety of production cost simulations reflecting potential changes in agricultural input and output prices during transition period that may effect the direction and volume of future trade flows. Even with these adjustments, however, the comparisons represent only guidelines to indicate where the agriculture in Ukraine might be competitive in international markets, if Ukraine continues on its current course of agricultural reform.  vi Uckraine Country Report 6. Finally, the comparisons do not deal with the problem of actually exporting agricultural commodities. Systems for export require sophisticated trading institutions, quality control, payments clearance, and other support activities. These are generally not present in Ukraine. Ukraine is more able to trade with nations of the FSU than on international markets. In short, the system for support of trade, due to momentum accumulated in the past, still has many of the features that existed during the FSU era. This is yet another reason why the comparisons provided as indicators of competitiveness should be carefully interpreted in terms of their implications for international trade potential. 7. This study is unique in several ways. First, it uses cost data specific to the production chain for the selected agricultural commodities. Previous studies have primarily relied on final product prices and variety of commodity to commodity price ratios for assessing existing distortions, inefficiencies and the potential competitiveness of the different subsectors of Ukrainian agriculture and food industry. Second, this study covers the most volatile period of economic transition utilizing consistent methods of deflating all prices and cost data to a pre-reform level. Third, the study uses the same data base and methodology for estimation of basic deflators: nominal and real annual average exchange rates, and nominal and real annual average CPI for four transition economies: Belarus, Moldova, Russia and Ukraine. Use of the same methodology to deflate all prices and unit production costs to 1991 level, when all the above countries operated under the same currency regime, allowed for direct between country comparisons of the cost trends, of the different strategies that each country uses to reform its agriculture and other features relevant to the assessment of agricultural trade potential. Fourth, the same methodology for all three countries has been used to make adjustments to potential changes in input and output prices that could occur at different stages of transition to the more liberalized economic and trade environment. 8. This report is primarily descriptive. Chapter 2 provides an overview of recent trends in agricultural production and trade, and discusses some relevant issues of agricultural and trade policy. Chapter 3 is the core of the report. Each section of this chapter provides relatively deep analysis of production, unit cost and output price trends for each commodity that has been chosen for analysis. The major emphasis is given to the unit costs trends and to the changes in its components. This chapter also provides a variety of cost simulations and discussion of potential competitiveness of each commodity in the FSU and international market. Chapter 4 provides a summary of production, unit cost and prices trends. It is also includes a summary table of conclusion on the potential international competitiveness of each commodity analyzed in the study. For those who are more interested in the "how" rather than in the "what", a detailed information on methodology and methods is included in Annex 1. Developments in Agricultural Production, Trade, and Policy 9. Ukraine has followed a very conservative course for agricultural reform compared to most of the other European nations of the Former Soviet Union (FSU). Policymakers have found it difficult to privatize the Ukrainian economy and develop policies that are consistent with a market economy. Public ownership on means of production have continued to dominate the economic environment and have required significant government support and intervention at every level of the production and distribution.  Executive Sumnzary vii 10. The government feared unemployment and social unrest, which could jeopardize the existence of the independent Ukraine much more than high budget deficit, inflation or weak domestic currency. Inflation rates, partly due to agricultural and consumer subsidies on food, have been above 1,000% for several years since 1991. To address inflation, budget deficits, and hard currency availability, Ukraine has tended to retain old inefficient methods, including government state orders, procurement of major agricultural commodities, government-controlled exchange rates, hard currency taxes, nontransparent restrictions on trade, and subsidized interest rates. Combined with the consumer subsidies, these measures have driven Ukraine into even deeper economic and social crisis. In 1994 the real GNP was only about 50% of the pre-reform level. 11. The agriculture and food processing industry of Ukraine has been considered to be a key to a smooth economic transition to a market economic system and has continued to be a hope of economic recovery in mid-90's. The agricultural sector has continued through 1994 to be one of the most protected sectors of the Ukrainian economy. While industrial production, construction, transport, and trade has dropped by approximately 50% from 1990 to 1994, agricultural production decreased by only 35 %. Moreover, from 1992 to 1993 (considered the worst performance year during the transition of the Ukrainian economy), the level of agricultural production was stable. The system of low interest rate agricultural loans and high procurement prices for most agricultural crops has remained more or less intact until current. 12. On the other hand, the agriculture and food processing industry remain one of the most regulated sectors of Ukrainian economy. State procurement of agricultural commodities and the levels of procurement prices has continued to be dominant factors in determining farm production from 1991 to 1994. The Ukrainian government has continued to control the assembly and distribution of most agricultural outputs, and was the major player, one way or another in the domestic food market. Price and margin controls persist, the state order system has been retained, exports and foreign exchange markets remain controlled, and a large share of bank credit continues to be directed by the government. However, the distribution of power between the government and the farms in negotiating the quantities to be procured and procurement prices has changed over the last four years. Currently, it is not so obvious whether the government or the state and collective farms are more interested in government procurement and procurement prices. Due to significant political and economic pressure, there has been a tendency in agricultural policy to replace direct methods of government intervention with more indirect subsidies and controls. 13. Our analysis indicates that the procurement prices for all selected crops were substantially above the reported costs of production. For sunflower seeds, winter wheat and corn the difference between production costs and procurement prices was the largest among all other crops and livestock products. A huge difference between price/cost ratios for crop and livestock products is also one of the features of recent developments in Ukrainian agriculture. It looks like farms2 are trying to compensate their losses in livestock production by putting more pressure on the government to offer them high procurement prices for crop products. 14. The situation for livestock production is different in several respects. The government has taken important steps toward liberalizing this subsector and has made livestock production more responsive to input and output prices. The government has substantially reduced direct price subsidies to pork and poultry producers and, at the same time, substantially reduced 2Predominant share of the Ukrainian farms specialize in both crop and livestock production.  viii Ukraine Country Report government procurement of these commodities, allowing the farms to deal directly with the meat processing plants. Due to the significant reduction in meat consumption, retail prices for pork, poultry, and other meats have increased more tardily than the procurement prices for crops. This has been one of the major reasons for the reduction in meat production. 15. Within the overall system of incentives that guide the agricultural enterprises in their production decisions, taxation plays a secondary role, much less important than procurement prices, subsidized government loans for purchasing agricultural inputs, or limited profit margin requirements. This may explain why it has been relatively easy for the government to introduce a different tax system almost every year since independence. At the same time, the debate on agricultural loans and procurement prices, which can be seen as implicit taxation, has been intense and ongoing among all involved in agricultural production. 16. In 1993-1995, subsidization of agriculture shifted from explicit budgetary transfers to implicit credit subsidies. The low interest loans to agriculture became a core of government support of agriculture. However, coupled with a soft policy on returning these loans the new system of supporting agricultural enterprises was not much different from the system of direct subsidization of agriculture during the Soviet era. 17. The slow pace of economic reform was coupled with unfavorable external economic environment: the collapse of traditional channels of inter-republican trade; decline in overall volume of exchange of goods and services between Ukraine and other FSU countries. The importance of inter-republican trade has in general been underestimated by the Ukrainian government and the international community. The first priority has been given to developing independent trade relations with the western countries at the expense of maintaining and reforming trade relations with the FSU countries. Especially for Ukraine, which is poorly endowed with fuel resources and has to rely on imports, solid trade relations with Russia and other suppliers of fuel from the FSU region has been a key to a much smoother economic transition. Unfortunately, political tensions between the neighboring FSU countries in the early 90's have created very unfavorable trade environment for all FSU countries Introduction of quotas, licenses and export taxes, coupled with artificially low official karbovanetz/ruble and karbovanetz/dollar exchange rates, delays in payment clearance have made trade between companies extremely risky and unattractive. Apparently, government has become the only agent that could supply fuel and other vital resources essential to the survival of the Ukrainian economy. The Ukrainian government has directed most of the trade through so-called "bilateral barter agreements," a mechanism of trade that has been widely used in trade between former COMECON countries. 18. Deep government involvement in international trade has become another complication of the transition period and has had several negative consequences on almost all aspects of recent economic development. It has added up substantially to inflation and govermnent budget deficit; prevented Ukraine from developing standard mechanisms of intemational trade; separated Ukrainian producers and trading companies from intemational trading community and from knowledge this community could bring to the country. It has also justified a variety of nontransparent restrictions to trade such as so called "recommended minimum export prices" for long list of exportable commodities including all agricultural commodities included in this analysis. 19. The current administration in Ukraine is committed to a more rapid pace for the mnarket reforms, including complete price liberalization, significant subsidy reductions, and the privatization of land and other production capacities in agriculture. It looks like that the new  Executive Summary ix Ukrainian government is making serious steps in developing a sound monetary, exchange rate and trade policy. There are clear signs of a more positive attitude towards the strengthening of commercial relations between Ukraine and other FSU republics (especially with Russia). Commodity-Specific Conclusions and Relevant Agricultural and Trade Policy Issues 20. Generally, the cost of production for the selected commodities, calculated in 1991 rubles, has been much less variable than agricultural input or output prices. In winter wheat, corn, sunflower seed, and pork production, it has been decreasing in real terms. However, calculated in US dollars, the cost of all selected commodities showed a significant increase: nine fold in sugar beet; about fivefold in winter wheat, sunflower seed and poultry and fourfold in pork production. The opposite dynamics of the cost of production calculated in constant rubles and US dollars reflects the fact of continuous appreciation of local currency calculated in real terms. Less variable dynamics of the cost of production give the impression that farms in fact, have been adjusting to relatively higher input prices by reducing the use of inputs such as fuel, mineral fertilizers and herbicides and substituting them with relatively inexpensive inputs such as labor. This is due to the reduction in subsidies for inputs, and domestic input prices that are more reflective of international prices. The largest real cost of production increases have occurred in the livestock and poultry sectors, where the liberalization has been most pervasive. Still, there is evidence that even with the slower course of economic reform in Ukraine, prices of agricultural commodities are tending toward world market levels. 21. When evaluated simply in terms of prices converted at the present exchange rates or into the 1991 ruble, all prices of the commodities selected for analysis (sugar beet and sugar, sunflower seed and oil, winter wheat and wheat flour, corn and formula feeds, hogs and pork meat, and poultry), are "low" relative to those in Russia and in broader international markets. However, these prices reflect significant input subsidies for most commodities supplied by government in the form of outright grants and artificially low input prices or credits provided for purchase of inputs at interest rates that are far below the market interest rate. 22. Comparisons of the costs of production adjusted for input subsidies ("calculated cost" for short) with the prices prevailing in the border international markets cast a significant doubt whether Ukraine has a comparative advantage in some of the commodities chosen for this study. Winter wheat and flour, corn and formula feed, and sunflower seed and oil have survived the test of adjustments of input prices to international level and again have shown a considerable export potential. Relaxation of consumer subsidies on food probably decrease overall consumption of food and increase opportunities for the export of addition quantities of grains, sunflower seed and oil, and sugar for export. Ukraine also appears to be a comparatively cheap producer of sugar beet, but this advantage in raw commodity is offset by very inefficient refining operations: the calculated Ukrainian production cost of sugar is almost twice the international level. In our estimate, Ukraine would have to significantly modernize it sugar processing and refining industry to compete in the international sugar market. 23. The livestock sector is obviously less competitive and will likely develop competitiveness, only after the reform has been more fully implemented in the crop subsectors. Our calculations show that with existing technology and productivity levels, pork production is the least competitive commodity among those selected for the study. In 1992-1994, the calculated unit cost of pork meat production was 40%, 60%, and 44% higher the international market price, respectively. Relative  x Ukraine Country Report stability and current cost advantages of small scale private hogs operations is temporary, and will probably vanish as soon as grain prices fully adjust3. 24. Although, Ukraine does not appear to be competitive internationally in pork production Ukraine remains the lowest-cost pork producer in the FSU region. However, the fact that the calculated cost of pork production is above the international market price makes it unclear whether Ukraine will supplant European and US exporters of pork to Russia. It is more likely that in the short run, Ukraine will become a net importer of pork. However, in the long run, with successful adjustments in the crop sector Ukraine may become a sizable pork exporter, to at least the FSU market. 25. Our analysis also suggests that the export potential of Ukrainian poultry industry is at least ambiguous if not low. In the short run, before the significant adjustments made in grain production and the feed industry, Ukraine is unlikely to become an exporter of poultry meat to the international market. However, considering the fact that the unit cost of poultry meat production is the lowest within the FSU region, there is a possibility of exporting poultry meat to Russia, Belarus and other FSU countries. The situation is somewhat different for egg production. Adjusted for input prices and subsidies, the unit cost of egg production appears to be 40% below the international price level. 26. In the long run, it is anticipated that Ukraine will become a major exporter of most of the agricultural commodities selected; that livestock and poultry which now evince little competitive potential will become more competitive. This will require adjustment in the livestock sector and in the procurement and distribution system for feed. In general, the profile for Ukraine agriculture suggested by the analysis of trade potential is that of a nation that is a producer of food grains for export, coarse grains and oilseeds for export and animal agriculture, and animal agriculture for export. The sequence of the reforms to date indicate that the first opportunities for export will come for sugar beet and food grains, followed by oilseeds and coarse grain, and then by animal products. 27. The export potential can be realized if the reforms in agriculture are accelerated and sustained. It is meaningless to discuss advantages or disadvantages of tariffs versus quotas unless the economic system is based on private ownership on land and other means of agricultural production. Assuming that Ukraine will succeed in privatizing its agriculture, and that the law of supply and demand will be the primary guideline for economic decision making in agriculture, it is reasonable to discuss some steps that will lead to a "normalization" of trade policy. Current taxes, restrictions on foreign currency, licensing, and quotas should be converted to tariffs. These tariffs can be reduced over time as the sectors adjust to international markets and prices. However these type of recommendations will be too general and generic if we do not mention a variety of nontransparent restrictions to trade that have to be abolished in order to normalize trade policy and trade environment. There is simply no rationale in the simultaneous liquidation of quotas and licenses and the introduction of so called "recommended minimum export prices" for more than fifty different 3By our estimation about 30% of bread production is fed to hogs and cattle by private farmers.  Executive Summary xi commodities including grains, sugar, sunflower seeds and oil, meats and milk products4. Unless the trade policy is rationally formulated, there will continue to be difficulties in export. In fact, inconsistent and complicated trade policy represents one of the major reasons why Ukraine is at present not exporting more wheat, sugar and sunflower oil. In a country that lacks a reserve of foreign currencies, these trade policies represent a major obstacle to economic development. Many of these trade policies have emerged to help protect the domestic market and the consumer and producer subsidy system. With the withdrawal of consumer subsidy and the phasing-out and decoupling of producer subsidies, there is little justification for continuing the current trade policy. Accordingly, a change to a transparent and more open trade policy should receive a high priority. 4These prices appear to be more restrictive than any quotas or licenses and bring even more unfairness and uncertainty to trade than any other trade restrictions.   1. BACKGROUND 1. Among the fifteen newly independent states of the FSU, Ukraine has the greatest potential to influence international agricultural commodity markets. For decades, Ukraine was considered the "bread basket" of the Soviet Union. Indeed, as shown in Table 1.1, Ukraine has accounted for a large portion of agricultural production in the Soviet Union. During the period 1985-1990, Ukraine accounted for approximately 60% of the corn, 50% of the sugar beet, and 40% of the sunflower seed and winter wheat. Ukraine also accounted for more than 25 % of the hog, and 17.9% of the poultry population. The Ukrainian agriculture sector has traditionally produced an exportable surplus of agricultural commodities for other republics in the Soviet Union. For the period 1986-90, an average of 24% of grains (mainly food grains), 22% of all meats, 44% of the total sunflower production, and 46% of the sugar came from Ukraine. The area used for agricultural production in Ukraine, however, accounted for only 15% of the Soviet Union's arable land resources. Table 1.1. Ukrainian share of agricultural production, 1985-1990. Commodity Units Ukraine FSU % Sugar beet 1,000 tons 43,619 87,437 49.9 Sunflower seed 1,000 tons 2,732 6,237 43.8 Corn 1,000 tons 7,996 13,705 58.3 Winter wheat 1,000 tons 22,693 54,256 41.8 Hogs 1,000 heads 19,791 78,400 25.2 Poultry 1,000 heads 252,200 1,185,600 21.3 Population min people 51,850 289,400 17.9 Source: Ministry of Statistics of Ukraine. 2. The collapse of the Soviet Union has had several negative consequences on the Ukrainian economy. For agriculture, the most serious difficulty was associated with the necessity of importing large quantities of energy and other inputs. The government had two choices: to allow market forces to solve this painful problem of domestic energy price adjustment to the international price level, or to use the budget to support a gradual transition of the economy to the higher energy prices. 3. The second approach was chosen to be a general strategy for transition. This choice would have been acceptable if the government had a well-defined economic program of transition and an efficient mechanism for subsidy distribution and taxation. However, the absence of such a mechanism led to high inflation, a growing government budget deficit, hard currency restraints, and ultimately to an even more serious economic and social crisis. 4. The government's efforts to smooth the shock of the high energy and other input prices on the Ukrainian economy during the first few years of independence was easily recognized. The government purchased energy on the international market and from other FSU countries and resold it at subsidized prices to producers. As a component of this program which has been suspended in 1995, specific restrictions were placed on profit margins from the enterprises.   2. RECENT TRENDS IN AGRICULTURAL PRODUCTION AND TRADE A. MACROECONOMIC CONDITIONS 1. Until recently, there was no general consensus in Ukraine on the best approach for transition from a centralized to a market economy. In fact, economic reform was given a secondary role relative to the goal of building of an independent Ukraine. In Ukraine, like in most other newly independent states (NIS) of the FSU, political independence and the establishment of a new state was the first priority. The Ukrainian Government had a tendency to choose a "temporizing" strategy and wait until Ukraine was established as fully independent country. Latest Government actions show that this strategy has been changed and economic reform has been given a primary role. 2. Policymakers found it difficult to privatize the Ukrainian economy and develop policies that were more consistent with a market economy. Moreover, to address inflation, budget deficits, and hard currency availability, Ukraine tended to retain old inefficient methods, including government procurement of major agricultural commodities, government-controlled exchange rates, hard currency taxes, nontransparent restrictions on trade, and subsidized interest rates. Combined with the consumer subsidies, these measures drove Ukraine into even deeper into economic and social crisis. In 1994, the real GNP was only about 50% of the pre-reform level. Industrial production, construction, transport and trade have suffered the most damage. In 1993, GNP generated by these sectors of Ukrainian economy was 35% below the 1990 level. In 1994 industrial production was only a half of that in 1990. Agriculture appeared to be the most stable sector of the Ukrainian economy. Agricultural production dropped by about 19% from 1990 to 1991 and was relatively stable at 27- 28% below the pre-reform level in 1992-1993. In 1994, due to continuous decline in livestock production and bad weather conditions, it again dropped by about 17% relative to 1993. However, the overall decline in agricultural production was the smallest among all sectors of Ukrainian economy, as it is shown in Table 2.1. 3. The level of employment has been almost the same during the first four years of transition and obviously, has been too high compared to the decline of economic activity in the country. In the middle of 1994, only 0.35% of the labor force was registered as unemployed. 4. Artificially high employment, agricultural and consumer subsidies, lack of financial discipline were the major factors of extremely high rate of inflation that has become one of the most significant deterrents to the improved performance of the Ukrainian economy. During 1991-1994, the annual average CPI showed the largest increase among all FSU nations. In 1994 it was 6,914 (!) times higher the 1991 level. Extremely high rate of inflation has been coupled with devaluation of the local currency in nominal terms. Starting from about 59 dollars per unit of local currency in 1991, the US dollar has been traded for 72,063(!) Ukrainian karbovanets in 1994. Comparison of the price level in creases with the nominal devaluations of the karbovantsi show a continual appreciation of the karbovantsi vis-a-vis the dollar over the period 1990-94. Though the appreciation has not been secular on a month-to-month basis (e.g. 1993 saw large periodic real devaluations of the karbovantsi),  4 Ukraine Country Report over the whole period, the real appreciation has been about five-fold (as evidenced by the last row of Table 2.1). Table 2.1. Macroeconomic indicators for the Ukraine economy and agriculture in 1991-1994. Indicator 1991 1992 1993 1994 Real GNP (1990=100) 87 71 61 49 Industrial Production 92 78 66 48 (1990= 100) Agricultural Production 81 73 72 60 (1990= 100) Meat Production (1990= 100) Crop production (1990= 100) Employment (1990=100) 98.4 96.4 94.1 91.7 Average Annual CPI 1 14 692 6,914 (arithmetical mean: 1991 = 1) Average Annual CPI 1 12 308 6,236 (geometrical mean: 1991 = 1) Average Annual Nominal 59 319 9,584 72,064 Exchange Rate (Ukrainian Karbovanetz/ US Dollar, arithmetic mean, CARD data) Average Annual Nominal 51 266 5,318 64,587 Exchange Rate (Ukrainian Karbovanetz/ US Dollar, geometrical mean, IMF data) Average Annual Real 100 41 34 20 Exchange Rate (Ukrainian Karbovanetz/ US Dollar, geometrical mean, IMF data; 1991 = 100) Source: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE; CARD staff calculations.  Recent Trends in Agricultural Production and Trade 5 B. MONETARY AND EXCHANGE RATE POLICY Monetary Policy 5. During the first four years of independence, Ukraine did not develop a consistent monetary policy. The Central Bank of Ukraine continues to be dominated by a government that has leaned toward support of the old economic structure. There have been very few signs of resistance by the Central Bank of Ukraine against government attempts to extend budgetary or credit subsidies to producers and consumers. This unwillingness to resist the appetite of the industrial and agro- industrial lobbies continues to threaten the entire financial system. Ukrainian currency is among the weakest in the region, with a rate of depreciation of more than 1,000% per year. Table 2.2. Official Monthly Cumulative and Annual Average CPI, in Ukraine, 1991-1994 (1991=1). 1991 1992 1993 1994 January 0.90 5.81 55.36 3,907.21 February 0.90 6.76 71.30 4,399.51 March 0.90 7.58 87.06 4,650.29 April 0.90 8.15 107.61 4,929.30 May 0.90 9.33 137.31 5,185.63 June 0.90 11.80 235.76 5,387.87 July 0.90 14.40 324.41 5,501.01 August 0.94 15.60 394.80 5,721.05 September 0.98 17.25 711.83 6,138.69 October 1.04 19.39 1,182.35 7,526.03 November 1.21 23.66 1,717.95 12,967.35 December 1.51 31.96 3,277.86 16,650.08 Annual Average 1.00 14.31 691.97 6,93.67 Source: Ministry of Statistics; IMF staff calculations; CARD staff calculations. 6. Inflation has been highly variable since late 1991. The CPI was relatively steady until the end of 1991, when it increased by more than fivefold (November 1991 - January 1992) after the government announced the price liberalization of almost all prices and introduced new prices for imported energy resources. During the rest of 1992, the CPI grew at a relatively steady speed. In 1993, inflation sped up significantly and reached 38% per month, the highest monthly rate during the whole transition period. In 1993, average yearly prices increased 692 times compared to the 1991 level. Inflation continued to be a significant factor of economic environment in 1994, but the average monthly rate dropped to 21 %. 7. The inflationary environment, an archaic banking sector, and extensive government regulations of the banking industry have prevented economic agents from making efficient financial transitions. Delays in transactions and settlements are common occurrences of the existing banking  6 Ukraine Country Report system. The delays force a significant portion of the economy to barter exchange or in-kind payments. To avoid involvement with the banking system, agricultural producers strive to sell raw materials to processors for in-kind payments. They usually take some portion of the processed commodity in exchange. Food processors use the commodity they produce as payment for other inputs to operate their enterprises. According to the Ministry of Statistics, more than 50% of a typical agricultural worker's annual salary is paid in-kind. Exchange Rate Policy 8. The foreign exchange rate has been controlled by a complex set of government regulations. Exchanges of the local currency that involve utilization of the Ukrainian banking system have been at the government-controlled exchange rate. The Government required a surrender of hard currency of 50% (1993-1994) and lowered this in late 1994 to 30%. In 1993 the offered exchange rate, which was different from the official exchange rate shown in Table 2.3, was overvalued by over 100%, and so the surrender requirement imposed an implicit tax of 30-40% on exports. This implicit tax has been reduced to 5-10% since late 1994, when the interbank currency exchange began to set the exchange rate as a function of demand and supply of currencies. 9. In real terms the local currency (first Ruble, then Karbovanetz) appreciated between 1991 and 1992 by 60% and another 50% until 1994. The monthly figures of the real exchange rate shows a rather volatile movement with several overshooting effects. Table 2.3. Official average monthly and average annual exchange rate for Ukraine, 1991-1994. Month 1991 1992 1993 1994 January 25.2 204 1,002 37,911 February 34.3 176 1,502 37,416 March 36.0 153 2,180 39,253 April 35.1 153 3,002 44,242 May 38.1 122 2,939 47,731 June 40.5 200 3,388 48,210 July 52.4 250 3,858 67,000 August 51.9 280 6,935 85,000 September 55.0 350 11,615 93,000 October 63.7 465 19,407 135,000 November 107.2 720 26,303 100,000 December 169.7 749 32,871 130,000 Annual average 59.1 318 9,749 72,063 Source: Ministry of Statistics; IMF Publications; UIAE.  Recent Trends in Agricultural Production and Trade 7 C. AGRICULTURAL PRODUCTION 10. The present structure of agricultural production and trade in Ukraine developed in the 1950's and 1960's when the Soviet government decided to institute an ambitious program to increase per capita consumption of meat and dairy products. This program introduced a significant change in agricultural technology and redirected interregional flows of agricultural inputs and outputs. Most meat products were to be produced on large-scale livestock and poultry farms, supplied with feed grains from the "virgin lands" of westem Siberia and Kazakhstan. This program was implemented directly by a significant shift in the allocation of funds from crop production to livestock production and indirectly by a change in overall agricultural policy. By the end of the 1980's, over 70% of the total annual investment and operational subsidies to farms benefited livestock production, and 80% of the annual price subsidies for food were for livestock commodities. 11. As a result of this policy, Ukrainian livestock production expanded substantially but it was not accompanied by a proportionate increase in domestic production of feed grains. By the end of 1980's, Ukraine, like other republics of the Soviet Unions, became a significant importer of feed grains from the world market. When the Soviet Union collapsed, and Ukraine was cut from imported feed grain supply, the livestock sector had to rely on its domestically produced feeds. However, crop production was predominantly wheat, sugar beet and sunflower seed at the expense of corn and other efficient feed grains. Insufficient supply of domestically produced quality feed restricted the supply of livestock products to the market, while the overall economic crisis, a sharp decline in per capita income and a major cutback in the livestock subsidy caused a significant decline in demand in the 1990's. The ensuing decline in livestock production was responsible for almost 85% of the total decline in agricultural production. In 1993, for the first time in twenty years, livestock production accounted for less than 50% of the value of the total agricultural output of Ukraine. Between 1990 and 1993, livestock population declined by 16%; hogs declined by 17%, cattle by 11 %, sheep by 32 %, and poultry by 25 %. The downward trend in livestock population continued in 1994. Relative to the 1993 level, hogs and poultry numbers decreased by 17% and 14%, respectively. Between 1991 and 1994, meat production dropped by almost 25%, indicating that the decline in animal numbers was accompanied by a significant decline in productivity. 12. Crop production did not manifest significant fluctuations similar to those in the livestock subsector during 1991-1993. From 1983 to 1993, Ukraine maintained almost the same level of grain, sugar beet, sunflower, and potato production. In 1994, however, there was a significant reduction in crop production partially due to a drought in southern Ukraine. The winter wheat crop was at 63% of the 1993 level, corn at 40.6%, sunflower at 75%, and sugar beet at 81.8%. Overall, the 1994 crop was the smallest crop produced in Ukraine since 1983. 13. The storage and distribution system in Ukrainian agriculture is a major constraints, retarding the transformation of Ukrainian agriculture into a market oriented system. It had been designed to serve the needs of the centrally planned economy. Most storage facilities had large capacities and were located on the major crossroads of the country so that products could be easily transported to any geographical point of the Former Soviet Union. By the time of independence, very few farms had their own facilities to store grains or other crops.  8 Ukraine Country Report 14. The food processing industry has likewise suffered from the same problems as storage and distribution system. It was an integral part of the Former Soviet Union, and was not designed to evolve independently. As in other republics of the FSU, it was poorly developed. Most enterprises were built in 1960's or earlier, consisting primarily of facilities considered to be large during that period. This has had highly negative repercussions for energy efficiency and the level of spoilage and waste present in most processing operations. D. AGRICULTURAL POLICY 15. Within a wide spectrum of transition policies for Eastem Europe and the FSU nations, Ukraine has adopted perhaps the least radical approach. The pace of privatization in agriculture has been slow. The legislative framework and govemment policy both continue to view collective ownership of land as the dominant form of land tenure. Minimally restructured state and collective farms continue to dominate Ukrainian agriculture. Private agriculture has been legalized, but only as a supplementary component of the farming structure. Private farms were slowly established during the first four years of Ukrainian independence. 16. As of April 11, 1994, there were almost 30,000 registered private farms, amounting to 620,548 ha. of agricultural land (I.5% of the total). On April 15, 1994, 2.4 million ha. of household subsidiary plots and gardens became the private property of the current users without requirement of payment. By January 1994, approximately 5 million ha., or 11 % of the agricultural acreage, was owned by private citizens and used as household subsidiary plots or for other small-scale agricultural activities. The total agricultural area owned by private agents (including private farmers) accounts for about 13 % of the agricultural land in Ukraine. 17. A number of statutes dealing with the privatization of state property, including the Privatization Program, were introduced in 1992 and 1993 by the Ukrainian government, and were approved by Parliament. The key element of the Privatization Program was the creation of vouchers to be used for the purchase of state property. The voucher system has generated considerable activity and competition among Ukrainian semiprivate banks, investment companies, and other financial institutions that are obtaining vouchers for later use. The end of voucher privatization in Russia also made Ukrainian privatization attractive to Russian banks and investment companies. This development in the privatization of state property, concomitant with the election of a new President of Ukraine, indicates that government will take further radical steps in the privatization of state property in the near future. 18. However, public ownership of the means of production continues to dominate the politics of the Ukrainian economy. Most major enterprises are still state-owned. In short, the economic environment of Ukraine is very similar to that of in the Soviet Union during "perestroyka" (1985-1991). The old regime attempted to incorporate some Westem economic ideas into the centralized system of production and distribution without making changes in the ownership of the means of production and without the institutions to support efficient functioning of markets. 19. The agricultural sector continued through 1994 to be one of the strongest sectors of the Ukrainian economy. While industrial production, construction, transport, and trade dropped by approximately 50% from 1990 to 1994, agricultural production decreased by only 40%. Moreover, from 1992 to 1993 (considered the worst performance year during the transition of the Ukrainian  Recent Trends in Agricultural Production and Trade 9 economy), the level of agricultural production was stable. At the same time the overall GNP dropped by 15%. 20. The slow pace of reform during the first four years of independence resulted in a spiraling decline of the Ukrainian economy, which was already stagnant in the early 1990's. It has continued a downward slide into one of the deepest economic crisis of all the FSU countries. In particular, high levels of inefficiency and loss from inputs through production, marketing, and distribution are now characteristics of Ukrainian agriculture. Government Subsidies to Agriculture 21. To support the large-scale socialist farms, the government continued to use output and input subsidies for producers until 1993. In 1992, subsidies to livestock producers made up 48-67% of the total remuneration (sales plus subsidy), amounting to 100-200% more than the price paid by processors to agricultural producers. Grain and sugar beet subsidies amounted not more than 11 % of total remuneration. Subsidies paid from the budget and accruing to agricultural producers were equivalent to 45% of the budgetary subsidies for all purposes in 1992. Including subsidies to consumers, the share of total subsidies accounted for by the food and agricultural sector was 63%. These subsidies represent 13% of the budget and close to 6% of the GDP. Including additional subsidies intended to cover the inflationary losses of agricultural producers, the total budgetary cost of agricultural subsidies was estimated to have reached 10% of GDP in 1992. 22. In 1993-1994, subsidization of agriculture shifted from explicit budgetary transfers to implicit credit subsidies. In 1993, budgetary subsidies for food processing, land improvement and irrigation, cattle breeding, and seed amounted to only 1 % of GDP. At the same time, credit subsidies resulting from negative real rates of interest amounted to an additional 3 % of GDP. Price and margin controls persist, the state order system has been retained, exports and foreign exchange markets remain controlled, and a large share of bank credit continues to be directed by the government. However, due to significant political and economic pressure, there has been a tendency in agricultural policy to replace direct methods of government intervention with more indirect subsidies and controls. 23. The system of low interest government loans to agriculture was not significantly changed during these years and was still in place in 1994 and 1995. These loans became a core of government support of agriculture and were coupled with a soft policy on returning these loans. In 1994, credit subsidies amounted to roughly 25.5 trillion krb which is % of GDP. In 1995, these credit subsidies appear to be limited to roughly 25 trillion krb. Taxation 24. Ukraine has made a number of major changes in its tax system since the beginning of 1992. Primary producers have been exempted from income tax and the value added tax (VAT) has been reduced to 20%. Agro-industrial firms were also exempted from income tax, but a profits tax  10 Ukraine Country Report was imposed at the rate of 25%. In addition, milk and meat products were exempted from the VAT, owing to reduced demand for these products. 25. Within the overall system of incentives that guide the agricultural enterprises in their production decisions, taxation plays a secondary role, much less important than procurement prices, subsidized government loans for purchasing agricultural inputs, or limited profit margin requirements. This may explain why it has been relatively easy for the government to introduce a different tax system almost every year since independence. At the same time, the debate on agricultural loans and procurement prices has been intense and ongoing among all involved in agricultural production. E. PROCUREMENT AND PROCUREMENT PRICES 26. State procurement of agricultural commodities and the levels of procurement prices remained dominant factors in determining farm production from 1991 to 1994. The Ukrainian government continued to control the assembly and distribution of most agricultural outputs, and was the major player in one way or another in the domestic food market. However, the distribution of power between the government and the farms in negotiating the quantities to be procured and procurement prices has changed over the last four years. Currently, it is not so obvious whether the government or the state and collective farms are more interested in government procurement and procurement prices. Table 2.4. indicates that the procurement prices for all selected crops were substantially above the reported costs of production. Since all farms have a tendency to report higher labor use in order to justify higher payments to labor and higher use of fuel to cover up sales to the free market, the gap between the cost of production and output prices could be even larger. Table 2.4. Output price/production cost ratios for major agricultural commodities in Ukraine, 1991-1994, in 1991 rubles. Commodity 1991 1992 1993 1994 Sugar beet 1.64 2.66 2.61 1.74 Sugar 1.23 1.21 1.86 Sunflower seed 4.50 8.10 9.32 Sunflower oil 1.15 0.98 0.63 1.48 Winter wheat 3.36 13.70 10.34 6.31 Com 2.93 2.26 6.49 5.36 Pork 1.08 1.22 1.01 1.27 Poultry meat (1) 1.06 1.27 1.03 1.19 Eggs 1.48 1.90 1.93 Notes: (1) 1994 retail price / unit cost ratio. Sources: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, 1994, The World Bank; UIAE; CARD staff calculations. 27. As shown in Table 2.4., for sunflower seeds, winter wheat, and corn, the difference between production costs and procurement prices was the largest among all other crops and livestock products. By 1993 procurement prices of wheat, corn and sunflower seed were tenfold, sixfold and ninefold higher that the cost, respectively. In 1993, in sugar beet, the difference between  Recent Trends in Agricultural Production and Trade 11 the cost and procurement prices was much less than that for grains, but n 1992-1993 procurement price/unit cost ratio was still greater than 2.0. Given this difference between the costs and procurement prices for major crops, and the fact that the farms were able to receive low-interest loans to cover their input needs, the farms were very interested in governnent involvement and, in general, did not have much incentive to search for alternative ways to buy inputs or sell outputs. 28. Some experts and agricultural advisors argue that this difference between the costs of production and procurement prices is illusive. Farms were receiving payments for outputs three to four months later than the time of actual sale. Therefore, inflation reduces the difference. In the end, the farns were not able to cover the costs of production. Unfortunately, there was not sufficient data to examine the validity of this claim. However, the fact that the farms have continued to produce at similar output levels supports the argument that the incentives for production have not decreased during the. reform. 29. The situation for livestock production is different in several respects. The government took important steps toward liberalizing this subsector and made livestock production more responsive to input and output prices. The government substantially reduced direct price subsidies to pork and poultry producers and, at the same time, substantially reduced government procurement of these commodities, allowing the farms to deal directly with the meat processing plants. Due to the significant reduction in meat consumption, retail prices for pork, poultry, and other meats increased more tardily than the procurement prices for crops. This was one of the major reasons for the reduction in meat production. 30. A huge difference between ratios for crop and livestock products is also easily recognized from the Table 2.4. It looks like that the farms are trying to compensate their loses in livestock production by putting more pressure on the government to offer them high procurement prices for crop products. F. AGRICULTURAL INPUT PRICES AND USE 31. The availability and price of fuel, mineral fertilizers, herbicides, and quality livestock feeds were the major concerns of Ukrainian agriculture from 1991 to 1994. Table 2.5 and 2.6 show the patterns of domestic input price fluctuation from 1991 to 1994, calculated in 1991 rubles and US dollars. During this period, real prices of diesel fuel increased more than fivefold, gasoline - more than fourfold. Real prices of mineral fertilizers did not grow as fast as of fuel through out this period. On average, they doubled in 1993 and then dropped below the 1992 level. In 1994 the price of nitrogen fertilizers was at the 1991 level. Prices of other fertilizers have even dropped below the pre-reform level. 32. Similar changes occurred in the prices of agricultural.machinery. Real prices of tractors and trucks more than tripled in 1993 and then dropped to the 1992 level. However, the real price of Russian made grain combines that have been severely underpriced, was increasing at a highest rate among all agricultural inputs. In four years it increased more than tvelvefold (!). Real prices of electricity and formula feed showed a consistent growth throughout the transition period. 33. By 1994, the two inputs that did not keep up with the rate of inflation during this period were phosphorus and potassium fertilizers (in 1994), labor (1992-1993) and formula feed. In 1993, the real per hour wage paid to agricultural workers was only one-third of that paid in 1991.  12 Ukraine Country Report The real formula feed price in 1993 was only 68% of the 1991 formula feed price. As shown in Tables 2.5. and 2.6., the major increase in input prices occurred from 1992 to 1993 period and reached the highest level during the transition period. From 1993 to 1994, real prices for fuel had a tendency to decrease as prices of the most of final products were catching up with the increase in input prices during the previous years. On average, in 1994 all input prices were below real the 1992 level. 34. Even with this significant increase in real input prices from 1992 to 1993, they were much lower than international prices, indicating continued direct government subsidization. Table 2.7. shows the patterns of domestic/international input price ratios for 1991-1994 calculated in US dollars. It can be easily seen from the above table that even in 1993, when the prices of almost all agricultural inputs were rising much faster than inflation, input prices stayed below the international market price. Even the price of fuel was 30% below the international market price. Although input prices continue to be lower in the domestic than in the international markets, the rate at which input prices were increasing gave an impression that they were too high. This has made it easier for the agrarian lobby to secure low interest agricultural loans for the purchase of fuel and other inputs. 35. Government willingness to cover the financial needs of the only modestly restructured state and collective farms in purchasing fuel and mineral fertilizers has significantly reduced the effect of input price increases on the behavior of farm managers in 1991-1993. During the first three years of transition, input use has been primarily guided by "non-price rationing." Overall input use has been more a function of the quantity of agricultural inputs the Ukrainian government has been able to buy or barter from the major international energy and mineral fertilizer suppliers. Table 2.7. clearly demonstrates that during 1991-1993, farms did not respond to the fuel price increase. In the case of sugar beet, winter wheat, and corn production, per ha. fuel use has actually increased. 1994 seems to be a turning point in farms' adjustment to the new economic conditions. In 1994 crop and livestock production became more labor intensive, while use of mineral fertilizers continued its downward slide. From 1991 to 1994, use of mineral fertilizers in wheat production dropped by 50%, in corn and sunflower production by more than 50%. In 1994 and 1995, farms have sought to escape their position of rationed input availability from state enterprises by accessing private sources of inputs. The prices of these inputs are at border price levels and significantly more expensive than those purchased from Ukrainian state-owned suppliers. 36. Although, the price of mineral fertilizers available from state enterprises did not increase in real terms, our data shows that use of mineral fertilizers has been reduced substantially during this period. On the other hand, although the price of fuel increased, the same data does not show any sign of reduction of fuel use in agriculture. One possible explanation is that the farms and companies affiliated with them where receiving cheep government loans for purchasing fuel and then reselling it in the free market, covering up these sales in input use statistics. Mineral fertilizers statistics look more reliable because mineral fertilizers do not have other use than agriculture and for this reason they do not have higher resale value. 37. Labor use per ton of production has a tendency to grow in production of all commodities. Since total employment in agriculture continues to go down (from 5.4 million people in 1985 to 4.9 million in 1994(MOAF data)), increase in labor use can be solely attributed to decrease in yields in crop production and that in animal productivity of livestock sector.  Recent Trends in Agricultural Production and Trade 13 Table 2.5. Agricultural inputs prices, Ukraine, 1991-1994 (in 1991 krb and US dollars). 1991 1992 1993 1994 Input Units 1991 USD 1991 krb. USD 1991 krb. USD 1991 krb. USD krb.(*) Tractors 22,000 873 38,462 1,727 72,908 5,264 22,418 2151 Trucks 11,500 456 20,210 907 45,585 3,291 30,373 2914 Grain Combines 9,761 387 228,951 10,279 308,055 22,243 117,154 11240 Gasoline ton 200 7.9 1,735 78 3,031 219 868 83 Diesel ton 145 5.8 1,428 64 2,313 206 796 76 Wage rate 40 hours 104 4.1 84 3.6 36 2.8 39.2 3.6 Mineral fertilizers ton of a.i. Nitrogen 217 8.6 224 10 1052 76 217 20.8 Phosphorus 1,402 55.6 613 28 2,565 185 600 57.6 Potassium 210 8.3 129 6 609 44 140 13.5 Electricity 1000 40 1.6 63 3 72 5 405 38.8 kw/h Formula feed ton 353 14 173 8 297 21 564 54 CPI/Average Annual Exchange 1 25.2 14.3 318 692 9750 6914 72064 rate Note: (*) Prices are as of January 1991; Nominal exchange rate for January 1991 - 25.2 rubles per US dollar. Table 2.6. Agricultural Inputs Annual Average Price Index, in 1991 rubles, 1991=1. Input Unit 1991(*) 1992 1993 1994 Tractors 1.00 1.75 3.31 1.02 Trucks 1.00 1.76 3.96 2.64 Grain 1.00 23.46 31.56 12.00 Combines Gasoline ton 1.00 8.68 15.16 4.34 Diesel ton a.i. 1.00 9.85 19.63 5.49 Wage rate 40 hours 1.00 .81 .35 .37 Mineral Fertilizer Nitrogen 1.00 1.03 4.85 1.00 Phosphorus 1.00 0.44 1.83 0.43 Potassium 1.00 0.61 2.90 0.67 Electricity 1000 KWH 1.00 1.58 1.80 10.13 Formula feed ton 1.00 0.49 0.84 1.60 Note: (*) January 1991. Sources: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE; CARD staff calculations.  14 Ukraine Country Report Table 2.7. International/domestic input price ratios in Ukraine, in 1991-1994.5 Input 1991(*) 1992 1993 1994 Urea 43.0 37.0 4.9 17.8 Triple Superphosphate 6.7 13.4 2.0 6.5 Potassium 20.1 27.8 3.8 12.4 Grain Combines 193.8 15.0 6.8 13.7 Gasoline 44.3 4.5 1.6 4.2 Diesel 34.5 3.1 1.0 2.7 Electricity 37.5 20.0 12 1.6 Formula feed 7.1 12.5 4.8 1.8 Labor 39.0 44.4 57.1 44.4 Note: (*) Prices are as of January 1991; Nominal exchange rate for January 1991 - 25.2 rubles per US dollar. Source: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE; CARD staff calculations. 51ntemational input prices are assumed to be constant over time: gasoline, $350 per ton; diesel, $200 per ton; electricity, $60 per 1,000 Kw/h; urea, $370 per ton of a.i.; triple superphosphat, $375 per ton of a.i.; potassium, $167 per ton of a.i.; wage rate, $4 per hour; formula feed; $100 per ton of o.e.; grain combine, $75,000.  Recent Trends in Agricultural Production and Trade 15 Table 2.8. Inputs use in production of major agricultural commodities in Ukraine, 1991-1994 (units per ton). Input Units 1991 1992 1993 1994 Sugar Labor man-hours 13.0 16.0 15.3 18.7 Seeds kg. 0.3 0.3 0.3 0.3 Mineral fertilizers kg. of a.i. 12.2 13.7 12.7 12.0 Fuel and lubricants kg. 13.9 14.9 14.6 14.1 Sunflower seed Labor man-hours 23.2 31.2 30.8 31.2 Mineral fertilizers kg. of a.i. 96.7 60.3 38.4 21.3 Fuel and lubricants kg. 45.1 50.6 55.0 53.4 Winter wheat Labor man-hours 15.2 16.3 13.8 ... Mineral fertilizers kg. of a.i. 38.6 34.8 26.1 19.8 Fuel and lubricants kg. 29.4 27.8 24.0 25.1 Electricity kw/hours 6.0 5.7 5.0 4.5 Corn Labor man-hours 22.7 34.5 29.8 31.5 Mineral fertilizers kg. of a.i. 74.4 52.4 42.8 31.7 Fuel and lubricants kg. . 40.3 67.0 56.4 54.3 Electricity kw/hours 6.0 5.7 5.0 3.7 Pork Labor man-hours 524 797 903 1025 Feeds 000 feed 11.0 12.9 13.9 15.7 units Fuel and lubricants kg. 594 540 490 370 Electricity kw /hour 900 870 840 805 Poultry meat Labor man-hours 129 156 187 193 Feeds 000 feed 5.6 5.2 6.4 6.7 units Fuel and lubricants kg. 1,268 1,148 1530 1,650 Electricity kw/hr 1,318 1,294 1,368 1,251 Eggs Labor man-hours 1.6 1.9 1.8 2.1 Feeds 000 feed 0.2 0.2 0.2 0.2 units Fuel and lubricants kg. 38.0 41.0 45.0 47.6 Electricity kwlhr 54.0 71.0 83.0 95.3 Sources: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE.  16 Ukraine Country Report G. PRODUCTION COST OF MAJOR AGRICULTURAL COMMODITIES 38. Generally, the cost of production for the selected commodities, calculated in 1991 rubles, has been much less variable than input prices, as shown in Table 2.8. In winter wheat, com, sunflower seed, and pork production it was decreasing in real terms. Only poultry production showed a sight increase in cost from 1991 to 1994. However, calculated in US dollars, the cost of all selected commodities showed a significant increase: nine fold in sugar beet; about fivefold in winter wheat, sunflower seed and poultry; and fourfold in pork production. Opposite dynamics of the cost of production calculated in constant rubles and US dollars reflects the fact of continuous real appreciation of local currency. Less variable dynamics of the cost of production gives the impression that the farms in fact, were adjusting to the relatively higher input prices by reducing the use of inputs such as fuel, mineral fertilizers and herbicides and substituting them with relatively inexpensive inputs such as labor. Table 2.9. Unit production cost of major agricultural commodities in Ukraine, 1991-1994, in 1991 rubles and US dollars. (per ton of output). Commodity 1991 1992 1993 1994 Sugar Rubles 70 86 83 92 beet US dollars 1 4 6 9 Sugar Rubles 1044 2548 2415 1914 US dollars 18 114 174 184 Sunflower Rubles 200 211 240 138 seed US dollars 3 9 17 13 Sunflower Rubles 1375 1063 3003 765 oil US dollars 23 48 213 73 Winter Rubles 135 109 86 110 wheat US dollars 2 5 6 11 Com Rubles 183 238 215 49 US dollars 3 11 16 5 Pork Rubles 4318 4949 4694 2487 US dollars 73 222 333 239 Poultry Rubles 3600 5120 5192 3778 meat US dollars 61 230 369 353 Eggs Rubles 135 169 163 172 (per 1000) US dollars 2 8 12 16 Sources: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, 1994, The World Bank; Ministry of Food and Agriculture; UIAE; CARD staff calculations.  Recent Trends in Agricultural Production and Trade 17 H. AGRICULTURAL TRADE AND TRADE POLICY Recent Trends in Agricultural Trade 39. Agricultural and food trade has been a significant component of the Ukrainian foreign trade. In 1985-1990 agricultural export accounted for 18-19% of total export to other FSU republics and to the rest of the world.6 Ukraine also imported a sizable amount of agricultural goods, which comprised 10-12% of total import from 1985-1990. Table 2.10. Role of agriculture and food in trade in goods and services in Ukraine. 1991 1992 1993 1994 in millions of 1991 rubles Total Export 54,200 84,399 55,326 Total Agricultural and Food Export 6,227 3,641 6,753 2,352 Agricultural and Food Export to FSU 5604 3,419 6,602 2,218 Total Import 59,500 77,650 56,119 Total Agricultural and Food Import 1,951 1,270 593 Agricultural and Food Import from FSU 975 343 205 Notes: Agricultural and Food Export/Import includes the following components: sugar, meat and meat products, eggs and eggs products, vegetable oil, grains, four, mnilk and milk products, butter, fish fruits and vegetables, and vine. Source: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FSU). Inter- Republic Agricultural Trade, 1987, 1989-1994, 993, ERS, USDA; UIAE; CARD staff calculations. 40. Foreign trade in general, and agricultural and food trade specifically appeared to be the most sensitive to the hardship of the transition period. By 1993, the share of agricultural trade in total foreign trade has comprised only 12% of the total export relative to 18-19% in the late 80's. In 1994, the exported quantity of every major agricultural commodity and food item was at least 50% below the pre-reform level. For example the quantity of exported grains in 1994 has accounted for only 2.6%, and the quantities of eggs, milk and milk products, and vegetables and fruits - for only 10% of the average level for 1988-1990 (Tables 12.a.- 17.a. of Statistical Annex). Calculated in 1991 ruble the average agricultural export in 1991-1994 has been only 50 % of the 1989-1990 average. Agricultural and food import has shrunk to the 12.5% of the pre-reform level and has comprised only 1 % of the total import, relative to 11-12% in the late 80's. 60% reduction in grain import, coupled with a large reduction of personal disposable income and purchasing power have been the major factors responsible for the decrease in the value of agricultural and food import. 6Ukraine. The Agricultural Sector in Transition. The World Bank. 1994.  18 Ukraine Country Report 41. Ukrainian agriculture and food processing industry were deeply involved in the intra- republic trade within the Soviet Union. This sector of the Ukrainian economy depended heavily on the supply of oil, gas, lumber, machinery, and equipment from other republics of the Soviet Union. In turn, Ukraine was a major supplier of food stuffs to other republics, including sugar, meat and meat products, milk and milk products, sunflower oil, food grains and flour. In the late 80's Ukrainian exports had a 35% market share of the intra-republican food trade and played an important role in meeting the food needs of the other republics. FSU countries have continued to be the major Ukrainian trade partners in the 90's. More than 95% of the total agricultural and food export of Ukraine has been directed to the FSU region, where Russia was the major importer. For example, in 1993, FSU countries received almost 100% of the total export of sugar, meat and meat products, wheat flour, grains, milk and milk products, and potatoes. The only exception has been export of eggs that traditionally have been in a high demand in Eastern and Western Europe. Almost 70 % of the total export of eggs has been directed to the countries other than FSU. On the other hand, agricultural import from FSU region constitutes about or less than 50% of the total. However, due to a significant decrease in the feed grain import from the western countries and lack of hard currency, the share of FSU countries in Ukrainian agricultural and food import has a tendency to increase (Tables 14.a.- 18.a. of Statistical Annex). 42. Sugar, poultry, pork, sunflower oil, milk and milk products constituted about 92% of total agricultural and food export of Ukraine in the 90's. The shares of individual agricultural commodities in agricultural and food export, however, have experienced a great deal of deviation during transition period. The share of meat and meat product dropped from 23% in 1991 to 10.8% in 1994. The share of sugar on average was about 50% of the total agricultural and food export, however in 1992 it dropped to a 37% and in 1993 jumped to highest 77% of the total. The shares of other components of agricultural and food export has been relatively stable throughout the 90's. The share of sunflower oil has been maintained at 10%, milk and milk products - at 15%, grains and flour - at 8% of the total agricultural trade. Feed grains has been a primary component of Ukrainian agricultural and food import, comprising about 80% of the total in the 90's. In 1992-93, the share of feed grains was about 90% on average. It is fair to say that Ukrainian food import has been very close to absolute minimum during this period. 43. Obviously, agricultural and food trade between Ukraine and the other FSU countries suffered the most from the collapse of the Soviet Union. The crisis of payments, the introduction of new currencies, the government intervention in the exchange rate clearance, and political tensions between the former neighbors, significantly reduced the flow of goods and services between Ukraine and other FSU nations. By 1994, Ukraine's agricultural exports to other FSU countries had fallen to about 40% of the late 1980's level; imports dropped by almost 75% during the period from 1989 to 1994. Trade with FSU countries, that did not have energy or other natural resources vital to Ukrainian economic survival declined the most. For example, Ukrainian export to countries such as Armenia, Georgia, Tajikistan dropped to negligible figures during 1992-1994. Russia has continued to be the major recipient of Ukrainian food and agricultural export. On average, in 1991-1994, Russia imported 80% of the Ukrainian sugar, vegetable oil, meat and meat products. On the other hand, the share of agricultural and food import from Russia has been relatively small. Most of the Ukrainian grain import has been coming from Kazakhstan (about 80% of the total import of grains from the FSU region). Uzbekistan, Azerbajdan, Moldova and Kirgizstan has comprised almost 100% of Ukrainian import of fruits and vegetables.  Recent Trends in Agricultural Production and Trade 19 Agricultural Trade Policy 44. Despite the progressive legislation adopted in late 1992 and early 1993, external trade continued to be highly restricted in the Ukrainian economy, being heavily controlled by the government. The system is not oriented toward developing trade relations consistent with an open market economy or toward improving perfonnance in the transition. State enterprises or associations of state enterprises continue to be the major participants in Ukrainian international trade. Most of these Ukrainian foreign trade agencies are financed from the budget and act on behalf of Ukrainian government to purchase the most needed resources including oil, gas, electricity and lumber. And of course, all these agencies are subject to strict government control and regulation. 45. Budget financing of import of resources and government willingness to cover a large share of the financial needs of state trade enterprises had several negative consequences on almost all aspects of Ukraine's involvement in international trade and the state of the economy as a whole: * it prevented Ukraine from developing standard mechanisms of international trade; * it separated Ukrainian producers and trading companies from the international trading community and from knowledge and expertise this community could bring to the country; * it justified a variety of export restrictions. 46. Apparently, government involvement in trade was absolutely essential to the survival of the Ukrainian economy. The rationale for trying to keep this mechanism in place can be summed up as follows: the government has to protect producers from dramatic input prices increase, and thus has to keep domestic input prices below international market levels. To do so, the government viewed itself as responsible for supplying most of the imported inputs to the domestic market. On the other hand, if the government supplies vital inputs, it has a right to control domestic output prices to prevent producers and trading companies from earning excessive profit. Also, in order to hold oil and other imported energy prices below the intemational market prices, the government must restrict export and the re-export of these inputs. 47. However, this policy could have been as a temporary measure that allows the government to smooth high input prices shock to reduce and cushion the impact of higher food prices on consumers. When it is not a part of a well defined economic reform program, the economy may eventually fall into even more deeper social and economic crisis. When the government assumes responsibility or supplying dear inputs from the international market and sell them below international market price, the government reduced the incentive for market entry by all other potential suppliers. Another consequence of this policy is that it increased pressure on the budget. By reducing farm gate prices it made already financially weakened state and collective farms even weaker. 48. Use of subsidized inputs keeps production costs low relative to the international prices and gives producers an incentive to export. This is the case for homogeneous products, most agricultural commodities, raw materials, and metals. To prevent "unfair" profit from the export of goods produced with subsidized inputs, the government has used a variety of methods to limit producers from entering the international market. These have included the surrender requirement of 50% of hard currency earnings, a difficult process of accessing hard currency earnings, and a tangled procedure for obtaining licenses and quotas.  20 Ukraine Country Report 49. Restricted by profit margins, low demands for final products in the domestic market, and the complicated process for entering the intemational market, producers were in fact continued to rely on government trade agencies to satisfy a large share of their energy and other vital production needs. In exchange for cheap inputs or cheap loans to buy inputs at the market price, government trade and procurement agencies have near-monopoly power to accumulate the primary and processed agricultural commodities for either domestic consumption or export. The major portion of those commodities have been bartered in bilateral agreements, especially with the FSU countries that are able to provide energy inputs to the Ukrainian economy. This has contributed to the perpetuation of the old economic institutions and slowed down the development of domestic markets. 50. The Ukrainian export regime was developed on the basis of the distinction between goods considered vital to the functioning of the economy and goods that are not. All agricultural commodities investigated in this study (winter wheat, corn, sugar beet, sunflower seed, and pork) have been considered vital by the Govermment, and were subject to strict foreign trade regulations. Every potential exporter of these commodities had to obtain an export license, a quota, and approval of the contract price from a special government committee. 51. Under legislation adopted in March 1993, all the agricultural commodities covered by this study were subjected to quota (Table 2.11.). Since 1993, enterprises were able to export commodities that are part of the quota system in two ways, by obtaining a quota or without a quota by paying an export duty. Available data do not indicate the share of goods exported under a quota. Export quotas, which are principally used to fulfill bilateral agreements, are divided into four categories: state contracts, state orders, intergovernmental agreements, and auctions. The general procedures for export under these categories are unknown. Table 2.11. Export Duties in Ukraine in 1993. Commodity Group Rate, % Remark* Live animals 30 Q/L Meat and meat products 30 Q/L Wheat and Cereals 30 Q/L Flour and flour products 30 Q/L Sunflower seed 30 Q/L Fats and Oils 30 Q/L Sugar 10 Notes: (*) - Q/L: Commodity is subject to quotas and licenses. Source: Ministry of Statistics; UIAE; The World Bank Reports. 52. If the exported commodity is not bartered for other vital goods (gas or diesel fuel, for example), exporters must pay a 30% export duty and must surrender 50% of their hard currency earnings to the state at a government-determined exchange rate. In 1992-1993, the exchange rate has normally been about one-half the free market rate. In addition to these restrictions, producers exporting these commodities must fulfill state orders to supply certain quantities of the commodity to the state fund. 53. Of course, there are many ways to avoid surrendering hard currency. For example, if an exporter provides the authority with a barter contract where it was stated that in exchange for the exported commodity, the exporter would import a commodity vital for the functioning the  Recent Trends in Agricultural Production and Trade 21 Ukrainian economy (oil, lumber, etc.), the exporter avoids the 30% export tax and the surrender of 50% of the hard currency earnings. However, many traders are unwilling to become involved in the inefficient barter trade. 54. The export regime changed significantly after 1994 presidential elections and new government came to power. It appears that export regime formally becomes less restrictive and more accessible to foreign traders that deal directly with producers and private trading companies. 55. However, along with some signs of liberalization of export regime, Ukrainian Government introduced " a list of products that can't be exported below the so-called "F.O.B. Ukrainian Black Sea port recommended indicative export prices". Every month or so this list of products and indicative prices were revised by the government and published in the local newspapers. This "indicative" price means that even if a foreign buyer and Ukrainian seller reached an agreement and signed a contract, the product cannot be exported if the price shown in the contract is below the lower bound of the indicative price. Usually, the indicative prices were unrealistically high and provide no incentive to foreign buyers to enter the Ukrainian market. For example, F.O.B. Black Sea port price for class I wheat in 1994-1995 has been established at 145-150 US dollars per metric ton. Bear in mind that the quality of Ukrainian wheat is usually an unknown variable, prompt delivery and loading is also very uncertain. Accordingly, this indicative price kept all serious international trades away from the Ukrainian wheat market. High indicative prices are common to all other exportable agricultural commodities including sunflower and rape seed, pork, beef, butter, sunflower and rape seed oil, sugar and wheat flour. 56. There are some other factors that make it difficult for Ukrainian producers to enter the world mnarket. It is well known that most of the international buyers trade under the so-called "documentary letter of credit, F.O.B. stowed vessel" condition. This condition means that the exporter is paid only after the product is loaded on board of the buyer's vessel and the buyer's bank has accepted all documents specified in the letter of credit (L/C). On the other hand, Ukrainian producers want to be fully prepaid before they ship anything to the port of loading. The common solution for this type of situation is a so-called documentary letter of credit that sets up rules and steps that both parties follow in any export/import transaction. L/C is a perfect financial instrument that assures the seller that he will be paid under specified conditions. It is even more valuable financial instrument to countries like Ukraine, where the mutual commercial risk is very high. 57. To utilize the advantages of L/C type trading, Ukrainian banks have to step up and offer Ukrainian trading companies some sort of pre-export financing that allows a trading company to buy the product from the supplier, transport it to the port, and load the product aboard the vessel. However, the Ukrainian banking system is adjusting very slowly to this new environment and does not provide necessary export/import banking services. Very few of Ukrainian trading companies have access to the above short-term financial resources. But if they do, banks treat these operations as very risky and charge a local client unrealistically high interest rate. The inability of the Ukrainian banks to respond to the needs of the local and international trading community limits the choice of foreign companies only to those willing to take a risk of making full pre-payment to the producers. Of course, the companies that are willing to take this risk enjoy extremely high profit margin if the deal goes through. But not many of these companies can survive for long in the extremely volatile Ukrainian export market. 58. The Ukrainian import regime is much simpler than that governing export. There are no non-tariff barriers except the standard rules that products must meet national safety and  22 Ukraine Country Report environmental standards. The import tariff system is characterized by a relatively narrow and modest set of rates (Table 2.12.). Nonetheless, noncompetitive industries enjoy considerable protection owing to the exchange rate and the low buying power of the Ukrainian population. 59. The import tariffs, introduced in January 1993, were based on the Harmonized System (HS) and did not distinguish between the rest of the world and other FSU countries. Most goods are subject to tariffs of 0-10%, depending on the product and the exporting country. A small number of goods are subject to tariffs of 15%, 20%, and 30%. Table 2.12. Import tariffs, Ukraine, 1993. Commodity Group Rate, % Rate, % Concessional Full Live animals 5 10 Meat and meat products 5 10 Wheat and Cereals 10 20 Flour and flour products 10 20 Sunflower seed 25 10 Fats and Oils 10 20 Sugar 10 20 Sources: Ministry of Statistics; UIAE; The World Bank Reports.  3. COMMODITY ANALYSIS A. METHODOLOGY, METHOD, AND DATA 1 The major goal of Chapter 3 was to assess agricultural trade opportunities for several specific agricultural commodities during the period of transition (in the short run) and during so called post-privatization period (medium run). To narrow down the choice of commodities to be analyzed, a decision has been made to collect data only on those agricultural commodities that before the collapse of the Soviet Union had a self-sufficiency ratio greater than unity. These commodities were: spring wheat, sugar beets, sunflower seeds, pork, poultry and eggs. Corn was added to the above list in anticipation that in the near future it may become one of the most important Ukrainian feed grains. 2. The approach to assess potential competitiveness of Ukraine in selected agricultural commodities involved a number of steps: * Output prices and prices for selected inputs were collected for 1991-1994; - Consumer price indices were collected for 1991-1994; - Nominal monthly exchange rates were collected for 1991-1994;. * Nominal production costs estimates were obtained. These cost estimates were prepared by the Ministry of Agriculture and Food of Ukraine and by the Ukrainian Institute of Agricultural Economics (UIAE). Within these basic data, direct comparative calculations were possible. 3. There are essentially two methods for allowing comparisons between average costs or prices of different years. Either annual averages for costs and prices are converted into dollars at the average annual nominal exchange rate or by using annual average of the CPI indices. 4. The domestic unit production cost in 1991 rubles indicates how comparative advantage change over time within the ruble zone. There are two important purposes of extracting domestic costs of production in constant rubles. First, it permits a comparison of the costs over the years within the region. The fact that Ukraine, Belarus, Moldova and Russia in 1991 all had the same currency, offers a basis for comparison. Moreover, it allows to predict directions of trade flows within the region without any reference to international markets. Second, CPI is relatively independent of foreign sector and, hence more accurately reflects the changes within the domestic economy. To assess international competitiveness of the industries, however, it is also necessary to express the domestic production cost in the foreign or world market price, i.e., in U.S. dollars. 5. The data obtained from the Ministry of Agriculture and Food and UIAE includes two sets of data: the cost of individual inputs per unit of output for every input (factor shares), and the input/output coefficients for all material inputs and labor. To establish whether Ukraine does have a "technical" advantage arising from natural conditions, an alternative domestic unit cost can be  24 Ukraine Country Report obtained by multiplying factor share by the world/domestic factor price indices for 1991-1994. The resulting figures will reflect the cost of producing goods, using domestic technology at the international input prices. If this calculated cost is lower than the price of the product in the international market, it can be concluded that Ukraine has a comparative advantages in the production of a particular commodity. 6. Different factors of production adjust to the international market level at varying speed. Under free trade conditions some input prices may immediately reach the international market level. This group of inputs includes mobile inputs such as fuel, electricity, seeds, etc. Prices of other inputs adjust to the international market level at a much slower rate and are more responsive to the regional economic conditions. Examples include the so-called "semi-mobile" inputs such as labor and agricultural equipment. 7. To calculate cost of production at international input prices or for short "calculated cost", it has been decided to price all mobile inputs such as fuel, fertilizers and electricity, seeds and feed at the prevailing international prices. Labor was treated as a mobile input only within the FSU region, where Russia is the major recipient of labor force from other FSU countries. Accordingly, the Russian labor market was used as a benchmark for calculating the shares of labor at international input prices. 8. Use of the above adjustments to the prices of some inputs an finally to the unit cost of production allowed us to rank the above commodities according to their export potential. (Table 4.1)7 9. The following sections of the report present a detailed analysis of production, production cost and trade trends, commodity specific policy issues for six most important agricultural commodities. Each sections includes data on calculated cost of production that permits specific conclusions on potential international competitiveness of each individual commodity in the short run and in the long run. B. Sugar Beet and Sugar Production, Use, and Trade Trends 10. Ukraine is one of the oldest continuous sugar beet-producing areas in Europe. Sugar beet is grown in 19 of Ukraine's 22 oblasts, and most prominently in Vinnitsa and Cherkassy. Ukrainian sugar beet production contributed almost 50% of the total sugar production of the FSU. It was the only republic in the Soviet Union in which the supply of sugar exceeded the demand. In the 1980's Ukraine produced 5-6 million tons of sugar, twice as much as it consumed, and was an important source of sugar for other republics. In addition, 1.5-2 million tons per year of raw cane sugar from Cuba were imported and refined in Ukraine for the other republics of the Soviet Union. 11. The collapse of the Soviet Union and the economic difficulties in the first few years of independence have adversely affected the Ukrainian sugar beet industry (Table 3.1). From 1990 to 7 For more details on methodology and formulas used to calculate the cost of production at international prices see Annex 1 of the Report.  Commodity Analysis 25 1994 the area under sugar beet was reduced by 10.4%. During the same period, production of sugar beet dropped by almost 40%, reflecting a dramatic decrease in sugar beet yields from 30 tons per hectare in 1980's to about 20 tons per hectare in 1992-1994 seasons. It is interesting to note that while consumption of sugar dropped by 22%, and retail sales of sugar declined by almost half. One potential explanation of different dynamics of retail sales and consumption is that due to the financial difficulties and lack of cash in the sugar mills' accounts, made the white sugar to serve as one of the major mean of payment and exchange. It became a common practice for the mills to make payment- in-kind to their suppliers of sugar beets, inputs and labor in the form of sugar. Due to the high inflation, sugar mills were in general more interested to barter sugar for inputs or other commodities rather than to sell sugar to the retail stores that could only pay in cash. Table 3.1. Production and use of sugar beet and sugar, Ukraine, 1991-1994. Sugar beet/Sugar Units 1990 1991 1992 1993 1994 Planted area of sugar beet 000 ha. 1607 1,558 1,498 1,530 1,456 Yield of sugar beet ton/ha 27,6 34 19.8 22.2 18.9 Output of sugar beet 000 ton 44,264 36,168 28,783 33,717 27,604 State procurement of sugar beet 000 ton 43,283 34,253 26,565 29,257 19,749 Beginning stock of sugar 000 ton 522 1,086.5 2,003 Output of sugar from sugar beet 000 ton 5,388 3,844 3,527 3,838 3,342 Output of sugar from cane 000 ton 1,403 942 120 139 Total import of sugar 000 ton 24.5 1.5 8.5 Total domestic sugar supply 000 ton 5,333 4,735 5,988.5 6376.5 Total export of sugar 000 ton 1,646 332 914 848 Including FSU countries % 100 98.9 99.9 Per capita consumption of sugar kg 50 45 39 32 Total consumption of sugar 000 ton 2,600 2,370 2,040 1,661 Retail sales of sugar 000 ton 1,802 1,867 1,263 1,012 Ending stock of sugar8 000 ton 1,086.5 2,033 3,034.5 3867.5 Source: Ministry of Statistics; UIAE; CARD staff calculations. Commodity-Specific Policy Issues 12. Sugar beet and sugar beet production were a subject of strict government regulation in the past. The govermnent required every producing oblast to produce a certain quantity of sugar beet in order to sustain the needs of the sugar beet processing industry. To support a desired level of sugar production, sugar beet production was made mandatory by governnent order. During the 1991-1993 seasons, up to 95% of all sugar beets were grown under state order. In 1994, the government slowly started to reduce procurement of sugar beet. In 1994, the state agency 8 Ending stock figures have been calculated according to the following formula: Ending Stock = Beginning Stock + Production + Official Import - Official Export - Consumption. Readers have to be very careful trying to make inference about the actual size of white sugar inventories in Ukraine, first, because of significant volume of illegal export of sugar to Russian and other FSU countries and, second, because of inaccurate reporting of sugar consumption.  26 Ukraine Country Report UKRSUKAR procured about 70% of total sugar produced in the country. Due to the falling domestic demand for sugar and weak demand for Ukrainian sugar in Russia and other FSU countries, the quantity of sugar beet procured by the government was substantially reduced from 43 million tons in 1990 to 20 million tons in 1994. Simultaneously with reduction in procurement of sugar beet, Ukraine started to reduce its import of raw cane sugar from 1.4 million tons in 1990 to a negligible quantity of 0.14 million tons in 1994. 13. Sugar beet was the least attractive commodity to farms to produce in 1980's and early 1990's. Among all major crops, sugar beet was the least profitable in Ukraine. For instance, in 1991 sugar beet generated only 20% of the profit generated by wheat or corn per hectare of arable land. Even a 40% increase in the procurement price in 1991 did not make sugar beet production attractive. In 1992 and 1993, two other major increases of procurement price for sugar beet followed and made it more than twice the reported unit cost of sugar beet production. 14. A significant increase in the procurement price of sugar beet and a corresponding increase in the mills gate price for sugar from 1,280 krb. in 1991 to 3,109,000 in 1993 (the equivalent of tripling of white sugar prices in terms of 1991 rubles) caused a steady decline in sugar consumption. From 1991 to 1994, total sugar consumption in Ukraine decreased from 2,600,000 tons to 1,661,000 tons. Accordingly, on average during 1991-1994, Ukraine had an exportable surplus of about 1,5-2.0 million tons of refined sugar. However, due to a significant drop in demand for Ukrainian sugar in other FSU countries and especially Russia, Ukraine was able to export less than a million tons of sugar in 1991-1994. 15. Most of the refined sugar export went to FSU countries, especially to those countries in a position to supply energy resources to Ukraine in exchange. In the years 1991 and 1993, Russia received 61% and 83% of Ukrainian sugar export to FSU countries, respectively. Most of the sugar went to Russia under an inter-government agreement that allowed Ukraine to receive crude oil, gas, and other vital inputs. 16. Exports to other than FSU countries continue to be negligible (less than 10% of the total sugar export). There are several reasons why Ukrainian sugar was not a player in the international market: * Quality of refined sugar produced by Ukrainian sugar mills: Only few of them can produce refined sugar with high enough degree of polarization to compete in the international market. For low grade refined sugar there is not much of international market. * Packing: Refined sugar has be exported in polyvinyl bags, of which there is a shortage in Ukraine. * Lack of pre-export financing (1991-1995), complicated procedure of obtaining licenses and quotas (1991-1993); unrealistically high indicative export price (1994-1995). 17. Before 1991 all Ukrainian sugar mills were owned by the State Committee for Food Industry (SCFI). In 1992, about half of Ukrainian sugar mills were separated from the SCFI and  Commodity Analysis 27 united under the roof of "Ukrainian Sugar Concern" (UKRSUKAR). Since 1992, in response to the privatization initiative, SCFI and UKRSUKHAR agreed to lease about 15 factories to collectives formed by their respective employees. These collectives have the obligation to fulfill the state order assigned to the mill, however, they also had the right to sell assets, and to hold a buy-out option for the lease. Written into that option was the obligation to sell to the state, the amount of sugar designated as the mill's state order. Capacity of the Sugar Beet Processing Industry 18. By 1994, there were total of 188 factories operating in the 17 sugar-producing oblasts, which were controlled by State Committee for Food Industry and 17 regional associations of sugar mills united under Concern UKRSUKAR. (See Table 1 la. of the Statistical Annex 1 for a complete list of Ukrainian sugar beet processing mills). Most of the equipment was locally made, and was obsolete by international standards. Obsolete machinery and inadequate processing capacities were the norn in many of the processing plants. The factories ranged in capacity from 1,200 tons to 10,000 tons per day. Some of the factories have been equipped for the refining of cane sugar, despite the current lack of international market sugar imports. This capacities may be used for refining raw cane sugar for re-export. Production Cost of Sugar Beet 19. There were no significant changes in mineral fertilizer application or fuel per ton of sugar beet produced during 1991-1994. However, if we consider the fact that yield of sugar beet decreased for about 100% during the same period, it becomes evident that per hectare use of fuel and mineral fertilizers has been reduced by almost 100%. This is one of the reasons why the total cost of production did not change significantly during these years. Table 3.2. Input use per ton of sugar beet in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man-hours 13 16 15.3 18.7 Seeds kg. 0.3 0.3 0.3 0.3 Mineral fertilizers kg. 12.2 13.7 12.7 12.0 Fuel & lubricates kg. 13.9 14.9 14.6 14.1 Source: Ministry of Statistics; UIAE; CARD staff calculations. 20. 50% increase in labor use per ton of sugar beet can also be attributed to a decline in sugar been yields and perhaps to insufficient use of herbicides and mineral fertilizers. The cost of this increase, however, was offset by a decrease in the real wages. This resulted in a relatively stable share of labor in the cost in sugar beet production: about 35% during 1991-1993. It is apparent that the Ukrainian sugar beet producers were reacting rationally to the increase in input prices.  28 Ukraine Country Report 21. An opposite trend in input prices and use in sugar beet production resulted in relatively flat behavior of real unit cost of sugar beet production. The real unit cost increased 14% in 1992-1993, and then rose again by 10% in 1994 (Table 3.3). There are two major factors that may explain this stability: * a relatively high labor intensity in sugar beet production (priced low relative to other inputs), (Table 3.2.); * 100% reduction in mineral fertilizers application and fuel use per hectare of sugar beet. Although the prices of fuel and mineral fertilizer were increasing at a rate higher than other inputs, the decline in their usage per hectare was so sharp that the fuel and mineral fertilizer share in the unit cost did not increase as much as might have been anticipated. 22. From 1991 to 1992, when the fuel price increased ninefold in real terms, the share of fuel in the unit cost even decreased by 3.7 basic units. There are two possible causes for this change. First, the reduction of fuel use per hectare of sugar beet. Second, the farms were using fuel reserves purchased during 1991 and tried to avoid purchase of fuel at the new price. However, in 1993, the year when fuel prices increased most, the reduction in fuel use was more than offset by fuel price increase. As a result, the share of fuel in the unit cost of sugar beet production more than doubled. Storing and Transportation 23. All beets are harvested during a three or four-week period between early October and the initial frost in mid-November. The sugar beets are unloaded and piled mechanically on inclined concrete slabs into 25 meter by 6 meter piles. Underground ventilation is provided by individual blowers. The sugar beets are sprayed with lime to prevent biological degradation. The sugar beets are also covered with either straw, used sacks, plastic sheets, or formaldehyde foam (Panplast) to protect against frost damage. 24. Approximately 75 % of all beets are stored more than 30 days. Some of the harvested beets are inadequately stored at the farms, and are sent to the factories as needed. Inadequate storage and handling at the farms, contribute to a sugar-content loss that may be as high as 5 %. The average storage loss of sugar for all Ukrainian factories is 1.1 % once the beets are received. The total loss of sugar content due to inadequate storage of beets in the farms and after beets were received at the mills contribute to about 6 basic points of sugar-content loss.  Comunodity Analysis 29 Table 3.3. Production cost of sugar beet in Ukraine, 1991-1994 (per metric ton of sugar beet). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 28 39.6 390 31.5 23,300 40.5 85,100 13.4 Seeds 4 5.5 18 1.5 1,250 2.2 98,600 15.6 Mineral fertilizers 6 8.5 112 9.1 9,520 16.6 109,800 17.3 Organic fertilizers 3 4.6 29 2.4 1,560 2.7 58,500 9.2 Herbicides 5 6.9 89 7.2 2,300 4 70,800 11.2 Fuel & lubricates 9 12.3 107 8.6 10,000 17.4 66,000 10.4 Electricity n/a n/a n/a n/a n/a n/a n/a n/a Depreciation & repair 6 8.3 127 10.3 5,520 9.6 61,600 9.7 Other cost 10 14.3 364 29.5 4,050 7 83,600 13.2 Unit cost 70 100 1,236 100 57,500 100 634,000 100 Unit cost in 1991 prices 70 86 83 92 Unit cost in USD 1 4 6 9 Procurement price 115 3,278 150,000 1,104,100 Proc. price in 1991 prices 115 229 217 160 Proc. price/unit cost 1.64 2.7 2.6 1.7 ratio Profit per ha 613 2,352 2,506 852 Sources: Ministry of Statistics; UIAE; CARD calculations. Cost of Sugar beet Processing 25. The real unit cost of sugar beet processing followed the pattern of the government- introduced procurement price for sugar beet (Table 3.4). The real unit cost of sugar more than doubled from 1991 to 1992 and decreased 18% from 1992 to 1993 and by additional 26% in 1994. A notable feature of the change in the cost structure was a fivefold decrease in the share for the repair and depreciation component from 8.9% in 1991 to 2.0% in 1993. This is an alarming picture; most of the sugar mills were built at the beginning of the twentieth century, and then suffered from decades of underinvestment. If this trend persists, presently Ukrainian sugar beet processing industry would not be able to operate even at 50% of current capacity.  30 Ukraine Country Report Table 3.4. Cost of sugar beet processing in Ukraine, 1991-1994 (per metric ton of sugar). 1991 1992 1993 1994 CostlPrice krb. % krb. % krb. % krb. % Labor cost 36 3.5 799 2.2 11,462 0.7 114,620 0.9 Row material 724 69.3 23,757 65.2 1,182,061 70.7 9,617,785 72.7 Fuel & electricity 64 6.1 4,947 13.6 177,158 10.6 499,586 3.8 Depreciation & repair 93 8.9 2,127 5.8 26,478 1.6 264,780 2.0 Overhead cost 112 10.7 4,120 11.3 265,450 15.9 2,654,500 20.1 Other costs 16 1.5 689 1.9 8,333 0.5 83,330 0.6 Unit cost 1,044 100 36,438 100 1,670,942 100 13,700,550 100 Unit cost in 1991 krb. 1,044 2,548 2,415 1,914 Unit cost in USD 18 114 174 184 Procurement price 1,280 47,694 3,109,000 Procurement price in 1991 krb. 1,280 3,097 4,493 Procurement price in USD 22 150 324 Retail price 1,930 26,335 5,887,000 14,400,500 Retail price in 1,930 1,710 6,911 2,083 1991 krb. Retail price in 33 83 614 200 USD Source: Ministry of Statistics; UIAE; CARD staff calculations. Cost Simulation and Results 26. Due to a significant increase in the procurement price for sugar beet in 1992 and a corresponding increase in the cost of raw materials, the unit cost of white sugar has rapidly approached the international price level. In 1991, the unit cost of white sugar was only 6% but in 1993-1994 it was more than 60% of the international market price. Adding up the 25% value added tax (VAT) and 20% profit margin we arrive to a whole sale price of about 300 US dollars, the price that on average has been prevailing in the international market for high graded white sugar. 27. However, to make a reasonable conclusion about the competitiveness of Ukrainian sugar beet and the sugar beet processing industry, it is necessary to remove from the reported unit  Commodity Analysis 31 cost of production any and all direct and indirect subsidies that existed in the economy during this period and make some adjustments to the input prices used in production of sugar beet and sugar. (For more details on the methodology of estimating costs, see Annex 2 of this report). Table 3.5. Simulation results: unit cost of sugar production in Ukraine, 1991-1994. Cost/Price 1991 1992 1993 1994 Sugar Beet Reported unit cost 1 4 6 9 Calculated unit cost 5 17 9 33 Calculated cost/Reported cost ratio 5.0 4.3 1.5 3.7 International price (Hungary farm gate price) 12 12 12 12 World price/Reported unit cost ratio 12.0 3.0 2.0 1.3 World price/Calculated unit cost ratio 2.4 0.7 1.3 0.4 Sugar Reported unit cost (I) 18 114 174 184 Calculated unit cost (II) 78 289 158 462 World price 273 276 277 300 World price/unit cost ratio (I) 15.2 2.4 1.6 1.6 World price/unit cost ratio (II) 3.5 1.0 1.8 0.6 Note: For reference see tables la. and 2a. of the Statistical Annex. Source: CARD staff calculations; FAPRI Reports. 28. Table 3.5. presents a rough estimate of what sugar cost will be if Ukraine makes substantial progress in liberalizing its economy. Adjustments for the difference between the unit cost and procurement price for sugar beet significantly reduces the unit cost of white sugar. On the other hand, adjustment for agricultural input price subsidies acts in the opposite direction and increases the unit cost. The data shows that during 199 1-1994, agricultural input subsidies that were reducing the reported unit cost of sugar dominated all other effects. Comparing the reported unit cost of sugar with the international price indicates that Ukraine was internationally competitive in the production of sugar. However, when estimated at international input prices the picture is less clear. In 1992, it was 7% higher and in 1994 - 50% higher the international price. This result contradicts the opinion of the majority of Ukrainian experts that the Ukrainian sugar industry can compete in the international sugar market. International Cost and Price Comparisons 29. Although the local currency/US dollar exchange rate was subject to continuous government intervention, it was instructive to know the dollar equivalent of the unit production costs of sugar beet and refined sugar. When calculated in US dollars using the official exchange rates, the unit production cost shows a dramatic increase. In dollar terms, the calculated unit cost of sugar increased from 78 US dollars per ton in 1991 to 462 US dollars per ton in 1994. Adding a 10% profit margin, transportation cost to the port of loading (approximately 10-15 US dollars per ton depending on the distance), and loading charges in the port (from 10 to 20 US dollars depending on the port) we obtain the F.O.B. price of sugar of about 530 US dollars per ton. Comparing this  32 Ukraine Country Report estimate to the world market price, we have a glimpse of a shocking result: the estimated Ukrainian production cost of sugar is almost twice the international price. Table 3.6. International comparison of sugar beet and sugar unit cost, in 1991 rubles and US dollars per metric ton. 1991 1992 1993 1993 in 1991 rubles in USD Sugar beet Ukraine farm cost 70 86 83 6 Moldova farm cost 77 70 72 7 Belarus farm cost 114 154 181 10.5 Hungary farm price 12 Sugar Ukraine plant cost 1,044 2,548 2,415 174 Moldova plant cost 1,720 1,870 1,750 170 Belarus plant cost 1,250 4,110 5,220 300 Hungary border price 230 World F.O.B. Europe 273 Source: CARD staff calculations, FAPRI Reports. 30. The results obtained from comparing reported unit cost and unit cost of sugar production calculated at international input prices cast significant doubt on the export potential of the existing sugar beet processing industry (Table 3.6). In our estimate, Ukraine has to undergo radical technical and technological changes to compete internationally. However, Ukraine seems to be the second most efficient producer among the FSU countries. Table 3.6 gives a notion of the competitiveness of the Ukrainian sugar industry relative to other FSU countries. The cost of sugar beet production seems close to that in Moldova and only one half of that in Belarus. Assuming that the unit cost of Russian sugar may be somewhere between those of Ukraine and Belarus, Russia and Belarus should be future markets for Ukrainian sugar. C. Sunflower Seed and Sunflower Oil Production, Use, and Trade Trends 31. Sunflower is the second most important technical crop in Ukrainian agriculture. By 1994, the total revenue generated by this crop was almost the same as that by sugar beet, relative to pre-reform level when the revenue generated by sunflower seed was only one fourth of sugar beet. 32. Within the Former Soviet Union, Ukraine was a sizeable supplier of sunflower oil to Russia, Belarus, and other republics. In the 1980's, Ukraine on average exported from one quarter to one third of a million tons of sunflower oil to other republics of the FSU, or equivalent to almost a quarter of the domestic vegetable oil produced and a third of domestic consumption. 33. During 1991-1994, Ukraine had a stable sunflower acreage of about 1,650,000 ha. (Table 3.7). However, due to a significant decrease in mineral fertilizers and herbicides use, and a corresponding decline in yields, the output of sunflower seed declined from 2,448,000 tons in 1991 to 2,075,000 tons in 1993. In 1994, although the planted area of sunflower went up by about 10%, the  Commodity Analysis 33 decrease in yield was so significant (from 1.27 to 0.91 tons per hectare) that output of sunflower seed reached a record low level of 1,556,000 tons. Table 3.7. Production and use of sunflower seed and oil, Ukraine, 1991-1994. Seed/Oil Unit 1990 1991 1992 1993 1994 Planted area 000 ha. 1,636 1,601 1,641 1,637 1,725 Yield tons/ha. 1.58 1.55 1.38 1.27 0.91 Output of sunflower seed 000 ton 2,571 2,448 2,277 2,075 1,556 State procurement of 000 ton 2,040 1,810 1,358 1,007 848 sunflower seed Change in beginning stock 000 ton 158.1 247.9 367.1 Production of vegetable oil 000 ton 1,070 1,004 858 803.2 530 Import of sunflower oil: 000 ton 24.5 2 0.2 0.2 Including from FSU % 93.8 34.8 35.9 Domestic vegetable oil supply 000 ton 1,249.5 1,089 721 Retail sales of oil 227 222 199 157 Export of sunflower oil: 000 ton 279 147 93 136 Including to FSU % 84.6 67.2 82.8 Net Exports of sunflower oil 000 ton 254.5 145 92.8 135.8 Per capita consumption of kg 11.2 10.6 8 8 vegetable oil Total domestic consumption 000 ton 582 551 416 416 of vegetable oil Change in ending stock 000 ton 158.1 247.9 367.1 345.3 Source: Ministry of Statistics; UIAE; CARD staff calculations. 34. The yield was decreasing for a variety of reasons, the most significant being a sharp decline in mineral fertilizer application from 96.4 kg. per ha. in 1991 to only 22.3 kg. per ha. in 1994. There was no official data on herbicide use in sunflower production, but it is likely that herbicide application decreased even more than mineral fertilizer use. Since sunflower production is highly sensitive to fertilizer and herbicides use, there is no need to consider other reasons to explain this almost 65% decline in sunflower seed output. 35. Sunflower seed and oil are considered important potential export commodities. During the 1980's, Ukraine was exporting about 30% of sunflower oil production. Most of this export was to the republics of the FSU. It was expected that the quantity of sunflower oil exports would increase significantly after Ukraine became independent, especially to the Western market. Instead, the collapse of the Soviet Union and the attendant economic problems in Ukraine had an adverse impact on exports. From 1991 to 1993-1994, the exported quantity of oil dropped from 279,000 tons to 93,000 and 136,000 tons consequently. 36. Geographical distribution of Ukrainian export of vegetable oil is significantly different from that of sugar. For instance, in 1992 the share of the non-FSU importers of Ukrainian vegetable oil was almost 50%, while that of sugar was only 10%. One plausible explanation for this difference is that unrefined vegetable oil is much more heterogenous in overall quality and is in a steady demand in the world market. On the other hand, there is no intermediate product, like raw sugar from cane, in the sugar beet processing industry. Processing of sugar beets involves a continuous production cycle that begins with sugar beet cleaning and ends with packing of refined  34 Ukraine Country Report sugar. Unfortunately, the current level of technology used in Ukraine generally allows production of only low quality refined sugar, which is hard to trade internationally; few serious sugar traders are interested in taking the risk of trading a product of unknown and variable quality. However, even in this favorable "technological environment", economic uncertainty and political risks have been so high that even the regular international buyers such as Cargill were not much interested in buying Ukrainian vegetable oil. On the other hand, Russia - which on average consumed about 50% of Ukrainian vegetable oil export - increased its share to 80% in 1994. Commodity-Specific Policy Issues 37. Production of sunflower seed is heavily supported through direct subsidization (for example, state farms producing sunflower seed receive a premium of around 30% of the procurement price) and indirect subsidization (through low interest rate credit and high state procurement prices). In 1991, the procurement price of sunflower seed was 2.4 times the estimated unit cost. In 1992, the procurement price was 5.2 times, and in 1993 - 7.2 times the cost of production. 38. The government has been deeply involved in the production, distribution, processing, and export of sunflower seed and oil for decades. The size of the yearly state order was traditionally determined by the oilseed meal required by the feed industry. All state orders for oilseed production were received and stored by the State Committee of Bread Products (SCBP) and were processed at the mills of "Ukrmaslozirprom," a Joint Stock Company jointly owned by MOAF and oil seed processing plants. Due to the problems in the Ukrainian livestock industry and a significant drop in the number of animals fed in the state and collective farms, the demand for oilseed meal has declined, as has the state procurement of sunflower seed. 39. In 1991, the government procured 1,810,000 tons of sunflower seed, but in 1994, state procurement dropped to 848,000 tons, or by more than one-half. Nevertheless, state procurement constitutes about 50% of the total sunflower seed produced. The rest of sunflower seed can be freely sold. 40. The remaining free of state order sunflower seed is considered by farms to be an important barter commodity. There are many different schemes by which sunflower-producing farms manage to exchange seed for consumer goods and agricultural inputs. In most cases sunflower processing plants agree to supply a certain quantity of agricultural inputs in exchange for sunflower oil from the seed supplied by oilseed-growing farms. Sometimes farms and crushing plants deal on a commission basis. In this situation, the plant does not actually buy the seed but only crushes them and returns all but 80-85% of the oil to the farm. The plant retains 10-15% of the oil as payment for crushing services. Then the farms sell this sunflower oil in a free market to generate cash and pay wages to their employees or to exchange it for the required inputs or consumer goods. It is not unusual to observe trucks selling bulk unrefined sunflower oil on the streets in Kiev. 41. Even though "Ukrmaslozirprom" continues to crush almost 95% of all the sunflower seed in Ukraine, "Ukrmaslozirprom" management predicts that this monopoly will soon be broken into smaller, semiprivate joint stock companies. According to sources close to top management, "Ukrmaslozirprom" does not plan to resist the break-up of the monopoly. "Ukrmaslozirprom" rather plans to concentrate on gaining full control of a few of the most efficient enterprises.  Commodity Analysis 35 Production Cost of Sunflower Seed 42. The decline in mineral fertilizer production and a 50% drop in mineral fertilizer imports resulted in continuous decline in mineral fertilizers use during 1991-1994. By 1994 use of mineral fertilizers per ton of sunflower seeds produced decreased to less than a quarter. Considering the fact that sunflower seed yield has also decreased by more that 40%, we may to conclude that per hectare application of mineral fertilizers per hectare of sunflower seed has declined to about 1/6. If this trend continues, in 1995, Ukrainian farmers would be harvesting more weeds than sunflower seed. Most experts believe this drop in mineral fertilizer application was a result of the increase in mineral fertilizer price. However, our calculations show that the real price of mineral fertilizer did not increase. The decline in mineral fertilizers use should be attributed to more basic failures of the system: short term thinking, lack of incentive to produce efficiently, etc. However, physical shortage of mineral fertilizers in the market can also be a possible reason for this decrease. On the other hand, although the price of fuel increased substantially in real terms, the same data does not show any sign of reduction of fuel use per ton of sunflower seed produced, probably because the farms or companies affiliated with them were receiving cheap government loans for purchasing fuel and then reselling it in the free market, covering up these sales in input use statistics. 43. With the decrease in mineral fertilizer and herbicide application the farms used more labor per ton of sunflower seed. From 1991 to 1994, per ton of sunflower seed produced the use of labor increased by 35% (Table 3.8). However, again this increase is attributed to the sunflower seed yields decrease rather than to the number of agricultural workers employed in sunflower seed production. Table 3.8. Input use per ton of sunflower seed in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man- 23.2 31.2 30.8 31.2 hours Fuel kg. 45.1 50.6 55 53.4 Mineral fertilizers kg. 96.7 60.3 38.4 21.3 Sources: Ministry of Statistics; UIAE; CARD staff calculations. 44. The reduction in mineral fertilizer and herbicide application did not materially affect the yield of sunflower seed in 1991. However, in 1992, 1993 and 1994, the yield was 14%, 24% and 73% below the 1990 level, respectively. With the planted area remaining stable, output level of sunflower seeds followed the yield pattern. 45. Even though the real prices for fuel increased by more than 15 times during 1991-1993, the real cost of sunflower seed production was relatively flat during 1991-1993 seasons. . There are two major factors that may explain this stability: * dramatic decrease in mineral fertilizer use; * 40% decrease in fuel use per hectare of sunflower seed. 46. The unit cost structure has undergone interesting changes. For example, the share of herbicides increased from 23.7% in 1991 to almost 40% in 1993. The 40% share of herbicides in the unit cost structure serves as an indirect indicator of the change in this market in 1992 when herbicide prices were fully liberalized and foreign companies were allowed to deal directly with the farms. The  36 Ukraine Country Report prices were fully liberalized and foreign companies were allowed to deal directly with the farms. The decrease in mineral fertilizer use, coupled with the real mineral fertilizer price decline, led to a reduction in mineral fertilizer cost share from 14.2% in 1991 to only 5% in 1994. It is interesting note that the share of seeds in the unit cost structure decreased from 6.5% to 2.5% and 3.9% in 1993 and 1994. This is an indication that farms continued to use local varieties of sunflower seed and do not have access or an incentive to purchase high yield imported planting materials. 47. In 1994, the unit production cost dropped by about 43% relative to the 1991-1993 level. The threefold decrease in fuel prices and almost fourfold decrease in mineral fertilizer prices were the major factor responsible for this decline (Table 2.5). However, due to a much faster decrease in mineral fertilizer use relative to that of fuel use, the share of fuel in the unit cost increased from 10% to 16%, and reached 32% in 1994, while the share of mineral fertilizers dropped to 5.1 % - a record low percentage level since 1991. Table 3.9. Production cost of sunflower seed in Ukraine, 1991-1994 (per metric ton of sunflower seed). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % 1. Labor cost 40 19.9 644 21.3 32,600 19.7 274,982 28.9 2. Seed 13 6.5 255 8.4 4,160 2.5 37,498 3.9 3. Mineral fertilizers 28 14.2 216 7.1 18,260 11 48,792 5.1 4. Organic fertilizers n/a 0 n/a 0 n/a 0 n/a 0.0 5. Herbicides 47 23.7 1,000 33.1 63,330 38.2 169,091 17.7 6. Fuel & lubricates 24 11.9 299 9.9 27,160 16.4 307,050 32.2 7. Electricity n/a 0 n/a 0 n/a 0 n/a 0.0 8. Depreciation & repair 28 13.8 310 10.3 7,340 4.4 41,468 4.4 Other cost 20 10 298 9.9 12,910 7.8 73,872 7.8 Unit cost 200 100 3,021 100 165,760 100 952,753 100.0 Unit cost in 1991 prices 200 211 240 138 Unit cost in USD 3 9 17 13 Procurement price 900 24,441 1,548,000 Proc. price in 1991 prices 900 1,709 2,237 Proc. price in USD 8 77 162 Proc. price/unit cost ratio 4.5 8.10 9.32 Profit per ha. 988 1,994 2,461 Source: Ministry of Statistics; UIAE; CARD staff calculations. Sunflower Oil Production Cost 48. The unit cost of sunflower oil production almost doubled from 1991 to 1993 (Table 3.10). There are several reasons why this happened. First, the price of sunflower seed nearly doubled in real terms. Second, there was a drop in sunflower oil production from 995,000 tons in 1991 to 628,000 tons in 1993, possibly causing higher quasi-fixed costs. Third, the production technology was not flexible in terms of substitutability of inputs.  Conmmodity Analysis 37 49. In 1994, the real unit cost of sunflower oil was only one half of the 1991-1993 average. The major reasons that can explain this significant deviation from the previous three years pattern are: * almost 50% reduction in the real cost of raw materials; * threefold decrease in real fuel prices. Table 3.10. Production cost of sunflower oil in Ukraine, 1991-1994 (per metric ton of sunflower oil). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 9 0.7 238 1.6 2,581 0.1 53,200 1.0 Raw material 1,286 93.5 12,694 83.5 1,988,143 9f5P66,640 95.8 Fuel & electncity 24 1.7 815 5.4 26,641 1.3 74,600 1.4 Depreciation & repair 22 1.6 439 2.9 9,883 0.5 14,200 0.3 Overhead cost 30 2.2 926 6.1 49,222 2.4 68,100 1.3 Other cost 4 0.3 89 0.6 1,850 0.1 11,400 0.2 Unit cost 1,375 100 15,201 100 2,078,320 1005,288,140 100.0 Unit cost in 1991 prices 1,375 1,063 3,003 765 Unit cost in USD 23 48 213 73 Procurement price 1,589 14,898 1,320,236 7,850,000 Procurement price in 1991 krb. 1,589 1,042 1,908 1,135 Procurement price in USD 27 47 135 109 Retail price (state stores) 3,150 16,585 14,801,000 30,989,000 Retail price (state stores) in 1991 krb. 3,150 1,160 21,389 5810 Retail price (state stores) in USD 53 52 1,518 488 Retail price (farmers market) 72,500 1,510,000 Retail price (farmers market) in 1991 krb. 5,070 2,182 Retail price (farmers 228 158 market) in USD Sources: Ministry of Statistics; UIAE; CARD staff calculations. Capacity of Oilseed Processing Plants 50. Over half of Ukrainian vegetable oil production is located in the south. About 2.7 million tons of oilseed were produced in Ukraine in 1991 on 1,600,000 ha. of land, implying a yield of about 1.7 ton per ha. Most of this seed was crushed by "Ukrmaslozirprom" and yielded a total of 852,600 tons of oil. The breakdown by type of seed is: sunflower seed, 824,000 tons; rape seed, 13,700 tons; soybean, 7,400 tons; corn, 6,000 tons, and other, 1,300 tons.  38 Ukraine Country Report 51. "Ukrmaslozirprom" has 18 operating oil mills, ranging in capacity from 250 tons of seed per day at Melitopol to 1,000 tons per day at Pologi, both in the Zaporozje Oblast. The average capacity of the mills is 400 tons of sunflower seed per day. The total installed capacity is slightly above 8,000 tons per day, which implies a capacity to process approximately 2.4 million tons of seed (or 1 million tons of oil) per year. In 1994, however, only about 50% of these capacities was used. Ukrainian refined oil is not bleached, deodorized, or winterized. The lack of final processing seriously limits export potential for refined vegetable oil. The processing plants in the industry need considerable updating, which should include additional oil-refining capacity. Cost Simulation and Results 52. There are two problems with the unit cost of sunflower oil that require an adjustment for estimating international competitiveness. The first is the agricultural input price subsidies. These subsidies tend to understate the unit cost of raw materials for sunflower seed processing. The second involves the government regulations of the industry such as procurement prices, value-added tax (VAT), and indexing of final commodity prices. To make a reasonable conclusion about the competitiveness of Ukrainian sunflower seed and oil processing industry, it is necessary to "adjust" the reported unit cost of production from all direct and indirect subsidies that existed in the economy during this period of time, and make some adjustments to the input prices used in production of sunflower seeds and oil. (For more details on methodology of cost estimates, see Annex 2 of this report.) 53. Table 3.11. shows the unit cost data of sunflower oil production adjusted for input price subsidies (calculated cost). Between 1991 and 1992, low energy prices had the major effect on the unit production cost of sunflower seed and oil. In 1991-1992 the unit cost calculated at international input prices was 2.8 and 4.4 times higher the reported unit cost. However, due to a shocking fifteenfold increase in real fuel prices in 1993, on the contrary, the reported unit production cost was 2.4 times higher than the calculated unit cost, reflecting the fact that there was an extremely large difference between the calculated cost and the procurement price of sunflower seed. Deregulation of sunflower seed and oil prices in 1994 tended to level the difference between the reported and the calculated unit costs of sunflower oil. This suggests that in 1994 the industry was one of the few in the Ukrainian agriculture and food sector that operated under more or less normal market conditions. 54. Observe from Table 3.11 that the difference between the unit cost of sunflower seed and oil calculated at international input prices sunflower oil and the international price is quite large. Obviously, these data lead to the conclusion that sunflower has a significant export potential under the current pricing regime.  Commodity Analysis 39 Table 3.11. Simulation results: production cost of sunflower oil in Ukraine, 1991-1994 in USD (per metric ton of sunflower oil). Commodity 1991 1992 1993 1994 Sunflower seed Reported unit cost 3 9 17 13 Calculated unit cost 27 89 34 50 Calculated cost/Reported cost ratio 9.0 9.6 2.0 3.8 International price 268 253 277 295 International price/Reported cost ratio 89.3 28.1 16.3 22.7 International price/Calculated cost ratio 9.9 2.9 8.1 5.9 Sunflower oil Reported cost 23 48 213 73 Calculated unit cost 65 210 87 120 Calculated cost/Reported cost ratio 2.8 4.4 0.4 1.6 International price 411 457 466 466 International price/ reported cost ratio 17.9 9.5 2.1 6.4 International price/calculated cost ratio 6.3 2.2 5.4 3.9 Note: For reference see Tables 3a. and 4a. of the Statistical Annex. Source: Ministry of Statistics; UIAE; FAPRI Reports; CARD staff calculations. International Cost and Price Comparisons 55. Comparing the reported cost of Ukrainian sunflower seed production to other major producers of sunflower seed in the FSU countries and in Hungary also suggests that Ukraine has a cost advantage (Table 3.12). Calculated in 1991 rubles, the unit cost of sunflower seed production in Ukraine is 30% and 56% lower than in Moldova and Russia, respectively. Assuming that there are no barriers to trade, Ukraine has an opportunity to become a major supplier of sunflower seed and oil to the other FSU countries and to the international market. Table 3.12. International comparison of sunflower seed and oil cost (per metric ton). 1991 1992 1993 1994 1993 Sunflower Seed in 1991 rubles in USD Ukraine plant cost 200 196 195 138 17 Moldova plant cost 350 259 254 25 Hungary plant price 201 International price 277 Sunflower oil Ukraine plant cost 1,375 1,063 3,003 765 213 Moldova plant cost Hungary plant price 720 World price 466 Source: Ministry of Statistics, FAPRI Reports, CARD staff calculations.  40 Ukraine Country Report D. Winter Wheat and Wheat Flour Production, Use, and Trade Trends 56. Winter wheat is the most important crop in Ukraine. On average winter wheat accounted for approximately one half of the area planted to grain in Ukraine and constituted more than one half of the grain output from 1991 to 1993. In 1993, the area planted in winter wheat was 20% smaller than in 1991. However, due to a significant increase in yield in 1993, wheat production was relatively stable and has accounted on average for about 20 million tons annually (Table 3.13). 57. In the early 1990's, approximately 70% of the total wheat output was of food quality and could be used in the production of bread and bakery products. Given the average domestic consumption of bread and bakery products of about 7 million tons per year, Ukraine had an excess supply of about 3-7 million tons of food-quality wheat annually. This surplus could have been used for export if Ukraine had had sufficient feed grain. However, a large portion of this potential surplus (around 3-5 million tons) has been fed to cattle, hogs, and poultry. 58. A decline in livestock production and weak demand for wheat in the 1990's, resulted in a steady decline of planted area for winter wheat from 7,022 to 4,453 thousand hectares in 1994. Table 3.13. Production and use of winter wheat, Ukraine, 1991-1994. Supply/Use Units 1991 1992 1993 1994 Planted area of grains: 1000 ha. 14,670 13,903 14,224 13,244 Planted area of wheat 1000 ha. 7,022 6,314 5,726 4,453 Yield of wheat tons/ha. 3.01 3.09 3.8 3.1 Output of grains: 1000 ton 38,674 38,537 45,622 35,497 Output of wheat 1000 ton 21,156 19,473 21,769 13,720 Beginning stock of grains 1000 ton 11,029 10,552 12,791 State procurement of grains 1000 ton 10,737 10,382 13,038 10,915 State procurement of wheat 1000 ton 8,013 6,864 7,963 5236 Total import of grains 1000 ton 2,400 1,961 3,245 Total domestic grains supply 1000 ton 38,063 37,993 41,210 Total exports of grains 1000 ton 550 267 161 405 Net export of grains 1000 ton -1,850 -1,694 -3,084 Total consumption of grains 1000 ton 41,001 37,992 38,763 Ending stock of grains 1000 ton 10,552 12,791 22,734 Output of wheat flour 1000 ton 6,313 5,426 5,041 Import of flour: 1000 ton 8.3 1.3 6.8 7.9 from FSU % 100 74.6 89.8 Export of flour: 1000 ton 162.3 93.9 81.3 84.9 to FSU % 100 100 100 Source: The World Bank Reports; IMF Reports; UIAE.  Commodity Analysis 41 59. Official statistics have not been published on the grain balance data since 1991. However, the available data shows that during 1991-1994, Ukraine continued to accumulate large reserves of grain. Our calculations show that by 1993, grain reserves have doubled, reaching 22 million tons. These stocks were equal to one-half of the average annual production of grain. Most of the grain reserves was wheat, at least one-half of which was of food quality. 60. There are several reasons for this high level of wheat accumulation. * a 7-million ton increase in grain production in Ukraine in 1993. * 1.5-million ton increase in feed grain import, likely concessionary sales. * a continuous fall in domestic grain consumption from 41 million tons in 1991 to 38.7 million tons in 1993. 61. In 1994, because of a drought in most of the southem oblasts, production of winter wheat reached its lowest level during the last 10 years: only 13,720 thousand tons. Considering the fact that southern oblasts are the major producers of high quality milling wheat in the country, the drought primarily reduced the output of the quality wheat. By some expert estimates, production of milling quality wheat was below its annual consumption. In our estimate, by the end of 1994 grain reserves were reduced to about 8-9 million tons. 62. What are the factors that prevented Ukraine from exporting at least some of this surplus? One primary reason is the collapse of the grain distribution system developed by the Soviet Union and temporary isolation of the Ukrainian grain market from the international market. The significant decline in demand for grain in Russia and other republics of the FSU that in the past were the major markets for Ukrainian grain was another factor. For example, Russian grain imports were reduced from 12-15 million tons in 1990 to less than 6 million tons in 1993-1994. 63. Another reason is that Russian grain importers do not consider Ukraine a reliable source for imported grains. They prefer to deal with the West, where they can obtain loans and subsidies. Also, the complex procedure of obtaining quotas, licenses, and approvals of contract prices common to the Ukrainian system of foreign trade becomes a limiting factor. Lack of experience and incentive to succeed in commercial negotiations and an undeveloped market information and communication system also contribute to the Ukraine's inability to move the grains efficiently from the farms to international markets. Finally, a set of non-tariff export regulations and the 50% surrender requirement for non-bartered grains create additional difficulties. 64. Winter wheat is the most important grain procured by the state. On average the government procures 6 to 10 million tons of wheat per year. Government procurement of wheat accounts for approximately 60-65% of the state procurement of all grains. Most of the wheat (more than 75%) procured by the state is used for bread and bakery products. The remaining 25-30% is of feed quality, used in formula feed production by the state-owned feed plants. The remaining wheat is of feed quality and used by farms directly for animal feed or as a component of simple formula feed.  42 Ukraine Country Report 65. Wheat is less efficient as animal feed than other feed grains such as corn and barley. However, wheat continues to be the most important animal feed in Ukraine. For example, the share of wheat in formula feeds produced in the country is almost 50%, while the share of corn is only 25%. 66. The current level of consumption of bread and bakery products is above the levels of consumption in Western European countries and the United States. During the 1990's, the average per capita consumption of bread and bread products in Ukraine was 140-145 kg. per year, approximately 45 kg. more than in the US and twice as much as in Germany or France. The Institute of Agricultural Economics of Ukraine estimates that 35-40 kg. of this amount is used for cattle and poultry feed by small private farmers who find it cheaper to buy bread to feed their livestock than formula feed. This is one reason why the private sector has shown such an impressive stability in meat production and has not been seriously affected by the significant increase in formula feed cost. 67. With real income decreasing, it is realistic to expect that per capita consumption of bread will remain constant. It is quite possible that the expenditure share for bread will increase compared to other products when the bread price control is lifted. There is little doubt, however, that raising the bread prices will eliminate the use of bread as an animal feed. By some estimates, lifting the bread price control will save Ukraine around 2.0 - 2.5 million tons of the food-quality wheat that can be sold in the international market. Commodity-Specific Policy Issues 68. Wheat is one of six agricultural commodities subject to state order. During 1991-1993, the government procured around 7 million tons of wheat (30-35% of the total wheat production). The government directly and indirectly encouraged state and collective farms to produce high-quality winter wheat. Compared to other crops, wheat has always been procured at a relatively high price. Calculations in Table 4.15 show that the government procurement prices were 2.7, 11.0, 8.2 and 5.0 times the unit cost of wheat production in 1991-1994, respectively. Thus, production of winter wheat continues to be very attractive to the state and collective farms. They attempt to produce as much high-quality winter wheat as possible to qualify for the attractive price. However, weather problems or failure to comply with the required technology means that only about 60% of the total wheat production can qualify for the "premium" price and be sold to the state. Production Cost of Winter Wheat 69. The real unit cost of winter wheat calculated in 1991 rubles has been decreasing during 1991 to 1994 (Table 3.14). Two major factors contributed to this dynamics are: * Negative rate of growth of agricultural wages; * A significant reduction in mineral fertilizer, herbicide, and fuel use.  Commodity Analysis 43 70. Different price patterns for different inputs resulted in significant changes in the cost structure of wheat production. A large increase in the fuel component was a major factor. The fuel share of cost grew from 3.5% in 1991 to 30.2% on 1993 (almost 30 times). However, in 1994 due to a threefold decrease in real fuel prices, the share of fuel decreased to 9.6%. Table 3.14 Input use per ton of winter wheat production in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man-hours 15.2 16.3 13.8 Mineral fertilizers kg. 38.6 34.8 26.1 19.8 Fuel & lubricates kg. 29.4 27.8 24 25.1 Electricity kw/hours 6 5.7 5 4.5 Source: Ministry of Statistics; UIAE; CARD staff calculations. 71. The decrease in the share of depreciation and repair expenses perhaps reflects deferred maintenance and is a sign of underinvestment in machinery and equipment. This fact is not a surprise considering more than tenfold increase in the real price of Russian made grain combines and other imported from FSU agricultural equipment. Table 3.15. Production cost of winter wheat in Ukraine, 1991-1994 (per metric ton of winter wheat) 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 26 19.3 324 20.7 13,306 22.3 44,500 5.8 Seed 17 12.6 188 12 274 0.5 96,200 12.6 Mineral fertilizers 11 7.9 138 8.8 13,000 21.8 190,900 24.9 Organic fertilizers 6 4.7 81 5.2 3,439 5.8 105,600 13.8 Herbicides 3 2.2 38 2.4 5,679 9.5 51,600 6.8 Fuel & lubricants 5 3.5 305 19.5 18,000 30.2 72,960 9.6 Electricity 0 0.1 5 0.3 90 0.2 760 0.1 Depreciation & repair 25 18.5 210 13.4 2,626 4.4 88,160 11.5 Other cost 42 31.2 277 17.7 3,283 5.5 114,000 14.9 Unit cost 135 100 1,565 100 59,697 100 760,000 100 Unit cost (1991 prices) 135 109 86 110 Unit cost in USD 2 5 6 11 Procurement price 453 21,500 615,000 4,800,000 Proc. price in 1991 prices 453 1,503 889 694 Proc. price in USD 8 68 63 67 Proc. price/unit cost ratio 2.7 11.0 8.2 5.0 Profit per ha. 856 4,114 2,350 1,674 Sources: Ministry of Statistics; UIAE; CARD calculations.  44 Ukraine Country Report Wheat Flour Production Cost 72. The unit cost of flour production rose by more than 22% from 1991 to 1992 following the new procurement price for the 1992 crop (Table 3.16.). In 1993-1994, the unit cost decreased by almost 30% relative to the 1992 level, following the decline of the procurement price for wheat. Table 3.16. Production cost of wheat flour in Ukraine, in 1991-1994. 1991 1992 1993 1994 Cost/Price in krb. in % in krb. in % in krb. in % in krb. in % Labor cost 7 1.4 150 1.6 2,555 0.7 24,160 0.8 Raw material 461 92.6 8,128 86.6 316,067 87.0 2,455,260 81.2 Fuel & electricity 3 0.6 94 1.0 5,476 1.5 81,540 2.7 Overhead cost 24 4.8 996 10.6 28,477 7.8 329,180 10.9 Other cost 3 0.6 19 0.2 10,587 2.9 132,880 4.4 Unit cost 498 100.0 9,388 100.0 363,162 100.0 3,023,020 100.0 Unit cost in 1991 498 656 525 437 prices Unit cost in USD 8 29 38 42 Procurement Price 540 22,330 1,222,480 7,017,000 Procurement Price in 491 1,207 1,767 1,316 1991 krb. Procurement Price in 10 64 105 111 USD. Retail Price (1) 1,140 16,620 4,944,000 11,194,000 Retail Price in 1991 1,140 1,079 5,804 2,099 krb. Retail Price in USD 19 52 516 155 Source: Ministry of Statistics; UIAE; CARD staff calculations. 73. The cost structure for flour production changed little during this period. Wheat on average constituted 90% of the unit cost of flour. The other factors introducing change were a threefold increase in the share of fuel and electricity expenditures from 0.6% in 1991 to 2.7% in 1993 and a decline in labor expenditures from 1.4% in 1991 to 0.8% in 1994. Capacity of Flour Mills 74. All milling of the state reserve of grain into flower and feed is done by the SCBP, which operates approximately 160 flour mills. Of these, approximately 140 are integral parts of about 100 large companies that also handle grains and produce formula feed. There are also about twenty small, separate flour mills. Many of the feed mills were built in the 1970's and 1980's. In each of the Ukraine's 450 rayons, there is a feed mill owned jointly by all of the rayon's state and collective farms. At the rayon mills, part of the grain left for producers after delivery on state orders  Commodity Analysis 45 is processed into feed. Each plant has an elevator capacity of approximately 10,000 tons. In addition, the facilities have dryers, cleaning equipment, and a fleet of trucks. There is an estimated on-farm storage capacity of around 6,000,000 tons. Cost Simulation and Results 75. The reported unit cost of winter wheat, converted into US dollars, appears to be low relative to the international price of wheat (Table 3.17). The unit production cost calculated at the international input price is again low for all the years included in this analysis. In 1991-1994 the calculated unit cost was only 4.4%, 10.3%, 6.4%, and 27.1% of the international price for wheat, consequently. This fact adds to the conjecture that Ukraine has the potential to become a sizeable exporter of winter wheat in the near future. Table 3.17. Simulation results, production cost of winter wheat in Ukraine, 1991-1994 (per metric ton). Cost/Price 1991 1992 1993 1994 Winter wheat Reported unit cost 2 5 6 11 Calculated unit cost 7 18 10 42 Calculated cost/Reported cost ratio 3.5 3.6 1.7 3.8 International price 159 174 155 155 International price/Reported cost ratio 79.5 34.8 25.8 14.1 International/Calculated cost ratio 22.7 9.7 15.5 3.7 Wheat flour Reported unit cost 8 29 38 42 Calculated unit cost 9 25 16 57 Calculated cost/Reported cost ratio 1.1 0.9 0.4 1.4 International price 250 250 250 250 International price/Reported cost ratio 31.3 8.6 6.6 6.0 International price/Calculated cost 27.8 10.0 15.6 4.4 ratio Note: For reference see tables 5a. and 6a. of the Statistical Annex. Source: CARD staff calculations; FAPRI Reports. International Cost and Price Comparison 76. Table 3.18 shows that Ukraine has a competitive advantage over Belarus and Moldova in winter wheat production. Calculated in 1991 rubles, the unit cost of wheat production in Moldova, Belarus, and Russia was 42%, 350%, and 284% higher than that in Ukraine in 1993, respectively. The fact that Ukraine has a very large margin over the nearby competitors in unit cost of winter wheat suggests that even in the short run, Ukraine will resume its position as a supplier of food quality wheat to the other FSU countries.  46 Ukraine Country Report Table 3.18. International comparison of winter wheat cost (per metric ton). 1991 1992 1993 1994 1993 Cost/Price in 1991 rubles in USD Ukraine farm cost 135 109 86 110 6 Moldova farm cost 150 108 100 15 Belarus (grain) 212 203 245 14 Hungary farm price 92 World F.O.B. Europe 174 Sources: UIAE; Ministry of Statistics; FAPRI Reports; CARD staff calculations. E. CORN AND FORMULA FEED Production, Use, and Trade Trends 77. Among feed grains produced in Ukraine, corn is second after barley in planted area. During the 1990,s, corn accounted for about 10% of the total grain hectarage. Given the efficiency of corn in animal feed and the favorable conditions for com production in some regions of Ukraine, corn output is likely to increase. With the break-up of the Soviet Union, the deficit of feed grains (corn specifically) has become a problem for Ukraine. 78. Ukraine imports approximately 4 million tons of feed grain per year, which is the same amount imported under the Soviet system in the 1980's. The import is primarily corn for use on large poultry, cattle, and hog farms. With an increase in feed prices, more hectares will likely be planted in corn. It is possible that domestic corn production could become a perfect substitute even for subsidized corn imported from Western countries. Table 3.19. Production and use of corn in Ulkraine, 1991-1994. Supply/Use Units 1991 1992 1993 1994 Planted area 1,000 ha. 1,462 1,160 1,330 652 Yield tons/ha. 3.24 2.45 2.84 2.36 Output 1,000 tons 4,747 2,851 3,786 1539 Beginning stock 1,000 tons Total import of corn 1,000 tons 1,288 245.7 Total domestic supply of corn 1,000 tons Total exports of corn 1,000 tons 2.6 Total domestic consumption 1,000 tons State procurement 1,000 tons 736 267 446 152 Ending stock 1,000 tons Output of formula feed 1,000 tons 22,500 11,000 8,400 6,784 Source: UIAE; Ministry of Statistics. 79. Two parastatals handle and process most of the grain produced in Ukraine. One is the State Committee for the Procurement of Grain and Distribution of Bread Products (SCBP). The  Commodity Analysis 47 other is the Association of Inter-Farm Feed Products Industries (IFFI), controlled by the Ministry of Agriculture and Food (MOAF). The most important intermediate users of state supplies are the state livestock complexes. Commodity-Specific Policy Issues 80. The Ukrainian government is currently interested in increasing corn production. Due to the changes in the input markets, especially for formula feed, it is becoming clear that wheat is highly inefficient as a major feed grain. A newly developed government program outlining the major priorities for agriculture in Ukraine recommends a doubling of corn production as one of the ways to increase efficiency of the livestock sector and to avoid the import of feed grains. This policy is reflected in the government procurement price for corn. The price averages two or more times the reported unit cost of com production during the period from 1991 to 1994. Production Cost of Corn 81. Corn production provides an example that illustrates how the state and collective farms are adjusting to the changing conditions in the agricultural input markets. The farms are substituting less costly inputs such as labor for relatively more expensive inputs such as fuel and mineral fertilizer (Table 3.20). From 1991 to 1994, the use of mineral fertilizer decreased by more than 40%, whereas the use of labor increased by almost 25 %. Table 3.20. Input use per ton of corn production, Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man hours 22.7 34.5 29.8 31.5 Mineral fertilizers kg. 74.4 52.4 42.8 31.7 Fuel & lubricants kg. 40.3 67 56.4 54.3 Electricity kw/ hours 6 5.7 5 3.7 Source: UIAE, Ministry of Statistics. 82. An interesting feature of the input use pattern is that the amount of fuel use in corn production did not decrease. Instead, it increased by almost 30%. One possible explanation is the farms or companies affiliated with them were receiving cheep government loans for purchasing fuel and then reselling it in the free market, covering up these sales in input use statistics. 83. Production unit cost was relatively stable during 1991-1993 for the same reasons as in winter wheat. However, due to a significant reduction in the real prices of mineral fertilizers and fuel in 1994, the real unit cost of corn has been sharply reduced and was even below the 1991 level. 84. The changes in agricultural input use and input prices resulted in significant changes in the structure of the unit cost of corn production (Table 3.21). From 1991 to 1993  48 Ukraine Country Report expenditures for fuel grew from 3.5% to 28%, giving fuel the highest cost share. Despite significant reductions in fertilizer and herbicide use, their shares also increased substantially from 15.9% in 1991 to 34.3% in 1993. On the other hand, the share of labor expenditures decreased from 33.5% in 1991 to 23.2% in 1993, despite a 30% increase in labor use. During the same period, the share of depreciation and repair declined from 18% to 4.3% in 1993, reflecting a slower increase in the real prices for domestically produced agricultural machinery and equipment. State and collective farms also reduced their purchases of new agricultural machinery and equipment. Table 3.21. Production cost of corn for grains in Ukraine, 1991-1994 (per metric ton of corn). 1991 1992 1993 1994 Cost/Price krb. % krb % krb % krb % Labor cost 61 33.5 787 23.2 34,569 23.2 Seed 26 14.2 59 1.7 1,856 1.2 Mineral fertilizers 23 12.4 383 11.3 29,275 19.6 Organic fertilizers 6 3.5 106 3.1 4,376 2.9 Herbicides 6 3.4 103 3.0 21,956 14.7 Fuel and lubricants 8 3.5 757 22.3 42,300 28.4 Electricity n/a 0.0 n/a 0.0 n/a 0.0 Depreciation and 33 18.0 212 6.2 6,478 4.3 repair Other cost 21 11.5 989 29.1 8,255 5.5 Unit cost 183 100.0 3,396 100.0 149,056 100.0 335600 100.0 Unit cost in 1991 183 238 215 49 price Unit cost in USD 3 11 16 5 Procurement price 536 7,700 965,000 1,798,000 Proc. price in 1991 536 538 1,395 260 krb. Proc. price in USD 9 24 99 25 Proc. price/unit cost 2.3 1.8 5.2 4.3 ratio Profit per ha. 994 783 3,646 646 Sources: UIAE; Ministry of Statistics; CARD staff calculations. Fornula Feed Production Cost 85. Raw materials, mostly grain, constitute about 90% of the unit cost of formula feed production. Due to government control of the industry, formula feed unit cost pattems have been mainly determined by the price of feed-quality wheat and com that the government set in negotiations with the farms. In 1991, com accounted for one-half of that of the unit cost of formula feed. In 1992 and 1993, the share of com slightly increased to about 65%. Table 3.22 provides detailed information on the unit cost of formula feed. As it shown in this table the real unit cost of formula feed followed the same pattem as the unit cost of com.  Commodity Analysis 49 Table 3.22. Production cost of formula feeds, ukraine, 1991-1994 (per metric ton). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 4 1.3 104 1.9 1,929 0.8 19,666 1.4 Raw material 329 93.1 4,745 86.9 208,566 89.4 1,147,426 79.8 Fuel & electricity 2 0.5 n/a 0.0 3,108 1.3 34,535 2.4 Depreciation & repair 4 1.2 437 8.0 8,615 3.7 90,310 6.3 Overhead cost 11 3.2 170 3.1 5,258 2.3 73,130 5.1 Other costs 3 0.7 2 0.0 5,900 2.5 2,131 5.0 Unit cost 353 100.0 5,459 100.0 233,376 100.0 1,437,198 100.0 Unit cost in 1991 prices 353 382 337 208 Unit cost in USD 6 17 24 20 Wholesale price (with 2,481 205,522 VAT) Wholesale price in 1991 161 297 krb. Wholesale price in 8 21 USD Sources: UIAE, Ministry of Statistics, CARD staff calculations. Capacity of Feed Mills 86. In recent years, 50-60% of all grains fed to livestock in Ukraine have been processed by feed mills into manufactured feed. The remainder was fed directly, usually after being ground by on-farm feed mills and without protein meal and other feed additives. The annual output of the feed milling industry has constantly dropped from almost 22 million tons of manufactured feed in 1991 to 6.8 million tons in 1994. Pig feed accounted for approximately 40% and poultry and cattle feed for 25% to 30% of this amount, respectively. 87. Approximately one-half of all manufactured feed is milled by 100 large feed mills owned by the State Committee for Bread Production. Forty percent of all mills have daily milling capacities (three shifts) of 630 to 1,050 tons, and 40% and 20% have capacities of 315 to 630 tons and 200 to 315, respectively. All the imported coarse grain, oilseed meal, and feed additives were used by the Committee for Bread Production mills. The SCBP mills supplied poultry feed to the State poultry enterprise "Ukrptakhoprom." Pig feed for most of the large interfarm hog complexes, as well as the protein meal and vitamin/mineral premixes, were supplied by the feed mills under MOAF, which operate at oblast or rayon levels. The latter owned about 420 smaller mills with daily capacities of 50 to 150 tons (three shifts). The MOAF feed mills produce mainly cattle feed (45 % of the total), pig feed (50%), and (5%) other feed. From 1991 to 1993, all feed mills operated well below 50% of capacity due to a significant decline in public sector demand for formula feed.  50 Ukraine Country Report Cost Simulation and Results 88. The conclusions on the competitiveness of wheat production in Ukraine are also applicable to com production and formula feed. As for wheat, adjustments made for agricultural input and related subsidies do not significantly change the relative unit costs of com production (Table 3.23). The cost is below the intemational market price. Intemational price/calculated cost ratios were 10.9, 2.2, 1.0 in the three consecutive years studied. These results support the conclusion that Ukraine has a potential for expanding com production, in the short run to substitute for imported feed grain and in the longer run for export. Table 3.23. Simulation results: production cost of corn in Ukraine, 1991-1994 (per metric ton). Cost/Price 1991 1992 1993 1994 Reported unit cost 3 11 16 5 Calculated unit cost 11 46 102 Calculated cost/Reported cost ratio 3.7 4.2 6.4 International price 120 106 107 110 Intemational price/Reported cost ratio 40 9.6 6.7 22 Intemational price/Calculated cost ratio 10.9 2.3 1.0 Note: For reference see Table 7a. in the Statistical Annex Source: UIAE, Ministry of Statistics International Cost and Price Comparisons 89. Unfortunately, the only comparable data available on the cost of com production were for Moldova. Table 3.24 shows that Ukrainian farms produced com 10%, 42%, and 48% more cheaply than did their southem neighbors during 1991, 1992, and 1993, respectively. Table 3.24. International comparison of corn cost (per metric ton). 1991 1992 1993 1994 1993 Cost/Price in 1991 rubles in USD Ukraine farm cost 183 238 215 49 16 Moldova farm cost 201 313 259 25 Hungary farm price 60 World F.O.B. Europe 106 Source: UIAE; Ministry of Statistics.  Commodity Analysis 51 E. Hogs and Pork Meat Production, Use, and Trade Trends 90. In Ukraine, there are approximately 10,000 state and collective hog farms, each feeding 500 to 3,000 head per year. There are also approximately 650 interfarm complexes with capacities of between 10,000 to 100,000 head per year. Due to lack of feed, limited export possibilities, and low domestic demand, many of the interfarm complexes have been closed. Others continue to operate well below capacity. Table 3.25. Pork production and use in Ukraine, 1990-1994. Supply/Use Unit 1990 1991 1992 1993 1994 Number of animnals (January 1) 1,000 heads 19,947 17,839 16,175 16,262 13,940 including private sector 1,000 heads 5,356 5,282 5,262 6,559 5,864 Fertility rate (piglets per 100 pigs) No./year 1,422 1,266 1,137 1,111 1,037 Mortality Rates %/year 4.3 5.9 7.6 9.2 9.3 Daily weight gain Grams 229 198 180 163 123 Liveweight at slaughter Kg 127 124 117 113 105 Liveweight, State procurement of hogs 1,000 tons 1,007.9 760 572.7 370.2 211.9 Carcass weight, Pork meat production 1,000 tons 1,576 1,421 1,180 1,132 916 Carcass weight, including private farms 1,000 tons 682 670 636 650 626 Meat consumption, per capita Kg 68 65 53 46 51 Meat & meat products export 1,000 tons 195 99.4 69.8 Meat & meat products import 1,000 tons 9.2 0.8 1.0 Sources: Ministry of Statistics; UIAE; CARD staff calculations. 91. From 1990 to 1994, the total number of hogs in the social sector declined from 14,591,000 to 8,076,000 or by almost 45% in four years. In contrast, the private sector maintained a relatively stable hog population, averaging 5,600,000 head during the same period. Due to a significant decline in hog population in the social sector, the share of small-scale, private hog operations in hogs population increased from 27% in 1990 to 42% in 1994. The Ukrainian Institute of Agricultural Economics expects the private sector share in total hog population to expand to 60% of the total. 92. Ukraine continues to be a net exporter of meat and meat products to Russia, Uzbekistan, Azerbaijan, Armenia, and all other FSU countries. By some sources the total positive trade balance in meat and meat products is three times the official figure, due to an extremely high level of illegal export (primarily to Russia).  52 Ukraine Country Report Commodity-Specific Policy Issues 93. Pork is one of the few agricultural commodities in Ukraine for which supply and demand dominates the government. In 1992, the government began to reduce the procurement of large quantities of pork. From 1990 to 1994, it was reduced from 1,007,000 tons in 1990 to 211.900,000 tons in 1994, or almost fivefold. In 1994, the government procured only 20% of all the pork meat produced. 94. At the same time, the government reduced direct subsidies to pork producers and lifted controls of pork meat prices. The result was predictable. Bounding by a weak demand for pork, inefficient pork production facilities started to produce at a loss. This unfavorable situation forced the state and collective farms, especially specialized hog farms, to reduce their operations. From 1990 to 1994, the public sector reduced pork production from 894,000 tons to 290,000 tons per year. 95. In contrast, the private sector continued to produce about 650,000 tons of pork meat per year. Due to a significant drop in pork meat production in the public sector, the share of small private hog operations grew from 43% in 1990 to 68% in 1994. There is no official data on costs of small-scale private pork operations, but the fact that production is stable indicates that the prevailing pork price is sufficient to cover costs. 96. Private pork operations appear to be more competitive. First, these operations are less capital intensive. Second, small producers do not use as much formula feed as do public farms. When they do use formula feed it is not necessarily purchased at the market price (state and collective farmers receive grain as an in-kind payment or appropriate it). Third, and most important, private farmers use bread and bread products to feed their hogs and poultry. The retail price of bread was half or less (60 cents per kg. in 1994) the price of grain during the 1991-1994 period. Private citizens apparently feed about 2.3 million tons of bread and bread products to their hogs and poultry. If the bread price controls are lifted, the private sector will experience problems siniular to those of the public sector in hog production. 97. The early 1990's were characterized by rapidly increasing pork prices. This increase was the largest among all the commodities investigated. By 1994, the average retail price calculated in US dollars was almost at the international price level, reflecting significant reduction in subsidization. Production Cost of Hogs 98. The only data available on the unit cost of pork production is from the public farmns. From 1991 to 1993, the unit cost of pork production expressed in 1991 rubles did not fluctuate significantly. Unit cost increased by about 6% in 1992 and dropped below the 1991 level in 1993 (Tables 3.26 and 3.27). In 1994, the real unit cost continued to decrease and was almost half of 1991 level.  Conunodity Analysis 53 99. There were some interesting changes in the cost structure that are worth mentioning. The share of feed in cost decreased from 46.8% in 1991 to 37.1 % in 1993, following the decrease in feed use and real formula feed price. In 1994, the feed share in the unit cost rose to 60% after the doubling of real feed price. Table 3.26. Input use per ton of pork production in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man hours 524 797 903 1,025.1 Feeds 000 of feed units 11 12.9 13.9 15.7 Fuel & lubricants kg. 594 540 490 370.0 Electricity kwfhour 900 870 840 805.0 Sources: Ministry of Statistics; UIAE; CARD staff calculations. Table 3.27. Production cost of pork in Ukraine, 1991-1994 (per metric ton of live weight). 1991 1992 1993 1994 Cost/Price in krb. in % in krb. in % in 000 in % in 000 in % krb. krb. 1. Labor cost 1,477 34.2 16,501 23.3 806 24.8 1,685 9.8 2. Feed 2,022 46.8 27,622 39 1,205 37.1 10,471 60.9 3. Fuel & lubricants 94 2.2 6,534 9.2 367 11.3 1,754 10.2 4. Electricity 29 0.7 879 1.2 43 1.3 172 1 5. Depreciation & 389 9 5,559 7.9 242 7.5 1,702 9.9 repair 6. Other cost 307 7.1 13,671 19.3 585 18 1,427 8.3 Unit cost 4,318 100 70,766 100 3,248 100 17,193 100 Unit cost in 1991 prices 4,318 4,949 4,694 2,487 Unit cost in USD 73 222 333 237 Procurement price 4,666 86,212 3,284 21,887 Procurement price in 1991 krb. 4,666 6,029 4,746 3,166 Procurement price in USD 79 271 337 304 Source: Ministry of Statistics; UIAE; CARD staff calculations. 100. Another interesting feature of the cost structure dynamics is that the share of labor fell from 34.2% in 1991 to 9.8% in 1994, despite the fact that labor use per ton of pork production nearly doubled. Pork Meat Production Cost 101. Raw materials constitute 90-95% of the cost of slaughtering and processing hogs. Due to the fact that the government procures only 20% of the total number of hogs for slaughter and the procurement price of hogs marginally covers the cost of hog production, the change in the unit cost of pork has been the major factor determining meat processing costs (Table 3.28).  54 Ukraine Country Report Table 3.28. Production cost of pork meat in Ukraine, 1991-1994 (per metric ton of pork meat). 1991 1992 1993 (1st quarter) 1994 Cost/Price krb. % krb. % krb. % 000 krb. Labor cost 76 1.3 842 1.3 2,283 0.6 Raw materials 5,467 95 59,851 89.5 375,557 91.4 Transportation & procurement 35 0.6 398 0.6 3,126 0.8 Fuel & electricity 15 0.3 565 0.8 3,440 0.8 Depreciation & repair 6 0.1 204 0.3 435 0.1 Overhead cost 49 0.9 1,012 1.5 2,343 0.6 Other costs 105 1.8 4,025 6 23,660 5.8 Unit cost 5,753 100 66,897 100 410,844 100 Unit cost in 1991 prices 5,753 4,678 5,767 Unit cost in USD 97 210 263 Plant gate price with VAT (3) 6,785 71,971 2,941,650 Plant gate price with VAT in 1991 krb. 6,785 5,033 4,251 Plant gate price with VAT in USD 115 226 307 Retail price (farmers market) (1) 13,000 163,000 10,850,000 67,500 Retail price (farmers market) in 1991 krb. 13,000 11,399 15,679 Retail price (farmers market) in USD 220 512 1,132 937 Source: Ministry of Statistics; UIAE; CARD staff calculations.  Commodity Analysis 55 Cost Simulation and Results 102. The calculated cost of pork production was evaluated using the same method that was used for the other commodities. Our calculations show that even with existing technology and productivity levels, Ukraine is a low-cost pork producing country. Table 3.29 shows that except for 1992, the calculated unit cost of pork meat production was lower than the international market price. In 1994 the international border price of pork was 3 times lower than the calculated unit cost. It is very tempting to conclude that even in the short run Ukraine has a potential to compete in the international pork market. However, bearing in mind that pork production is in decline, the productivity level is very low, and the quality of Ukrainian pork at best does not comply with international standards, this conclusion is too optimistic. In our opinion there is even a chance that in the short run Ukraine may start to import pork meat for processing to satisfy demand for processed pork products in Kiev and other industrial centers of the country. Table 3.29. Simulation results. Production cost of pork in Ukraine, 1991-1994 (per ton of liveweight). Cost/Price 1991 1992 1993 1994 Reported unit cost 73 222 333 239 Calculated unit cost 665 1,331 863 432 Calculated cost/Reported cost ratio 9.1 6.0 2.6 1.8 International price 1,370 1,189 1,124 1,300 International price/Reported unit cost ratio 18.8 5.4 3.4 5.4 International price/Calculated cost ratio 2.1 0.9 1.3 3.0 Note: For reference see Table 8a. of the Statistical Annex. Source: Ministry of Statistics; UIAE; FAPRI Reports; CARD staff calculations. International Cost and Price Comparisons Table 3.30. International comparison of pork meat cost (per metric ton of live weight). 1991 1992 1993 1994 1993 Cost/Price in 1991 rubles in USD Ukraine farm cost 4,318 4,949 4,694 2,487 333 Moldova farm cost 4,820 5,340 7,200 700 Belarus farm cost 4,130 5,120 6,730 6,770 390 Hungary farm price 1,020 World F.O.B. Europe 1,189 Source: Ministry of Statistics; UIAE; FAPRI Reports; CARD staff calculations. 103. Table 3.30 suggests that Ukraine is a low-cost pork producer among the FSU nations. However, the fact that the calculated cost of pork production is above the international market price, makes it unclear whether Ukraine will supplant European and US exporters of pork to Russia. It is more likely that in the short run, Ukraine will become a net importer of pork. However, in the long run, with adjustments in grain production and prices, Ukraine may become pork exporter, at least to the FSU market.  56 Ukraine Country Report G. POULTRY Production, Use, and Trade Trends 104. Poultry is the third most important component of the Ukrainian livestock production, coming after cattle and hogs. In the 1960's and 1970's almost every collective and state farm had a traditional small-scale poultry operation. Also, a few chickens were common to almost every farm family's backyard in Ukraine. 105. The late 1980's witnessed the extensive construction of large "industrial" poultry complexes that were heavily subsidized by the government. Small-scale, traditional poultry production became uneconomical. By 1991, almost all poultry produced by the public sector was concentrated in the state-owned concern "Ukrptakhoprom," (Table 3.31) which produced 150 million head of poultry or 60% of the total poultry population in Ukraine. Table 3.31. Poultry and eggs production and use in Ukraine, 1991-1994 Supply/Use Unit 1991 1992 1993 1994 Number of animals ml heads 246 243 188 165 including private sector 1,000 93 133 75 100 head Procurement of poultry meat 1,000 170.2 114.6 77.95 73.4 tons Poultry meat production 1,000 654 500 361.3 tons including private sector 1,000 444.5 322 229.4 tons Eggs production 1,000 15,188 13,496 11,066 10,154 eggs including private sector ml. 5,948 6,006 6,087 5,463 State procurement of eggs ml. 7,582 5,543 5,154 3,704 Export of eggs ml. 376.58 174.96 Import of eggs ml. 3.74 6.13 2.17 Export of poultry meat ml. Import of poultry meat ml. Per capita consumption of eggs eggs 256 227 193 Procurement price of poultry krb. per ton Source: Ministry of Statistics; UIAE; The World Bank Reports. 106. The state-owned formula feed industry became the major supplier to the industrial poultry units, providing all the formula feed and vitamin additives. A significant portion of the grains and required additives were imported. In the 1980's, this subsection of Ukrainian agriculture was one of the most prosperous. 107. A severe adjustment in public sector of poultry production was caused by dramatic increases in energy prices; a lack of hard currency resources to import the required components for  Commodity Analysis 57 quality formula feed production; an overall reduction of subsidies to poultry production; and depressed domestic demand for poultry meat eggs. 108. Low quality formula feed, frequent interruptions of the electricity supply, and management problems were responsible for dramatic drops in both productivity and production of poultry. From 1990 to 1994, poultry numbers were reduced by 33% (Table 3.31). During the same period, productivity dropped by 30%. 109. In the 1980s, Ukraine was a net exporter of poultry meat to other Soviet republics. On average, Ukraine exported about 400 tons of poultry meat (primarily fresh frozen whole chickens) to Russia and the other republics (Table 3.31). By 1993, poultry meat export as officially reported by the Ministry of Foreign Trade was zero, meaning that no export activity was reported by "Ukrptakhoprom." 110. However, in 1992 - 1994, the Ukrainian media reported significant numbers of Ukrainian citizens going to Russian farmer's markets to trade poultry and other meat products. There is no official data on this type of export activity. Some estimate that the quantity of poultry meat sold in Russian farmer's markets by Ukrainian citizens was equivalent to the quantity of poultry meat exported by "Ukrptakhoprom" in the mid-1980's. 111. The decrease in the quantity of poultry exported to Russia made Ukraine a net importer of poultry meat products. In 1993 Ukraine imported about 500 tons of poultry meat, mainly from Eastern Europe and the United States (probably subsidized). Beginning in 1992, the poultry sector of Ukrainian agriculture was fully deregulated. 112. In contrast to poultry meat, Ukraine continues to run positive trade balance in eggs trade. However, the size of eggs trade diminished rapidly. In 1994, Ukrainian export of eggs was only a third of 1993 level. As in other commodities, Russia is a major recipient of eggs Ukraine exports. However, Russia's share is decreasing. In contrast to poultry meat, Ukrainian eggs have a relatively good hard currency market in Eastern and Western Europe. The share of non-FSU countries in Ukrainian export of eggs is the largest among all products under consideration, and for the period 1992-1994, accounted for about 60% of total export. Production Cost of Poultry Meat and Eggs 113. Due to a substantial reduction of per head productivity in the state poultry farms during this time period, the use of major agricultural inputs increased. From 1991 to 1994, labor use in poultry meat production increased by 45% and in eggs production by 25 %, feed use by 14% and 10%, fuel by 20% and 25%, consequently. Table 3.32. Input use per ton of poultry meat production in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man-hours 129 156 187 193 Feeds 000 of feed units 5.6 5.2 6.4 6.7 Fuel & lubricates kg. 1,268 1,148 1,530 1,650 Electricity kw/hour 1,318 1,294 1,368 1,251 Source: Ministry of Statistics; UIAE; The World Bank Reports, CARD staff calculations.  58 Ukraine Country Report 114. The increase in input use per unit of production resulted in a relatively large increase in unit cost from 3,600 krb. in 1991 to 3,778 krb. in 1994 in poultry meat production ( per ton of poultry meat) and from 135 krb to 172 krb in eggs production (per 1000 eggs). The share of fuel increased significantly, from 8.0% in 1991 to 20% in 1994 in poultry meat and from 10% to 16% in eggs production. The fact that fuel was the major factor in the increase in the unit cost of poultry meat production is a new development. All publications that have discussed the situation in the poultry industry indicate that the increase in feed prices, rather than in fuel, has been responsible for the performance of the industry in the 1990's. Table 3.33. Production cost of poultry meat in Ukraine, 1991-1994 (per metric ton of poultry meat). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % 000 krb. % Labor cost 360 10 8,347 11.4 308,300 8.6 670 2.6 Feed 2,419 67.2 47,595 65 2,368,832 65.9 16,533 64.7 Fuel & lubricants 288 8 9,592 13.1 558,529 15.5 5,239 20.3 Electricity 25 0.7 1,098 1.5 70,068 2 77 0.3 Depreciation & repair 173 4.8 2,856 3.9 122,619 3.4 778 2.8 Other cost 335 9.3 3,734 5.1 164,660 4.6 2,615 9.4 Unit cost 3,600 100 73,222 100 3,593,008 100 26,120 100 Unit cost in 1991 prices 3,600 5,120 5,192 3,778 Unit cost in USD 61 230 369 353 Procurement price 3,800 92,800 3,687,700 Procurement price in 3,800 6,489 5,329 1991 krb. Retail price (1) 19,000 134,500 11,711,500 31,025 Retail price in 1991 krb. 19,000 9,406 16,924 4,487 Retai] price in USD 321 422 1,201 431 Note: (1) farmers market. Source: Ministry of Statistics; UIAE; The World Bank Reports, CARD staff calculations. 115. During the 1990's, state farms significantly reduced consumption of expensive, high-quality feed and substituted less efficient concentrates. This substitution had two effects on the unit cost of poultry production. The cheaper formula feed drove the real unit cost down. In fact, the share of formula feed decreased from 67.2% in 1991 to 64.7% in 1994. Alternatively, the lower- quality feed significantly reduced unit productivity of poultry, thereby increasing the real unit cost. These two effects worked in opposite directions, but the reduction in productivity due to the use of low-quality feed dominated (Table 3.35). 116. The fact that per unit labor use increased only by 14% from 1991 to 1993 when the real wage rate dropped by almost 70% during the same period resulted in a significant reduction of labor cost share in the unit cost of poultry meat production, from 10% in 1991 to 2.6% in 1994.  Commodity Analysis 59 117. Input use in egg production was similar to that in poultry meat production (Tables 3.34 and 3.35). A substantial reduction in unit productivity was reflected in the increase in inputs use per 1,000 eggs on the state farms. Labor use went up by 12.5%, fuel by 18.4%, and electricity by 53%. However, in contrast to poultry meat production, the use of feed was relatively stable during the 1991-1994 period. This was likely due to government attempts to keep eggs (and milk) available in state stores. Table 3.34. Input use per 1,000 eggs in Ukraine, 1991-1994. Input Units 1991 1992 1993 1994 Labor cost man-hours 1.6 1.9 1.8 2.08 Feeds 000 of feed units 0.2 0.2 0.2 0.22 Fuel & lubricants kg. 38 41 45 47.6 Electricity kw/hour 54 71 83 95.3 Sources: Ministry of Statistics; UIAE; The World Bank Reports; CARD staff calculations. 118. In contrast to poultry meat production cost, the unit cost of egg production was relatively flat from 1992 to 1994. It increased by 16% from 1991 to 1992 and then stayed almost at the same level for three years in a row (Table 3.35). Table 3.35. Production cost of eggs in Ukraine, 1991-1994 (per 1,000 eggs). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. Labor cost 21 15.8 305 12.6 9,592 8.5 16,660 1.4 Feed 83 61.8 1,591 66 77,303 68.5 853,230 71.7 Fuel & lubricants 13 10 327 13.6 17,492 15.5 184,450 15.5 Electricity 0 0.3 12 0.5 1,016 0.9 10,710 0.9 Depreciation & 7 5.2 26 1.1 2,370 2.1 32,130 2.7 repair Other cost 9 7 150 6.2 5,078 4.5 91,630 7.7 Unit cost 135 100 2,412 100 112,851 100 1,188,810 100 Unit cost in 1991 prices 135 169 163 172 Unit cost in USD 2 8 12 16 Procurement price 200 4,600 217,100 Procurement price in 200 322 314 1991 krb. Retail price 3,000 35,000 3,150,000 37,500,000 (farmner's market) Retail price 3,000 2,448 4,552 6,960 (farmer's market) in 1991 krb. Retail price in USD 51 110 329 740 Source: Ministry of Statistics; UIAE; The World Bank Reports, CARD staff calculations.  60 Ukraine Country Report Cost Simulation and Results 119. The dynamics of the calculated cost of poultry meat has the same pattern as the dynamics for pork and eggs. The calculated unit cost reached its peak in 1992, when the difference between international and domestic input prices were the largest. Since then the tendency has been to decrease to the level of the reported costs. In general, this suggests that input price subsidies to agriculture and the food processing industry are decreasing and that market forces have a stronger influence on this sector. Table 3.36. Simulation results: production cost of poultry meat in Ukraine, 1991-1994 (per ton of poultry meat). Cost/Price 1991 1992 1993 1994 Reported unit cost 61 230 369 353 Calculated unit cost 783 2,101 1,388 748 Calculated cost/Reported cost ratio 12.8 9.1 3.7 2.1 International price 1,162 1,175 1,175 1,200 International price/Reported cost ratio 19 5.1 3.1 3.4 International price/Calculated cost ratio 1.5 0.6 0.8 1.6 Note: For reference see Table 9a. in the Statistical Annex. Source: Ministry of Statistics; UIAE; The World Bank Reports; CARD staff calculations. It can be observed from Table 3.36 that beginning 1992 calculated unit production cost of poultry start to decrease and by 1994 the international price to calculated cost ratio becomes greater than 1. At least in the short run, Ukraine is unlikely to become an exporter of poultry meat on the international mnarket. It suggests that at international input prices Ukrainian poultry meat producers has a slight competitive advantage. Given unit costs of poultry meat production in other FSU nations, there is a possibility of exporting poultry meat to Russia and Belarus. 120. The situation is similar for egg production. Adjusted for input prices and subsidies, it appears that the unit cost of egg production was 50% below the international price level in 1994. Table 3.37. Simulation results: production cost of eggs in Ukraine, in 1991-1994 (per 1000 eggs). 1991 1992 1993 1994 Reported unit cost 2 8 12 16 Calculated unit cost 27 69 43 34 Calculated cost/Reported cost ratio 13.5 8.6 3.6 2.1 International price 58 58 58 58 International price/Reported cost ratio 29 7.3 4.8 3.6 International Price / Calculated cost ratio 2.1 0.84 1.34 1.7 Note: For reference see Table lOa. in the Statistical Annex Source: Ministry of Statistics; UIAE; The World Bank Reports; CARD staff calculations.  Commodity Analysis 61 121. The results in Table 3.37 suggest that Ukraine can currently meet competition from the international egg producers and might be able to explore export opportunities. Within the region, comparisons of the cost data for eggs confirm this conjecture. Ukrainian egg producers continue to produce at the lowest cost in the region. There is an opportunity for Ukraine to export eggs to Russia, Belarus, and other FSU nations. International Cost and Price Comparisons 122. Table 3.38 provides an indication of how the current cost of poultry meat production corresponds to the international price of poultry meat. From Table 4.38, observe that the production cost of poultry meat (calculated in US dollars) is about one third of the cost of either Hungary or Europe. Comparing the costs of poultry production with those in Belarus and Moldova, Ukraine seems competitive. While in Belarus and Moldova the unit cost of poultry meat production more than doubled during 1991-1993, Ukraine maintained a relatively moderate rate of cost increase. Table 3.38. International comparison of poultry meat cost (per metric ton). 1991 1992 1993 1994 1993 Cost/Price in 1991 rubles in USD Ukraine farm cost 3,600 5,120 4,218 3,778 375 Moldova farm cost 2,420 3,880 4,950 290 Belarus farm cost 2,694 2,845 5,234 5,554 303 Hungary farm price 1,062 F.O.B. Europe 1,175 Source: Ministry of Statistics; UIAE; The World Bank Reports; CARD staff calculations.   4. CONCLUSIONS 1. The aim of this report was to determine commodities for which Ukraine may have export potential in international markets. Obviously, many factors can alter these conclusions. When analyzing prices and costs in an economy undergoing a social and economic transformation, such conclusions must be treated with caution. However, the data assembled and the analysis clearly support preliminary conclusions on competitiveness. Table 4.1 and 4.2. summarize these conclusions on the short-run export opportunities of Ukrainian agriculture and food processing industry. Table 4.1. International price/Calculated cost ratios in Ukraine in 1991-1994 (in US dolars). Potential for export (in the short run) Commodity 1991 1992 1993 1994 Sugar beet 2.4 0.7 1.3 0.4 not applicable Sugar 3.5 1.0 1.8 0.6 high Sunflower seeds 9.9 2.9 8.1 5.9 high Sunflower oil 6.3 2.2 5.4 3.9 high Winter wheat 22.7 9.7 15.5 3.7 high Wheat flour 27.8 10.0 15.6 4.4 high Corn 10.9 2.3 1.0 ... ambiguous Pork 2.1 0.9 1.3 3.0 ambiguous Poultry meat 1.5 0.6 0.8 1.6 ambiguous Eggs 2.1 0.8 1.3 1.7 ambiguous Souces: CARD staff calculations. 2. Comparing the reported unit cost of sugar with the international price indicates that Ukraine was internationally competitive in the production of sugar. However, when adjusted for input price subsidies, the picture is less clear. In 1992 it was 7% higher and 1994, 50% higher the international price. This result contradicts the opinion of the majority of Ukrainian experts that the Ukrainian sugar industry can compete in the international sugar market. 3. The difference between the unit cost of sunflower seed and oil calculated at international input prices sunflower oil and the international price was quite large during these years. Obviously, these data lead to the conclusion that sunflower has significant export potential under the current pricing regime. Comparing the reported cost of Ukrainian sunflower seed production to other major producers of sunflower seed in the FSU countries and in Hungary also suggests that Ukraine has a cost advantage. Calculated in 1991 rubles, the unit cost of sunflower seed production in Ukraine is 30% and 56% lower than in Moldova and Russia, respectively. Assuming that there are no barriers to trade, Ukraine has an opportunity to become a major supplier of sunflower seed and oil to the other FSU countries and to the international market.  64 Ukraine Country Report Table 4.2. International price/Reported cost ratios in Ulkraine, in 1991-1994 (in US dollars). Commodity 1991 1992 1993 1994 Sugar beet 12.0 3.0 2.0 1.3 Sugar 15.2 2.4 1.6 1.6 Sunflower seeds 89.3 28.1 16.3 22.7 Sunflower oil 17.9 9.5 2.2 6.4 Sunflower oil 17.9 9.5 2.2 6.4 Winter wheat 79.5 34.8 25.8 14.1 Wheat flour 31.3 8.6 6.6 6.0 Corn 40.0 9.6 6.7 22.0 Pork 18.8 5.4 3.4 5.4 Poultry meat 19.0 5.1 3.1 3.4 Eggs 29.0 7.3 4.8 3.6 Sources: CARD staff calculations. 4. The reported unit cost of winter wheat, converted into US dollars, appears to be low relative to the international price of wheat. The calculated unit production cost calculated at the international input price is again below for all year included in this analysis. In 1991-1994, the calculated unit cost was only 4.4%, 10.3%, 6.4%, and 27.1 % of the international price for wheat, consequently. This fact confirms the conjecture that Ukraine has the potential to become a sizeable exporter of winter wheat in the nearest future. 5. Ukraine has a competitive advantage over Belarus and Moldova in winter wheat production. Calculated in 1991 rubles, the unit cost of wheat production in Moldova, Belarus, and Russia was 42%, 350%, and 284% higher than that in Ukraine in 1993, respectively. The fact that Ukraine has a very large margin over the nearby competitors in unit cost of winter wheat suggests that even in the short run Ukraine will be in the position to resume its role as a supplier to the other nations of the FSU. 6. The conclusions on the competitiveness of wheat production in Ukraine are also applicable to corn production and formula feeds. As for wheat, adjustments made for agricultural input and related subsidies do not significantly change the relative unit costs of corn production. The cost is below the international market price. The international price to calculated cost ratios were 10.9, 2.3, 1.0 in the three consecutive years studied. These results support the conclusion that Ukraine has potential for expanding corn production, in the short run to substitute for imported feed grain and in the longer run for export. 7. Our calculations show that even with existing technology and productivity levels, Ukraine is a low-cost pork producing country. Table 3.29 shows that other than in 1992 the calculated unit cost of pork meat production was lower than the international market price. In 1994, the international border price of pork was 3 times lower than the calculated unit cost. It is very tempting to conclude that even in the short run Ukraine has the potential to compete in the international pork market. However, it is important to bear in mind that pork production is in decline in Ukraine, productivity level is very low, and the quality of Ukrainian pork at best does not comply with international standards. Therefore, this conclusion is in all likelihood too optimistic. In our  Conclusions 65 opinion there is even a chance that in the short run Ukraine may start to import pork meat for processing to satisfy demand for processed pork products in Kiev and other industrial centers of the country. 8. Our analysis suggests that Ukraine is a low-cost pork producer among the FSU nations. The fact that pork production in Ukraine is on decline makes it unclear whether Ukraine will supplant European and United States exporters of pork to Russia and other FSU countries. However, with adjustments in grain production and prices, Ukraine may in the long run become a pork exporter, at least to the FSU market. 9. Our analysis suggests that at international input prices Ukrainian poultry meat producers do not have a comparative advantage. At least in the short run, Ukraine is unlikely to become an exporter of poultry meat on the international market. However, given unit costs of poultry meat production in other FSU nations, there is a possibility of exporting poultry meat to Russia and Belarus. The situation is somewhat different for egg production. Adjusted for input prices and subsidies, the unit cost of egg production appeared to be approximately 60% of the international price in 1993-1994.   ANNEX 1. STATISTICAL ANALYSIS CONTENTS Table la. Production cost of sugar beet at world inputs prices in Ukraine, in 1991-1994 (per metric ton of sugar beet). Table 2a. Production cost of sugar at world input prices in Ukraine, in 1991-1994 (per metric ton of sugar). Table 3a. Production cost of sunflower seed at world inputs prices in Ukraine, in 1991-1994 (per metric ton of sunflower seed). Table 4a. Production cost of sunflower oil at the world input prices, Ukraine, 1991-1994 (per metric ton of sunflower oil). Table 5a. Production cost of winter wheat at world input prices in Ukraine in 1991-1994 (per metric ton of winter wheat). Table 6a. Wheat flour production cost at world input prices in Ukraine, 1991-1994. Table 7a. Production cost of com for grain in Ukraine, 1991-1994 (per metric ton of corn). Table 8a. Production cost of pork at world input prices in Ukraine, 1991-1994 (per metric ton of live weight). Table 9a. Production cost of poultry meat at world input prices in Ukraine, 1991-1994 (per metric ton of poultry meat). Table 10a. Production cost of eggs at international input prices in Ukraine, 1991-1994 (per 1,000 eggs). Table I la. International and domestic input prices, 1991-1994 (in US dollars). Table 12a. International\domestic input price ratios, in 1991-1994. Table 13a. Ukrainian sugar mills by oblast and capacity in 1994. Table 14a. Agricultural and food trade of Ukraine in 1991-1994 (in metric tons). Table 15a. Agricultural and food trade of Ukraine in 1991-1994 (in metric tons, 1991 = 100). Table 16a. Agricultural and food trade of Ukraine with FSU countries in 1991-1994 (in metric tons, 1991 = 100). Table 17a. Role of agriculture in trade in goods and services in Ukraine. Table 18a. Agricultural trade of Ukraine in 1991-1994, in current 1,000,000 krb. Table 19a. Calculated cost/Reported cost ratios in Ukraine, in 1991-1994, in US dollars.  68 Ukraine Country Report Table la. Production cost of sugar beet at international input prices in Ukraine, 1991-1994 (per metric ton of sugar beet). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 28 8.8 390 7.2 23,300 28.1 85,100 3.6 Seeds 4 1.2 18 0.3 1,250 1.5 98,600 4.2 Mineral fertilizers 97 31.0 2,282 42.1 27,608 33.3 1,065,060 44.9 Organic fertilizers 3 1.0 29 0.5 1,560 1.9 58,500 2.5 Herbicides 79 25.2 1,797 33.7 6,670 8.0 686,760 29.0 Fuel & lubricates 86 27.6 415 7.7 13,000 15.7 231,000 9.7 Electricity n/a n/a n/a n/a n/a n/a n/a n/a Depreciation & repair 6 1.9 127 2.3 5,520 6.7 61,600 2.6 Other cost 10 3.2 364 6.7 4,050 4.9 83,600 3.5 Unit cost 312 100.0 5,422 100.0 82,958 100.0 2,370,220 100.0 Unit cost in 1991 312 379 120 343 prices Unit cost in USD 5 17 9 33 World price in USD 273 276 277 300 Source: UIAE; Ministry of Statistics; CARD staff calculations.  Annex 1 69 Table 2a. Production cost of sugar at international input prices in Ukraine, 1991-1994 (per metric ton of sugar). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % 1000 krb. % Labor cost 36 0.8 799 0.9 11,462 0.7 115 0.34 Raw material 3,744 80.7 65,064 70.7 995,496 64.7 28,443 85.39 Fuel and electricity 640 13.8 19,293 20.9 230,305 15.0 1,748 5.25 Depreciation and 93 2.0 2,127 2.3 26,478 1.7 265 0.79 repair Overhead cost 112 2.4 4,120 4.5 265,450 17.3 2,654 7.97 Other cost 16 0.3 689 0.7 8,333 0.5 83 0.25 Unit cost 4,641 100.0 92,092 100.0 1,537,524 100.0 33,308 100.00 Unit cost in 1991 4,641 6,440 2,222 4.8 krb. Unit cost in USD 78 289 158 462 World price in USD 273 276 277 300 Source: UIAE; Ministry of Statistics; CARD staff calculations Table 3a. Production cost of sunflower seed at international input prices in Ukraine, 1991-1994 (per metric ton of sunflower seed). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 40 2.5 644 2.4 32,600 9.9 274,982 7.6 Seeds 13 0.8 225 0.9 4,160 1.3 37,498 1.0 Mineral fertilizers 459 29.2 4,385 16.0 52,954 16.1 473,282 13.1 Herbicides 771 49.1 20,300 74.2 183,657 55.8 1,640,182 45.4 Fuel & lubricants 240 15.3 1,166 4.3 35,308 10.7 1,074,675 29.7 Depreciation & repair 28 1.8 310 1.1 7,340 2.2 41,468 1.1 Other cost 20 1.3 298 1.1 12,910 3.9 73,872 2.0 Unit cost 1,571 100.0 27,358 100.0 328,929 100.0 3,615,960 100.0 Unit cost in 1991 1,571 1,913 475 523 krb. Unit cost in USD 27 86 34 50 Source: UIAE; Ministry of Statistics; CARD staff calculations.  70 Ukraine Country Report Table 4a. Production cost of sunflower oil at international input prices in Ukraine, 1991-1994 (per metric ton of sunflower oil). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 9 0.2 238 0.4 2,581 0.3 53,200 0.6 Raw material 3,566 92.1 62,103 92.7 746,669 88.4 8,208,229 95.3 Fuel & electricity 240 6.2 3,179 4.7 34,633 4.1 261,100 3.0 Depreciation & 22 0.6 439 0.7 9,883 1.2 14,200 0.2 repair Overhead cost 30 0.8 926 1.4 49,222 5.8 68,100 0.8 Other cost 4 0.1 89 0.1 1,850 0.2 11,400 0.1 Unit cost 3,871 100.0 66,973 100.0 844,838 100.0 8,616,229 100.0 Unit cost in 1991 3,871 4,683 1,221 1,246 prices Unit cost in 1991 65 210 87 120 krb. Unit cost in USD 411 457 466 466 Source: UIAE; Ministry of Statistics; CARD Staff calculation.  Annex 1 71 Table 5a. Production cost of winter wheat at international input prices in Ukraine, 1991-1994 (per metric ton of winter wheat). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 26 6.5 324 5.6 13,306 13.1 44,500 1.5 Seed 17 4.2 188 32.0 274 0.3 96,200 3.2 Mineral fertilizer 173 43.0 2,719 46.6 37,700 37.1 1,805,000 60.2 Organic fertilizer 6 1.5 81 1.4 3,439 3.4 105,640 3.5 Herbicides 47 11.7 749 12.8 16,469 16.2 490,200 16.3 Fuel & lubricants 50 12.4 1,190 20.4 23,400 23.0 255,360 8.5 Electricity 16 4.0 94 1.6 1,080 1.1 1,140 0.0 Depreciation & repair 25 6.2 210 3.6 2,626 2.6 88,160 2.9 Other cost 42 10.3 277 4.8 3,283 3.2 114,000 3.8 Unit cost 402 100.0 5,831 100.0 101,577 100.0 3,000,200 100.0 Unit cost in 1991 402 408 147 434 prices Unit cost in USD 7 18 10 42 World price 159 174 155 155 Source: UIAE; Ministry of Statistics; CARD staff calculations. Table 6a. Wheat flour production cost at international input prices in Ukraine, 1991-1993 (per metric ton of wheat flour). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 7 1.4 150 1.9 2,555 1.6 24,160 0.6 Raw materials 442 87.4 6,414 80.7 111,735 69.6 3,300,220 81.1 Fuel & Electricity 30 5.9 367 4.6 7,119 4.4 285,390 7.0 Overhead cost 24 4.7 996 12.5 28,477 17.7 329,180 8.1 Other cost 3 0.6 19 0.2 10,587 6.6 132,880 3.3 Unit cost 506 100.0 7,946 100.0 160,473 100.0 4,071,830 100.0 Unit cost in 1991 506 556 232 589 prices Unit cost in USD 9 25 16 57 Source: UIAE; Ministry of Statistics; CARD staff calculations.  72 Ukraine Country Report Table 7a. Production cost of corn for grain at international input prices in Ukraine, 1991-1994 (per metric ton of corn). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 61 9.1 787 5.4 34,569 3.4 Seed 26 3.8 59 0.4 1,856 3.0 Mineral fertilizers 340 50.1 7,354 50.6 819,722 80.2 Organic fertilizers 6 0.9 106 0.7 4,376 0.4 Herbicides 92 13.5 1,986 13.7 61,477 6.0 Fuel & lubricates 64 9.5 2,953 20.3 54,990 5.4 Electricity 34 5.1 100 0.7 1,080 0.1 Depreciation & repair 33 4.9 212 1.5 6,478 0.6 Other cost 21 3.1 989 6.8 8,255 0.8 Unit cost 678 100.0 14,545 100.0 992,803 100.0 Unit cost in 1991 prices 678 1,017 1,435 Unit cost in USD 11 46 102 World Price in USD 120 106 107 Sources: UIAE; Ministry of Statistics; CARD staff calculations. Table 8a. Production cost of pork at international input prices in Ukraine, 1991-1993 (per metric ton of live weight). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 1,477 3.8 16,501 3.9 806 9.6 1,685 5.4 Feed 33,767 85.9 345,275 81.4 5,784 68.8 19,895 64.0 Fuel & lubricants 940 2.4 25,483 6.0 477 5.7 6,139 19.7 Electricity 2,485 6.3 17,580 4.1 516 6.1 275 0.8 Depreciation & repair 338 0.9 5,559 1.3 242 2.9 1,702 5.5 Other cost 307 0.8 13,671 3.2 585 7.0 1,427 4.6 Unit cost 39,315 100.0 424,069 100.0 8,410 100.0 31,106 100.0 Unit cost in 1991 39,715 29,655 12,153 4,499 prices Unit cost in USD 665 1,331 863 432 International Price 1,370 1,189 1,124 1,300 Source: UIAE; Ministry of Statistics; CARD staff calculations.  Annex 1 73 Table 9a. Production cost of poultry meat at international input prices in Ukraine, 1991-1994 (per metric ton of live weight). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 360 0.8 8,347 1.2 308,300 2.3 670,000 1.2 Feed 40,397 87.3 594,963 88.9 13,370,394 84.0 31,412,700 58.2 Fuel & 2,880 6.2 37,409 5.6 726,088 5.4 18,336,500 34.0 lubricants Electricity 2,143 4.6 21,960 3.3 840,816 6.2 115,500 0.2 Depreciation & 173 0.4 2,856 0.4 122,619 0.9 778,000 1.4 repair Other cost 335 0.7 3,734 0.6 164,660 1.2 2,615,000 4.8 Unit cost 46,288 100.0 669,268 100.0 13,532,876 100.0 53,927,700 100.0 Unit cost in 46,288 46,639 19,556 7,800 1991 prices Unit cost in 783 2,101 1388 748 USD World Price 1,162 1,175 1,169 1,200 Source: UIAE; Ministry of Statistics; FAPRI Reports; CARD staff calculations. Table 10a. Production cost of eggs at international input prices in Ukraine, 1991-1994 (per 1,000 eggs). 1991 1992 1993 1994 Cost/Price krb. % krb. % krb. % krb. % Labor cost 21 1.3 305 1.4 9,592 2.3 16,660 0.7 Feed 1,386 87.1 19,888 90.9 371,054 87.7 1,621,137 68.5 Fuel & lubricants 134 8.4 1,275 5.8 22,739.6 5.4 645,575 25.3 Electricity 34 2.2 242 1.1 12,192 2.9 16,065 0.7 Depreciation & 7 0.4 26 0.1 2,370 0.6 32,130 1.3 repair Other cost 9 0.6 150 0.7 5,078 1.2 91,630 3.6 Unit cost 1,592 100.0 21,886 100.0 423,026 100.0 2,423,197 100.0 Unit cost in 1991 1,592 1,531 611 350 prices Unit cost in USD 27 69 43 34 International Price 58 58 58 58 in USD Source: UIAE; Ministry of Statistics; CARD staff calculations.  74 Ukraine Country Report Table lla. Interantional and domestic input prices, 1991-1994 (in US dollars). 1991 1992 1993 1994 Input Units World Ukraine World Ukraine World Ukraine World Ukraine Urea ton of 370 7.2 370 10.0 370 76 370 20.8 a.i. Triple ton of 375 41.5 375 28.0 375 185.0 375 57.6 Superphosphate a. i. Potassium ton of 167 4.8 167 6.0 167 44.0 167 13.5 Chloride a. i. Mineral fertilizer ton of index NPK for wheat ton of 337.6 21.5 337.6 17.1 337.6 117.4 337.6 35.4 (40%,43%,17%) a.i. for corn ton of 337.8 22.6 337.8 17.6 337.8 120.7 337.8 36.5 (37%,46%,17%) a.i. for sugar beet ton of 308.2 18.8 308.2 15.2 308.2 105.3 308.2 31.8 (33%,36%,31%) a.i. for sunflower ton of 308.2 18.8 308.2 15.2 308.2 105.3 308.2 31.8 seed a. i. (33%,36%,31 %) Gasoline ton 350 46.7 350 78.0 350 215.0 350 87.0 Diesel ton 200 8.3 200 64.0 200 206.0 200 76.0 Fuel index ton 275 27.5 275 71.0 275 210.0 275 79.5 (50%,50%) Electricity 1,000 60 0.7 60 3.0 60 5.0 60 38.8 Kw/hour Formula feed ton of 100 6.0 100 8.0 100 21.0 100 54.0 o.u. Wage rate 40 hours 160 1.8 160 3.6 160 2.8 160 3.6 Note: (1) International input prices are assumed to be constant over time. (2) The data from this table has been used to calculate ratios in Table 12a. Source: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE; CARD staff calculations.  Annex 1 75 Table 12a. International/domestic input price ratios in Ukraine, in 1991-1994. Input 1991 1992 1993 1994 Urea 51.4 37.0 4.9 17.8 Triple Superphosphate 9.0 13.4 2.0 6.5 Potassium 34.8 27.8 3.8 12.4 Mineral fertilizer index for wheat 15.7 19.7 2.9 9.5 for corn 14.9 19.2 2.8 9.3 for sugar beet 16.4 20.3 2.9 9.7 for sunflower seed 16.4 20.3 2.9 9.7 Gasoline 7.5 4.5 1.6 4.2 Diesel 24.1 3.1 1.0 2.7 Fuel index (50%/50%) 10.0 3.9 1.3 3.5 Electricity 85.7 20.0 12.0 1.6 Formnula feed 16.7 12.5 4.8 1.8 Labor 88.9 44.4 57.1 44.4 Note: (1) These ratios have been used to calculate production cost of agricultural conmnodities at international input prices. Sources: Narodne Gospodarstvo Ukraini, 1993; Agricultural Sector in Transition, Ukraine, The World Bank, 1994; UIAE; CARD staff calculations.  76 Ukraine Country Report Table 13a. Ukrainian sugar mills by oblast and capacity in 1994. Oblast Number of mills Total capacity, tons of sugar beet per day Vinnitskaya 38 79.44 Volinskaya 4 16.95 Zitomirskaya 6 12.91 Kievskaya 13 33.46 Kirovogradskaya 11 39.92 Lvovskaya 7 24.35 Nikolayevskaya 2 11.99 Odesskaya 3 9.0 Poltavskaya 11 40.76 Rovenskaya 6 15.93 Sumskaya 17 32.23 Temopolskaya 9 35.03 Khmelnitskaya 17 49.16 Kharkovskaya 12 30.50 Cherkaskaya 23 51.22 Chernigovskaya 5 8.62 Chernovetskaya 4 11.23 Source: State Committee for Food Industry of Ukraine; UIAE.  Table 14a. Agricultural and Food Trade of Ukraine in 1991-1994 (in metric tons). Commodity 1991 1992 Export Import Export Import Total To FSU Total From FSU Total To FSU Total From FSU tons tons % tons tons % tons tons % tons tons % Sugar 1,645,526 1,645,526 100% 24,489 22,976 94% 322,017 318,612 99% 1,540 721 47% Meat & Meat 226,930 226,860 100% 7,744 4,664 60% 195,681 195,267 100% 9,244 8,107 88% Products Eggs & Egg 674,073 566,212 84% 11,878 11,878 100% 376,582 205,984 55% 3,740 3,740 100% Products Veg. Oils 279,080 236,174 85% 24,489 22,976 94% 147,425 99,062 67% 1,963 684 35% Wheat Flour 162,262 162,262 100% 8,363 93,926 93,852 100% 1,271 Grains 550,000 2,400,000 267,397 1,961,105 Milk & Milk 1,300,000 671,923 52% 19,000 11,231 59% 292,000 287,970 99% 10,000 8,058 81% Products Fruits & 180,000 98,000 53,085 53,085 100% 135,350 135,530 100% Veg.(total) Fruits & 65,306 65,000 100% 20,726 19,497 94% 16,086 25,042 Berries Potatoes 37,978 37,951 100% 90,202 27,307 30% 6,614 13,711 Vegetables 30,385 96,777  Commodity 1993 1994 Export Import Export Import Total To FSU Total From FSU Total To FSU Total From FSU tons tons % tons tons % tons tons % tons tons % Sugar 914,412 913,845 100% 8,565 1,095 1,380 797,200 4,500 Meat & Meat 99,200 99,150 100% 751 578 600 1,700 Products Egg & Egg 174,964 54,649 31% 6,137 5,641 968 39,200 2,500 Products Veg. Oils 92,721 76,818 83% 234 84 110 900 3,100 Wheat Flour 81,300 81,310 100% 676 600 626 Grains 160,942 1,942,697 131,400 1,700 Milk & Milk 459,000 452,055 98% 153,000 1,499 30,257 221,800 12,800 Products Fruits & 53,283 53,283 100% 36,000' Veg. (total) Fruits & 20,306 6,845 15,109 Berries Potatoes 8,159 1,000 665 Vegetables 24,818 17,593 7,555 Notes: Agricultural and Food Export/Import includes the following components: sugar, meat and meat products, eggs and eggs products, vegetable oil, grains, four, milk and milk products, butter, fish fruits and vegetables, and vine. Sources: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FSU). Inter-Republic Agricultural Trade, 1987, 1989-1994, ERS, USDA; UIAE; CARD staff calculations.  Table 15a. Agricultural and Food Trade of Ukraine in 1991-1994 (in metric tons, 1991 = 100). Commodity 1991 1992 Export Import Export Import tons 1991 = 100 tons 1991 = 100 tons 1991 = 100 tons 1991 = 100 Sugar 1,645,526 100 22,489 100 322,017 20 1,540 6 Meat & Meat 226,930 100 7,744 100 195,681 86 9,244 119 Products Eggs & Egg 674,073 100 11,878 100 376,582 56 3,740 31 Products(1,000) Veg. Oils 279,080 100 24,489 100 147,425 53 1,963 8 Wheat Flour 162,262 100 8,363 100 93,926 58 1,271 Grains 550,000 2,400,000 267,397 1,961,105 Milk & Milk 1,300,000 100 19,000 100 292,000 22 10,000 53 Products Fruits & Veg. 180,000 100 98,000 100 53,085 135,530 (total) Fruits & Berries 65,306 100 20,726 100 0 0 Potatoes 37,978 100 90,202 100 0 0 Vegetables 100 100  Commodity 1993 1994 Export Import Export Import To FSU From FSU To FSU From FSU tons % tons % tons % tons 9 Sugar 914,412 56 8,565 35 797,200 48 4,500 18 Meat & Meat 99,200 44 751 10 1,700 22 Products Eggs & Egg 174,964 26 6,137 52 39,200 6 2,500 21 Products( 1,000) Veg. Oils 92,721 33 234 1 900 3,100 13 Wheat Flour 81,300 50 676 Grains 160,942 1,942,697 131,400 1,700 Milk & Milk 459,000 35 153,000 805 221,800 17 12,800 67 Products Fruits & 53,283 36,000 Veg .(total) Fruits & Berries Potatoes Vegetables Notes: Agricultural and Food Export/Import includes the following components: sugar, meat and meat products, eggs and eggs products, vegetable oil, grains, four, milk and milk products, butter, fish fruits and vegetables, and vine. Sources: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FSU). Inter-Republic Agricultural Trade, 1987, 1989-1994, ERS, USDA; UIAE; CARD staff calculations.  Table 16a. Agricultural and Food Trade of Ukraine with FSU Countries in 1991-1994 (in metric tons, 1991 = 100). Commodity 1991 1992 Export Import Export Import tons 1991 = 100 tons 1991 = 100 tons 1991 = 100 tons 1991 = 100 Sugar 1,645,526 100 22,976 100 318,612 19 721 3 Meat & Meat 226,860 100 4,664 100 195,267 86 8,107 174 Products Eggs & Egg 566,212 100 11,878 100 205,984 36 3,740 31 Products(1 ,000) Veg. Oils 236,174 100 22,976 100 99,062 42 684 3 Wheat Flour 162,262 100 100 93,852 58 Grains Milk & Milk 671,923 100 11,231 100 287,970 43 8,058 72 Products Fruits & Veg. 100 100 53,085 135,530 (total) Fruits & Berries 65,000 100 19,497 100 16,086 25 25,042 128 Potatoes 37,951 100 27,307 100 6,614 17 13,711 50 Vegetables 100 100 30,385 96,777  Commodity 1993 1994 Export Import Export Import To FSU From FSU To FSU From FSU tons % tons % tons % tons % Sugar 913,845 56 1,095 5 797,200 48 4,500 20 Meat & Meat 99,150 44 578 12 1,700 36 Products Eggs & Egg 54,649 10 5,641 47 39,200 7 2,500 21 Products(1 ,000) Veg. Oils 76,818 33 84 0 900 3,100 13 Wheat Flour 81,310 50 600 Grains 131,400 1,700 Milk & Milk 452,055 67 1,499 13 221,800 33 12,800 114 Products Fruits & 53,283 Veg.(total) Fruits & Berries 20,306 31 6,845 35 Potatoes 8,159 21 1,000 4 Vegetables 24,818 17,593 Notes: Agricultural and Food Export/Inmport includes the following components: sugar, meat and meat products, eggs and eggs products, vegetable oil, grains, four, milk and milk products, butter, fish fruits and vegetables, and vine. Sources: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FSU). Inter-Republic Agricultural Trade, 1987, 1989-1994, ERS, USDA; UIAE; CARD staff calculations.  Table 17a. Role of Agriculture in Trade in Goods and Services in Ukraine. 1991 1992 1993 1994 in millions of 1991 rubles Ukraine Total Export 54,200 84,399 55,326 Total Agricultural and 6,227 3,641 6,753 2,352 Food Export Agricultural and Food 5604 3,419 6,602 2,218 Export to FSU Total Import 59,500 77,650 56,119 Total Agricultural and 1,951 1,270 593 Food Import Agricultural and Food 975 343 205 Import from FSU Note: Agricultural and Food Export/import includes the following components: sugar, meat and meat products, eggs and egg products, vegetable oil, grains, four, milk and milk products, butter, fish fruits and vegetables, and wine. Sources: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FSU). Inter-Republic Agricultural Trade, 1987, 1989-1994, ERS, USDA; UIAE; CARD staff calculations.  Table 18a. Agricultural Trade of Ukraine in 1991-1994, in current 1,000,000 krb. Commodity 1991 1992 Export Import Export Import ml krb %' %2 ml krb %' %2 ml krb %I %2 ml krb %I %2 Sugar 2,800 43.7% 45.0% 23 1.1% 1.2% 18,131 36.5% 37.2% 86 0.4% 0.5% Meat & Meat Products 1,430 22.3% 23.0% 46 2.2% 2.4% 18,183 36.6% 37.3% 752 3.6% 4.4% Eggs& Egg Products(1,000) 132 2.1% 2.1% 4 0.2% 0.2% 1,295 2.6% 2.7% 19 0.1% 0.1% Veg. Oils 629 9.8% 10.1% 69 3.4% 3.5% 3,660 7.4% 7.5% 17 0.1% 0.1% Wheat Flour 133 2.1% 2.1% 9 0.4% 0.5% 857 1.7% 1.8% 36 0.2% 0.2% Grains 249 3.9% 4.0% 1,370 66.9% 70.2% 3,724 7.5% 7.6% 16,012 77.6% 92.9% Milk & Milk Products 854 13.3% 13.7% 430 21.0% 22.0% 2,874 5.8% 5.9% 309 1.5% 1.8% Butter 1,833 78 Fish Fresh Fruits and Veg. 180 2.8% 98 4.8% 938 1.9% 3,396 16.5% Fresh Fruits 443 947 Potatoes 94 763 Fresh Veg. 401 1,686 Canned Fruits(1,000 cans) 1,170 365 Canned Veg.(1,000 cans) 983 223 Grape Wine(liters) 1,185 344 Total Total(w/o fish) 54,834 21,637 Total' 6,407 100.0% 2,049 100.0% 49,663 100.0% 20,627 100.0% Total'(in 1991 rubles) 6,407 2,049 3,473 1,442 Total2 6,227 100.0% 1,951 100.0% 48,725 100.0% 17,231 100.0% TotaI2(in 1991 rubles) 6,227 1,951 3,407 1,205  Commodity 1993 1994 Export Import Export Import ml krb %I %2 ml kTb %I %2 ml krb %I %2 ml krb %I %2 Sugar 3,221,127 70.3% 70.7% 10,270 2.4% 2.6% 7,326,974 45.1% Meat & Meat Products 481,538 10.5% 10.6% 3,009 0.7% 0.7% 1,757,913 10.8% 42,814 Eggs & Egg Products(1,000) 48,588 1.1% 1.1% 1,174 0.3% 0.3% 387,041 2.4% Veg. Oils 94,870 2.1% 2.1% 426 0.1% 0.1% 1,227,740 7.6% Wheat Flour 56,515 1.2% 1.2% 685 0.2% 0.2% 685,105 4.2% Grains 104,526 2.3% 2.3% 355,452 83.8% 88.6% 2,235,600 13.7% Milk & Milk Products 545,810 11.9% 12.0% 30,305 7.1% 7.6% 2,639,420 16.2% Butter 144,300 30,019 Fish 82 44,366 Fresh Fruits and Veg. 30,969 0.7% 22,601 5.3% Fresh Fruits 6,799 13,949 Potatoes 4,209 1,074 Fresh Veg. 19,961 7,578 Canned Fruits(1 ,000 cans) 54,054 1,807 Canned Veg.(1,000 cans) 53,813 966 Grape Wine(liters) 12,335 5,986 Total 4,848,527 507,066 Total(w/o fish) 4,848,445 462,700 Total' 4,583,943 100.0% 423,922 100.0% Total'(in 1991 rubles) 6,624 613 Total2 4,552,974 100.0% 401,321 100.0% 16,259,793 100.0% Total2(in 1991 rubles) 6,579 580 2,352 Note: 1. Percent to the Total Agricultural and Food Trade without butter, fish, canned vegetables and fruit, and wine. 2. Percent to the Total Agricultural and Food Trade without butter, fish, fresh fruits, canned fruits and vegetables, and grape wine. Agricultural and Food Export/import includes the following components: sugar, meat and meat products, eggs and egg products, vegetable oil, grians, flour, milk and milk products, butter, fish, fruits and vegetables, and wine. Source: Narodne Gospodarstvo Ukraini, 1993; Former Soviet Union (FS&), Inter-Republic Agricultural Trade. 1987, 1989-1994, ERS, USDA; UIAE; CARD staff calculations.  Table 19a. Calculated cost/Reported cost ratios in 1991-1994, in US dollars. Commodity 1991 1992 1993 1994 Sugarbeet 5.0 4.3 1.5 3.7 Sugar 4.3 2.5 0.9 2.5 Sunflower seeds 9.0 9.6 2.0 3.8 Sunflower oil 2.8 4.4 0.4 1.6 Winter wheat 3.5 3.6 1.7 3.8 Wheat flour 1.1 0.9 0.4 1.4 Corn 3.7 - 4.2 6.4 Pork 9.1 6.0 2.6 1.8 Poultry meat 12.8 9.1 3.7 2.1 Eggs 13.5 8.6 3.6 2.1 Sources: CARD staff calculations.  ANNEX 2. METHODOLOGY 1. Data collection The approach to assess potential competitiveness of Ukraine in selected agricultural commodities involved a number of steps: * Output prices and prices for selected inputs were collected for 1991,1992, and 1993 * Consumer price indices were collected for 1991 (base), 1992, and 1993. * Nominal average annual exchange rates were collected. * Nominal production costs estimates were obtained. These cost estimates were prepared by the Ministry of Agriculture and Food of Ukraine and by the Ukrainian Institute of Agricultural Economics (UIAE). * Within these basic data, direct comparative calculations were possible. 2. Domestic Costs Adjustnents to Changes in Inflation and Exchange Rate There are essentially two methods for allowing comparisons between average costs or prices in different years. Annual averages for costs and prices are converted into dollars either at the average annual nomninal exchange rate or by using annual average of the CPI indices. Let ct denote the nominal average CPI in period t and e' denote the nomninal exchange rate in period t, i.e., the amount of dollars per unit of rubles ($/ruble). If nominal CPI indices and the nominal exchange rate are changing at the same rate, i.e., Act/At = Aet/At, for all period t, then the two indices would be equivalent, i.e., ct = k e', where k is a positive constant. In this case, we need to collect and use only one set of indices. However, since foreign exchange markets were exceedingly distorted, these two indices evolved in diverse directions. Thus, there are two distinct approaches to examine the behavior of domestic costs of production and corresponding wholesale, procurement, and retail prices. A. Domestic Costs of Production and Prices in Constant Rubles There are two important purposes of extracting domestic costs of production in constant rubles. First, this method allows us to compare the costs over the years within the region. The fact that Ukraine, Belarus, Moldova and Russia in 1991 all shared the same currency, makes these comparisons relatively more reliable. Moreover, it allows to predict directions of trade flows within the region without reference to international markets. Second, CPI is relatively independent from foreign sector and, thus, more accurately reflects the changes within the domestic economy. Let gjdenote the domestic production cost of good j expressed in domestic currency in period t. Then domestic unit production cost of good j can be written: Ai= W1a1j + W2a2i + ... + wtamj. (1)  88 Ukraine Country Report where *iis the domestic price of input i in domestic currency unit in period t, and a,, is the input- output coefficient, representing the amount of input i required to produce one unit of good j. These coefficients vary significantly during the transition period. The time index t, however, is suppressed for convenience. Thus, the domestic unit cost in 1991 rubles is: Ci= #c . (2) where c' is nominal average CPI in period t. The domestic unit production costs in 1991 rubles indicates how comparative advantage change over time within the ruble zone. Specifically, Ukraine has a comparative advantage in good j if Iykrm < (:eius Cl j (3) B. Domestic Unit Cost of Production in Current U.S. dollars To assess international competitiveness of the industries outside the FSU bloc in the world market, however, it is necessary to express the domestic production cost in the foreign or world price, i.e., in U.S. dollars. Let et denote the nominal exchange rate, i.e., the amount of dollars per unit of rubles ($/ruble). Then the domestic unit cost of production in current U.S. dollars is: Gj= gjx e' = (ruble/unit) x ($/ruble) = ($/unit). (4) The domestic unit product cost in U.S. dollars indicates how comparative advantage changes over time. Specifically, a country has a comparative advantage in good j in period t if Qj< Pi* (5) Note that the world prices change over time because of the instability of the markets. Moreover, Gj/P*must be sufficiently less than unity for the country to enjoy comparative advantage over time. If Gj/Pj*is less than, but close to unity, even a small disturbance in the world market can wipe out the country's comparative advantage. 3. Adjusted Production Costs Our data resources obtained from the Ministry of Agriculture and Food and UIAE includes two sets of data: the cost of individual input i per unit of output (Wla,j) for every input, and the input output coefficients for some inputs (aj). To establish whether Ukraine does have "technical" advantage arising from natural conditions, an alternative domestic unit cost can be obtained by multiplying factor share (O*a,j) by the world factor price indices. Specifically, bj= W,a,j(W*/w,') + W2a2j (WV*IN) + ... + Wmmj (w'*/w>. (6) This can be further simplified as: Bj = W* a j + W2* a2j + *-+ V.* amj;- (7)  Annex 2 89 Then the domestic adjusted unit cost of production in current U.S. dollars is: Bj= bj x e' = (ruble/unit) x ($/ruble) = ($/unit). (8) This reflects the cost of producing good j, using domestic technology at the world prices. If Ukraine and, for exarnple, the U.S. have the same technology, then B,= Pt'. If Bj < Pj*, then Ukraine has a definite technological advantage in the production of good j. However, no land rental was included because the land market has not been established. The domestic adjusted costs presented in Annex 1 tables are obtained using (6) and (8). The domestic unit production costs and prices for selected commnodities were calculated according to (2), (4) and (8). g' = coupon price in 1991 (base year) = coupon/unit el = exchange rate in 1991 = $/coupon G' = converted dollar cost of a Ukrainian product in 1991. ' = dollar price in the US in 1991. If G' < PI*, then Ukraine has a comparative advantage of that particular product in 1991. G' = g1 e' = (coupon/unit) x ($/coupon) = ($/unit) in 1991. (1) How much does a bushel of Ukrainian wheat cost now in $? Now= 1993. G3 = g3 e3. (1) A table of G"s shows how much a bushel of Ukrainian wheat would cost in US dollar each year. A comparison of Gl's and Pi's would show comparative advantage of the product over the years. (2) In 1993, a bushel of Ukrainian wheat cost g3 coupons (because of inflation and other factors), using certain amount of resources. How much would it have cost in 1991? CPI = c' = 1, c' > 1.00 * inflation. g3/c3 = cost of a bushel of wheat in 1991 coupon price. (g31c3)e' = cost of a bushel of wheat in 1991 dollar price. Is this satisfactory? Yes, if there is no inflation in the U.S., but not otherwise. If (g3/c3)el < p'* does not necessarily mean Ukraine has a comparative advantage now.