eItg PIJOM. Wel-ld -uead ing; P-} Urkpo ::-: 9966N AN AGRICULTURAL STRATEGY FOR POLAND REPORT OF THE POLISH * EUROPEAN COMMUNITY * WORLD BANK TASK FORCE Copyright © 1990 The International Bank for Reconstruction and DevelopmentllIHE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1990 This report is published with the least possible Thematerialin thispublication is copyrighted. delay for the use of governments and the aca- Requests for permission to reproduce portions demic, business and financial, and development of it should be sent to Director, Publications communities. The typescript of this paper Department, at the address shown in the copy- therefore has not been prepared in accordance right notice above. The World Bank encourages with the procedures appropriate to formal dissemination of its work and will normally give printed texts, and the Task Force and the gov- permission promptly and, when the reproduc- ernments and institutions it represents accept tion is for noncommercial purposes, without no responsibility for errors. asking a fee. Permission to photocopy portions The Task Force and the governments and for classroom use is not required, though notifi- institutions it represents do not guarantee the cation of such use having been made will be accuracy of the data included in this publication appreciated. and accept no responsibility whatsoever for any The complete backlist of publications from the consequence of their use. Any maps that accom- World Bank is shown in the annual Index of pany the text have been prepared solely for the Publications, which contains an alphabetical convenience of readers; the designations and title list (with full ordering information) and presentation of material in them do not imply indexes of subjects, authors, and countries and the expression of any opinion whatsoever on the regions. The latest edition is available free of part ofthe Task Force and the governments and charge from the Publications Sales Unit, De- institutions it represents concerning the legal partment F, The World Bank, 1818 H Street, status of any country, territory, city, or area or N.W., Washington, D.C. 20433, U.S.A., or from of the authorities thereof or concerning the Publications, TheWorld Bank, 66, avenue d'Idna, delimitation of its boundaries or its national 75116 Paris, France. affiliation. Library of Congress Cataloging-in-Publication Data Polish-European Community-World Bank Task Force. An agricultural strategy for Poland: report of the Polish- European Community-World Bank Task Force. P. cm. ISBN 0-8213-1708-3 1. Agriculture and state-Poland. 2. Rural development- -Government policy-Poland. 3. Capitalism-Poland. I. International Bank for Reconstruction and Development. II. Title. HD1995.7.Z8P64 1990 338.'8438-dc2O 90-21181 CIP ii Foreword In April 1990, the Polish government decided future, the strategy proposes the creation of that it urgently needed to formulate a strategy structures and methods that will take at least a for the agricultural sector. During discussions few months to establish. with the World Bank, it was agreed to appoint a jointtask force tohelp prepare a proposal, which The Task Force was chaired by Mieczyslaw was to be submitted to the government by the Stelmach, Undersecretary of State, Ministry of end of July 1990. The Commission of the Euro- Agriculture and Food Economy, and led by pean Communities supported the effort by fi- ClaudeBlanchi. TheothermembersoftheTask nancing consultants. Force were: This document is the result of the work of the Gottfried Ablasser, Zdzislaw Adamczyk, Karol Task Force. It was submitted to the Ministry for Adamik, Ronald Anderson, Pascale Binon, Agriculture and Food Economy, which, after FranciszekBlok,TadeuszBorek,KarolBorzuta, review, presented it to the Council of Ministers Barbara Dabrowska, Cornelis de Haan, for its consideration. The document is divided Jean-Jacques Dethier, Andrzej Dygnarowicz, into a main report and 21 annexes. The main Piotr Eberhardt, Malgorzata Ellert, Izoslaw report combines the Task Force findings and Frenkel, Maria Halamska, John Hayward, recommendations; it assumes the reader is Manuel Hinds, Oskar Honisch, Stanislaw conversant with Poland's economic background Jablonski, Zdzislaw Jablonski, Ulrich Koester, and the main characteristics of its agricultural Andrzej Kolodziej, Wladyslaw Korcz, Tadeusz sector. Kowalak, Tadeusz Kowalski, Odin Knudsen, Because of the short time available to the AndrzejKwiecinski,MarianKrol,GaryLuhman, Task Force (May 28 to July 27, 1990), the pro- Wladyslaw Lukasik, Wales Mack, Stefan posed strategy is only a broad framework. It Malecki, Jan Malkowski, Kamil Matuszewski, covers essential actions and decisions to be John McCarrick, Krystyna Milewska, Adrian taken immediately or in the near future, but Moens,KnudMunk,MariaNowak,PeterOram, doesnotpretendto cover completelythe detailed Jan Pawlak, Zdzislaw Piasek, Andrzej actions that must accompany and complement Pilichowski, Elzbieta Piotrowska, Jerzy Plewa, these major decisions. Wherever possible, the Lorenz Pohlmeier, WlodimierzRembisz,Ryszard main reportidentifies those areas wherefurther Rozwadowski, Orlando Sacay, August studies and review are required. Schumacher, Anna Tuz, Roman Urban, Jerzy While many ofthe strategic recommendations Wilkin, Nick Young, Montague Yudelman, and imply that decisions should be taken in the near Ryszard Zrobek. Warsaw, July 1990 . LIST OF TASK FORCE MEMBERS Task Force Chairmarn Mieczyslaw STELMACH Undersecretary of State, Ministry of Agriculture and Food Economy, Warsaw Task Force Leader: Claude BLANCHI Senior Operations Adviser, Europe, Middle East and NorthAfricaRegional Office, The World Bank, Washington, D.C. Task Force Members: Gottfried ABLASSER European Department, The World Bank, Washington, D.C. Zdzislaw ADAMCZYK Ministry of Agriculture and Food Economy, Warsaw Karol ADAMIK Dairy Institute, Warsaw Ronald ANDERSON Universite Catholique de Louvain, Louvain-la-Neuve, Belgium Pascale BINON Technical Department, The World Bank, Washington, D.C. Franciszek BLOK Ministry of Agriculture and Food Economy, Warsaw Tadeusz BOREK Independent Farmers' Solidarity Trade Union, Warsaw Karol BORZUTA Institute of Meat and Fat Industry, Warsaw Barbara DABROWSKA Consultant, The World Bank, Washington, D.C. Cornelis de HAAN Agriculture and Rural Development Department, The World Bank, Washington, D.C. Jean-Jacques DETHIER European Department, The World Bank, Washington, D.C. Andrzej DYGNAROWICZ Ministry of Agriculture and Food Economy, Warsaw Piotr EBERHART Institute of Geography and Spatial Organization, Polish Academy of Sciences, Warsaw Malgorzata ELLERT Ministry of Agriculture and Food Economy, Warsaw Izoslaw FRENKEL Institute of Vi'lage and Agricultural Development, Polish Academy of Sciences, Warsaw Maria HALAMSKA Institute of Village and Agricultural Development, Polish Academy of Sciences, Warsaw John HAYWARD Technical Department, The World Bank, Washington, D.C. Manuel HINDS Technical Department, The World Bank, Washington, D.C. Oskar HONISCH Technical Department, The World Bank, Washington, D.C. iv Stanislaw JABLONSKI Ministry of Agriculture and Food Economy, Warsaw Zdzislaw JABLONSKI Institute of Meat and Fat Industry, Warsaw Odin KNUDSEN Agriculture and Rural Development Department, The World Bank, Washington, D.C. UTrich KOESTER University of Kiel, Kiel, Germany Andrzej KOLODZIEJ Institute of Planning and Organization of Rural Areas, Agricultural Academy, Wroclaw Wladyslaw KORCZ Ministry of Agriculture and Food Economy, Warsaw Tadeusz KOWALAK COPA-COGECA-EFA Committee for Agriculture and Rural Development in Poland, Warsaw Tadeusz KOWALSKI Ministry of Agriculture and Food Economy, Warsaw Marian KROL Institute of Crops, Fertilizers and Soil Science, Pulawy Andrzej KWIECINSKI Warsaw University, Warsaw Gary LUE3MAN European Department, The World Bank, Washington, D.C. Wladyslaw LUKASIK Council of Ministers, Warsaw Wales MACK University of California, Berkeley, USA Stefan MALECKI Ministry of Rural Welfare, Warsaw Jan MALKOWSKI Institute of Agriculture and Food Economics, Warsaw Kamil MATUSZEWSKI Independent Farmers' Solidarity Trade Union, Warsaw John McCARRICK Dairy Consultant, Dublin, Ireland Krystyna MILEWSKA World Bank Resident Mission in Warsaw, Poland Adrian MOENS University of Waageningen, Waageningen, The Netherlands Knud MUNK Commission of the European Communities, Brussels Maria NOWAK Caisse centrale de coop6ration economique, Paris, France Peter ORAM International Food Policy Research Institute, Washington, D.C. Jan PAWLAK Institute of Building, Mechanization and Electrification of Agriculture, Warsaw Zdzislaw PIASEK Zootechnical Institute, Krakow Andrzej PILICHOWSKI Institute of Sociology, Lodz University, Lodz Elzbieta PIOTROWSKA Institute of Sociology, Lodz University, Lodz Jerzy PLEWA Institute of Human Nutrition, Agricultural Academy, Warsaw Lorenz POHLMEIER Technical Department, The World Bank, Washington, D.C. u Wlodimierz REMiBISZ Central School for Planning and Statistics, Warsaw Ryszard ROZWADOWSKI Ministry of Agriculture and Food Economy, Warsaw Orlando SACAY Technical Department, The World Bank, Washington, D.C. August SCHUMACHER European Department, The World Bank, Washington, D.C. Anna TUZ Supreme Cooperative Council, Warsaw Roman URBAN Institute of Agriculture and Food Economics, Warsaw Jerzy WILI]N Department of Economics, University of Warsaw Nick YOUNG Centre for European Agricultural Studies, Wye College, University of London, Wye, United Kingdom Montague YUDELMAN World Wildlife Fund, Washington, D.C. Ryszard ZROBEK Institute of Planning and Organization of Rural Areas, Agricultural Academy, Olsztyn vi Table of contents An agricultural strategy for Poland The macroeconomic context of Polish agriculture 1 The social context of Polish agriculture 2 The obstacles to transformation 4 Market prospects for agricultural products 6 The future of rural Poland 7 Strategy for the agribusiness sector 8 Strategy for strengthening the rural infrastructure 12 Changing the role of government 14 Developing rural institutions: cooperatives and rural financial systems 17 Sector-specific strategies 20 Postscript: Addressing the present surplus production crisis 26 vii List of annexes Annex 1 The macroeconomy and agricultural adjustment 29 Annex 2 Rural development strategy 47 Annex 3 Changes in food demand, January 1989 - April 1990, and food demand projections 69 Annex 4 Agricultural trade policy strategy 91 Annex 5 Privatization of agro-industrial enterprises 117 Annex 6 Agricultural cooperatives 135 Annex 7 Structural reform of state farms 167 Annex 8 The agricultural and food marketing system and the agrifood industry 179 Annex 9 The transformation of grain marketing 193 Annex 10 Agricultural research 203 Annex 11 Seed production and distribution 215 Annex 12 Agricultural extension 221 Annex 13 Rural finance 231 Annex 14 Agrarian structure, land consolidation, and farmland management 249 Annex 15 Farm production and profitability 257 Annex 16 Soil fertility, acidity, and requirements for fertilization 269 Annex 17 Land amelioration 273 Annex 18 Agricultural mechanization 279 Annex 19 Agriculture, pesticides, and the environment 287 Annex 20 Livestock production sector 293 Annex 21 The dairy sector 307 viii An agricultural strategy for Poland Poland embarked on the road toward a market the rural sector keep its population, develop economy with its economic reform program of employment, and relieve pressures on the ur- January 1990, aimed at stabilizing the ban sector until the latter adjusts to the new macroeconomy. The productive sectors, includ- economy. ing agriculture and related industries, will be * Technical improvements at farm levels are able to build on the solid foundations of this possible but will occur only if the proper envi- program. But the productive sectors are diffi- ronment is created. cult and time consuming to reform, and it is not * While the government must not interfere always easy to identify the actions that will with production and marketing, it has an es- bring about the desired changes and differentiate sential role to play in creating favorable condi- them from those that slow down the reform tions for agricultural and rural development. process. Both categories often look dangerously alike. A strategic plan is needed to help orient One of the major and most unfortunate lega- decision-makersin themaze ofcomplex relations ciesfrom the previous social system is the scarcity and detailed actions that are constantly re- of Polish personnel, both in the public and pri- quired. The agricultural sector, because of its vate sectors, trained in modern economic and social and economic importance, has the po- financial concepts. Another is the habit of tential to be either a brake or an engine for the dependence on the state for everything - com- reform program. The present farm crisis is only bined with a fundamental distrust of the state's a reminder of this fact. actions. Training and education in the new This report is an attempt to define such a concepts must be an essential activity. Devel- strategyforagriculture. Itis articulatedaround oping public and private staff capable of creat- a few basic ideas: ing the conditions for change will depend on the success of these programs. * The immediate problems of agriculture re- side mostly in the agribusiness sector and not on The macroeconomic context of Polish the farms themselves. agriculture * The key to solving agribusiness problems lies in the privatization and demonopolization When the Mazowiecki government took power process pursued by the government, which will in September 1989, it inherited a difficult eco- force an increase in efficiencythrough increased nomic situation. Inflation was reaching triple competition. digit rates, the budget deficit was about 8% of v Rural development is indispensable to help GDP, and debt service was five times export I e , sidization of the economy, and ductivity. The expectation in Poland is that the ,-~-_-X-.-t.W,-V r-y" "state enterprises, which com- changed economic system, and particularly the pe ' th e industrial sector and con- increased efficiency that can be expected from a Ld I .; exports, was so high and marketeconomy,willunleashhithertorepressed ii - me budget revenues that the productive forces and that this can happen ba,7F, t ''.c 'eached 29% of expenditures in quickly. S '. Per capita income had Until very recently, the agricultural sector in Se J-i a. 20% over the previous 10 Poland wELs closed and inward-looking. Agricul- yes? a ,IIOU t-armers and part-time farmers tural policy was based on notions of income -v-zie s:i a. netrer position than the rest of the parity with. the urban sector and on food self- C';Ai-;s, <'lhei. real incomes had declined sufficiency. To achieve those objectives, prices :SY . - o respectively. The economy were manilpulated, subsidies were given, pro- e bankrupt. duction targets were established, and imports s kenbythenewgovernment and exports were controlled with little consid- n cr1 over the budget and eration given to economic costs. Since prices -uorocedurestolettheworst were not allowed to reflect scarcity, central I a: was accompanied by allocation had to be used, resulting in large *-.tar--r iestraintsand distortions and waste. Although about 75% of .' n ana complete liberaliza- total agricultural land in Poland is farmed by c C. N.iseO z-ricet mechanisms were then private farmers, they were entirely dependent t fle -mistefficient enterprises. on state agencies and state-controlled coopera- Is --qas X- recogmzed that this process would create tive sectors for input purchases and sale of their b_ b--t that it was expected to products. In the state and cooperative sectors, .--yard efficiency through com- capital was immobilized, since investment was .eultura was expected to become always a government decision and bankruptcy .Xe: a coir petitive, to deliver prod- of public fi:rmns was not allowed. Similarly, labor -kets at p-rices closer to world was immobilized because housing and other e- s.'-eeviously existing shortages, social benefits were linked to employment, itself age od the devaluation by consideredaebasicright. Theresultwasahighly i-c.itu aiexports, despite che de- distorted sector that was unable to realize its na<- stion of subsidies. The sector economic advantage. -;-. :thelpabsorbtheunemployed by transforming some of the The social context of Polish agriculture Der -,. 0% of the farming popula- -yn -i1e; far I ers. Unlike many countries of Western Europe, the £Cy',g 28% of the work force, Polish rural sector is of major importance to the J --oane X-sP creates only 12% of GDP. social and economic equilibrium of the country. ; 11 3, *e '7 e ,yw figure hides the fact that Its main characteristics, which should be kept '1-'9¾.'n'=' p n son agriculture for 87% of its in mind while designing an agricultural strat- t-Ye d p s su mpt.e. Similarly, 20% of industrial egy, are described in the following paragraphs. e - '3S from agro-industries, which in The rural population has remained approxi- turr 'e on agriculture for 90% of raw ma- mately at the same level (15 million) since 1950 w sector is thus much more important and is now 40% of the population. This popula- 1v ohan its size would indicate. tion stabilitv, largely the result of easier access eec.ons assign an important role to to housing and food, is a major advantage for the he s.x;--o i.s s-upposed to grow at 3-4% per economy during the present crisis. Theoreti- gnq-' -n 'K rthe next five years, and is also cally, it m.ay enable the rural sector to act as a axp ette T Treaseits exports substantially, to buffer and absorb some of the unemployed. 'rJtmThutionl to GDP. The ambitious However, beyond a certain level, this can onlybe tar, ge-t7'` Ch ewvifanycountrieshaveachieved, done at the expense of agricultural efficiency. will requ.ire major changes in the agricultural The average farm size is 6 ha. The approxi- production and processing sectors. Sustained mate breakdown of holdings is as follows: eiculf..al Fgrowth on that scale cannot be e- .. (.w m f't< br.gh normal gains in pro- Size of farms % of farms structure and the low quality of life are impor- tant determinants of migration of women and Very small 0.6 to 2 ha 24% Small 2 to 5 ha 27% young people. Medium 5 to 10 ha 28% The behavior of the rural population is a Large over 10 ha 1% direct consequence ofa perverse system in which private farming had to survive in a centralized environment. This semicapitalist, semisocialist There are 21 persons per 100 ha in Poland, system, as well as the policy of repressive toler- about three or four times the number in EC ance, has created behavioral patterns that are countries. However, it must be noted that wide often contradictory and can be described as regional differences exist, resulting from the follows: history of partition of the country into three regions as well as from unequal regional indus- * farm management that is based principally trialization and development. on a logic of survival rather than on a logic of Although the rural population is generally development. This is expressed in a propensity stable, its composition has changed with time. to minimize risk rather than maximize profit, to The share of the rural population working out- ensure self-financing mostly through multiple side agriculture increased from 15.7% in 1950 to employment, and to take advantage of all labor 40.7% in 1988. Only 20% of the actively farming resources of the family; population derive their income exclusively from * an attitude of resistance to, but also de- farming; 40% supplement their income with pendenceon,thestate. Thisbehavioraldualism outside activities, and the rest are part-time expresses itself in rejection and distrust of farmers. This high level of nonfarming activi- anything that derives from the state, yet, at the ties directly related to the small size of farms is same time, in complete dependencyvis-A-vis the a major structural characteristic of the rural administration. It also creates a habit of unlim- population. Itrepresents flexibility, an assetfor ited demands by farmers on the state as well as the future that can help develop rural economic an acquired helplessness toward market regu- activities upstream and downstream from ag- lation by the state; riculture. * differences in behavior between the private The Polish rural sector represents a unique and state sectors. Private farmers are tied to combination of the private economy, dominant the land and this enables them to remain inde- at the farm level (75% of area, employing 85% of pendent. In contrast, farm workers in state the active agricultural population), and coop- farms are wage earners benefittingfrom specific eratives and state enterprises, dominant in ac- advantages, particularly housing. The same tivities other than agriculture (92% of the active differences exist between private farmers and nonagricultural population). Historically, this workers in cooperatives upstream or down- combination of decentralized and centralized stream from agriculture. economies is a result ofthe failure of agricultural collectivization and of the subsequent policy of Structural changes in agriculture are likely to indirect collectivization. It should be noted be slow, given that farms are small and the however that, in addition to the official private agricultural population is aging. Small farms, sector outside agriculture, there is an important contrary to what is commonly thought, will not unrecorded informal sector. be eliminated by the crisis. They will simply The rural population lives in 2,121 gmina withdraw from the market and only disappear (counties), comprising 42,000 villages, 82% of when their owners retire without successors. which have fewer than 500 inhabitants. Except Commercial farms (which are more dependent for a recently developed road network, infra- on the market) will be in a difficult situation, structure and public services are much less with a risk of economic regression. They will developed than in the cities. The weakest as- have to use labor-intensive methods, yet at the pects are water supply (only 29% of villages same time reduce their costs and improve quality have a piped water system), sewerage, and tele- to survive and develop in the medium term. phone (only 8% of villages). The quality of However, the population's habit of off-farm schools and health services is also weaker than work and the semiprivate character of the rural in the cities. The poor quality of rural infra- economy offer the possibility of more rapid de- 3 velopmentofprivateinitiativesandinvestments, adequate or well-distributed, farm infrastruc- both in the upstream sectors that sell to or ture, a well-developed rural road network, and service agriculture and in downstream sectors electricityavailableinnearlyallvillages. Heavy that buy from it. This potential needs to be farm subsidies during the past 10 years have at actively tapped, as it represents an essential least equipped the sector with machinery, ingredient for the progress of agriculture itself without creatingmuch indebtedness at the farm It also represents the possibility of generating level. This should alleviate the need for costly rural employment (notagricultural employment, investments in the immediate future. which is likely to decrease when on-farm effi- * Poland is geographically well situated for ciency increases), thus helping reduce overall export markets in both the West and the East, unemployment while creating a market possesses an appropriate exchange rate and a economy. The rural sector could thus play a convertible currency, and has a largely free social role, in addition to its traditional pro- trade regime. ductive one, and make a significant contribution * Most important, Poland has a good techni- to the economic reform process. cal knowledge base, and a substantial number Implementing a new agricultural strategy of farmers, particularly younger ones, are well presupposes a gradual reduction in the dual educated. Crop husbandry is sound, but can be perspective of farmers and, particularly, the substantiallyimproved: althoughyieldincreases adoption by farmers of market-related behav- have been high over the past 10 years, they ior. It also presupposes a reduction in the remain largely below their potential. Animal antagonism between farmers and the state, an husbandry is basically sound and veterinary antagonismwhich,underpresentcircumstances, standards are high. could be exacerbated by the sudden fall in ag- riculturalincomeandbytheuncertaintieslinked The obstacles to transformation to the absence of market signals. The only solutions to reduce the antagonism are: Despite some signs of adjustment in the sector, particularly evidence that exports have in- * immediatedefinitionofcleareconomicrules creased despite an end to export subsidies, the to enable farmers to define their own holistic agricultural sector is presently beset by major strategy in a stabilized environment; obstacles to transformation that are outside the * establishment of transition mechanisms to farming sector itself. Symptoms of these ob- buffer the collapse of prices; wherever possible, stacles are that price transmission mechanisms use of welfare policies that increase demand for have not functioned: there are large gaps be- food; tween Polish and world market prices for agri- * development of rural employment, based on cultural products; stocks have accumulated the creation ofgainful activities centered around, (dairy products, grains); little competition is and servicing, agriculture. present on agricultural markets; and credit re- mains so expensive that many agro-industries Poland's agriculture possesses many positive are facing acute difficulty and farmers are un- characteristics which should help it through the willing to borrow. transition from a command economy to a mar- The rural sector, although mostly private, ket economy: was, and still is, totally dependent on the state and cooperative sectors for the procurement of * Comparedwithothercountriesintransition, all inputs and services and for the sale of all the private farm sector is large and has deep- production. The previous economic system had rooted traditions. successfully discouraged private wholesale and * Polish farmers have consistently demon- retail trade, and producers were tied to coop- strated their resilience and survival abilities; eratives that enjoyed territorial monopolies. All although the economic transition is difficult and marketing systems, whether for grain, milk, or sudden, they have the imagination, strength, animals, were and still are largely vertically and willingness to make it on their own - integrated. The producers had no access to essential ingredients for future entrepreneurs. markets above the level of their cooperatives, * There is an abundant, albeit not always which in general they did not control. In prac- 4 tice, therefore, a largely private rural sector was The consequences of inefficiencies in the in fact completely dependent on an omnipresent agribusiness sector go much beyond the agricul- state and cooperative sector that enjoyed mo- tural sector. In fact, they threaten the stabiliza- nopolistic and monopsonostic privileges. tion program. Farmers find it difficult, if not This situation has not changed significantly impossible, to sell their products; consumers see since the economic reform program was started. no decrease in food prices; dairies are unable to The upstream and downstream agribusiness purchase milk; and buying prices are not being structure remains the same as before, and no announced by purchasing agencies. Farmers actual competition has emerged to challenge therefore ask with increasing insistence for the powers of existing enterprises, which are government-guaranteed crop prices. Because of operating fully independently. The state and very low prices, sometimes much below produc- cooperative agribusiness sectors still respond to tion costs, and, as in the case of milk, well below the same pre-reform incentives and not to mar- world prices, farmers feel justified in demand- ket incentives. Their primary objective, since ing minimum prices or even minimum income they are managed by labor, is to maintain the guarantees. Because the cost of credit has labor force at pre-reform levels, and to retain all remained at prohibitively high levels, farmers social benefits. In this, they have largely suc- are also asking for preferential credit at fixed ceeded, as can be seen by the very low number of and lower interest rates. The government rec- jobs lost in the state and cooperative sectors. ognizes that the crops must be bought at rea- They still have no incentive to maximize return sonable prices, and in the very near future. on capital invested, since there is no advocate Because time is so short before harvest, the for efficient capital utilization in their man- government has few practical options to modify agement. Because they still enjoy monopolistic the faulty structures, to create new ones, or to privileges, their preferred solution, when con- let the private sector find its own ways. It is, fronted with a decrease in demand, is to keep therefore, under considerable pressure to re- their margins constant by manipulating prices, turn, at least partially, to the old system of rather than by increasing efficiency through a direct government interventions. This would, reduction in costs and an increase in sales at however, bea severe setback to the establishment lower prices. It even seems possible that some of a market economy. The very large and sud- state industries (not only in the food sector), by den cash outlays demanded from the Treasury extending credit to each other through exces- would fuel inflation. The entire economic pro- sively delayed payments, are contributing to gram would be in jeopardy. the perpetuation of inflation. It is, thus, clear that the agribusiness sector is This situation, worrisome in itself, is made critical to the development of agriculture, and worse by the fact that the food-processing sector indeed of the economy, and that the roots of the (the downstream sectorfor most ofthe farmers), present agricultural crisis are to be found there, is particularly inefficient in Poland. It ranked rather than on the farms themselves. The second to last in a review of the 17 major Polish present crisis is clearly not one of lack of pro- industrial groups, declining in productivity by duction atthefarmlevel: thegovernmenthas to 5.1% from 1978 to 1982. During the overall deal with a glut rather than a shortage. Cer- resurgence in output growth between 1982 and tainly, on-farm efficiency needs to improve and 1985, food industry sector productivity grew by can do so. However, farmers are not going to 1.2% but still ranked second to last in growth. make the needed efforts if the benefits are lost Nationally, the food industry showed negative to an inefficient trade and processing industry. value added at world prices in 1986, and 90% of It would not be efficient to invest at the farm the loss-making public enterprises were in the production level if downstream industry and food-processing sector. This gross inefficiency trade are not capable of handling the products means that there is no incentive for farmers to more efficiently. Government priority actions improvetheirqualityorproductivitysincethose should therefore be directed toward increasing gains are likely to be confiscated by subsequent agribusiness efficiency. processing. This inefficiency also further rein- forces self-sufficiency attitudes in farmers, with negative consequences for productivity. 5 Market prospects for agricultural income and consumption in Poland is typical of products middle- to high-income countries, that is, that consumption increases quickly at low levels of DOMESTIC DEMAND FOR FOOD income, stabilizes, then remains constant at higher levels of income. The projections indicate Households have experienced a 30-40% reduc- that, in per capita terms, food demand grows at tion in real income in the first quarter of 1990 as an average rate never exceeding 1.2%. Because a result of the removal offood subsidies and the of population increase, however, total food liberalization of food prices. Their overall con- demand shows amore pronounced upward trend. sumption of food has declined by 10-15%. Theprojectionsindicate that, inthelongterm, Households spent on average 55% (65% for total food demand in Poland will be mainly pensioners) of their incomes on food in January- driven by population growth. On a per capita April 1990, compared with 39% last year. Fifty- basis, and in both income growth scenarios, food four percent of food expenditures was spent on demand will not increase at high rates. More- meat and dairy products, compared with 45% over, increased prices and better food availabil- last year. ity will reduce food wastage. The fall in household demand for most food The transition to a market-based economy is items is lower than commonly thought. This is likely to induce a worsening distribution of due to hoarding by households of nonperishable income for three to four years. Demand for basic food before the price increases of October 1989, food items will be higher than the projections and to households having reduced or deferred indicate inview of this worseningincome distri- their nonfood expenditures. Households have bution. As real incomes increase after 1993 and restructured their expenditures according to more people move to higher income groups, the relative price changes but have attempted to food budget share and the income elasticity will maintain approximately their past food con- decline sharply, and the latter may come close to sumption levels. zero, as in the high-income OECD countries. Average nutritionalintakes comparefavorably When the economy recovers, growth in food with those of Western European countries. demand will slow down, implying that projected However, average figures mask the increasing figures are biased upward for the years 1993- number of people who are below the poverty line 2000. As income increases and the share of the and nutritionally at risk as a result of the fall in poor in total income decreases, demand for more their real incomes and limited income opportu- processed and more expensive food items will nities due to rising unemployment. The per- increase and demand for primary, unprocessed centage of households below the poverty line is food will decline. estimated to be 37% among pensioners and 30% Supply-side factors, such as the opening ofthe among workers' households. economy and the restructuring ofthe food sector, There is thus a need to reinforce and expand will have a profound effect on consumption the existing social welfare system by transfer- patterns. There will be a reduction in seasonal ring income to low-income groups and by ex- consumption fluctuations linked to the pandingexistingtargetednutritionalprograms seasonality of processing industry production for vulnerable groups to cover those nutrition- andtothevirtualabsenceoffoodimports. Inthe ally at risk. short term, food demand is expected to adjust to During the period of economic adjustment, relative consumer price changes until food real incomes can be expected to fall until they markets are in equilibrium. There will also be attain a macroeconomically sustainable level. substitution overtime within majorfoodgroups. Projections have been carried out for two The availability of imports, together with the scenarios: the more optimistic predicts a 14% greater choice and quality ofconsumer products, decline in real terms in 1990 followed by growth will lead to a differentiation of consumer tastes at a real rate of 5% thereafter; the more andaconsequentdifferentiationoffoodmarkets. pessimistic predicts that real GDP will decline by 20% in 1990 and by 5% in 1991, will not grow FOREIGN TRADE PROSPECTS in 1992, and will then grow at an annual real rate of 3% thereafter. Estimated income Poland's agrifood exports accountforabout20% elasticities show that the relationship between oftotal exports, butthe share ofexports compared with total agricultural production is relatively competitive in export mark-ets, argel;; &e. small: 9.5% in 1989 and 1990. The Polish trade of upstream and downstream inefi icies. A balancebecamepositive overthefirstfive months strategy of exportexpansion would -reuireelarge of 1990, partly due to an increase in exports of export subsidies or other -Forms of sbsidi`es an d agricultural products, but mostly because of a is not affordable in the present cnntexv- Buclt tile decrease in imports (mainly feedstuffs), which export potential for specialized agri-rul ral is a dangerous development for future meat and products for which Poland currentliy has an dairy production. Agrifood exports were sup- advantage in terms of low labor costs S' "De oD ported in the past by disproportionately large identified and exploited. Thnmos in export subsidies and enjoyed a greater effective quality standards could assist iln rate of protection than other sectors. There are such specialized exports. A sociallly a~cajpt ble indications that exports of processed food are way to reduce excess capacity in agr -e less competitive than exports of agricultural wouldbeto aimtoproducesornewha beiowself- commodities. Profitable exports of processed sufficiency. In such a case, bhe seco&r w\e nt products will therefore depend on the ability of require major government intei.ve-roion or fi- agro-industry to increase efficiency. Inefficient nancial outlays. Such an ptnion v, -uld iynply food-processing sectors will have to be reorga- that consumer prices in Poiand woula f# d.nate nized and restructured. Export markets are around import parity levels, and st,-. _;9e w4-e-ll importantforPoland's agriculture, andthe shift below pricespaidby consumrnes in tl-eE-, e ropean to a market economy should help the industry Community. It would aiso rnean 12bat- consolidateandimproveitspositionontheworld taxpayers would avoid the cosLs t ub- markets. However, there are serious limitations sidies or other government snppoofo arisingfrom the characteristics ofthose markets for agriculture. that should be kept in mind. Although it would be good for Poland to obtain The future o Zi n La n increased access to European Community (EC) markets, increased tariff quotas are unlikely Withthe abovebackgroundio.4.iif-,:i. o. under the generalized system of preferences to set goals for the developn - (GSP) or other schemes, since it is unlikely that and the rural sector, ad, er ..d - the Common Agricultural Policy of the EC will tions. be modified to accommodate Poland. Of course, Agriculture in Poland 2hou.s Poland could negotiate special agreements al- nationally and internationPahly, . lowing privileged access for Polish products ibility and responsiverness to nnket si gi als5 t that have a comparative advantage (such as exploit its comparative va-nr,age, ai Pro- fruits and berries); in return, privileged access duce competitively for both dames f-_ e , to the Polish market mightbe granted for other markets. This means that the d-ri ve< EC products, including agricultural products autarky, which is the tradiPoae,sio not produced in Poland. However, the possibili- Polish farmers, must progress:v8ly-, ve :ra- ties of significantly expanding agricultural ex- a production pattern that a's mcst.l£; ' ly ports toward the EC are not great. oriented. The prospects for exports to the Soviet Union Agriculture and its upstreaman-dd -wi amn and other Eastem Eu-ropean countries are bet- sectors should strive for efli-cien .- a w kow ter. Experience proves that exports are greatly mobility of labor and capital. I.-9borg an sdpital facilitated if the exporter enjoys a strong and markets should be developed ani . 3 ,`n- stable domestic market. Given that income tion as freely as possible. levels in those countries and in Poland are Agricultureshou]dbed .v _ similar, the quality requirements for export of and be private; agricultural produis" - Si-.5 agrifood products will probably be similar to beonlandthatisessent.allyp.rivai;e. .riw those of Poland's domestic market. This would marketing, transport, process-ing, anel svo- age permit the expansion of exports. However, activities should be private; as for prif'eSs, they these markets are unlikely for some time to offer should be determined by m.arket fo- -S prices higher than, or even equal to, world Agriculture should be free to u9e al!. trade markets. possibilities, boti domestical]y and Jnltenla- Most Polish agricultural products are not tionally, since this is the only way it can fully 7 exploit its comparative advantage at any given agricultural sector is given the freedom to de- time. cide how and where to invest, as well as access The rural sector should be a dynamic and toall thetoolsandinformation thatallowfarmers integral part of society; it should provide diverse and processors to make informed investment sources of income by creating employment out- decisions and to reap the benefits (as well as side the farming sector and should consistently bear the costs) of their decisions. improve the quality of life in rural areas;holistic rural development should thusbeaprioritygoal Strategy for the agribusiness sector to help create employment in the rural areas outside of, but connected to, agriculture. This MODIEYNG OWNESmflP AND PRIVATIZING STATE would compensate for the loss of rural employ- ENTERPRISES ment and possibly also help absorb some of the urban unemployed. Improving the efficiency of the agribusiness The foreseeable long-term structural changes sector should be the first priority of an agricul- in the sector (increase in average farm size, tural strategy. The causes of the present ineffi- decreaseinoverallfarmingpopulation, increased ciencies are well known and understood in Po- specialization ofproduction) will be progressive. land. They are to be found in their structure These changes should be promoted by govern- rather than in the quality of management or ment action but not forced upon the rural equipment. While both need great improve- population. For some time to come, an in- ments, these cannot be achieved until the creasingly modern and high-performance ag- structures are profoundly modified. At present, riculture, not only on the large farms but also on the state enterprises dealing in agro-industries small, modem, and highly intensive ones, will and input supplies do not respond to market coexist with the more traditional small-farm incentives because they were built to be large sector. The interests of both must be safe- monopolies insulated from market pressures by guarded. an almost total lack of competition. Further- Since parts of the rural population will suffer more, because they are generally vertically in- from the consequences of those changes and tegrated and large, they prevent the introduc- maynotbe abletobe self-employed, non-market- tion of new entrants into the market. distorting social safety nets should be designed, State enterprises do not respond to profitability principally through subsidies uncoupled from incentives because they are controlled by production and prices. workers' councils. However ambiguous the Agriculture should be protective and support- ownership of the enterprises remains, the owner ive of the environment; appropriate regulations (the state in the case of state enterprises, and an and incentives should be designed and enforced. undefined owner in the case of enterprises As will be described later, major changes in previously belonging to the cooperative unions) the structure of agricultural production cannot in the final analysis is responsible for enter- be foreseen. Grains and livestock (including, of prises'losses. Untilnow,this systemhasallowed course, dairy) will remain prominent for social workers and managers to extract a maximum and technical reasons. There are no miracle from enterprises under the form of various crops waiting to take over the Polish fields once compensations, andthe statehas always covered markets are free, but changes can be expected losses. with new demandformore elaborate food (fruits In such circumstances, it is clear that those and vegetables); a lower consumption of animal who control the enterprises have no reason to fats will probably induce more demand for take, or accept, decisions that could harm their vegetable oils (rapeseed); and changes in mod- immediate interests, and a drive for em agro-industries may create changing de- demonopolizationandincreasedefficiencywould mands for new crops (including industrial ones clearly harm a part of the work force, even if, in such as flax). Government research, at the the long term, it might benefit those who stay. cutting edge of development, should be on the Their strategy is therefore to reinforce their lookout for opportunities, and agriculture (in- control of the enterprises through acquisition of cluding its supporting services) must be posi- the shares at the occasion of the privatization tioned to respond to changing market needs. drive; and to obtain capital either from the The best way to achieve this is to ensure that the state, banks, or foreign partners (through joint 8 ventures) to renew and augment the enter- will not need to be forced to do it since the prises' fixed assets, which are seen as the only sanction for nonprofitability is bankruptcy. reason the enterprises face difficulties. Their Enterprises should also be relieved of the rationale is to maintain the monopoly situation social functions and goals they now carry as a they inherited. result of the previous social organization in Remedies to these structural problems lie in Poland. Such functions are not compatible with the privatization objectives of the government a market orientation. Social security, such as and in the law that has been recently voted by medical coverage, insurance, pensions etc., Parliament The entire agribusiness sector, shouldbe assumed atthe communityornational andparticularlythose parts ofitwhich are most level, and not as an adjunct to an employment important for farmers, such as product market- contract, except for the normal employer's ing and processing, transport, services and in- contribution. Similarly, housing should not be put supply, should be demonopolized and a consequence of an employment contract. The privatized as a matter of urgency. Moreover, stock ofhousingbelongingtoenterprises should, this process should affectthe entire sectorin the therefore, be separated from other assets, and same fashion: it would be harmful to leave some distributed in full ownership to their occupants monopolies-monopsonies intact for some time, either free or on very favorable terms. This forthis couldinduce distortions and undesirable would ensure that the loss ofjobs that will come shifts in production patterns. Such distortions with the efficiency drive is not rendered more would cause imbalances that would be costly to painful for the worker by loss of housing. Such correct. The privatization drive should affect a decision would remove one of the major wor- the agribusiness sector homogeneously. Sev- ries that workers have regarding privatization eral basic decisions should be taken following of enterprises. A housing distribution program the enactment of the Privatization Law. would also help create a housing market and First, public ownership mustbe reestablished. develop labor mobility in Poland. Following the reestablishment of public own- Rapid and massive privatization should be ership, temporary new government agencies initiated in the agribusiness sector, particularly should be created to control the management of in the food-processing, transportation and farm enterprises until these can be transferred to input sectors. new owners. The temporary agencies should be Criteria for appraising investment proposals geared to maximize economic return and mini- should be developed to ensure that public sector mize the time needed for the next step, enterprises targeted for privatization do not privatization. They should be sufficiently small continue to claim public resources unless they to avoid creating very large holding agencies demonstrate their ability to use them efficiently. that could accumulate too much economic and Access to financial resources either public or thus political power and be able then to develop private, other than self-financing, should be their own agendas. submitted to strict a priori controls by the con- Conglomerates, agrokombinats, and all other trolling institutions. monopolies and monopsonies should be broken There are many waystoapproachthe complex down into smaller concerns to promote compe- issue of privatization and very little relevant tition. The present integration allows compen- experience on which to draw lessons. The Polish sation of losses between different units at the situation is difficult to compare with that of cost of overall efficiency. The conglomerates other countries that have privatized part of should be divided into profit centers capable of their public sectors, if only because of consid- operating independently. erations of scale. The principles which should While this recommendation is largely outside govern anyprivatization can be stated asfollows: the scope of an agricultural strategy, it should be mnentioned that the promulgation of a mod- * The privatization drive's main goal is to ern accounting and auditing system capable of improve enterprise management and result in clearly measuring the profitability of enter- an optimal dispersion of ownership. This dis- prises is an urgent priority. Public enterprises persion should be sufficient to create an active not yet privatized and those not immediately capital market, improve income distribution, subject to privatization should apply this new and avoid too much economic concentration, system as soon as possible. Private enterprises which would lead to inefficiencies. It should not 9 be so large as to dilute ownership excessively state farms are not particuiarlv effincient; al- and prevent owners from exercising their con- though they tend to have better yields than trol over management. private farms, their overall efficiency of use of * The process should be as rapid as possible. production factors is below that of the private The present inefficiencies of the agribusiness sector. A number of them are integrated hon- sector are cripplingfor the economy and hamper zontally and vertically (agrokom,binats)', which stabilization and economic growth. They also allowsforcompensation oflossesbetweenunits, threaten consumers with food shortages and at the cost of overall efficiency. high prices, while imposing low prices and glut State farms, particularly the largest ones, conditions at the farm level. Moreover, the cannot easily be broken down Into - edium-size public enterprises remain the responsibility of units without a major temporary loss of effi- thegovernment,whichbearstheblamefortheir ciency. Their lands cannot be distributed with- inefficiencies and, eventually, will have to cover out creating a major population miigration that their losses. Speed in the process is also neces- would be socially and financial:y costly in the sary to limit the process ofspontaneous short term. Moreover, suduenlv placing large privatization that is now taking place and is an tracts of land on a narrow land rnrarket would undue appropriation. seriously depress land values. L't is therefore * The privatization process should be equi- advisable to take a gradual approach to state- table. Poland is on the verge of distributing owned land distribution, synclnronized with the assets accumulated over 40 years (and more) development of a land market and related insti- and paid for by the population through low tutions. Apart from those state faryns that are standards of living. This distribution, whatever structurally unprofitable and coulid be sold to form it takes, should be equitable, if it is not to adjacent private farmers, the others should be create future social tensions. If shares are allowed to operate as large enterprises, but with transferred without payment (in part or in to- some fundaimental changes to £tee tn state or tality), they should be given equally to all citi- its agencies from the task ofrunning agricultural zens. If they are sold, buyers should pay the production inits and covering their losses, and right price for them. to ensure that the new units are as efficient as possible. To achieve the above. the fo'ilowing Enterprises shouldnotbetechnicallyimproved strategy is proposed: before being transferred. Privatization is the prerequisite for management and efficiency * As with other public enterprises, housing improvement, and before this happens, there is should be delinked from state farms and dis- no certainty that the amount spent on refur- tributed to the workers, after w7hch tnre stafe bishing the assets of the enterprise will be farmsshouldbelegallyre, o ssessed- thestate recouped through its sale. and the managerial power ofw crkerse councils rescinded (this would probably be covered as MODIFYNG OWNERSHP AND PRIVATIZING STATE part of the legislation on public enterprises). A FARMS new management control system should be es- tablished, through holding cornpanies, as in the Although state farms are not principally part of case of other public enterprises. the agribusiness sector, their role in * Ownership of land and buildingsshou.ld be agroprocessing is large, and their situation is legally separated from the right of isage of similar to that of state enterprises. There are these assets. The land and buildings should be 1,300 statefarms, consistingof5,000 agricultural transferred to a state land agencyS whose only units and enterprises, on about 4 million ha, mandate would be to own state lan, , 'nd lbuld- providing employment to more than 470,000. ings, to make sure that they a --nlainined in They account for about 24% of agricultural out- good agricultural condition5 ana >e;ease oru sell put, and 35% of marketed output, and are re- them to private farmners or ind-ustes. A state sponsible for about 25% of agricultural exports. land-leasing policy sholuld be developed to en- It is clear that such an important subsector sure that the leases are fixed at levels repre- must be included in any reform of agriculture. sentingtheir true economic value. quch a policy State farms benefit from government subsidies, would also influence the prices of private lease estimated at about $100 million a year. But agreements. 10 * The conglomerates (agrokombinats) should vided by the Cooperative Law of 1982. It follows be broken down into smaller, independently that since the primary cooperatives own the managed units that would operate as autono- cooperative unions, all assets of the cooperative mous, financially independent, cost and profit unions, including the industrial assets accumu- centers. lated over the years in the industrial enter- * Privatization of management should be ini- prises are owned by the primary cooperatives. tiated for each of the independent units. The * It cannot be claimed that the assets of these industrial parts of state farms shouldbe treated enterprises were financed by state subsidies. as industrial public enterprises. The agricul- Subsidies were passed on to consumers and tural parts should be offered on lease to private cooperatives were heavily taxed. In 1988, 27% enterprises, including workers' cooperatives. of the income of cooperatives went to pay taxes. Leaseholders would take the entire commercial Cooperatives were also indirectly taxed, as 21% responsibility for management of production of their income was spent for social purposes. units. A bidding system should be developed to * The cooperative system was largely self- ensure equity of opportunity to purchase. financed. A total of 32% of the income of coop- * As with other privatized public enterprises, eratives was allocated to different funds (re- state farms not yet under private management source fund, 14%; investment fund, 9%; and should not have unrestricted access to new fi- development fund, 9%). The development fund, nancing and should not be given preferential which averaged 9% but was as high as 25% of treatment over private farms. income for individual cooperatives, went to the * To facilitate and guide this effort, a state central unions and in turn was used to finance farm agribusiness restructuring group should the establishment and operation of enterprises. be constituted from the current state farm task * These enterprises (agroprocessing, whole- force, with members from MAFE, Treasury, saling, transport, etc.) are part of a marketing BFE and state farms. chain. To suddenly break these linkages would create further disruption in the system and Part of the land belonging to state farms could aggravate the already difficult situation in the be used to start a land market. Land at the food industry. periphery of state farms could be offered for sale * Appropriation of these enterprises by the toneighboringfarmerstoenablethemtoincrease state would be a step backward for the the size of their enterprises to viable levels. privatization process. Primary cooperatives are Smaller state farms might be sold in their en- private enterprises and retaining the assets of tirety. In some cases, lessees may not wish to cooperativeenterprisesbyprimarycooperatives take over all land previously belonging to the would have the effect of privatization or state farm. In this case, residual land should reprivatization. Privatization in this sense remain with the State Land Agency, which will means releasing these enterprises from state lease it or sell it to private farmers. Land found control. unattractive to leaseholders might be turned over to publicforestry or conservation activities. The state had control of these enterprises through the cooperative unions, but this does RESTRUCrURING COOPERATIVE ENTERPRISES OF not establish its proprietary rights. Neither is LIDATE UNONS there justification for favoring the takeover of these enterprises by their workers, as the liq- Many agro-industries, and especially the dair- uidation law permits. These assets should be ies and fruit-processing ones, were created and kept within the cooperative system, but the owned by the cooperative unions, which were enterprises should be transformed into joint- dissolved at the beginning of 1990 and are stock companies with the primary cooperatives undergoing liquidation. It appears that the as shareholders and operating exactly like pri- primary cooperatives are the legitimate owners vate firms, without special privileges. Those of those enterprises. The reasons for this are as that operate unsuccessfully will go bankrupt. follows: Those not claimed by primary cooperatives should be treated as public enterprises and *The primary cooperatives organized and liquidated if they are redundant. registered these unions with the courts as pro- TheliquidationprocessundertheCooperative 11 Law of January 1990 has had negative conse- agriculture. Any development strategy must, quences for the entire cooperative system be- therefore, go beyond production aspects to en- cause marketing linkages, previously managed compass the full spectrum of rural activities. by the unions, have been severed. Thousands of What is needed is a rural development strategy. economic enterprises owned by cooperative The objectives of such a strategy can be de- unions have been orphaned and operate without scribed as follows: effective ownership representation. Their ac- cess to financing is in doubt and their ability to * in the short term, maintenance of the pro- enter into joint-venture arrangements has been ductive potential of agriculture and of its role in crippled. providing employment; the rural sector should Those appointed to liquidate the unions have act as an employment buffer for the economy as been given full authority to decide on future a whole; ownership of the unions' enterprises and to * in the medium term, creation of a rural manage them until new owners take over. It is market economy through privatization and de- clear that these liquidators are not prepared to velopment of nonagricultural activities; this assume these decisive roles and have no clear rural economy would be an engine of growth for guidelines or supervision to perform their du- the economy as a whole. This will be achieved ties. Some 400 unprepared liquidators operate through the development of local markets, of largely individually in restructuring most ofthe itinerant trade, of handicrafts, of cottage in- country's agroprocessing and trade enterprises. dustries, and of rural services. In addition to To prevent further deterioration of the situa- small and medium-size enterprises, there will tion, it is proposed that any decision to award be self-employment and many microenterprises, ownership of cooperative unions' assets be de- corresponding to the investment and manage- layed until a cooperative restructuring organi- ment capabilities of individuals; zation includingregional restructuringteams is * in the long term, regional planning and formed. It is proposed that the cooperative multisectoral development of rural areas will restructuring organization be managed by a raise rural living standards and decentralize national committee of representatives of the the national economy; this will improve utili- Ministry of Finance and the Supreme Coop- zation of productive factors and promote a more erative Council (composed of 98 elected repre- harmonious regional distribution of rural assets. sentatives of primary cooperatives). At the regional level, the committee should have a In the short term, over the next few months, similar organization. These bodies would have the following actions should be undertaken: the responsibility of immediately ensuring pro- fessional managementofcooperative enterprises * incorporate the specific requirements of the with the participation of the legitimate owners. agricultural cycle in fiscal, credit and This would allow more time for restructuring privatization policies as they apply to the rural enterprises along efficient lines, proper evalu- sector; ation of assets, and identification of prospective * reduce the present instability of the rural buyers and joint-venture arrangements. economy through measures leadingto stabiliza- tion of producer prices and interest rates, by Strategy for strengthening the rural developing access to storage of products and by infrastrucutre disseminating information about prices and markets to increase market transparency. Such DEVEOPING AND DIVERSIFING TEE RURAL measures should not involve direct interven- ECONOMY tions in price fixing or direct buying by the state or its agencies. The rural sector in Poland contributes much more to the economy than food and fiber. It In the medium term, incentives for private houses a large proportion of the population, and initiative to develop must be put in place. Nor- has the potential to create employment through mal mechanisms to create a network of small the reestablishment of a network of productive production units, entrepreneurship and capital and trade activities normally associated with accumulation in rural areas have been blocked 12 for 45 years. Outside of agriculture, where oping individual strategies, management and multiple jobs and the liberal credit policy of the marketing (the use of active and participatory Gierek period have permitted savings to de- training methods, until now unknown in Po- velop, the only means of accumulating capital land, would be very efficient); and group action- were informal. They included: illegal appro- training for small rural activities, delivered at priation of means of production (private use of the work place; public resources, includingworkers'time, assets * afinancingpolicyfacilitating access to credit and inputs); informal trade made possible by by new economic agents. Since interest rates distortions in the economy; and unrecorded re- should not be subsidized, it is necessary to mittances from labor abroad. The creation of a create mechanisms to compensate for the new rule of law and of a market economy presup- entrepreneurs' lack of equity contribution or poses the elimination of distortions and privi- assets by granting temporary exemption from leges, but also deprives economic agents ofthese taxes and social security contribution (without previous sources of cheap capital. reduction in benefits), by giving them start-up The reform policy, and particularly the drive grants to help in project preparation, and by for increased efficiency, will create massive supervisingthestart-upoftheiractivities. These unemployment, estimated at 2 million by the two mechanisms necessitate two forms of sub- end of 1990. Clearly, the policy cannot be sidies, one at the level of the entrepreneur and limited to simple welfare, which wastes human the other at the level of the bank or local de- potential and perpetuates and increases de- velopment agency. Both would require financ- pendence on the state. State involvement in ing from the state budget; welfare is at present limited to a small part of * a favorable environment. For this it is the population. The economic reform program necessary to eliminate useless regulations and calls for a more active policy, supporting the modify the administration's arbitrary and slow disadvantaged and giving everyone an oppor- behavior; to develop a clear, coherent legal and tunity to generate employment. This supposes fiscal framework (this is currently being elabo- that access to capital is facilitated. Obviously, rated); to implement an information policy re- resource limitation means that such a policy garding markets, technologies and new behav- must be precisely targeted. It is also a powerful ioral patterns; to facilitate access to appropriate tool for reawakening private initiative and for machinery by reorientation of national produc- developing local markets in which the income of tion toward small-scale equipment, permitting one creates the market for another. It is also a the import of small-scale machinery, including means of providing opportunities for entrepre- secondhand equipment (given the high relative neurs. cost of such equipment in Poland, it would be Thiskind of self-employmentpolicyis unusual helpful to create the legal framework for the in industrialized countries, where wage labor development of leasing contracts); and to fa- has killed the concept of independent labor and cilitate access to land and building to establish where society accepts the need to offer perma- workplaces. nent support to a high percentage of unem- ployed. It nevertheless reflects the modern To prepare for the long term, it will be neces- industrial revolution, in which a multiplicity of sary: technologies and markets fosters a new pro- duction model based on closely linked small * to put in place a capacity for regional plan- productionunits. Thisdevelopmentisfacilitated ning and undertake the development of rural by progress in telecommunications and infor- infrastructure; priority should be given to the mation technology. This model, in the medium supply of piped water, energy and telephones, term, could be the objective of rural job creation. and also to cultural, educational and health The three major instruments of such a self- infrastructure; employment strategy are: * to enact regional development policies and land set-aside policies for reforestation, hunting, o a training policy with two basic compo- fishing, and tourism; nents: a reawakening of private initiative * to promote decentralization of the indus- through management seminars based on devel- trial structure, following the privatization of 13 monopolies, for storage, transport and process- * ensure that the level of price stabilization is ing. not above the average c.i.f. world price available To implement such a strategy, the state must to Poland, so that exports can cover the cost of provide a legal and administrative framework stabilization when purchased products cannot and necessary budget allocations. Local agen- be sold on domestic markets. cies and governments should take responsibil- ity for economic and social development at the In the medium term, Poland will need to local level. Both state and local governments establish a system to limit major fluctuations in should avoid getting directly involved in eco- domestic prices principally for grains, pigs, nomic activity. Local rural organizations and poultryanddairyproducts. Since Poland willbe nongovernmental organizations (agricultural close to self-sufficiency and will switch from chambers, the Church, foundations) can play an imports to exports, domestic price fluctuations important role, particularly in information will be induced by world market price fluctua- transfer and training. tions and, more important, by the f.o.b.-c.i.f. differential. In addition, small farmers under- Changing the role of government going modernization and specialization will need relatively stable prices. Social reasons also MARKET REGULATION justify price stabilization. Border measures will play an important role in such a policy. The Government will always be called upon to in- temptation to remonopolize part of the trade to tervene in market regulation. The case can be avoid inter-Polish competition, which may made that, until the transition period is over, sometimes occurin such asituation, is dangerous domestic marketsbeingimperfectandmonopoly and not justified by the relatively small size of forces still existing in the country, government the export sector compared to the domestic intervention is necessary to provide some degree market. However, minimum export prices can of stability and predictability to prices both for be imposed at the borders to prevent Polish commodities and credit. Interventions should exports at unnecessarily low prices. be designed to promote responsible actions by Modern trading techniques used in national the private sector, avoid the creation of unjus- and international trade are not developed in tified rents, and limit open-ended and Poland. Financial matters must be separated unsustainable budgetary commitments. The fromphysicalpossessionofassets. Forinstance, interventions and protection granted by OECD traders should hold certificates of ownership or countries to their agricultural sectors are often supply contracts, not grain or oil. Introducing given as examples for Poland. It should be those modern techniques and setting up a sys- remembered, however, that Poland's industrial tem for buying and selling such certificates are and service sectors are notyetgeneratingvalue- essential steps for developing trade in Poland; it added surplus that can be transferred to agri- is the indispensable complement of the culture. Similarly, the capacity of urban dwell- privatization drive and of the modernization of erstopayhighfoodpricesisseverelylimited. In Poland's banking sector and accounting and such circumstances, lasting protection over av- auditing profession. A speedy modernization of erage world prices cannot be sustained finan- the Commercial Code, making it compatible cially. Such interventions also distort produc- with the laws, regulations and practices in force tion patterns. The basic rules to follow should in Poland's tradingpartners, is urgently needed. be as follows: SOCLAL INTERVENTION * avoid direct state intervention in buying, storing and selling commodities in favor of ne- One of the most important roles of government gotiable financial instruments and deferred istoprovideasocial safetynetforthoseadversely purchasing contracts. Avoid price fixing, which affected by economic adjustment and those who creates state purchase obligations if the private cannot benefit from new opportunities for job sector does not buy above the level fixed; creation or self-employment. Such a safety net * make sure that budget transfers for price is beingdeveloped by the government, and there stabilization mechanisms are explicit and de- is little to add here, except concerning the fol- cided ex ante; lowing: 14 o As stated previously, it is advisable to sepa- favoring, through noncoercive means, the rate the provision of housing from employment transfer of farms; and welfare centers, which contract, and to distribute, under favorable arebeing createdinthe countryside and citiesto terms, the present stock of state farms' and channel financial aid, in-kind help and food aid; state enterprises' housing; all these channels are appropriate and need 4 S: cial benefits over and above the public only to be developed. norms are often distributed by firms on an ad hoc basis. It would be desirable to have those AGRICULTURAL RESEARCH regrouped progressively into national or regional schemes, again to avoid the dispersion of ac- Research has a major role to play in helping tivities inside enterprises. In any case, when farmers increase productivity, find new oppor- enterprises have to adjust to the new economic tunities, and catch up with other countries. The conditions, they are likely to reduce social ex- agricultural research sector is large (six central penses to be competitive. It will be a serious laboratories, 16 institutes, 90 substations, and economic and social loss if the infrastructure 80testingstations). Itemploysmorethan8,300 created is not managed to the benefit of the people and appears to be overadministered and community at large. underfunded. Polish scientists are of a high B Assistance is justified for those who are less scientific and technical level, and have achieved able to adust to the new economic circum- important scientific results. The major con- stances. The government has introduced un- straints seem to be the following: employment compensation and special centers to deliver food to the poor and unemployed. * lack of a comprehensive agricultural re- Food distribution to, or income supplementation search policy; of, the poorer segment of the population can * lack of coordination and duplication in re- in crease overall demand for agricultural prod- search because there is no central management, ucts, since the poor have a high marginal pro- such as an agricultural research council; pensity to purchase food. This form of assistance * inconsistencies in financing (all research is is technically preferable to general food subsi- program-based) have produced distortions in dies, which tend to distribute benefits both to long-term research; those who need it and to those who do not. Its * the Ministry of Agriculture and Food budgetary costs can be defined in advance and Economy (MAFE) system is too dispersed and kept under control. Thetargetpopulation needs lacks integration and focus; to be clearly identified, and the distribution well * research has been until now largely pro- focused on intended beneficiaries only. Several duction-oriented, geared to large state farms ways exist, including: food stamps, which were and cooperatives. This has created an increas- envisaged by the government in the fall of 1989 ing gap between actual and potential yields. and have been successful in other countries, The system is not attuned to economic analysis; school and pensioners feeding programs, and * major gaps exist in research coverage; direct distribution to the neediest. The assistance * linkages between research and extension of philanthropic organizations in identifying need reappraisal and reinforcement; target groups and in distributing food would * scientific salaries and operating budgets greatly help the government, reduce its costs are very low by world standards, thus promot- and increase the distributional efficiency. To ing a dangerous brain drain, and most of the avoidcreaatingopen-endedentitlement,benefits equipment is obsolete. Core funding of key shouald not be given for fixed periods of time and scientific salaries is essential to promote conti- renewable. They should be financed by ex ante nuity of effort. budget allocations. Poland does not merely need an adaptation of Welfare mechanisms to implement a social existing agricultural production techniques, but policy already exist in Poland. They are: unem- afundamentalrealignmentofagriculturalpolicy ployment benefits included in the Labor Fund with emphasis on private farms and on eco- (of mlimited duration); the social security sta- nomic efficiency rather than maximizing yields. tus of farmers, which is presently undergoing Research will be essential to find solutions to revisiontoensurepensionandhealthcarewhile those problems at the conceptual level and to 15 develop more cost-efficient methods of produc- between Polish scientists and foreign research tion. Additional investment in basic science is institutions; unnecessary atthis time as Polish science should * structure training efforts for institute staff, first adapt international findings to its own especially to bridge major disciplinary and needs. Significant economies and increases in subject matter gaps; efficiency are possible if a significant reordering * institute an award system for demonstrated of research resources is carried out. The main research achievements, particularlyfor evidence recommendations for immediate actions are the of adoption and impact rather than for academic following: publications. * shift the emphasis of research policytoward Given the present inefficiencies in the system, economic efficiency at farm level. Examples are: the above strategy can be substantially achieved efficient use of inputs, minimizing pollution by reallocating existing resources and rede- hazards; more responsive crop varieties; more ploying staff. It is expected that the national efficient feed conversion factors for livestock; cost of agricultural research would decrease, integrated pest management; all production but its contribution to farming would increase. research should involve an assessment of eco- nomic response levels. Research on the social AGRICULTURAL EXTENSION acceptability of technical findings is essential; is reinforce MAFE procedures for policy for- The existing extension service (WOPR) is inef- mulation and resource allocation to agricultural ficient, fragmented, and uncoordinated. Like research by creating a policy-making and the research system, it is geared toward maxi- management unit to coordinate the national mization of output and production targets, and system through the establishment of a national not efficiency. Extension mostly disperses its agricultural research council under a deputy activities into larger production units, analogous minister; to state farms. Overall, itis mistrusted, particu- * establish sound procedures for evaluating larly by small private farmers. However, the research proposals before their submission to rural sector is now subject to dramatic shifts in the National Scientific Research Council for farm input/output price relationships which funding; generate great uncertainties regarding farm * develop a blueprint for a more rational management decisions; these shifts will bring structure of agricultural research; differentpressurestobear on different groups of * initiate new research programs as a com- farmers. In these circumstances, there is a ponent of an agricultural research policy, with great need, for an effective extension service, the aim of closinggaps in crop research, economic capable not only of passing information to farm- evaluation, animal feeding, and environmental ers, but also of informing the research estab- management. lishment about problems at farm level. The government is considering a proposal to For the medium term, actions to be taken are transfer ownership of extension to farmers as follows: through the Chamber of Agriculture (COA) at voivodship level. The proposal seems fraught * establish a new regional research organiza- with problems, principally regarding: tion based on well-equipped centers in each of the country's seven main agro-ecological zones * the mixing of public and private funds, and to replace the uncoordinated mass of more than the private system for disbursing them; 200 substations; * the dominant role that large farmers will * strengthen technology transfer by improv- play in these COAs, which may perpetuate a ing linkages between research and extension. lack of attention to smaller farmers' problems; Extension should not undertake research on its * possible conflict of interest situations; own; * the risk that the COAs will become self- * update scientific and management compe- serving, profit-making organizations with little tence, to meet the new knowledge and changing relevance to the needs of the majority of farm- technological and socioeconomic dynamics. Im- ers. prove exchanges and networking arrangements 16 Although the concepts of coordinating public The consequences ofthe above strategy would and private sector activities and increasing be that: farmers' influence over advisory agencies are sound, the present plan to entrust extension * The government and the voivodships would responsibilities to the COAs needsto be critically be faced with the responsibility of retrenching reviewed and modified. The following is recom- the number of staff. The remaining staff would mended for the immediate future: have to be fully funded by government. * Technical assistance would be needed for a * Extension shouldimmediatelyberedirected variety of tasks. toward efficiency and awayfrom achievement of * Commercial farmers could expect better high production targets. No production target farm management advice and more efficient goals should be issued. diagnostic facilities, but at full cost that they * Extension staff should be retrained toward could possibly offset against taxes. Smaller business orientation and efficiency of farm farmers would have greater interaction with management, using technical assistance. AUR staff, whose performance evaluation cri- * Performance criteria should be designed teria would be geared toward more farm effi- and published on the basis of an identification of ciency. All farmers would gradually increase theserviceneedsofrepresentativefarms. Tech- their influence over extension through the Ag- nical assistance will be needed. ricultural Advisory Board and the Chamber of e WOPR advisory functions should be sepa- Agriculture. rated from its production units, which should then be treated as state farms. The advisory Financial and technical assistance from bi- service should be renamed to reflect its new role lateral and multilateral sources is likely to be and break with the past (suggested name: Ag- available, often on a grant basis, to support ricultural Service Agency, Agencja Uslug reforms of the research and extension system. Rolniczych(AUR)); * Staff levels at the AUR level should be Developing rural institutions: reviewed. A ratio of one advisor to 250400 cooperatives and rural financial systems farmers, depending on the region, seems appro- priate. TheAURshouldbesupportedbyappro- Two sets of rural institutions are particularly priate budget commitment, and operating critical for the future of the rural sector: the budgets must be kept at a proper level vis-a-vis cooperatives and the rural financial system. It salaries (65:35 seems appropriate). is essential to envisage their transformation to make them responsive to the evolving needs of For the medium term, the recommendations agriculture. cover the diversification of extension activities to respond to the needs of almost all rural AGRICULTURAL COOPERATIVEs communities, notonlyfarmers. Also essential is the revision of agricultural school and univer- Initiated in the middle of the 19th century, sity curricula to emphasize farm economics and primary cooperatives are an important part of ruraldevelopment. Itwillbenecessarytoreview the economy, contributing about 11% of GNP AUR operations and develop a full cost assess- and employing almost 2 million people. Coop- ment to permit phasing over the longer term of eratives figure prominently in agriculture: they full-cost payment for agricultural advice and channel consumer goods and production inputs service. The AUR should be coordinated at in rural areas; they serve as purchasers as well voivodship level by advisory boards of farmer as processors of 60% of agricultural products; representatives, government agencies and pri- and they controlled until recently the entire vate agribusiness. The AUR may need dairy and most of the horticulture industries. reequipping to allow it to perform efficient Cooperatives collectively hold the largest assets analysis and diagnostics. Finally, it will be in rural areas. In the absence of an active necessary to study the operation of the Cham- private sector, and also to make sure that they bers of Agriculture in appropriate Western are not entirely dependent on a few traders, countries (Spain, Austria), and test the validity Polish farmers, like most farmers in Western of the approach in Poland. Europe, generally recognize the need to keep 17 nt1.;r *zopeyative organizations, principally for tives are business enterprises requiring capital pr ,cuII Ie- t Mf inputs and sale of products. and needing to generate profits for members. '_9'nnsau-v sooperatives were mostly controlled The duties and responsibilities of members, ov the >-,ave over -he last 45 years. They were management and workers should be well de- no_ e-teT -,,e.;,edbusinessorganizationsand fined. Wide consultation with the successful 't Z-3 7 teVJ were regrouped into regional cooperative systems of other countries is rec- -,n _ightly controlled and op- ommended. Assistance of international agen- erane_l the'; state, While they often enjoyed cies in formulating legislative proposals should m?71 opoli s, cooperatives were heavily taxed be sought. nake involuntary contributions to In the interim period, there is need for a cocpe-rti-*g$, .lnions. Large portions of their cooporative policy declaration to address the I Sf V?l F- eC. allocatedfor socialpurposes. But mosturgentissuesfacingprimarycooperatives, to accumulate significantassets, to establish the cooperative restructuring or- U7Rere members' initial equity con- ganizationnmditsregionalteams,andtoprovide '--ame insignificant. The result was the basis for establishing cooperative service Wht. rt b zoo. eoratives owned themselves and centers. Redesigning the unions' liquidation - ^ -1e fi7m of soeialized property. and restructuring process and establishing co- kBE Z "';:iiesX- rAt.ltc,eeeiasbusinessenterprises. They that require professional input from local and -C7nsbine,rest---ct -redtoincreasetheirefficiency expatriate consultants. The offers of many _=<: e -aLVAe tbein to respond to market signals international and bilateral donor agencies and and n-embers' needs, protect members' rights nongovernmental organizations to provide co- a- t eneeurage efficient management. Many operative business consultancies on a grant 1Me.rPetives have already embarked on this basis should be immediately explored. patl,' aned increasing competition is developing bet-+.-e agrig'eultural cooperatives. Coopera- RURAL FINANCIAL SYSTEM t.e com.npared with other market players, in- clui ng state and parastatal enterprises, are The financial system will play a crucial role in eelatively advanced in reacting to the new eco- the transformation toward a market-driven nom c.. on.d.iions. economy. Since the creation of a two-tiered ot ofie liquidation of regional and banking system, the development of the bank- cen'>ral inions, the cooperative system has been ingsectorhasprogressed steadily. The National decap-tated. Training, management advice and Bank of Poland (NBP) has assumed full central auditing thas stopped. The Supreme Coopera- bankingfunctionswhileitscreditactivitieshave tive Co,-ci could play a major role in the been transferred to nine regionalized commer- estcibllih.~ment of regional cooperative service cialbanks. Allbanksarenowallowedtooperate ,nIeviers to sei7e primary cooperatives. Aside in all sectors. So far, 26 licence applications for . :j^Ii -e tco ntributionsofprimarycooperatives new commercial banks have been approved by foD semyices rendered, this apexinstitution could NBP. identit ources of funds to continue these vital Major distortions in the previous economic services. One possibility would be the sales system prevented efficient financial interme- proceeds of some of the assets of cooperative diation. Depositrates were higherthan lending LUiOnsO External financial and technical assis- rates; the difference was subsidized by the gov- tance should also be explored. In the medium emient. Credit was allocated, which meant terme, the functions of the cooperative service that the use of deposits was restricted. Interest canters would be taken over by new cooperative rates have now been liberalized and real inter- unions freely established by primary coopera- est rates are no longer negative. The policy tives. adopted is to eliminate preferential interest New cooperative legislation is urgently needed rates although there still remain pockets of to ensure the revival of an efficient and truly subsidized programs in agriculture. Subsidiz- private cooperative system. This legislation ing agricultural credit would be a major con- shoulddensuxreindependenceofcooperativesfrom straint to developing the financial system and government intervention; cooperative principles would have many negative consequences. s I-, Te reaffiTmed, recognizing that coopera- The demand for credit has declined precipi- ,P,2 tously because of high nominal interest rates Furthermore, they have little experience in en- since the beginning of the year. It appears that terprise analysis. the supply of funds is adequate to meet this In view of their separate histories and their reduced demand. This, however, is a temporary different sets of clientele, it seems likely that situation and it is expected that credit demand BFE and the CBs will evolve into separate will grow to meet the requirements of restruc- structures. Withits base ofclients andbranches, turing and modernization of enterprises and of BFE should focus initially on its traditional anexpandingprivate sector. Itisthusnecessary clients in the social sector and seek to meet the that the capacity of financial institutions to full range of their financial needs. It should perform financial intermediation be strength- analyze its loan portfolio, recapitalize, and de- ened. A major effort will be needed to generate velop a business plan. It should also undertake resources through deposit mobilization if agri- a major institutional development program. cultural production and investment are not to There are various options for developing the be unduly constrained by a shortage of credit. Cooperative Banks system, but the best would It is indispensable to integrate the rural fi- be the development of regional apex banks as nancial system with the financial sector. But, full-service banks independent of the govern- despite rapid progress in the financial sector, ment. These banks would expand the lending the Bank for Food Economy (BFE) and Coop- capacities ofCBs, increase deposit mobilization, erative Banks (CBs) will remain for some time and promoteregional development. They would as the dominant financial institutions in rural also have access to NBP refinancing facilities. areas. These institutions provide 23% of total They would assist in upgrading and computer- credit. The BFE has experience in lending to izing accounting systems, provide training for large state and cooperative enterprises through management and staff, coordinate retention of a network of 95 branches. However, the BFE external auditors and perform other support has certain limitations: little experience in risk services for CBs. There are now various initia- analysis and no experience in lending to the tives to form such banks. The Supreme Coop- private sector. It is overly dependent on NBP erative Council should take the lead in helping resources, which constitute 60% of loanable the CBs federate into such regional cooperative funds. banks. The CBs have a widespread membership of The capitalization of CBs is presently very about 2.5 million people; about 75% of the low, at less than 1% of total resources. Addi- members are farmers and the rest are artisans, tional capital is needed to allow individual banks employees ofthe social sector, and otherresidents to operate satisfactorily in the new environment of rural communities. There are 1,660 CBs, and meet the capital requirements of regional which are the onlyfinancialinstitution providing banks. In the short term, CBs need to obtain both deposit and credit services to the private additional capital from their members. Many sector in rural areas. Some have traditions have initiated this process by raising the value datingbackmore than a century. Itis estimated of shares from the lowlevels resultingfrom past that about two-thirds of deposits of private indi- inflation. The payment of dividends providinga viduals were generated by CBs. positive real return to shares would aid this After a long history of state control, CBs also effort. In the medium term, CBs might consider have major weaknesses. The BFE was imposed requiring borrowers to contribute a small per- as their apex organization. As a result, they centage of their loans to equity. were able to lend only 40% of the deposits they These measures would strengthen the rural generated and the rest were siphoned off by financial system and enable it to mobilize do- BFE and lentto the social sector. Over the years mestic resources to meet the credit demand for of government control, CBs were not permitted investment. This would strengthen the credit to accumulate capital, resulting in a situation delivery system ofbanksinthe shortterm, move where their equity base became insignificant, toward a financially viable position in the me- thereby placing their financial stability in a dium term and eventually achieve financial very precarious position. The financial resources independence. of CBs are large if taken in their totality. But individually, they cannot meet the equity re- quirements for medium-size and large loans. 19 TRANSFORMING THE AGRARLAN STRUCTURE * A state land holding agency should be orga- nized, perhaps through the reorganization of Farm structure is likelyto change-slowly over the State Land Fund. The agency should re- the next five years, then at an accelerated pace. ceive all land (as well as other immovable as- A decline in the number of small farms is to be sets) previouslybelongingto state farms, and be anticipated, mainly through the retirement of empowered to divide, lease, and sell, by public their owners and part-time farmers finding full- auction or negotiation. It should be entirely time work in the nonfarm rural economy. How- self-financing. Incentives should be given to ever, it is neither likely nor desirable that this managers to encourage the sale of land. The decline in farm numbers take place in the early land now belonging to the National Land Fund part of the decade as the overall restructuring of that is not of adequate agricultural quality or the nonfarm industrial and service sector is does not find a buyer or lessee should be con- likely to create extensive unemployment and solidated into regional land and conservation related social dislocations. This will put pres- managementagenciesforconservationpurposes, sure on the rural sector to act as an employment in both grass or, in appropriate cases, forestry. sponge, and delay theneeded structural changes. Grazing and forest cutting should be limited to Thus, a strategy for adjustment and land own- environmentally sound practices. ership restructuring is proposed, especially for * Farmland belonging to the National Land the partial breakup of the small or bankrupt Fund (or to the land holding agency, if one is state farm or cooperative farm sector. This created), should be first offered for sale or lease strategy is phased to take the labor absorption to farmers in the vicinity, through an auction or need into account. bidding system. Several changes are required in the short * To assist land consolidation, which is in- term to legalize and improve on the functioning dispensable to allow productivity increases, of the private land market and to foster legal modestly expanding the present program of transfers of public land to the private sector: land consolidation to 100,000 ha per annum is recommended, with improvement in adminis- * eliminate the 100-ha administrative re- trative efficiency and addition of a Global Posi- striction on private sector holding ceilings. A tioning System (GPS) computer mapping facil- substantial increase in the limit should be per- ity. Poland should study the experience accu- mitted if it is felt that complete removal of mulated by the French SAFER (Soci6t6 pour ceilings would lead to short-term inequities; l'Am6nagement Foncier et le Remembrement), * permit farmland to be purchased or leased which has successfully conducted large-scale by anyone, rescindingtherequirement offarmer land consolidation in France. Assistance from qualification. Such a restriction is not justified SAFER could help define the best approach for in a market economy where the acid test of Poland. For conservation and reforestation financial success will soon return farmland not programs, linkages to the Bureau of Land productively used to the market. This should Management and to the Forest Service in USDA enable individual workers and firms to acquire or equivalent offices in Canada would be profit- freehold or long-term leases on farmland and able. enable persons, especially younger farmers, to * A review of forestry and land conservation gain entry into farming; issues should be undertaken without delay to * establish modern regulations for leasing define a strategy for those subsectors. farmland to protect equally the interest of owners and renters, to encourage renters to invest in Sector-specific strategies their farms, and to provide for divestiture by the state through leasehold transfer of land now AGRICULTURAL PRODUCTION managed by state farms and production coop- eratives; The present situation * consideration should be given to introduc- ing a land tax aimed at promoting productive Significant progress has been made in the last use of land. 10 years in crop production. Cereal yields have Other restructuring measures should be un- increased 37%, rapeseed 69%, sugar beet 17%, dertaken in the short term. and potatoes 105%. However, considerable scope 20 remains forfurther improvements in productiv- the best animal husbandry skills; such farms ity, for raising product quality and for increas- are essential elements in the future develop- ing cost-effectiveness by greater attention to ment of livestock and especially dairy develop- economic efficiency. It may be misleading to ment in Poland. draw inferences as to Poland's future yield po- ThelivestocksectorplaysakeyroleinPoland's tential simply by comparing current Polish lev- agriculture. It provides nearly half the value of els with those in other European countries, agricultural production and half of agricultural especially Western Europe, because Poland has exports, uses 70% of all domestically produced more difficult soils and climate and a very dif- grains, and is the main source of cash income for ferent agrarian structure. Nevertheless, dif- well over a million small farmers. In addition, ferences in productivity within Poland between Poland's 10.5 million cattle, 20 million pigs, 67 the favored state farms and relatively neglected million poultry, 5 million sheep, and 1.4 million private farms confirm that overall yields could horses provide critically important organic fer- be much higher. tilizer and the essential power for many small- With good crop husbandry, yields of all the farm operations. With livestock, as with crops, major cereals could be increased within a few the genetic base for improvement is good, but years by at least 15-20%. The major constraints there is scope for improvement in nutrition and are low levels offertilizer use and lack of adher- for better feed conversion that should facilitate ence to the optimal agricultural calendar, par- economies in concentrate feed utilization. Bet- ticularly to recommended sowing dates. There ter management of pastures and fodder con- is good potential for root crop improvement: servation should both raise the quality of feed yield increases over the next three to five years and reduce costs of livestock production. of at least 20% in potatoes and 10% in sugar beets do not seem unrealistic, provided essential Farm profitability. A preliminary analysis of inputs can be secured. An augmentation in farm profitability, using mid-1990 prices and rapeseed yield of at least 10% should be feasible costs, suggests that a small private farmer can through improved plant nutrition, timely field make a living equal to that of an industrial operations and crop protection. There is good worker. Below about 10 ha, farm size is less potential for further improvement in vegetable critical than either the choice of agricultural yields, which is likely to come from expansion of activities, the soil type, or the quality of man- greenhouse and plastic cover technology, and agement. Pigs are by far the most profitable better crop protection, in combination with im- enterprise at present and dairy cattle the least proved agronomy. rewarding: increasing the number of cattle on a Apart from triticale, attempts to introduce farm has no beneficial effect on profit. An new crops (sunflower, soya bean, hybrid maize) analysis of 18 typical farm models clearly shows have had little success. While this does not that the most successful farms are those that mean that attempts to diversify the agricultural combine satisfactory levels of productivity with economy should be abandoned, it suggests that cost containment. This confirms the need for for the immediatefuture Poland should continue research and extension to pay more attention to to capitalize on its comparative advantages by efficiency and cost-saving rather than yield reinforcing research and extension on wheat, maximization. Farm modeling is an indispens- triticale, rapeseed, potatoes, grain legumes, able tool for modern farmers. However, models fodder crops (including maize), and horticul- are only as good as the data available and must tural crops while striving to improve its consid- be up-dated to match the movements of the erable area of poorly managed permanent pas- market. Extension services should be equipped tures. with the necessary facilities to help farmers The typical small Polish farm has evolved into make decisions in a climate of economic uncer- a balanced combination of crops, livestock, and tainty. family labor, well suited to low-input risk aver- sion technology, but not well equipped to cope Major areas of untapped potential with the demands of market-driven modern agriculture. Medium- and large-size farms (5- Coping with natural constraints. Crop yields, 40 ha) are generally highly mechanized, have and the productivity of grazing livestock, are the best genetic quality livestock, and possess depressed by inadequate drainage and soil 21 acidity over much of Poland. Investment in wider use of herbicides and seed treatments their alleviation both benefits yields directly could have a high payoff at relatively low cost and has an indirect multiplier effect through (weed populations are high and only about 50% improving responses to plant nutrients, widen- of cereal area received seed treatment), and that ing the crop range, and facilitating access to possibilities ofcombiningherbicide and fertilizer land for mechanization. However, more rapid application and introducing integrated pest progress implies improving machinery for management practices should be explored. drainage and lime spreading, and closer atten- tion to the economics of these practices. More Mechanization. There is also considerable attention may also be needed in the longer term scope for reducing costs without reducingyields to mitigating climatic constraints by means of through more effective mechanization. On irrigation andthe wideruse ofplastics, especially nonmechanized farms, labor costs are higher for horticultural crops. The introduction of and timeliness of practically all farm operations more quickly maturing crop varieties, changes is more difficult to achieve. Thus yield losses are in cropping systems, mechanization to facilitate higher than on mechanized farms during the more timely field and harvesting operations, growing season and at harvest. Poland's ineffi- and improvements in drying and storage, es- ciently designed and poorly serviced machinery pecially on small private farms, can also con- also leads to higher farm costs and reduced tribute to this objective. An approach along yields. Large state farms and private farms are these lines is consistent with the goal of in- already well mechanized; small private farms, creasing efficiency through reducing losses. however, have been neglected until recently, both by the farm machinery industry and by Raising the efficiency of input use. Fertilizer research and extension services. As a result, application in Poland is not well balanced in there is a shortage of appropriate modern trac- terms of the elements applied, mainly due to tors and equipment and a serious lack of spares weaknesses in formulation by manufacturers. to maintain machinery, much of which is old There are also large regional differences in and in poor condition. Priority must be given in levels of application. Evidence as to the opti- the immediate future to designing or importing mum economic levels ofuse is lacking, reflecting machinery that meets the requirements of such serious weaknesses in economic research farms, and lparticularly to promoting contract throughout Polish agriculture and the produc- operations on smaller units of land. In addition, tion-oriented mentality in the socialist sector. agricultural land tax policy should be used to Much remains to be learned before the real stimulate amalgamation of holdings and con- potential contribution of fertilizer and lime to solidation of plots, which would help achieve agricultural growth can be determined, but it economies of scale in farming. appears considerable. This knowledge has to be related to specific agro-ecological zones of Po- Animal feed. For the livestock industry it is land and farming conditions, rather than to clear that rationalizing the feed industry and broad national averages oradministrativeunits. improving supply management and markets Inflation and the removal of subsidies have are essential to intensifying smallholder animal increased input prices sharply and farmers have production and enhancing economic standards cut back on their use. Cutbacks have extended of production on medium-size farms. For crop to seeds, most significantly to seed potatoes, production, the upgrading of processing which represent about 25% of potato production standards is no less essential. For example, the costs. Spraying against potato blight has also expansionofrapeseedproduction ofdomestically been reduced, and the repercussions on future processedhigh-value concentrate feedis limited yields could be serious. Sales of certified cereal by lack of processing capacity; similarly, seeds have also fallen, which may have serious inefficient industrial extraction of sugar from implications for future yields and quality. beets negates the benefits expected from In Poland little information is available to breeding for higher sugar content. show how costs could be reduced without reducing yields. Privately sponsored research Areas for action suggests that considerable economies are feasible in tillage and seeding practices, that Because of Poland's lack of strong comparative 22 advantage in export crop production, the present year. Stricter quality standdards nei as t3 be strategic orientation toward the supply of basic introduced for feed producfion units. !iTnpove- foodforthepopulationandprovisionoffeedstuffs ment in product quality and mark.eting Will be for animal production should continue. About essentialtomakePolishlivestoc '-preducts fmore 70% of crop production (including cereals and competitive on world markets and livestock potatoes) directly or indirectly supports livestock production must be backed up by more efficient production, and the rest is essentially used in input supply, marketing and support seirvices. human consumption. Whether these propor- In particular, research on livestock h-usbandry tions should remain or whether there should be and pasture management requiires greater em- changes should be determined entirely by mar- phasis: current allocatioris do not reflect the ket decisions. Crop area and production targets importance ofthe livestock sector eltleux socnally should not be prescribed by the state. or economically. In technical terms, the following actions are To avoid the well-known pericdic fliatiih.i3as recommended: in pigpopulation and prices, it s sug tbat an industry-financed and -managed ui sta- * concentrating cereal development mainly bilization program be introduced, by irnposing a on intensification of wheat and triticale; levy on all animals slaughtered. The -keference * expanding the production of double-zero price should be tied to the world 1uk. e. rapeseed, accompanied by a corresponding ex- Such price stabilization metbods WO-I w ell in pansion of crushing capacity; other European countries. * concentratingpotato production on the most suitable agro-ecological areas; improving genetic Environmental issues. Polis- a1 w, is resistance to potato blight; not a major contributor to r,ural enivr * raising the efficiency of sugar extraction degradation. Farm chemical tse IrL d is frombeetsbyintroducingdifferentialpayments about 20% of levels applied Der ha i to producers based on sugar content and im- tries. Industry is by far the gre alsest Sos-au ce of proving factory processing standards. Con- rural pollutants. There is no effectve!egsla- comitantly increase breeding efforts for higher tion on the use of restricted pn 9dutis acai-Oice- yields and sucrose contents; ment of laws related to the use of such prcdvcts. * double (at the least) the grain legume area, Also, there appears to be no enforceinent of iaws notably in private sector farms, in order to regarding the disposal of older, u-nTused or provide more high-value vegetable proteins for deregistered pesticides and pestio Vie r *oiitain- human and animal consumption and to improve ers. Asfarm chemicaluse expands inthe co-miing soil structure and fertility; decade, it is critical that Poland estaibhish a code * improving grassland management through of conduct to ensure that pesticide repealations better research, crop nutrition, and introduc- are brought to international stanclards, and tion of appropriate harvesting and conservation that imported and locally produced farra chemi- techniques; cals meet international standards for -registra- * exploringthejustificationforincreasedpro- tion, both on crops grown for do-mest>Eic Iccn- duction of some of the more important minor sumption and for export. Training sIhoTuld be cropshaving either export or export substitution undertaken in careful pesticide use by fr:armers. potentials, such as malt barley, hops, tobacco, Initial efforts in integrated pest management flax, and hemp; and biological control need to be expanded. * increasing small-farm production of vegetables, flowers, fruits, and berries, to supply Agricultural marketing increased domestic and export demand. The crucial importance of the agriculturral mnar- Livestock will remain an integral part of keting and processing system for te Polish farming; diversification and intensification of economy and for the agricultural production livestock production should be encouraged, es- sector has already been mentioned. This sector pecially on small farms, and greater production is mostly owned by the state and cooperatives efficiency encouraged on medium-size farms. (principally the former unions). Its present The major constraint to livestock efficiency is inefficiencies (poor resource allocation, long de- the provision of quality feed throughout the pendence on large and increasing subsidies that 23 rewarded loss-making enterprises, monopolis- aim is to facilitate development of a comprehen- tic-monopsonistic organization, low-quality sive market information service and rational production, absence of responsiveness to mar- spot, forward and futures market exchanges ket signals) have also been reviewed. The struc- throughout the food chain. Information should tural causes have been identified and recom- be collected and disseminated to all players. A mendations made to start reforming the struc- specific and detailed study is essential and ur- ture through rapid change of ownership struc- gent. Local retail market facilities should be ture, modification of management systems, and encouraged and inspected for public hygiene. rapid privatization. Those measures are to be Finally, market exchange facilities at the pro- complemented by more specific actions and ducer/primary wholesaler and processor level policy decisions applying particularly to the must be established and encouraged. These sector. activities require public investment (at state In addition to forcing the enterprises to make and local government levels), but the operation the structural changes mentioned above, the of the market should become self-financing. following actions are necessary to increase Marketing services should be developed. Nei- competition: ther the state nor local governments should involve themselves in the direct operation ofthe Antitrustregulation shouldbe designed and market system - their intervention should be implemented. Competitive conditions should limited to the regulatory level. Direct opera- be monitored; this should extend at the regional tions are the responsibility of the professionals level and throughout the food chain. An anti- and of their associations. The establishment of trustlawhasbeen introducedbythe government, interprofessional organizations (IOs) by major an agency is in place, and the agricultural sector commodities, as exist in the Western countries, is at the top of its priorities. It needs reinforce- should be encouraged, and for this, appropriate ment and technical support to work efficiently enabling legislation may be necessary (models and rapidly. can be found in Holland, France, Germany, or d Barriers to entry should be lowered to en- Belgium). 9hose IOs should help establish hance competition. This can be achieved by quality standards and provide market analysis encouraging joint ventures, establishing a new andinformation services to their members. They cooperative law, and making special provisions can organize storage and transport. They can for new entrants. The latter is justified by the also play an important role in the organization importance of the food sector, the nature and and promotion of exports, replacing the present magnitude of the existing barriers, and the fact Foreign Trade Organizations, which restrict that privatization of the existing enterprises competition, discriminate against other players may not, without additional measures, increase and suffer from conflicts of interest when they competition, but rather help create private mo- are also importers or exporters. Those organi- nopolies. Small- and medium-scale enterprises zations should be fully privatized and prevented could be given temporary tax concessions and from monopolizing their activities. It is impor- help to get access to finance through the estab- tantto separate marketingpromotion activities, lishment of a business development fund pro- to be undertaken by the 1Os, from trading, viding partial guarantees once banks have ac- which is the responsibility ofthe traders. Public cepted the feasibility of an operation. The fund support for the export-marketing drive is useful could also provide technical assistance to the to help establish the reputation of Polish prod- new entrepreneurs and to the banks. ucts abroad. Finally, lOs can play an important * No special concessions or treatment should role in market regulation, not only through be given to established enterprises, particularly their information and advisory services, but to state and cooperative ones. also through interventions financed by the pro- * Competitionfromimportsshouldbeallowed fession itself (and thus budget neutral). in some product areas, while taking appropriate Development ofhuman resources is a particu- measures to protect against dumping, in agree- larly critical need, since one of the worst eco- ment with GATT regulations. nomic legacies of the previous regime is an absence of people trained in commercial opera- Measures should be taken to improve mar- tions or having the right attitude toward the ketinginfrastructure and institutions. The main exigencies of a market economy. A coordinated 24 program for the development of the food indus- heavy discount when exported. try shouldbeprepared, and technical assistance The economic stabilization program has ex- from foreign countries will be essential. These acerbated those problems by dramatically re- programs should be targeted at young middle ducing the subsidy on milk products, which managers. Development ofbusiness school edu- dropped from US$1 billion in 1988 to about cation has high priority. US$70 millionin 1990. The remainingsubsidies Rational investment should be encouraged in were applied to low-fat milk and stimulated the the agrifood sector. Many opportunities for production ofbutter. The liquidation ofcoopera- efficiency-improvinginvestmentswillbe created tive unions, hitherto responsible for stock once the structural changes are implemented. management and financing, has obliged pri- There might soon be a lack of funds to finance marycooperativestofindthefinancingfortheir those investments. It might be advisable to stocks themselves. The interest rate policy consider retaining tax concessions to facilitate adopted at the beginning of 1990 confronts and encourage self-financing. Enterprises not butter-producingprimarycooperativeswithhigh yet privatized should not have automatic access interest charges at the same time that their low- to those concessions until they demonstrate qualityproductcanonlybesoldatpricesthat,in their ability to manage theirbusiness profitably. terms of milk equivalent, are only one-third the price paid by dairies producing cheese, skim Furtherresearch. Thefollowingareasdeserve milk products, and other exportable products. further examination: These low prices threaten the solvency of the dairies and specialized dairy farmers, who may * detailed description of the structure and be forced to sell their cows. Those farmers have channels of distribution and ownership; the best genetic stock and hold the future of the * detailed examination of comparative ad- Polish dairy sector. If measures are not taken vantage, and particularly up-to-date assess- rapidly, the present distress sales of butter on ments of strategic marketingopportunities; this world markets at severely discounted prices is work requiring specialized expertise not will continue, resulting in butter shortages available in Poland; during the winter season. * review of the market information require- The Polish dairy industry's strengths are in ments of the sector and the establishment of a the husbandry skills of its farmers and the formal market reporting and service agency; excellent health condition and genetic potential * exploration of the feasibility of establishing of its herd, which are at par with other world more commodity exchanges in the Polish food producers; in addition, the sector benefits from chain. low labor and energy costs. But food demand projections and comparisons with other Euro- The special case of the dairy sector pean countries suggest that domestic demand for dairy products will not regain the levels of Theimportanceofthedairysectoriswellknown. the 1980s before the end of the century, al- With a production of over 15 billion liters (19% though product mix will change. Predicting of agricultural GDP), the sector is the main export market possibilities is difficult given the source of cash for more than 1.1 million small protection afforded to their producers by the farmers. The dairy industry employs 110,000 OECD countries; but with the present quality peoplein 712plantsspreadovertheruralareas. and processing technology of the Polish indus- The sector suffers from extreme fragmentation try, only modest prospects exist. of production (average delivery per farmer is 12 The strategy proposed is, after a necessary liters at more than 10,000 assembly points). stabilization period of a few months, to steer the Dairy equipment is largely obsolete, and it pro- industry toward the production of a full range of duces a very narrow product mix. The price quality products, to enable the industry to hold structure gives very low importance to quality, the domestic market and export as opportuni- no importance to protein content, and limited ties arise while providing a viable income to a premium to winter milk. Finally, quality en- maximum number of farmers. forcement is inadequate, with only 30% of milk Forthe shortterm, industryconfidence should collected actually qualifying as class I. Polish be restored and distress sales prevented. An dairy products are of low quality and suffer a inventory of available stocks and their quality 25 should be taken, and the government should will bring the price of milk in a range nearer to guarantee a price level to exportable quality Zl900/liter(generallyassumedtobe the present butter that would increase from the present production cost of milk), improve quality, and levelto8O%oftheworldlevelbynextspring. On reduce the price discount for Polish dairy the basis of present world prices, this means a products in the world market. The emphasis on guarantee of US$1,000 per ton equivalent by quality would tend to exclude smaller producers March 1991. The guarantee would cover the who could not afford the cooling equipment. difference between the domestic price in March Similarly, the milk pools will tend to exclude and the guaranteed price. The price guarantee producers in low-density areas; a number of would increase the collateral value of stocks and dairy plants will become redundant. facilitate their financing. The state guarantee In the medium term, rationalization of the would be dependent on: industry should continue around the milk pools. At the end of the 2-year collection exclusivity * dairyindustrysassurancethatanewpricing given to regional dairies, new entrants should structure increasing the premium for quality be let in the market to develop niche products and decreasing the premium for fat is imple- and markets and maintain the competitiveness mented; of the industry. A study should be undertaken * the scheme being valid only until 1991; to prepare an industry-wide stock management * implementation by the industry of a quality and export system. The milk subsidy should be improvement scheme. abolished; it could be replaced by measures such as distribution of milk to schools and vulnerable Dairy industry restructuring should start population groups. immediately and strive to achieve economies of scale, product flexibility, and better sales and Postscript: Addressing the present export organization. For this a regional ratio- surplus production crisis nalization is recommended to create a dozen or so milk pools by amalgamating dairy coopera- The 1990 grain harvest is only a few weeks tives. Temporary (2-year) collection exclusivity away. The flush season for milk is in full swing. could be granted to accelerate the process. The food industry, still monopolistic and man- Legislation may be necessary. Technical assis- aged as before the reform, is not yet obliged to tance will be needed to help organize the milk compress its margins to face competition. The pools, plan for regional organization, and con- farmers, who went out of debt in February 1990 vince farmers and financiers that the plan is when interest rates increased and became vari- workable. able, have not borrowed since then and have by The industry should move as fast as possible now exhausted their stocks of inputs; they need toward higher quality standards. Change in to replenish them for the next planting season. price structure, a well-targeted investment pro- Yet they do not know at what prices the coming gram, and an extension effort will be necessary. crops will be bought, and much less what the Strict enforcement of international standards pricesfor nextyear's crop will be. Milk producers should be introduced. Those dairies not com- are unable to obtain remunerative prices for plying with quality standards (particularly re- their product. At the same time, dairies are garding milk contaminated with antibiotics) choking on a glut of unsalable butter they can- should be excluded from government support. not finance. Dairy farmers have started selling Strict suspension rules should be applied to cows that are uneconomic to maintain, and the producers. An investment program to improve present glut may, by winter, become a shortage chilling facilities on farm and other on-farm of milk and butter. Pig production seems to be improvements and improvements to the dairies the only large-scale activity st-ill doing reason- and stock management facilities should be de- ably well. signed with the banks. A dairy export promo- The government is asked by farmers to inter- tion board should be created, and export coordi- vene directl;y to correct those problems and nation mechanisms reviewed. Particularly, the substitute itself for the apparently failing mar- role of the present export agencies should be ket system. It is pressed to reintroduce price-, reassessed. marketing-, and even income-guarantee It is expected that the above set of measures mechanisms. Grain stocks are still large be- 26 cause ofinventory carried overdue to lastyear's farmer but still below world markets. The bumper crop, and commodities from imports newly established Agricultural Marketing and food aid. The shortage of capacity to dry and Agency could offer such contracts. This system store the incoming grain harvest could create a could lead to the establishment of a futures problem of crisis proportions. The government market for grain in Poland. A solution along is urged to guarantee the purchase of grain and those lines is being considered by the govern- commit itself to open-ended financial support. ment. The impending agricultural crisis threatens the * Forbutter, a similarcourseisrecommended, very objectives of the economic reform program, including resistance to calls for fixing prices at since a relaxation offiscal discipline may restart cost-plus levels. Dairies should be offered de- inflation. ferred purchase guarantees at prices slowly In the course of its work, the Polish-EC-World increasing to about 80% of world market level by Bank Task Force was confronted with current March 1991; they should use these contracts as problems, andits advicewas soughtonmeasures collateral to borrow from banks to finance their to alleviate the present crisis. The most press- stocks. ing problems are being faced in: * The process of liquidating the enterprises formerly ownedby the cooperative unions should * grain purchases; be suspended and amended. A cooperative * milk and dairy restructuring; restructuring organization should be created to ^ credit policy; manage and restructure these cooperative en- * cooperative union liquidation. terprises. While the Task Force did not fully examine all Agriculture is acrucial sectorin most countries, the subtleties and ramifications of these prob- and probably more so in Poland. Today, it is not lems andis not privytothe negotiations between an exaggeration to say that agriculture holds the government and the farmers, it has looked one of the keys to the success of Poland's eco- into these issues and can offer the following nomic transformation. The path to a reformed, recommendations: efficient and market-driven agriculture will be difficult. Old habits, mentalities, and structures * An amendment to the present credit policy, must change if Polish agriculture is to catch up particularly regarding the predictability of in- with the rest of Europe. The sector needs far- terest rates, is essential for farmers. No farmer reaching reforms and structural changes that will borrow if interest rates remain as variable will be beneficial to most, but onerous to some. as they have been since the beginning of this Polish farmers can certainly cope with this situ- year. If interest rates remain too high, they will ation and even take advantage of these changes stronglydiscourageborrowing. Itisduringthis if the country pursues the right policies. To period that farmers make their planting deci- define these policies, a strategy is as essential to sions and replenish their stocks of inputs. It decision-makers as a map is to the traveller in appears that the govemment has already de- unknown territory. But, unlike a map, a strategy cided to freeze interest rates for this year. needs to be adjusted from time to time, and * It is urgent to negotiate with Poland's food modified according to experience gained from aid donors to obtain a relaxation of the interdic- success as well as from failure. The Task Force tion on reexporting grain in order to provide hopes that this document will contribute to the space to dry and store the 1990 grain harvest process of mapping out the future of agriculture with the existing facilities; in Poland. * Purchasing grain at guaranteed minimum Endnote fixed prices should be avoided at almost any cost. Rather than trying to manipulate supply This report was written by Claude Blanchi on and demand through an import-export policy, the basis of the documentation, data and analy- Polish farmers and traders should be provided sis prepared by the Task Force. incentives to store the grain in Poland. For this, it is proposed to create deferred purchase con- tracts, with a guaranteed price at six or nine months calculated to be remunerative for the 27 Annex 1 The macroeconomy and agricultural adjustment Normally, when middle-income countries em- agricultural sector as illustrating the initial bark on major policy reforms of the successes of their programs and argue that macroeconomy - real devaluations, liberaliza- these successes will soon spread to the rest of tion of prices, reductions in inflation, and trade their economy. liberalization - agriculture prospers. The real But this has not been the case in Poland. devaluation of the exchange rate raises the Although the reform program is still new - price ofall tradeable commodities in comparison prices liberalized in August 1989 and with nontradeables. Since agriculture produces macrostabilization in January 1990 - there largelytradeable commodities, this devaluation existfewindicationsthatsuccess willbe achieved raises relative agricultural prices while lower- in the next several years, unless there are sub- ing the costs of labor; agricultural producer stantial additional reforms. Agricultural incen- incentives are thus boosted. Liberalization of tives have declined significantly despite rela- prices eliminates the implicit taxation of farm- tively high international commodity prices, a ers coming from price controls that normally massive devaluation, and price and trade liber- foster urban consumption. It also allows a alization. Despite inflation having fallen dra- relative price adjustment between various com- matically, resulting in a more stable real interest modities, permitting farmers to use resources rate, farmers and merchants have failed to more efficiently, andthusraisingtheirincomes. borrow. Stockholding has become entirely in- Reductions in the inflation rate reduces uncer- voluntary, a result of being unable to sell pre- tainty in prices and should lower real interest viously acquired stocks. Many agro-industries rates, permitting stockholding and on-farm in- are suffering from high debt, exacerbated by vestments to be less costly and risky. Finally, large stocks of unsold commodities and low trade liberalization allows domestic farm prices throughput. As a consequence, Polish agricul- to be linked more closely to world prices, expands ture is in crisis. markets for agricultural commodities, and The purpose of this annex is to analyze why lowers input costs. Polish agriculture is not responding positively In many countries, these macroeconomic re- to the economic reforms, to suggest a short-term forms have resulted in agricultural growth that strategy for alleviating the farm crisis, and to has exceeded growth in other sectors. While present a medium-term strategy reliant on a construction may suffer or import-substituting private agro-industrial sector. To do this, the industries endure the adjustment costs of the annex is divided into five parts. After this transitionto more exportorientation, agriculture introduction, the second section describes the responds quickly and normally booms. Govern- macroeconomic crisis and its effects on agricul- ments initiating these reforms can point to their ture. The third section presents three options 29 for dealing with the short-term farm crisis. The The government had then inherited in the fall fourth section addresses the medium-term of 1989 an essentially bankrupt economy - strategy, in particular the role of privatization unable to service its debt, in macroeconomic and trade. The fifth and concluding section free-fall, and with a state sector outside of its summarizes the elements of the economic control. It had few options. Over 40 years of strategy and draws some broad conclusions. communist rule had culminated in a rigid eco- nomic structure in macroeconomic ruin. The macroeconomic crisis and The new government decided to launch a stabilization critical two-pronged attack on the unstable economy. In the first part of this strategy, the The government that took power in September government attempted to gain control over the 1989 faced an extremely difficult economic situ- budget and prepare for the next phase by mak- ation. Inflation was accelerating at triple digit ing someinstitutional and legal changes, mainly rates, fueled in part by a massive budget deficit introducing unemployment compensation and equal to 8% of GDP. External debt amounted to bankruptcy procedures. On January 1, 1990, 80% of GDP; debt servicingwasfive times export the second phase of the program was launched. earnings. Growthhadstagnated,withpercapita The crux of this phase of the government's income now lying below 1978 levels, while gov- program was a standard IMF-type stabilization ernment expenditures had grown by over 30% package - fiscal and monetary restraints, a in real terms in the last decade (see Table 1.1). wagefreeze,andamassivedevaluationfollowed Complicating the macroeconomic situation by a fixed nominal exchange rate to serve as a was the structure of the economy. Over 70% of nominal anchor. The stabilization package was the industrial sector was owned by the state. designedtobringdowninflationrapidlyandput Exports were canalized by a few large enter- pressure on, inefficient state enterprises. With prises that had survived on massive export budgetary constraints in place, the government subsidies. But even more critical was the nature expected that the market would select inefficient of decision-making in these enterprises. In state enterprises for bankruptcy and initiate 1981, the Polish Parliament gave wide powers the rationalization of the state sector. Unem- to the workers' councils, among them the power ployment was expected to rise, but this could be to hire and fire management. Management and viewed as a sign of the success of the process- laborhadmergedintoanexplicitcollusion,with enterprises would be trimming labor costs by the government, the nominal owner of capital, reducing employment levels and controlling having lost control of costs and production while wages. With improvement in efficiency and it retained the ultimate obligation to fund the reduced costs, the cost-push part of inflation losses of these enterprises. Because of large would be brought under control. Following subsidies to state enterprises and a substantial macroeconomic stability, the real adjustments fall in revenues, the fiscal deficit reached 29% of in the economy were expected to follow through budget expenditures in the first half of 1989. a gradual process of enterprise restructuring. Table 1.1 Evolution of the economy, 1978 - 1988 Change / Change/Macro variables Per capita Household survey data Per capita (%0) (%) Gross domestic product -4A Real income of farmers -3.1 Domestic absorption -8.6 Real income of farmer/workers -1.1 Consumption 0.7 Real income of workers -24.7 Government expenditures 31.7 Real income of pensioners -16.9 Gross fixed investment -29.3 All households -19.9 Year % Farmers' income as a percentage of workers' income: 1978 90.8 1988 116.9 30 Agriculture's role in this stabilization pro- Januaryto 24% in Februaryto about5% in May. gram was envisaged to be three-fold. First, it Budgetary controls andincreasedrevenues (from was expected to respond rapidly to the new severalreformsonenterprisetaxation)produced incentives. It was anticipated that agriculture, a budgetary surplus, projected to be between 1 being largely a private sector (about 75% to 80% and 3% of GDP. Monthly interest rates followed of arable land is held by private farms), would the decline in inflation, undershooting inflation follow the incentives of higher relative prices in January but becoming real and positive in and deliver food to urban areas at prices closer February by 14 to 16% and falling to 1 to 4% in to world prices. Although higher food prices May. The massive devaluation in January of would mean drops in real wages, these would be about 100% (compared with the December rate) moderated by the increased availability of both held: zlotysbecame readily convertible in Poland greater quantities and varieties of food. Fur- and foreign exchange reserves expanded. Driv- thermore, the hidden costs of food - waiting in ing the foreign exchange accumulation was a long queues - would be eliminated. Second, contraction in imports and a rapid expansion of agriculture was expected to boost exports, eas- exports (imports contracted dramaticallyby 27% ing pressure on the balance of payments. Al- and exports expanded by 14.5% from convert- though export subsidies were eliminated, it was ible currency areas in the first five months of expected that about 80% of remaining exports 1990). would be competitive at world prices. Further- But there were also signs of trouble (see Table more, the devaluation of the real exchange rate 1.2). Real wages fell dramatically by 40% in the would compensate for the loss of export subsi- first quarter of 1990. Output declined by 30% in dies. And finally agriculture would hold back the socialized sector (29% below its level in May rural-to-urban migration and perhaps absorb 1989)1. Food expenditures rose from about 39% some of the unemployed from the industrial to 55% of total expenditures (compared with the sector. With about 50% of the small-farm popu- first four months of 1989), reflecting the im- lation being part-time farmers employed in lo- mediate pressure offood price rises onhousehold cal state enterprises, a more prosperous agri- real income. Unemployment, however, did not cultural sector was expected to absorb part of increase as expected. By the end of April, these displaced workers. unemployment stood at only 2.6% of the labor force. Only a few enterprises had declared THE ACTUAL ouTCOM0 OF THE STABILIZATION bankruptcy. Nevertheless, real debt was in- creasing rapidly by 12% in March, 18% in April, By most macroeconomic indicators, the stabili- and 3% in May (see Table 1.3). Also, there were zation program was a great success. Inflation variousreportsoflengtheningdelayedpayments crumbled under the stringent monetary and and of indebtedness between enterprises. It fiscal restraints from a monthly rate of 79% in appears that the restructuringprogramhad not Table 1.2 Industrial production" and unemployment, 1990 Jan Feb March Aprl May Jan /June Changes in percent -28.7 -31.5 -31.9 -31.9 -28.6 -30.1 with respect to the same month in 1989 Changes in percent -10.1 -14.2 10.5 -8.6 3.5b over previous month Total registered number of unemployed ('000) 65.8 152.2 266.7 351.1 443.0 Percentage of work force unemployed' 2.0 2.6 3.3 a. Output sold by socialized sector. b. Correcting for different working days, the increase in May is zero. c. National work force calculations; do not include employment in agricultural sector. Sourem GUS data. 31 Table 1.3 Bank credit to public enterprises, 1990 (billions of zlotys) Dec Jan Feb March April May Total nominal 30.6 31.79 39A5 46.09 58.78 63.5 percentage increase in month 3.89 24.10 16.83 27.53 8.03 Total real 30.60 17.80 17.83 19.89 23.47 24.14 percentage increase in month 41.83 0.15 11.59 17.96 2.89 Percentage change in real credit since 1/90 0.15 11.74 29.70 32.59 Source: Calculated on figures supplied by National Bank of Poland. yet hit the state enterprises-labor was largely industrial output comes from agro-industries, being retained and enterprises were holding on which in turn are dependent for 90% oftheir raw despite the magnitude of the macroeconomic materials on domestic agriculture. The agricul- adjustment. tural sector is thus more important to the The signs of problems with the macroeconomic economy than its economic size would indicate. program were most evident in the agricultural When the economic program began, the agri- sector, where the greatest successes had been cultural sector was highly protected and subsi- hoped for. The very strengths of the agricul- dized. From 1986 to 1989, food subsidies ranged tural sectorthatweretoleadtoits success-its from 3.4 to 4.8% of GDP (see Table 1.4). Al- largely private nature and its ability to respond though part of this subsidy was nominally for quickly to incentives - rapidly brought forth consumption, it was in part brought about by the difficulties facing the macroeconomic ad- high producer prices. For example, producer justment program: the inability to achieve sta- prices for wheat during the late 1980s ranged bility and a supply response through macro- from 10 toi over 30% above equivalent border economic policies when the real structure of the prices. For the state sector, which produced economy remains distorted and economically most of the marketed wheat, the price support concentrated. Table 1.4 Agricultural subsidies in terms THE EFFECT OF THE ECONOMIC PROGRAM of GDP, 1986 - 1990 ON AGRICULTURE (percent of GDP) Agriculture in Poland is a small sector, con- 1986 1987 1988 1989 1990(est) tributing only about 12% of GDP, so it would Fod 3.5 8.4 4.8 3.8 0.2 appear at first consideration that agriculture Meat prod3CtS 0.8 0.8 1.4 1.2 would most likely be affected by the economic Chicken 0.1 0.0 0.1 0.1 program but would not in turn influence the Fish products 0.1 0.1 0.0 0.0 program's success. But this is turning out not to Milk and be the case. The effect of the economic program milk products 1.6 1.4 2.1 1.6 is straightforward. With the domestic marFlour 0.7 0.9 0.9 0.4 iS straightforward. With the domestic market Sugar 0.0 0.0 0.1 0.1 consumingabout87% ofagricultural production, Vegetable oil 0.2 0.2 0.2 0.2 it is not difficult to foresee that the macroeco- Baby food 0.0 0.0 0.0 0.0 nomic program and the resultingsharp recession Milk bars 0.0 0.0 0.0 0.0 could significantly affect the market for farm Agro-inputs 1.1 1.0 0.9 1.3 0.3 products and hence the sector's economic well- Fodder 0.4 0.4 0.3 0.0 being. But agriculture also has strong feed- Fertilizer 0.4 0.4 0.8 0.3 backs to the general economy through employ- Tractors 0.0 0.0 0.0 0.0 ment (28% ofthe work force) and through affect- Pesticides 0.1 0.0 0.2 0.0 ing the real wage rate (food expenditures range Credit to from 35to over50% ofall expenditures depending agriculture 0.2 0.1 0.1 0.1 0.1 on income class). Furthermore, about 20% of Total 4.8 9.5 5.8 5.2 0.6 32 was even higher - averaging about 50 to 60% gary and Yugoslavia, where farmers' income is above world prices. In the case of milk, the below that of urban workers by 4 and 20%, producer support was nearly equally generous, respectively).3 from 24 to 50% above world prices depending on This subsidization ended abruptly with the the year. As with wheat, the support was macro-stabilization program and the reduction concentrated in the state sector. This support of state expenditures. Food subsidies fell from through output prices was supplemented by about4%ofGDPin l989tolessthanabudgeted input subsidies for fertilizers, pesticides, and 0.2% for 1990. Agricultural input subsidies are animal feed at the rate of about 1% of GDP. to decline from 1.3% of GDP in 1989 to 0.3% in Credit subsidies also were provided to the agri- 1990. Furthermore, credit subsidies and export cultural sector. Furthermore, export subsidies subsidies were nearly eliminated. In less than were given for certain commodities at a rate a year, a once highly supported agricultural often half the value of the goods exported. sector (with support near Western European Aggregating these subsidies for the different standards) had been released to survive in a cropsresultsin whatis referred to as the producer deeply recessionary economy, still struggling to subsidy equivalent (PSE), or the total income establish a market economy.4 supplement offered farmers and the state farm Partly compensatingfor this near elimination sector. In the state sector for wheat, this PSE of direct subsidies should have been the de- constituted nearly 70% of the value of the wheat valuation of the exchange rate. The real ex- produced; for rye, about 50 to 70%; for sugar, changerate(thenominalexchangerate corrected about 50%; for rapeseed, about 40 to 50%; for for inflation) was devalued nearly 50% com- pork, about 40%; and for milk, about 40 to 80% pared with its 1989 level. If this devaluation (see Table 1.5).2 In other words, support for were to be transmitted to farm-gate prices, then agriculture and processing on a per unit value the net effect would have been a much more basis was about at the level of many industrial neutral adjustment in producer support. economies. Agriculture, especially the state But the price transmission did not occur - in sector, was sheltered andheavily subsidized. In part because of deliberate government policies 1988, average farmers' income exceeded that of and in part because of economic concentration urban workers by 17% (compare this to Hun- in agro-industry. With inflation running ram- Table 1.5 Producer subsidy equivalents (PSEs) (percentage) Wheat Rye Barley Beetsb Seed, Pork Beefd Milk 1988 Poland Private 34.2 28.1 32.0 State - - - EC 30.0 34.0 34.0 71.0 69.0 6.0 56.0 60.0 1987 Poland Private 47.1 48.1 58.7 31.0 43.5 - 39.1 22.7 State 67A 69.3 75.2 49.7 69.0 - 3.9 41.1 EC 66.0 63.0 63.0 80.0 67.0 5.0 46.0 68.0 1986 Poland Private 46.2 37.8 64.9 32.8 50.1 28.1 15.7 57.1 State 68.2 62.3 87.3 56.7 75.6 36.6 4.0 77.9 EC 63.0 66 66 76.0 67.0 5.0 50.0 73.0 a. Coarse grains used for ECs PSE data. b. Refined Equivalent of Sugar used for ECs PSE data. c. Soybeans used for ECa PSE data. d. Beef and veal used for ECs PSE data. Source Polish data calculated by the Foreign Trade Reaearch Institute in Warsaw. EC data published in AgricuturuZl Polices, Markets and Trade, OECD (1990) 33 pant, the cooperative structure in disarray (the by its food aid agreements to prevent reexport). cooperative unions were dissolved), and a col- For butter given as food aid, it cancelled its lapse in real producer prices, farmers withheld request and sought the substitution offeed corn. grains from the market in early- and mid-1989 But the crisis was now deeply imbedded in the (for the first nine months of 1989, agricultural sector. Meanwhile the flush season for milk supplies to cities were reportedly down by 30%). began and the grain harvest began to loom on The specter of a food shortage in urban areas the late summer and fall horizon. High nominal was of deep concern to the government. Exports and real interest rates made stockholding ex- of essential foodstuffs were prohibited and food tremely expensive, adding to the indebtedness aid urgently procured. With the blockage of of agro-industry. Dairy cooperatives, the potato exports, the arrival of food aid, and the sales of industry, feedmills, sugar processors, and part faTmers to the milling industry increasing (be- of the horticultural industry were particularly cause of the cooling down of inflation and rising hard hit. Farmers and some state farms, fleeing interest rates), scarcity quickly turned to abun- high interest rates and debt, quickly sold off dance. Exacerbating the situation was the de- durablegoodsandfarmimplements. Mostdairy clineindomesticfoodconsumptionbroughtabout farmers received only extremely low and de- by rising retail food prices and declines in real layed(sometimesformonths)paymentsfortheir inzic-e. Stocks of grains and milk products milk. Agriculture, the only largely private sec- accumulated and farm gate prices plunged. torinPoland,hadbeenbroughttoitsknees. But Because of low demand for agricultural inputs, to rescue agriculture through subsidies meant animal feed, and fertilizer sales also sharply openingthe floodgate of subsidization elsewhere declined. in the economy, since the austerity program Further aggravatingthe fall was thebehavior now was beginning to take hold in other state of agro-industry. Although on an economywide sectors. In a collective consciousness, state basis it appears that the grain industry (the managers began to contemplate the day of res- grain monopoly was broken up into 41 separate titution of their state enterprises by the govern- companies) and the milk industry are quite ment. Macroeconomic stability was being fragmented and competitive, at the local level threatened by the problems ofa relatively minor they are highly concentrated. Years of accumu- sector (in terms of GDP): agriculture. lated collusive behavior (encouraged by past governments in order to meet the objectives of a The short term (one year) - diminishing state-coordinated sector) continued after prices options were liberalized and most subsidies removed. The breakup of national monopolies created As the agricultural season proceeds, the local monopolies and a system of cost-plus pric- government's options are becoming limited. The ing continued. Instead of lowering prices to majorharvestcomesonceayear;thecowsreach encourage sales, agro-industry restricted their peak milk production during the summer throughput, raised selling prices and forced months when feed is usually abundant. When back on producers (through lower purchase the fall comes, the carrying cost of the herd prices) most of the industry's higher per unit increases and slaughter becomes a more operatingcosts. In May/June 1990, wheat prices prominent option. were at 60% ofthe border price; oilseeds at 80%; To deal with the farm crisis and the threat of pork at 70% of its export price; and cattle for itsintensification, thegovernmentbasicallyhas slaughter at 59% of the f.o.b. export price. The two options. One is to let market forces take ratio of flour to wheat prices rose from about 3 to their toll - some farmers go broke, many agro- 1 on January 1, 1990, to 6 to 1 by the end ofJune industrial enterprises sink deeper into debt, 1990. and eventually, as domestic supplies diminish, Heavygovernment support to agriculture had imports begin once again. Since c.i.f. import turned to indirect taxation through export con- prices are higher than f.o.b. export prices, trols, food aid, and oligopsony behavior. The prices to consumers, and possibly to farmers, government, recognizing the rapidly deepening will eventually rise. For consumers, the shift farm crisis, lifted the ban on most agricultural from f.o.b. to c.i.f. prices could add as much as exports except grains (where it remained bound 20% to the cost of food. For farmers, the results 34 in terms of farm-gate prices would be uncertain, development of a more transparent market that dependingon whether agro-industryfullypasses circumvents the local monopoly power of the on the higher costs of competing imported food state grain enterprises. Already the govern- to producers. But the adjustment is likely to be ment has established legislation (in May 1990) swift - a major realignment of the sector fol- authorizing an agency to intervene in the grain lowed in several years by a leaner agricultural market. This agency (Agencja Rynku Rolnego, sector with a sharply dual structure consisting Agricultural Marketing Agency) has been as- of subsistence farmers producing for their own signed the following objectives: needs and large farms producingfor the market. But this outcome may not result in an economi- * increase storing and drying capacity cally efficient sector. Market signals would be * increase competition in grain merchandizing distorted by the economic concentration ofagro- * stabilize grain prices. industry, causing an overreduction in the size of the sector and a distortion in the relative shares As originally conceived, the proposed agency of crops under production. would buy grain from qualified organizations; The second option is to intervene through clean, weigh, test, and dry grains; pay to have injecting lower cost liquidity in agriculture, the agency grain stored by qualified organiza- stimulating demand for some foods, circum- tions; and sell grain to processors, merchandis- venting the oligopsony strength of agro-indus- ers, and exporters. To fulfill these functions, the try, and possibly in an indirect way providing agency would establish purchase prices, qualify some subsidization for agriculture. In this way, storage facilities, finance investment in stor- the sector is brought through the summer and age, inspect grains at purchase and during fall and allowed to adjust at a slower pace. storage, and monitor market conditions. The The first option is relatively straightforward agency would have a governing council of 21 - hold the course and let the market bring seats, 12 of which would be held by producers, about a different agriculture. But the risks are processors and traders. Budget proposals call great - when the sector hits bottom, strong for 1 million tons of storage (transferred from political forces will demand once again subsidies the former state grain trust, PZZ) and an allo- for agriculture and direct intervention to raise cation of ZI 876 billion (or about US$87 million). agricultural prices. The prospects for the financial survival of the The second option is more complex, requiring agency are not strong. If the coming harvest is delicate management by the state. Its primary large, a rough calculation indicates that the dangeristhattbeinterventionsthatareintended agency is likely to generate large losses (unless to be short term - to get agriculture through the government bails it out) because of storage the immediate adjustment - stick and become costs and the inability to support prices when permanent and are viewed as an entitlement by the crop is large. Also, it is likely that storage farmers and agro-industry. The key to the losses will be high since those storing the grain second option is to intervene in a manner that do not have an incentive to preserve it (it is doesnotcreatepermanencetotheintervention owned by the state). Furthermore, by and ideally promotes the development of the overstabilizing prices (announcing a fixed pro- market. The short-term intervention options curement price), private storage will be dis- suggested have three elements: first, the pro- couraged (one incentive to store grains is price motion of market and price transparency and fluctuations) and budgetary costs could quickly inducements for private storage; second, the expand because the government has made a reduction of the uncertainty in real interest commitmentthrough the agencyto buy all grains rates; and third, the promotion of demand at a fixed spot price. through targeted food programs. However, the agency could fulfill its objectives without overly disrupting the market by alter- THE FIRST INTERVENTION OPTION - DEALING ing the way it operates.5 Instead of physically WiTH PRICE UNCERTAINT AND STORAGE procuring and storing the grain (or paying oth- ers to store it), the agency could reduce price The first of these interventions is for the grain uncertainty, encourage private storage, and add market. It is really an attempt to promote the competition in the grain market by creating a 35 forward market in bonded storage certificates.6 buy futures contracts) and the offset price (the Although the proposed alternative operations of price at which it will sell these contracts), it is theagencyappeartobecomplex,inessencethey able both to control its losses (losses would are relatively simple.7 depend on its pricing policy and how the spot The key to the alternative operation of the market develops) and to avert the actual deliv- agency would be the bonding of storage certifi- ery of grains. cates. Farmers or merchants would either sell To make the market more transparent and their grain directly at the going price or put it less arbitrary, the agency could state its futures into storage for later sale (when possibly prices prices in terms of US dollars, convertible to will be higher). If they place their grain in a zlotys at the official exchange rate. The futures bonded warehouse, they will receive a certificate prices could be directly related to the futures that guarantees that the grain will be properly prices trading in the Chicago Board of Trade, dried and of a specified quantity and quality. corrected by quality and marketing costs and The farmer or the merchant would be able to sell other discounts. By setting the discount, the this certificate or use it as collateral for a loan government could establish the subsidy for for a percentage of the current value of the grain grains in the country. The agency could sell the in storage (for example, 60 or 70%). The trading futures contracts to an exporter if it is necessary of this certificate would allow farmers to seek to remove excess stocks from the domestic mar- the highest prices for their grain among differ- ket. The agency and sophisticated traders could ent merchants or millers. hedge their price uncertainty in the Chicago To create a market for these certificates and to Futures Market.8 make their value more certain, the agency could Although the system appears complicated, for be set up to trade in these certificates. The thefarmer ormerchantitwouldbe rather simple agency could offer both a present price or spot - store grain in a bonded warehouse and then price and a future price for delivery of the grain decide whether to sell the bonded certificate of at some specific dates in the future. Instead of storage today or hold it for later sale or contract selling their grain, farmers or merchants could for delivery to the agency at a stated futures makeasalescontractwiththeagencyfordelivery price. The agency would be basically a trading of the grain at some specified future date at a agency in contracts for delivery - it could be a stated price (the agency would maintain a list of small office staffed by traders (such as those prices for future delivery). This sales contract who buy and sell foreign exchange for the cen- for future delivery would put a lien on the grain tral bank). Spot and futures price lists would be (if the grain is not delivered, the agency would publicized throughout the country to make the havealegalrighttoconfiscatethegrain)butthe market more transparent. If the government ownership and, hence, responsibility for the decided to subsidize the price it would do so storage of the grain would rest with the farmer through setting the discounts or premium from or merchant. The agency could resell the con- the Chicago Futures price (this subsidy would tract to a merchant (domestic or foreign) or appear through the losses of the agency). could sell back the contract to the owner of the There are several advantages to dealing in grain ataprice (the offsetprice) attractivetothe storage certificates and futures contracts over owner. In this way, the agency would never buying and storing grain directly. These are: have to take actual delivery of the grain. By acting in this way, the agency would be estab- * Ownership of the grains would be retained lishing a futures market in grains by acting as by farmers or merchants who have a stake in a market-maker in futures contracts. maintaining quality; Through these actions, the agency would be * Prices, both present (spot) and future, would facilitating the trade in bonded storage certifi- be known and publicized and related to world cates and establishing afutures price that would present and future prices; reduce price risk to storers of grain. Since the * Collateral would have been created that sales contract has a specified price, the sales would reduce the banking risks of loans and contracthas known value and could alsobe used hence lower interest rates on borrowing; and as collateral for loans. By daily setting the * Farmers would be able to hedge their price futures price (the price by which the agency will risks. 36 Bothalternativeoperationsoftheagencycould to exist for agriculture. Farmers can receive provide temporary price support through subsi- credit at fixed rates of 24% for six months (3.7% dies. Subsidization through futures contracts per month) and 36% for nine months (3.5% per would be more controllable, however, as the month). The government has allocated ZI 750 agency would have greater ability to offset its billion (about US$80 million) to finance the position in the market by selling delivery con- difference between these interest rates and the tracts. An additional advantage is that after market rates. In addition, counterpart funds about three years or so, the agency could be fromtheECareavailableat75%oftheprevailing transformed into an actual futures market with rate for small-scale production, trading, and private traders, rather than the agency, arbi- processing. Theremainingcreditavailablefrom trating the market. It should be noted that for the Bank of Food Economy is at prevailing rates both proposed operations of the agencies, it of interest, which are set monthly based on would be necessary to certify storage facilities anticipated inflation. Real rates on these funds and inspect storage. A trained field staff would were negative in January and February and be required for both operations. Furthermore, positive the months thereafter. storage wouldneedtobe separatedfrom milling, With high and variable real interest rates, with storage facilities and silos sold (preferably) only the stout of heart or the foolish carry stocks or rented to private merchants or cooperatives. financed through banking credit. Ifthe prices of the goods stored do notincrease near the nominal THE SECOND INTERVENTION OPION - REDUCING rate of interest, high losses will occur. Given REAL INTEREST RATE RISK that the monthly interest rates are currently at about 5%, miscalculation can be disastrous. Preferential interest rates have been largely Because the rates are variable based on antici- eliminated beginning in 1990, and banks have pated monthly inflation, the risks are even been allowed to set their own loan rates (see greater. Voluntary stockholding by traders Table 1.6). But two preferential rates continue under these circumstances will be very limited. Table 1.6 Monthly nominal and real interest rates, Jan-March 1990 Jan Feb March April May Nominal Central Bank discount rate 36.0% 20.0% 10.0% 8.0%Co 5.5% Demand deposits 7.09% 5.5% 3.0% 3.0cl 2.0%o 6-month time deposits 17.0% 13.0% 6.5% 5.0%l 3A% 1-year credit minimum 36.0% 20.0% 9.090 7.5% 5.0%o maximum 62.0% 23.0% 12.0% 9.5% 8.09o Bank for Food Economy 1-year credit 39.0% 20.0% 10.0% 8.0%o 5.5% 6-month credit 39.0% 23.0% 10.0% 8.0%90 5.5% Real, Central Bank discount rate 33.9% 14.0% 3.7% 1.4% 1.4% Demand deposits -48.0% 0.2% -2.9% -3.3% -1.9%O 6-month time deposit -43.1% 7.3% 0.4% -1.4% -0.6% 1-year credit mninimum -33.9% 14.0% 2.7% 0.9% 1.09%0 maximum -21.3% 16.8% 5.6% 2.8% 3.8% Bank for Food Economyb 1-year credit -22.0% -3.1% 5.1% 2.9% 0.5% 6-month credit -22.0% -0.7% 5.1% 2.9% 0.5% a. Real rates according to point-to-point index. b. Real rates according to average index. Source: Gazeta Bankowa, No. 27 1990. 37 But stocks must be held or exported. The THE THIRD INTERVENTION OPTION - harvest comes in over a short period while the SELECTIVELY STIMULATING FOOD DEMAND processing of the grain takes place over the entire year. If export controls are fully released It is generally accepted that the economic ad- on grain, it can be expected that stocks will be justment will be difficult, with unemployment quickly exported and grain imported later as increasing and real incomes falling. Already needed. In other words, stockholding will be food expenditures, especially among pension- effectively carried abroad, by those payinglower ers, have fallen in the first quarter of 1990. It and more certain real interest rates. can be expected that the austerity program will The problem for the economy is that exporting take a heavier toll among the less skilled and and importing both carry costs, represented by the old. Furthermore, in large families with the difference between f.o.b. and c.i.f. prices several children, the food budget could be se- (costs of transport, distribution, and insurance, verely hit with the result that older children are etc., cause price differences). Furthermore, dis- kept from school in order to find menialjobs. No tress exporting (as is currently seen for butter one set of programs can fully alleviate the suf- stocks) brought on by the high and risky costs of fering that could accompany a reform of the storing could find only low prices, below what magnitude that Poland is attempting. Some could be expected as normal f.o.b. prices.9 assistance to those less able economically to The government must then continue to defend themLselves in this adjustment is called maintain some constraints on exports of grains for. Already (since January 1990) the govern- and provide some additional incentive to hold mentisbeginningtoprepareassistancethrough stocks until real interest rates stabilize at lower unemployment compensation and special cen- levels.'0 The proposed agency, by offering a ters to provide food to the poor and unemployed. futures price, will provide an incentive to hold In this assistance, agriculture can also be stocks. But unless the futures price is above the aided by increasing the demand for food. Fami- costs of carrying the grain, including interest lies at lower income levels have a higher pro- charges, stocks will not be voluntarily carried. pensity to consume food; that is, for every zloty If PZZ companies are forced to hold stocks (they spent a higher proportion goes to food than at remain state enterprises), losses will accumulate higher income levels. Thus, supplementing the and at some future date subsidies may become incomes of low-income families increases food necessary. demand. One wayofsupplementingtheirincome Since the harvest comes once a year and at a is through food stamps, or coupons which can be time when great uncertainty still remains over spent only on food. The advantage of stamps real interest rates, it seems reasonable for the over direct income supplements is that there government to continue to offer a fixed nominal can be a higher propensity to consume food out interest rate for a period of six or nine months to of the implicit income transfer offood stamps. "1 agriculture and agro-industry. The rate of in- One option then is to initiate a food stamp terest should be set at a projected positive rate program targeted to the poor and other vul- but at one below what the market rate is cur- nerable groups. Stamps could be redeemable rently demanding (the monthly rate varies but for selected essential commodities in stores or has been as high as 30% real). To further induce through farmers markets. Stores and farmers stockholding, this interest rate could be offered receiving food stamps for the foods they sell to loans collateralized by the futures sales con- could redeem the stamps through banks but tract to the agency. Since banks receive secured only through direct deposit in accounts (for later collateral for the loan, some inducement to monitoring of abuses). In rural areas, these making the loan at lower real rates should be banks could be the cooperative banks. Stamps present. should also be made available to the vulnerable The government should make it clear that in rural areas, possibly through the Church, this preferential rate is a short-term offer, one charity groups or other social bodies (compensa- that is made to alleviate the current crisis, and tion and food stamps given only in urban areas one that will be withdrawn once real interest creates an incentive to migrate to the cities). To rates stabilize at lower levels. It should not be preventthe program from being an entitlement, viewed as an entitlement for agriculture or family eligibility for food stamps should be for a agro-industry. fixed period (six months, renewable depending 38 on circumstances). Stamps should be redeem- The medium term - two to five years able for a certain value of food (if based on quantity, then inflation could raise budgetary To describe the options for the medium term, it costs).'2 is necessary first to present a vision for the Another possibility is to initiate school feed- agricultural sector and to define in broad terms ing programs and expand pensioner feeding the role of the government in fulfilling this programs. Food could be procured from excess vision. To contrast this new vision (one largely stocks for direct distribution, again supple- held by the current government), the past ap- menting the demand for food. proach to agriculture needs to be presented These types of programs help to buffer the call first. forgeneralfoodsubsidieswhichtendtodistribute In the 1980s, the vision of agriculture held by benefits to rich and poor alike. By settingup the the government was one based upon income basis for target intervention, farmers and the parity and self-sufficiency. Farmers should be poor could be assisted. The key to success in the receiving prices that guarantee an income more targeting will be achievement of the maximum or less commensurate with urban wages. Fur- gain both in food demand and social welfare. thermore, imports and exports should be re- Since part of the purpose of these interven- stricted so that Poland would become food self- tions is to stimulate demand for domestically sufficient. This policy produced a highly dis- produced food, food aid should be limited. Ide- torted sector thatwas unable to follow its natural ally, food aid should be used to substitute di- economic progression - that is, one that would rectly for commercially imported food; that is, it produce a diminishing share of GDP with a should be part ofcommercial foreign assistance, lower portion of the work force (agricultural and not an instrument to impoverish farmers. employment remains extraordinarily high at To ensure this, food aid should only be accepted about 30% of the labor force for an agricultural for those commodities that canbe freely exported sector producing only about 12% of GDP). or imported without quantitative restrictions.'3 Poland in the mid-1980s, then, had an agri- The government should distribute the food aid cultural sector that was relatively large and atcommercialormarketprices. Thebestwayto employed more labor than countries of compa- ensure this outcome is to open the acquisition of rable real income per capita (especially if income food aid stocks to competitive bidding, instead of comparisons are made on a purchasing power the current system of distributing it to state basis). This large sector did not come about by controlled agro-industry for sale.'4 chance or through absolute advantage - All three options described above have rel- Poland's soils are only of moderate fertility and evance for both the short and the longer terms. its growing season is short. It came about by The (futures) agency, by dealing in futures con- conscious govermment policy to promote income tracts and encouraging private storage, pro- parity at nearly any cost through subsidies and motes the development of a viable rural market guaranteed prices. In fact, on a per unit of value economy supported by both spot and futures basis, subsidies, especially to the state sector, markets. The preferential credit line based on were equal to or higher than in the EC and the longer term (six- and nine-month) credits will United States. This highly supported agricul- become more the norm when inflation and in- tural sector now faces a new reality - that of terest rates stabilize; that is, the term structure market forces and world prices. The sector must of interest rates will naturally evolve to offering adjust; the only question is how quickly it can do longer term, fixed interest rate loans. And the so. food stamps and other target food programs are If other sectors of the Polish economy were not the safety nets offered by most industrial and in recession and such a desperate need to export some developing countries for their most vul- did not exist, then the adjustment in agriculture nerable groups. The interventions, while di- could be leisurely, with the sector allowed a soft rected at the short-term farm crisis, do not landing. According to World Bank estimates, unduly compromise the future by setting pre- the economy, after a decline in GDP of 14% in cedents of unlimited government support for 1990, must grow at a rate of 5 to 6%. Exports agriculture. In this way, these interventions must expand to 26% of GDP by 1993. For would support the medium-term vision and op- agriculture's share of GDP to decline at a rea- tions presented in the next section. sonable rate, agriculture would need to grow at 39 a rate of 3 to 4% per year. To meet the targets sponsive to market forces. In terms of factor on exports, agricultural exports would need to productivity growth, food processing ranked expand from about 12% to 25 to 30% of agricul- second to last in a sample of 17 industrial tural GDP."5 Most observers of Polish agricul- groups, with a decline in annual growth of 5.1% ture believe that such growth rates and export in productivity from 1978 to 1982 (see Table orientation are optimistic. 1.7). With the overall resurgence in output Besides the technical obstacles to raising growth between 1982 and 1985, food industry productivity growth to these rates, two other productivity growth became positive at 1.2% major impediments prevent the achievement of but still ranked second to last in growth. In such performance in agriculture. The firstis the terms of international comparisons of competi- state sector and its control of food processing tiveness(asmeasuredthrough domesticresource and inputs. The second is the external barriers coefficients), the food industry displayed the facing agricultural trade. least international competitiveness of all of Poland's industries (see Table 1.8).'7 In fact, the THE eTATE-CONTROLTE AGRO-INDUSTRIES AS DRC measure for food processing was negative, BARRIERS TO GROWTH indicating that the value of inputs exceeded the value of outputs when measured in world prices.'5 In Poland, the efficiency and productivity of Fieldvisitstoagro-industrial enterprises tended agro-industry is as critical to agricultural per- to confirm these numbers on lack of efficiency. formance as good farm technology and manage- Processing plants were generally a decade and ment. An estimated 75% of food is processed a half behind in technology. and almost all agricultural inputs come from This lack of efficiency shows up in other mea- domestic industry. Between these upstream sures. In a 1988 sample of 500 of the largest and downstream industries lies agriculture. Its state-owned industrial enterprises, about 10% farmers are dependent for their share of were found to be loss-making in the absence of wholesale food prices on the efficient and com- subsidies and taxes (see Table 1.9). Of this 10%, petitive operation of food processing and distri- about 90% were in the food processing industry. bution. Farmers also require high quality and Of other industries that made losses, about 70% low cost inputs such as seeds, fertilizer, and supplied agricultural inputs, animal feeds and other chemicals from their input suppliers. fertilizer. While part of this loss-making is Without the efficient operations of these in- attributable to price controls, major responsibil- dustrial sectors, agriculture is helpless and in- ity must also be assigned to the agro-industries' vestments in improving farm productivity are inefficiencies and antiquated technologies. nearly useless.'6 Beginning in August 1989, the government Unfortunately, agro-industry in Poland is began the liberalization of prices with the objec- grossly inefficient and, worse, generally unre- tive of allowing the market to determine which Table 1.7 Total factor productivity growth, 1978 - 1985 1978-1982 1982-1985 Best Performances (1) Precision instruments 2.7% (1) Precision instruments 6.3% (2) Pottery and china 2A% (2) Pottery and china 4.8% (3) Engineering 1.9% (3) Electrical engineering 4.4% (4) Metal products 0.7% (4) Engineering 3.6% (6) Wood 0.4% (5) Textiles 3.5% Worst Performances (17) Building materials -5.3% (17) Paper -0.5% (16) Food processing -5.1% (16) Food processing 1.2% (15) Wearing apparel -2.1% (15) Nonferrous metals 1.2% (14) Nonferrous metals -1.6% (14) Ferrous metals 1.2% (13) Basic metals -1.0% (13) Building materials 1.4% Source: Konovalov, 1989. 40 Table 1.8 DRCs and value added, 1986 Table 1.9 Loss-making enterprises in (millions of zlotys) 1988 Value Value Sample of 500 largest state-owned industrial enterprises added added Short Long domestic world run run Total number of loss-makers 56 Industry prices prices DRCs DRCs of which: Food Processing, 43 Metallurgical 15,411 5,785 1.15 4.00 of which: Electro- meat products 23 engineering 89,208 70,802 0.55 1.32 food-oil products 6 Chemical 23,581 18,786 OA1 1.25 poultry products 5 Mineral 8,981 9,177 0.49 1.05 grain products 5 Wood and paper 9,226 8,399 0.54 1.04 sugar products 3 Light 40,601 30,373 0.61 1.01 Food 6,048 -3,803 -1.47 -3.40 Other Industries, 13 of which: Grand Total 193,226 139,518 0.62 1.45 fodder production 6 Source: Konovalov, 1989. fertilizer production 3 a. Coal mining excluded. Source: Konovalov, 1989. enterprises are efficient and which are not. other industries, such as dairying, milling, and Unfortunately, the drive for efficiency through meat processing, the two-firm concentration price liberalization confronted another barrier ratios were lower (in the range of 2 to 20% of the - the oligopolistic structure of agro-industry market), but these low percentages concealed (see Table 1.10). Agro-industry is highly con- the regional oligopsony nature of the enter- centrated, at both the aggregate and regional prises. With transport difficult to obtain and levels. For example, in a 1987 sample, it was costs high, single buyers dominated many re- found that two enterprises had 47% of the mar- gional markets. Also, there is a strong possibil- ket in food concentrates, 41% in oils and fats, ity of collusive behavior among these state en- 51% in potato products, 30% in vegetable and terprises. Oneofthelegaciesofcentralplanning fruit products, and 30% in sugar products. In is that a large number of enterprise directors and managers are accustomed to formal and Table 1.10 Economic concentration informal economic coordination. ratios of state firms, 1987 To complete this bleak picture, it is necessary (fractios of tarete firms, 1to describe the response of enterprises to the (fraction of market sales) economic reform program. Despite a dramatic One-firm Two-firm Four-firm fall in throughput and increasing indebtedness Outputs of enterprises, only one agro-industrial enter- prise has gone bankrupt and few have signifi- Oilsoand fats 0.28 314 0.66 cantly reduced their labor force. With workers' Potats produfts 0.27 n.a. n.a. councils having the right to select and fire man- Fruit and vegetable agers and with the state still the nominal owner products 0.23 0.31 0.40 and thus eventually obligated to bail out failing Flour milaang enterprises, no manager has the incentive to Eggs and poultry 0.0 0.1 0.28 reduce his laborforce or for thatmatter close the Milk and milk products 0.02 n.a. n.a. enterprise. In many ways, price liberalization Sugar and sugar pro'Iucts 0.19 0.30 0.51 has contributed to the worst case scenario - inefficient oligopoly and oligopsony enterprises inputs pricing largely as they wish to compensate for Tractors 0.90 0.96 n.a. loweroutputandnotreducingcosts. Itisimpos- Fertilizer 0.22 0.43 0.73 sible to conceive of a vibrant agricultural sector Farm machinery 0.15 0.23 0.35 while it is hostage to such an uncompetitive and Animal feed 0.14 0.26 0.51 inefficient agro-industry. Source Rocznik Ststystyzny Pmemyslu, 1988. 41 DEALING wrrH UNcoMPErrrivE AND INEFFCIENT a clear owner financially liable for losses and STATE INDUSTRIES benefitting from gains, it is doubtful that in- vestment will be economic. The government in confronting this situation A variation of the piecemeal approach is to has basically two broad options: keep agro- privatize quickly all enterprises but on a com- industry in the state sector or privatize it.'9 pany-by-companybasis. Each enterprise ismade Economic theory says little about the benefits into a joint shareholding company with the arising from one ownership structure over the state initially the only owner of shares. The other but, auspiciously, experience throughout state would then sell off the shares to various the world with state ownership of agro-industry parties: workers, the public banks, etc. The has demonstrated that government ownership problem with this scheme is that the state simply does not work. Agro-industry, when would retain only the enterprises that no one dealing with such an economically sensitive wants to own while having divested itself of the product as food, is unable to withstand political profitable ones. Also, if employees or banks influence. Inevitably, prices are controlled by have controlling interest, the enterprise may be the state either directly through laws or direc- managed eitherto the workers'orbanks'benefit, tives or indirectly through more informal re- neither of whom may have the preservation of quests. Controlled prices lead to subsidization the assets of the enterprise at heart. and to the disincentives that come from know- The last suggested option is to create holding ing that the state is the controller of prices and companies initially to take control of the shares stands by as the ultimate source of financing for of a variety of enterprises; at the next stage, the losses. These observations on state behavior shares of the holding company are given or sold and the need for privatization are shared widely to the public at large with the state retaining a in Poland both by the government and the pub- minority and noncontrolling allotment of the lic.' The reliance on state enterprises is a shares. The public having now received shares legacy of the past; the only outstanding issue is is free to sell them to other parties as it wishes. how to privatize and with what speed. Equity sellingandbuying would lead to control- In privatizing agro-industry and, for that ling interests by various private parties. Once matter, other state enterprises, the government the shares have achieved value and manage- has three broad options: first, a slow piecemeal ment is under the control of private owners, the privatization such as Britain has been attempt- state can divest itself of its remaining shares. ing; second, a more rapid enterprise-by-enter- This method of privatization allows the state prise privatization; or third, a broad-based initially to reclaim control from the employees privatization based on holding companies or over the management of the enterprise, main- mutual funds.2' tain continuity in management until private In the piecemeal approach to privatization, ownership exerts itself, and then receive a re- enterprises are sold off to investors, to groups turn on its initially retained shares. The public such as workers, or to other enterprises. The also gets a share of the state enterprise pie in an essential determinantfor privatization ofenter- equitable distribution. The holding companies, prises is the market. As the market reveals then, control a wide variety of enterprises, some through bankruptcy which enterprises are not profitable and some loss-making. Based upon being managed properly, they are sold off to the private sector. The state remains the owner of enterprises that are competitive under a mar- ket economy while ridding itself of inefficient Table 1.11 The share of agrifood exports and badly managed enterprises. The process is in total exports then orderly and Darwinian. Unfortunately, (percentage shares) the process is also long and costly and subject to 1989 Jar, - May 1990 a major risk - the soft-budget option. Enter- Food Agrifood Food Agrifood prises that find themselves unable to compete Zone products products will attempt to rally political support in defense of their survival. The political temptation will Nonconvertible 1.6 2.0 1.5 1.3 be to continue to subsidize inefficient enter- Convertible 13.8 5.8 12.5 7.1 prises orinvestin their rehabilitation. Without Source: Annex 4. 42 its criteria of return to its private owners, the Table 1.12 Agricultural and food exports holding company can sell or close enterprises. mainly to hard currency countries, Eventually, the holding companies would be increasing share of EC countries dissolved with shareholders receiving directly (percentage shares) shares in companies under holding company 1975 1984 1989 ownership. Convertible zone 67.4 77.2 81.9 A MAJOR BARRIER TO AGRICULTURAL RECOVERY of which: -EXERNAL TRADE CONSTRAINTS EC countries 31.1 34.6 50.1 USA 12.1 12.8 10.5 Poland's farmers have two markets: the inter- soure Annex 4. nal market and the world market.22 The de- mand for food products in the internal market will largely be set by income growth; if Poland's January 1991, this trade will become convert- income per capita recovers quickly from the ible). severe recession and future growth is rapid, the Polish exporters also face the constraint of a domestic marketwill expand atarate much less highly concentrated export trade - five state than overall income growth. Because of the enterprises dominate agricultural exports. severe fall in incomes in 1990 and slow growth These enterprises are resistent to new competi- forecast for 1991 and some of the later years, tion yet continue to maintain old channels for projections indicate that domestic consumption trade and methods of doing business. Without of food will not reach 1989 levels until the year additional private sector competition in export- 2000.3 That is, farmers can expect that the ing, agricultural exports will remain confined domestic market's ability to absorb domestic and diversification in terms of both products farm produce will be limited; nevertheless, do- and markets will be hindered. mestic consumers will have to remain the pri- On the positive side, the real exchange rate mary market for most food output. has depreciated significantly, giving a strong The export market for certain products - incentivetoexport. However,inflationpersists, meat and fruits and vegetables - will remain and each day it appreciates the real exchange strong but will be limited by external trade rate (as long as the nominal exchange rate restrictions. Poland's agricultural exporters remains fixed), reducing export competitive- face variable import levies, quotas, minimum ness. The race is then between devaluations prices, and voluntary export restraints for most and an inflation rate that erodes export com- of its agricultural exports to hard currency ar- petitiveness, but eventually each feeds on the eas. These restraints to trade are particularly other. At a 5% rate of monthly inflation, incen- pronounced in the EC, which currently consti- tives offered by a 50% undervalued exchange tutes about 50% of Poland's agricultural export rate will evaporate in less than nine months market (see Table 1.12). Agricultural exportsto without further nominal devaluations. non-convertible currency areas remain small, about 1 or 2% of total exports to these areas. A STRATEGY FOR AGRICULTURAL EXPORTS Some expansion in these markets can be ex- pected as the Soviet Union adjusts its agricul- Agricultural exports are important to the pros- tural policies but, to say the least, the prospects perity of Polish agriculture - without growth in are highly uncertain (it is expected that in exports, farmers face a stagnant or only slow- Table 1.13 Oligopolistic position of foreign trade organizations (centralas) in agrifood import and export (percentage shares) Centrals Animex Rolimpex Rybex Agros Polcop TotWl Export 31.6 21.1 10.0 9.5 4.9 77.1 import 9.1 39.9 5.0 20.8 3.0 77.8 Source: Annex 4. 43 growing domestic market. Three steps are falling domestic food demand and high interest needed to expand and diversify exports.24 The rates. Overshadowingeventhesedifficultprob- first step is privatization of agro-industry and lems is the legacy of inefficient agro-industries export enterprises and the removal of all formal and lethargic export enterprises. Finally, many barriers to entry by new private enterprises. export markets remain constricted by protec- Without this step, exports will be bound by tionist policies of trading partners. Under such traditional ways of trading and new products circumstances, it is difficult to be optimistic and markets will be difficult to develop. The about the prospects of Poland's agricultural second step is political negotiation with major sector. trading partners for market access. The Euro- An additional danger that exists is a potential pean Community gave Poland GSP status, but overreactionbythegovernmentthat could exac- this concession, while cutting tariffs by 50% for erbate the economic situation - by imposing some products, still imposes quantitative re- price controls and guarantees, by creating state strictions (quotas are shared by other GSP enterprises to intervene in the market, by pro- countries so the concession is minimal) and vidinglarge subsidies and by enactingexcessive variable levies. Bilateral donors cannot just import and export controls. These interven- give financial and technical assistance to Po- tions taken at the height of a farm crisis could land; they must provide market access. Other- become the barriers to achieving a more effi- wise, it is equivalent to putting one foot on the cient economy in the future. accelerator while the other presses down hard This danger does not mean that the govern- on the brake. Poland cannot survive such con- ment should be inactive in addressing the cur- tradictory signals. It is hoped that the Uruguay rent farm crisis. Some actions have already Round of trade negotiations will make some been suggested: creating an agency to trade in progress in reducing trade barriers but this will futures contracts based on certificates of stor- beealongprocess. Inthemeantime,donorsmust age, providing incentives to store butter (see take a more favorable stance to market access Annex 21), providing longer term loans at fixed for Polish agricultural exports. nominalinterestrates(butatrealinterestrates), The third step is maintaining the real ex- and stimulating food demand through food change rate at a somewhat undervalued level stamps and clirect feeding programs for school (see Table 1.14). If the exchange rate becomes children,pensionersandothervulnerablegroups overvalued, then Polish farmers will not only initially harmed by the economic reforms. On face the barriers to trade outlined above, but the trade side, the government should continue will be confronted by an implicit export tax. It to maintain an attractive exchange rate for is unlikely that Poland can compete in the world exports and attempt to negotiate market access agricultural markets with this additional for its products. On the technical side, many handicap. suggestions are offered in the other annexes, Finally and most importantly, it must privatize. With output markets, external trade Conclusions and input supplies dominated by state enter- prises responding to noncommercial incentives, Poland's agriculture has gone from a highly it is difficult lto imagine a vibrant agricultural protected and subsidized sector to a somewhat sector. Because the problems of agriculture are indirectly taxed sector almost overnight. Be- intensifying -- the farm crisis is already upon sides this abrupt transition, agriculture faces a the sector - privatizing agro-industry must difficult macroeconomic situation resulting in occur soon and rapidly. Table 1.14 Effective real exchange rate, 1981-1990 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Real exchange rate 110.65 137.95 167.55 163.85 140.95 110.30 79.55 72.73 76.95 43.29(est) a. A decrease indicates depreciation. Sources: 1MF, World Bank. 44 Endnotes 8. See Annex 9 for qualifications and greater details on these operations. This annex was prepared by Odin Knudsen, assisted by Wales Mack. 9. This problem is described more fully in Annex 4. 1. These numbers may overstate the se- verity of the fall as production in the private 10. Some temporary licencing of exports sector is not recorded. wouldneedtobemaintained. Thelicensescould be auctioned or taxed to prevent excessive profits 2. Some caution should be exercised in for exporters. interpreting PSE numbers for Poland as the exchange rate is a confounding factor. How- 11. Although the income supplement from ever, if estimates of the real exchange rate food stamps is partially fungible, this higher from the World Bank and IMF are used to propensity is thought to originate because the correct the PSE numbers then the level of stamps are used primarily to supplement the subsidization actually increases for 1987 expenditures of the primary food purchasers and 1988 because these estimates point to an whotendtohaveahigherpropensitytobuyfood undervalued exchange rate (compared with than others in the family. Income supplements 1980) for those years (see Table 10.14). From are spread wider in the family and therefore 1982 to 1985, the exchange rate was follow more conventional intrafamily distribu- overvalued (compared with 1980); subsidies tion patterns. helped compensate for this overvaluation in those years. 12. See Annex 2. 3. In the first quarter of 1990, farmers' 13. Imposingtariffs on imports and exports income was 86% of workers' income. Caution would be all right since domestic prices would should be exercised in interpreting these then be equal to the world price plus the tariff ratios as other intangibles such as housing and with correctionsfortransport, etc., regardless of seasonality may not be uniformly or consis- the amount of food aid. Since domestic prices tently applied to the data. would be unaffected, domestic supply would not be discouraged. Of course, one of the assump- 4. This is most evident in the dairy sector tions implicit in this discussion is that compe- where subsidies reached nearly US$1 billion tition exists, an assumption that currently does in 1988, fell to US$70 million in 1989 and not hold in Poland. In later sections of this nearly disappeared in 1990. This sector con- annex, this lack of competition will be discussed tributes 19% of agricultural GDP and provides in more detail. an important source of cash to over 1 million small farmers. 14. Under the current system, state agro- industries sell the food aid on behalf of the 5. A legal opinion would be needed to es- government. Proceeds from the sale go into a tablish conclusively whether the proposed al- counterpartfundafterdistributionandhandling ternative operations of the agency are consis- costs are retained by the enterprise. Under the tentwith the legislation establishingthe agency. current system, these enterprises have little incentive to reduce costs or follow market pric- 6. Thisinterventionisdescribedmorefully ing in the distribution of food. Competitive in Annex 9. bidding would offer some competition for the food aid, although collusive bidding would need 7. A similar concept of price stabilization to be prevented. is proposed for butter but using a more guaran- teed price intervention by the government (see 15. Source: World Bank President's Report Annex 21). No. P-52-94. 45 16. The reverse is also true - agro-indus- 20. Polls taken in March and April 1989 by try depends on the efficiency of agriculture. the Center for the Study of Public Opinion show This alsohasbroadereconomywide implications that between 80 and 90% of workers and man- since the food industry share of all industrial agers support privatization of most small- and output is about 20%, of (convertible) exports medium-size industries. For large industries, 13%, and of employment roughly 10%. the number declines to about 57%. 17. These results are based on results from 21. Thissectionisbasedondiscussionswith V. Konovalov, Poland: Competitiveness of In- Manuel Hinds and Polish counterparts. For dustrial Activities: 1961 - 1986, August 1989, more details, see the annex on privatization of The World Bank. agro-industrial enterprises. 18. There was considerable variability of 22. See Annex4foramoreelaborate analy- results, with the dairy and meat industry is sis of Poland's agricultural trade and its pros- being the least competitive and soft drinks and pects. milling products being more competitive. 23. See Annex 3 for details on the projections. 19. The issue of privatization of the state farms and cooperative industries is dealt with 24. Ot]her steps are of course necessary. in Annexes 6 and 7. Annex 8 gives suggestions in this regard. 46 Annex 2 Rural development strategy Initially, the Task Force had planned to limit reflect their relative importance, but rather the the scope of the strategy to agricultural policy access to data necessary for the analysis during issues. Butitsoonrealizedthatitwasnecessary the work of the Task Force. Therefore, this to broaden the strategy and include issues re- annex should be viewed as a general outline of lated to rural development because of the im- rural policy development based on a selective portance ofthe rural sectorin the Polish economy approach to different issues. and of the possibility of sustained development This annex is mainly based on information in rural areas. provided by the members of the Task Force. It The main objectives pursued by a rural de- has also benefittedfrom discussions with-and velopment strategy are: reports provided by - representatives of the Ministry of Agriculture, Ministry of Rural * increasing employment and labor mobility, Welfare, Ministry of Labor and Social Policy, and and Ministry of Finance. * quickly privatizing and creating small pro- duction units. Demographic and sociological determinants of rural change Because of the limited time available, the Task Force was not able to examine in detail the In contrast to the situation in many Western wide range ofeconomic, sociological and cultural European countries, the rural sector in Poland issues related to rural development. Some of continues to be an essential component of the these are discussed in other annexes, while national economy and of social equilibrium. Its others still require a more systematic analysis main characteristics are discussed in this section. before policy conclusions can be drawn. This annex focuses mainly on characteristics of the STABILrry OF THE RURAL POPULATION rural population and on proposals for the short term regarding: The rural population has been very stable. It has remained approximately at the same level * the awakening of economic initiative and - 15 million - since 1950. Today, despite the the creation of an alternative labor market; strong demographic increase, the rural popu- * the implementation of a social safety net for lation still represents 40% of the total popula- the rural population. tion and 36% of the productive-age population (see Figure 2.1). The structure of the rural The level of analysis which is applied to the population differs considerably from that of the various issues discussed in this annex does not urban population (see Figure 2.2) and is much 47 Figure 2.1 Total and rural population, 1950 - 2000 millions 40- 35- - Total population 30- - 25- - Total active population 20_ - _ _ _ _ _ _ _ 15_-~~~ - - -Rural population 1S- _ - -= - - - - - - - - - - - _ - ._ - - - - - - - - - - - - 1o__ ~~~~~~~~~~~~~~~~~Rural active population 5- 1950 1960 1970 l978 1988 2000 older as a result of migration. The farm popula- Size of Farm Percent of Tota tion in rural areas is older than that working Ver small (fom 0.5 to 2 ha) 24% outside the farms. More than 20% of farmers Small (from 20 to 5 ha) 27% are of post-productive age, and this is an impor- Medium (from 5 to 10 ha) 28% tant constraint on agricultural productivity in- Large (more than 10 ha) 21% creases. The percentage of old people is particu- larly high in northern, central and central- There are important regional differences in eastern voivodships (see Map 2.1). The short- farm structure. The average farm size varies age of women of marrying age (see Figure 2.2) from 2.4 ha inthe Katowice districtto 11.8 ha in will slow down the process offarm takeover and the Suwalki district. These differences can be farm management. This farmer's wife problem explained by the country's partition into three is strongest in the northeast, where the number regions during the 19th century and by the of women of marrying age is 65 per 100 men. It unequal pace of regional industrialization and is a major reason for depopulation in rural areas development. (see Map 2.2). There are also wide regional differences. As AcTIvrrIEs OF THE RURAL POPULATION an example, the high rural population density in the central and southern parts of Poland contrasts with the low density in the horseshoe- Although the rural population has remained shaped area comprising the eastern, northern stable, its structure has changed over time. The and western border territories. In parts of the share of farm population has decreased while horseshoe and in several regions of central Po- the off-farm population living in rural areas and land (accounting in total for one-third of the working either there or in cities has increased. Polish territory), the depopulation process is From 1950 to 1988, the percentage of rural ongoing. It gives rise, as in several other Euro- population working outside agriculture has in- pean countries, to difficult economic and politi- creased from 15.7% to 40.7% (see Figure 2.2). cal problems. Almost 2.3 million rural inhabitants work out- side the gmina (county) where they live, and DIEENCEs IN FARM SIZE more than half of the rural population works in cities. Table 2.1 shows the distribution of the The average farm size is 6 ha. Farms can be active population by place of employment and broken down into four groups of approximately by economic sector. Rural areas not only absorb equal size, as follows: surplus labor from farms but also provide shel- 48 Figure 2.2 Population structure Urban Rural 90 90 yars years and and Male above F l Male above Female I .- 70 Surplus of women Suover men w Surplus of women over men 60 60 ______...__._ _ 50 _________ _40 4___ 0 4 . C- -t- _ _. _ ___ ____ __ i _~~~ Supu ofmi r- ove women 50 _ bu30 Surplus ~~~~~~~~~~~20 20 0 .0 3 *0 B a a 4pc a0 2t -~ ~ ~~Bfr and afe prodplusv age Prouciv ag szilS6+|b**gllieroo~~~ ~ ~ ~ ~ ~~~~~~~~~~~~~ .............. o~~~~~~l~ .. .. Z o~~~~~~~~~~~~~~~~~~~~~~~~~~..... ,6,7 ~ ~ ~ ~ Map 2: Number of Women per 100 Men N eS~~~~~~~~~~N Greater than 95.0 87.5 - 95.0 72.5 - 80.0 650 0-72.5 Less than 65.0 C~~~~ 0 - ' u~~~~~~~~~' a)' ' I 0 'L 0 to C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~v C ;'; ,,~~~~~~..... ,,, .., ..... .......... ,,,,,. .'. , ' W ., .... ........... 0sC i e .- 7 . , 3 < ... ... .......o 0 0 .v, .. .. . D.........; 1 0~~~~~w. 52 0 0 co C 00 -c 0 0 0 0 4- 0 Le) 0 Ito) L OD ° ° °e co L ot) ° Cl V ~ ~ ~ [ 1 ^~~~~~~~~~~~~~~~~~~~0 I I l E E ....... .. 0 0 0 0 i E~~~~~~~~~~~~~~~~~~~ 1..~~~~~~~~~~~~~~~~~~~~~~~~...... L.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L 53 Table 2.1 Percentage of nonagricultural population by place of employment and by economic sector, 1978 (in percentage) Commuting outside theirgmina Working in the gmina to to other Economic sector Total where they live Total cities gminas By workplace Total 100.0 36.8 63.2 56.8 6.4 Industry 100.0 30.2 69.8 63.1 6.6 Houlsing 100.0 26.2 73.8 65.5 8.3 Forestry 100.0 60.0 40.0 23.8 16.1 Transport and communication 100.0 23.4 76.6 68.9 7.7 Trade 100.0 50.7 49.3 44.7 4.6 Municipal and housing management 100.0 18.8 81.2 78.8 2.4 Science, education anad culture 100.0 73.1 26.9 23.2 3.6 Health and social care 100.0 42.0 58.0 54.1 3.7 Tourism and recreation 100.0 49.0 51.0 46.1 4.9 Other sectors 100.0 59.4 40.6 36.2 4A By economic sector Total 100.0 100.0 100.0 100.0 100.0 Industry 43.2 35.5 47.6 47.9 44.6 Housing 12.3 8.7 14.3 14.1 16.0 Forestry 2.5 4.1 1.6 1.1 6.4 Transport and communication 11.2 7.1 13.6 13.6 13.6 Trade 11.3 15.6 8.8 8.9 8.1 Municipal and housing management 2.9 1.5 3.8 4.1 1.1 Science, education and culture 6.9 13.8 2.9 2.8 3.9 Health and social care 3.5 4.0 3.2 3.4 2.1 Tourism and recreation 0.7 1.0 0.6 0.6 0.6 Other sectors 5.3 8.6 3.4 3.4 3.7 ter for an important fraction of the population COEXISTENCE OF THE PRrVATE, COOPERATIVE AND that is employed in urban areas and commutes STATE-OWNED SECTORS daily as much as one hundred kilometers (be- cause of housing problems in cities and the The main chaLracteristic of the countryside - a relative ease of con structing houses in the coun- result ofthe long-term struggle of the peasantry tryside). This situation implies high industrial against collectivization - is the coexistence of production costs and transportation costs of the private farming with a public sector that is labor force. dominant in extra-agricultural activities. As Along with an increase in the rural labor force Table 2.2 shows, the private sector accounts for working outside agriculture, there has been an 85% of the active population employed in agri- increase in the level of multi-activity of the farm culture. The remaining 15% are state farm population (see Figure 2.3). The number of employees (47%), agricultural services employ- households that derive their main income from ees (30%) and production cooperatives employ- outside agriculture (peasants working in the ees (23%). Outside agriculture, the situation is state-owned or cooperative sector, peasant- different: 92% of the active population work in workers, and retired peasants) has increased the state sector, and only 8% in the private greatly. In 1988, only 20% of farm families sector. Although the latter figure is low, it must derived their income exclusively from farming be pointed outthatithas tripled overthe past 10 and 40% mainly from farming. years and that it does not include the informal 54 Table 2.2 Rural population working in agriculture and in other sectors, 1978 and 1988 Rural population Ruralpopulation Proportion working in working outside of those working Total agriculture agriculture in agriculture Total in '000 1978 8040 4771 3269 59.3 1988 7749 4348 3401 66.1 1978 = 100 96.4 91.1 104.1 x State sector 1978 3899 747 3152 19.2 1988 3788 647 3141 17.1 1978 = 100 97.2 86.6 99.7 x Private sector 1978 4141 4024 117 97.2 1988 3961 3701 260 93.4 1978 = 100 95.7 92.0 222.6 x Private sector, as percentage of total 1978 51.6 84.3 3.6 x 1988 51.1 85.1 7.6 x sector, which is sizeable, especially in handi- as compared with 40 in Western Europe. crafts, housing and transportation. The level of education andhealth care ismuch Table 2.3 shows the frequency of occurrence of lower than that in urban areas. The education registered industrial and service units in rural network includes about 13,000 schools, but the areas as well as their form of ownership. It can education level is poor because of lack of skilled be seen thatmost agricultural marketing enter- personnel and poor organizational conditions. prises and most agro-industrial enterprises are The situation is similar in the 3,311 health part of the state sector: this is an effect of the so- centers, which lack doctors and medical equip- called indirectcollectivization carried outbythe ment. The weaknesses in the socioeconomic state after the failure of direct collectivization infrastructure in the countryside result in diffi- efforts in the early 1950s. On the other hand, it cult living conditions and are the main cause of should be pointed out that despite a policy women's and young people's migration to town aimed at destroying handicrafts, services and and of the negative selection of the remaining private trade enterprises, many skills remain population. available in the countryside and allow the rural population to perform necessary tasks in con- AMBIGUOUS BEHAVIOR AND ATTITUDES OF THE struction, mechanics, carpentry, etc. This work RURAL POPULATION ismostoften carried out on thebasis of assistance from neighbors or as informal (unregistered) The attitudes and behavior of the rural popula- work. tion are the consequence of a perverse system in which private enterprises worked in a centrally WEAKNE9SE9 OF THE RURAL INFRASTRUCTURE planned economic environment and the state discriminated against private farming rather The settlementnetwork includes 42,000 villages than trying to create conditions for its growth. divided into 57,000 rural localities. Villages are This mixed economic system and the policy of small: about 82% have fewer than 500 inhabit- repressive tolerance toward peasant farming ants. Administratively, villages are grouped has created behavioral patterns that are often into 2,121 gmina, one-third of which have be- contradictory. tween 5,000 and 7,000 inhabitants, Peasant way of management. The manage- Village-level infrastructure is insuflicient. The ment behavior of peasants is based on a logic of greatest problem is water supply (only 29% of survival and not on a logic of development. It villages have a water supply system) and access expresses itself in a propensity to minimize risk to a sewerage system (5.3% of villages). About rather than to maximize profit, to ensure self- 8% of villages do nothave telephones. There are financing mostly through multiple employment two telephone owners per hundred inhabitants, and to take advantage of all labor resources of 55 Figure 2.3 Breakdown of rural population, 1960 - 1988 millions 12 12 _Fann population 10 8 Others 6 - - - - - - 4 __ .- - 2 0 I l l 1960 1965 1970 1975 1980 1985 1988 Figure 2.3 Breakdown of rural population, 1960 -1988 millions 14 12 F poplation 10 4 + - -_ __ Employed mainly on farm 2 Employed mainly off farm ----- ; - - - - - - - - - - - - - - -------------Pensioned farmers 1960 1965 1970 1975 1980 1985 1988 the family. It nevertheless allows some flexibil- farms. By contrast, state farm workers are ity in behavior. wage earners carrying out passively and in a Resistance to and dependence on the state. On repetitive fashion the tasks set out for them. the one hand, farmers have developed a strat- They are mainly concerned with their public egy of resistance toward changes coming from employee status, their salary and their perqui- above andtheirbehavioralpatterns enable them sites (housing, bonuses, paid vacations, child to maintain the independence of their activities care, etc.) The same asymmetry of behavior and private initiative. On the other hand, they exists between private farms and those enter- are completelydependentonthe administration. prises in the cooperative sector (samopomoc Farmers are accustomed to unrestricted food chlopska, agricultural circles, and others) re- demand sustainedbythe centralizedmarketing sponsible for agricultural marketing and ser- organization and food subsidy system. They vices. In a small number of such cooperative show an acquired helplessness and seem un- organizations, the self-governmentelections held willing to undertake actions independent of the in March 1990 led to a change in the balance of public sector. power in favor of cooperative members and to Differences in behavior between private and the subordination of the goals and activities of state-owned sectors. Private farmers are emo- the cooperatives to the interest of these mem- tionally tied to the land, which allows them to bers. In most cooperative organizations, how- remain independent and in charge of their own ever, such changes did not take place. 56 Table 2.3 Frequency of industrial POTENTIAL AND CONSTRANT OF THE RURAL plants and services in gmina and owner- SECTOR ship status in 1987 of which: Some conclusions regarding the potential for Percentage of percentage of change and constraints in the rural sector can locaities with priuate plants be drawn from the observations made above. Both the negative and the positive aspects ofthe Industrial plants present situation must be considered. Construction materials 1.8 41.7 Structural changes will be slow at the farm Construction ceramics 2.1 71.5 Concrete 5.0 82.6 level because of the fragmented farm structure Sawmills 2.7 61.3 and the old age offarmers. Small farms may not Slaughterhouses and * * * - Meat processing plants 2.1 29.3 be elmiated by the present crsis and may Dairy processing plants 0.6 4.6 simply wither away. Commercial farms - that Mills 3.3 48.2 are more dependent on the market - face a Bakeries 5.0 50.0 difficult situation involving the risk of regres- Potato processing plants 0.4 4.4 Fruit, vegetable and sion. They will have to use more labor-intensive Mushroom processing 0.9 64.6 techniques, reduce costs and improve the quality Soft drink plants 1.4 51.9 of their products. Some rationalization of the Feed plants 1.7 7.1 Other plants 12.6 79.0 agrarian structure can be achieved through a Centers purchasing shift ofpart ofthe state sector land to the private Angicultural p6.ducts: sector, land consolidation in private farms and Cereals 6.9 x a better combination of factors (see Annex 14). Potatoes 5.5 x But the attitude ofstate farm employees preclude Beet 1.9 x the use of an agrarian reform-type solution. Fruit and vegetables 8.3 x Milk 21.5 x The multiple activities of the population and Other products 5.7 x the semiprivate character of the rural economy Commerial outlets 68.5 can contribute to relatively fast rural develop- Restaurants 7.3 22.02 ment. The privatization ofsupply and marketing Gas stations 4.3 x functions is necessary for the adjustment and Agricultural machinery and implements 0.2 development of agriculture i the new market Construction materials 5.2 x economy. This will have to take place in a Services context of growing unemployment related to the Mechanical and restructuring of the industrial and cooperative electro-technical 1.3 60.5 Fitting and smithing 13.7 92.5 sectors, coinciding with the increase of the Cars 9.2 89.2 population of productive age.' The rural sector Repair ofag6icultural should play the role of buffer sector for the Radio and television 3.2 46.3 unemployed and make a significant contribu- Glazier 1.7 53.2 tion to the economic reform process because of Carpentry, fu u15.5 952 its stability and its capacity to absorb labor. Tailoring 6.7 92.8 The implementation of a new, efficiency-ori- Shoemaking 1.6 94.3 ented policy presupposes the gradual reduction Plumbing 8.1 64.7 of the ambiguous behavior of the farmers and a Construction repairs 33.1 96.0 Electrical installation 9.5 961 more dynamic attitude toward the market Drycleaning and dyeing 2.2 55.5 economy. It also presupposes a reduction of the Hairdreasers 2.8 56.8 antagonism between farmers and the state, Photographers 1.3 91.4 presently exacerbated by the sudden fall in Other services 19.3 97.2 agricultural incomes and by the uncertainty Interitywbu station 71.6 x regarding prices. An improvement in relations Post office 12.1 x between the farmers and the state depends on Cooperative bank 5.8 x three factors: Primary school 21.4 x Health care centers 7.3 x Pharmacists 3.2 x * the definition of (and information about) Hotel, shelters, tourist house 5.0 x clear economic rules, enabling the farmers to carry out their personal strategies and giving 57 them a large amount offreedom in a more stable date the specific requirements of the agricul- environment; tural production cycle. The rural strategy should * the creation of transition mechanisms to be coordinated with the establishment of the buffer the collapse of agricultural prices; and new market economy. Because of the strong * a policy of rural development and social dependence of the agricultural sector on state welfare. The outline of such a policy is discussed and cooperative supply and marketing institu- in the remainder of this annex. tions, a quick privatization and demonopoliza- tion of these institutions is recommended (see Outline of a rural development strategy Annexes 5 and 6). There should also be a reduction of the level of price uncertainty in the The strategy for rural development should be rural economy through measures aimed at the developed taking three periods into account: the stabilization of agricultural markets (in par- very short term, which will be a period of un- ticular, through the Agency for Agricultural certainty and regulatory vacuum; the short- Marketing (see Annex 9)). term, during which the legal and institutional In the short term, and at the heart of the rural framework ofthe new economic system needs to development strategy, are measures leading to be built; and the long-term, during which the the reawakening of economic initiative and the new economic mechanisms put in place will creation of a network of small and medium-size produce their effects, leading to structural and economic units in and around agriculture. functional changes. Specifically, this means the creation of genuine cooperatives (see Annex 6); the development of STRATEGIC GOALS a competitive agricultural processing industry (see Annex 8); and the development of cottage The basic goals of the strategy for the very industries and services, which now exist mainly short term should be: informally, and of local and itinerant trade and craftsmen. (This point is discussed below.) This m maintenance of the productive capacity of includes a set of measures aimed at creating agriculture; and incentives for the development of private ini- - protection of the main source of income for a tiative and the promotion of various forms of large part of the population. economic activity. In the long term, the objectives of rural de- For the short term, the goals should be: velopment are, first, to make rural areas more attractive as a place of work, housing and rec- - reduction of the structural asymmetry be- reation, and improve living standards; second, tween agriculture and its environment; and to shift the public investment structure in favor * creation of a rural model ofmarket economy. of radical improvement of the socioeconomic infrastructure in rural areas; third, to change For the long term, the goals should be: the programs and methods of agricultural edu- cation; fourth, to improve the starting conditions * regional economic planning and balanced for the employment of the rural youth; and, population distribution; finally, to develop regional planning and set- * multisectoral development of rural areas; aside areas. * revival of an active social life in the country- side; Short-term strategy - components and * rationalization of structures in agriculture instruments itself and in activities that are upstream and downstream from agriculture, based on a better REAWAKENING ECONOMIC INITiATIVE IN RURAL combination and spatial allocation of factors. AREAS ELEMENS OF THE STRATEGY For more than 40 years, the normal mechanisms of economic activity based on entrepreneurship The implementation of the above goals requires and capital accumulation have been blocked. various means and actions. In the very short Outside of agriculture, the possibilities of capi- term, fiscal and social policies should accommo- tal accumulation by the rural population were 58 mainly informal and often illegal. They in- The three main components of the self-em- cluded: ployment strategy are a training policy, a finan- cial policy, and a set of measures to create a * illegal appropriation for private use of pro- favorable regulatory environment. ductive factors belonging to state enterprises (including equipment, raw materials and work- TRAING POLICY ers' time); * informal trade, taking advantage of the The two areas deserving consideration in the distortions and irregularities present in the trainingprogram are changingeconomicbehav- economy, and in particular exchange rate dis- ior and training for new jobs. During the com- tortions; munist period, a lot of damage was done to the * periodic, and usually illegal, work abroad. work mentality of the population. Nobody can estimate this fully, but it will remain a fact to be The restoration of the rule of law and the taken into account for some time to come. It establishment of a market economy imply that would be an error to think that simply changing these distortions be removed, that privileges the economic system will change attitudes and related to a political or administrative rank be behavioral patterns created by 40 years of lies, abolished, and that respect for public property fear, resistance and cheating. Apart from the be restored. However, at the same time, the transformation of property rights, the essential change of economic and political system deprives problem of the transition period is to adapt economic units of easy access to capital. The mentalities and attitudes to the new reality. In economic reform program will lead to increased rural communities, this requires organizing unemployment. Assuming that the 2 million short courses aimed at freeing people from the unemployed forecast by the end of 1990 include constraints imposed by the previous system, an equal proportion of rural nonfarm and urban opening up a real dialogue and awakening their workers, unemployment in rural areas could be initiatives, showing potential micro-entrepre- as high as 300,000 to 400,000 persons. The neurs how the market economy functions and situation of these jobless workers could be par- assisting them at the same time to define their ticularly difficult, considering the fact that la- own economic strategy. This would require bor supplyin the countryside is verylimitedand high-quality trainers, able to use modern, par- that labor mobility is low because of the lack of ticipatory training methods not widely used housing. previously in Poland. The state faces a choice between welfare Vocational training is currently carried outby policies based on unemployment benefits that the extension service (WOPR) for farmers and perpetuate the dependence on the state and by the Vocational Training Units (ZDZ) for policies giving a large place to self-employment. workers, apart from the education system. Self-employment promotion policies are not Trainingfornewactivitiesrelatedtothemarket common in industrialized countries where wage- economy will require that new solutions be labor has gradually destroyed the concept of found, within or outside of the framework of independent labor and where societies became these institutions. In the new situation created used to supporting a large number of unem- by the economic and political changes, it must ployed. However, it is increasingly recognized be noted that the goal of training is changing. that self-employment can fill in labor market The purpose is not to update one's knowledge, gaps resulting from economic rigidities. It also but rather to change skills or to train for a new follows the modern evolution of industry. The kind of job. Rapid action is required given the availability of many technologies and the dif- number of workers who risk losing their jobs, ferentiation of markets have contributed to the butthe directions of newtraining are difficult to collapse of the Fordist mass production indus- determine beforehand. Training funds, until trial model and to the development of a new now included in the overhead of enterprises - model based on a network of small, flexible at least as far as ZDZ are concerned - are production units, easily adapting to market becoming increasingly limited. Training costs demands thanks to telecommunications and could be partly covered by the Labor Fund, but information technology. This model can be one have to be met mainly by the trainees them- of the objectives of rural development.2 selves. The available training personnel are not 59 prepared to train new - that is, independent cal and foreign institutions. Several existing and reliable - economic operators. initiatives are good initial steps in this direc- Given this situation, the principles of voca- tion, for instance, the Plunkett Foundation tional training should be as follows: course on economic activity, French minibuses traveling in the Polish countryside with audio- Training should correspond strictly to the visual data on French agriculture, etc. The existing or envisaged jobs, including, in the participation of foreign experts in the team for rural areas, small-scale trade, crafts, cottage instigating changes in rural areas would prob- industry, etc. ably contribute to a better understanding of the * Training should be concentrated on essen- market economy model, on the one hand, and of tial know-how and essential tasks, and be lim- rural realities and attitudes, on the other. ited in time. * Training teams should be mobile and flex- Retraining for a new job. The best basis for ible. To the extent possible, training should be training as far as adaptation to new standards practical on-the-jobtrainingand trainers should and economic (agricultural or not) activities in be able to provide technical advice on the choice the countryside goes is without doubtthe WOPR of technology and equipment. extension service. Its basic goals and the sug- gested reforms to its organization are specified Changing economic behavior. Courses help- in Annex 12. The WOPR is currently providing ing the rural population to understand the new differentkinds oftrainingfor carpenters, fitters, economicenvironment,andtoinitiatenewforms drivers, mechanics, tailors, etc. In changingits of activity, require a relatively small number of structures and modes of operation, it should trainers with the ability to adjust to educational consider the future increase in the demand for needs. Above all, the work of this group should new crafts in the countryside and the need for be directed at local self-governments and at the extension regarding purchases of new technical various forms of rural organizations. The cre- equipment. ation of a small team, perhaps called a team for instigating changes in rural areas, would have FINANrCIAL PoIcy two main goals: training of instructors in charge of short courses for the emulation of Problems related to small loans to smallproduc- economic activity in the countryside, and accu- ers. In most countries, banks avoid providing mulating experiences allowing a better under- credit for small investments for three reasons: standing of the social psychology and setting up the relatively high cost of distribution and ad- progressively a strategy for change. ministration of these small credits, the lack of The creation of such a team in itself would down-paymentandcollateralfromtheborrower, raise one of the main issues of post-communist and the low level of economic know-how on the societies - which is a preliminary condition for part of customers who do not know how to its solution-and would also facilitate dialogue presentthe projectorhow tofillin the necessary between the state and the farmers. forms. Some programs set up to finance small At the same time, such a team could more enterprises show that these problems can be easily identify cheaters who will be interested overcome by using appropriate methods and no doubt in this new market. Obviously there is that, in contrast to the general opinion, loans for a risk of falling into dull - and inefficient - microenterprises created by poor people entail propaganda. Therefore it would be desirable low financial risk. that the team be outside the state administra- tive structure (for example, within the frame- Principles of small investment credit. These work of the Agency for Local Initiatives, dis- principles, based on the experience of many cussed below) and facilitate contacts with the countries, can be summarized as follows: extension service and the mutual exchange of experiences. Given the usefulness of * Small credit is based, above all, on the multidisciplinary approaches, this team should customer and on the local market. Project consistofexpertsfromdifferentfields. Itisclear evaluation requires common sense rather than thatit wouldnothave anykind of monopoly and complex financial analysis. Nevertheless, the should cooperate in various initiatives with lo- preconditionforacredittobegrantedisthatthe 60 profitability ofthe enterprise allows repayment loans permit methods and procedures to be of capital and interest. It is clear that rates of adapted to customers' needs and constraints. interest currently prevailing in Poland do not There is a necessity to provide advisory ser- allow investment credit to expand in the rural vices. In general, and in particular in a country population. in transition toward a free market, the financ- * The methods and procedures of granting ing of small enterprises requires: credits must be based on knowledge of the local community and on the needs and constraints of * assistance in preparing the project and customers. This applies to collateral and to presenting it to the bank; forms and schedules of repayment. Apart from * services for economic activity such as ac- mortgaging farm land, which applies only to countancy and tax advice; farmers, the main collateral used in rural areas * supervision of economic activity allowing is warranty. It is a serious guarantee in small faster diagnosis of difficulties and assistance in local communities where people know each other solving them. well and are able to evaluate not only the effi- ciencyandhonestyofthepotentialentrepreneur Offering advice of this type goes beyond the but the project itself. Apart from warranty, a tasks of a bank and should be offered by sepa- good way of collateralizing a credit would be to rate institutions. Several organizational introduce equipment leasing, which currently schemes for the credit system are possible. The does not existin Poland (although itis envisaged necessity of using existing means and institu- by the newly founded Bank for Socioeconomic tions leads us to make the following proposals: Initiatives - BISE). * The interest rate to be used should be the Credit institutions. Labor Offices currently marketrateand shouldbepositiveinrealterms. provide small amounts of credit for setting up A lower rate would bring about a rapid one's workshop. This can be only a transitory decapitalization of banks. The main disadvan- solution. Presently, Labor Offices attempt to tage of preferential interest rates is that they develop contracts with banks so that the latter are available only to a limited number of bor- can evaluate professionally the reliability ofthe rowers and that they attract customers to whom borrower and the profitability of the project. they were not initially targeted. Thus, they do Banksaretheusualinstitutionsofferingcredit. not ensure that all economic operators, includ- In the rural community, cooperative banks exist ing poor people, have permanent access to credit. in almost all gmina (there are 1,663 banks for Therefore, it is preferable not to interfere with 2,121 gmina). These banks, which are rela- banking mechanisms. Instead of giving pref- tively sound from a financial viewpoint, operate erential interest rates, the state could give mainlywiththe depositsofthe rural population, separate subsidies to assist small entrepreneurs who find them more reliable than other coopera- in building up the necessary equity, as well as tives. Using this network of small cooperative subsidies allowing banks to cover complemen- banks would make it considerably easier not tary costs connected with small credits. only for the customer but also for the state * Credits should not be forgiven. The condi- budget. Credit could be refinanced by the Na- tion for granting production credit to all groups tional Bank - the BISE - created by initiative of the population is the strict observance of of the Ministry of Labor or the Bank of Food repayment rules. Credit forgiveness makes Economy. people think that credits do not have to be repaid. Financial mechanisms. Cooperative banks * Progressiveness is an important principle of operating with member deposits must be able to small credit. This principle applies both to the meet additional costs related to distribution of amount of individual loans (the first loan should small credit and to risk. A guarantee fund be relatively low so as to check the efficiency of should be set up to cover part of the risk. The the entrepreneur and his behavior with respect share covered would be relatively high at the to the bank) and to the number of loans in a beginning(about5O%dependingontherequire- given area. The good performance and repay- ments of cooperative banks), and would fall as ment on the part ofthe first clients then becomes the banking techniques for this type of credit a model for the followers. At the same time, first improve, thus permitting a better repayment 61 rate. The guarantee fund could gradually be such as accounting, and the creation of a basis replaced by local mutual guarantee funds. Each for mutual guarantee funds. These groups could borrower would pay 10% of his loan into this follow the tradition of the old 'agricultural fund and bear, to this proportion, the risk of all circles," based on solidarity and mutual coop- credits taken by members of the group of bor- eration. This would allow the development and rowers. It must be noted, however, that the progress of rural areas. creation of funds of this type, based on mutual guarantee, requires time, since they are possible CREATION OF A FAVORABLE ENVIRONMENT only on a small, local scale, where people know each other. Training and financing policies for rural areas According to normal cooperative principles, will only yield results if the environment is loans are granted to members having some favorable to change. The following measures personal contribution. This contribution could can contribute to the creation of a favorable be covered by a single bonus for creating one's environment in rural areas. own new workplace. The guarantee fund and bonuses allowing the creation of the equity Revision and lorabrogation ofall unnecessary could be provided by the Labor Fund. However, lawsandregulationspreventingthedevelopment it is necessary for the people who have not been of economic activity. In this respect, the sys- laid off (for example, young entrants in the labor temic changes induced by the privatization law market or small farmers without sufficient and the revision of the civil code recently passed means of subsistence) to be able to gain from by Parliament are essential. But there are also this system. many regulations preventing the development of economic activity by private entrepreneurs Economic advisory system. At present, there thatshouldbe abolished. Alisthasbeenprepared is almost no advisory system. Organizing one by the Office of Property Restructuring. In would require ample funds. In this instance itself, the existence of a set of consistent regu- also, emerging initiatives should be followed up lations offering maximum freedom to economic on. OneofthemistheAgencyofLocalInitiatives, subjects, protective of the public good, and created to assist the BISE. This agency is part translated into a language understandable to ofthe Fundfor Development of Local Democracy the average citizen, is necessary for the good and aims at creating initially 17 regional performance of the economy. But legal changes agencies. Considering the fact that there are alone will not imply the end of the dictatorial 2,121 gmina, the range of each agency would be attitude or of the inertia of the administration. too wide for it effectively to carry out advisory In this field, the dependence observed until now fimetions at the local level. To solve this prob- must give way to citizen action against all kinds lem in abudgetarily cost-effective manner, there of abuse. are various options that could be tested experi- mentally (and may differ depending on the Simplification of the tax system and tax ex- voivodship). The two main options would be: emptions for new enterprises. The present tax system for small-scale economic activity has to increase the personnel through coopera- three main shortcomings: it is complicated, it is tion with other local institutions (chambers of an excessive burden for new enterprises, and it commerce or industry, agricultural organiza- changes too often. Apart from the turnover tax, tions, etc.) through encouragement of social there is currently an income tax (or wage tax, work by retired people, and through the use of paid by the employer), a surtax, a tax on special the graduates that are employed in the inter- fields in agriculture,a real estate tax, alandtax, vention work financed by the Labor Fund. All etc. As of January 1991, an income tax will thosepotentialadviserswouldhavetobetrained replace the salary tax and the surtax. A year appropriatelyanddemonstratenotonlyoccupa- later, it is envisaged that the turnover tax will tional skills, but also the ability to perform be replacedbyavalue-added tax. These changes social and enterprise-oriented work. are important not only because they rationalize * to group borrowers. The creation of rural the taxation system, but also because they mean business 'circles" would reduce advisory costs the progressive elimination of a system in which and enable the consolidation of advisory services, scores of poorly understood regulations enabled 62 the Nomenklatura to decide that private busi- equipment for large plants and access to equip- nessmen had not fulfilled all of their tax obliga- ment depended on arbitrary decisions. It is tions and to destroy their businesses through therefore no wonder that there is a mismatch unexpected fines. between supplyof equipmentandtheneedsand The stabilization plan was not a fortunate financial capacity of small businesses. How- transition from this point ofview. Higher taxes, ever, this market is slowly organizing itself. rents and prices of raw materials and energy, The departmentofagroprocessingofthe Ministry combined with lower demand and payment de- of Agriculture provides, for instance, useful in- lays, have eliminated many small enterprises. formation on prices and supply outlets to in- In the first quarter of 1990, the number of terested parties. Domestic industry is slowly handicrafts in Poland dropped by 7.8% and that adjusting to the needs of small businesses: for of businesses run by physical persons by 5.6%. example, small trucks have been equipped with Many of the businesses have shifted to specu- cold storage equipment to be used for street lativetrade. AdecreedatedMayl8,1990,ofthe commerce. Imports of small equipment (for Minister of Finance decided to suspend for one example, small dairy facilities) are growing. to five years taxes on new private businesses It would be recommended that the extension registering before the end of the year. This service (WOPR) and trade unions contact co- decree, however, does not apply to all enterprises operatives and chambers of commerce of West and partly only solves partly the problem of tax European countries in order to organize imports exemptions for new businesses. Encouraging of secondhand equipment that could be useful settingup small enterprises andlegalizing many for Polish microenterprises. Such contacts exist activities in the so-called hidden economy would for agricultural machinery from Germany. be facilitated by the temporary suspension of It should be stressed, however, that the es- taxes and Social Security dues (which amount sential problem is the high cost ofthe equipment to 43% of wages, plus 2% for the Labor Fund). compared with average income levels. The BISE estimates that an investment of Z125 to Making it easier for an enterprise to find a ZL35 million zlotys is necessary for the creation location. The fact that state supervision ofrents of a workplace. This represents three to four to be paid by private firms was terminated has times the average annual salary. The intro- had a very negative effect on many small en- duction of leasing, mentioned above, could be terprises, in particular in cities. In the coun- one option to make it easier to purchase equip- tryside, this problem can be solved more easily. ment. Farmers often have buildings that can be used for workshops, and local self-government bodies Developing an informationpolicy. This policy own many buildings used by the state and co- is a necessary complement to the training policy operative sector. The Office for Property Re- and is particularly important in the transition structuring sent a circular to communes on period. With respect to the uncertainty pre- June 1, 1990, suggesting that they should re- vailing in the countryside, it is preferable to possess their properties and sell or lease to the know clearly what the future holds, even if it is private sector. At the same time, communes difficult, than to be afraid of unknown dangers were advised to pay more attention to the need with respect to which the difficult but certain to develop market places and street commerce present feels safer. Having appropriate infor- and to facilitate the obtainment of lots for new mation allows people to have reference points to buildings. These directives (which are not carry out their activity in the new market mandatory since power is in the hands of self- economy. governments) will be implemented in a more or Ruralareasobtaininformationmainlythrough less quick fashion depending on the situation of radio and television. Since the beginning of the the local government but represent a step in the crisis, fewer copies of agricultural newspapers right direction. are being sold. Therefore, emphasis should be put on those media. Radio and television Facilitating access to appropriate equipment broadcasts devoted to agriculture (for example, and machinery. Small rural enterprises need Notowania - Rates, in English) should be ex- small, cheap and easily accessible equipment. panded and should cover other branches of For alongtime, Polishindustrymainlyproduced economic activity which can be developed in the 63 countryside, providing information on markets, SOCIAL WUFARE POUCY technologies and sources of supply of machinery and raw materials. Though maximum attention should be paid to The important thing, for people livingfor over employment policy, the state must also fulfill its 40 years in a system restricting their personal obligations in matters of social welfare and initiative and setting the standards of activity protection of vulnerable groups. Social policy in from above, is to break the imagination barrier. the countryside entails specific problems re- Therefore, another essential initiative should lated to (1) the large number of old people living be to give concrete information on the principles in rural areas, and therefore, the problem of and performance of a market economy from the pensions and organization ofhealth care services point of view of economic units (for example, required by these people; (2) the large proportion how Mr. X went about setting up a private ofpart-timefarmers, who willbein all likelihood bakery in the countryside). The purpose of this the first to be dismissed from their workplaces, information would be to alter the negative pre- although they often work in the occupations vailing attitudes with respect to private opera- requiring the least skills; and (3) the low level of tors and to show what specific possibilities exist education and health care services, and there- and what rules applyfor small-scale businesses. fore the poor initial conditions for the rural This information, supplied by the mass media, youth. should be supported by manuals guiding po- The policy of rural development aims at tential entrepreneurs through the necessary gradually improving living conditions in the steps. countryside and shares this aim with welfare policy. Apolicy of social protection would include Developing public works. The development of three main components. agriculture and rural areas requires urgent investment in land irrigation, water supply, Unemployment fund. Labor Fund unem- telephone and telecommunication systems, ployment benefits are available only to farmers market places and transport. Given the tradi- having less than 5 ha. Part-time farmers do not tion of collective action existing in rural areas, receive unemployment benefits, but the Labor many roads, schools and health centers have Fund pays their insurance fee. (Since 1989, been built with unpaid work from the rural part-time farmers have been exempt from pen- population - amounting to one-third of con- sion payments paid to the Peasant Insurance struction costs (the remainder being covered by Fund, since insurance was automatically paid the state budget and other financial sources). by their workplace. Pensions for farmers are The Labor Fund could finance the salaries, for currently about Z1480,000 per person and six months, of unemployed persons within the Z175,000 per hectare.) Part-time farmers are framework of the existing intervention work. also authorizedtoobtainaretrainingallowance The combination of these elements could form when changing jobs in rural areas, and part- the basis for a rural works policy which could be time farmers having less than 3 ha may obtain carried out by local self-governments with the a loan amounting to six times the average assistance of local organizations and existing monthly salary for setting up an extra-agricul- foundations (such as the Foundation for Sup- tural workplace in the countryside. plying Water to the Countryside, and the Agri- In reducing funds available to part-time cultural Committee of the Church). Such works farmers, account was not taken of the fact that would not only provide employment for those they represent a specific category for whom taking part in them, but would also create the work outside the farm is an economic necessity. infrastructure necessary for the development of The fact that many of them will be laid offbefore the countryside. They would also have a posi- others seems unavoidable but it would seem tive income effect and offer opportunities to less justified, from the point of view of social local small entrepreneurs. These initiatives justice, to restrict funds available to them. The could be an important complement to the self- shortage of funds for creating new workplaces employment policy. outside agriculture and the unnecessary flow of labor toward the farm sector is liable to have negative effects on rural development. At any 64 rate, the system of financing and advising small of the bank, which does not seem to be the most enterprises should be open to all potential can- effective or safest way of dealing with funds. didates. Social welfare, including food assistance. The Reform offarmers' insurance. In 1978, social state of rural social welfare is worse than in insuranceforfarmerswasintroduced. Thiswas cities. Benefits for private farmers are lower an important step from the point of view of than those for employed persons. For example, welfare policy. However, there were several since May 1, 1990, the family allowance for shortcomings. There was no correspondence farmers' children has been set at the same level between the fee paid and the value of the funds. as workers' children, but only a handful of The real burden on farms increased continually farmers' children are entitled to such an allow- because of the decreasing number of farmers ance. paying fees. There was no relationship between Because of the dispersed settlement network, the social objective and the economic objective transport difficulties and late introduction of a to stimulate production (the pension amount free health care system for farmers (in 1972), being dependent on the value ofthe agricultural the countryside lags behind considerably in product sold). And social insurance had rigid terms of welfare services, of particular impor- effects on structural and generational changes tance for the elderly. The recent transfer of in agriculture (the right to pension being in social welfare functions to the Minister of Labor force only when the farmer stops farming). and Social Policy, who will share responsibility The reform now being proposed by the Minis- withlocalself-governments,andthepreparation try of Rural Welfare consists mainly of three of a new law to replace the social assistance bill elements. First, an independent Peasant Social of 1923 should improve the situation, although Insurance scheme would be created, specializ- this takesplace atatime ofwidespreadincrease ing in services for the agricultural system, with of poverty in the countryside. farmer interests represented by farmers' coun- Social welfare centers now handle 1.5 million cils, operating under the supervision of the cases, out of which about 40%, or 600,000 per- Ministries of Agriculture and Finance. This sons, live in the countryside. There is no doubt institution would be able not only to collect that this number will increase, since the num- funds but also to perform previously nonexist- ber of poor people has been estimated at 8 ent financial functions (investing surpluses, million. Since funds are limited, it is important carrying out economic activities, applying for to determine, first, who should be priority ben- loans, managing deposit funds paid to farmers, eficiaries and, second, what means of assistance etc). Second, old age and disability pensions are the most efficient. At the initial stage, on would be separated. Third, the contributory both counts, much initiative was left to the pension fund (where the choice of insurance centers themselves. But this state of affairs premium and pension amount depend on the cannot be sustained in the long run because it farmer's decision) would be separated from the places too much responsibility on social workers state pension. The contributory pension would and can lead to abuse. be available at retirement age (though premia From the point of view of an agricultural can still be paid in order to obtain a higher policy, emphasis should be placed on food dis- pension). The state pension, paid by the state tributiontothe neediestpeople, and distribution budget and amounting to 35% of average wage, should be organized in such a way that it does would come after 60 years when the farmer not interfere with the market mechanism. Food stops farming and transfers the farm to some- distribution for welfare purposes should en- one else. large demand without inducing an artificial If passed by Parliament, this reform would decrease of prices. At present, social centers represent a great improvement over the current carry out such functions, for example, through situation because it represents a better balance school canteens. Theyalso distribute food parcels between farmers' contributions and contributory and free meals, issuing so-called milk bar cou- pension, as well as between state pension and pons. The rural housewives' circles have taken giving up farming. However, several objections part in such actions in the countryside. couldberaised concerningtheeconomic activities In the autumn of 1989, the Ministry of Labor 65 proposed the introduction of food stamps Local finances will not be defined before the throughout Poland but the project was dropped end of the year. At present, this fact greatly because of opposition from banks and the lack of constrains any action at the local level. What interest on the part of retailers. At present, the may turn out to be a long-term problem is the main constraints to the distribution of food desire of many local self-governments to per- stamps are the fact that retailers are used to form economic activities, which would allow cash transactions and the perceived stigmati- them to earn necessaryfundsbutreduce private zation of the poor, who would feel more than initiative. Such a policy would represent, at the evermarginalized. Thesystemoffoodstampsto local level, a repetition of the errors of the the poorest should be tested on a small scale, in centrally planned system. Increases in the gmina where prices of agricultural produce are budget of local governments should be sought particularly low and local governments would through the development of private economic agree to simultaneous creation of marketplace activity in rural areas ratherthan through public development and introduction of food stamps economic activity. redeemable for all agricultural products. All rural organizations are currently under- goingan identity crisis. Despite thefactthatthe RESPONSIBIUTIES OF THE RURAL ACTORS Farmers Union, agricultural circles (such as those of rural housewives), and rural organiza- A dynamic rural development strategy requires tions officially have 1,200,000 members, have the cooperation of all the actors involved in the large assets, and count on an experienced countryside. This section outlines the main apparat, they lack authenticity and activism. responsibilities of the key actors in rural areas. Rural organizations tend tobe regressive rather The state is responsible for: than constructive. This attitude, related to the enormous difficulties of agriculture during the * creating a legal framework to provide social transition period, is characteristic ofthe National protection without perpetuatingunemployment Union of Farmers, agricultural circles and or- and to allow independent private businesses to ganizations,andalargefactionofruralSolidarity develop (almost 400,000 members in 2,000 communes). * ensuring budgetary support for training, A renewal of authentic rural organizations, extension, a guarantee fund, infrastructure and the goals of which would be not only to maintain social welfare a dialogue with the state and popularize infor- a creating a favorable environment for the mation on rural areas and agriculture for public socioeconomic development of the countryside. opinion, but also to take part in the promotion of progress, education and enterprise, is necessary After many years of investment in large-scale for the success of a policy of rural development. industry and city development, state policy The Church still plays an important role, not should make an about-face toward the agricul- only through its charitable action, but also tural sector, small- and medium-sized industry through various foundations - notably the located in rural areas, and a decentralized net- Water Foundation -in the development of in- work for commerce, transport, storage, handi- frastructure in the countryside. The Church's crafts and services. In economic terms, these agricultural committee envisages many train- policies would have the highest returns on in- ing and financing projects. In an initial stage, vestments and would contribute to a reduction training policy could use the network and expe- of unemployment, complete the process of riences of the Church committee for farmers, privatization and reactivate the economy. which has had an important educational role Local authorities are responsible for: during the martial law period. Finally, the rural community itself will play a * defining a development strategy at the local decisive role through social pressure, through level private initiative and through the transforma- * helping in the development of new economic tion of the hidden-economy activities into more activities and participating in social welfare formal activities. Social committees exist in policy many villages and collective work also remains * implementing a policy of sociocultural de- an important instrument for a program of rural velopment. development. 66 REsEARCH PROGRAM reforms must create favorable conditions and opportunities for all economic agents, including The national rural development program could the self-employed, and small and medium-size be facilitated and accelerated through research enterprises, and should avoid concentrating carried outinthree different areas:Wielkopolska economic initiative in the hands of the state, District (advanced agriculture); Kielce District local governments or other established institu- (small farms and part-time farmers); and East- tions. ern Border (depopulated and poor regions). In each of the chosen areas inhabited by about Endnotes 50,000 people, the program would include studying the constraints and opportunities for This annex was prepared by Maria Nowak development; training, with contribution from (Caisse centrale de cooperation 6conomique/ existing institutions; experimental develop- consultant, EC), assisted by Piotr Eberhardt mental work based on local resources and ini- (Institute of Geography and Land Policy), tiatives, financed by existing banks and funds; IzoslawFrenkelandMariaHalamska(Institute and conclusions and generalizations. of Rural and Agricultural Development), This program could be carried out with the Wladyslaw Lukasik (Council of Ministers), assistance of local self-governments. The main Stefan Malecki (Ministry of Rural Welfare), goal would be to create appropriate conditions Andrzej Pilichowski and Elzbieta Piotrowska for activities by private farmers and small en- (Institute of Rural Sociology, Lodz University), trepreneurs, without trying to replace them. and Jerzy Wilkin (Warsaw University). The history of rural development projects and programs all over the world shows how easily 1. The trend for the population in produc- they can be prey to bureaucracy and vanish tive age was decreasing - reaching a low level along with the funds which helped their emer- of 300,000 persons during 1986-1990-but will gence. What is at stake here are not projects of increase and reach 700,000 persons in 1991- this type but rather studies and actions from 1995, and up to a million in the next period. which general conclusions can be drawn. The team responsible for this program should con- 2. The most often cited example illustrat- sist of representatives of universities and re- ingthis model is the area of Bolognain northern search institutes and local representatives. Italy where an extensive mechanical and textile industry based on small flexible units has de- Concluding comments veloped over the past 30 years. Many small enterprises have been constituted by creating This annex is a first attempt at defining a rural narrowly specialized workshops with managers development strategy for Poland. We have who were trained in large plants. There are emphasized the necessity to base the strategy examples of this approach to creating small on the current reality and on human factors, production units in Poland. In the area of taking into account the demographic and psy- Konskie where the metallurgic industry has a chological features that are observed in rural 300-year long tradition, and where there are areas. We would like to stress that changes in three large metallurgic plants (foundries and the behavior and mentality of the rural popula- mechanical working plants) employing some tion willbe as critical to the success ofthe reform 5,000 workers, about 100 small fitting, me- process as changes in property rights and own- chanical, and pressing production units have ership. Finally, we would like to point out that been created in recent years. 67 Annex 3 Changes in food demand, January 1989 April 1990, and food demand projections This annex presents an analysis of the changes consumer subsidies in 1987) were in effect for in food consumption that have taken place in - milk and dairy products (40% of food Poland largely as a result ofthe liberalization of subsidies in 1987); agricultural markets and removal offood subsi- - meat, meat products and fish (27.5%); dies in 1989. The analysis is based on monthly - cereals (25.6%); Household Budget Survey estimates for Janu- - sugar; ary 1989 - April 1990 from the Central Statisti- - fats and oils. cal Office (see appendix on data sources). The overall subsidy rate for food (value of sub- The annex also presents food demand projec- sidy divided by value of retail sales) was 32.5 % tions for 1990 - 2000. These long term projec- in 1987. Potatoes, vegetables and fruits were tions are done, at constant prices, on the basis of not subject to state procurement and were not exogenously given income and population growth subsidized. rates, using income elasticities by income group * During the period January-July 1989, prices estimated for this annex. Two different sce- of most food products were not controlled but narios (high and low income growth) are pre- the system of subsidies (and meat rationing) sented. The final section of this annex summa- was still in operation. rizes the findings and discusses the projections. * On August 1, 1989, official fixed procure- ment prices for farm products and retail prices Policy reforms affecting food for food products were replaced by a system of consumption market-based prices. Subsidies on food prod- ucts and on industrial feed for animals were not Important policy reforms implemented in 1989 yet removed but were frozen (until their elimi- have affected prices and quantities of agricul- nation the following October). Between August tural products consumed by Polish households. and October, the increase in the retail prices of The reforms, carried out in several stages, are food was much higher than the increase in the briefly summarized in this section. producer prices of meat, dairy and crops deliv- ered to the food-processing industries. At the end of 1988, the state monopoly of * On October 1, 1989, all consumer subsidies procurement of grains and livestock products on food (with the exception of subsidies on low- was abolished. The food subsidy system, how- fat cottage cheese, 2% fat milk and baby food) ever, was still in place so that this reform hardly and the subsidy on concentrated feed were re- affected quantities and prices of food consumed moved.' by households. Subsidies on food (accounting * On January 1, 1990, the stabilization plan for 3.45% of GDP and making up 31% of total was implemented: it included many measures 69 thathave further affected agricultural markets. with reductions in real wages enforced through * First, a major devaluation of the exchange high marginal tax rates on wage increases; rate (ZI 9,500 per US$ versus an average 1989 * Fifth, reductions in subsidies of agricul- rate of Z1 1,400 per US$); tural inputs (to one quarter of the level of 1989) * Second, the elimination of the system of and an abolishment of the Price Equalization centrally allocated foreign exchange and the Fund for foreign trade and thus the elimination liberalization of all current account transac- of the corresponding subsidies. Other subsidies tions; the reduction of most barriers to export affecting agriculture, such as those for energy, and import. Many trade restrictions have been are still in place. removed although, in December 1989, a new customs law (consistent with GAIT) allowing As described in the following sections, these the imposition of quotas, licenses, surcharges reforms have considerably affected levels and and higher tariffs was adopted; patterns of income, expenditure and consump- * Third, sharp increases in nominal interest tion by households. rates (monthly rates of 36% in January, 20% in February, 10% in March, 8% in April, 5.5% in Changes in food prices May versus ayearly rate of approximately 100% for 1989); As a result of the measures summarized in the - Fourth, an anti-inflationary income policy, previous section and of other (policy- and non- Table 3.1 Monthly consumer price indices, January 1988 - April 190. Jan Feb March April May June July August Consumer price index 1988 128.40 138.20 143.20 146.00 147.90 149.40 150.90 152.20 Previous Year = 100 1989 183.20 176.20 175.50 176.10 178.20 180.70 184.40 198.10 1990 1,189.70 1,281.40 1,296.80 1,298.20 1988 103.70 117.20 105.70 107.10 102.40 102.90 103.20 100.60 Previous Month = 100 1989 111.00 107.90 108.10 109.80 107.20 106.10 109.50 139.50 1990 178.80 123.90 104.70 108.10 Consumer food price index 1988 123.40 136.00 142.30 144.30 145.70 146.10 146.50 146.90 Previous Year = 100 1989 164.20 154.10 152.20 155.10 159.20 162.20 166.60 191.20 1990 1,654.90 1,735.00 1,713.00 1,691.10 1988 101.70 123.00 106.40 103.80 101.90 102.30 100.80 97.70 Previous Month = 100 1989 105.70 108.00 108.10 114.40 109.80 104.30 107.10 180.40 1990 179.00 118.10 100.00 112A0 Sept. Oct, Nov. Dec. Jan. IDec. Consumer price index 1988 153.60 155.40 157.60 160.20 160.20 Previous Year = 100 1989 219.60 258.10 300.30 344.10 344.10 1988 102.80 102.60 103.80 104.90 Previous Month = 100 1989 134.40 154.80 :122.40 117.70 Consumer food price index 1988 147.50 148.00 148.80 150.10 150.10 Previous Year = 100 1989 227.90 290.50 353.20 412.60 412.60 1988 101.20 101.70 104.40 104.30 Previous Month = 100 1989 144.50 16S.10 117.40 111.60 Notes: 'Previous year' means corresponding period of previous year on accrual basis. Consumer price index is based on all goods and services. Consumer food price index is based on retail pnces of food items. Source Central Statistical Office, Informacja Statysbtyna, May 1990. 70 policy-related) factors, the official price index Table 3.3 Nominal (average monthly for food increased sharply after August 1989 per capita) income in 1-1990 and and at the beginning of 1990. Table 3.1 shows comparison with 1-89 and PV-89 the official indicesforretail prices of(1) all goods and services (CPI) and (2) food items for the Household Type ZL 7housand 1-89 = 100 IV-89 = 100 period January 1988-April 1990. Worker 396.60 821 172 The increase in retail prices of goods and Farmer/worker 387.30 837 140 services translates into higher costs of livingfor Farmer 340.06 860 110 Polish households: in the first quarter of 1990 (I- Retiree/pensioner 341.70 985 199 1990), the cost of living was 13-14 times higher than in the same quarter in 1989 and approxi- Changes in incomes mately two and a half times higher than in IV- 1989. Price increases have affected households Nominal income estimates calculated by house- differentially. ThisisshowninTable3.2forfour hold category on the basis of family budget different types of households: workers, farmer- surveys and national accounts data indicate workers, farmers, and pensioners. For farmer great differences in average per capita monthly and farmer-worker households, the index does income and in changes in average monthly in- not take into account the value of the food that come depending on the household category (see is produced on-farm and consumed by the Table 3.3). household. Compared with the same quarter one year ago (I-1989), average nominal income has grown most in pensioner households and least in worker households. This has reduced disparities in per capita income levels between the different types Table 3.2 Cost of living increase in of households. The relatively low growth of 1-1990, by type of household income in I-1990 as compared with IV-1989 in farm households, shown in Table 3.3, is due to I-1989 IV-1989 the production cycle: the lowest levels of farm Worker Households =100 =100 income in any year are always recorded during Total 1,319 236 the first quarter. Food 1,757 212 Retail consumer prices increased much more Alcoholic beverages 1,144 184 Nonfood products 1,022 259 than nomial icomes i I-1990 compared with Services 1,304 IV-1989. Price increases amounted to 248% causing an average decrease of about 29% in Farmer/Worker Households (*) purchasing power during the period. Total 1,351 248 Real incomes have declined by 30-37% be- Food 2,090 237 tween March 1989 and March 1990, depending Alcoholic beverages 1,139 188 on the type of household. In other words, the Nonfood products 1,076 271 Services 1,076 329 capacity of households to satisfy their needs at Services 1,2" 329 a level similar to 1-1989 has been limited to 63- Farmer Households(*) 70% (see Table 3.4). Total 1,341 254 Food 2,119 248 SOURCES OF HOUSEHOLD INCOMES Alcoholic beverages 1,138 189 Nonfood products 1,096 276 Changes in the structure of nominal income Services 1,254 317 have also been significant. There has been a Retiree/Pensioner Households reduction in the share of wages from 45.2% in I- Total 1,434 246 1989 to 39.1% in I- 1990 and an increase in social Food 1,850 218 security benefits from 13.3% to 19.4%, respec- Alcoholic beverages 1,138 184 tively (see Table 3.5). Nonfood products 1,049 284 Compared with 1-1989, there has been a de- Services 1,251 30 crease in the share of wages in total income in all Note: * = excluding faod fmn own farm types of households: in worker households from Soure: (GUS). 87.7 to83.6%, infarmer/workerhouseholdsfrom 71 Table 3.4 Real (average monthly per 56% to 52.8%, and in pensionerhouseholdsfrom capita) income in 1-1990 compared with I- 14.7% to 9.4%. By contrast, in all household 89 and IV-89 types, the importance of social benefits has increased - mainly as a result of the reevalua- 1-1989 IV-1989 tion of retirement benefits and an increase in Household Type =100 =100 social benefits for farmers. In 1-1990 social Worker 63 73 benefits amounted to 86.3% of pensionerhouse- Farmer/worker 64 57 holds'income, 14.9% offarmers', 14.5% offarmer- Farmer 66 44 workers'and 13.9% ofworkers'. This represents Retiree/pensioner 70 82 an increase of 5.9, 3.8,2.9 and 3.6 points, respec- tively, compared with I-1989. Table 3.5 Structure of nominal income, In the case of farm households, the share of 1-1989 and 1-1990 income from the farm in total income has fallen (in percent of total) from 87% in 1-1989 to approximately 81% in I- 1-1989 1-1990 1990. In farmer/worker households, the ratio had remained almost unchanged (about 31%). Total Income 100% 100% It is difficult to ascertain whether this is due to of which: changes in the terms of trade facing farmers or Wages 45.3% 39.1% to difficulties in valuing farm output duringthe Social benefits 13.3% 19.4% first quarter ofthe year (some GUS statisticians Revenue of private economy, except farming 12.4% 12.2% consider that incomes from the farm in 1-1990 Other incomes 29.0% 29.3% are underestimated by 20 to 30%). Table 3.6 Frequency distribution of SIZE DISTRIBUTION OF INCOME household per capita income in worker and pensioner households, December Preliminary information on the size distribu- 1989 and March 1990 tion of incomes in December 1989 and March (in percen) 1990 is available for workers and for pensioners (see Table 3.6). It must be noted, however, that Income Group Houseidd Type December is not a typical month either with (per capita Retiree / onthly income) WorRer Pensioner respect to incomes (because of wage premia payments, increases in retirement payments December 1989 and pensions, profit shares, awards and allow- 100,000 Zi - and less 0.8 3.9 ances) or with respect to spending (because of 100,001 - 150,000 7.3 15.6 the holiday season). 150,001 - 200,000 17.0 24.6 The Polish Institute of Labor and Social Af- 200,001 - 250,000 19.5 24.3 fairs calculates quarterly a poverty line called 250,001 - 300,000 17.3 16.2 the social minimum. It is based on a basket of 300,001 -400,000 9.0 4.1 goods considerednecessaryforsubsistence, with 400,001-450,000 6.2 1.8 an additional 10 percent for discretionary 450,001 - 500,000 3.5 0.9 household spending, and is adjusted quarterly 500,001 and over 6.8 1.6 to take inflation into account. The data pub- March 1990 lished by the Institute indicate an average per capita minimum income of ZI 150,000 for 1989.2 150,000 Zi - and less 0.4 1.3 Among workers, 8% of households were below 160,001- 200,000 2.2 4.3 this poverty line and among pensioners 19% of 200,001 - 250,000 5.9 8.0 250,001 - 350,000 21.4 25.7 households. Considering that the increase in 350,001 -450,000 23.0 27.0 consumer prices over the December-March pe- 450,001 - 550,000 18.5 18.1 riod was 132%, the level ofthe minimum income 550,001 -660,000 12.3 7.8 for March 1990 may be taken at ZI 300,000 per 750,001 850,000 .6 41.7 capita. Using ZI 300,000 as a poverty line, one 850,001 - and over 6.2 2.1 may consider that 30% of worker households were below this level and 39% among pensioner NoLe P,iminary estimat. households in March 1990. 72 Changes in expenditure patterns comparison with IV-1989, by 30-40% (see Table 3.7). FOOD AND NONFOOD EXPENDITURES Important changes in the structure of house- hold expenditures have been forced primarily It is estimated that, in real terms, total house- by the higher increase in food prices compared hold expenditures in 1-1990 have decreased by with nonfood prices (especiallyhousingwhich is 33% with respect to the previous year and, in subsidized). Inflation-driven purchases ofgoods and hoarding, which was observed during the hyperinflation of 1989,has stopped and the high prices of goods and services caused some Table 3.7 Real per capita expenditures households to forego purchases or defer them to in 1-1990 the future. Household 7~ype 1-1989 141989 The change in the structure of household 100 = expenditures and average monthly expenditures during 1-1990 are presented, by type of house- Worker 65 69 hold, in Table 3.8 below. Nominal average per Farmer/worker 67 61 capita expenditures by households in I-1990 Farmer 68 54 increased almost 8-fold compared to the previ- Retireelpensioner 67 78 ous year, with food expenditures increasing Table 3.8 Household expenditures for n2ajor products, per capita, in I-190 Retireel Expenditures Worker Farmer/Worker Farmer Pensioners 1-1990, average monthly expenditures in Zi V000 Total 339.6 311.5 344.1 312.0 Yearly increase a-1989 - 100) Total 853 873 883 936 of which: Food 1,166 1,177 1,253 1,200 Clothing and shoes 489 610 500 529 Housing 802 789 706 769 Fuel/electric power and heating 959 733 630 940 Personal hygiene and health protection 716 771 824 771 Culture, education,upbringing, sport, tourism and others 650 749 507 559 Transport and telecommunications 850 1,014 1,141 986 1-1990 structure of expenditures (percent of total) Food 51.9 50.6 52.4 60.3 Clothing and shoes 10.9 11.1 9.0 8.4 Housing 9.6 12.0 10.5 8.7 Fuel/electric power and heating 2.8 2.9 3.2 6.0 Personal hygiene and health protection 2.9 2.2 2.0 3.5 Culture, education, upbringing, sport, tourism and others 6.7 4.3 3.4 3.7 Transport and telecommunications 5.3 6.4 8.0 4.2 1-1989 structure of expenditures (percent of total) Food 38.0 37.5 36.9 47.0 Clothing and shoes 19.0 19.0 15.9 14.8 Housing 10.2 13.3 13.2 10.6 Fuel/electric power and heating 2.5 3.5 4.4 6.0 Personal hygiene and health protection 3.5 2.4 2.1 4.2 Culture, education, upbringing, sport, tourism and others 8.7 5.0 5.9 6.2 Transport and telecommunications 6.4 6.5 6.2 4.0 73 Figure 3.1 Food share in total expenditures, November - (percent of total) 70 60 20 40 Nov Dec Jan lFeb >'ti_4 i r 30 Workers Retirees Farm er much more than othe-r products and services. (milk, butle~ &... Ie-.. ;:.Snd o-........- -llbeefO Changes in the share of food in total expendi- over thie pastr ; <- e:n tures by household type for the 6-month period November 1989 - April 1990 are sho Jan in Feg- Ch g- ia; ption ure 3.1. As a result, the structure of expenditures Ds a .Zi. FIRST compared with I-1989 has changed greatly with QUARTER O]P the food share in tne budget increasing by 13- 16%. Expenditures on nonfood products and Average .-onrri' - n ...ntion of services (clothing, culture, education, upbring- basic food i-e-s s giv. en in ing, sport, tourism and others) have been re- Table 3.1. hly con- duced correspondingly (see Table 3.8). sumption i e --e given in Table SA.L - T 4- E S8 ? sump- CHANGES IN FOOD BUDGET SEARES tion in nF 1 an d re- fer, properkY, Y 7 -uisitions Table 3.9 shows monthly changes in the budget of food and notto c -'' House- share (expenditures by food item in percent of holds partic:tp tig g e e- I ou*, a ques- total food expenditures) of an average house- tionnar: is quan- hold for 17 food groups for the period January tities purclas d; -.on from 1989 to April 1990. Meat and dairy products own produnc,21211..'; - A.luat-cna;fod products alone account for nearly half of household food acquired awjiltout 0Pnrodduction or expenditures. Figures3.2and3.3 showrmonthly gifts) are aluedi a;! p -- ,e e recorded changes in the budget share for dairy products for the sa. ie m i u e ihe differ- 74 Table 3.9 Food expenditure shares, January 1989 - April 1990. (percent of total food expenditures) 1989 I II In IV v VI VII VIII ix X XI XII Average Cereals 6.22 6.12 4.97 5.99 5.74 5.16 4.55 8.24 5.62 6.64 8.08 7.47 6.23 Potatoes 2.85 3.08 2.50 3.25 2.96 4.28 4.70 6.29 6.36 5.87 1.99 1.23 3.78 Pulses 0.48 0.46 0.33 0.31 0.23 0.12 0.32 0.42 0.22 0.20 0.24 0.25 0.30 Vegetables 6.56 6.97 7.83 11.38 16.00 15.89 17.52 23.38 8.89 6.20 4.57 4.29 10.79 Fruit and products 10.40 8.52 7.64 5.67 4.28 12.19 14.20 15.71 6.18 3.84 4.90 6.71 8.35 Meat and products 29.17 29.65 33.21 29.35 28.50 24.72 22.49 50.69 39.32 39.61 39.62 38.24 33.71 - Pork 7.52 7.45 8.75 7.60 7.46 6.17 5.94 10.45 10.41 10.09 9.89 10.32 8.51 - Beef 2.35 2.58 2.03 2.46 2.33 1.91 1.87 3.51 3.57 3.42 3.48 2.70 2.68 - Poultry 3.49 3.79 3.86 4.16 4.20 4.13 3.99 4.87 4.21 4.17 3.76 3.05 3.97 Fish and products 2.55 3.21 2.77 2.34 2.03 1.71 1A5 2.11 1A3 1.52 1.79 3.71 2.22 Butter 4.80 4.50 3.99 4.53 4.14 3.53 3.27 7.55 6.74 8.73 7.02 4.76 5.30 Animal fat 0.98 0.95 0.81 0.81 0.76 0.69 0.72 1.67 1.53 1.95 2.09 1.56 1.21 Vegetable oils 1.29 1.33 1.32 1.38 1.15 0.95 0.88 1.33 1.26 1.64 2.10 2.09 1.39 Eggs 5.78 5.60 5.33 4.77 4.34 3.97 4.58 6.95 3.69 3.29 3.62 4.06 4.66 Mfilk 15.23 15.36 13.67 16.96 17.77 16.33 13.15 22.01 13.25 14.92 14.69 11.95 15.44 Cheese 3.05 2.92 2.30 2.53 2.41 2.04 1.85 4.22 3.36 3.62 3.47 2.41 2.85 Sugar 8.02 8.36 8.96 9.00 8.36 8.33 7.84 9.91 4.55 6.17 8.42 10.25 8.18 All Food Items 39.11 39.91 39.97 38.20 39.33 40.95 44.41 62.33 52.27 55.92 51.66 52.92 45.58 (share of total expenditures) 1990 Average Average I I III IV 1990 (I-IV) 1989 (I-IV) Cereals 12.64 13.76 12.96 10.06 12.35 5.82 Potatoes 1.54 1.55 1.42 1.10 1.40 2.92 Pulses 0.25 0.27 0.24 0.18 0.24 0.39 Vegetables 3.02 3.35 3.58 4.35 3.57 8.19 Fruit and products 4.40 4.59 5.14 4.24 4.59 8.06 Meat and products 38.97 39.37 40.95 47.82 41.78 30.34 - Pork 10.16 9.86 9.86 11.85 10.43 7.83 - Beef 3.72 4.04 4.52 3.28 3.89 2.35 - Poultry 3.47 3.39 3.46 4.31 3.66 3.82 Fish and products 1.68 2.31 2.20 1.71 1.98 2.72 Butter 4.75 3.59 3.25 2.80 3.60 4.46 Animal fat 2.12 2.16 1.90 1.60 1.95 0.89 Vegetable oils 2.39 2.00 1.76 1.52 1.92 1.33 Eggs 4.34 3.45 2.73 2.96 3.37 5.37 Milk 14.74 5.30 16.09 16.17 13.07 15.31 Cheese 3.14 3.26 3.21 2.23 2.96 2.70 Sugar 8.50 7.48 7.30 3.73 6.75 8.59 All Food Items 58.83 53.57 50.14 55.34 54.47 39.30 (share of total expenditures) 75 Figure 3.2 Share of dairy in food expenditures (January 1989 - April 1990) Percent 24 20 16 12 8 4 0 I II II V V VI VII VIII IX X XI XII I II III IV Month Milk -- Butter Cheese Figure 3.3 Share of meat in food expenditures (January 1989 - April 1990) Percent 60 50 40 30 20 10 __- - - - -- - 0 I II m IV V V VI VI IX X xI XII I II III IV Month Meat products -- Pork Beef 76 Table 3.10 Average monthly per capita Table 3.11 Changes in average monthly consumption of basic food products in per capita consumption, 1-1990 compared 1-1990 with 1-1989 (1-1989=100) Household type Household type Product Farmer/ Retireel Farmer/ Retireel (in kg) Worker Farmer Worker Pensioner Product Worker Farmer Worker Pensioner Flour 1.10 2.20 2.46 1.82 Flour 92 105 102 89 Bread 6.97 7.90 8.38 8.26 Bread 102 97 97 101 Noodles 0.14 0.07 0.08 0.20 Noodles 93 70 73 87 Rice and Rice and cereal flakes 0.29 0.47 0.49 0.66 cereal flakes 73 71 70 73 Potatoes 4.46 9.58 10.90 6.59 Potatoes 110 97 101 113 Pulses, Pulses, vegetables, vegetables, mushrooms mushrooms and processed and processed products 3.25 4.42 5.03 4.72 products 93 77 102 94 Fruit and Fruit and processed fruit 2.60 1.75 1.85 2.93 processed fruit 94 84 88 87 Meat and Meat and processed meat 4.79 4.96 6.18 5.64 processed meat 94 91 97 100 Meat 2.62 3.11 4.16 3.28 Meat 93 93 101 99 Processed meat 2.17 1.85 2.02 2.36 Processed meat 94 88 71 73 Fish and Fish and processed fish 0.39 0.23 0.49 processed fish 78 70 71 73 Pats 1.47 1.53 1.80 2.02 Fats 94 92 96 94 of which: of which: Butter 0.67 0.59 0.60 0.78 Butter 93 97 100 94 Animal fat 0.37 0.55 0.79 0.59 Animal fat 106 95 101 105 Milk 7.11 10.10 12.78 11.44 Milk 95 103 108 102 Cream Cream and sour cream 0.43 0.72 0.89 0.58 and sour cream 77 92 100 72 Cheese 0.80 0.86 0.91 1.09 Cheese 81 90 95 78 Eggs 15.04 19.23 22.92 20.02 Eggs 86 92 97 88 Sugar 1.47 1.78 2.00 2.06 Sugar 77 73 72 77 ence between acquisition and consumption is sumption ofpotatoes and animalfats, andfarmer only significant in the case of nonperishable, households offlour and milk. Farm households storable items such as potatoes and we have have a higher per capita consumption of flour, therefore used the term 'consumption' through- potatoes, meat, poultry and cream (low fat and out this annex. normal). Worker and pensioner households Generally, in all types of households - but consume more pasta, fruit and processed fruit, especially in worker households (with or with- processed meat and fish (including processed out additional farm income) - a decrease in fish). consumption for most food products can be ob- In order to compare per capita food quantities served. The most significant decrease in con- consumedamongdifferenthouseholdtypes, one sumption is in sugar, fish, and rice and cereal has to consider demographic differences be- flakes. Worker and retiree households have tween groups. Worker households generally also greatly reduced their consumption of dairy have more children than farner or farmer- products (cream and cheese). Fanner house- workerhouseholds. Pensionerhouseholds con- holds have greatly reduced their consumption of sist mostly of two elderly adults. To take these pasta. Compared with l-1989, workerand pen- demographic differences into account, Table 3.12 sioner households have the most increased con- shows average monthly consumption recalcu- 77 Table 3.12 Average monthly consump- Table 3.13 Nutritional requirements tion of basic food products corrected for (monthly per capita, adult equivalent, in kg) differences in consumption units, in I-1990 Minimum Recommended Cereals 12A7 9.73 Household type of which: Product Farmer/ Retiree/ Bread (mixed) 13.38 10.65 (in kg) Worker Farmer Worker Pensioner Flour/pasta 1.37 1.22 Other cereals 1.06 0.76 Flour 1.10 2.20 2.46 1.82 Milk and dai:ry 18.25 31.94 Flour 1.38 2.66 2.98 2.06 of which: Bread 8.71 9.56 10.14 9.33 Milk 9.13 15.21 Noodles 0.18 0.08 0.10 0.23 Cottage cheese 0.76 1.06 Rice and Cheese 0.46 0.91 cereal flakes 0.36 0.57 0.59 0.75 Eggs (number) 7.5 23 Potatoes 5.58 11.59 13.19 7.45 Meat and fish 3.65 5.32 Pulses, of which: vegetables, Meat 2.13 2.89 mushrooms Sausages 0.61 0.91 and processed Fish 0.76 1.22 products 4.06 5.35 6.09 5.33 Butter 0.61 0.91 Fruit and Vegetable oils processed fruit 3.25 2.12 2.24 3.31 Soybean/sunflower oil 0.15 0.15 Meat and Potatoes 13.69 9.13 processed meat 5.99 6.00 7.48 6.37 Fruits and vegetables Meat 3.28 3.76 5.03 3.71 Vitamin C-rich 5.78 7.60 Processed meat 2.71 2.24 2.45 2.66 Carotine-rich 3.65 4.56 Fish and Dry Pulses 0.37 0.09 processed fish 0.49 0.28 0.36 0.55 Sugar 1.52 1.98 Fats 1.84 1.86 2.18 2.28 of which: Note: The figures apply to a male adult, 21-64 years, for Butter 0.48 0.71 0.72 0.88 ~~~~moderately heavy work conditions. Butter 0.48 0.71 0.72 0.88 mSoudre: Instytut Zywnosci i Zywienia, 1987. Animal fat 0.46 0.67 0.96 0.67 Milk 8.89 12.22 15.46 12.93 Cream and sour cream 0.54 0.87 1.08 0.66 Cheese 1.00 1.04 1.10 1.23 relative priices of 1989-90, it is likely that the Eggs 18.80 23.27 27.70 17.72 same dietary requirements would translate to- Sugar 1.84 2.15 2.42 2.33 day into other combinations of food intakes. MONTHLY CHANGES IN FOOD CONSUMPTION, lated at the level of so-called consumption units JANUARY 1989 - APRIL 1990 - that is, using different demographic weights to account for the population structure. Table 3.14 shows monthly changes in average per capita consumption. This series represents Nutritional norms. The data in Table 3.12 an average for the population (all household above can be compared with normative informa- types) and reflects two influences: the price tion on minimum food requirements published changes that have taken place in 1989-90 and in Poland. The Instytut Zywnosci i Zywienia the pattern of seasonality of consumption usu- (Prof. Szcygiel) published in 1987 a list of ally observed in Poland. dietary requirements. The data in Table 3.13 Seasonality is linked to several factors: ab- below presents both the minimum requirements sence of significant amounts of imports, climate (minimum levels required for an adult's normal (for vegetables and fruits, for instance), and work) and the target requirements (recom- seasonality of production (due to the poor infra- mended dietary allowances) published by IZiZ. structure - cooling, storing facilities - in the The kg figures are obtained by translating re- food-processing industry). The level of income quired levels of energy (2,630 caVday) and nutri- also affects the seasonality of purchases: poor ents (minerals and vitamins) into food intake at households purchase nonperishable food (for prices prevailing in 1987. Given the changes in example, potatoes in the last quarter of the 78 year) when i . ies -tore it at home for The long-term forecasts that are presented in the rest of i- -. c-> a,r households are less this section assume that the main factor that likely to exhib w i.i"avior. Figures 3.4-3.7 will influence consumption in the future is the show the pate, f- s onality of purchases of level of income and that other factors (such as milk, cheese, e- l . s. E . Fotatoes. changes in prices, in the distribution of income or in family size) do not affect food consumption SELF- SUF7F -:UeH-n'1OLDS in a systematic (nonrandom) way. They are therefore tentative and must be interpreted Table 3.15 ow30 U7 e cA' tot al per capita with caution. In this section, we describe the consumptiono btat rTigJalaes from the farm's models used for the projections and the results own produa, -. oEC-!nonth period, com- obtained. The implications of this exercise from paring uthe pe n ' 'S £''.-,.gFst 1i988 to March 1989 the point of view of an agricultural strategy are (before th e fcd ep 3 Bc reases) with the period presented in the following section. August 1-? 33. The share of own Long term changes in demand for food were co:nsunpt';'S r '.. xas ready high in 1988/ calculated, at constant prices, using exogenous 89, has iner2ar3e d'b;o a.rJ.-ost all categories of growth rates of income and population. Two goods. Ito sothat, according scenarios are presented. The high income growth to the s1rh. s.:sebolds have a high scenario assumes that real income will decline self-su9Li&ie. zv T-,:" ^ !?, by 14% in 1990 and then grow at an annual rate of 5% during tne 1991-2000 period, with popu- Foowd d e .:. .r 990-2000 lation growing at a rate of 0.6% in 1990-92 and 0.8% in 1993-2000 (with a 1989 population of 38 Food de-iern-ni ,, u ;Ja &sLar iteem depends million).4 The low income growth scenario as- mainly on %-'. '" 1. o!e price of that item; sumes that real income will decline by 20% in (2) thke pri.ce^ ., ori n iitems; (3) the leve! of 1990, 5% in 1991, stagnate in 1992 (0%), and per capita -4; t population. In a then grow at a rate of 3% in real terms during mrlarket econ>. rt ~- --; i i , pr Jections for food the 1993-2000 period." Population growth as- demand wvo-i - - hat one sta-rt from an sumptions are the same as those of the high equilibri -x^i oi m i- rketforaparticu- income scenario. Base levels of per capita con- lar food pro , e te the grow,Ith in sumption are those of 1989 presented in Table demand by 'U n iYe respective elastici- 3,14. ties (own-> 'e .r ; cs, and income) by Incomeelasticitieswereestimatedfromcross- exogenou-.s pr. cc -; nr.',es; income, and sectional data for the last quarter of 1989 (that populatior . is, when markets for food were liberalized).6 The At present, 7i- l -- Žs mar'kets are not in elasticities used for the projections are shown in an equil- . The n-_.PaPolish economy is Table 3.16. We use these estimates in the currentlyin aten c osticiies. The long-term projections are presented in 79 Tables 3.17-18 (high-income scenario) andTables Summary of findings 3.19-20 (low-income scenario). Tables 3.18 and 3.20 present the projections on a per capita SHORT-TERM CHANGES IN HOUSEHOLD basis. Tables 3.20 and 3.22 present projections E END1 TURE AND CONSUMPON PATFERNS of food demand for the whole population. (Note that these figures refer only to demand for Households have experienced a sharp reduction human consumption and do notinclude demand in real income as a result of the removal of food for feed.) Finally, Tables 3.21-22 show annual subsidies and the liberalization of food prices, growth of food demand, for each scenario. but their overall consumption of food, in quan- Table 3.14 Food consumption, January 1989 - April 1990 (in kilograms per capita) 1989 1989 1989 I II III IV V VI VII VIII IX X Xl XII Total Average Cereals 7.99 7.56 8.23 8.04 7.98 8.31 8.27 7.55 7.80 7.89 7A7 8.08 95.2 7.93 Potatoes 5.66 5.48 5.75 6A9 6.21 6.24 7.54 8.35 19.83 24.88 7.97 5.64 110.0 9.17 Pulses 0.11 0.09 0.09 0.07 0.06 0.04 0.13 0.13 0.13 0.12 0.11 0.11 1.2 0.10 Vegetables 3.85 3.73 4.11 3.19 3.51 4.91 6.83 9.32 8.10 8.31 4.94 4.51 65.3 5.44 Fruits and fruit products 2.88 2.57 2.69 1.66 1.12 3.92 5.07 4.25 4.55 3.02 2.53 2.93 37.2 3.10 Meat and meat products 4.97 4.94 6.01 5.11 5.17 5.03 4.97 4.79 5.30 5.18 5.26 6.37 63.1 5.26 of which: Pork 1.25 1.23 1.69 1.34 1.38 1.31 1.32 1.21 1.27 1.22 1.24 2.00 16.5 1.37 Beef 0.50 0.52 0.51 0.51 0.51 0A7 0.50 0.47 0.49 0A7 0.53 0.57 6.1 0.50 Poultry 0.70 0.71 0.03 0.78 0.76 0.79 0.81 0.83 0.93 0.85 0.73 0.82 8.7 0.73 Fish and fish products 0.42 0.50 0.58 0.41 0.37 0.35 0.33 0.29 0.32 0.38 0.39 1.03 5.4 OA5 Butter 0.71 0.66 0.75 0.74 0.76 0.81 0.87 0.73 0.79 0.65 0.65 0.70 8.8 0.74 Animal fat 0.47 0.46 OAS 0.41 0.40 0.44 0.50 0.45 0.48 0.50 0A9 0.49 5.5 0.46 Vegetable oil 0.51 0.50 0.60 0.51 0.49 OA9 0.52 0.41 OA9 0.55 0.54 0.63 6.2 0.52 Eggs (number) 17.30 17.71 23.45 19.39 19.39 18.27 16.51 16.12 16.73 16.11 5.27 18.25 204.5 17.04 Milk (liters) 13.80 13.27 14.67 14.64 15.71 16.19 15.18 14.27 14.34 13.63 13.16 12.78 171.6 14.30 Cheese 1.18 1.15 1.29 1.20 1.24 1.26 1.21 1.06 1.09 1.03 1.00 0.97 13.6 1.14 Sugar 2.68 2.39 3.05 3.34 2.90 3.68 3AO 2A1 2.27 2.27 2.26 3A1 34.0 2.84 1990 Average Average I II III IV I-IV 1990 I-IV 1989 Difference Cereals 7.92 7.05 7.86 7.50 7.58 7.95 -4.7% Potatoes 5.91 5.72 6.33 6.84 6.20 5.85 6.1% Pulses 0.11 0.10 0.10 0.09 0.10 0.09 11.1% Vegetables 3.63 3.59 3.72 3.73 3.67 3.72 -1.4% Fruits and fruit products 2.48 2A3 2.56 1.82 2.32 2A5 -5.2% Meat and meat products 4.78 4.87 5.48 5.87 5.25 5.26 -0.1% of which: Pork 1.18 1.17 1.27 1.54 1.29 1.38 -6.4% Beef 0.53 0.61 0.72 0.54 0.60 0.51 17.6% Poultry 0.67 0.62 0.72 0.87 0.72 0.56 29.7% Fish and fish products 0.34 0.40 0.41 0.34 0.37 0.48 -22.0% Butter 0.66 0.63 0.73 0.76 0.70 0.72 -2.8% Animal fat 0.47 0.44 0.46 OA1 OA5 OA5 -0.6% Vegetable oil 0.51 OA1 0.47 0.50 0.47 0.53 -10.8% Eggs (number) 15.80 16.60 18.80 21.70 18.23 19A6 -6.4% Milk (liters) 12.67 11.97 13.33 12.09 12.52 14.10 -11.2% Cheese 0.97 0.93 1.05 0.87 0.95 1.20 -20.6% Sugar 2.28 1.68 2.03 1.87 1.96 2.86 -31.4% 80 Table 3.15 Self-sufficiency ratios, August 88 - March 89 and August 89 - March 90 (own production as a percentage of per capita consumption) Farmer households Worker households Households 1988/89 1989190 1988189 1989/90 Cereals 13.7 32.3 1.3 1.9 Potatoes 99.2 97.9 28.1 29.0 Pulses 92.0 90.7 41.3 41.8 Vegetables (fresh and processed) 81.5 83.1 35.5 37.9 Fruits (fresh and processed) 77.0 72.8 24.0 22.3 Meat and meat products 72.9 73.8 9.6 11.0 Fish and fish products 0.9 1.0 1.2 0.5 Butter 9.9 18.6 0.3 1.1 Animal fat 57.5 62.7 7.8 8.4 Vegetable oils 1.2 0.0 0.0 0.0 Eggs 97.8 98.4 28.3 30.2 Milk and dairy (except butter and cheese) 93.1 94.3 11.0 11.2 Cheese 35.2 51.4 0.9 1.2 Sugar and sweets 0.0 0.0 0.3 0.6 tity terms, has not declined as drastically as 17.6%, now representing only 2.3% of expendi- previously reported. While real incomes have tures (compared with 3.9% a year ago). Poultry declined by 30-40% - depending on household consumption has increased by 30% and repre- type - in the first quarter of 1990 (I-1990) sents 3.8% of expenditures. compared with I-1989, consumption has de- * Consumption of cereals in various forms clined on average by 10-15%. The most signifi- (bread, flour, and the like) has declined by 4.7% cant decline in consumption has been observed and represents 5.8% of expenditures compared in sugar (31%) which accounts for 8.6% of aver- with 12.3% a year ago. age household expenditures at 1990 prices. In * Consumption ofpotatoes, which in Poland is terms of expenditures, however, profound not an inferior product,7 has increased by 6% changes took place over the past year. On and represents 2.9% of expenditures (compared average, households spent 55% of their income with 1.4% a year ago). on food in January-April 1990, compared with * Consumption offruits and vegetables, both 39% lastyear. Pensioners spent as much as 65% fresh and processed, has fallen by 5.2% and of their income on food. More than half (54%) of 1.4%, respectively. They represent now 8.0% food expenditures go to meat and dairy, on and 8.2% of expenditures, compared with 4.6% average, compared with 45% last year. and 3.6% respectively a year ago.8 * Consumption of dairy products has been The fall in household demand for most food seriously affected: milk (15.3% of expenditures, items is lower than commonly thought (and compared with 13.1% a year ago) has fallen by reported in newspapers). This is due to two 11.2%; cheese (2.7% of expenditures, compared factors. First, to the fact that households had with 3.0% a year ago) by 20.6%; but butter hoarded and bought nonperishable food before consumption (4.5% of expenditures, compared the price increases of October 1989. Second, with 3.6%) has fallen by only 2.8%. households have reduced their nonfood expen- * Consumption of meat and meat products ditures (such as clothing, education, and (representing30.3%oftotalhouseholdexpendi- durables) and deferred those expenses to the tures), overall, has not been affected by price future. Households have restructured their changes (fall of 0.1% in consumption). But expenditures according to relative price changes relative price changes have led households to but have attempted to maintain approximately substitute cheaper products: consumption of the same food consumption level as in the past. fresh pork has fallen by 6.4% and represents In macroeconomic terms, households have be- now 7.8% of expenditures (10.3% a year ago), haved overthe pastyear as ifthey adjusted their while fresh beef consumption has increased by consumption pattern to a lesser permanent in- 81 Figure 3A Monthly changes in milk Figure 3.5 Monthly changes in butter consumption consumption (liters per capita, per month, January 89-April 1990) (kg per capita per month, January 89-April 1990) 17 Iicapita 0.9Kgcapita 16 0.85 15 0.8 14 0.75 13 ~~~~~~~~~~~~~~~~0.7 IV 12 f V9 o.s: \ \ _ 1 1 0.6 - I IIIII IV V VI VII VIlII IX X Xi XII I 11 III IV V VIVi Vill IX X Xi XII Month Month 1989 -1990 -1989 -1990 Figure 3.6 Monthly changes in cereals Figure 3.7 Monthly changes in potatoes consumption consumption (kg per capita per month, January 89 - April 1990) (kg per capitar per month, January 89- April 1990) Kg/capita Kg/capita 8.4 25 8.2 23 2 1 8 19 7.8 ~~~~~~~~~~~~~17 15 13 7 .4 11 1 ~~~~~~~~~~~~~9 7.2 1 ~~~~~~~~~~~~~7 7 L 5 I IIIII IV V VIVIVl iii IX X Xi XII I II IV V VI VIl VIIIix x xiXII Month Month e1989 1990 1989 - 1990 82 Table 3.16 Income elasticities used for long-term projections A. High-income scenario 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Income level 1989=100 86.0 90.3 94.8 99.6 104.5 109.8 116.3 121.0 127.1 133.4 140.1 Flour 0.13 0.12 0.11 0.11 0.10 0.10 0.09 0.09 0.08 0.08 0.08 Bread 0.10 0.10 0.09 0.09 0.08 0.08 0.08 0.07 0.07 0.07 0.06 Other cereals 0.18 0.18 0.17 0.16 0.15 0.14 0.13 0.13 0.12 0.12 0.11 Potatoes 0.28 0.27 0.26 0.25 0.23 0.22 0.21 0.20 0.19 0.19 0.18 Pulses and vegetables 0.25 0.24 0.23 0.22 0.20 0.20 0.19 0.18 0.17 0.16 0.16 Fruits and fruit products 0.28 0.26 0.25 0.24 0.22 0.21 0.20 0.19 0.19 0.18 0.17 Meat and meat products 0.23 0.22 0.20 0.19 0.18 0.17 0.17 0.16 0.15 0.15 0.14 Pork 0.35 0.34 0.32 0.30 0.29 0.27 0.26 0.25 0.24 0.23 0.22 Beef 0.11 0.11 0.10 0.10 0.09 0.09 0.08 0.08 0.08 0.07 0.07 Poultry 0.26 0.24 0.23 0.22 0.21 0.20 0.19 0.18 0.17 0.17 0.16 Fish and fish products 0.33 0.31 0.30 0.28 0.26 0.25 0.24 0.23 0.22 0.21 0.20 Total fats 0.22 0.21 0.20 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13 Animal fat 0.17 0.16 0.15 0.15 0.14 0.13 0.13 0.12 0.11 0.11 0.11 Vegetable oil 0.31 0.30 0.28 0.27 0.25 0.24 0.23 0.22 0.21 0.20 0.19 Butter 0.18 0.17 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 0.11 Milk 0.09 0.09 0.08 0.08 0.07 0.07 0.07 0.06 0.06 0.06 0.06 Cheese 0.19 0.18 0.17 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 Eggs 0.20 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13 0.13 0.12 Sugar 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 0.11 0.10 0.10 B. Low-income scenario 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Income level 1989=100 80.0 76.0 76.0 78.3 80.6 83.0 85.5 88.1 90.7 93.5 96.3 Flour 0.14 0.14 0.14 0.14 0.14 0.13 0.13 0.12 0.12 0.11 0.11 Bread 0.11 0.12 0.12 0.12 0.11 0.11 0.11 0.10 0.10 0.09 0.09 Other cereals 0.20 0.21 0.21 0.20 0.20 0.19 0.19 0.18 0.17 0.16 0.16 Potatoes 0.31 0.32 0.32 0.32 0.31 0.30 0.29 0.28 0.27 0.25 0.25 Pulses and vegetables 0.28 0.29 0.29 0.28 0.27 0.26 0.26 0.25 0.24 0.22 0.22 Fruits and fruit products 0.30 0.32 0.32 0.31 0.30 0.29 0.28 0.27 0.26 0.24 0.24 Meat and meat products 0.24 0.26 0.26 0.25 0.24 0.24 0.23 0.22 0.21 0.20 0.19 Pork 0.38 0.40 OAO 0.39 0.38 0.37 0.36 0.34 0.34 0.31 0.31 Beef 0.12 0.13 0.13 0.13 0.12 0.12 0.12 0.11 0.11 0.10 0.10 Poultry 0.28 0.29 0.29 0.28 0.28 0.27 0.26 0.25 0.24 0.23 0.22 Fish and fish products 0.35 0.37 0.37 0.36 0.35 0.34 0.33 0.32 0.31 0.29 0.28 Total fats 0.24 0.25 0.25 0.24 0.23 0.23 0.22 0.21 0.21 0.19 0.19 Animal fat 0.19 0.19 0.19 0.19 0.18 0.18 0.17 0.17 0.16 0.15 0.15 Vegetable oil 0.34 0.36 0.36 0.35 0.34 0.33 0.32 0.31 0.30 0.28 0.27 Butter 0.19 0.20 0.20 0.20 0.19 0.18 0.18 0.17 0.17 0.16 0.15 Milk 0.10 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.08 0.08 Cheese 0.20 0.21 0.21 0.21 0.20 0.19 0.19 0.18 0.18 0.16 0.16 Eggs 0.22 0.23 0.23 0.22 0.21 0.21 0.20 0.19 0.19 0.17 0.17 Sugar 0.17 0.18 0.18 0.18 0.17 0.17 0.16 0.16 0.15 0.14 0.14 Sour= Computed from fourth quarter 1989 Household Budget Survey data. 83 Table 3.17 Long-term projections: Per capita food consumption (high-growth scenario) (in kg) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Projected consumption Flour (kg) 15.60 15.81 15.91 16.01 16.12 16.23 16.30 16.37 16.45 16.50 16.56 16.61 Bread (kg) 83.10 83.48 83.91 84.34 84.79 85.25 85.56 85.88 86.22 86.45 86.68 86.92 Other cereals (kg) 4.68 4.75 4.79 4.84 4.88 4.93 4.96 4.99 5.03 5.05 5.08 5.10 Potatoes (kg) 110.04 107.52 108.93 110.32 111.81 113.33 114.48 115.69 116.98 117.82 118.69 119.62 Pulses and vegetables (kg) 65.28 65.44 66.24 67.04 67.89 68.77 69.38 70.03 70.71 71.16 71.63 72.12 Fruits and fruit products (kg) 37.20 37.19 37.68 38.18 38.71 39.25 39.63 40.04 40.47 40.75 41.04 41.35 Meat and meat products (kg) 63.12 62.74 63.41 64.08 64.79 65.52 66.04 66.59 67.17 67.55 67.95 68.36 Pork (kg) 16.44 16.16 16.42 16.69 16.98 17.27 17.49 17.72 17.96 18.12 18.29 18.46 Beef (kg) 6.00 5.97 6.01 6.04 6.07 6.10 6.13 6.16 6.18 6.20 6.22 6.24 Poultry (kg) 8.76 8.69 8.79 8.90 9.01 9.13 9.21 9.30 9.39 9.45 9.51 9.58 Fish and fish products (kg) 5.40 5.33 5.41 5.49 5.58 5.67 5.73 5.80 5.87 5.92 5.97 6.02 Total fats (kg) 20.64 20.53 20.74 20.95 21.17 21.40 21.57 21.74 21.92 22.04 22.16 22.30 Animal fat 8.88 8.87 8.94 9.01 9.09 9.16 9.22 9.28 9.34 9.38 9.42 9.46 Vegetable oil 5.52 5.47 5.56 5.64 5.72 5.81 5.88 5.95 6.02 6.06 6.11 6.17 Butter (kg) 6.24 6.19 6.25 6.30 6.35 6.41 6.45 6.49 6.53 6.56 6.59 6.62 Milk (liter) 171.60 171.84 172.59 173.34 174.13 174.94 175.49 176.07 176.69 177.09 177.50 177.93 Cheese (kg) 13.68 13.68 13.80 13.93 14.05 14.19 14.28 14.38 14.48 14.55 14.61 14.69 Eggs (number) 171.60 172.00 173.65 175.30 177.06 178.85 180.09 181.41 182.80 183.71 184.65 185.64 Sugar (kg) 33.72 34.02 34.28 34.55 34.83 35.12 35.32 35.52 35.74 35.88 36.02 36.18 Table 3.18 Long-term projections: Demand for food (high-growth scenario) (in thousand tons) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected demand Cereals 3,950.3 4,000.6 4,046.8 4,093.6 4,150.4 4,208.1 4,258.3 4,309.9 4,363.0 4,410.2 4,458.3 4,507.5 Potatoes 4,181.5 4,110.3 4,189.3 4,268.3 4,360.1 4,455.0 4,536.0 4,620.7 4,709.6 4,781.5 4,855.4 4,932.3 Pulses and vegetables 2,480.6 2,501.6 2,547.3 2,593.7 2,647.7 2,703.3 2,749.1 2,797.0 2,847.0 2,888.0 2,930.2 2,973.9 Fruits and fruit products 1,413.6 1,421.5 1,449.1 1,4771.0 1,509.6 1,543.0 1,570.5 1,599.1 1,629.2 1,653.6 1,678.8 1,704.9 Meat and mewat pducts 2,398.6 2,398.3 2,438.6 2,479.1 2,526.7 2,575.5 2,616.7 2,659.6 2,704.3 2,741.4 2,779.5 2,818.9 Pork 624.7 617.6 631.6 645.7 662.0 678.9 692.9 707.6 723.1 735.4 748.0 761.3 Beef 228.0 228.4 231.0 233.6 236.7 240.0 242.9 245.8 248.9 261.6 254.4 257.2 Poultry 332.9 332.1 338.2 344.3 351.4 358.8 364.9 371.3 378.0 383.5 389.2 395.0 Fish and fish products 205.2 203.6 208.0 212.4 217.4 222.7 227.1 231.7 236.5 240.3 244.3 248.4 Total fats 784.3 784.8 797.6 810.6 825.7 841.3 854.5 868.3 882.6 894.5 906.7 919.3 Animal fat 337.4 338.9 343.7 348.6 354.4 360.3 365.3 370.6 376.0 380.6 385.4 390.2 Vegetable oil 209.8 209.2 213.6 218.1 223.2 228.5 232.9 237.5 242.3 246.1 250.1 254.3 Butter 237.1 236.8 240.2 243.6 247.7 251.8 255.4 259.2 263.0 266.3 269.7 273.1 Milk ('000 liters) 6,520.8 6,569.1 6,637.4 6,706.2 6,790.7 6,876.6 6,953.6 7,032.5 7,113.4 7,186.6 7,261.0 7,337.0 Cheese 519.8 523.0 530.9 538.7 548.1 557.6 565.8 574.2 582.9 590.3 597.9 605.7 Eggs (millions) 6,520.8 6,575.2 6,678.2 6,782.2 6,904.8 7,030.5 7,136.0 7,245.6 7,359.5 7,455.4 7,553.5 7,654.9 Sugar 1,281.4 1,300.4 1,318.4 1,336.7 1,358.4 1,380.6 1,399.4 1,418.7 1,438.8 1,456.0 1,473.7 1,491.8 84 Table 3.19 Long-term projections: Per capita food consumption (low-growth scenario) (in kg) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ABsumptions Per capita income growth -20% -6% 0% 3% 3% 3% 3% 3% 3% 3% 3% Projected consumption Flour (kg) 15.60 15.65 15.54 15.54 15.60 15.66 15.73 15.80 15.86 15.92 16.08 16.12 Bread (kg) 83.10 82.77 82.29 82.29 82.56 82.84 83.13 83.43 83.70 83.95 84.60 84.76 Other cereals (kg) 4.68 4.68 4.63 4.63 4.66 4.68 4.71 4.74 4.77 4.80 4.86 4.88 Potatoes (kg) 110.04 104.97 103.30103.30 104.25 105.23 106.26 107.32 108.26 109.07 110.95 111.55 Pulses and vegetables (kg) 65.28 64.07 63.18 63.18 63.68 64.21 64.76 65.33 65.85 66.32 67.49 67.81 Fruits and fruit products (kg) 37.20 36.34 35.78 35.78 36.10 36.43 36.77 37.12 37.44 37.73 38.46 38.66 Meat and meat products (kg) 63.12 61.56 60.80 60.80 61.23 61.69 62.16 62.65 63.09 63.48 64.43 64.71 Pork (kg) 16.44 15.68 15.38 15.38 15.55 15.73 15.92 16.12 16.30 16.45 16.82 16.93 Beef (kg) 6.00 5.92 5.88 5.88 5.90 5.92 5.95 5.97 5.99 6.01 6.05 6.07 Poultry (kg) 8.76 8.50 8.38 8.38 8.45 8.52 8.60 8.67 8.74 8.80 8.95 9.00 Fish and fish products (kg) 5.40 5.18 6.09 5.09 5.14 5.20 5.25 5.31 5.37 5.42 5.53 5.56 Total fats (kg) 20.64 20.16 19.92 19.92 20.06 20.20 20.35 20.50 20.64 20.76 21.06 21.15 Animal fat 8.88 8.74 8.66 8.66 8.70 8.75 8.80 8.86 8.90 8.95 9.05 9.08 Vegetable oil 5.52 5.33 5.24 5.24 5.29 5.35 5.40 5.46 5.52 5.56 5.68 5.71 Butter (kg) 6.24 6.10 6.04 6.04 6.08 6.11 6.15 6.19 6.22 6.25 6.32 6.34 Milk (liters) 171.6 170.55 169.70169.70 170.18 170.68 171.20 171.74 172.23 72.67 173.77 174.06 Cheese (kg) 13.68 13.47 13.33 13.33 13.41 13.49 13.58 13.67 13.75 13.82 13.99 14.04 Eggs (number) 171.60 169.18 167.33167.33 168.38 169.47 170.61 171.78 172.85 173.81 176.25 176.90 Sugar(kg) 33.72 33.57 33.28 33.28 33.45 33.62 33.80 33.98 34.15 34.31 34.72 34.82 Table 3.20 Long-term projections: Demand for food (low-growth scenario) (in thousand tons) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Asswnptions Per capita income growth -20% -5% 0% 3% 3% 3% 3% 3% 3% 3% 3% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected demand Cereals 3,955.2 3,968.6 3,968.0 3,991.8 4,037.8 4,084.9 4,132.9 4,182.0 4,230 44,278.0 4,348.7 4,392.6 Potatoes 4,181.5 4,012.7 3,972.6 3,996.4 4,065.4 4,136.6 4,210.3 4,286.6 4,358.7 4,426.4 4,538.6 4,599.6 Pulses and vegetables 2,480.6 2,449.3 2,429.6 2,444.2 2,483.6 2,524.2 2,566.1 2,609.4 2,651.2 2,691.3 2,761.0 2,796.3 Fruits and fnuit products 1,413.6 1,389.2 1,376.2 1,384.4 1,407.8 1,431.9 1,456.8 1,482.6 1,507.4 1,531.2 1,573.2 1,594.1 Meat and meat products 2,398.6 2,353.5 2,338.0 2,352.1 2,387.9 2,424.9 2,462.9 2,502.1 2,539.9 2,576.0 2,635.8 2,668.2 Pork 624.7 599.5 591.3 594.9 606.4 618.4 630.9 643.8 656.1 667.6 688.1 698.3 Beef 228.0 226.2 226.1 227.4 230.1 232.8 235.6 238.4 241.2 243.9 247.6 250.1 Poultry 332.9 325.1 322.4 324.3 329.6 335.0 340.7 346.5 352.0 357.3 366.3 371.0 Fish and fish products 205.2 198.1 195.7 196.9 200.5 204.3 208.2 212.3 216.1 219.8 226.2 229.4 Total fats 784.3 770.7 766.0 770.6 782.1 794.0 806.2 818.8 830.9 842.5 861.6 872.0 Animal fat 337.4 334.1 332.9 334.9 339.5 344.1 348.8 353.7 358.5 363.0 370.2 374.3 Vegetable od 209.8 203.8 201.5 202.7 206.4 210.2 214.1 218.2 222.1 225.8 232.3 235.6 Butter 237.1 233.3 232.4 233.8 237.0 240.3 243.7 247.1 250.5 253.7 258.6 261.6 Milk ('000 iter) 6,520.8 6,519.8 6,526.1 6,565.2 6,636.7 6,709.6 6,783.8 6,859.5 6,934.0 7,007.2 7,108.5 7,177.5 Cheese 519.8 515.0 512.8 515.9 523.1 530.5 538.0 545.8 553.4 560.7 572.4 579.0 Eggs (milions) 6,520.8 6,467.5 6,435.0 6,473.8 6,566.5 6,662.0 6,760.1 6,861.1 6,959.1 7,053.8 7,209.8 7,294.5 Sugar 1,281.4 1,283.4 1,279.9 1,287.6 1,304.3 1,321.5 1,339.2 1,357.3 1,375.0 1,392.3 1,420.1 1,435.7 85 Table 3.21 Long-term projections: Demand for food (high-income growth scenario) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Population growth 0.6 0.6 0.6 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 Projected growth of food demand Cereals 1.3 1.2 1.2 1.4 1.4 1.2 1.2 1.2 1.1 1.1 1.1 Potatoes -1.7 1.9 1.9 2.2 2.2 1.8 1.9 1.9 1.5 1.5 1.6 Vegetables and pulses 0.8 1.8 1.8 2.1 2.1 1.7 1.7 1.8 1.4 1.5 1.5 Fruits and fruit products 0.6 1.9 1.9 2.2 2.2 1.8 1.8 1.9 1.5 1.5 1.6 Meat and meat products 0.0 1.7 1.7 1.9 1.9 1.6 1.6 1.7 1.4 1.4 1.4 Pork -1.1 2.3 2.2 2.5 2.5 2.1 2.1 2.2 1.7 1.7 1.8 Beef 0.2 1.1 1.1 1.4 1.4 1.2 1.2 1.2 1.1 1.1 1.1 Poultry -0.2 1.8 1.8 2.1 2.1 1.7 1.8 1.8 1.5 1.5 1.5 Fish and fish products -0.8 2.1 2.1 2.4 2.4 2,0 2.0 2.1 1.6 1.7 1.7 Total fats 0.1 1.6 1.6 1.9 1.9 1.6 1.6 1.6 1.4 1A 1A Animal fat 0.4 1.4 1.4 1.7 1.7 1.4 1.4 1.5 1.2 1.2 1.3 Vegetable oil -0.2 2.1 2.1 2.4 2.4 1.9 2.0 2.0 1.6 1.6 1.7 Butter -0.1 1.4 1.4 1.7 1.7 1.4 1.5 1.5 1.2 1.3 1.3 Milk 0.7 1.0 1.0 1.3 1.3 1.1 1.1 1.2 1.0 1.0 1.0 Cheese 0.6 1.5 1.5 1.7 1.7 1.5 1.5 1.5 1.3 1.3 L3 Eggs 0.8 1.6 1.6 1.8 1.8 1.5 1.5 1.6 1.3 1.3 1.3 Sugar 1.5 1.4 1.4 1.6 1.6 1.4 1.4 1.4 1.2 1.2 1.2 Table 3.22 Long-term projections: Demand for food (low-income growth scenario) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -20o -5% 0% 3% 3% 3% 3% 3% 3% 3% 3% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected growth of food demand Cereals 0.3 0.0 0.6 1.2 1.2 1.2 1.2 1.2 1.1 1.7 1.0 Potatoes 4.0 -1.0 0.6 1.7 1.8 1.8 1.8 1.7 1.6 2.5 1.3 Pulses and vegetables -1.3 -0.8 0.6 1.6 1.6 1.7 1.7 1.6 1.5 2.6 1.3 Fruit and fruit products -1.7 -0.9 0.6 1.7 1.7 1.7 1.8 1.7 1.6 2.7 1.3 Meat and meat products -1.9 -0.7 0.6 1.5 1.5 1.6 1.6 1.5 1.4 2.3 1.2 Pork 4.0 -1.4 0.6 1.9 2.0 2.0 2.1 1.9 1.8 3.1 1.5 Beef -0.8 0.0 0.6 1.2 1.2 12 1.2 1.2 1.1 1.5 1.0 Poultry -2.3 -0.8 0.6 1.6 1.7 1.7 1.7 1.6 1.5 2.5 1.3 Fish and fish products -3.5 -1.2 0.6 1.9 1.9 1.9 2.0 1.8 1.7 2.9 1.4 Total fats -1.7 -0.6 0.6 1.5 1.5 1.5 1.6 1.5 1.4 2.3 1.2 Animal fat -1.0 -0.4 0.6 1.3 1.4 1.4 1.4 1.3 1.3 2.0 1.1 Vegetable oil -2.8 -1.1 0.6 1.8 1.8 1.9 1.9 1.8 1.7 2.9 1.4 Butter -1.6 -0.4 0.6 1.4 1.4 1.4 1.4 1.4 1.3 2.0 1.1 Milk 0.0 0.1 0.6 1.1 1.1 1.1 1.1 1.1 1.1 1.4 1.0 Cheese -0.9 -0.4 0.6 1.4 1.4 1.4 1.4 1.4 1.3 2.1 1.2 Eggs -0.8 -0.5 0.6 1.4 1.5 1.5 1.5 1.4 1.4 2.2 1.2 Sugar 0.2 -0.3 0.6 1.3 1.3 1.3 1A 1.3 1.3 2.0 1.1 86 come, attempting to preserve their past level of expect for major food groups over the next de- food consumption but reducing their purchases cade? of durable goods. Projections for 1990-2000: the influence of NUTRITIONAL sTATUS income. During the period of adjustment of the economy, one can expect reai incomes to fall In the early 1980s, average consumption per until they attain a macroeconomically sustain- capitaofcereals,meat, milk andfatsfell sharply able level. Projections have been carried out for leading to a worsening of nutritional indicators two income-growth scenarios: the optimistic (for instance, energy intake fell from 3,570 kcal scenario considers that GDP will decline by 14% in 1980 to 3,300 in 1982). But at the end of the in real terms in 1990 and grow at the real rate decade, average energy and nutrient intakes of 5% thereafter; the pessimistic scenario con- were back at their 1980 levels.9 siders thatreal GDP will declineby 20% in 1990 Average nutritional intake compares favor- and by 5% in 1991, that it -will not grow (0%) in ably with that of Western European countries. 1992, then grow at an annual real rate of 3% Per capita daily calorie supply in 1986 was 3,336 thereafter. cal in Poland, compared with 3,326 cal in the Our food demand projections, under both Netherlands, 3,336 cal in France, 3,645 cal in scenarios, are based on estimated income elas- the United States, 3,528 cal in the Federal ticities. Our estimation shows that, empiri- Republic of Germany, and 3,064 cal in Sweden."0 cally, the relationship between income and con- Even if changes in nutritional indicators were sumption in Poland (for example, the Engel as drastic as those observed at the beginning of curve) is typical of middle- to high-income coun- the eighties, this would still represent a good tries - it increases fast at low levels of income, nutritional status for the population, on average. stabilizes, then renmains constant at higher lev- However, average figures mask the fact that els of income. The projections indicate the an increasing number of persons are below the Following trends." poverty line and nutritionally at risk, presently and in the future, as a result of the fall in their Per capita consumption. In per capita terms, realincome and/orlimited income opportunities the food demand curve over time is flat. After due to rising unemployment. The percentage of the initial shock ofthe declinei ri income, demand households that are below the poverty line for food products grows at an average rate never (evaluated by the Institute of Social Affairs exceeding 1.2%. Demandfor cereals grows atan at ZI 300,000 per month) is estimated to be 37% average rate of 0.5% in the optimistic scenario among pensioner households and 30% among (0.3% in the pessimistic seenario); for meat at a worker households. rate of 1% (pessimistic scenario: 0.7%); and for There is a demonstrated need to reinforce and milk at O.4% (pessimistic scenario: 0.3%) expand the existing social welfare system in two directions: first, to reinforce existing programs Total demand. When population growth is thattransfer income to low-income groups (Social taken into account,12 total food demand shows a Aid Centers, Labor Fund, and other institu- morepronounced upwardtrend. Averagegrowth tions); and, second, to develop existing targeted rates of poultry, pork and fish exceed 2% per nutritional programsforvulnerablegroups (such annum, but cereals grow at an average rate of as the milk bars) to cover all old persons, chil- 1.1% in the optimistic scenario (0.8% in the dren, and pregnant and lactating mothers that pessimistic scenario); meat at a rate of 1% (pes- are nutritionally at risk. simistic scenario: 1.2%); and milk at a rate of 1% (pessimistic scenario: 0.8%) The average growth MEDIUM- AND LONG-TERM PROSPECTS rate for the 1990-2000 period in the pessimistic scenario is affected by the fall in the demand for During the shock period of the transition from a all food products in 1990-91 and the low rate of centrally planned to a market-based economy, growth (approximately 0.6%) in 1992. the pattern of expenditures and consumption The projectionsindicate that, in the longterm, described in the previous section is not repre- total food demand in Poland will be mainly sentative ofwhat can be expected in the medium driven by population growth. On a per capita term. What consumption profile can we then basis - whatever income growth scenario one 87 uses - food demand will not increase at high * A middle-income country like Poland (per rates. We can say that food consumption will capita income level of US$1,860 in 1988) cannot not continue to be sustained at levels similar to sustain over a long period an average household those existing when the generalized food sub- food budget share of 55%. This share will sidy program was in effect.13 decline over time until it reaches a level similar to that of middle-income European countries Other factors that will affect food demand. (for instance, Portugal 34%, Greece 30%, Spain The long-term forecasts discussed above as- 24%, Ireland 22%); sume that the main factor that will influence * During the short term, we can expect food food demand in the future is the level of income demand to adjust to relative consumer price andthatotherfactors (such as changes in prices, changes until food markets are in an equilib- distribution of income, or family size) will not rium position. There will be substitution within affect food demand in a systematic (nonrandom) major food groups (for example, pork versus way. beef; butter versus margarine; animal fat ver- But food demand is influenced not only by the sus vegetable oil; bread versus processed cere- level of income but also by the distribution of als) as a result of relative price effects; income. During a period of 3-4 years (say, until * The availability of imports, and the greater 1993), we can expect that the change from a choice and quality of consumer products, will centrally planned to a market-based economy lead to a differentiation of consumer tastes. If will - in all likelihood - effect a worsening in the supply side responds, food markets will be the distribution of income. Demand for basic differentiated according to income and price food items will therefore be higher than the elasticities of various types of consumers; projections indicate. Then, after 1993, as real * In the long term, improvements in nutri- incomes increase and more people move to higher tional standards of the population, through income groups, the food budget share and the nutrition education, will reduce high-choles- income elasticity will decline sharply.'4 There- terol, high-calorie food intake and modify con- fore, after 1993, if the economy recovers, the sumption habits. overall growth in food demand will slow down, implying that our projected figures are biased Appendix: upward for the years 1993-2000. At the same time, another tendency will come into play: as Data sources income increases and the share of the poor in total income decreases, demand for more pro- The main source used in this annex are unpub- cessed and more expensive food items will in- lished data from the Budzety Gospodarstw crease and demand for primary, unprocessed Domowych (Household Budget Surveys) on in- food will decline. comes and expenditures, including consump- Several other factors - not accounted for in tion estimates (in zlotys andkg)for some 65 food the projections - will affect food consumption. items that were aggregated into main food In particular, supply-side factors such as the groups. The surveys are carried out on amonthly opening up of the economy and the restructur- basis by the Central Statistical Office (GUS) ing of the food sector will have a profound effect since 1980. The data for January 1989 - April on consumption patterns. 1990 were kindly provided to the Task Force by GUS. Seasonal fluctuations. First, the profile of The Household Budget Survey suffers from consumption will be flatter. There will be a several shortcomings but is statistically reli- reduction in the amplitude of seasonal fluctua- able.'5 Stratified random sampling techniques tions that are observed in consumption in Po- are used with a large sample size.'6 The survey land. This seasonality in consumption is linked covers some 90% of the population. Excluded to the seasonality of production in the process- from the survey are persons employed in the ing industry, to the absence of much food im- private sector outside of agriculture, military ports, and to the scarcity of storage and cooling and police. The information included in the facilities, long-shelf-life products, and so forth. survey is presented for four types of households Second, the consumption trend for major food made up of: workers and employees; farmers; groups will be affected by important factors: farmers/workers (for example, rural farming 88 households with an important share of income Endnotes originating outside the farm);17 and retirees and pensioners. Annually, the size distribution of This annex was prepared by Jean-Jacques income and expenditures (by income class: from Dethier (The World Bank) and Jerzy Plewa poorest to richest) is published by GUS. Pre- (Warsaw Agricultural University). liminary information for size distribution for The authors would like to thank Prof. workers and pensioners in 1989 and March Jan Kordos, Mr. Kubiczek and Mmes Gradek 1990 is available (see Table 3.6). and Gizicka (GUS) for kindly providing them Three important caveats must be mentioned: with Household Budget Survey data, and Prof. Stanislaw Berger (Warsaw Agricultural Uni- Regarding food consumption, households versity) for advice on nutrition policy in Poland. must fill out a questionnaire indicating quanti- ties and value of purchases, gifts, or own produc- 1. Subsidies on bread were eliminated. tion. Food products acquired without payments However, in the case of rye bread, the Ministry (own production or gifts) are valued at the aver- of Finance exercises some degree of control over age price recorded for the same item in the the price because of the obligation for bakeries voivodship. Quantities therefore referto monthly to submit a justification of cost increases if they acquisitions and not to consumption of food. wish to increase consumer prices. The difference between acquisition and con- sumption, however, is only significant in the 2. The per capita survival minimum for case of nonperishable, storable items such as December 1989 was: potatoes. * Income and expenditure data for rural worker households for I person = ZI 179,000 households (farmers and farmer-workers) men- 4 persons = 21 147,900 tioned in this annex must be interpreted with retiree/pensioner for 1 person = Zi 156,000 caution: rural income according to GUS experts households 2 persons Zi 138,400 is underestimated by 20-30%. This is due to the 3. In such a situation, subsidies do not method ofdata collection: household net incomes alter demand at the margin. Conceptually they and expenditures are obtained by subtracting are simply transfers from the budget to the purchases and sales related to the management consumer. of the farm from gross incomes and expenditures. Corrections to the rural data are done by GUS at 4. See World Bank, Structural Adjust- the end of the year since many activities are, by mentLoan, ReportNo.P-5294-POL,June 1,1990. nature, seasonal activities. The average per capita income in 1989 was Zl * Finally, it must be mentioned that GUS has 2.8 million. Population projections are from the not yet adapted its method of collecting data to 1988 World Bank Atlas. the changes that have occurred in the economy. The private nonagricultural sector was excluded 5. Production for the first quarter of 1990 from the sample design. In the future, the has declined by 30.1% compared with the same coverage of the survey must be extended to period in 1989 (GUS estimates). include incomes coming from this source. In addition, underreporting of income generated 6. They represent the percentage change in the hidden economy is known to exist but in food consumption induced by a percentage statistically unobservable. In conclusion, one change in income, at various levels of per capita should not expect the 1990 income data used in income. this annex (even when corrected for seasonal and demographi e influences) to be entirely reli- 7. According to our estimates, the income able since it underreports incomes. elasticity for potatoes is small but positive - The other sources used in this annex are unlike what is observed in Western Europe. Informacja Statystyczna, published monthly by GUS (usedforprice indices) and amimeographed 8. All the figures presented in this section report from GUS dated May 1990 titled are percent changes between January-April 1990 Informacja o warunkach bytu ludnosci w I (average) and January-April 1989 (average). quartale 1990r. 89 Tables 3.9 (expenditure shares) and 3.14 (con- 14. In market economies with high per sumption) give the monthly data for 1989-90. capita income levels (OECD countries), the in- come elasticity for most food products - even 9. See B. Kowrygo, S. Berger and B. highly processed food - is almost zero. Sawicka, 'Nutritional Implications of Changes in Agricultural Policy. Poland in the Eighties," 15. For details, see World Bank, Poland: mimeographed, Institute of Human Nutrition, Subsidies and Income Distribution, report No. Warsaw Agriculture University, n.d. 7776-POL, November 1989, and Branco Milanovic, "Poverty in Poland in the years of 10. World Bank, WorldDevelopmentReport crisis 1978-87,"The World Bank, mimeographed, 1990, Oxford University Press, 1990. November 1989, which uses the data to examine safety net and poverty issues. 11. Note that the figures for cereals and potatoes refer only to demand for human con- 16. In 1989, the sample included 20,555 sumption and do not include demand for feed. workerfamilies (forapopulation of 18.8 million) and 5,216 pensionerfamilies (fora population of 12. We have used the 1988 World Bank At- 4.9 million). las population projections indicating 0.6% growth until 1992 and 0.8% from 1993-2000. 17. Inthefirstquarterofl990,thesefarmer/ worker households received on average 52% of 13. In addition, higher food prices will lead their income from wages, 31% from their farm to reduced waste. This means that total demand and the rest from social security and other (= consumption + waste + stocks) will also grow benefits. more slowly as less food is wasted and/or fed to animals. 90 Annex 4 Agricultural trade policy strategy The Polish government's declared intention is sures are normally less costly to administer tomovePolandfromacentrallyplannedeconomy than internal measures. Agricultural trade to a Western market economy. This implies a measures could therefore play an essential role desire to move to a situation where domestic in assisting the adjustment process both on the prices in general will be closely related to world supply and the demand side. market prices and where trade will take place The agricultural sector is not directly linked according to market forces. to the international market. Agricultural prod- However, economic liberalization should not ucts are always traded in some processed form. be considered as an objective in itself, but rather Hence, the import and export parity farm prices as a means to achieve more basic social welfare are derived from c.i.f. and f.o.b. world market objectives. Liberalization of markets without prices taking into account the costs of trans- the appropriate governmentregulationmaywell forming agricultural products in form, space generate effects in both the short term and the and time. The present inefficiency of upstream long term that are undesirable due to negative and downstream sectors in Poland taxes the effects on production growth and the distribu- agricultural sector indirectly. In connection tion of income. Accepting that liberalizing the with a high (perceived) real interest rate this is economy in general, and foreign trade in par- a major source of agricultural price instability ticular, will bring major benefit in the long run (as will be argued subsequently). This can does not imply that the overall process of liber- increase the adjustment costsforthe agricultural alization should start with a complete liberal- sector(whichintermsofemploymentandincome ization of external trade, in particular not for generation is of major importance to the Polish agricultural products. economy) and will cause problems in relation to Liberalization will only produce the desired the urban sector where the price of food is of results if market-oriented institutions, which crucial importance for social stability. respond to market signals, exist. To create such The trade policy needed may appear to con- institutions requires a change of management tradict the government's general policy to de- culture and a redefinition of property rights. crease government involvement in the economy, The process of doing this will take a long time. but the basic hypothesis underlining this annex During this process the use of trade policy in- is thata specific agricultural tradepolicyforthe struments may ease the adjustment process. short and medium term could assist the ad- The use of trade policy instruments is particu- justment process of transforming the Polish larly important in Poland's present situation economy into a modern market economy. The where the government lacks other instruments formulation and communication to the economic to adjust the income distribution. Trade mea- agents of such a policy would stabilize expecta- 91 tions, which in itself could contribute to the The trade regime realization of the government's stabilization policy. THE PREVIOUS SYSTEM This annex presents briefly the past and present trade regimes and describes the trade In the centrally planned economic system which flows in recent years on the basis of available prevailed before the reforms introduced by the empirical evidence. External trade was very present government, foreign trade in agricul- distorted in the past. Thus, the evaluation of tural and food products was regulated by the past trade is important to evaluate whether the following principles: same pattern of trade flow should prevail in the future as in the past. * State monopoly of foreign trade. Producers The role of the agricultural sector in foreign did not have direct access to foreign markets trade depends on the competitiveness of the and had to operate through a few specialized sector. Hence, the main determinants of its state and cooperative foreign trade organiza- competitiveness are investigated in the section tions (centralas). Even in 1989, after the first on the effect of trade policy on the competitive- decentralization attempts of foreign trade, the ness of the agricultural sector. Of main interest share of the five main centralas in the total is the question of whether the agricultural sector value of imports and exports of agricultural and was taxed or subsidized in the past, also taking food products amounted to about 80-85%. into account the effect of the inefficiency of * Tradingaccording to plan. The volume and upstream and downstream sectors. If the ag- the price to be paid to domestic suppliers, as well ricultural sector was taxed in the past one would as the exchange rate, was fixed by the central expect the agricultural sector, and hence agri- plan. Centralas were responsible for carrying cultural exports, to expand in the medium term out the plan. They imported goods and services without government support (assuming that on the basis of currency availability as fixed by the restructuring of the Polish economy in the central plan, and in turn had to sell to the generalwillmaketheupstreamanddownstream state almost the entire amount of foreign cur- sectors function efficiently). If, on the other rency earned through exports. In the 1980s, hand, the agricultural sector was subsidized however, the exporting firm was allowed to keep one would expect Polish agricultural exports to a certain percentage of the hard currency ob- contract. It has not been possible to present tained. definitive answers to all questions raised in this * Overvalued exchange rate. During 198 7-89 section. Nevertheless, it is hoped that the pre- there was a practice of fixing the exchange rate sentation will help to get a better idea of the at a level which would make 80% of total exports future agricultural trade prospects and to specify profitable. the needs for further research. * No transmission between the international The reader more interested in the policy rec- and domestic prices. ommendations might, however, want to move * Agricultural and food exports were more directly to the summary section, in which the heavily subsidized than exports of other prod- strategic considerations are presented and rec- ucts. Exports were subsidized more to the ruble ommendations for the medium term and short area than to the hard currency area. In 1989, term are formulated. Trade performance would 88% of the exports of agricultural and food improve if measures were instituted to improve commodities to the ruble area were subsidized, the functioning of the internal markets. How- as were 67% of the agricultural and food exports ever, these measures are not explored in this to the hard currency area. The average subsidy annex. Rather, we have focused on the question paid for agricultural andfood products amounted ofhow the agricultural sector couldbe influenced to 40% to the ruble area and 24% to the hard by trade measures in a beneficial way. Specific currency area compared with 8% and 3%, re- emphasis is laid on the grain and dairy markets. spectively, for nonagricultural products. Since these product markets are the most im- portant for Polish agriculture, assisting the THE CURRENT AND FUTuRE sYSTEM adjustment in these markets through the use of trade policy instruments deserves special at- Some changes in the foreign trade regime were tention. initiated in 1987. The changes were accelerated 92 in 1989, but the radical liberalization offoreign In the latest annual trade agreement with trade did not take place until January 1, 1990. COMECON countries the value of trade in ag- Since this date the external trade regime has ricultural and food products under the trade been based on the following three main prin- agreementwasdecreasedsignificantlycompared ciples: internal exchangeability of the domestic to previous years. Agricultural and food prod- currency; no central distribution of hard cur- uctshavebeen excludedfrom the trade protocols rencies; and free access to foreign trade. with the German DemocraticRepublic, Hungary Duties on imports of agricultural and food and Romania. Exports of agricultural and food products are relatively low. The unweighted products require subsidies of up to 50%. In order average of duties paid on the imports of agri- to minimize these subsidies the Ministry of cultural products duringthe first five months of Foreign Economic Relations has organized 1990 amountedto8.3% andthe weighted average auctions where the commitment to export a (the weights being the 1989 import shares) only certain contingent is given to the enterprise 2.5%; for processed food products, the corre- that accepts the lowest subsidy. Trade in ag- sponding figures are 13.7% and 6.8%, respec- ricultural and food products in excess of the tively. commitments under the clearing agreements is There are no quantitative restrictions on im- not subsidized. ports into Poland. From 1991 on, all trade with the COMECON Exports of agricultural and food products to countries including the Soviet Union will be the hard currency area are not subsidized. conducted in hard currency. Clearing arrange- DuringJanuary 1990 quantitative restrictions ments, as in the trade between the Soviet Union were imposed on the export of some strategic and Finland, are currently under negotiation. products, including agricultural and food prod- ucts, either by export quotas (for meat, live Trade flows and trade performance' animals, vegetable fats, sugar, butter and full milk powder) or by discretionary export licenses TRADE FLOWS (for cereals, flour, rapeseed and cheese). These quantitative restrictions were motivated by the During the first five months of 1990 Poland had desire to prevent excessive domestic price in- a surplus on its balance of trade with both the creases immediately after the strong devalua- convertible zone (US$1,605 million) and the tion of the zloty in December 1989. nonconvertible zone (1,198 million rubles) coun- At present Poland's export of agricultural and tries (see Table 4.1). This represented a sig- food products is only restricted in order to sat- nificant improvement compared with the same isfy Poland's international obligations: the re- period the year before (US$1,223 million and maining bilateral clearing agreements with the 786 million rubles). Nearly half of this im- COMECON countries; minimal prices for dairy provement is explained by improvement of the products (butter, skim and full milk powder) agrifood balance (see Table 4.1). The improve- agreed in the GATT; the ban by donor countries ment of the agrifood balance is partly due to an on the reexport of wheat and wheat flour; and increase in the export of agricultural products, restrictions on exports to the EC in return for but is mainly due to a dramatic fall in agrifood trade concessions (for example, quotas under imports. The fall in food imports may, however, the GSP (General System of Preferences), ref- be overestimated due to significant private food erence prices for fruit and vegetables, minimal imports. But unregistered private exports that prices for eggs, poultry, live animals, and pork, did not clear customs are not assumed to be and voluntary export restraints on sheep, mut- significant. ton, goats and goat meat). Trade reversal has taken place over the last During the last six months of 1989 Poland 12 months for a number of products. Poland, obtained improved market access to the EC: the which used to import butter, has during the first quotas imposed because of Poland's status as a five months of this year exported it in a sizeable CMEAcountrywereliftedandPolandwasgiven amount. If there had not been a ban on cereal a number of tariff quotas (export at reduced exports, Poland would have exported wheat. tariffs) under the GSP arrangement. At the Theincreaseinexportsisnotaconsequenceof beginning of 1990 Poland was also given GSP increased production, but rather a consequence status in its trade with the United States. of a decrease in domestic stocks of agricultural 93 Table 4.1 Balance of Trade cant changes in the trade balance. A relatively (I: nonconvertible zone, II: convertible zone) small increase in food consumption or decrease in agricultural production may therefore easily turn the surplus into a deficit. Total 1989 (i-v) 1990 (i-v) % Change For these two reasons the significant increase Exports (I) M ruble 4313 4508 104,5 in the agrifood surplus during the first five Exports (II) MUS$ 3361 3758 111,8 Imports (I) M ruble 3901 2528 64.8 months of 1990 should not be taken as an indi- Imports (O1) M US$ 2979 2154 72.3 cation that the Polish agrifood surplus will continue to increase. Further depreciation of Balance (I) M ruble 412 1198 +786 the real exchange rate due to expected inflation Balance (HI) M US$ 382 1605 +1223 of around 20% until January 1 will mean that the picture may change for the second halfofthe Agrifood 1989 (i-v) 1990 (i-v) % Change year. Exports (I) M ruble 160 130 81 The share of exports in domestic production of Exports (II) MUS$ 658 737 112 certain products such as slaughter lambs and Imports (1) M ruble 103 55 63 Imports (O) M US$ 787 208 26 frozen fruits and vegetables has in the pastbeen very high (see Table A1 in the Appendix). Balance (I) M ruble 57 75 18 Whether this will continue under free market Balance (rI) M US$ -129 529 658 conditions remains to be seen. The evolution of exports and imports for se- Food 1989 (i-v) 1990 (i-v) % Change lected commodities from 1987 to 1990 is illus- Exports (I) M ruble 73 70 95.7 trated in Tables A.2 and A.3 in the Appendix. Exports (II) M US$ 464 471 101.7 Agrifood exports constitute an important share Imports (I) M ruble 89 36 40.6 of total exports to convertible zone countries Imports (II) M US$ 393 167 42.5 whereas the share of exports to nonconvertible Balance (I) M ruble -16 34 50 zone countries is very small. Balance (U) M US$ 71 304 233 The share of agricultural products in total agrifood exports has in the past been twice that of food products. The increase in the share of Agriculture 1989 (i-v) 1990 (i-v) % Change agricultural products in 1990 exports may be Exports (I) M ruble 87 60 69.0 Exports (II) MUS$ 194 266 137.1 takenasanidicationthatagriculturalproducts Imports (I) M ruble 15 19 128.3 are more competitive under free market condi- Imports (lI) MUS$ 394 41 10.4 tions than processed products. Thisis consistent with the analysis below. Balance (I) M ruble 72 41 -31 The shares of animal and crop products in Balance (HI) MUS$ .200 225 425 total agrifood exports have in the past been of the same order of magnitude, but it seems that Note: Figurea only cover trade by state trading companies and private trade which has gone through cutoms. crop products are gaining in importance. Source: GUS. Table A4 in the Appendix indicates that Poland's agrifood exports are very diversified. products in a period when the real interest rate has changed from being negative to being posi- Table 4.2 Share of exports in production tive, and when food consumption has decreased due to the sharp fall in real income of Polish Export of 1988 1989 1990 (est) households (see Annex 3). The decrease in imports of agricultural prod- Agrifood products ucts is mainly due to a decrease in the imports % of total production 5.8 6.1 7.0 of feed stuff, which will subsequently lead to lower animal production. This will have a Agrieultural products negative effect on the future agrifood balance. % of total production 3.0 3.4 4.3 The share of exports in total agrifood pro- Food duction is relatively low (see Table 4.2). Rela- % of total production 9.4 9.5 9.5 tively small changes in production and con- sumption may therefore lead to quite signifi- Source GUS and Instiute of Agriculture and Food Economies. 94 Table 4.3 Share of agrifood in total Table 4.6 Share of foreign trade by exports and imports state trade organizations (centralas) in convertible imports and exports, 1989 1989 (i-v) 1990 (i-u) % % Exports Imports Exports (I) ruble 3.6 2.8 Pewex 6 Exports (II) US$ 19.6 19.6 Animex (animal products) 32 9 Rolimpex (grain) 21 40 Imports (1) ruble 2.9 3.1 Rybex(fish) 10 5 Imports (11) US$ 26A 9.7 Agros 10 21 Polkrop 5 3 Source: GUS. All 77 84 Source: Ministry of Foreign Economic Relations. This diversification has been seen as an advan- tage, as it makes Poland's export earnings less sensitive to fluctuation in the price of specific Table 4A Share of agricultural and food products. However, this is again something products and of crop and animal prod- that may change under free market conditions. ucts in total agrifood exports Agrifood exports to the convertible zone, in particular the EC countries, have been in- 1984 1988 1990(i-u) creasing over recent years, whereas exports to %td % %flo the nonconvertible zone countries have de- creased. Agricultural products 31 28 36 This trend may very well be reversed in the Food products 69 72 64 future when all trade, including trade with the Animal products 54 47 36 Soviet Union, will be in foreign currency. Polish Crop products 46 53 63 food products, which are of relatively low qual- ity, seem to have abetter chance of competing in the Soviet marketthan in the EC market, where Source: GUS. both quality requirements and trade barriers will make further expansion difficult. In the Appendix, Table A.5 provides more detail on the country destination of Polish ex- ports, and Tables A.7 and A.8 give information on the distribution of exports and imports for Table 4.5 Share of agrifood exports convertible and nonconvertible zone countries going to various destinations for selected commodities. gat o vaick iu exchange rate) Foreign trade organizations (centralas) have in the past had a dominant position in agrifood 1975 1984 1989 exports and imports and still maintain it, even with expanding private trade. Nonconvertible zone 33 23 18 of which: EVALUATION SU 13 other 5 Up to 1989, the export of agrifood products was Convertible zone 67 77 82 strongly subsidized. Subsidies amounted to ZI of which: 748 billion, of which ZI 151 billion were subsidies EC 31 35 50 for exports to nonconvertible zone countries US 12 13 11 (area I) and ZI 594 billion to convertible zone other 24 29 21 countries (area II). In 1988 the corresponding figures were respectively Zl 249 billion, Zl Source GUS andl Institute of Agculture and Food Economics. 62 billion and Zl 187 billion. 95 Agrifood exports were more subsidized than nonagrifood exports were 1.12 (export subsidy exports in general. Whereas the share ofagrifood of 11%) for area I and 1.03 (export subsidy of exports in total exports was 14%, (3.6% in area only 3%) for area II. These coefficients were I, 19.6% in area II) the share of agrifood export similar in previous years. subsidies in total export subsidies was signifi- Table A.10 in the Appendixcontains technical cantlyhigher,44.2%(17.3%inareaI, and 74. 1% coefficients for a number of products. These in area 1I). data seem to suggest that processed products, in In 1989, 88% of agrifood exports to area I and general, required greater subsidies than agri- 67% to area II required subsidies. In 1988, the cultural products. corresponding numbers were 87% and 67%. The budgetfigures showingthe revenue and expenses The effect of trade policy associated with the import and export ofagrifood on the competitiveness products in 1988 and 1989 are shown in Table of the agricultural sector A.9 in the Appendix. The main reason for the large budget deficit in 1989 was the huge sub- THE BASIC QUESTION sidies to the import of grain and meat products (ZI 91 billion). The largest subsidies in exports Poland's net exports are by definition the differ- to areal were associatedwithfruitandvegetable ence between Poland's domestic demand and products and crop products. For exports to area domestic supply. In order to understand the -I, big subsidies were given both to fruit and evolution in trade and prospects forfuture trade, vegetable products (Zi 134 billion) and to meat domestic supply and demand conditions need and animal products (Zl 109 billion). therefore to be considered, in particular the It is difficult to make a general assessment functioning of the upstream and downstream about export profitability in 1989. Official sectors (see below). procurement prices which were in use up to The prospects for future Polish agricultural August 1, 1989, have been increased several trade depend on whether or not the Polish ag- times but the exchange rate has not been ad- ricultural sector in the future will be competitive justed to the same extent during this period. at world market parity prices. The basic ques- This caused an increase in export subsidies. tion to be answered before discussing Poland's Therefore most centralas made losses. In the agricultural trade strategy (in fact, before the last quarter of 1989, the exchange rate was discussion of any aspect ofPoland's agricultural adjusted, which allowed the centralas to cover strategy) is to what extent the Polish agricul- previous losses to some extent. tural sector will be profitable without govern- Anindicationoftheexportsubsidiesonvarious ment support after the implementation of the products may be obtained from data on the government'srestructuringprogram.Toanswer average cost of obtaining foreign currency. In this question it is important to know to what 1989, subsidies to agrifood exports were as fol- extent Poland's agricultural sector was subsi- lows: dized or taxed in the past. If the Polish agri- cultural sector was heavily subsidized one would for exports to the nonconvertible zone expect Polish agricultural exports to contract countries (area I), ZI 958 had to be spent (in and if it was taxed one would expect them to payment to middlemen) to obtain one ruble. expand (assuming no changes in domestic Comparing this with the official exchange rate household demand). of ZI 536 ruble, this corresponds to a technical coefficient of 1.78 (= 958/536) or an export sub- CONCEPTUAL FRAMEWORK sidy of 44%-2 * for exports to the convertible zone countries In a market economy, production decisions of (area II), ZI 1,928 had to be spent to obtain one the agricultural sector are a function of its dollar. Comparingthis with the official exchange endowment with primary factors (land, labor rate of ZI 1,4791US$, this corresponds to a tech- and capital), the prices it has to pay for its nical coefficient of 1.30 or an export subsidy of intermediate inputs (such as fertilizer, feed and 23%. machinery) and the prices it receives for its outputs (c0op products, animals and animal The corresponding technical coefficients for products). The relationship between agricultural 96 sector output prices and intermediate input energy inputs in the fertilizer industry prices is popularly called the price scissors. If * downstream sectors: for example, invest- output prices increase or input prices decrease, ment subsidies and input subsidies to the food- the price scissors open and the agricultural processing sector; consumption (food subsidies, sector will tend to expand, and vice versa. The rationing) agricultural sector prices depend on the world * export: for example, export subsidies or market price, the exchange rate, government taxes, export bans. intervention and the functioning of upstream and downstream sectors. The agricultural sector prices will naturally The upstream sectors are the industries de- also be affected by the government's livering inputs to the agricultural sector and macroeconomic policies (income policy, exchange organizations dealing with trade in these com- rate policy, credit and monetary policy, and modities. The upstream sectors include indus- public finance and taxation policy). These tries producingfertilizers, pesticides, feed stuffs, policies affect the agricultural sector directly, as machinery, transport and services. well as indirectly through their effect on other The downstream sectors are the sectors pro- sectors, in particular through their effect on cessingagricultural outputs andtradingin these export and household demand for agricultural commodities. The downstream sectors include products. industries which deal with dairy, meat pro- This framework should draw attention to two cessing, fruit and vegetable processing, other issues: crop processing, transport and services. The linkages between the agricultural sector, * It is extremely difficult to assess the even- the rest of the economy and the world market tual effect on the agricultural sector of the may be illustrated by the supply-utilization dramatic change of government policy which matrix in Figure 4.1, which shows the physical Poland has experienced in recent months, in- flows affecting the agricultural sector. volving fundamental changes both of In a market economy these physical flows are macroeconomic policy and of government in- governed by a set ofprices specific to each sector. tervention in relation to all sectors. For each production sector there exists a specific * The competitiveness of the agricultural set of output and input prices which are deter- sector depends crucially on the cost efficiency mined on the one hand by production costs, and and competitive behavior of upstream and on the other hand by government intervention downstream sectors. in terms of taxes, subsidies and government intervention. The agricultural sector input and To wHAT EXTENT is THE POLISH AGRICULTURAL output prices (the price scissors) are influenced SECTOR TAXED BY THE INEEFCIENCY OF THE by a wide range of government policy instru- USTRs Mi AMM DOWNSTREAM SECTORS? ments related to the various sectors: To evaluate the prospects for the agricultural * import: tariffs, import restrictions sector and hence for agricultural trade we need * upstream sectors: for example, subsidies to to assess the extent of the implicit taxation of Figure 4.1 Supply-utilization account Agricultural Human Import Upstream Sector Downstream Consumption Export Food products +x +x -x -x Agricultural products +x +x -x -x -x Inputs specific to the agri- cultural sector +x +x -x -x Other products +x -x -x -x -x -x +: supply -: utilization 97 the Polish agricultural sector by the monopolis- than the corresponding import price (the c.i.f tic and inefficient upstream and downstream price). The f.o.b. price is determined by the sectors. This analysis is also important for transport costs from the Polish border to the understanding the role agricultural trade closest international trading center where there measures can play in the stabilization of agri- is an import deficit and the c.i.f. price by the cultural prices. Figure 4.2 illustrates the points transport costs from the closest international to be made using the situation on June 1, 1990, trading center where there is an export surplus. for rye as an example. The domestic price will be the fo.b. parity price Economists often speak about the world (f.o.b.- for short) or the c.i.f. parity price (c.i.f+ market price. One of the supposed benefits of for short) depending on whether Poland has an the government's policy of starting the reform export surplusor an importdeficit. Thef.o.b.- is processbyliberalizingtradewasthatthiswould the fo.b. price minus the costs of moving the allow the domestic agents to replace the old commodity to the border and the c.i.f+ is the distorted price system by world market prices c.if. priceplusthecostsofmovingthe commodity fordomestic transactions. Theideathatthere is from the border.3 This naturally applies both to one world market price which may serve as a commodities that are used by the agricultural guide to the domestic transaction price is a sector as an input (in this case the price trans- simplification which may be especially mis- mission is through an upstream sector) and leading for agricultural products, where Poland commodities produced by the agricultural sec- isclosetoself-sufficiency. Foragivencommodity tor (in which case the price transmission is there exists one relevant world market price at through the downstream sector). Since rye is the closest international trading center where both produced by the agricultural sector and there is an export surplus and another one at consumed as a feed input the example used in the closest international trading center where Figure 4.2 may serve to illustrate both cases. there is an importdeficit. The difference between The difference between f.o.b.- and c.i.f.+ prices these two prices is determined by the costs of is greater the higher the transport costs and the moving the commodity from the one center to more inefficient the trade and processing the other. At the Polish border, the export price channels. As is illustrated by the example, the (the f.o.b. price) will for any commodity be lower difference for Poland is for the moment quite significant. This is confirmed by the information Figure 4.2 The price transmission from contained in Table 4.7. the world market depending on the Table 4.7 shows the ratio between f.o.b. and direction of trade f.o.b.- and between c.i.f. and c.i.f.+ for a number Point of consumption: of agricultural and food products. Since Poland Poit of consumption: for the moment is in an export position for most or household sector products, f.o.b. and f.o.b.- prices are in general the border prices and the domestic (wholesale) processing ciFarm-gate pric prices, respectively. The data indicate a very transport costs inefficient price transmission between f.o.b. and services f.o.b.- prices. Column (7) in Table 4.7 indicates monopolistic profit the dramatic increases in wholesale prices which may be expected if Poland moves from an export Import price (c.i.f.) 110 $/t toanimportposition. Asoursubsequentanalysis Range of domestic indicates, this is not a purely theoretical possi- price variation at bility. constant world market price Two important conclusions may be drawn Export price (f.ob.) 85 $/t from this analysis: processing transport costs services * The level of domestic consumer and producer monopolistic profit Farm-gate price pricesfor agricultural products will, particularly (f.o.b.) 56 $/t in the short run where the downstream or up- stream sectors are very inefficient, be signifi- Point of production: cantly different depending on whether Poland is Agricultural sector exporting or importing. 98 Table 4.7 The price transmission in June 1,1990 f.o.b. f.o.b.- Ratio c.i.f. c.i.f.+ Ratio Ratio price price (1/2) price price (415) (613) (1) (2) (3) (4) (5) (6) (7) $ $ S $ Pigs, live x 961 x 910 1,226 .74 1.28 Beef 741 550 1.35 741 886 .84 1.61 Meat pork 1,440 1,397 1.03 1,370 1,501 .91 1.07 beef 1,470 954 1.54 1,420 1,556 .91 1.63 Ham 4,020 #4,726 .85 3,216 4,363 .74 (.92) Calves 2250 *1,789 1.26 2,250 2,352 .96 1.31 Sheep (EC) 2,242 ** x 2,242 2,343 .96 x Ducks 1,820 ** x x x x x Wheat 121 88 1.38 146 161 .90 1.84 Rye 85 69 1.23 110 122 .90 1.76 Oats 95 63 1.50 120 133 .90 2.10 Lupin 150 105 1.43 195 216 .90 2.05 Beans 160 105 1.52 195 216 .90 2.05 Rapeseed 390 #684 .57 x x x x Sugar 400 #519 .77 430 498 .86 (.96) Potato flour 320 316 1.01 340 410 .83 1.30 Casein 1,800 1,368 1.32 3,500 4,221 .83 3.08 Butter 1,200 #895 1.34 1,350 1,522 .89 (1.70) Skim milk powder 800 453 1.77 1,500 1,960 .77 4.33 Fall milk powder 1,250 579 2.16 1,600 2,010 .80 3.47 Cheese Cheddar 1,400 947 1.48 1,600 2,091 .77 2.21 Gouda 1,650 1,105 1.49 2,100 2,638 .80 2.39 Legend: * Retail pricem. *: Avege pice paid to exporterm. **3 Revenues frorn exports are calculated on the basis of the export price. Source: Ministry of Finance and author calculations. * If stocking is neither technically nor eco- Polish agriculture in the past. The discussion nomically feasible (due to excessive real interest above should have made it clear that the level of rates or credit rationing), the domestic prices protection of the Polish agricultural sector in may change dramatically from year to year due the past cannot be assessed solely on this basis. to trade reversal and even within the market- First, subsidies to agricultural sector outputs ing season due to the seasonal pattern of con- and inputs also need tobe taken into account. In sumption and production. the past the prices were fixed administratively. The subsidies to the agricultural sector were Inthetwofollowingsubsectionstheframework therefore related to the losses made by food- presented above will be used to assess the level processingcompanies and companies producing of protection of the Polish agricultural sector in inputs to the agricultural sector.4 Out ofthe 500 the past and the recent developments of Polish biggest state enterprises, 56 were loss making agricultural trade. in 1988. Of these, 43 belonged to the food- processing industry and nine to the feed-pro- To wHAT EXTNT WAs THE AGRICULTURAL sECTOR cessing and fertilizer industry. The profitabil- TAXED OR SUBnSMzm IN THE PAST? ity of these industries (the return to invested fixed capital) in 1988 was -8.5%. The strongly In the section on trade flows and performance subsidized dairy industry is not included in data were presented on the border protection of these figures. The losses of the food-processing 99 firms are a function of the ratio between farm- Table 4.8 Gross unit producer subsidy gate prices and the consumer prices that in the equivalents, 1987 (private sector) past were fixed administratively. It is difficult to determine to what extent these losses are due 1986 1987 1988 to too high producer prices or too low consumer prices. In other words, it is difficult to establish Wheat 46 47 34 to what extent the losses represent subsidies to Rye 37 48 28 consumers, to the agro-industrial companies or Barley 65 59 32 to the farmers. Sugar 33 31 A rough idea of the price transmission in the Rapeseed 50 43 past can be obtained from the data contained in Beef 16 39 46 Table A.11. In the past, domestic prices for the Milk 57 23 food-processing industry were in all cases higher than border prices. For grain products and live domestic prices for fertilizer. The level of pro- animals the farm-gate prices were also higher tection of crop products is therefore higher than thanborderprices,whereasfarm-gatepricesfor the PSE dlata indicate. pork and fruit seemed to have been lower. A more fundamental problem in interpreting The price transmission does not reflect taxes these data is the role played by the exchange and subsidies given to agricultural inputs. In rate. In the PSE calculations, the world market assessing the level of protection of the agricul- prices have been translated into domestic prices tural sector in the past these should also be at the official exchange rate. If the exchange taken into account. rate was overvalued in relation to the equilibrium According to preliminary calculations, direct exchange rate, the level of subsidization would production subsidies in 1989 (includingthe state be overestimated. The fact that the black market budget subsidy to the social security and re- exchange rate was significantly higher than the tirement system for private farmers) for pro- official exchange rate could support such an duction of grains, rapeseed and sugar beets interpretation. Purchasing parity comparisons (mostly the subsidy to mineral fertilizers) may lead to the opposite conclusions. amounted to one-tenth of the farm-gate prices, Another issue is the level of world market while subsidies to livestock production (mainly prices used in the calculations. For 1986 and to coal and concentrate feedstuffs) constituted a 1987, world market prices for agricultural third of the procurement price for slaughter products were particularly low. If calculated at swine and a tenth of the procurement price of 1989 world market prices, the PSE would be cattle and milk.5 Input subsidies for previous significantly lower. years were at a similar level. It is unclear to what extent the PSE calcula- Producer subsidy equivalent (PSE) has been tions reflect the considerable efficiency gains calculatedforPoland.'7 TheunitPSEindicates which would arise from restructuring the up- the transfer to the agricultural sector due to stream and downstream sectors and to what border measures and subsidies to agricultural extent subsidies in the past have been eaten up sector outputs and inputs in relation to the by the administrative cost of the rationing value of agricultural production at producer scheme in force at that time. prices. These data (see Table 4.8) suggest - as The misallocation of resources within the one would expect since they take into account agricultural sector due to rationing inputs in the input subsidies mentioned above -that the the past (havingthe effect of input taxes) should agricultural sector was subsidized in the past to also be taken into account in assessing the level an even larger extent than the export subsidies of protection. and price transmission data seem to indicate. However, on balance the evidence seems to The PSE for animal products do not take into suggest that the agricultural sector was subsi- account the excess feed costs due to higher than dized in the past. In other words, it suggests world market prices for feed grain. The pro- that the removal of government intervention is tection for animals and animal products, in likely to lead to lower agricultural production particular for pork, is therefore lower than the and therefore, if the fall in production is not PSE data indicate. The PSE does not take into accompanied by an even greater fall in food account the effect of low energy prices on the consumption, to lower net exports. One impor- 100 tantimplication ofthis isthat domestic pricesin optimal for the medium term, and 2) to price Poland, if left to market forces, will move from instability over the season due to price swings the present level, well below the fo.b. prices, to from fo.b.- to c.i.f.+. a level of prices above the c.i.f. prices. Table A.11 in the Appendix shows that the However, considering the complexity of the situation has changed dramatically during the link between the world market prices and the first three months of 1990 compared with the agriculturalsectorprices,itwouldbepremature previous period. The prices paid to farmers as to assess the prospects for Poland's agricultural well as to middlemen during this period were trade only on the basis of past performance as significantly lower than border prices. The reflected by the PSE calculations. increase in the exchange rate from Zl 2,990/US$ to ZI 9,500/US$ on January 1, 1990, eased the RECENT EVOLUTION OF TRADE AND PRICES effect of the suppression of export subsidies. But as the real exchange rate depreciated (due The decrease in income and the relative price to high inflation) the relation between output increase for certain food products have made prices and input prices deteriorated. food consumption in 1990 decrease by around Data gathered by the Ministry of Finance also 10% compared with 1989 (see Annex 3). It is show that the ratio of input prices to output unlikely that adaptation has been completed. prices has developed unfavorably during the Substitute products like quality margarine, for first five months of 1990, particularly for milk, example, are not yet available. The consump- but also for grain; the evolution of input to tion of butter may therefore decrease signifi- output prices for pork, on the other hand, has cantly if in the future it is priced at cost. Food been more favorable. consumption in general, however, is likely to More detailed calculations describing the re- increase to a similar level as in the past when lationbetweenfarm-gatepricesandborderprices the level of income recovers (see Annex 3 on food are presented in Appendix Table A. 11 for pork, demand). live cattle and live lamb. Appendix Table 12.1 After having accumulated stocks during the shows that exports of pork were subsidized until hyperinflation in 1989, private agents (farmers 1989. The border price was lower than the price and consumers) seem to have reduced stock to a paid to the meat processing firms. During the bare minimum in 1990 due to the shift from a first months of 1990 the devaluation allowed negative to a highly positive real interest rate. profitin the trade of pork carcasses. The domestic Farmers have decreased the use ofinputs partly price has increased 389.3% while the border because of high prices and partly because of pricehasgrown510.5%. Thefirstfigurereflects crippling high interest rates. Data gathered by the inflation rate, while the second can be at- the Ministry of Finance provide clear evidence tributed to the devaluation of the Polish zloty. of a planned reduction in herd size (although The picture is similar for live cattle and live these plans have yet to be implemented) due to lamb. the low feed costs during the summer season. This has caused an accumulation of stocks in RECOMMENDATION REGARDING FUTrURE RESEARCH state enterprises and trade reversal for several products, which in turn results in very low It has not been possible within the timeframe of domestic prices relative to world market prices this study to provide reliable projections for (f.o.b. parity prices). The present situation is not Poland's trade prospects for the future. Trade indicative of the future situation if the must be seen as the interaction between exter- government's restructuring program succeeds nal conditions and domestic supply and demand in improving the efficiency of upstream and conditions. It may be possible to predict future downstream sectors and iftrade reversal moves domestic demand for agricultural products; but prices up from the fo.b.- to the c.i.f.+ level. without knowing how the agricultural sector Uncertaintyaboutthegovernment'sagriculture will react in the medium term without govern- policy and the high and uncertain real interest ment intervention (which in turn depends on rate may lead 1) to destocking and running how much the agricultural sector has been sup- down of agricultural capital (in particular, ported in the past), it is very difficult to predict livestock capital), which will representa serious trade. We have reviewed the evidence concern- misallocation compared with what would be ingthe extent ofpastagricultural subsidization. 101 Figure 4.3 The price transmission for wheat processing Point of consumption: transport costs Household sector services Farm-gate price (c.i.f) 160 $tt monopolistic profit Import price (c.i.f.) 146 $/t Range of domestic price variation at constant Export price (f.o.b.) 120 $tt world market price processing transport costs services monopolistic profit Farm-gate price (= MinistyofAgriclture and Food Ecoomy. 167 Table 7.2 Production on state farms as Table 7.4 State farm profits and losses percentage of total Polish farm output and Treasury subsidies (ZI billion in fixed prices) (Z milliard) Year Total State farms % Year Profit and losses Subsidies Net transfer 1985 2,732 519 19% 1980/81 (21.9) 26.8 (48.7) 1987 2,812 548 19% 1981/82 28.1 27.1 1.0 1988 2,848 542 19% 1985/86 53.8 80.6 (26.8) 1987/88 220.6 140.7 79.9 Source: Ministry of Agriculture and Food Economy. 1988/89 2381.3 410.1 1,971.2 Source: Ministry of Agricultue and Food Economy and Ministry of Finance. ginning to reemerge spontaneously as the CONTRIBUTION To THE AGRICULTURAL ECONOMY kombinat grouping of state farms is split into smaller administrative units. State farms are active in export development, While the land in state farms accounts for 18% accounting for an estimated 28% of Poland's of arable farmland in Poland, these farms ac- US$1.2 billion in farm exports. State farms are count for more than 40% of arable area in 14 especially important with shipments to other voidvodships, mainly in northern and western countries in Eastern Europe, accounting for Poland, producing primarily grains and some nearly half of the US$240 million shipped to livestock products. The distribution of state CMEA countries in 1988. farm holdings is shown in Table 7.3. Onlylimited data on the currentandpotential The 1,000 ha Kalisz state farm near Poznan is financial viability of the state farms was avail- an example of an agribusiness type of the state able. The Polish Bank for Food Economy farm structure in western Poland. Its opera- estimates that perhaps 40% of state farms are tions comprise the following parcels and enter- experiencing financial difficulty, though this prises: was disputedby MinistryofAgriculture analysts. Until the new economic reforms of 1989 and X onion production and packing for export (1,000 m tons annually to France, Germany, and England); Table 7.5 State * dairy unit (200 ha) milking 200 cows; ag ltural Stpfarm contribution to * pig fattening unit of 2,000 animals; agricultural output by crop and live- * cereal production on 300 ha; stock * vodka plant; Wheat 25% * tractor and equipment repair unit; and Rye 10% * worker housing and day care center. Barley 25% Buckwheat and millet 18% Maize Corn 39% Sugar Beet 14% Rapeseed 60% Table 7.3 State farm holdings by size in Vegetables 7% Potatoes 7% 1988 Orchards 10% Berries 4% less than Greenhouses 4% 100 ha 7.2% Livestock (No) 100-199 5.2% Cattle 21% 200-399 10.9% Pigs 33% 400-599 7.8% Sheep 42% 600-799 5.5% Horses 2% 800-999 3.4% Poultry 9% over 1,000 60.0% Milk 14% Source: GUS. Source: GUS, 1988. 168 1990, state farms did not have to be profitable Table 7.6 The structure of the state and could cross-subsidize loss-making farm op- farm workforce in 1988 erations and enterprises. Direct transfers from the state budget to the Category No. state farms are running at about US$50 million. A fair portion of these financial transfers are Wotrale 4735,000 being given to loss-making farms. These Management 9,000 transfers do not account for the imputed rental Technical 39,000 value of farmland, interest on loans, and so Finance 26,000 forth. Even at US$10 per ha annually, land Administration 24,000 rental receipts by Treasury would amount to Note: The estimate above for administrative workers on state US$33 million. farms may be much lower than actual cases. Some economist. Thus, direct and indirect state subsidies are estimate that up to 33% of the state farm labor force is adminis- likely to be approaching US$100 million annu- Souc: MinistryofAgricultureand GUS. ally, a figure which some in Poland consider conservative. For example, state farms have normally had preferential access to new farm administrators will need to eventually pay mar- tractors and equipment, usually at lower capi- ket rents for the value of this housing. In the tal costs than the private sector. In addition, meantime, it may be most difficult to separate the state farm sector does not properly account such workers from this housing tied to state fordepreciation. State farm administrators are farms. thus selling these tractors after 2 to 3 years use to the private sector at a handsome capital gain. Reduction in labor force. In visits to state The high profits in 1989 mayhave been caused farms and in discussions with specialists in by inventory gain in grain and cattle sales with labor management, it appears that a reduction the extensive inflation pressures occurring in of 20-30% in the state farm labor force over the that year. nextfive to seven years willbe necessary. Most farmshave atleast 50 excess workers. In what LABOR AND MANAGEMENT issUEs sectors andwherethisworkforcewillbe deployed and the question of their current housing are Wages and otherpayments. State farms account critical issues facing the Polish government. for 27% of rural employment and 36% of farm employment in the country. Wage rates on Worker attitudes toward state farm employ- state farms are similar to wages paid in indus- ment. Several studies ofworker attitudestoward try, with small differentials between labor, state farm employment have been undertaken mechanical, and machine operators. State in recent years. Dr. Elzbieta Piotzowaska, farm workers also receive free garden plots (100 sociologist at the Institute of Sociology in Lodz, sq meters), and often get a free milk allowance, writes that worker attitudes vary, from indiffer- potatoes, and occasionally meat. Managers ence to the land, to passivity toward work with receive about 10% more than the average paid to a preference for segmented tasks. Workers on workers, a differential that provides little in- these farms have major concerns about losing centive to management. their jobs and particularly their housing and public employee status, with the associated Housing. Key to recruiting workers on state publicbenefits. Theirprincipal attitude toward farms is the provision of adequate housing. In employment on the state farm is"determinedby an economy with severe housing shortages, salary and especially the social benefits of availability of on-farm housing was crucial. housing, collectiveholidays, day careforchildren Nearly 200,000 housing units, mostly apart- and bonuses." ments averaging two to three rooms, are cur- rently provided essentially free for state farm CURRENT EFFICIENCY OF STATE FARMING SECTOR workers and managers. Restructuring state farm operations will re- While accounting for nearly 20% of agricultural quire carefully accounting for the value to on- GDP, state farms received an estimated 40% of farm workers of this housing. Workers and capital investment and annual operating allo- 169 cationsoverthepasttwodecades. Thisresulted and shareholding can take place, decisions on in substantial capitalization of these farms, the recasting of the legal status of state land- particularly in worker housing, workshops, holding needs to occur. livestock housing and especially farm machin- This top down legal restructuring of state ery. 'Per hectare inputs of capital goods on farms (legal, institutional, and fiscal) is neces- state farms are twice as high as the average for sary as the rural private sector is fiscally unable Polish agriculture..." (RGZ, 1987) to spontaneously alter the ownership pattern of State farms also are involved with some value- the state farm sector. The legal structure must added activities, particularly feed milling, trac- be clarified, following the options of land use, tor and machinery repair, some vegetable pro- leasing, and ownership; and management of cessing, vodka making, starch production, and existing assets and, perhaps in some cases, so forth. State farms sell and purchase from assets divested to local, national, and possibly local private farmers and often are important external firms and owners. Natural evolution economic nodes in their areas. would be too slow to permit state farms to Cashflowanalysis,profitandlossaccounting, restructure themselves without some top down and balance sheet auditing on state farms basi- change in the land leasing and land ownership cally do not exist. Financial controls are re- question. porting and inventory management systems. Since it will take considerable time to develop State farm managers are judged on production a program for the orderly freehold sale of the and yield performance, not on profitability. statefarm laLndbase, an interim option wouldbe In 1988, yields on state farms in basic grains for the government, in reasserting its owner- and potatoes were estimated at some 15-20% ship over state farm assets, to specify that all greater than the private farming sector. Pri- state-managedfarmlandbeplacedonaleasehold vate farmer yields in Poland are low, primarily basis and managed by a new state landholding due to lack of inputs. Input use is substantially agency and that economic rents (payable to the higher in the state farm sector (with 18% of the Ministry of Finance) be instituted. cultivated area, they use 45% of the fertilizer). This option has the benefit of delinking the Yet even on state farms yields are not high, land base from the enterprise operation, mak- reflecting inefficient use of these scarce input ingiteasierforthedivestitureofstate-managed resources. farmland via medium-term leasing to private Tractor usage on state farms per 100 ha is farmers, joint ventures, and remaining about the same as on private farms (6.4 tractors privatized state farm agribusiness units. per 100 ha compared with 6.5 tractors per 100 Farmers in Poland have expressed interest in ha on private farms). State farms have some leasing and buying land in some regions from 170,000 tractors (16% of the national tractor local state farms. Until the legal issues are stock of 1.1 million), with the private sector sorted out, the option of leasing this land (under owning 932,000 units. an auction or bidding for a medium term lease) should be made available. Parcels in economic Legal clarification of land leasing and blocks with road or vehicle access could be made ownership available and the lease payments set by an open auction or by written sealed bids. Clarification of the land-leasing and ownership This lease/purchase option is also available issue is particularly critical in the forthcoming for the equipment and perhaps some of the state farm restructuringandprivatization effort. building assets of the state farm. Tractor and With some 3 million ha cultivated, the arable equipment pools, together with the repair fa- land involved is worth roughly US$600 million, cilities, could be leased at market rents to a at US$200 per ha. If the state farms paid rent person or group of persons keen to run a farm to the state for the use of this land, at a low equipment repair and contract hire business. annual rate of 5% of estimated value, the state Treasury would gain some US$30 million per State farm restructuring year. Currently, all land is owned as social property Should the state farm system be privatized and by the state. Before any discussion of owner- then dismantled? An unplanned, sudden break- ship of assets and new forms of management up of state farms would be difficult, but for the 170 medium and longer term, privatization and re- disruption in the subsector, and thus substan- structuring is essential. tial needs for transfer of resources. This is not The reasonsfor a carefullymanaged approach possible now, since agriculture must be an im- to state farm privatization and restructuring portant engine of economic development and are the following: cannot count on any significant transfer of re- sources from the other sectors. It seems thus * Private farmer and purchase/leasing. Pri- that prudence dictates caution regarding any vate farmers are interested in enlarging their decision about the sudden physical breaking up farms (purchase or leasehold), but only if the of the state farms. landtheyacquireisconnectedornottoofarfrom Leasing state farmland may be a preferable their present land. Neighbors of state farms short-term option, ensuring the land would re- (most notably those who lost land to them dur- mainpublicpropertyuntil abroaderlandmarket ing the nationalization process) are those most develops and this land can be sold or leased on interested in getting land from the state farms. a long-term basis. * Employment. State farms provide a signifi- The question of what to do with the state cantportion of rural employment (nearly 500,000 farms therefore becomes the following: how can jobs), and there is clear recognition that suddenly the state farm sector become more efficient in breaking them up would create additional short the short term, and how can a land market term unemployment. (including the rental market) be developed in * Agri-service centers. State farms sell and the medium term, allowing the more efficient purchase from private farmers, and are very private farmers to purchase or lease land from important economic actors in their areas. In the state farms, subject to such limits of size of some areas, such as cattle assembly for export, ownership as will be decided for social reasons? this linkage to the private sector is growing rapidly. BAsIc ISSUES In addition, the buildings and equipment of The general privatization law for Poland was the state farms were conceived for the needs of passed in late July, 1990. However, it excluded these large operations and could not easily (if at the state farm system from its provisions. Ad- all) be used by private farmers. Any break-up ditional legislation will be required for the of state farms would make this equipment privatization andrestructuring ofthe state farm partially or totally redundant (unless leased at system. New laws, regulations, and policies great cost for the economy) and would also will need to take into account the following entail investment costs to equip or reequip the principles: farmers who would take over the land. Because state farms are so large compared Financial controls. No privilege should be with the size of the individual farms (current given to the state farms that is not enjoyed by Polish law limits the size of any private farming the private farming sector. This means that to 100 ha), it would not be possible in most cases preferential access to inputs, equipment, cred- to sell or lease all the state farm land immedi- its, markets, and the like should be rescinded. ately to those farmers who already farm in the Controls are also needed to ensure that neighborhood. interfinancial transfers between state farms Nor does it seem reasonable to expect that a are put on a sound accounting basis and that substantial number of state farm employees such loans and cross-transfers are not used to have thewill or are capable of becomingefficient circumventnormal operatinglosses andto avoid self-managingfarmersintheshortterm. (See: worker layoffs. Controls also are needed to Workerattitudes toward statefarm employment, ensure againstlossesfrom asset strippingduring above.) the privatization and restructuring process. Reconstituting the former large estates does To ensure that the state farms become eco- notseemaverydesirableoptioneither. Breaking nomic entities competing more equally with the up the state farms would cause a migration of private sector, the financial and administrative population to other areas, at the same time links with the state should be severed, so that causing additional unemployment in the receiv- the financial consequences of mismanagement ing areas. Itwould at anyrate resultin amajor do not become government responsibilities. 171 State farms must be allowed to go bankrupt if concept to the industrial restructuringtask force, mismanaged, while safeguarding the integrity needs to do an immediate analysis of current of public ownership. These farms should then book values of state farms, undertaking an be divested by sale or lease or allotted by govern- immediate inventory of all assets including land, mentto a management team for reorganization. buildings, livestock, equipment, and crops. This inventory analysis is critical to (1) prevent Regional differentiation of state farm unauthorized disposal of state property; and (2) privatization. There are seven major agro- determine what assets, especially excess ecological zones in Poland that have been equipment and uneconomic crop and livestock identified and mapped. State farm divestiture inventory, can be auctioned off and at what criteria needs to be adjusted to recognize the values reserve prices should be established. regional differences in agro-ecological potential. Currently, accounting on state farms is designed In addition, the land market for divesting por- only for reporting and inventory control pur- tions or all of state farmland differs greatly, poses, not fi)r determining profitability. Es- with demand higher in the south and central tablishing systems for developing appropriate regions and lower in the west and north. profit and loss statements and balance sheets for state farins and their individual related on- Profit centers. The notion of a financially farm enterprises is crucial. autonomous profit and cost Finally, there needs to be guidance docu- center should be introduced, and cross-subsi- mentation prepared by the state farm dizations among different units should be ac- agribusiness,restructuringgroupforindividual tively discouraged since it generally reduces the state farm mianagers to set the rules during the overall financial efficiency. An accounting longer-term period of major organizational and system shouldbe introduced to accurately reflect ownership change within the state farm system. the profitability of the units. RESTRUCTURING OPTIONS Worker housing. A policy decision is needed to establish a clear separation - a delinking - Three scenarios are apparent for restructuring of the state farm housing and the land on which and privatization of the state farm system: it stands from the commercial operations of the farmnenterprise. Housingforstatefarmnworkers, Laissez-faire (continuation of spontaneous in an economy short of housing, has been an division). In late 1990, a number of state farms incentive for recruiting and retaining workers per month are spontaneously dividing into in rural and in some remote areas. With the smaller managed parcels and independent en- shortage ofhousing in urban areas, demand will terprises. ;Farms made up of separate land continue to be high in the short and medium parcels are splitting off under independent term for this housing. In a restructuring pro- management. Enterprises on state farms such gram, state farm housing will need to be legally as feed mills, poultry processing, and livestock separated, delinked, from the new commercial fattening units are also organizing into sepa- entity and setup as a separately owned housing rately managed units. This is occurring with- cooperative financially independent of the farm out guidance or approval from the Ministry of enterprise. Agriculture and Food Economy if the local voivodship and the farm workers' council agree Land ownership and leasing. As disposal of to a split. Only if there is no agreement does a the state farmland is likely to be a difficult legal state farm division question get referred the and political issue, state farmland should be MinistryofAgriculture and Economy in Warsaw separated from the farm enterprise by the gov- for a decision. emment into a new state landholding agency Laissez-faire division of state farms and en- and then leased on terms determined on a case- terprises into separate management units by-case basis. Rentals would then be paid to hasthebenefit of obtaining separate accounting Treasury. entities that contract with other units (farm machinery and repair, for example) for services. Establishment of a state farm agribusiness This makes it easier to identify those units that restructuringgroup. This task force, similar in are profitable or potentially profitable. 172 On the negative side, it is unclear whether the several years of transition. division is taking place with any sort of rational Nonetheless, a number of state farms meeting business planning as to efficiency of scale in the following criteria should be immediately parcel size or and the viability of basic services restructuredintocontractmanagement,leased, or processing units. This division is taking or placed into conservation and forest reserve place without financial restructuring. Also, no status. This includes state farms that: land rent is being paid to the state. * are not meeting their 25% tax payments to Contract management. Until the longer- the Treasury; or term structure and ownership is settled, there is * are in areas of extensive private landhold- anoptionofcontractmanagementofstatefarms. ing whose owners are keen to expand their This has the benefits of tighter management landholdings and would be able to lease or controls, of establishing viability of accounts purchase state farm landholdings. This is and inventory, and of tighter worker supervi- especially the case for those smaller and dis- sion. bursed state farms in central and southern However, the contract management option Poland. lacks the benefit ofincentive management. The contractors, receiving a small percent of the In addition, in the next several years, leasing overall gross, may lack serious incentives to of land to local private farmers and sale or ensureimprovedprofitsintheshortandmedium leasing of excess machinery by some form of term. It would also be questionable whether auction with reserve pricing should be encour- internal management teams would be avail- aged, especially for state farms in areas of: able, and,ifthe governmentwereto reach outside Poland, whether enough quality management * high numbers of private farms wishing to teams would be available and whether this expand their landholdings with leasing or pur- option could in fact be achieved for all the state chase of portions ofor entire smaller statefarms; farms. In a few specific cases, such as those * state farms with dispersed and parcelized state farms that need to be managed in an holdingsthatarelogisticallyuneconomictofarm; interim manner pending policy decisions on * state farms whose cropping pattern and longer-term management, there might be a comparative efficiency cannot compete with limited role for contract management services, private farms, such as in horticulture; and particularly by EC younger farm managers ex- * excessequipmentonstatefarms. Manystate perienced in similar size operations. Such farms have accumulated excess stocks of farm operations could serve as useful models to equipment. Managers are hoarding this demonstrate modern agribusiness management equipmentas a source of spare parts andbackup techniques. as major repairs are difficult to get done in a timely manner. Even with a modest excess State farm restructuring and privatization. inventory, spare capacity exists. A detailed Phasedprivatizationandrestructuringisathird inventory farm by farm, with auction sales to option. As mentioned, this requires state otherfarms(withreservepricesspecified),would reassertion of legal ownership into state farm(s) ensure a more rational and efficient pattern of state holding group or groups and creation of utilization of farm equipment. joint-stock ownership for state farms. This redefinition would then enable the state to legally Phasing: what needs to be done privatize the state farm system. A sudden privatization and full divestiture of Changing the land use and ownership system all 1,300 state farms' assets to the primarily willtaketime. Becauseofthis,andalsobecause local private sectorfarm ownersmaybe difficult one needs to insulate governmentfrom the risks to arrange in the short term. Funds are un- of production, a phased approach along the likely to be available for complete privatization following lines might be considered: at reasonable market values, especially with credit unavailable or at very high real rates. * Separateworkerhousing,itsland,andother Full sale might also result in a decline of food social benefits from the commercial farming output in grains as new owners would need enterprise. 173 * Reassert Treasury joint-stock ownership granting bonuses in the form of shares to em- over the fixed assets (buildings, processing ployees if the company so decides. Neither equipment, offices, repairfacilities, storage, and would it preclude granting a minority so forth) as well as moveable assets (such as shareholding to the workers of those companies farm equipment). These enterprises and assets or entities being privatized, if such an action would then be restructured and offered for lease were deemed essential for political reasons. orsaleto theprivate sector. Landunderpinning But this must be defined as a gratuity, not as a these assets would be leased at market rents. right. Appropriate legislation should be enacted (if Not all state farms will attract experienced need be) to authorize the creation of private managers, and thus it will be necessary to corporations with the objective of managing implement interim measures to ensure efficient state assets (Ref: Societe fermiere in France). management until appropriate divestiture of Those companies should have full legal per- the assets occurs. Since it is essential to sonality and be properly capitalized. They reaffirm the property rights of the state over should also be authorized to purchase land. those units, it would be essential to rescind the The above mentioned corporations would 1983 self-management rules, and reestablish compete through bidding for the management the responsibility of the authorities for over- of allorpartofthestatefarms. Theywouldtake seeing management, with a clear mandate to responsibility for all the assets not belonging to find private managers, and a deadline after the agency, would ensure maintenance of the which mandatory sale of the land will take land, and would be entitled to all the profit ofthe place. It is essential that the transitory nature exploitation after payment of the fee to the ofthose measures be clearly affirmed and strictly agency and all taxes. enforced. o Separate farmland from the farming enter- prise and place it into a new state landholding Future of state farms agency that would be empowered to lease this land to the restructured farm enterprise, to the In the short term (1990 and early 1991), the private sector, or to joint ventures. Public rural policy questions are those of employment ownership of state farmland should be formally stability in rural areas, maintenance of pro- disconnected from its management. The state duction for domestic and export markets, and landholding agency should make sure that land the development, in the short term, of the legal is maintained in good agricultural condition; and financial framework for transferring land when appropriate legislation is passed, the ownership andmanagementfrom the statefarm agency will be empowered to sell it. sectortodifferentformsofprivatemanagement One major problem to resolve as soon as pos- and ownership. Immediate policy steps are sible is the confusion created in the mind of the required as follows: public regarding who owns what. There is clear indication that workers and managers of state * Tightened financial controls. The govern- farms tend to believe (or want to believe) that ment should not provide any preferential fi- under the previous laws, they acquired legal nancial or input provisions to state farms that rights of ownership to the assets they managed. are not also provided to private farms on similar This confusion applies to the state farms, but terms. also to the cooperatives and to their industries. * Accounting systems to replace current re- It is ofutmost importance to clarify this point as porting and inventory control mechanisms. It early as possible, for it not only affects the is critical to undertake an inventory of assets on present problem of transfer of ownership, but each state farm. These accounting systems are might very well deter future investors if it ap- needed to develop financial criteria to assess: pears that an employment contract generates profitable state farms; potentially profitable rights to the assets of the enterprise. state farms; and bankrupt state farms, espe- Clear declaration of intent and appropriate cially those unlikely to become profitable in the legislation is necessary to clarify that an em- medium term. ployment contract does not create any property * Identification of nonprofitable state farms. right to the assets of the entity in which the Listing the state farms that are effectively in employee works. This does not preclude the bankruptcy throughnonpaymentoflegallyowed 174 taxes to the Treasury is essential. These farms Treasury for permission to register as a joint need to have priority identification and asset stock company. This board would then appoint valuation, and then be given priority for apart- new management, introduce normal commer- ment delinking and sales, building and land cial codes in transacting business, and prepare leasing where possible, and, most importantly, regularoperatingstatements andbalance sheets equipment auctions with reserve pricing. They under generally accepted international ac- cannot, in fiscally austere times, continue to be counting standards. a drain on the state Treasury. * Establishment of a state farm agribusiness MEDIUM-TERM grATE FARM RESTRUCTURING restructuring group. This is critical to prevent unauthorized disposal of state property (asset In the medium term (1991-1995), restructuring stripping) and determine what assets, especially ofthe management and ownership of state farms excess equipment and uneconomic crop and will be done in the context of the wider policy of livestock inventory, can be auctioned off, and at public sector asset management reform and what values reserve prices should be estab- privatizationstrategies. Theneedfordeveloping lished. There needs to be guidance documen- bothamarketeconomyandafunctioningcapital tation prepared by this restructuring group for market, as well as the resolution of the trans- individual state farm managers to set the rules ferability of property rights, will be crucial in during this upcoming period of major organi- the medium term and will shape the rate and zational and ownership change within the state structure ofprivatization ofthe state farm sector. farm system. * Worker housing separated - delinked - Joint ventures. If the short term legalization from the question of state farm ownership. An measures outlined above take place, then joint important consideration on state farms is the ventures between state farms, private Polish eventual ownership andmanagementofworker farmers, and external investors will be mark- housing. Housing standards in rural Poland, edly easier. Efforts to establish joint ventures both in private and public sectors, are relatively during the medium term should be fostered to high. Apartments on state farms for the most introduce modern management, accounting and part are well constructed. Rents and utility agronomic standards. costs are minimal. With a severe housing shortage in Poland Management restructuring. Regardless of limiting worker mobility, state farm workers the longer-term structural form of the state are likely to be most reluctant to give up their farms, a strong and consistent introduction of on-farm housing. However, privatization of management and accounting reforms on state state farm housing is an option, with sale by the farms is necessary. Once the joint-stock own- state with lease/purchase options available. ership is settled, it is imperative that an indi- * The land issue. Clarification of the legal vidual statefarmboardofdirectorsbe appointed, status of the leasing statutes is imperative (for with state farm workers not to exceed 20%. The example, the right to lease land in perpetuity- new board should develop criteria for restruc- the usufruct rights inherent in leasing). Some turing management, appoint new management joint ventures are proceeding with a form of where necessary, and develop separate and ac- usufruct in constructing joint ventures with countable profit and cost centers (financially external and internal firms, but further legal independent units) for all identifiable enter- clarification is needed as to the rights of the prises and farm parcels on the state farm. lessor. Linkages and contracts with external * Treasuryjoint-stock ownership. Once basic agribusiness management traininginstitutes is and realistic book values of state farms are de- critical. Adequate funding for these linkages termined, the state ownership in those farm appears to be offered from currently available assets would need to be reregistered in Trea- external aid packages. sury-held joint stock shares. Only in this legal structure can future restructuring occur. Asset and inventory valuation. Valuation of each state farm operation should be completed Inthisprocess,statefarms(enterprises)would no later than the end of 1991, guided by the have to apply to the office of privatization in the 175 recommended state farm agribusiness restruc- enjoys a local or regional monopoly. turing group. Privatized state farms with land owned or Liquidation. Bankruptstatefarmsshouldbe leased from the state. In some cases, complete placed at auction, with moveable assets sold dismantling and selling of state farms to local and fixed assets leased or sold, especially worker farmers or to the local or foreign private sector and management housing. Land for which may not be feasible. Sale of such farms over there is no private market and which cannot be time to local farmers, farm managers and pos- worked should be placed in protected crops or, if sibly to external technical partners working as continued production is not feasible, should be joint shareholders, and then appointing inde- placed in pasture or forestry reserves. The pendent management may be feasible. Several national land fund would be restructured to pilot operations along these lines are being enable such land to be managed to avoid soil developed currently, although it is far too early erosion. to assess the outcome. LONGER-TERM STATE FARM RESTRUCTURING State ounership of land and enterprises with independentmanagement. Afourth option might In the longer term (1995 and forward) and from be government hiring of skilled, independent, the perspective of economic efficiency, the internal and external farm management firms preferable option would be to permit individual, to manage state farm enterprises for an agreed exclusive, and freely transferable property fee plus a percentage of the net revenue. This rights, with capital markets and markets for is done frequently by trusts, insurance firms, corporate control assuring market valuation of and banks in other countries. In most cases, the state farms assets and liquidations as nec- these are interim arrangements until a sale of essary. Until this environment is achieved, the enterprises can be effected. It may have some shaping of the state farms may evolve in a applicabilityinPolandasaninterimmeasureto variety ofmanagementand ownership patterns. restructure loss-making state farms prior to privatization, until a longer-term sale can be Full privatization of land, buildings, and arranged. equipment. Some state farms on productive The government is receiving a number of such soils in zones of extensive private farming are proposals from Polish entities and from other likely to be liquidated and the land auctioned to countries. local farmers in the area. Currently, the larger private farmers appear tohave ample equipment Conclusions and would be able to farm additional acreage. If full payment is not feasible due to liquidity Generally, the state farm sector is inefficient in issues, a lease/purchase option for farmers its use of factor inputs. Privatization, if man- wishing to buy land is likely. aged well, should result in efficiency gains and lower cost production, especiallyfor basic grains. Agri-service centers. Some state farms are As the government develops its policies for re- beginning to act as service centers to their local structuring the extensive state farm system private farming communities both in the state, through the proposed state farm agribusiness cooperative and private sectors. Machinery restructuringtask force, a series ofprivatization, repair firms, storage, livestock assembly and saleAeasing, and management contractual ar- buying stations, and feed milling and distribu- rangements will be developed, all under an tion could be privatized from existing state farm agreed set of basic clear laws with enforceable units and serve a larger local market than just regulations. Regionally, the approaches will the state farm. Enterprises with horizontal differ: what might work for a state farm di- integration with a restructured state farm pro- vestiture in an area of many private farmers videagro-processingforneighboringlarger-scale keen to expand may not be applicable in the and smaller-scale farms. northeast where the local farming population These agri-service centers should be encour- has little interest or is aging rapidly. aged, but not in a manner that substitutes a As market mechanisms develop, the recom- state-run repair shop with a private firm that mendations of the state farm agribusiness re- 176 structuring task force will have increasing im- to conservation areas, and those with more portance as the state farm system evolves though economic and better managed farms in north- a variety of means; some undertaking full em and western Poland being privatized, re- privatization, including the sale of land to local structured, and put on a sound management farmers; others selling enterprises to local and and financial basis. external investors in joint-venture formats; and still others developing into agri-service firms, Endnote undertaking assembly, storage, processing, and repair with separate, privately owned enter- This annexwaspreparedbyAugustSchumacher prises on former state farms. (World Bank), assisted by Andrzej Kolodziej A regional pattern may evolve, with small (AgriculturalAcademyofWroclaw)andRyszard state farms in central and southern Poland Rozwadowski (Agricultural Academy of being sold off to local farmers, with uneconomic Warsaw). state farms in eastern Poland being converted 177 Annex 8 The agricultural and food marketing system and the agrifood industry The functioning of the agriculture and food- as a result of liberalization has warranted a marketing system is of fundamental strategic more detailed consideration of the options for importance to the Polish agricultural and food rationalization (see Annex 21). Other sectors sector. It affects the overall distribution of might need similar detailed examination, but resources, economic welfare, and the efficiency only after the main framework of strategy has and competitiveness of the agriculture and food been developed. industries. It should also be emphasised that under the The agrifood industry is also of considerable current situation of the stabilization program strategic importance. It employs an estimated and the transition from command to market 800,000 employees, produces roughly 20% of economy there are rapid and fundamental total value added in the Polish economy, and changes taking place within a very unstable set accounts for 13% of all convertible exports. In of external circumstances. The sector is in addition, consumers spend roughly 50% of their transition and in these circumstances it is often income on food of which an estimated 75% of the difficult to clarify the underlying economic po- volume is processed in some form. Thus, the sition. Consequently, in a number of areas we performance of the agrifood industry, and the will recommend further examination of aspects policies which affect it, have major economic, of the marketing system and agrifood sector. political, and social implications. As will be seen below, there are some serious The recent historical context deficiencies in the operation of the food-market- ing system and the agrifood sector within it, and The agricultural and food marketing system this short paper addresses these and proposes has been subject to a fundamental change in measures which should be key components of an function and modus operandi. Previously, un- agricultural strategy for the Polish agriculture der the command economy, it was simply a and food sectors. means of delivery of products on the basis of This annex is restricted to a consideration of directive, and subject to manipulation by dis- the broader strategic issues affecting market- tortion of input and output prices. ingandtheagrifoodindustry. Itfocusesattention Most of the production going onto the market on the institutional framework rather than the was channeled through the state-controlled co- detailed exploration of the operation of indi- operatives and the processing sector was vidual sectors. With one exception, exploration dominatedby state enterprises. Subsidieswere of the detail seems unjustified in the process of given throughout the system to reflect the cen- definingan agricultural strategy. The exception tral perception of what was needed. Within this is the dairy sector where the crisis in confidence system, the decision of what was produced and 179 the price of sale was determined by balancing enterprise was its function (a conduit to the the subsidies on production, distribution, pro- market) amd its social contribution (local em- cessing, and consumption. No market mecha- ployment and other social services). The man- nism operated to provide an allocation function.' agers of these organizations were subject to The command economy had little need for many pressure for increased efficiency, but they were ofthe institutions required in a market economy also subject to conflicting claims on them which to facilitate the exchange of goods at prices led to substantial compromise on any efficiency determined by the state of demand and supply. criteria. Much of the transfer of goods along the food The level of distortion to economic incentives chain was at predetermined prices and was is made clear by Schaffer, (European Economy, based on a complex set of administerial, regu- March 1990). He studied the 1988 data on the lated, and contract prices. Wholesale exchanges largest 500 state enterprises. This showed existedbutonlytofacilitatethephysicaltransfer clearly that food enterprises were most likely to of goods along the food chain. Small private be loss makers and that those which made markets existed for the sale of produce, which losses were paid supplementary payments which was residual to that required through the state resulted in the loss makershavingbetter results system, and there was a limited development of than many profit makers. Under these condi- farmer markets for vegetables, fruits, flowers, tions, it is hardly surprising that individual and eggs. Wherever processing was involved, enterpriseswere not run effectively or efficiently. the socialized sector and channels to the market represented the only possible alternative sales The adjustment to liberalization route. Farmers were under considerable pres- sure to use the state channels because of the The speed and magnitude of change have been access this granted to inputs and other services. considerable. The system has been subject to The extent of the distortion caused by this rapid liberalization of farm input and output system varies by commodity. In some com- prices and the removal of price subsidies at the modities (particularly basic foods) there was a retail level, beginning in August 1989. On their much heavier subsidy and degree of control. In own, these measures caused considerable dis- others, such as fruit and vegetables and some turbances throughout the system, with some processedfoods, the subsidies were less, although stockpiling of storable products, and later a they still made a significant impact. 2 No part of sharp drop in consumption of some products. the agricultural and food marketing system was However, of much more fundamental importance left untouchedby the command economybecause were the implications of liberalizing the system of the size and nature of the distortions in before any changes in the structure and own- operation. ership ofthe marketingchainhad been initiated. But the impact of such a system extends far As might be expected given the background, the deeper than distortions of commodity markets. system was hardly capable of responding to the The people involved in the system were also new circumstances of liberalized prices and the strongly influenced by it. The criteria of ad- market economy. justment of production was not connected in any The management situation throughout the way to market conditions by the concepts of system is critical. For any of these managers to priceandprofitsbutbywhatwasperceivedtobe adjust to the disciplines of a market economy required. Thus, managers of enterprises were demands a considerable metamorphosis in mo- not accustomed to examining and analyzing tivation. However, in addition to this, manag- their organizations on the basis of profitability, ers are faced with the uncertainties arising from and the extent of subsidizing enterprises often restructuring. meant that those who had the largest deficits at The liberalization was also accompanied by the end of the year ended up with a higher the first moves in the privatization and re- surplus than many others after the end-of-year structuring program of the government. State negotiation of subsidy. Not only did this result enterprises werebroken up andindividual units in a serious misallocation process, but it also wereunderautonomousmanagement. Similarly generatedamanagementattitudeandapproach in the cooperative sector, cooperative unions which was both administrative and, inevitably, were liquidatedandindividual cooperatives were political in emphasis. The rationale for an left to operate independently. As a result, 180 throughout the marketing system, managers bypass the existingmonopsonistic channels (see who have been highly dependent on state con- below) and partlybecause ofpast designation as trol and assistance from the center have had to the chosen channel to the market. survive on their own in a completely new man- A serious flaw in the existing situation is the agement environment. absence of reliable and comprehensive sources On top of this, the position of management of market information or the necessary vehicles within various parts of the food chain has been of dissemination of this information. The old undermined. Those in charge of autonomous system required a certain degree of market units have little freedom to manage with true transparency, but the emphasis was on volumes executive authority. In the autonomous state flowing through the system and costs and there enterprises the managers ultimately report to was no need to disseminate any information the voivodship and the social role of the enter- throughout the marketing system as the deci- prise is reinforced by the powers of the workers sions were made centrally. Currently, the committees. Management responsibility is di- emerging market system desperately needs the vorced from ownership and the result is lack of development of a comprehensive market infor- motivation and commitment to organize the mation structure which will help provide mar- enterprises efficiently. The hiatus over owner- ket transparency and provide a rational base ship because of the recent reforms and the upon which individuals in the system can make attempts to break up the state monopolies result their production and selling decisions. There is in considerable uncertainty and inhibit any evidence that farmers have little idea of what management initiatives. Throughout the food alternative prices are available and some spend chain, managers await clarification of their a considerable amount of time finding out the position before taking positive action. best place to sell their products. The costs of Despite the liberalization of the market, the inadequate market transparency are enormous lack of market exchange infrastructure is still in terms of both time wasted and the overall evident at many parts of the food chain and misallocation of resources. farmers have few opportunities to sell on wholesale markets, which are subject to com- Competition in the food chain petitive bidding. While wholesaling facilities exist for unprocessed and processed products One of the objectives of the restructuring of there are imperfections in the way they operate enterprises is to increase competition in the and, in some, the number of participants is sector. However, this has met with only limited limited and there is little open determination of success. In some areas the national monopolies prices. It has not proved possible for the task have simply been replaced by the autonomous force, within the time period, to obtain a reliable regional or local monopolies and competition full and comprehensive description ofthe current has hardly been affected. Indeed, as might be status of market exchange facilities and this expected, where large national organizations remains a high priority. have been broken up, the local management, Another characteristic of the current system which depended on the support of the central is the extended links in the food chain. This is services, has continued to seek help from within a legacy of the previous system where, for ex- the old 'family'. Thus, there is strong evidence ample,themillingsectortraditionallypurchased of collusion and anticompetitive behavior that from cooperatives rather than directly from reduce the level of competition. farmers because of the historical pricing and The extent of competition varies by area and margin system for grain. Some of these re- industry branch and also there are substantial dundant links in the chain still exist, although differences at the various stages of the food the liberalization of the pricing system and the chain. The spatial distribution of competition greater autonomy of the individual grain-pro- appears to result from historical and geo- cessing state organizations have brought some graphical accident. In some areas, single coop- pressure to introduce more direct links between eratives will supply a town with much of their farmers and processors. Contradictorily, there basic foodstuffs, while in other areas coopera- is also a strongtendencyforvertical integration tives compete with other cooperatives, state in some parts of the marketing system. Such a farms, and private traders. feature exists partly because of the attempts to The extent of competition in the food-process- 181 ing industries will depend on the form of previ- these and other new entrants are constrained ous organization and the capital intensity ofthe by a wide range of barriers to entry such as lack branch. In most cases, the processing capacity of capital, skills, and access to market outlets. was evenly spread throughout the country in The frustration experienced in finding mar- order to provide adequate processing facilities keting outlets has been one factor leading to the to absorb production. Where branches of the widespread development of the street markets food industry were capital intensive, restruc- that abound throughout Poland. These markets turing has left the relatively few autonomous offer an alternative way of selling and have management units with well-defined local or resulted in the development of competition to regional monopolies. the established channels at the retail stage in The flour milling and edible vegetable oil some areas. These informal retail markets branches, both of which retain strong regional represent an encouraging development in the oligopolies despite restructuring, are oligopolistic food economy and a concrete indication of the sectors. In the edible vegetable oils sector, the extent to which the rules ofthe market economy old national monopoly has been broken into a can be adopted. However, many of the street small number of autonomous enterprises, each markets need to be supervised and formalized of which holds a strong regional position with so that public hygiene and other consumer very little competition in the production of protection issues can be introduced and the margarine, except from imports. Each of these standards of markets raised. All food markets have combined to form a service company which should have access to water and facilities for plans new investment in manufacturing ca- ensuring hygienic handling and presentation of pacity. This investment will consolidate the food. oligopolistic nature of the branch. The national The export and import of agricultural and grain-milling enterprise (PZZ) was divided into food products have been handled by a number of separate milling companies. However, each of foreign trade organizations. These had mo- these mills has a local monopoly of storage, nopolies for designated commodities and were drying, and milling facilities. Farmers selling primarily established as state enterprises. their grain have little option except to use the Competition in this area was severely limited as same channels that they have used for years these state export agencies had considerable and the prices paid are not competitively de- monopolistic power with regard to trade. Be- termined. cause of the monopoly powers all exporters In otherbranches competition maybe greater. became dependent upon them and did not need For example, small-scale meat processing (for to invest in any aspect of export development. example, sausage making) has always included The monopoly agencies charged margins but some private participants and here conditions their role was buttressed by state export policy, can be more competitive. Estimates of the which included heavy subsidization of exports. structure of the meat-processing sector suggest These monopolies have now been broken down that the private sector is relatively well-repre- and in most product areas anyone can export, sented (about 10% of throughput), largely but the old foreign trade organizations still hold throughverysmall-scalesausagemakingplants. an important and influential position simply Although this feature is probably more highly because oftheir dominant position in this activity represented in the meat sector, small-scale and their widely developed existing trading manufacturers can be found in other branches relations. There is also evidence that they such as baking and the fruit and vegetable retain their old powers, including control over processing sectors. Much interest in setting up the grantingofexport licenses in some products. enterprises in those sectors is motivated by the In some areas liberalization ofcontrols on exports desperate attempt by producers to identify al- has encouraged many to export directly, inde- ternative outlets for their products in the face of pendently, and in competition with the estab- thelocalmonopsonistbuyers. Fieldvisitsatthe lished state-owned agencies (with its well-de- beginning of June 1990 revealed substantial veloped network). interest in investing in small-scale slaughter- ing, meatcutting, and processingfacilities among private farmers and state farms. However, 182 Deficiencies in the current marketing ture to stimulate the development of competi- system tive markets. * There are excessive links in the chain be- The legacy of history and recent reforms can be tween consumer and producer. summarizedasfollows. Themainproblemsarise * There has been misdirected investment to from the failure of the markets to function as a provide for the needs of the command economy result of: rather than those of the market economy; thus, processing plants are inappropriately located * the absence of certain preconditions for the and some essential investments are not evident. functioning of a market such as adequate mar- ket transparency and market exchange infra- The situation in the agrifood industry structure; * the absence of competition; and It is difficult to separate the problems of the * the problems ofthe individual management agrifood sector from the specific market defi- organizations adjusting from a command to a ciencies itemized above. The predicament of the market economy. sector arises from the inheritance from the past and the consequent lack of preparedness to face Such problems are to be expected given the newcircumstancesinthefuture. Ingeneral,the rapid transition of the Polish economy from condition of many of the enterprises is poor, command to market economy and the extent of with buildings in need of refurbishment, and the changes required from individuals and in- outdated and obsolete equipment and facilities stitutions. It is difficult to separate the mar- often falling below acceptable standards of hy- keting system from the more general problems giene, safety, environmental protection, and of the economy. The economy still lacks a fully employee health and safety. Many of the en- functional competitive credit system and many terprises in the food-processing sector have a of the institutional features of a normally op- seriouslackoffinancialresourcesforinvestment. eratingmarketeconomy(for example,insurance, The combined subsidy and taxation and distri- capital market, and corporate legal framework). bution policies have greatly contributed to this All of these are taken for granted in a developed situation. In years of deficit, subsidies made market economy and each dovetails with the good any losses while in years of surplus taxes others to provide cohesion to the marketing penalized success. In effect, these policies have system. combined to prevent enterprises from under- The explicit malfunctions of the market as it taking long-term strategic planning and in- now exists in Poland are the following: vestment. It is clear that the food-processing industry * Thereispoorpricetransmissionthroughout represents a major constraint on the develop- the system, with large trading and processing ment of the entire agricultural and food sector. margins and obvious price distortions atvarious The food industry is not geared to the market points in the chain. economy and the ownership hiatus referred to * There is a lack of feedback through the food earlier (management responsibility divorced chain from consumers to producers, with many from ownership) continues. These are serious ofthe participants in the chain beingproduction problems and require urgent attention if agri- rather than market orientated. The range of culture is to achieve its full potential within the products is very narrow, the quality is often market economy. poor, there is little attention to added value, and It is very difficult to get a clear picture of the the presentation of products is poor. financial position prevailing in the sector. De- * Thereislittlemarkettransparency;inother spite the observed problems of the industry, words, there is little reliable information avail- official data suggest that investment levels in able that will allow the individual actors par- recent years compare with historical averages. ticipating in the market to determine what 1989 was characterized by investments almost the true market position is. This results in very 15% higher in real terms than in the previous high costs of marketing and misdirection of year, although much of this was generated be- effort. cause of the hyperinflation of that year. Invest- * There is little market exchange infrastruc- ment in milk, vegetable oils, grain elevators, 183 cold storage, andfreezerfacilitiespredominated simply mark up their sales prices without pres- (as in previous years). Much of this investment sure to increase their efficiency; however, ac- took place in the first half of the year and counting practices may give a false picture of interestininvestmenthaltedwiththeintroduc- their current position. Where fixed costs are tion of the economic changes at the end of the either written off or inadequately accounted for year. by depreciation, the impact of lower capacity There is substantial interest in capacity as utilization (usually a key criteria in determin- mightbe expected in a centrally-driven economy. ingfood industryprofitability) maybeless critical Institute of Agriculture and Food Economy data in determining profitability. Irrespective of suggest that these investments, coupled with this, the absence ofcompetitionhas undoubtedly the reduction in demand in 1990 ensure that shielded parts of the processing sector from the there is adequate capacity for the current sup- full financial effects of the stabilization plan. ply (except possibly grain in a very wet year or * In certain higher value grocery products with a large stock overhang). We are concerned (nonessentialbasic foods which were previously about the capacity for processing rapeseed oil, unsubsidized), margins are compressed (for future capacity constraints on the margarine, example, confectionery, dehydrated products, brewing, pasta, and cheese sectors, the poor frozen products, etc.). quality ofand losses in much potato storing, and * In industries that are exposed to competi- the low level ofvegetable and potato processing. tion from substitutes, financial problems are Whether higher levels of investment in these greater (for example, where margarine competes areas would be economicallyjustified is difficult with butter and starch, in the form of glucose, to assess. competes with sugar). All parts ofthe food chain have been put under * Inindustries with campaignprocessingand financial pressure by the adjustments required heavy seasonal stockholding(for example, sugar as a result of the implementation of the stabi- and starch) financing costs have caused serious lization program. The distribution channels are problems and there is similar concern over fi- mainly cooperatively owned (their position is nancing this year's cereal crop. discussed in Annex 6). In the agrifood industry * In the dairy industry there are very serious there has been very little investment since the structural problems (see Annex 21). autumn of last year, largely because of the uncertainty, the economic reforms, and the very It is clear that there is a need for some form of high interest rates. Demand has dropped con- short-term action to assistthoseindustrieswhose siderably as real incomes have fallen by 35% liquidity has been most seriously hit to ensure (see Annex 3). As a result, many processing that the 1990 crop can be purchased. Such plants are operating at low capacity and some assistance should be temporary and clearly are carrying large stocks and are in a difficult targeted to avoid the perpetuation of serious financial situation. Statistics collected by GUS distortions. for the socialized sector suggest that the current Currently, the agrifood industry is already financial situation is generally worse than last benefiting from a number of specific taxation year, but varies between branches for a number and credit provisions not available to other of reasons: industries: * The economic position of industries where * an allowance against profit tax equivalent the competition is low or demand has not been to 50% of the annual investment in equipment; seriously hit is not strong but neither is it * exemption of industries manufacturing critical (for example, in the meat industry and products previously subsidized from turnover the beer and milling industries, profits contin- tax (normally charged at 20%); ued at the same level aslastyear). The absence * a temporary tax holiday (until January 1, of real impact on the financial results of these 1991) for new private enterprises in selected branches ofthe food industry companies is quite activities (including meat and distributive astonishing considering the extent to which the trades); restoftheeconomyhasbeenhit. Itisuncertain * credits for small-scale private companies whether these results are real or illusory; it is from the EC Counterpart Fund (75% ofcommer- true that companies in a monopoly position can cial interest rates). 184 In addition, the food industry is influenced In addition, there are several other important directly by the general arrangements for foreign aspects to take into account. Exports figure investment and joint ventures, although no very prominently as a macroeconomic objective special arrangements exist. for Poland and this particularly applies to ag- ricultural and food exports. However, it is clear The potential of Polish food products that the industry is unprepared for developing new markets and products. The industry has The underlying longer-term comparative ad- nothadtoinnovate in new product development vantage of Polish food products is uncertain and previously, and it lacks many of the capital and needs systematic study. In particular there is a know-how resources to prepare for this. If the marked absence of up-to-date strategic mar- industry is to exploit any opportunities and to keting studies upon which to assess the market defend its own market it needs to invest in the potential, a deficiency which should be corrected. necessary plants and equipment and also, of However, a number of general observations critical importance, to develop human resources. can be made that help to clarify the current Thus, no matter what the comparative advan- situation and the nature ofthe future challenge. tage for Polish products, progress in domestic First, unprocessed or slightly-processed products and foreign markets will not come easily. There are a significant part of agricultural exports. will need to be a considerable effort to adjust the Second, Polish exports are usually commodity- industry so that it performs well in both price type products of low value and positioned at the and marketing terms. bottom of the market; in this market, their positionisfragile aspriceisthekeydeterminant The desired future situation of success. Ifthey are not the cheapest they are displaced from the market. This allows little There are many deficiencies in the Polish mar- prospect for extracting value-added and higher keting system and its agrifood sector when profits. judged against market economy criteria. It is Third,Polandhasveryfewnaturalmarketing true that the performance of agricultural mar- advantages. While there is afeelingthat Poland kets in other developed countries is often not has some potential in serving the market for low good, largely because of the impact of massive input (organic) products, major hopes based on subsidization and control of competition. How- this premise are unlikely to be fulfilled. The ever,themacroeconomicenvironmentforPoland marketopportunitiesarethere,butcompetition precludes such an interventionist policy will be very tough. Moreover, the general image framework, at least in the short term. Because of Poland in this market is unfortunately com- of the tendency toward liberalization of world promised by its general reputation for serious agriculture, this applies in the longer term also atmospheric pollution. (see Annex 1). In any case, the fundamental Fourth, there arebig uncertainties associated challenge for the Polish economy is to make the with the development of export markets (par- transition to a true market economy so that the ticularly trading relationships with westem entire marketing system is able to respond to economic blocs and the Soviet Union); these two market developments. markets are likely to demand different strate- In the medium term - subject to social, po- gies (see Annex 4). litical, and macroeconomic considerations - Fifth, there are a number of niche and added the marketing system should develop so that it value market opportunities in the domestic is competitive and effectively serviced. The marketdespite the contraction in demand. These dynamic effects of enhanced efficiency, innova- opportunities are illustrated by the importation tion, and entrepreneurial activity will result of a number of higher quality products selling at from such a development. Those who operate substantial premiums to domestic products (for successfully will be rewarded with profitability example, high-quality long-life milk selling at rates providing the basis for further necessary 10 times the domestic price. Finally, there can investment to improve their overall position. be little doubt that the domestic market will The benefits for consumers will be a greater develop all the characteristics of western mar- range of products at lower prices. The process- kets in the medium/longer term (for example, ing sector will provide greater market opportu- demand choice, convenience, added value). nities for the farm sector and can provide more 185 general benefits for the country as a whole as a all constraints of the macroeconomic param- result ofthe positive impact on export revenues. eters. It is well recognised that the temptation The precise distribution of these benefits will to alleviate such politically sensitive effects as depend on the terms of trade between Poland unemployment by reintroducing new subsidies and the rest of the world and between agricul- is there, and this represents a threat to the ture and other sectors of the Polish economy. shorter-term economic strategy. The nature of demand will change as the Having said this, the support of objectives benefits of the current economic policy program that have an important effect, for example, on are revealed. Consumers will demand a wider food consumption, rural employment, farm di- rangeofproducts with considerablyhigheradded versification, and related income distribution value. Niche markets will be more prevalent issues may justify a high priority for the Polish and better presentation will yield regular price government. With some important qualifica- premiums. The marketing system and the main tions, strategies that provide special assistance components of it will need to be able to respond to further such objectives might be justified, to these changes. especially as one moves from the short to the medium term. The policy options THE MAIN ELEMENTS OF STRATEGY It is important to distinguish between two dif- ferentlevelsofissuesinidentifyingpolicyoptions The underlying assumption of the strategy is and strategies for the marketing system: that the marketing system would perform bet- ter if competition were increased and certain * those that concern marketing system mal- market infrastructure encouraged. This applies function; and equally to the agrifood sector as an integral part * those that concern individual enterprise ofthemarketingsystem. Consequently,thekey management. priority is to encourage competition and to help markets function. Many of the latter arise because of the former This will be achieved by: and recognition of this is an important consid- eration in the identification of the desirable * increasing competition throughout the food phasingofpolicyreforms. Resolvingthe system chain; malfunctions will also specifically contribute to * improvingmarketingsysteminfrastructure improving the position of the agrifood industry. and institutions (in the form of both physical Clearly the priority is to ameliorate the system and forward markets); and malfunctions and this implies making the * improving general marketing services. market work. However, in addition to this it may be neces- In addition, it will be necessary to bolster the sary to consider various policy options that ability of the agrifood industry to adjust to the involve proactive interventions in the workings challenge that lies ahead. of the market. The degree of flexibility to in- terveneinthe operation ofthemarketrepresents Tyri OF MEASURES RECOMMENDED an important strategic issue. Since all actions in the short term must be undertaken within Much ofthestrategyreinforces what is currently the very tight constraints of the stabilization in progress. In keeping with the development of program and the macroeconomic targets of the the overall strategy for agriculture a key con- economy as a whole, any special assistance or sideration has been to identify measures that concessions which are requested demand very accord with the stabilization program in the careful examination and justification. Each short term and that, in the medium term, do not action granting special assistance for any sector substantially distort resource allocation in the must pass the test: might the objectives be economy as a whole. The emphasis is on devel- achieved by market forces? oping the necessary institutions to help the If the answer to this is no, or only after a long markets function. Thekey characteristics ofthe period, then the issues come down to the prece- components of the strategy are: dence of government objectives within the over- 186 * that they involve modest financial assis- the law has a major challenge in developing its tance (primarily start-up financing as many of capability within a relatively short time and the institutions can be self-funding or run as with only limited experience in such activities. private businesses themselves); Clearly, if the agency is to be effective technical * that they may involve some enabling legis- assistance will be required. Ithas been indicated lation (to facilitate raising funds from a sector that the agricultural sector is a high priority for for self-help); the agency. In fact, in terms of criteria of * that they involve some regulation (for exter- industry concentration, the agricultural sector nalities such as food quality and public health). comes fairly low compared with other more capital-intensive industries. However, concern To meet the special needs of the agrifood has focused on agriculture simply because ofthe industry we propose additional measures that political importance of food and food prices and serve to modify the outcome of current market the potential of antimonopoly rules to improve strueture, namely special temporary concessions the competitive situation. for new entrants and, eventually, reestablish- * The third set of measures to increase com- ment of equipment investment incentives in the petition is the lowering of barriers to entry, agrifood industry. particularly by offering: - encouragement to joint ventures (this is not MEASURES FOR INCREA8ING COMPETITION specific to agriculture); - a sound legislative structure for coopera- Under the heading of increasing competition, tives; and we emphasize the need for pursuing several - special provisions for new entrants. reforms which are already in progress. There are five broad areas of priority: As far as joint ventures are concerned, it is clear that the balance of interest must be ad- * First, and most essential, the privatization equate to attract technical assistance and new of all state enterprises in the food chain (includ- capital, and to have access to markets. This is ing the foreign trade organization) should be a critical issue as foreign partners can provide undertaken. This stage warrants the highest considerable technical assistance as wellas much priorityinviewofthewiderangeofbenefitsthat needed capital. Currently, this issue is receiv- will result. The mechanisms of privatization ingthe priority attention ofthe government. As are discussed in Annex 5. Here, it is sufficient far as cooperatives are concerned, a separate to note that the stages required are: annex (Annex 6) addresses what is needed to - affirmation of state ownership; convert them into more enterprise-oriented or- - establishment of state holding companies; ganizations. and The provision of temporary encouragement to - state disposal of assets. new entrants is one of the areas where special The implementation of this timetable should be assistance is justified. It is justified by the as rapid as possible to avoid further uncertainty following premises: over ownership and to ensure that market- - the importance of the food sector both eco- driven incentives are adequately installed in nomically and socially (as food is such an im- the management of these enterprises. Should portant part of the budget of the less well off); any delay be foreseen in this process, adequate - the nature and magnitude of the barriers to provision should be made within the holding entryintothefoodindustry andthe perpetuation companies for encouraging more efficient, moti- of oligopoly and oligopsony; and vated management. - the fact that privatization alone will not be * The secondmeasureto increase competition enough to increase competition; there is the is to implement antitrust regulations and moni- likelihood that in certain sectors private mo- tor competitive conditions. As far as the food nopolies will replace public ones, at least in the sectoris concerned, itisveryimportantthatthis short to medium term. extends to, and is effective at, regional and local In addition, we concur with others about the levels through the food chain. An antitrust law need to give small- or medium-scale enterprises has been introduced with this objective, al- special assistance, at least for a temporary pe- though the agency charged with administering riod. These types of enterprises are not appro- 187 priate to all processing activities or markets; MEASURES FOR IMPROVING MARKEFING SYSTEM however, with some assistance, they may be INFRASTRUCTURE AND INSTTMTIONS well suited to: - meeting emerging niche market require- The promotion ofappropriate marketing system ments; infrastructure and institutions represents a - identifying gaps in the markets of the large major objective. The main aim here is to facili- state enterprise; tate the development of a comprehensive mar- - they may offer additional diversification ket information service and a rational spot, activities to farm businesses; and forward, and (eventually) futures trading and - providing rural employment. market exchlange system throughout the food However, care must be taken in the way these chain. There are several specific areas that concessions are offered because of the problems need priority attention: of targeting and the implications of distorting the credit system. Despite the problems of * First, there is an urgent need to develop distortion, we consider this issue of sufficient markettransparencythroughoutthefoodchain. importance to justify some assistance at the This means to collect and disseminate the in- point where it will mean most, namely in fa- formation that will be necessary for all the cilitating better access to finance for new en- players in agricultural markets to make their trants. production and marketing decisions. Such in- For new entrants the major constraint is in formation is the essential oil on the cogs of the the area of access to finance. While we are marketing system. The precise details of this aware of the problem of introducing distortions initiative deserve special study that will take into the credit system we consider that some into account the needs ofthe system, the current action is required here. In preference to subsi- procedures, and the areas of development, in- dized interest rates, we support establishing a cluding market information dissemination temporary fund that can act as a bank guarantee mechanisms. for small- and medium-size agrifood invest- * Second, there is a need to encourage and ments. This fund can be administered by an regularize local retail market facilities. The agency that helps in the selection of projects. growing retail street markets are a positive The service can be made available to any bank aspect of the economy. They are to be fostered that applies for the fund, thus preventing any and encouraged by providing better sites and distortion by designating privileged channels. basic facilities and making them subject to ad- The agency can also provide technical assistance equate public hygiene regulations. to the banks in assisting the appraisal of in- * Third, the marketing system is desperately vestment proposals and in this way help provide in need of market exchange facilities, especially the much needed assistance required by the at the producer/primary wholesaler, producer/ newly emerging commercial banking sector. In processor stage, and these should be encouraged. addition, the conversion of future EC counter- The feasibility of establishing such formal and partfundsorofcounterpartfundsfrombilateral supervised rmeans of exchange should be ex- sources to such a purpose should be considered. amined to extend and encourage markets. Strengthening the markets should be accompa- The fourth measure to increase competition nied by the development of forward markets, involves ensuring there are no special conces- but a precondition of this is a better, more sions for the current players in the sector (for reliable market information system. Eventu- example, cooperatives). Such provisions are ally, more sophisticated markets may be devel- essential for a truly competitive environment to oped to help the sector cope with risk and to tie evolve. in with credit facilities. The precise form of * As a final measure to increase competition these should be explored in some detail. The it might be appropriate in some product areas to market information service will demand public allow competition from imports (with appro- investment. This is justified as it is a public priate antidumping protection). The qualifica- good. The devrelopment of market facilities may tion on antidumping is particularly important require initial assistance with governmentfunds, in view ofthe protectionist nature of agriculture but the markets should eventually be self-fl- and trade policy in many parts of the world. nancing institutions. 188 MEASURES FOR IMPROVING MARITING SERVICES port market assessment, and information. IOs also have a role in the organization of A large number of market services are required exporting and promotion of exports, either act- to ensure that a market system works well. At ing separately or in concert with other IOs for the outset it is important to clarify the respon- other agricultural commodity sectors. In view of sibilities for these. There are strong arguments the importance placed on exports in the mac- for restricting government responsibilities to a roeconomic framework, the organization of ex- limited range of activities that involve the public port market development is a key issue and one good. For example, we support the case for for which Poland is not well established with the government supervision in maintaining mini- existing foreign trade organizations. These mum public health standards, because if the trading organizations can still restrict compe- government does not do this, no one else will. In tition and discriminate against others as well, the same way, the government has a responsi- holding conflicting interests through their role bility to ensure that an adequate unbiased and in importing. They should be fully privatized independent statistical andmarketinformation and any anticompetitive activities should be service is maintained. restricted. They should act only as export agents There is strong argument for a commodity in competition with others. sector to assume responsibility for certain ac- However, there remain certain key activities tivities for the common good ofall the professions that need to be undertaken on behalf of the in the sector (for example, farming, trade, pro- sector in the area ofexport market promotion. It cessing, and retail). In order to carry out these is important to separate industry promotion sectoral responsibilities it will be necessary to activities (with interprofessional responsibility) provide opportunities for the establishment of from trading (with private responsibility). If interprofessional organizations (IOs). These this is not done it is inevitable that conflicts will agencies of sectoral self-help, which can adopt arise since an organization driven by its own responsibility for activities for the common good, incentive to maximize profits or commission exist in most of the agricultural sectors within will inevitably be tempted to discriminate developed countries. Establishing these agen- against others. Generic industry promotion cieswillrequire appropriate enablinglegislation. should be undertaken with interprofessional This legislation should enable sectors to estab- responsibility by the IOs. This generic promo- lish such organizations and to collect the required tion can cover both promotion of Poland as a funds. The best model would be a form of the source of supply or promotion of the commodity produktschaps that exist in the Netherlands, itself Again the Dutch model seems most ap- although other models exist in France, West propriate, although other export promotion or- Germany, Belgium and the United Kingdom. ganization models may be as suitable. The Thus, there would be an IO covering each of the emphasis should fall on control of export qual- major commodity sectors should the sector de- ity, development of export market information cide to establish one. systems, market analysis, and market promo- The sort of activities that could be usefully tion. Very careful consideration should be given covered are considered below. Such an organi- to defining the role of the 10 and of private zation can establish sectoral quality standards. organizations to ensure that there is no overlap These may be essential to protect the sector ofresponsibility. As in most other models, there from adverse effects on demand arising from may be a need for some government assistance poor-quality products coming onto the market. to ensure that Poland adequately competes. In This is not a priority area in the short term on addition the IOs have a role in developing the the home market but it is extremely important internal market where generic promotion may in developing and maintaining export markets. be necessary. In addition the I0 can provide some additional Some note should be made of the possible marketanalysis andinformation services. These participation of IOs in market regulation ac- services, supplementing those provided by a tivities. Where such activities are envisaged state-funded organization as part of the devel- they maybe ideal agentsbecause they represent opment of market transparency, do not have a the different participants in the sector and they public good character since they cover commer- should have the means of raising funds from the cial issues such as country market shares, ex- sector to contribute to the financing costs. The 189 issue of price stabilization and the role of the date, and there is a serious deficiency in basic new Agency of Agricultural Marketing is dis- packaging investment to facilitate better pre- cussed in a separate annex (see Annex 1 on sentation and marketing of products. In addi- macroeconomic adjustment and agriculture). tion to this, there is a serious lack of capital and Finally, there are a number of activities that this constrains investment. In these circum- have traditionallyhad state involvementbutfor stances we would argue for concessions. Spe- which private sectorresponsibilitywillbe critical cifically to assist investment in the food-pro- in the future. In particular, storage and trans- cessing sector we consider it necessary to argue port; although there may need to be some public for the retention of the principle of tax conces- provisionfor strategic stocks and coverfor short- sions for investment in the food-processing term concern over storage capacity. sector. However, we consider it important that this concession be rescinded or reduced for state MEASURES FOR DEVELOPING HUMAN RE80URCES enterprises until adequate management is in- stalled. There is little point in making these The development of human resources is critical. concessions if we cannot be certain that they It is possible to identify needs throughout the willbe adequately utilized. This is a controversial different levels of human resources, but of key issue and is very closely linked to the issue of current significance is the absence of manage- privatization and the methods which will be mentresourcesgearedtooperatinginthemarket adopted to achieve that. One argument would economy. Investment in management devel- hold that adequate management cannot be opment can improve efficiency (for example, achieved until the organization is in private more marketing-oriented management, more hands (oI- at least a majority private rational raw material purchasing procedures, shareholding). It must be noted, however, that and promotion and market development). some members of our group felt that such a In the area of human resources we consider it criteria was unnecessarily dogmatic and that important that a coordinated program for the some state enterprises could provide adequate development of food industry management be management. prepared. Technical assistance from individual countries needs to be very closely coordinated in Sequencing this area. Much of the technical assistance currentlyprovidedisaimedatdevelopinghuman In terms of sequencing there are some urgent resources although there is little evidence that short-term problems to be faced. There is an it is being directed in a coordinated way to argument for providing special temporary ar- ensure that it meets Polish priorities. The rangements to ameliorate the stock and new tendency for promotion of local or regional ac- crop financing problems ofthe sugar and potato tivity may lead to a patchwork ofprograms that industries (and also grain). Of more important are not integrated into national objectives. significance are: The management development programs * thereinforcementofprivatizationassomany shouldbetargetedatyoungmiddlemanagement improvements will follow from this; and emerging management resources. Busi- * the initiation of a major review and reform ness school education would seem to need high to the market information system; priority. A range of food industry management * strengthening the new entrant incentives and marketing activities needs to be covered, for small- and medium-sized agrifood indus- with priority given to applied corporate man- tries; and agement development rather than academic * coordinating an agrifood management de- approaches. velopment plan. In the medium term and after privatization, SPECLIL MEASURES TO ENCOURAGE RATIONAL the reintroduction of investment incentives INVESTMENT IN THE AGRIFOOD SECTOR should be reconsidered. Any consideration of the sequencingofpolicyin the area ofmarketing Wherever one turns in the food-processing in- andtheagrifoodindustrydependsonthenature dustry it is easy to identify possible areas for and speed ofthe privatization program adopted. investment to improve efficiencies and to en- Asummaryofpriorities,phasing,andlegislative hance value. Much of the equipment is out of and public finding implications follows. 190 Summary of strategic areas, priority and phasing Strategic area Comments Increasing competition in food chain: * Ensure enterprise structures are outside control 1 S Yes None Implies privatization program of state (see Annex 5) Privatization laws under discussion * Ensure competition in food chain locally by 1 S No None Antimonopoly agency est- implementing antitrust regulations ablished; implementation of rules for food chain awaited. Agency competitiveness to be developed * Ensure lowering of barriers to entry for new entrants: a) special provisions for new entrants to food 1 S Yes Major Agency to be developed processing sector (bank guarantees for small and Possibly to incorporate EC medium-sized enterprises) Counterpart Fund b) encouraging joint ventures that introduce 1 S Yes None Joint venture arrangements foreign capital under review c) ensure the cooperative legislation provides realistic I S Yes None (See Annex 6) incentivised corporate status and encourages private enterprise development * Ensure no special concessions offered to those 1 S None None (See Annex 6) in a dominant position in the food chain (e.g., coop- eratives or exporting foreign trade organizations) * Allow competition from imports 1 S No None Improving marketing system infrastructure and institutions: * Develop framework for providing market information 1 S Possibly Minor/ Review requirements and base and dissemination mechanism startup information base to develop basis of new market trans- parency framework • Encourage development of supervised retail market 1 S Possibly Minor/ Depends on status of premises startup legislation affecting establishment of retail markets and their supervision * Examine potential for development of 1 SIM None Minor/ Potential and opportun- a) supervised auction markets for farm products startup ities to be examined b) supervised forward physical markets for certain products in detail with recommenda- c) supervised auctions for certain processed products tions brought forward d) market facilitating activities Improving marketing institutions and services *Develop commodity-based interprofessional industry 2 M Yes None Legal framework probably re- development associations to carry out key activities quires allowing such organiza- for common good (no trading, no market management) tions to assume responsibility on behalf of industry promotion (possibly in collaboration with other interprofessional bodies Developing human resources * Coordinating management development program for 1 S/IM No Major To be coordinated with other agrifood sector initiatives on development of enterprise management expertise in Poland Special agro-processing support * Bolster agrifood sectors ability to invest by allowing 1 S No Major continuation of tax concessions on investment in in equipment on enterprises that are either private or adequately managed 191 Further research required Endnotes The following areas are priorities for further This annex was prepared by Nick Young, assisted by examination: MalgorzataEllert, Karol Borzuta and Karol Adamik. * detailed description of the structure of the 1. A detailed account of the channels and pro- channels of distribution and ownership; cedures operating in the agricultural and food mar- * detailed examination of comparative ad- keting system is given in World Bank, Poland:Agri- vantage andparticularlyup-to-date assessments cultural Sector Study, August 1989. of strategic marketing opportunities; * review of the market information require- 2. Historically, 10 major sectors of the food ments of the sector and the establishment of a industry have been under the control of the state: formal market reporting service and agency; cereals, sugar, potato, oilseeds, tobacco, meat, fish, and beer and alcoholic spirits. In addition, dairies, fruit * exploration of the feasibility of establishing and vegetable processors and bakeries were tradi- more commodity exchanges in the Polish food tionally controlled by cooperatives. chain. 192 Annex 9 The transformation ofgrain marketing Poland has declared its intention to rapidly with the continuing uncertain prospects for ag- adapt its economic institutions to function ac- gregate demand have made producers very con- cording to the logic of the market. The full, cerned thatthe situation could continue to erode detailed implications of this are difficult to after the 1990 harvest. This difficult situation foresee for the economy as a whole and for the has been exacerbated by the long-standing re- grain sector in particular. Uncertainty is in- sentments ofthe private sector farmers against creased by the move within Eastern Europe the state farms and grain merchandisers and from ruble trade to hard currency trade. In the processors, Panstwowe Zaklady Zbozowe (PZZ). long term, the status of Poland as a net exporter The result has been a significant political or importer of grain will only be determined by crisis that threatens to undermine the adjust- the actions of the market. However, the domi- ment toward a market-based economy. In nant role of domestic production in satisfying Poland's current situation, the first issue posed demand suggests that the development of the is whether the fragile consensus in favor of the grain sector can make a significant contribution transformation toward the market will break to the national drive for increased efficiency. down. This, in turn, raises the prospect that the The problems ofthe real economic adjustment authorities would respond with short-term in Poland have been compounded by major measures that, on their own, may undercut the macroeconomic instability. The emerging market system and that, if perpetuated in new hyperinflation of 1989 has been met by sharp institutional forms, could become sources of counterinflationary measures. These measures, economic inefficiency for years to come. including an increase ofreal interestrates, have The heart of agricultural marketing, and of resulted in a dropoff of aggregate demand, and grain trade in particular, is the problem of this in turn has led to some reduction in con- allocating a seasonably produced good to con- sumption of grain-basedproducts. Furthermore, sumption thattakes place continuouslythrough high real interest rates, instability of rates, and time. Thus, the medium-term adjustment issue uncertain prospects for grain prices have all in this area is whether and how the former state tended to discourage the willingness to hold procurement and storage mechanism can be grain stocks. Finally, shipment of grain aid to reorganized to be carried out by institutions Poland from the EC and the United States that are responsive to prices. Beyond this, the appears in retrospect to have been unneeded. issue is the creation of pricing structures that As a result of these conditions, the grain efficiently aggregate the information needed to marketinPolandhasbeendepressedinthefirst make the link between the original grain pro- half of 1990. Furthermore, the significant hold- duction and consumption. over stocks from the 1989 harvest combined 193 The grain sector in Poland out of operation. The total PZZ drying capacity is 145 thousand tons per day of which 50 tons In recent years, Polish grain production has per day is located at flat storage facilities. Thus, been about 25 million metric tons. This consists using full drying capacity, grain sufficient to fill predominantly of soft wheat comparable to total storage capacity could be dried in about 31 French wheat or American soft red wheat. In days. It is estimated that, at the start of July addition, there is a substantial production of 1990, there was a total of 1.7 million tons of rye, barley, and oats. Additionally, rapeseed is grain in PZZ warehouses. However, these es- grown as an animal feed. Of the total harvest, timates should be treated with some caution. somewhat more than 5 million tons enters Wholesale prices within the grain sector were commercial channels. The remainder is pro- liberalized starting in 1989. Table 9.1 presents duced and stored locally for use largely as ani- the price pattern for 1989 and 1990. mal feed. Poland routinely imports grains, in particular high gluten hard wheat, which are used for mixing with local soft wheats in flour production and for production of pastas. Table 9.1 Polish average wholesale The organizations that are predominant in wheat prices, 31/7/89-25/6/90 the production and processing of grain are state (r0Oo zlotys) farms, the regional state grain merchandizing companies (PZZs), and independent private Date 31107 28/08 25/09 30/10 27/11 25/12 farmers. The state farms tend to be large, price 121 168 172 213 321 372 vertically integrated organizations. They pro- Date 29/01 26/02 26/03 30/04 28/05 25/06 duce a substantial proportion of wheat destined Price 809 807 731 701 705 660 for human consumption. There are 41 PZZs organized largely by voivodship. These orga- Sourx:MinistiofAgicutur. nizations clean, dry, store and ship grains. In addition, their mills yield much of Poland's flour output. Independent farmers generally operate The sharp rise during the latter half of 1989 on a smaller scale and produce grains, including coincided with the rapid general inflation. Since wheat, for use mostly as animal feed. However, that time general inflation rates have slowed, smaller-scale storage units can serve for the reaching approximately 3% for June. This im- storage of human consumption grains if they plies the fall of 20% in the nominal price of have been first dried to reduce moisture to 14% wheat represents a real drop of at least 41% to 18%. It should be noticed that, since much of from the end of January to the end of June. Poland's capacity for the intermediate stages of In 1989 the 41 separate PZZs were given the grain processing, including drying, are concen- freedom to independently set prices. Further- trated in the hands of state companies, any more, the newly developed antitrust laws and radical steps toward privatization of these or- administration are an official impediment to ganizations would pose a risk of significant horizontal price restraints. It is often alleged disruption in the supply chain. On the other thatinformal cooperation exists in settingprices hand, the same initial state also implies there amongPZZs. However, the absence ofan obvious may be significant efficiency gains if local mo- coordinating framework and the necessity of nopoly power is undermined. frequently revising prices during the period of The profile of the PZZs has important impli- rapid general price rises all represent obstacles cationsforbothshort-andmedium-termanalysis to tacit collusion. Average prices by voivodship ofthe Polish grain sector. The PZZs have a total reported by the governmental statistical office grain storage capacity of 4.5 million tons. Of (GUS) for May 1990 indicate significant geo- this total 2.9 million tons are in high capacity graphic price dispersion. While this is not storage silos, and the remaining 1.6 million are necessarily inconsistent with monopolistic price in flat storage. The PZZs have 849 drying units (for example, if regional markets are segmented of which 479 are Russian-built units that are and have different elasticities of demand), it moveable. These latter work on the basis of suggests that there may be independence in diesel exhaust, which has been found to pose a price setting implying responsiveness to local health risk. In principle, these are to be phased market conditions. 194 The Agency for Agricultural Marketing * establishment of a system of warehouse (ARR) receipts; and * monitoring of market conditions for grains BACKGROUND to facilitate selling and trading. TheAgencyforAgriculturalMarketing(Agencja The agency is being organized under the Rynku Rolnego, ARR) was created by an act of auspices of the Ministry of Agriculture; how- Parliament in May 1990. The agency has the ever, formally it is an autonomous state agency. potential for being a major new player affecting There is a supervisory board of 20 members the production and merchandizing of agricul- drawn from diverse producer and consumer tural products. On the one hand, it has the interests. In practice, these seats are likely to potential for developing new institutions that reflect the major political groupings. The gov- cansupplantthetraditional,monopsonisticstate erning council officially is to be provided a role procurement system and that move in the di- indeterminingthepricingstructure,particularly rection of free markets. On the other hand, at the beginning of the crop year. The admin- there is a risk that the agency may develop into istration is to be organized into a central office a vehicle for massive state intervention, which andfive regional offices. The regional offices are would protect production and merchandizing to have the responsibility for administering the decisions from market prices as effectively as storage facilities and effecting payments. under central planning. Consequently, while The agency budget from the state sources is theagency isin itsformative stage, itis extremely ZL876 billion (approximately US$87 million) important to ensure that it be organized along foritsfirstyearofoperations.' Inaddition,under lines that are consistent with the desired ad- the agency enabling act, 1 million tons of grain justment to a market economy. out ofthe PZZ system's 4.5 million ton long-term The scope of the agency would be to intervene storage facilities would be transferred to the in the storage and trading ofprimary agricultural agency. This would be an asset transfer with no commodities, initially limited to grains. The compensation paid by the agency. For the cur- purposes of the agency in the grain market are rentyear, the govemmenthas authorized credits to: (i) increase storing and drying capacity; (ii) for the acquisition and processing offood of 20% increase competition in grain merchandizingby annually. Grains stored in agency-certified facilitating the creation of new enterprises or warehouses would automatically qualify for producer groupings; and (iii) stabilize grain these credits. prices. These three objectives are notnecessarily mutually consistent, and the priority among PRELEMINARY ASESSMENT objectives, should conflicts arise, remains to be resolved. Independent of how well the proposed organi- As it is currently conceived, the agency will zation of the agency will fulfill the intent of the engage in the following operations: (i) buying Polish Parliament is the question of the con- grain on either a spot or deferred basis from sistency with the goals of the economic trans- qualified organizations; (ii) certifying quality; formation program, namely: (i) stabilization; (iii) facilitating the provision of credit for par- (ii) structural reform to promote a market ticipating producers and merchandisers; and economy; and (iii) restoration of Polish credit- (iv) sellinggrain to processors, private domestic worthiness. We will discuss this issue with merchandisers or for export. In order to qualify respect to five separate dimensions. as a seller, an organization would be required to The original conception of the agency gave a possess acceptable storage facilities that are central place to direct ownership of grain that available for storage of the grains sold. In would be stored in private warehouses. Since conjunction with these operations the agency the agency is to be a public organization with no wouldperform the following separate functions: profit-making purpose, there would appear to be a very serious and fundamental difficulty in * establishment of purchase prices; making it reach its decisions in response to * establishment of offset prices for estab- market principles for grains that it would own lished contracts; itself. It would appear to suffer from the same * qualification of storage facilities; failing oftraditional state procurement: there is 195 no clear incentive to carry out its activities in a for pricing transactions not directly involving cost-effective manner. Furthermore, as a new the agency. Agency prices can help to better organization with relatively established exper- aggregate information and facilitate potentially tise, there is little indication that it will be superior decisions based on agency-based profit effective in maximizing the value of a given calculations. stock of grain by discovering the highest-price uses for the product. A FORWARD TRADING MECHANISM The key to this original conception is that ownership of the grain would be transferred The basic institutional features that are at the from private hands to public ownership. In this heart of the forward pricing mechanism are as way private merchandisers who participate in follows: the agency's program no longer have an incen- tive to find the highest value use of the grains. * The agency maintains a price list at which it Consequently, their network of information on is willing to buy grain at certified warehouses at supply and demand conditions is effectively lost specified dates in the future as well as for spot in determining the final disposition of the grain. delivery. Atthe sametime,the agencymaintains Beyond this, once they have transferred own- a price list at which it is willing to offset (sell ership, the private storers will have the incen- back) contracts established previously; tive to minimize the actual cost of storing grain * Parties who have contracted to sell to the subject to the constraint that they continue to agency for deferred delivery will be required to qualify for the storage fee paid by the agency. post as collateral grain that is stored in certified The agency will have the burden of inspecting warehouses. The agency would have a lien on the storehouses and the grains in store; how- this grain so longas the party has a sale contract ever, its incentives to perform this contract outstanding with the agency. However, the enforcement function are again compromised private party retains ownership of this grain by its lack of a clear profit motive. and has the right to arrange for use of this grain The second mode of operation of the agency in any way it sees fit. In particular, it can sell to involves contracting for delivery on a deferred another private party on a spot or forward basis basis. This has fundamentally different impli- in any way it wishes. In order to effect such cations for incentives. Since there is provision transactions, the party would have to arrange for making offsettingtrades to cancel the original for the withdrawal of the agency's lien on the contract, this gives an opportunity for the grain; merchandiser to protect the collateral value of * The combined physical grain and sale con- the grain and therefore have access to credit. tract with the agency would be sufficient basis Furthermore, while the grains are in store, the for the private party to borrow up to a specified merchandiser can evaluate local market condi- fraction of the contracted selling price from tions and find the best marketing opportunity participating banks. The practice of preferen- for the grain. Again, this is made possible tial credits, which is a familiar practice and through the facility for secondary trading. which is in effect for the food sector at this time, If the agency is active, this will likely imply would facilitate this practice. that a significant amount of storage capacity will be owned by private organizations of one Central to the agency's forward pricing form or another. Storage facilities are an inte- mechanism is the possibility of an offset trans- gral part of private grain merchandizing. In action. Inessence,theparticipatingpartywould this way, the effect of the agency would be to aid have the possibility of secondary trading, which the private economy in meeting one of the pre- would allow him to undo his initial transaction conditionsforthe creation oflarger-scale private should a better alternative use of his grain grain markets (which until nowhave notexisted). become available. This form of liquidity would More broadly, after a period of operation the be an important means of stimulating the de- agency may have contributed to the growth of velopment of the private markets for grain larger, better capitalized private merchandisers transactions. who then would be in a position to compete on a The offset transaction in combination with national or even international scale. the initial sale would imply a profit or loss The forward contracts can become the basis depending upon how the posted price for the 196 stated delivery date had changed. If the price invested in the storage facility. list for the stated month rose, the offset price Alternatively, transaction can be closed out would be above the sale price and the private by offset. For example, suppose that in October party would have incurred a loss. They would the prices have generally risen. The agency is have to pay this to the agency before the lien on now quoting Z1700,000 for spot delivery and their physical grains would be released. If the Z1735,000 for November delivery (which for price list had been lowered, the contracting simplicity we assume applies for offset as well party would have made a profit. The agency as initial sales). However, suppose that the would have to pay this to the party and also merchandiser has located a willing buyer of the release the lien. If by chance the price list had wheat at a price of Z1720,000 for spot delivery. not been revised in the time between initial sale In order to effect the transaction, the mer- andoffset,theprivatepartywouldmakeasmall chandiser goes to the participating bank and loss reflecting the difference between the price carries out the offset transaction, which incurs listedforagencypurchases and thehigheroffset him a loss ofZl5,000 per ton which must be paid price. This could be a small transaction cost tothe agency. Thebankwillallowhimto prepay that would help cover the actual costs of ad- his loan for Z1630,000 of principal plus one ministration. month's interest at 5%. However, now that the Perhaps the best way to understand the op- lien has been withdrawn on his warehouse re- erations of the proposed agency pricing system ceipt, he can assign that to the buyer in return is with examples that would illustrate the basic for Z1720,000. The net proceeds on the transac- principles involved. Suppose initially it is Sep- tion are Z1720,000 - Z1630,000 - Z175,000 = tember and a merchandiser owning a certified Z115,000 per ton. warehouse can acquire wheat in the local area Note that the details of the transactions de- at Z1600,000 per ton. Suppose also that the scribed above can be routinized and standard- agency price list at this time is Z1600,000 for ized so that in actual practice they work spot delivery and Z1670,000 for November deliv- smoothly. Properly packaged, the participating ery. Suppose that the merchandiser also can parties can simply view this as buying grain on obtain a loan through a bank participating in credit. Furthermore, note that the procedure the agency credit network for up to 90.9% of the can be facilitated if the agency can operate contracted sale price at a rate of 10% for two through the offices of banks participating in its months. Once the merchandiser has located a credit network. willing supplier of the grain, he can have it The offset example given above made the delivered to his warehouse, have it inspected, assumption ofa rise in the price level. The same and create a certified warehouse receipt, which principle will also work in the case of a falling at this point is the property of the original seller price level. Suppose the initial September of the wheat. Given this, the buyer and seller go transaction took place under the conditions as- to the participating bank and arrange for a sumed above. However, now assume that prices deferred delivery sale ofthe wheat to the agency had fallen so that the agency price list in Octo- for Z1670,000 per ton. On this basis, the bank ber is Z1500,000 spot and Z125,000 for Novem- will grant a credit of Z1600,000 per ton. The ber. However, the merchandiser has a willing merchandiser uses this credit to pay the grain spot purchaser at Z1520,000. If the merchan- supplier; the warehouse receiptis then assigned diser offsets his agency sale, prepays his loan, to the merchandiser, who posts it at the bank as and sells his warehouse receipt spot, the me- collateral for his credit. chanics are precisely as above. In this case, This initial transaction can come to fruition however, the merchandiser has made a profit on either by allowing the sales contract and loan to his offset ofZl 145,000 (= Z1670,000 - Z1525,000). mature or by offset. If the transactions are His net proceeds from the transaction are allowed to mature in November, the agency Z1520,000 - Z1630,000 + Z1145,000 = Z135,000. pays to the party Z1670,000 per ton at his bank In the examples just given, the principal rea- and in return acquires the warehouse receipt. son that the merchandiser is able to realize a The proceeds of the sale to the agency are used profit in the face of either a price level rise or fall to pay back the loan principal and interest of is that during the time he has held the grain in Z1660,000 leaving the merchandiser a small storage, he has been able to locate a buyer who profit of Z110,000 as a return on his capital iswillingtobuythegrainataZ120,000premium 197 over the price quoted by the agency for spot Table 9.2 Determining agency contract transactions. This price differential prices at 20% simple interest (merchandiser's spot price less agency's spot (1,)OO Zl per ton) price) sometimesisknown as the merchandiser's Contract basis. In the operations of forward trading, the D.iey date Storage Credit primc smart merchandiser will soon realize that he canmakemoneyfromthesystembyengagingin August 1 15 11.67 700.00 sales to the agency when he expects his basis to September 1 14 11.67 726.67 rise. Whenheexpectshisbasistofall,he should October 1 13 11.67 762.33 avoid agency sales and rent his storage facilities November 1 12 11.67 800.67 for a fee. This is the logic of trading. Note that January 1 10 11.67 823.33 unless the merchandiser is very well capitalized, February 1 9 11.67 845.00 he is unlikely to be able to simply buy and store Marh 1 8 11.67 865.67 the grain uncovered as a speculation on grain April 1 7 11.67 88S.33 pricelevels;the reason for this is that banks are May 1 6 11.67 904.00 prce levels; . June 1 5 11.67 921.67 unlikely to lend to him if his collateral is subject July 1 4 11.67 938.33 to substantial price risk. An important part of the functioning of the agency is the determination of the price list. increases) is the sum of two parts. The conces- This can be done to accomplish a variety of sion for credit cost is calculated on the basis of objectives. First, it should be noticed that the simple interest. In actual practice, it should differentials between prices for various delivery reflect the way interest is calculated by Polish dates will determine the incentives to store or to banks. The marginal monthly concession for deliver to the agency. In particular, if the storage costs is decreasing as of the time since agency spot price is below the spot price pre- the last harvest. The reason for this is to give a vailing in the private market, no private agent reduced incentive to store as the crop year would ever have an incentive to deliver to the progresses, therefore assuring a flow ofthe good agency. Nevertheless, if the premium of the out of storage and into processing channels. agency-deferred price over the private spot price To the extent that the market environment in is sufficient to cover carry costs, including in- the grain sector remains fragmented and inef- terest from participatingbanks, there will be an ficient, the agency can exercise considerable incentive for merchandisers to engage in agency power in setting prices. Basically, the agency deferred sales. Thus the agency has the means can vary the level of the schedule and the steep- ofguidingresources intoholding stocks ofgrains ness of the schedule. The steeper the schedule, in private hands. The agency itself need never the greater the incentive to store. The higher take possession of any grain. the level ofthe schedule, the greater the number These general points are best illustrated by of dealers who will find it desirable to do spot means of an example ofthe calculation of a price sales to the agency. In the current environment, schedule. Table 9.2 gives the steps in the cre- it is likely that the agency would like to deter- ation of a price list based on information avail- mine the level of the schedule by setting a spot able at the end of July. All contracts are due at pricejust under the prevailing cash market spot the beginning of the month. The components price, thereby avoiding physical trading at this are a price base, an interest rate, and a storage early time in its existence. On the other hand, cost schedule. setting a steep schedule implies a strong incen- In this table the price for immediate delivery tive to store grain. This may be deemed desir- generally should be set below the highest price able at early stages of development as an in- competitor, usually PZZ, in order to discourage ducement to enter into the agency trading sys- deliveries and to encourage participation in the tem. deferred delivery pricing system. The prices A crucial issue is the extent to which agency rise along with the time until the maturity. This prices will fullyreflectmarketforces. By setting reflects a concession needed to encourage the itsdeferredpricessufficientlyhigh,itcaninduce storing of grain. Notice that the carry (the agents to produce grains and keep them in steepness of the price increment as maturity storage. However, to the extent that it is more 198 attractive to carry grain within the agency sys- Table 9.3 Estimated agency losses tem than through storage in private channels, through storage report the agency will tend to make a systematic loss. (biuion ZI) This operating loss must be met by the agency's ,Z Aec Carry Agency budget. This implies that if budgetary disci- stocs Aags (IcOOOz) Ae pline is maintained, the degree of price distor- tion is limited by the extent of the agency bud- August 1.95 0.65 26.35 17.13 get. This simple fact implies that, should the September 1.9 0.63 25.35 16.05 agency evolve to become a long-standing, very October 1.62 0.54 24.35 13.15 expensive government body, it would have con- Nvember 1.37 0.46 22.35 10.21 siderable power to introduce significant price January 1.27 OA2 21.35 9.04 distortions. February 1.34 0.45 20.35 9.09 A more positive outlook would be for the March 1.22 OA1 19.35 7.87 agency to become progressively self-financing, April 0.95 0.32 18.35 6.81 which would be possible only if the agency May 0.65 0.22 17.35 3.76 respected the market environment it found it- July 0.05 0.02 15.35 0.26 self in. In principle, nothing stands in the way of the agency being an independent private Note: Tobl estimeda storngeiding cot is ZI 106.4 billion. company. Furthermore, once established, there could be a very natural way for the agency's purchases (Z170,000 per ton per month), this operations to evolve into a modern futures mar- would equal approximately Z1329 billion. Con- ket. As was the case in the development of a sequently, we see that imperfect hedging could number of markets, the two crucial steps in this easily swamp other costs. For this reason, as the direction wouldbe to introduce a margin system agency grows, it is important to get successful and to open the way for trading by agents trading procedures in place. without posting physical goods as collateral. The principles of hedging the agency forward This would invite forward purchases so that purchases arethose thatapplyto any physicals- demand forces would be more immediately oriented trading operation. The best hedge for transmitted to the pricing apparatus. A more a given long position is a short position that obvious, but no less important, point is that, to matches the long as closely as possible with the extent that external grain trade is liberal- respect to maturity date, grade, and location. ized, the agency should and would be forced by The main alternative is to hedge in a liquid arbitrage to conform to world prices. market that may not match the characteristics The foreseeable cost to the agency per con- of the existing position. In the case of the tract written is simply the carry ofthat contract agency, it is likely that its hedging operation over the period held. Consequently, we have a should be directed toward developing forward clear basis for estimating what that budgetary trading with the major users of grain. Alterna- cost might be. Assuming that the agency estab- tively, it should be seen whether Chicago Board lished in August 1990 a price schedule running of Trade grain futures contracts can hedge the from Z1680,000 spot to Z1900,000 per ton for agency'sprice risk. The majorpotential impedi- June 1991 delivery and that the agency carries ments to this may be the imperfect connection longcontractsthatrepresent33% ofthose stored between Polish and world prices because of by PZZs in 1989-90, we conclude that the ap- quality differences, trade restrictions, and sub- proximate budget cost excluding administra- stantial transportation costs. Furthermore, tion would be some Z1108 billion. The details of there is considerable foreign exchange risk. the calculation are given in Table 9.3. These are significant issues that require exper- The other potential drain on the agency bud- tise that is not currently within the agency. get would be trading losses. If the agency maintains forward purchases equal to, say, 1 Competitive issues million tons, it faces the risk that the price may fall. For example, on the basis of the stock Under the former state procurement mecha- holding assumptions given in Table 9.3, if the nism, the PZZ for grains was effectively a state agency trading operation lost 10% ofits forward monopoly with 41 branches under its control. 199 Producers ofgrain for commercial purposes had routinely filled with agency-owned grain, the little choice but to sell to the PZZs, at the single net effect would be to add an additional, larger state price. The competitive outlook for the trading partner to the existing 41 PZZs. Since grain sector to this point has been affected by none of these 42 bodies would have a clear profit two important acts: motive, it is not clear that this would have a significant effect in reducing possible price * the old grain trust has been divided into 41 distortions due to collusive activities of these independent PZZs in most cases organized at producers. the level of the voivodship 2 or in a few cases for On the other hand, if, as a result of the pro- a region consisting of several voivodships; and gram, there were a significant increase in pri- * there is no longer any legal impediment for vately owned storage capacity that was largely any new or existing organization to engage in utilized in storing privately owned grain, the grain trading, storage, or transportation in any net effect would be to add a new competitive region of the country. force in the sector that would be responsive to market forces. This could serve as a significant On the face of it these acts move toward discipline on the incumbent PZZs. This is par- reducing concentration in the grain sector and ticularly the case with respect to local elements removing barriers to entry. Thus there would of monopoly power for cleaning and drying appear to be the basis for considerable compe- grains. The key to this is the level of the support tition in this area. price established by the agency. If the agency Nevertheless, it is frequently doubted that sets a relatively low support price most storage effective competition will quickly establish it- would be for privately owned grain in normal self. There would appear to be three main circumstances. Nevertheless, there may be possible justifications for such fears. First, the significant interest on the part of private mer- long working association of managers at the chandisers either to have the option to sell to the newly separated PZZs may be conducive to the agency when market conditions are unusually emergence of collusive practices. This is exac- bad or to have access to credits for investment erbatedby the fact that managers may exercise under favorable terms. considerable managerial discretion since their organizations have not established clear profit- Policy approaches to the current seeking ethos. Second, the existing PZZs are situation generally highly vertically integrated and have significant storage and milling capacity. To the In the current depressed situation in the grain extent that there are important economies of market, the natural question to ask is the extent scale in these activities, these existing assets to which the agency's activities will aidinlending would represent significant effective entry bar- support to grain prices. The agency's program riers that would discourage potential competi- tends to raise grain prices for three reasons: by tors. Finally, even if technical scale economies setting the premium of deferred prices suffi- might permit additional plant investments or ciently high the agency encourages storage; the might even require the consolidation of produc- expectation of higher prices as more agents add tive capacities, private entities may be unable to to storage tends to reduce hasty selling in de- have access to the required credits under the pressed conditions; and by providing price in- current conditions of high real interest rates. surance the agency helps to channel credits to Consequently, the existing entrenched position producers and thereby reduce sales caused by of the PZZs would tend to be perpetuated. farmer illiquidity. These are hypotheses that are difficult to In the very near term the main supporting assess without more information and, probably, effect of the agency is on expectations. Full more actual experience. Here, the specific ques- operations of the agency are still months away. tion to be asked is more limited: will the emer- Consequently, it is prudent to prepare a con- gence of the agency have significant pro-com- tingency plan. The main additional steps that petitive benefits? The answer depends criti- could be taken are to arrange for exports ofgrain cally on the proportion of grain that would be or to force the PZZs, explicitly or through indi- owned by the agency relative to that held pri- rect means, to directly increase their prices. vately. If the non-PZZ storage capacity were This latter method is very undesirable since it is 200 an extreme form of administered prices. The contracting for outside hedging expertise for a exports appear to be an option. The main period of six months to one year. problem with rapid exports at this time is that Given the apparent willingness of important current market conditions could lead to a rush farm groups to cooperate with the agency, there forexports. Potentially,thiscouldputPolandin is some chance that a support will be estab- the position of importingathigh costlaterin the lished for the market. Consequently, the deci- crop year. Consequently, it would be desirable sion to export on a large scale should be deferred to be ready to allow export licenses in Septem- to late August at which time more will be known ber if the grain markets erode further. about the harvest. The grain sector faces numerous potential Conclusions sources of inefficiency at the micro level. In particular, the concentration of drying capacity The Agency for Agricultural Marketing has the could promote monopolistic practices at the lo- potential to exert a powerful influence on the cal level. Analysis of this is required before it is grain sector eitherin the development ofmarket possible to assess the truth of the claim that institutions or to undercut those institutions. PZZs exercise monopolistic power. Its current emphasis on trading on a forward basis with offset, using certified grain, offers a Endnotes reasonable prospect for stimulating market in- stitutions. However, should political pressure This annex was prepared by Ronald Anderson lead to excessively high prices, especially for (Universite Catholique de Louvain and City immediate delivery, the agency could fairly UniversityofNewYork). Claude Blanchi(World quickly degenerate into a traditional state grain Bank), Odin Knudsen (World Bank), Wales acquisition company. Consequently, additional Mack, Knud Munk (EC), and Wojciech Pawlak efforts by the World Bank and others to support (Agency for Agricultural Marketing) have helped its development toward market forms could be in providing information and in discussing the very beneficial. issues. Given its newness, there are very significant concerns about its administrative capacity to 1. At the time of this report the official operate successfully in the near term. There is zloty exchange rate was Z19,310 = US$1. the need for improved administration at all levels. In particular, there is a very pressing 2. Poland is divided into 49 voivodships, need to develop expertise in hedging and trad- for administrative purposes. ing. Strong consideration should be given to 201 Annex 10 Agricultural research The current situation their technical quality, but qualifies this by listing a number of organizational and financial Agricultural research in Poland is primarily the problems. responsibility of the Ministry of Agriculture Total funds allocated to agricultural research and Food Economy (MAFE), although some under the 1990 plans are Z1516.399 million: work is undertaken at the nine agricultural equivalent to approximately US$54 million at universities, and by the Polish Academy of an exchange rate of 9500. For comparison, the Science (which supports an animal research French agricultural research system, which is institute). Other ministries may also be in- approximately the same size, has a 1990 budget volved, particularly the Ministry of Industry of US$324 million. with respect to machinery and pesticide de- Research is funded principally from the Cen- velopment. Some adaptive trials are under- tral Fund for Science and Technology Develop- taken by the Voivodships Agricultural ment, and decisions about allocation of funds to Progress Centers (VOPRs). research programs are made at present by the By far the most important component of the Praesidium of the Science and Technology De- national agricultural research system is the velopment Committee, with some advice from complex of 16 institutes, six central laboratories, MAFE with respect to agriculture. In 1990, the and eight other central research-related units MAFE institutes are to receive Z1442,788 mil- under the aegis of MAFE (Annex 1). In addition, lion from this fund, of which Z13 12,000 Million there are about 90 substations of research in- are channeled to them directly by the S&T stitutions, and 80 variety testing stations. These committee for central programs, while ZI130.755 institutions employ a total staff of 8,325, of million is allocated to MAFE for redirecting to whom 1,693 are scientists, supported by around branch programs at institutes and to support 4,000 technicians, and 1,170 administrators. In some central services. There is also a popular- 1989 the ratio of technicians to scientists was ization fund ofZl70,000millionpaidto institutes 2.16:1, adequate but not lavish, whereas the by MAFE out of the state budget for outreach administrator:scientist ratio of 0.63:1 was high. activities-includinglinks to WOPRs and state Data on the breakdown of the scientific staff farms, publications, information bulletins, by level of training are not available, but most meetings, statistical analysis, etc. have an M.Sc. or Ph.D. The 1989 report of the There is some resentment in MAFE concern- Foundation for the Development of Polish Agri- ing the allocation of funds to agricultural re- culture (Borlaug Report) gives them a gen- search by the Science and Technology Develop- erally high rating and credits them with a mentCommittee. Agriculturegenerates around considerable number of significant achieve- 13% of the GDP and 28% of employment; while ments. The Bank report endorses this view of 30% of S&T funding is currently from a 1.2% 203 cess on sales of agricultural products. Yet all of sound management. Until the present Direc- the direct research needs of agriculture receive tor of Research and Extension took office no only about 9.5% of the fund's money, although financial records were maintained. Uncer- apparently some research by the Polish Acad- tainty about future funding arrangements and emy of Science, and also industrial research rumors about reorganization of the MAFE related to fertilizers, pesticides, tractors, and institutes are causing further instability. vehiclesusedinagriculturemayalsobecharged The MAF:E system is too dispersed and lacks to agricultural research by the S&T committee. integration and focus. Some institutes deal Data on this expenditure could not be ascer- with commodities, some with disciplines, and tained, butitmaybe aboutZl76,000 million (the some with mixtures of the two. In addition, difference between the total allocation of there are various laboratories - mostly com- Z1516,399 million and the allocation ofZl442,788 modity-oriiented, but not forming part of related million to the MAFE system from the S&T production programs. There is little evidence of committee). interdisciplinary interaction at the institutes or It is probable that the cess system will be of collaboration among institutes; nor is there abolished at the end of 1990, after which all any network ofregional stations working across research funds will be derived from the state commodities with a farming systems approach. budget, although mostly channeled through a Severalinsti.tutes mayhave substations located proposed new scientific research council of the in close proximity to others without any contact. Council of Ministers which will replace the Senior MAFE staff feel that a more rationally present Science and Technology Development structured system is urgently needed, leading Committee. to better use of resources with economies of scale, and a committee of scientists has pre- Constraints to the effective use of pared a proposal for reorganization (Annex research resources 2). Research has been largely production oriented, There is a lack of a comprehensive national and geared. to large state farms and coopera- agricultural research policy, with medium- and tives, whicih received preferential treatment for long-term horizons as a framework for devel- inputs. Hence widening gaps have opened up in oping programs geared to national priorities for recentyearsbetween actual and potential yield, submission to a scientific research council for as inputs have been in short supply and these funding. large agricultural entities have ceased to receive There is considerable instability in the agri- preferred status. The research system is not cultural research system because there is no attuned to economic analysis; there is only one central management unit such as an agricultural institute directly charged with economic work, research council, and no core fumd to pay sala- which receives only 4% of the total MAFE allo- ries. Research tasks are contracted to specific cation, and other institutes have little or no programs, and program coordinators assign staff economic capability. Hence, much of the infor- once those programs are accepted for funding. mation needed to assist farmers in managing Overheads such as institute directors' salaries, their resources efficiently, and to assess the real administrative costs, vehicles, equipment, etc., costs of government support to the agricultural are prorated among programs. Directors' sala- sector to optimize future use of resources by ries are determined on a points basis according government and farmers, is not available. to the number and size of programs, so there There are gaps in research coverage which may be considerable inequalities from institute have become more apparent as economic con- to institute. The directors of institutes have ditions and the structure of farming change, some latitude to suggest programs, and are and more attention is being directed to private responsible for their administration overall, but farms. These gaps include economics and social there is little cohesion among the institutes; nor sciences, fann management, integrated pest is there any central authority in the ministry to management, small-scale mechanization, coordinate effort, provide guidance, training grassland and fodder crops, and animal man- and other services to the institutes, maintain agement. ;Research on livestock production records of expenditure, staff and equipment, seems to receive an unduly low share ofresearch evaluate results, and perform otherfunctionsof resources: about 16% of funds, and 17% of staff, 204 compared with 45% of staff for crops. Yet in search system funded from the public budget, or 1988 animal products comprised 62% of whetheritcouldprogressbyborrowingtechnol- commercial sales from the agricultural sector. ogy from other countries with analogous eco- However, the issue is not simple, since crop logical situations and by offering incentives to production provides the majority of livestock the private sector to engage in research. feed in Poland, and crop research has con- Reports suggest that there is a considerable tributed substantially to this. Agricultural underexploited potential to raise yields of exist- processing, with only 12% of total staff, ing crop varieties and breeds of livestock, owing receives the largest share of scientific re- to constraints outside research, especially high sources after crops and livestock. It is not prices and some shortages of production inputs clear that marketing is allocated a significant and animal feed, farm structure, deficiencies in proportion of this, nor that marketing re- market infrastructure, inefficient processing ceives sufficient attention from the three industries, and uncertainties concerning prices institutes dealing with production of veg- of fresh and processed products. Consequently etables, fruit and herbs, where quality and yields of several major crops and livestock are consistency of supply are crucial. well below those in other Eastern European Links between research and extension need countries, and significantly below Western Eu- reappraisal and reinforcement. The nine agri- ropean countries even though Polish genetic cultural universities have no extension respon- material is rated as good and sometimes better. sibility. The WOPR research-extension demon- No computation ofthe internal rates of return stration farms bear little resemblance to private to agricultural research in Poland has been farms, and there is not much cooperation between undertaken, either for individual commodities research institutes and extension workers in or for the research system as a whole. Never- on-farm trials on private farms. WOPR farms theless, it is possible to infer from the World are used by individual research institutes for Bank sector survey and from the Borlaug report experimental work by mutual agreement, but that the agricultural research establishment interinstitute coordination is limited and there has served Poland well, at least with respect to is no systematicfeedback processfrom extension the geneticbase for production. It might further toresearchorviceversa. TheWOPRsthemselves be inferred that a good deal of progress might do some adaptive research, but it is not clear now be possible with respect to increasing out- that this is linked to work by any institute. put per hectare of the major staple commodities There is virtually no research by the private without much investment in research beyond sector, although it seems desirable to encourage testing for local adaptation. it in order to reduce the burden on the public This is a plausible but untenable hypothesis budget, and to stimulate innovation through in the light of the social and economic implica- competition. tions of the transition from a centrally planned Scientific salaries and operating costs are to a market economy and from a predominantly very low by international standards (about state-controlled agricultural sector to one led by US$27,500 per scientist), and much of the private enterprise. Not merely an adaptation of equipment is obsolete. Per scientist costs at existingagricultural production techniquesbut INRA(the French national agricultural research afundamental realignment of agricultural policy organization) averagedUS$215,000in 1988 and with emphasis on owner-occupied farms, on costs at the 13 international agricultural re- economic efficiency rather than maximization searchcentersexceedUS$200,000. Hencethere of yields, and on radical improvement of mar- is a drain of good scientists from the MAFE to keting and processing methods, will be needed the universities and elsewhere. The program- to meet future needs. In restructuring its ag- orientedsystemoffinancingtendstofavor short- riculture Poland faces many problems which termexpediencyoverneededeapitalinvestment are not encountered in the Western industrial- across programs at the institute level. ized countries with which comparisons are sometimes made; some maybe transitional, but Strategic recommendations many, for example the necessary upward ad- justment of farm size, are long term. A first issue which needs to be addressed is Research will be essential to find solutions to whether Poland needs a large agricultural re- these problems, both at the conceptual level of 205 agricultural policy and at the practical level for harvesting and preparing products for to apply science to develop more efficient and feed, silage, hay, and forage production; cost-effective production and processing herbicide and fungicide application including techniques. At this juncture there is no clear seed treatments; and lime and fertilizer ap- need to invest more heavily in basic science, plication; for example, in biotechnology for DNA trans- * testing new materials and modular designs fer; there is an adequate base of knowledge to for on-farm storage of grain, oilseeds and pota- achieve the goals outlined above without this. toes. Nor is a larger agricultural research estab- * promoting specialist horticultural and live- lishment necessary: we believe that consid- stock produiets for local markets, for processing, erable economies are possible in the size of andforexport. Marketdemandanalysis,market the system while increasing its effectiveness. organization, and quality control, are particu- To achieve this, however, will require a larly important areas for research but are often significant re-ordering of Poland's consid- neglected. erable agricultural research resources to * expanding interdisciplinary research, with create a more manageable,better-equipped, and particular emphasis on social and economic as- better-integrated national system able to re- pects of technological change, and the develop- spond flexibly to new challenges. The remain- ment of improved farming systems for private der of this chapter will concentrate on how this farms, integrating crops, livestock and possibly might be achieved. trees. o Incorporation of some aspects ofbiotechnol- SHORT-TERM RECOMMENDATIONS ogy into research programs at existing insti- tutes, for example, to reduce costs in certain Shift the emphasis of research policy to effi- processing industries or to accelerate multipli- ciency. New research programs need to be cation of genetic material (tissue culture). developed as amatter ofurgency, to be submitted However, the government should not create for funding to the proposed new scientific re- new biotechnology facilities requiring major search council of the council of ministers. While investments. Large sums have been spent by those programs should be designed to fill certain both private and public institutions in Western important gaps in research on commodities, the countries wvith relatively limited commercial central objective should be to improve the effi- success. Patent issues and environmental ciency and economic viability of Polish agricul- controls have sometimes impeded the applica- ture, and to clarify some of the crucial issues tion of successful results. This is a field of which impede determination of economic pa- research which seems particularly amenable to rameters needed to reach domestic agricultural joint ventures between agricultural research policy decisions and to indicate comparative institutions and otherpublic (university, etc.) or advantage in external trade. Highest national private organizations having proven capability priority must be given to applied research, and in biotechnology research, as well as the equip- to the adoption of up-to-date technology in Polish ment, legal, environmental and other knowledge agriculture. Programs include: required for successful application ofthe results. Contractual arrangements between appropriate seeking approaches that will lead to a more government agencies and private firms should efficient use of inputs and minimize pollution be considered, probably in cooperation with the hazards. These may include improved appli- new science and technology council. In the short cation methods, more responsive crop varieties, term, such arrangements would have to involve more efficient feed conversion by livestock, and external expertise, as private firms with expe- integrated pest management. Identification of rienceinbiotechnologydonotyetexistinPoland. economic response levels to inputs must form part of all production research, and the results Reinforce existing procedures at MAFE for must be applied rapidly in the formulation of policy formulation and resource allocation to recommendations for advice to farmers. research. This could be done by creating a * testing imported or locally manufactured policy-making and management unit to coordi- agricultural machinery of modern design for nate the national system, through the estab- adaptation to small farms, including equipment lishment of an agricultural research council 206 under a deputy minister. This council would ponents of the national system in the light of have both an advisory and an executive role, national agricultural research policy, so as to including policy analysis and policy formula- identify gaps or overlaps in subject matter cov- tion, coordination, financial oversight and erage and also in the coverage of agro-ecological evaluation, the provision of central services regions and areas with special needs. This to the institutes; training and human re- would provide the basis for a plan to redeploy source development; and international link- existing resources to cover priority commodity ages. It is most unusual for an agricultural and environmental management research more system as large as that in Poland to have no effectively, and to establish an integrated net- apex management organization. work of main institutes and regional centers to achieve economies of scale and enhance research Establish an improvedprocedureforevaluat- capability. A major objective must be to create ing research proposals from institutes. This better conditions for interdisciplinary research would take place before their submission to the and for interinstitute coordination and coop- National Scientific Research Council for fund- eration. ing. At present programs are submitted ad hoc A possible structure of a future national ag- by scientists after scrutiny by a scientific advi- ricultural research system in set out in Annex 3. sory council at their institutes. Proposals are It should be feasible to commence implementa- subsequently reviewed by a technical consulta- tion of a plan developed along the lines indicated tive committee in MAFE, but do not have to above within 12-18 months from the initiation conform to an established national policy and of the proposed review of the current structure related priorities, since no overall framework of the system. exists. In the future, all proposals from research institutes should be channeled annually by a set MEDIUM- TO LONG-TEEM RECOMMENDATIONS deadline to the Technical Advisory Committee (TAC) of the agricultural research council for Establish a new regional research organization. scientific evaluation according to defined crite- This wouldbe based on well-equipped centersin ria, and for conformity to established national each of the main agro-ecological regions of Po- agricultural research priorities. Recommenda- land. These would replace the existing tions of the TAC concerning programs would be uncoordinated mass of nearly 200 substations of reviewed by the council for approval before research institutes and variety testing stations submission of a consolidated request to the scattered all over the country. Characterization Scientific Research Council on behalf of MAFE. of ecological zones permits the results of research This is of particular importance at the moment done at central institutes to be tested for local as all programs are currently funded for a five- suitability with much greater precision; more- year period by the existing Science and Technol- over, those zones can be further subdivided to ogy Development Committee and will be ter- cater to varying socioeconomic situations. Good minated atthe end of 1990 when that committee work has already been undertaken in Poland to is replaced by a new scientific research council. define the seven major ecological zones. A If, as has been reported, information of how network of regional research centers based on research funds are actually spent is lacking, an those zones would not have to be very large to important task for the agricultural research cover national needs economically and effec- council should be to improve accountability and tively. to establish financial monitoring procedures. Each regional center would be located stra- tegically to represent a specific subset of condi- Develop a blueprint for a more rational struc- tions within a major agro-ecological region, if ture of agricultural research. A comprehensive possible at a site where land and facilities could review of the current structure and facilities of be transferred to it from a state farm or aVOPR. institutes, laboratories, research stations, and Regional centers' staff would consist of a man- substations should be initiated immediately by ager and administrative unit, and a small inter- MAFE to make detailed recommendations for disciplinary scientific team with supporting creating a new national agricultural research technicians. Program staff of the national in- system. A first step should be to review the stitutes could be outposted to the regional cen- mandates, functions, and locations of the com- ters to conduct research relevant to their man- 207 dates with facilities provided by the centers; the tutes for numerous purposes, many of them not regional staff would also undertake on-farm closely identifiable with outreach. work to test suitability of new varieties and techniques to local conditions, and to develop Update scientific and management compe- improved farming systems integrating crops tence. and livestock. Promisingnew technology would be transferred directly to farmers through an * Exchange arrangement. There is a consen- extension service unit based at each regional sus among visiting agricultural scientists that center. Regional research centers would not be Polish scientists are well trained and capable of subject to the jurisdiction of regional govern- good scientific work. Nevertheless, scientific ments. and managerial capability needs to be updated The whole regional center network would be to meet new knowledge and changing techno- managed and administered by a regional direc- logical anid socioeconomic dynamics, and more torate of research under a director, based at the frequent exchanges between Polish scientists agricultural research council, and the staff of and those from research institutions in Western the regional units would be members of that industrialized countries would be a valuable aid directorate. Funds for the directorate and re- to this end. gional center staff would be provided from the * Training arrangements. In addition to ex- MAFE budget, not from the national scientific change arrangements, which can often be made research council; funds for research conducted on relatively short notice on the basis of per- at the regional centers by program staff of the sonal contacts, there is a need for a more struc- national institutes would, however, be charged tured training effort to introduce new knowl- to their programs out of the National Research edge and methodology to the institutes' staff, Council support to those programs. and especially to bridge major disciplinary and subject matter gaps. The latter include research Strengthen technology transfer procedures. It management; policy analysis; animal manage- is essential to improve linkages between re- ment; farming systems techniques; agricultural search and the various agencies involved in processing and marketing; agricultural ma- extension. The latter should not undertake chinery design - especially for small farms; research oftheir own, but should work with staff and biotechnology. Since the training program ofthe institutes and regional centers in adaptive is likely to involve PhD-level studies, it should testing and monitoring of new technology, and be planned with a ten-year horizon and closely transferring successful new techniques to aligned to national research priorities and the farmers, and should provide feedback of infor- new thrusts outlined under Short-term recomn- mation on research needs and problems to re- mendations above. Twinning arrangements search staff to help set national and regional between appropriate international research research priorities. Measures to achieve these institutions ornationalinstitutionsin countries goals will have to be phased with the proposed with advanced scientific capabilities should be changes in the structure and responsibilities of encouraged as part of this program. the extension agencies (see Annex 12 on agri- * Instituting an award system for demon- cultural extension), and with the creation of the strated research achievements. The present new agricultural research system of national approach to review of agricultural research institutes and regional ecological zone centers performance is mechanistic and program ori- described above. However, the overall aim must ented. There is some annual internal peer be to strengthen both the research and the review of progress and new proposals for ad- extension services to cooperate more effectively, justments to the 5-year program budgets; but and to work out jointly new conceptual ap- there are no external reviews of institutes, and proaches to achieve this. The proposed regional little systematic evaluation of research impact research centers shouldplay akeyrole inlinking at the farm or user level. The system seems to the work of the national institutes to the ex- leave little room for movement of staff among tension staff. Funding for improved technology institutes or for recognition of individual or transfer procedures might be provided from the team excellence; royalties to plant breeders go existingMAFE popularization budget, currently to institutes, not to individuals. The S&T coun- Z170 billion, which seems to be used by insti- cil has an award scheme: it would be useful for 208 MAFE to retain some of its S&T research bud- Implications of the strategic get to reward outstanding performance, par- recommendations ticularly for evidence of adoption and impact of applied research, rather than for academic pub- The proposed major reorganization of Poland's lications. Royalties earned on sales oftheir seed agricultural research system, implies: varieties or improved breeds of livestock should * creating an agricultural research council be shared equally by the breeders and their as the management, policy-making and coor- institutes. dinating unit of the MAFE to develop and * Encouraging private enterprise in re- implement an agreed national agricultural search. Although some research in plant research policy, and to provide central ser- breeding and horticulture and some industrial vices to research institutes and programs. An research on design of agricultural machinery important objective would be the improvement and new plant protection products is done of financial management, accountability, and outside the formal institutional research evaluation procedures for the research sys- system in Poland, little of this is truly pri- tem; vate. Yet in most industrialized countries, * initiating new research programs for sub- and some other countries with an important mission for financial approval by the new Na- agricultural sector, particularly in Latin tional Science Council, with the aim of closing America and Asia, a substantial share of re- existing gaps in crop research, strengthening search related to agricultural production and economic inputs, reinforcing livestock research, processing is privatized. An extreme example and improving environmental management. is the recent sale of the Cambridge Plant These programs should be the key components Breeding Institute in England to Unilever. of the national agricultural research policy, and Fields of research particularly well suited to not an ad hoc collection of ideas submitted by private enterprise are plant breeding, es- individual scientists or institutes; pecially where hybrid techniques are in- * developing a more rational structure of na- volved; biotechnology; horticulture; ma- tionol agricultural research institutes, backed chinery design and development - including by regional centers representative of the prin- processing machinery; and certain agricul- cipal agro-ecological zones. A main objective tural chemicals - pesticides and veterinary would be to increase efficiency and cost effec- medicines. It must be emphasized, never- tiveness by reducing the number of national theless, that because private involvement in institutes to minimize duplication of effort, and agricultural research in Poland is practically promote interdisciplinary and systems-oriented nonexistent, and because research is not gen- research programs. A second objective would be erally the first activity pursued by the pri- to achieve a sweeping reorganization of sub- vate sector when entering new markets, stations by eliminating a large number, and significant progress in this respect is likely collapsing the bulk of the remainder into fewer to be slow, and will probably require incen- butbetter-equippedregionalcenterswhich could tives to its development. accommodate research programs from several Action to stimulate private involvement in national institutes instead of being affiliated to research in Poland could be via joint ventures only one, as is frequently the case at present; with Polish agricultural orindustrial companies, * rethinking approaches to technology trans- contracts on competitive bidding to undertake fer and links to extension with a new and impor- specific research tasks, commissioned research tant role for the regional research centers; to private companies, and incentive measures to * expanding MAFE' s linkages with the uni- encourage investment as long as these do not versities and the private sector to commission involve economic distortions. Alternatively, work on aspects of basic research, including takingindirect action by phasing out redundant biotechnology, as well as on applied research or ineffective elements of the public sector re- related to agriculture-related industries, search system and withdrawing research funds through contractual or joint ventures to be fi- from quasi-state enterprises such as tractor nanced by the National Science Council. manufacturers, could stimulate private entre- preneurs to fill the gap. Consequences of the above proposals would include: 209 * a greater role of the Ministry of Agriculture that economies resulting from the reorganiza- in the articulation, coordination, and imple- tion will enable the reorganized national insti- mentation of agricultural research policy; tutes and newly created regional centers to be * a cohesive set of research programs submit- better equipped to modern standards; that the ted to the National Science Council for financ- proportion of operating costs can be raised to ing, more closely aligned to identified national 40% that olF salaries; and that expenditure per priorities; scientist (remuneration, operational and ad- * a tighter management structure, with the ministrative support) can also be increased. national institutes as the key instruments rather than the research programs, so as to improve The share of research funds obtained from the accountability and provide better services and Ministry of Agriculture budget may also in- management stability. Each major research crease. This is because the proposed agricul- program would be headquartered at an institute, tural research council, the management and with elements ofthatprogrambeingundertaken other fixed costs of running the national insti- as necessary at other national institutes and/or tutes, and the regional research centers are not at regional agro-ecological zone centers (Appen- program costs strictu sensu, and may therefore dix 10.1); not be provided from the resources of the new * a reduction of at least 50% in the number of scientific research council of the council of min- research institutesandlaboratories, andamuch isters. This, however, remains to be decided, larger reduction in numbers of substations. Some since that council has not yet commenced op- institutes would be amalgamated, for example, erations and its rules are not clear. In any case, animal production and veterinary science; hor- the total national cost of funding agricultural ticulture and medicinal plants; but in particular research is expected to decrease even if the it is foreseen that a majority of the laboratories share of MAFE in that cost rises. The costs of dealing with processing would be phased out by running the agricultural research council and integrating them with related institutes re- servicing both its committees and those of the sponsible for research on production (for ex- institutes is expected to represent about 3% of ample, cereal, potato and sugar technology with the total national agricultural research expen- the field crop institute that deals with breeding diture. This is a reasonable overhead charge for and production of those crops); and meat tech- providingpolicyguidance, efficient management nology with animal production research; coordinationi, and essential services to a large 3 a substantial redeploymentofexistingstaff, national agricultural research system. and some staffredundancy. There would also be buildings and equipment at stations or labora- Concluding comment tories which would be closed down and which could not be used in situ for other purposes or A proposal with many similar features to those transferred to the remaining institutes. suggested in Appendix 10.3 has been developed * an anticipated saving in total annual costs by a committee of scientists for consideration by of operating and maintaining the national agri- MAFE's research advisory committee This would cultural research system, resulting both from a reduce the total number of research institutes reduction in the number of institutes and labo- from 16 to 12, and would retain only four other ratories and in their total staff, and from im- units of the remaining 15 laboratories and other proved management and efficiency in the re- research-related entities (Appendix 10.2). In maining national institutes and regional cen- effectitwouldhalve the number of institutional ters. Most important, the economic and finan- components. However, the scientific staffwould cial returns to research are expected to increase remain about the same, with savings being as a result of the impact of the new research effected by some 2,400 cuts in administrative organization on agricultural productivity, in- and support staff. While some further consoli- come growth and thebalance ofpayments. Thus dation might be envisaged, for example, com- the share of agricultural research expenditure bining animal production and veterinary sci- in agricultural GDP would decrease. ence in one institute and reducing numbers of substations, implementation of this proposal This does not mean, however, that no new would achieve many of the objectives recom- expenditure will be necessary. It is expected mended in this annex. It does not, however, 210 provide for a management organization (agri- Endnote cultural research council) for the system as a whole, nor for a drastic reorganization of re- This annex was prepared by Peter Oram, gional research. Both of these provisions must JohnHayward,OskarHonischandMarianKrol. be considered essential to the establishment of a more cost-effective and efficient national system. 211 Appendix 10.1 Situation of MAFE agricultural research system, 1989 %of % of Total Scien- total Head Number 1989 % of tific 1989 quarters of Sub- aglres Total total staff ag/res Institutions location stations budget staff 1989 1989 staff Institute of Pulawy 17 4.8 745 8.9 170 10.1 Agronomy and Soil Science Institute of Plant Breeding Radzikow 16 8.4 770 9.2 145 8.6 Institute for Potato Research Bonin 7 4.1 441 5.3 63 3.7 Institute of Vegetable Research Skietniewice 5 2.3 395 4.7 90 5.3 Institute of Skietniewice 15 6.7 518 6.3 123 7.3 Pomology and Horticulture Sugar Beet Research Institute Warsaw 0 0.6 79 0.9 21 1.2 Institute of Medicinal Poznan 0 0.9 162 1.9 42 2.4 Plants/Herbs Institute of Plant Protection Poznan 1 2.3 412 5.0 99 5.9 Center for Cultivar Testing Slupia Wielka 81 n.a. 134 1.6 15 0.9 and Certification Center for Forestry Research Konstantin- 0 n.a. 38 0.5 13 0.8 Jeziorna Institute of Land Reclamation Falenty 8 3.9 506 6.1 106 6.3 Institute of Animal Production Krakow 12 10.1 310 3.7 92 5.4 Veterinary Research Institute Pulawy 3 2.3 438 5.3 126 7.5 Inland Fisheries Institute Kortowo 2 1.2 189 2.3 50 2.9 Center for Poultry R&D Poznan 10 n.a. 513 6.2 24 1.4 Meat and Fat Research Institute Warsaw 1 4.9 267 3.2 55 3.2 Institute of Food Industry Warsaw 0 2.2 241 2.9 51 2.9 Biotechnology Institute of Agriculture Warsaw 0 6.5 265 3.2 67 4.0 and Food Economics Institute for Building and Mechanization Warsaw 4 5.2 672 8.1 129 7.6 Center for Animal Gdansk 0 n.a. 165 2.0 16 0.9 Mechanization Center for Technical Services Zolzary 0 n.a. 205 2.5 0 0.0 R&D Central Lab for Cereal Warsaw 0 n.a. 38 0.5 12 0.7 Technology Central Lab for Food Poznan 0 n.a. 86 1.0 17 1.0 Concentrates Central Lab for Potato Poznan 0 n.a. 54 0.6 10 0.6 Central Lab for Tobacco Krakow 0 n.a. 78 0.9 18 1.1 Central Lab for Refrigeration Lodz 0 n.a. 96 1.2 18 1.1 Central Lab for Feed Industry Snopkow 4 n.a. 70 0.8 27 1.6 Extension Methodology Brwinow 2 n.a. 277 3.3 86 5.1 Training Center Central Library Warsaw 2 n.a. 78 0.9 8 0.5 Museum Szreniawa n.a. 83 1.0 0 0.0 Total Ratio of Nonscientific Staff to Scientists 190 100.0 8,325 100.0 1,693 100.0 212 Appendix 10.2 Reorganization after 1990 proposed select committee of MAFE scientists As % of all As % of all Number components Scien- components of sub- Total of tific of station staff system staff system Institute of Agronomy and Soil Science 4 750 15.4 250 15.2 Institute of Plant Breeding 4 650 13.4 200 12.2 Institute of Horticulture 0 600 12.3 200 12.2 Institute of Medicinal Plants 0 150 3.1 50 3.0 Institute of Plant Protection 2 300 6.2 110 6.7 Institute of Animal Production 2 550 11.4 160 9.8 Veterinary Research Institute 0 400 8.2 160 9.8 Inland Fisheries Institute 2 160 3.3 60 3.7 Institute of Food Industry 1 450 9.3 150 9.1 Institute Agriculture and Food economics 0 250 5.1 100 6.1 Institute of Mechanization and Amelioration 3 600 12.3 200 12.2 Extension Methodology Center 1 n.a. n.a. Central Library 3 n.a. n.a. Museum 0 n.a. n.a. Center for Cultivar Testing and Certification n.a. n.a. n.a. TOTAL 4,860 100.0 1,640 100.0 Appendix 10.3 Possible future structure of national agricultural research system Agricultural Research Council (i) Council: Executive & Finance Committees; Technical Advisory Committee; Secretariat (Policy, Administrative, Finance, Central Services) Gi) Central Services': Data base/Management Information System; Library; Training & Staff Development Unit; Computer and Equipment Services; External Relations and Meeting service; Directorate of Regional Research (iii) Central Funds': Core Staff Budget for Council staff, Regional Research staff, and Management staff at Institutes; Contract research fund to encourage joint research with universities, private sector, etc. Technology transfer funds Agricultural research institutes4 (i) Plant breeding, genetic resources, seed technology and varietal certification (ii) Field crop production and protection (cereals, potatoes, sugar beet, oilseeds, legumes) (iii) Horticultural production and protection (vegetables, flowers, herbs) (iv) Ruminant livestock production and health, (Including pasture and fodder crop management) (v) Land and water resource management and agricultural mechanization (vi) Food and agriculture policy and socio-economic strategy (vii) Food technology and agricultural processing Regional agro-ecological zone stations' 1. Services provided by the Council to the research institutes and centers. 2. Funded from the MAFE regular budget provided by the State. 3. Currently known as the "popularization" Fund, derived from the MAFE budget. 4. Research programs funded mainly by the Science Council Central Fund: Core managemenVadministration costs of institutes by MAFE Central Fund. 5. Decision as to number to be based on national review, but probably not exceeding 21. A small number of special purpose substations might be retained in addition, e.g., for atypical ecological or socioeconomic conditions; tree crop research, and so forth. 213 Annex 11 Seed production and distribution Strategic importance Bank sector study report states that seedbreed- ing and seed multiplication in Poland is at an Good quality seed of well-adapted varieties is internationally recognized high level of quality, fundamental to achieving economic returns to and may have been the single most important crop production. If the seed is diseased, or has contributor to expansion of cereal production poor germination because it has been badly over the past eight years. harvested or stored, plant population will be poor and returns to the use of other inputs will Current situation be low. If the seed is affected with seed-borne diseases or impure due to mixtures with other VARitrAL DEVELOPMENT crops or weeds, yields at harvest time will be low. If the varieties used are not well adapted to Other reports, notably the 1989 Borlaug report, local ecological conditions, the crop may have conclude that the genetic base for crop produc- poor resistance to weather, pests, diseases, or tion in Poland is good, and that scientific com- weeds, and may even fail completely. petence is satisfactory. Some objectives for crop Conversely, the choice of a well-adapted vari- improvements by breeding are suggested in ety may offer the cheapest insurance against Annex 10 on research, and in addition to those catastrophic losses, and provide a reasonable goals there is a continuing need for breeders to assurance of an adequate yield to risk-averse maintain existing standards of varietal quality, small farmers reluctant to apply substantial pest and disease resistance, and to adjust to inputs of fertilizers or pesticides. Seed is not changes in demand. only a relatively cheap input, but one which is Before varieties are released for multiplica- understood by all farmers and which is environ- tion they are normally tested at substations of mentally benign. the parent institutes, then submitted to the Satisfactory arrangements to develop, test, National Institute for Cultivar Testing and and maintain ecologically well-adapted variet- Certification which has 81 testing stations all ies of the major crops, with good yield potential, over Poland. After three years of testingby this genetic resistance to the main pests and dis- institute, varieties which have performed sat- eases, and good consumer acceptability, and an isfactorily are added to the national list of ap- efficient organization to multiply and distribute proved varieties; conversely some which have high-quality seed to farmers, are therefore basic become obsolete, or broken down due to biological components of a sound agricultural develop- stress, are removed from the list. ment strategy. Once approved for general release, seed devel- It is noteworthy in this context that the World oped by the plant breeders may be bulked up at 215 research institutes where land is sufficient to do ha of land for seed multiplication in rotation so, at least up to elite standards, before being with commercial crops for sale. The breeding channeled to state farms, or sometimes to other work is partly state subsidized, but seed prices contracted growers, for further multiplication. have not been subsidized since 1986. Sale prices of certified cereal seeds are reported to be 15- SED MUTIPUCAMON 20% above those of commercial crops. This is an adequate return on seed production except for Seed production in Poland is organized along potatoes, which may require a higher mark-up conventional lines and within legal standards because of hieavy transport and storage costs. which conform to those of Western Europe or Seed inspection and certification is the re- the United States. However, with the exception sponsibility of a separate organization of the of some horticultural crops, private firms have Ministry of Agriculture - the Seed Service. It no role in either plant breeding and varietal has 17 regional divisions based on the old distri- development or in seed production and distri- bution of voivodships, but effectively covering bution. all voivodships by overlap. This organization, State farms are particularly concerned with which is funded from a surtax on sales of certi- producing elite and original seed of cereals (the fied seeds, sets and enforces standards for seed stage beyond elite), which they are especially quality and seed inspection as laid down in the well equipped to produce economically. They national seeds law. It trains seed inspectors are also concerned with seed potato andrapeseed who field inspect seed being grown throughout production. Smaller contractors deal either the multiplication chain, and carry out spot- with the two subsequent stages of cereal seed checks of seed at harvest before it is sealed for production, which require less stringent stan- sale to farmers. dards,orwithothercrops(horticulture,grasses, As far as could be ascertained, the current sugar beet, legumes). arrangements for varietal certification, testing, Until recently, seed was mainly purchased and seed inspection are adequate and in line irom state farms and contractors by Seed Pro- with generally recognized international stan- duction Central, an organization belonging to dards. On the whole seed development in Poland the voivodships with 17 main depots through- hasagoodrecord. Somevery mixedeerealerops out Poland, supported by funds from the Minis- were seen on farms during field trips, but the try of Agriculture budget. This organization main cause seems not to be inadequate seed sold seed to farmers. It also maintains around inspection of contractors' seed, but poor stan- 70 breeding stations with 200,000 ha of land for dards of combining, leadingto mixtures ofcereal creation of new varieties and maintenance varieties and species in harvested seed where breeding of registered varieties. There are also farmers save their own seed, and poor tillage a number of smaller companies in the seeds practices allowing seed shed at the previous business, which originally belonged to the State harvests to germinate in the following year's Union of Agricultural and Horticultural Seed crop. Inadequate and poorly constructed stor- Production. This has been dismantled since age facilities (silos difficult to clean, and the 1988, but it seems to maintain its existence as like) also contribute to this problem. the PolishAgricultural Plant BreedingandSeed However, concern must be expressed at the Production Company (Ltd), CENAS, which has trend toward mixingresearch on plantbreeding its own offices in Warsaw, as well as in the and the production of breeders'seed with large- Ministry of Agriculture. It maintains a cata- scale seed multiplication at research institutes, logue ofassociated companies, listingthe species experimental stations, and state farms, which and varieties of seed which are available from also use their land for commercial crop produc- them. Some are plant breeders, some do both tion. To quote the recent report of a team under breeding and seed production, and some are the aegis ofthe Economic Council, led by Profes- only involved in multiplication. They all appear sor Anton Leopold, "The structure and manage- to be quasi-governmental in nature, although it ment system of the enterprises encompassing is reported that at least one successful breeder genetic stations and commercial entities has would like to become independent. CENAS deprived them of autonomy as well as abolished maintains 2,000 ha for breeding and variety the breeders'control over and responsibility for testing, plus their own laboratories, and 100,000 the reproduction of their products. The whole 216 system, including the evaluation, was subordi- Reports that sales of certified seed have nated to a centrally planned command and dropped significantly in recent years are con- quota economy.' Paradoxically, there is a fur- firmed by the statistics with respect to potatoes, ther cause for concern if the dissolution of the but not in the case of cereals. Potato seed sales centralized seed multiplication organization and have fallen from 618,000 MT in 1986/87 to the break-up of state farms leads to a vacuum in 455,000 MT in 1988/89. However, over the supply of certified seed. The current situation same period the total area planted to potatoes therefore calls for very careful monitoring by also declined by about 80,000 ha, although the the government. percentage reduction in their area is a good deal smaller than that of seed. Since seed represents THE ADEQUACY OF sEED sUPPLY (TABLE 11.1) about 25% of potato production costs it is clearly a target for economies by growers, although Production ofcertified cereal seed is adequate to those economies could prove false if the use of allow farmers to renew their seed from stocks home grown seed leads to increased virus and every 2-3 years in the case of barley, oats, and other disease problems resulting in a serious triticale, and every 3-4 years in the case of decline in yield. wheat. These replacement rates are within In the case of cereals, changes in the use of those recommended for normal husbandry, but certified seed by farmers seem to be related below need for the high technology package. mainly to technological change. Sales of triti- The situation with rye is unsatisfactory: it is a cale seed have increased from 6,000 MT in 1985 cross-pollinated crop and therefore needs seed to around 50,000 MT in 1989; this has mainly renewal more frequently to prevent genetic di- replaced rye, sales of which fell from 78,000 MT lution, yet certified seed supply is only enough to 60,000 MT over the same period. Sales of to replace farmers' seed from stock every 6.3 winter wheat declined from 104,000 to years. Currently about 30% of wheat, 40% of 88,000 MT; but spring wheat sales rose from barley and oats, and 66% of triticale area is 27,000 to 58,000 MT. Sales of spring barley sown to improved seeds, but only 15% ofthe area declined by 1.5% but oats showed little change. of rye, and 12% of the potato area. Seed imports The total sales of cereal seed in 1988/89 were are small, mainly consisting of hybrid maize 403,000 MT compared with a 5-year average of varieties from Hungary, Western Europe and 398,000 MT. A note of caution is necessary with the United States and horticultural seeds from respect to 1990. There are reports of a serious Holland. Exports of seed are negligible, although decline in purchase of certified seed by farmers once domestic supplies are adequate, seed ex- but this cannot yet be confirmed because the ports of specialist crops might be an area with system of data reporting has been disrupted. growth potential. Table 11.1 Seed Requirements and Production (1988/89 data) Miinimum Minimum Average Seed Seed Adequate for Desirable Desirable Area Sown Seedrate Required, Produced replacement replacement Need Ha Crop ('000 ha) (kg/ha) (total MT) (total MT) (years) (years) (MT/year) Change Wheat 2,1CS 275 604,000 163,500 3.7 3-4 155,000 -1,700 (5) Barley 1,175 175 205,625 109,300 1.9 3-4 60,000 -12,325 (4) Oats 803 160 128,480 55,700 2.3 34 37,000 -6,233 (3) Rye 2,275 180 407,500 64,800 6.3 2-3 163,000 +32,733 (3) Triticale 649 230 149,270 56,900 2.6 1-2 99,000 +10,525 (4) Potatoes 1,859 2,500 4,647,500 542,500 8.6 3 1,555,000 +40,500 (25) +63,50 Assuming that entire crop area is planted with new original seed each year. Seed of sugar beet and rapeseed is adequate to meet annual replacement requirenenta. 217 Main constraints ing seed directly to farmers rather than acting as contractors to the bulk purchasing depots. * Inadequate production of seed potatoes and None of these seed producers is a private com- rye seed. There is a need to triple annual output pany, although in some respects they seem to be of seed potatoes and to almost triple that of rye moving in that direction. It is not possible at seed. Triticale is marginally adequate, but this moment to determine how these changes in special care needs to be exercised to maintain the structure of the industry will affect output genetic stability and avoid dilution of seed stocks and quality of certified seed, but the situation with other cereals, especially rye. should be monitored carefully by the agencies * Insufficient and/or unsuitable storage, es- responsible for seed certification. pecially for smaller seed producers and horticul- tural crops. Strategic recommendations * Shortage ofhandlingfacilities and cool stores for seed potatoes. SHORT TERM * Inadequate supply of seed dressing materi- als, lack of proper equipment for treating seed Fill gaps in seed supply. Seed availability of rye for small farmers, and short time bottlenecks and potatoes should be increased as rapidly as for treatment of winter-sown cereals between possible consonant with sound quality control. harvest and seeding. It is reported that seed in Wheat seed production, which is only margin- bulk storage is not treated during processing, ally adequate for renewal every 3-4 years, should with treatmentbeingleft to the farmers. Some- also be expanded. There is a surplus of barley times farmers simply mix seed treatment and oat seed production so that about 20,000 ha chemicals with seed in the farmyard, or even in could be shifted from those crops to producing the seeddrill. Thisleadstopoor coverage of seed seed of the other cereals (see Table 11.1). Triti- and can even reduce germination. Only about cale seed breeding and multiplication should be 4.2 million hectares of cereals were treated in monitored carefully to guard against genetic 1988/89, about 50% of total area. The govern- degeneration and against physical mixtures with ment target for the year 2000 is approximately other cereals. Pasture seed quality is also re- 80% of cereal area. It is estimated by MAFE ported to be affected by dilution, and there may that a 10-fold increase in supply of seed treat- alsobelimitationsintermsofquantity. Economy ment equipment to farmers is needed to over- incerealseedusemightbeachievedbyreducing come these problems. A new mobile pedal- the current rather high seedrates, especially for driven machine capable of treating 2 tons of wheat. However, this probably depends also on seed per hour, costing 1 million ZI is to be the improvement of seeding and seed dressing manufacturedbyjointventure;andnow,broadly equipment, and more widespread treatment of effective seed treatment materials are available seed. This is an important area for research. costing only 16,000 ZI per 100 kg seed treated. Research on production of true seed of potatoes * Seed impurity, which is increased on farms should also be considered. There are reports by unsatisfactory equipment for combine har- that the quality of pasture seed is poor. Small vesting and by inefficient seed cleaning during quantities (0.3-2.5 tons) of most temperate pas- processing by larger contractors during bulk ture grasses are listed as available in the seeds handling and storage, as well as during trans- catalogue, and these appear to exceed demand. port. However, it was not possible to check their * Transportation bottleneck for seed potatoes quality. No seeds of clovers are listed. Annual being shipped from the low disease areas of forage and grain legumes are produced in quan- northeast Poland to other production areas, tities from 15,00040,000 MT depending on the according to the Bank Sector Study, which also species; supplies of these seeds seem adequate states that a considerable expansion of trans- to meet demand. port capacity is required to remedy this. * Seed industry in a state of transition from Improve seed storage and handling facilities. state control and centralized organization to a Bulk storage capacity, location, and equipment more dispersed system composed of associa- should be evaluated to determine the adequacy tions of smaller operators. State Farms are and quality of the facilities, as a basis for an reported to be interested in producing and sell- investment program to modernize the resource 218 and to expand capacity where necessary. Cool for transport, cleaning, storage, seed treatment, storage facilities for seed potatoes should be and transport to buyers? What is the distribu- included in this review. On-farm storage is tion network? generally inadequate, particularly on smaller * Seed quality control: What is the role of private farms. New storage technology based on government? Are the current arrangements for plastics should be tested in collaboration with field inspection of seed being produced by con- importers, with the help of appropriate consult- tractors and at various state enterprises ad- ants. Small-scale portable equipment is avail- equate to ensure seed quality? Is seed properly able for quantities from 5-50 MT; at costs from inspected and certified before bags are sealed 65-40 US$IMT plus transport; and silo storage for sale to farmers? Is labeling clear and are from 25-1,000 MT at a cost of 80-200US$/T there minimum standards of labeling which (costs per ton decrease as the storage capacity must be met? Are there satisfactory arrange- rises). The material is reported to be insect and ments for spot-checks and growing-on samples vermin proof, moisture proof (when properly of seed taken from seed suppliers at point of installed), simple to install and easily cleaned. shipment to farmers. Can farmers have seeds MAFE is considering seekinghelp from FAO for tested independentlyifthey wish? Do theyhave testing such equipment, and this project merits any recourse to law if they are sold bad seed? support. Can seed companies be fined for lack of quality? Are there sufficient and well-trained field in- Reduce seed-borne diseases. High priority spectors? Should their training be expanded or should be given to expanding the availability of upgraded? Would external assistance to gov- small-scale seed treatment equipment to farm- ernment be helpful in establishing standards, ers, and to a campaign to upgrade standards of preparing legislation, and training seed inspec- application and to expand total coverage of tion staff? cereal seed to 80% by 1995. Seed under bulk storage should be treated routinely by seed The object of this review should be to provide merchants before bagging and sale to farmers, the basic data for the preparation of a national and labeled accordingly. Routine spraying of seed development program, and a related in- potatoes grown for certified seed against potato vestment package to ensure the future supply of blight should be enforced; and farmers growing quality seed of the principal crops. seed for their own use should be encouraged to spray whenever conditions favor blight. Improve standards offarm equipmentfor sow- ing, weed control, and harvesting. Seed is MEDIUM AND LONG TERM wasted when improperly sown and poor plant populations may result, leading to higher weed Initiate a national review of the current state of infestation and low yields. Lack of weed control the seed industry in all its aspects. through cultivation or herbicide use causes fur- ther problems and weed seeds or seeds of other * Plant breeding: What is the role of the crops contaminate seed at harvest time, espe- MAFE research system and how do other orga- cially as combining and seed cleaning standards nizations involved in breeding complement the are low. The important issue of improving farm national institutes? Are there any major equipment and raising standards of operation breedingproblems orbottlenecks requiring spe- to reduce those losses is dealt with in Annex 18 cial priority? on mechanization * Seed multiplication: Research institutes, other breeders, state farms, cooperatives and Privatize the seed industry. An important private farmers are all involved in some phases. objective should be to identify activities suited Who does what? How adequate are their facili- to private involvement in seed breeding, multi- ties? What is their competence and what stan- plication, and distribution, and to activate mea- dards do they maintain? To whom do they sell sures to stimulate private investment in the their seed? Do they have storage facilities? seed industry. a Seed purchasing, storage and distribution: In most developed countries the private sector What is the chain of supply prior to storage? now plays an important part in breeding new How is seed stored? How adequate are facilities varieties of seed, and has the major role in seed 219 production and sale; but this is not yet the case To encourage the transformation of seed en- in Poland. In many ways the industry there now terprises from state or para-statal control to seems ripe for privatization: large state-con- private ownership various incentives could be trolled centrally managed seed organizations offered. These might include royalties to breed- have been dismantled and numbers of loosely ers (which should also be available to breeders associated companies of a quasi-public nature atthe national research institutes), patentrights seemtobetakingtheirplace. Itisexpectedthat on new varieties and on machinery or other the review of the industry proposed above will innovations in seed technology, tax holidays for clarify their current role and activities, and the entrepreneurs, joint ventures with foreign com- extent to which they are suited to private own- panies, and credit availability on suitable ership in the future. It will be necessary to (nondistorting) terms. introduce a system of licensing companies to ensure the maintenance of quality throughout the industry, from breeding to sale of seed. Even Endnote in countries where the seed industry is predomi- nantly private, governments play a key sup- This annex was prepared by Peter Oram. porting and regulatory role. 220 Annex 12 Agricultural extension This annex sets out the rationale for developing Centers(WOPRs)andtheirfieldagentsatgmina a new approach to extension in Poland. The level, by livestock services, by quarantine and approach is proposed in the form of a strategic plant protection services and by agrochemical program reflecting immediate and longer-term centers. The public sector system is loosely actions to support the approach. supervised by the Ministry of Agriculture and The annex addresses some basic questions Food Economy (MAFE). Many public and pri- which the Polish government must face: vate sector agents operate at farmer level: spe- cialized extension is provided by commodity and * Does Poland need an extension service? field crop services of the agricultural and food * If so, what functions should extension per- industries such as the sugar beet industry, and formn? advisory services are also provided to farmers * Who should provide the extension - the by village cooperatives and private sector agri- public or private sector of both? cultural unions. In January 1990, estimates of * Who are the future clients of extension? the total extension workforce were: * What should be the ownership and structure of extension? Voivodship advisers at WOPR headquarters 1,792 * What strategic steps should the government Field advisers at gmina level 8,017 take in the short, medium and long term to WOPR administrative and service employees 3,068 enable extension to meet it objectives? Total WOPR 12,877 * What are the implications of the strategy? Agricultural union advisers 1,600 Quarantine and plant protection staff 1,900 The annex begins with a brief review of the Commodity and field crop service advisers 4,500 present extension system and examines con- Village cooperative advisers 3,500 straints on the system which are relevant to Agrochemical service advisers 330 answering the above questions. Total 24,607 Present situation Precise numbers of individuals charged with Agricultural extension in Poland is provided the responsibility of advising farmers is not through 49 Voivodship Agricultural Progress known, as the service is fragmented and 221 uncoordinated even at voivodship level. For sion staff at gmina level know as much about example, in addition to WOPRs, commodity and farming as do the better farmers themselves. cooperative advisers, research institutes also Funding of WOPR. Each WOPR is funded employ specialist extension advisers to coordi- through the voivodship from taxes which are nate with WOPRs and to promote research supplemented by the state. The activities and messages, for example, the Institute of Plant fundingofWOPRsaretheoreticallydividedinto Protection has 1,800-2,000 field staff located in two parts: production and extension, each hav- about 50 field stations. What can be said is that ing different accounts. the ratio oftrained specialists capable ofprovid- The production units of WOPRs are supposed ing technical information to farmers in Poland tobe self-financing,andprofitsaftertaxes should is extremely high. With a private farm popula- be used partly to finance extension. Salaries tion around 2.2 million, it is estimated that the and bonuses of production farm staff, including WOPR advisers, union advisers, commodity the WOPR director and production advisers, advisers and private cooperative advisers alone depend on gross production of the farm. As a total almost 20,000; a ratio of one to every 110 consequence the farms have attempted to maxi- farms. It is accepted that rigid ratios are mean- mize production through the high use of inputs ingless in work program development, but they and bear little relevance to typical farms of the can be used as a rough planning indicator. voivodship. Indeed, pressure to produce profits Consideringthe average size offarm and level of has encouraged some production units to invest sophistication of farming, a planning level of in operations only distantly related to agricul- one adviser to about 200-250 farms suggests ture, for example, to develop commercial dis- that a reduction in extension staff numbers is tilleries and brick-making operations. possible. Such a step has already been taken in The deputy directorforextension ofthe WOPRs some voivodships (for example, Jelenia Gora, is responsible for all training and extension and where half the extension staffhas been laid off). is paid from the state (voivodship) extension A rationalization program which would deter- budget which is supplemented by sales of publi- mine precise advisor members and match num- cations and accommodation receipts from train- bers to needs is urgently required. ing centers, which at times also serve as hotels. The WOPRs are the official lead agency for All extension andtrainingexpenditureisfunded extension. About 80% of WOPRs have training from the budget but is expected to be supple- centers attached to them and all are combined mented frorn farm production. There is tension with production farms which may include dairy between the production and extension sides of and pig units in addition to full-scale arable WOPRs because production teams feel that in- areas ranging from about 500 ha to over 6,000 vestment in farm operations, and therefore in ha, and land for adaptive research trials and their bonus potential, should take precedence demonstration areas. The total arable land over investrnent in extension. farmed by WOPRs exceeds 40,000 ha. These In 1989, the state budget allocation for WOPR farms, however, do little for extension as they operationswasZ151.6billion, which is expected are quite unrepresentative of the greatmajority to rise to about ZI 250 billion in 1990. This of private farms. increase does not keep pace with inflation and About half of all WOPR staff have received a there istherefore significantpressure onWOPRs university-level education. Training has, how- to cut costs. All cuts will fall on extension, not ever, been mostly limited to academic disci- on production. Of this budgeted amount an plines and not directed to the problems of increasing proportion, between 75% and 90%, is practical farming. Particularly lacking is farm used for salaries. No financial records are main- cost analysis and farm business planning skills. tained at the state level for individual WOPRs, Subject matter specialists at WOPR headquar- although each WOPR must legally maintain its ters are usually well-qualified technical staff own financial records. The sources and appli- who mostly maintain a good theoretical knowl- cation of funds are poorly defined, and the al- edge of their subject through personal liaison locations from state and profit centers and the with appropriate research institutes. Few, ownership of assets between production and however, have practical farming experience and, extension seem inextricably intertwined. Ex- hence, take a narrow view of farm enterprises. tension advice is provided free to all farmers A range of opinions suggest that very few exten- irrespective of their ability to pay. 222 Organization of extension programs targets and numbers of training programs held. Evaluation analysis to assess the impact of A large part of the extension effort involves specific WOPR campaigns on rural clientele is extracting information from research literature not conducted. and preparing technical packages for dissemi- * WOPRs have their own field information nation. Headquarter subject matter specialists centers dealing with the production of extension hold regular monthly seminars at which gmina materials for the local press and radio stations. extension agents are presented with these Much of the information produced, however, packages. Gmina extension staff then dissemi- appears ad hoc and frequently duplicates infor- nate this information by means of a network of mation produced from other sources such as innovation and extension farms. Throughout research stations. Ahigh proportion of farmers Poland there are about 3,000 innovation farms, own orhave access to television buttoo little use at least one pergmina, where new packages are is made of television in the dissemination of first tested, and about 40,000 extension farms, farm innovations or for illustrating the prob- one per village, selected in agreement with local lems faced by farmers in their day-to-day ac- authorities, where technology packages, which tivities. must be approved by the voivodship and by * There is a general lack of trust among farmers union representatives, are introduced. farmers for everything associated with the Several problems affect the performance of government. Farmers clearly identify WOPRs what, on the surface, appears to be a satisfactory with government control and treat WOPR agents dissemination pathway: more as regulators than as advisers. This particularly affects smaller farmers who do not All packages are designed for output maxi- believe the WOPRs and its associated farms, mization andnotfarm operation efficiency. This training and service functions are designed for problem stems from the production target men- them. These shortcomings have caused the tality of previous administrations and the WOPRs to be heavily criticized at all levels: maximization philosophy of research. Itis also senior government officials consider them continued by WOPR agricultural economists wasteful of resources; farmers' unions see them whose computer programs test only the finan- as self-serving institutions; and the majority of cial returns to the total package rather than farmersconsiderWOPRadviceandWOPRfarms search for component combinations which as irrelevant to their needs. maximize financial returns. The packages are therefore only applicable to thosefarmsthat can Constraints on the extension service afford high input levels and are not necessarily the mostefficient. The existingrecommendation The most severe constraint on the effectiveness packages are of limited value to farmers in ofextension in Poland is causednotby structure today's economically constrained environment. or procedure but by attitude. In response to * Innovation and extension farms are chosen centrally determined production targets, the largely on the basis of farmers' willingness to drive for maximum production is pervasive accept packages; this implies that the farmers throughoutthe extension and research services. are able to take risks and are therefore atypical. All targets, programs and incentive systems are Furthermore, extension staff have mobility geared to crop and livestock production rather problems and understandably choose farms that than to farm efficiency and this has promoted a are easily accessible. Such farms are therefore misguided respect for maximum yields, for high rarely representative of the majority of local input systems and for so-called commercial farm conditions. Small, traditional farms are farmers. The extension system has therefore not adequately covered by extension. evolved to be in tune with the objectives of state * Extension agents are nottrainedtointerpret farms and the small traditionalfarmeris largely farmers' needs and to feed information back to held in disdain. research. Information transfer is therefore This attitude problem cannot be overcome overwhelmingly one way. quickly; time, training and exposure to other * Evaluation of staff performance is subjec- approaches will be needed to turn technicians tive and weak. Evaluation of extension cam- intofarm advisors. Manywillbeunabletomake paigns relates only to voivodship production the necessary adjustment, and evaluation pro- 223 grams will need to be designed to distinguish tion farmers having to pay for inputs on dem- fairly between staff. New incentive systems onstration areas. This has tended to sour re- must recognize and reward contributions to lationsovertheon-farmdevelopmentprograms. local farm efficiency, with particular emphasis being placed on identifying representative farm Addressing the problems of Poland's clients and catering to their needs. Farm extension business planning, in physical and financial terms, should be recognized as a professional DOES POLAND NEED AN EXTENSION SERVICE? skill which is as valuable to the Polish economy as that of a doctor or engineer. In Western In view of the problems and constraints listed Europe and America, and increasingly in the above the answer must be certainly not in its more advanced agricultural areas of Asia and presentform. However,therehasperhapsnever Latin America, farm planning advisors are in been a more pressing need for an effective advi- demand and are supplied by the private sector. sory service. The current dramatic shifts in Problems of careerpathwaysfor such specialists farm input-output price relationships has gen- in government service are therefore minimal. erated great uncertainty throughout farming In Western Europe and America, university communities. This makes it even more impor- curricula have responded to these changing tant for farmers to make the right decisions needs and certificates and degrees in farm man- regardingoptimizing scarce resources; they need agement economics are commonplace. In Po- advice urgently on minimizingrisk. The shift to land, curricula will similarly need to be revised a market-driven economy will bring differential to reflect this change in attitude. pressure on different farm groups; poorer The extension and production service system farmers will leave the land and better farmers in Poland is duplicative and wasteful of finan- will look for ways of meeting market demands. cial and skilled manpower resources. Further- Undoubtedly farmers will obtain information more, its procedures are inflexible and not re- from unofficial and union sources but the ex- sponsive to changing economic conditions or tension service should be the basis for rural changing local farm needs. There needs to be a advice. There is clear evidence of large regional clear distinction between production work, ad- differences between crop and livestock produc- visory roles, research and regulatory functions. tion technology and particularlylarge differences There are no position deacriptions, lines of between production levels in large and small command are blurred, and there is little pro- farms. The extension service has an important fessional or financial accountability. role to play in raising small-farm production by Poor communication and transport facilities interpreting research results and commercial waste personnel time, discourage staff, and farm practices to the small scale, and in moving distort the advisory program. Few gmina ex- information rapidly between regions. tension officers have adequate transport, and In addition to these well-understood roles, telephoneconnectionstovillagesandhouseholds extension has a critically important responsi- are extremely scarce. Inadequate operating bility in the current circumstances of feeding expenses also constrain extension's ability to back information on farm problems from the interact effectively with more remote farms. field to research and to government policy- Linkages between WOPRs and research in- makers. Research programs willhave to change stitutes appear ad hoc, mostly depending upon to respond to farmers' needs and extension must personal contacts between subject matter spe- articulate those needs. Similarly, the govern- cialists and institute scientists. WOPR farms ment should be able to assess objectively the are in charge of the execution of adaptive re- impact of policies on rural conditions, and a search trials and of demonstrations of innova- countrywide network of extension staff should tionsin crop and livestock production techniques. provide this feedback as part of a normal work However, on-farm trial programs are designed routine. by individual programs of research institutes Polish farmers urgently require access to and there is no real coordination into a coherent analytical and diagnostic services. SomeWOPRs on-farm strategy. Recent financial constraints have developed farm model computer programs have resulted in institutes being asked to pay whicharepopularwithadvancedfarmers. These for the running of WOPR trials and in innova- programs are based on packages of prescribed 224 inputs and allow little flexibility. Nevertheless * farm and household advice; they illustrate the type of assistance which * formal and informal training of farm fami- extension should offer. This need for farmers to lies; interact with computer-based farm model pro- * analytic and diagnostic services including: grams will become increasingly important as - farm planning the pressure for farm efficiency builds. Diag- - farm budgeting and investment appraisal nosis of soil nutrient deficiencies, plant disease - simple soil testing and advice on lime and problems, etc., and advice on fertilizer and lime fertilizer advice application rates designed for specific field - accessibility to livestock feed testing conditions are just indicators of the main advi- - pest and disease identification and advice sory functions which extension should offer. on plant protection The present shift from a centrally regulated to * ensuring a two-way flow of information be- amarket-driveneconomywillundoubtedlybring tween farmers and research; about major changes in farm households and in * articulation of farm problems for the gov- rural communities. The needs of these commu- emient; nities and individuals for qualified advice will * assisting research agencies with on-farm increase enormously. Initially such advice will testing and demonstration; relate to technical farming but its emphasis will * cooperating with scientists in research pro- shift rapidly to broader needs, such as how to gram planning. establish cottage industries, how to set up small businesses and, indeed, how to make the move WHO SHOULD PROVIDE EXTENSION? out offarming. The rate ofthis shift in emphasis cannotbepredictedas it depends on government Ideally, at a high level of farm and farmer policy toward maintaining rural employment. development most, if not all, extension advisory However, the Polish extension service must functions should be paid for by the users of such position itself, through retraining programs and advice, reflecting the value farmers place on the through evaluation and incentive schemes advice and at least covering full costs. Such a geared to emerging social needs, to become the situation is increasingly being employed in front-line advisors to rural communities. The Western Europe where ministry of agriculture challenges to the administrators and the trainers advisors are expected to take on the partial role of extension are great. One thing is certain, of paid private consultants. The degree to which however, an effective extension service is needed this ideal situation, of extension being provided and will be needed in the foreseeable future. as a private service, applies, however, depends on the technical sophistication of farming, farm WHAT FUNCTIONS SHOULD EXTENSION PERFORM? profitability, and farmers' education levels. Above all, however, it depends on the professional At present, WOPR functions are spread across a competence of extension and the level of confi- wide range of activities, with the split between dence which farmershave in their new advisors. production and advisory services being par- In Poland, many commercial farms are capable ticularly divisive and disruptive. It is essential of paying for advice and services. However, that all farm production functions be removed these are normally the more prominent farms physically and financially from the advisory with greater access to government services and and diagnostic service. benefit from free advice. Small, poorer farmers Furthermore, it is important that extension cannot pay and would rely on government ex- advisors be welcome on farms. Therefore, ad- tension if it were made available to them, which visors should not have government regulatory it mostly is not. It should be a recognized and functions, for example, checking produce qual- carefully monitored policy that government ity standards, reporting transgressions of en- extension advice to private farms, operating at vironment protection laws, etc. The confidence profit levels which generate income tax liabili- of farmers in their advisors must be built up as ties, and to all statefarms, shouldbefullycosted a central theme of government strategy. and that these costs should be paid by the Extension functions should therefore be con- recipients ofadvice and services. Costs of advice fined to: and services should, as in Western Europe and North America, be a legitimate farm expense 225 deductible from pretax farm profits. In these strategy should identify major client groups, circumstances private competition for provision their characteristics and needs. Work programs, of services by the private sector would be en- budgets andtrainingprograms shouldbegeared couraged. to identified needs. Government advice and services would con- Government extension has to date focused tinue to be provided free to those farms whose exclusively on the needs of more progressive enterprises were not profitable, the intention andcommerciallymindedfarmers. Thesegroups being to make them profitable or to assist the have quite different needs from the majority of poorer farmers in making the transition out of farmers, needs which can increasingly be filled farming. The practical aspects of distinguish- by private sector initiative. Shifting the em- ing between those farmers who can and should phasis of government extension staff to cater pay for advice and those who cannot, are diffi- specificallytotheneedsofdisadvantagedgroups cult and often subjective. When development will require strong direction, revised training reaches a stage where farmers pay income tax, programs, appropriate support from research the problem becomes easier; in the meantime, and revision of staff performance criteria. however, the system must rely on the judgment of extension managers. Pressure on the budget WHAT SHOU1LD BE THE OWNERSH1P AND ,o encou. rage partial self-financing is a common STRUCTURE OF EXTENSION? practice (for example, in Britain) but must be carefullymonitored to ensure that such pressure Farmers rightly feel that they have no owner- is transferred to commercial farmers. Deter- ship influence over the WOPR services and that miningpriority clients for government-supplied in many ways the WOPRs reflect the worst free extension and monitoring the frequency of aspects of former central planning. This situa- contacts with those poorer farmers is essential. tion is fully r ecognized by the government, whose Increasingly the successful commercial farmers intention it is to change WOPRs radically. will employ their own advisors as government A widespread network of WOPRs does, how- services become harder and more expensive to ever, exist throughout Poland, and each WOPR obtain. has a substantial infrastructure, training, ac- In the foreseeable future, therefore, extension commodation and printing facilities, and access will be available to farmers through a combi- to areas of undisputed state land. The essential nation of government agents and private sector feature of any strategy should be to work with consultants, with the latter gradually increas- this networ]k; attempts to break down the net- ing in importance. Government extension will work, to replace it with something new or op- continue to be required by less well endowed erating in parallel, would be disruptive and farms. It is unfortunately true that the best unnecessarily expensive. The strategic plan for advisors will move first to the private sector, the WOPRs should therefore be to change their where their value will be recognized and re- structure, management, staff, procedures and warded. If the government wishes to offer a ownership as rapidly as possible but without good professional service to poorer farmers it destroying the basic service network facilities. must reward good staff appropriately. Some At present each voivodship has a WOPR. As form of differential bonus based on performance part ofthe restructuringofthe extension service criteria is essential. some rationalization of the geographical spread of responsibility is needed; this could lead to WHO ARE THE FUTURE CULEMS OF EXTENSION? budgetary savings. Clearly differences in the geographical spread of WOPRs' responsibility The most obvious clients of extension are farm- should reflect regional differences in farm ers. However, an extension service should cater structure. A review of the physical network is to the needs of government, research, farmer therefore neededbut should not take precedence servicing agencies and particularly farm fami- over a review of institutional and procedural lies - rural youth, farm spouses, etc. As ex- matters. plained above, some clients can more appropri- As a first step, all farm production functions ately be dealt with by private extension and - including arable farm, dairy units, pig pro- some by government extension. Extension duction, seed production, machinery and ancil- 226 lary production units such as distilleries, etc., tension programs to the interaction of livestock should be completely removed from advisory and crops. Technical specialists should be and diagnostic support services. The produc- trained to see their specialization from a holis- tion facilities, including staff and physical as- tic, farm efficiency standpoint, taking into ac- sets, should be treated in the same way as state count farmer goals, not technical production farms Management and physical assets should standards. be divided: WOPR headquarters buildings, An inventory of extension staff at all levels training facilities, accommodation and catering should be prepared, showing qualifications and facilities, and audio-visual units should be al- a record on in-service training and performance located to the new advisory service. Farm evaluations. Position descriptions and perfor- building and equipment would be allocated to mance criteria should be prepared for all staff production units. Land allocated to the advisory categories. service for operating research trials should be Greater use should be made of local newspa- adjacent to headquarters. In order to illustrate pers, radio, television and, increasingly, of tele- this clear separation and new approach, the phones to communicate with farmers. Televi- farmer support service should be renamed: the sion and local video programs are powerful, Agricultural Service Agency (Agencja Uslug cost-effective tools for information dissemina- Rolniczych or AUR) would seem appropriate. tion and feedback. The effective use of commu- The AUR should be financed from the budget; nication tools requires analysis of farmer per- staff salaries should reflect qualifications and ceptions; therefore, careful training of opera- responsibilities. Abudget commitment of65:35, tives, even for telephone communication, should salaries to operating costs, should be maintained be budgeted to make the best use of new tech- to ensure adequate provision for mobility. The nology. Extension strategy should recognize, ratio of frontline AUR advisory staff to farmers, however, that farmer skill development requires taking into account private extension, gradually personal contact, and a combination ofextension improving communications, and the opportuni- advisors and mass communication media will ties offered by mass media programs, should not be essential throughout the long term. exceed 1:400. This would imply a gmina-level Farmer ownership of extension is at present advisory force of about 5,500 backed up by about being proposed by the government through the 1,400 voivodship advisors in addition to the reinstatements of the system of Chambers of analytical and diagnostic technicians who are Agriculture (COAs). Various proposals are be- essential to supply extension with farm support ing put forward for these COAs and a draft bill services. It is anticipated that the existing work is being prepared. The essential features of the force could be significantly reduced by acceler- COAs as proposed are that they would be self- ated retirement, by movement of some technical governing bodies with voluntary membership staff to the private sector and by retrenchment drawn from government agencies, the private of frontline extension staff at gmina level - sector and farmers' unions or associations. especially those incapable of being trained in Membership would be flexible so that the com- thenewmethodologyofgivingfarmmanagement position of the COAs could reflect the needs of advice to typical small farmers. Early training rural communities. Differentvoivodships would program results should be used as a basis for require different COA composition to reflect retrenchment, which would accelerate the shift local circumstances. in emphasis to the small-farm program. A draft bill anticipates that the COAs would Extension work programs should be strictly come into legal operation in January 1991. They stratified according to farmer types and the would operate mostly in a single voivodship but number of farmer contacts related to the pro- could stretch their influence beyond the portion of specific farmers in the rural commu- boundariesofthevoivodshipifnecessary. Within nity. For example, if half of the farms are below one voivodship the COA would be supervised by 5 ha and are mixed livestock and cereal farms, the voivod, but if working in an area exceeding then about half of the extension time, visits and thevoivodship,theMinistryofAgriculturewould resources should be spent advising this type of supervise. This arrangement is administra- farmer. tively unworkable; it has obvious problems of Much more attention should be given in ex- administration and accountability in time and 227 space. When a COA is established it must have The concept of developing a mechanism for a defined area of influence and must also have ensuring coordination between public and pri- specifically defined accountability. vate sector activities, and for increasing the The draft bill proposes funding the COAs direct influence of farmers over their service from: and advisory agencies, is sound. However, there is a real danger that the COA as presently * members' contributions; conceived could become another central au- * subsidy allocations from state and local thority with little representation from smaller budgets; and farmers. Criticisms to this effect are being * income from commercial and service opera- charged in the Poznan case. The COA could tions. easily become a self-serving, profit-making or- ganization, an end in itself rather than a means Such funding raises issues on two counts. to an end and with little relevance to the prob- First, only wealthier farmers are likely to con- lems of the majority of farmers. tribute and therefore have voting rights over all Chambers of agriculture are operating in voivodship agricultural matters (the Poznan Western Europe and the details oftheir financing model COA has only 500 farm members). Sec- and operating procedures should be reviewed to ondly, under this model state budget allocations determine whether they are immediately ap- would become subject to private sector disburs- plicable to Poland. The concept of chambers of ing procedures. Thus private farmers would agriculture should be seen as part of a long-term make decisions about the allocation of state experiment - one of several possible means of funds, a situation which would be unacceptable achieving the goal of deemphasizing the influ- to the government and to potential donors. ence of the state on local agricultural affairs. It It is further anticipated by the draft bill that should be tested at a voivodship level to see if the the COA itself may carry out its own production COAs can become self-financing but its intro- activities and in addition will "take over all duction by legislative means throughout Poland matters relating to agricultural extension and appears premature. The administration of the production organizations - including financ- voivodship, however, is already fully equipped ing.' This would be satisfactory if the COAs to deal with the manybureaucratic requirements were self-financing or operated entirely with of administering and accounting for staff and farmers' contributions; it could not apply to finances. It is recommended therefore that, in government budgets which have a responsibil- the short term, the AUR work directly with the ity to all taxpayers. voivodship administration. The voivodship Important questions arise over the COA: its shouldbe advisedin its operations andin setting relationship to the voivodship; its funding and priorities in its budget allocation by an agri- accountability, and whether it could have ex- cultural advisory board comprised of a true ecutive andfinancial authority over government cross-section of farmers. agencies such as the AURs and their associated agrochemical centers, plantquarantine stations, WHAT STRALTEGIC STEPS SHOULD BE TAKEN? etc. The last proposal could clearly bring about conflict of interest situations: conflicts might The above outline suggests that government arise where government policy, for example, strategy should be aimed toward gaining easy over environment protection, did not coincide access for all rural families to an efficient pro- with the short-term interests of farmers over fessional advisory and diagnostic service which pest control and fertilizer application - an is responsive to their needs. Steps to be taken issue in which agrochemical centers could be- are: come entangled. Such problems are occurring in Western Europe and North America and Short term should be anticipated in Poland. The system of combining government extension with farmers' * Issue government instructions to all exten- unions was tested for several years in North sion staff to redirect the extension effort toward America but the experiment was abandoned as farm efficiency and away from the simple at- unworkable largely because of conflict of inter- tainment of high production target goals. est problems. Voivodships should refrain from issuing pro- 228 duction target objectives. tional experience would be essential to stimu- * Employ technical assistance to develop re- late rural development. training programs for extension staff in busi- * Revise agriculturalcurricula at agricultural ness-orientedfarmmanagement,includingfarm secondary schools and universities to empha- planning andbudgeting; there shouldbe support size farm economics and efficient farm manage- for this effort from equipping extension econo- ment. mists with appropriate computer software. * Encouragetwinningarrangementsbetween * Employ technical assistance to develop new appropriate international institutions and agri- performance criteria for extension based on cultural teaching, research and extension es- identifying and servicing the needs of represen- tablishments in Poland. tative farms and farm households, and on im- * Review AUR operations and develop full provingfarmefficiency. Publiclyintroducethese cost assessment of advisory and diagnostic criteria and a system of extension evaluation by services. Phase in full-cost payment for agri- representative client farmers. cultural advice and diagnostic services, pay- * Remove all WOPR advisory and diagnostic ment for such services to be tax deductible. functions, administratively, physically and fi- * Establish agricultural advisory boards at nancially, from production functions. Rename voivodships. Boards should act as a coordina- the advisory and diagnostic service to reflect its tion mechanism for all voivodship agricultural new focused role: the Agricultural Service operations in the public and private sector, to Agency, Agencja Uslug Rolniczych (AUR), would review functions offarm support services and to be appropriate. make recommendations to the government. i Review staff levels atAUR to rationalize the Board members would be drawn from repre- number of advisors to farm families based on sentatives ofmajorfarminggroups, government revised work programs. A ratio of around 1 agencies, research and private agribusinesses, advisor to 250-400 farmers, depending on region etc. and farm complexity, would seem appropriate. * Reequip diagnostic facilities and AUR labo- * Demonstrate support for the AUR by a full ratories as appropriate to enable efficient and budget commitment; ensure that the operating rapid analytical and diagnostic services to be budget is about 50% of salary costs (that is, a offered to farmers atgmina andAURlevels. This ratio ofabout65:35forsalaries:operatingcosts). local level voivodship service to be coordinated * Review extension client characteristics and with the more complex services offered by the needs; together with research, develop appro- research network. priate technology options and promote these * Review details ofthe operations of chambers through mass media and personal communica- of agriculture in appropriate Western European tion campaigns. countries (for example, Spain and Austria). * Review the entire diagnostic and analytical Assess to what extent chambers of agriculture network of services offered to farmers to avoid could be self-financing and to what extent all duplication and waste of resources. farmers could achieve full representation. In- troduce a chamber on a test basis within the Medium term jurisdiction of a voivodship and monitor its operation. If the model were found acceptable, * Review the emerging needs of farming com- the chamber of agriculture could take over from munities and categories of individuals such as the agricultural advisory board. However, to pensioners, rural youth, farm women, and fail- the extent that public funds are being used for ing farmers in the light of changes in govern- extension, the voivodship administrative ment policies, and develop training programs to mechanism would be required to administer prepare extension staff to meet these advisory and account for such funds. needs. * Equip AURs with training materials, video Long term equipment and technical assistance to demon- stratetofarm community membershowto man- * Change full-cost advisory and diagnostic age the transition from a controlled to a market- services to commercial farms. Facilitate the driven economy. Cross-referencingexperiences gradual takeover of extension advice and diag- from differentparts of Poland andfrom interna- nosis by the private sector. Government ser- 229 vices should continue to be made available for * WOPR production farms remaining after poorer farmers at subsidized rates. the split from AURfacilities wouldbe treated in * Government advisory service should be the same way as state farms. Some land in equipped to advise rural households on all as- specific agro-ecological zones would be retained pects of farming, including environment and by the AUR for research and demonstration resource protection, low energy agriculture and purposes but the WOPR farm, staff and man- rural society management. agement would be treated as independent units with no budget support and no linkage to the Implications of the strategy AUR. * Commercial and poorer farmers would be The proposed strategy would have implications better off but in different ways. Commercial forthegovernment,forthe existingWOPRsand farmers could expect more farm management for commercial and poorer farmers. advice and imore efficient diagnostic facilities; but at full cost, which they could offset against * Governmentandvoivodshipadministration taxes. Smaller, poorer farmers would have would be faced with the responsibility of WOPR greater interaction with AUR staff, whose per- staff retrenchment and retraining. It is antici- formance rewards were geared to increasing pated that the numbers of extension staff might farm efficiency. All farmers and private agen- be halved. However, the remaining advisory cies should gradually increase their influence and diagnostic staff of the AUR, plus an addi- over extension through the agricultural advi- tional 50% of salary costs for operating expenses sory board and eventually their own self-sup- would have to be taken fully onto the govern- porting chamber of agriculture. ment budget. * Technical assistance would be required to Endnote assist the government in developing position descriptions and performance criteria, training This annex was prepared by Wladyslaw Korcz programs and new curricula for secondary and John Hayward. schools and agricultural universities. 230 Annex 13 Rural finance Background tals, and the CB system of cooperative banks (CBs), with 1,660 banks, 495 branches, and The financial sector has been dominated by the 2,700 cash counters. (A CB or CB branch is banking system, although the banks operated present in every community in the country.) as financial agents of the government under the BFE was formed in 1975 through the merger of previous regime, rather than as the independent the Agricultural Bank and the Central Union of financial intermediaries found in market Savings and Loan Cooperatives; the Ministry of economies. In the past, the National Bank of Finance holds 51% of its shares and the CBs the Poland (NBP) supervised the preparation of remaining 49%. Under this arrangement, BFE credit plans in support of the government's served as the central union for the CBs, which annual production and investment plans, and was a violation of the cooperative principle of these were reviewed by the Council of Banks voluntary organization and prevented the CBs (chaired by NBPs president) before being sub- fromoperatingasindependentinstitutions. BFE mitted for approval of the Council of Ministers provided services to social sector agriculture and Parliament. The credit plans were then and agro-industry (state and cooperative farms; implemented by the banking system under the state enterprises; and dairy, horticultural, and general guidance of NBP. NBP provided fi- agricultural circle (machinery service) coopera- nancial servicesto the commercial andindustrial tives).' CBs provided services for private sector sectors; the Bank for Food Economy (BFE) and farmers, craftsmen, and rural households; em- the cooperative banks (CBs) served agriculture ployees of social sector enterprises; and local and agro-industry; Bank Handlowy was the governments. primary bank involved in foreign trade; PKO BFEmobilized savings directlyfrom the social Savings Bank provided services to households; sector (15-20% oftotal resources) and indirectly and Bank Polska Kasa Opieki (PKO-SA) pri- from the private sector through the CBs (15- marily served as a channel for foreign exchange 20% of resources), but the major part of its provided by Poles living abroad. The portfolios resources (over 60%) was provided by NBP. of BFE and the CBs together represent about BFE granted loans in accordance with the an- 23% of total bank loans outstanding at the nualcreditplans,andthegovernment sometimes present time, and their deposits amount to ap- intervened in individual loan decisions. BFE proximately 18% of the total (about two-thirds bore little risk in its loans since the founding of which are deposits in CBs). organizations of state farms/enterprises and Finance in the rural sector has been domi- central unions of cooperatives normally pro- nated by the Bank for Food Economy (BFE), vided funds to allow entities to repay their with its 95 branches located in provincial capi- loans, if they had insufficient funds of their 231 own.2 Of BFE's total loan portfolio, about 45% the consolidatedportfolio of CBswasforagricul- was in agriculture (including machinery ser- ture (roughly 15% in production credit and 45% vices) and 50% in agro-industry. In agriculture, in investment credit), 25% for housing, and less about half of the portfolio was in production than 10% for craftsmen and other small busi- credit (at year end) and half in investment nesses. credit. In agro-industry, approximately 75% Current data are not available, but in the was for working capital and 25% for investment. past, virtually all state and cooperative farms The importantrole of CBs in the rural economy received productiun credit from BFE amounting is the result of a long history of cooperative to nearly 50%, of their material production cost, tradition in Poland. (Some of the CBs are over on average. About 50% of their average in- 100 years old.) The forerunners of the present vestment expenditures also were financed with CBs went through several setbacks but emerged credit. While the number of private farmers as relatively sound rural financial institutions. who received production credit through the CBs Theyhave survived government control exerted is not available, only about 5% of their material through BFE and local administrations. Their production cost was financed with credit. In strength is based on the fact that they thrive on accordance with past priorities, creditfor private their own resources. This exemplifies the merits farmers was allocated largely to investment. A of the cooperative spirit of pooling resources of larger amount of credit was made available to members to serve a common goal. CBs have private farmers for investment. Thus roughly succeeded in assembling small amounts of 40% of farmers received credit for investment savings which would not have been possible purposes, amounting to somewhat less than otherwise. They are community-based organi- 25% of expenditures. zations, and they were the only financial insti- tutions providing services to private entities in the rural sector. The CBs have a widespread Recent developments membership with about 2.5 million individuals, of which about 75% are farmers and the rest Substantialchangesarebeingintroducedinthe artisans, employees of the social sector, and financial system, with major implications for other residents of rural communities. ruralfinance. In early 1989,NBPwas converted The CBs mobilized savings from the private into a central bank, and its commercial banking sector, some social sector entities, and local operationsweretakenoverbynineindependent governments, but they were required to deposit banks established with former NBP staff and their funds with BFE, and their lending was facilities. Sectoral credit ceilings have been constrained by the national credit plans imple- eliminated, and all banks are allowed to operate mented through BFE. They obtained refinancing in all sectors. Some expansion into other sectors from BFE in individual cases but were net has occurred, although banks have tended to depositors with BFE in the aggregate and thus concentrate initially on their traditional sectors. provided finds for the social sector. (At the end NBP has approved licenses for 26 new banks, of of 1986, over 60% of deposits - including net which two are wholly private domestic banks deposits of local governments - amounting to and two are joint ventures between domestic the equivalent of about US$ 1.0 billion, had been and foreign interests. While license applications diverted to the social sector.) The CBs provided indicatethatthe newbanksintend to operate as financing for agricultural production and in- universal banks, the Agricultural Development vestment, consumption, housing, land, and Bank ofPoznan andAgrobank ofWarsaw appear budget support purposes, and they also recorded to be aiming at the agricultural sector. It seems the value of farm output sold to the state (for that the number of banks being formed may be purposes of calculating pensions) and served as excessive and that closer scrutiny may be war- agentsforland sales. CBs operated on anegative ranted to ensure that new banks are financially margin between deposit and loan rates, and sound and that they are not being formed to received a subsidy from the government in serve narrow interests ofthe owners. A program compensation. The environment for CBs was for the establishment ofa system ofcreditunions riskier than that for BFE, but they required is being prepared and is likely to result in a farmers to assign receipts from output sold to broad network of such institutions focusing on the state for repayment of loans. About 60% of personal finance. 232 Under the new banking law of January 1989, dards for banks are being developed within the interest rate policy was gradually liberalized program to bring general accounting and au- beginning in August 1989. Preferential interest diting standards in line with international rates (including those for agricultural credit) standards, and they are expected to be intro- were raised and unified with other rates at the duced as of January 1, 1991. Computerization beginning of 1990. During the first half of this programs arebeingdesignedto enable thebanks year, NBP's refinancing rate has been set on a to generate the information required by the new monthly basis, at the level of inflation expected accounting standards, the reporting require- for the month. (In practice, the rate has been ments of NBP, and modern management infor- below the rate of inflation, although the real mation systems. Prudential regulations are refinancing rate has increased from around - being developed to address major aspects of 24% per month in January to perhaps 0% per sound banking such as loan classification, pro- month in May.) Banks are allowed to set their visioning, and capital adequacy, and are to be own loan rates, but because of the high nominal introduced by the beginning of 1991. A review rates charged by some banks in January of 45- is being undertaken of the present system of 50% per month (about -19% to -16% in real government deposit guarantees (primarily on terms), NBP has been recommending a level for savings deposits in state banks such as BFE and the prime lending rate. BFE's rates generally household deposits in CBs), with a view to have been below the recommended level and developing an appropriate deposit insurance were set at 4.4-5.0% in June, compared with the system. Financial marketsarebeingintroduced, refinancing rate of 4.0%. The loan rate of CBs as NBP has begun to issue bills and rediscount has varied among individual banks but has commercial bills, and bond and stock markets tended to be somewhat higher than BFE's rate. are to be established. Subsidized credit for agriculture continues A bank restructuring program is to be imple- under at least two programs. NBP allocated ZI mented following diagnostic studies (including 900 billion for a program initiated in April to audits according to international standards) to provide credit to farmers at fixed rates of 24% determine the status ofbanks (particularly with for six months (3.7% per month) and 36% for regard to loan portfolios), in conjunction with nine months (3.5% per month). In July the rate the restructuring of social sector enterprises. A on six-month credit was reduced to 16% (2.5% major part ofthe program willbe the assessment per month), and the nine-month credit was of loan portfolios to determine potential loan eliminated. Farmers have the option of paying losses, the allocation of these losses, and the interest at the market rates in effect during the recapitalization necessary to establish a sound loan term if that proves to be lower. Banks financial basis for future operations. Special receive the difference between the fixed rates financial audits already are being arranged for and the market rate from budget funds. BFE banksparticipatingintheAgroindustriesExport was given an allocation of Zi 250 billion which it Development Project (AEDP) and Industrial utilized in April and May; the commercial banks Export Development Project (IEDP) being sup- were allocated the remaining ZI 650 billion but ported by the World Bank. (BFE and Bank reportedly have utilized very little of it. BFE Handlowy are the participating banks at has applied for an increase in its allocation, present.) Ownership structures also will be although the seasonal demand for the summer modified duringimplementation ofthe program, crop is largely over. The other program is based as state banks acquire capital from the private on thefunds generatedbythe EC food assistance sector and from foreign sources, and as the program amounting to about 800 ZI billion. government divests itself of its shareholdings. Credit is available to the private sector for As aresultofthe amendment ofthe cooperative small-scale production, trading, and processing law at the beginning of this year, BFE no longer through both BFE and the CBs at 75% of the serves as the central union for the CBs. It has prevailing interest rate. attempted to continue its arrangements with A number of initiatives are being undertaken the CBs by signing agreements of association to improve the infrastructure of the banking with some 1,400 of them, although these system. A clearing system involving electronic agreements do not constitute a permanent link processingoftransactionsistobeestablishedby and can be terminated on a year's notice. The beginning 1991. Accountingand auditing stan- other 260 CBs have signed agreements with 233 commercial barnks - ae planning to form re- Potential gional banks. A process of dis termedia4ion has occurred The goal in rural finance would be to provide atanacceleratingrate as polit eal and economic efficient financial intermediation services, in- uncertainties haYe r -o,5 b udget constraints tegrated inlto the overall financial system and have taken hold. noninat l interest rates have encompassing the processing of transactions; increased as Pat of tIAP general adjustment of mobilization of savings through the provision of relative prices enr in rn esporse to risinginflation, financial instruments with appropriate char- and real interest rates have become highly acteristics of safety, liquidity, and return; and volatile. Tota: >- cf BFTE. and the CBs allocation ofresources through the provision of declined by more t h~,a-n l in constant terms credit on appropriate terms and conditions for between 1982 and' I 9, and 44% between 1988 production, investment, and consumption pur- and 1989. A the, end of 1989, the CBs had poses. These services should be provided by a deposits ofZi '2 9t-cll.on an 'oans f only Zl 1.2 network of competing commercial and coopera- trillion (about 4 2 % T1he dramatic tive banks, all operating in the private sector. increase in no.ina) Interest rates at the be- While substantial improvements can be expected ginningof19903 vau-sd nan y b orowers to repay in the relatively short term through broad outstanding r-av ng 3n a contraction of measures suchastheintroduction ofthe clearing bothdepositsadi-. a--od3-0s, (BFE'snominal system (see below), institutional development loan rate junm'ep,d ,T'ron 8 n6per -ear 5.3% per of BFE/CBs and the CBs and the expansion of month - at the endA of 1.989 to 39% per month in commercial bank operations in the rural sector January.) High n-'>iin.1 and velatile real rates willrequirealongerperiod. Thereforeabanking also led to a dec - sa,- ~n -retdit derhand for the system which is reasonably satisfactory for op- spring planting seasor. as armers reduced the erating in a. market environment will develop use of purchased impo s s used own funds to only over the medium term. the maximum e -tanr, 'S7FE`s real loan rate A clearing system involving the electronic decreased from -1 tv morthin lDecember to processingoftransactions isbeingdesigned and -22% per monm-6 - ter climbed to is to be introduced at the beginning of 1991. about 5% pernmo .3K.. r h i- 'farc before declining BFE and the CBs will need to install the nec- again to arou n, 0 pe- mont'n in May.) In- essary equipment to participate in this system, vestment decisic"n s r'- w 'ere postponed. and the CBs will need varying amounts of time BFE has utilized a-y .aWot 70% of its refi- to acquire direct access, but an efficient means nancing ailocation NB-"w- B P although the of effecting payments will become available to general credit - nrsr a-d by NBP may an expanding clientele in the rural sector over have restricted the ' ' s o- 4the allocation. the short to medium term. The current axce's siocks of agricultural Effective credit demand will rise as a result of commodities resu'it4rnf--? f'-rcm f,ctOrs such as the factors such as the elimination of constraints decline in domesic den-and and the inventory imposed by credit plans under the previous management olic-&s of-,_ rmers, processors, regime; increases in relative prices of some anddistributor "ss- psesap %nrentlywereheld agricultural inputs and outputs; expansion of from the markg -'I--- t he 1989 fall harvest private sector involvement in input supply, inanticipation o-fc . -nuef rriceincreases)has output marlketing, and processing; and enter- caused problems for lborrowers and banks. prise restructuring. The potential for mobili- Borrowers were r '-alable to V dpose of surplus zation ofresources to meet this demand appears inventories wh en nc-nial interest rates rose, substantial,providedadequatereturnsarepaid were thereforeu 7lbe t h eir loans, and on deposits and other financial instruments. were forced to in u.-nacc astomed high finance BFE and the CBs can play an important role charges. Banks (n?d'J 3.ng BFS) were left with in the rural sector if they undergo substantial substantial amrmounts ot nonpe-rforming loans. modification. BFE will need to become much This situation will be agg_avted by the 1990 more energetic in adapting to a competitive fall harvest and n eeeds te3 be nanaged carefully market environment and acquiring the capabil- to ensure ethat ad di.on rl burdes are notplaced ity of dealing with the private sector, but it has on the banking syste-in. extensive experience with state and cooperative 234 farms and agro-industrial enterprises, and it provide substantial competition for CBs and has a broad network of branches. It could be a other banks in the field of personal finance. major factor in the restructuring of state and cooperative entities, since it knows their op- Constraints erations and holds their outstanding debt. If BFE is able to overcome its present deficiencies, Financial intermediation. A basic constraint it could develop into a full-fledged commercial is that financial intermediation as known in bank, with a solid base in agriculture and market economies essentially did not exist un- agribusiness but also providing a range of ser- derthepreviousregime. CBsmobilizedresources vices to the public and to commerce and indus- from the private sector but were not allowed to try. determine the allocation of those resources. Because of their roots in the cooperative tra- Instead, the utilization of resources was deter- dition and their integration into the life of rural mined in a national credit plan which allocated communities, as indicated above, CBshave been funds between social and private sectors and able to survive the attempts to incorporate them between production and investment goals. As a into the state control system over the past 45 result, substantial sums were transferred from years. While loan decisions under the previous the private sector to the social sector. BFE regime were made by managers selected with received demand and savings deposits from the concurrence of local party structures and social sector entities but provided a much larger sometimes influenced directly by these struc- amount of credit to these entities. Thus, the tures, and although high repayment rates were financial system served as part of the planning achieved because of CB involvement in the mechanism, and BFE channeled government payment process for state procurement of agri- and private sector resources to the social sector. cultural commodities, the CBs have extensive Financial intermediation in the sense of mobi- experience in lendingfor agricultural production lizing and allocating financial resources in an and investment, craft enterprise requirements, increasingly efficient manner in a competitive and consumption needs. Of particular impor- market environment must now be established tance during the restructuringofthe economyis in the rural sectorin orderto provide households therole CBs canplayin supportingemployment and businesses an opportunity to obtain a sat- generation through the financing of rural busi- isfactory return on financial assets and access to ne s ses. In general, provided adequate funds forviable production/investment activities strengthening is undertaken at the level of and consumption needs. Other sectors should individual banks and a suitable superstructure also benefit, since the rural sector is likely to is put in place, the CBs should be able to provide provide a net outflow of funds. The process of effective services to rural households and busi- introducing financial interrnediation has only nesses. As the superstructure is established, just begun and needs to be accelerated through the CB system can extend its coverage at the measures such as the elimination of agricultural regional and national levels and thus compete credit subsidies and the strengthening of BFE on an equal basis with the commercial banks. and the CBs. Competition for BFE and the CBs The nine commercial banks spawned by NBP needs to be increased through judicious licens- reportedly have started to serve a few of BFE's ing of additional banks, includingforeign banks. former farm and enterprise clients, and are likely to expand their involvement gradually. Subsidized credit. A policy of providing a Other banks, such as Bank Handlowy, Export subsidy to agriculture through the credit Development Bank, and PKO-SA also are be- mechanism would be a major constraint on ginning to finance agro-industries to a limited development of the financial system in the rural extent, and new banks may become involved sector and would have a wide range of negative with agriculture and agro-industry. Overtime, consequences. Itwouldinterferewiththetrans- local banks will be established to serve towns formation of existing banks into efficient fi- and villages. Thus, the commercial banking nancial intermediaries, since they would be system is likely to extend its coverage through- dependent on a flow of government funds and out the rural areas. The system of credit unions would be subject to government intervention, which is likely to be established will probably and the subsidy would preclude satisfactory 235 assessment ofbank performance through profit for financing of private land sales; this can be and other measures. The subsidy would dis- expected to develop with the expansion of the criminate against poor farmers, since it would private land market and to form a significant favor borrowers over nonborrowers and large portion of aggregate credit demand in the fu- borrowers over small borrowers. Furthermore, ture. Resources to meet this demand may be since subsidized credit must be rationed ad- supplied in part by refinancing from NBP, but ministratively, large influential farmers tend to these funds will be limited by the constraints of benefit the most, and the system generally is monetary policy. If agricultural production and subject to abuse. Subsidized credit encourages investment are not to be unduly constrained by farmers to engage in production and investment a shortage of credit, a major effort will be needed activities which are not viable and cannot be to generate resources through deposit mobili- sustained. When the subsidy ceases, farmers zation, as discussed below. Furthermore, the are confronted with the necessity of shifting banking system currently is not prepared to production patterns and may be stuck with meet the private sector credit requirements for unutilized facilities. The incentive of banks to land and enterprises because of factors such as pursuerecoveryofsubsidizedcreditisweakened, the term structure of CB resources, the CBs' as is the credit discipline of borrowers. The lack of experience with enterprise analysis, and public must bear the cost of a subsidy, either BFE's lack of experience with the private sector. through inflation or through taxes. And finally, The institutions will need to develop the capa- subsidies create vested interests which make it bility to meet these requirements. extremely difficult to remove the subsidies, as current experience demonstrates. Substantial Resource mobilization. At present, rural sec- progress has been achieved to date in the re- tor entities tend to invest surplus funds in duction of agricultural credit subsidies, and the tangible assets or foreign exchange, affected in opportunity should not be missed to phase out their behavior by factors such as experience the remaining subsidies, to the long-term ben- under the previous regime, inflation, and uncer- efit of farmers, banks, the government, and the tainty. In addition to the resulting serious public. misallocation of real resources, the banking system is deprived of financial resources which Excess commodity stocks. The situation on could be channeled to viable production and excess stocks was described above. While credit investment activities. In general, banks have to viable borrowers may help to carry these not providecd a positive real return on deposits stocks, care needs to be taken not to burden the and have offered a limited range of financial banking system with additional bad debts. products. Their incentive and capacity to pay a suitable return in the future will depend in part Adequacyofcredit. Thedemandforcredithas on the govemnment's credit subsidy policy. At declined precipitously because ofthe high nomi- least they now have control over the allocation nal and widely varyingreal interest rates which of funds and can expand the range of financial have been in effect since the beginning of the products. year, as noted above, and it appears that the Inthepast,BFEobtainedmostofitsresources supply of funds presently is adequate to meet from NBP and the CBs (15-20% of its resources the reduced demand. It is unclear whether the from CB deposits and over 60% from NBP). In volume of credit was adequate to meet produc- the future, it will need to expand greatly its tion and investment needs previously, because mobilization of deposits from households and offactors such as the restrictions imposed by the enterprises to compensate for dwindling supplies credit plan and the scarcity of inputs. However, from the CBs and NBP and to meet the growing the demand for credit should rise substantially needs of clients in the private sector. CBs no with the return of stability; the gradual ac- longer are constrained in the use of their re- commodation to relative price changes; accli- sources by a national credit plan and therefore matization to market uncertainties; expansion can utilize the deposits formerly retained by of private sector involvement in input supply, BFE to increase lending to the private sector. marketing, and processing; enterprise restruc- However, they will need to expand the mobili- turing, etc. A segment of credit demand which zation of deplosits to accommodate the growing wasvirtually nonexistentpreviously is the need requirements of farmers and rural enterprises, 236 as well as the demands arising from the future evolution of the CB system, but there is privatization and restructuring of state and also an opportunity for the CBs to determine cooperative farms and enterprises. Since indi- their own development. In spite of the deficien- vidual CBs are unable to meet the needs of cies, the CBs appear to have operated reason- medium-size and large clients, some form of ably well within all the constraints and seem superstructure is required to consolidate re- relatively well suited to serve as financial in- sources for lending to these clients. termediaries in the rural sector. Nevertheless, Inadequate institutional capability of existing substantial institution-buildingis required, and banks. BFE has virtually no experience in risk a superstructure is needed. Initiatives are un- management or in assessing enterprise credit- der way and should be supported. worthiness in a competitive market environ- The existing commercial banks have institu- ment. Furthermore, it has only a limited ca- tional limitations similar to those of BFE, and pability of assessing the viability of production they have major problems with their industrial and investment activities since analysis of such and commercial loan portfolios. Theyhave little activities was previously undertaken in a experience in the rural sector, except for their planned environment, with government in- financing of trade cooperatives such as the volvement extending to individual lending de- peasant self-aid cooperatives. Thus, they will cisions. Its network of some 95 branches affords need to undertake substantial institutional national coverage, but all branches are located development programs and resolve their port- in provincial capitals. Thus, BFE presently is folio problems in order to become a significant not well suited to providing full services to the factor in the rural sector. NBP will need to be rural sector and will need to undertake major judicious in granting licenses to new banks in changes to perfoim satisfactorily in that role. towns and smaller cities to ensure that they are Yet BFE does have an institutional basis and viable and are intended to serve a broad range branch network on which to build and could of clients, notjust the owners. No credit unions grow into the role. The process of institutional exist at present, although they might be estab- development has been initiated, but it needs to lished fairly rapidly on the basis of the program be accelerated substantially. now under preparation. The CB system is built on the foundation of previously existing cooperative banks (some of Strategic recommendations the CBs are over 100 years old), but it was decapitated when BFE was formed to serve as A series of measures needs to be implemented to apex institution. In addition to the central strengthen rural finance and integrate it into control which was exerted through BFE, CBs thenationalfinancial system. Theyaredescribed were subjected to the influence of local admin- briefly below in terms of short-, medium-, and istrations in the selection of managers and in long-term time horizons. individual loan decisions. Thus there appears to be a dearth of professional management ex- SHORT TERM pertise in some CBs, and they have retained little expertise for operating within a risky, Phasingoutsubsidizedcredit. Asnotedabove, competitive environment. Information systems there is an opportunity to build on the substantial are rudimentary. The CBs' ability to assess risk progress which has already been achieved and is virtually nil, and their experience in assess- to phase out subsidized credit, thereby contrib- ing the creditworthiness ofenterprises is limited. uting to efficient agricultural development and Portfolios contain loans granted on nonbanking benefiting all concerned (with the possible ex- criteria. Furthermore, defaults were minimal ception oflarger influential farmers who receive under the previous system, and CBs will need to most of the subsidy and who can afford the cost establish provisions to absorb losses on loans of adjustment when the subsidy is removed). granted in a risky environment. The capital of The special creditprogram which wasintroduced CBshasbeen eroded and needs tobe replenished. for the spring planting season with NBP funds (At the end of 1989, the consolidated net worth now has served its purpose and should be termi- of CBs was less than 3% of total resources.) nated. Any further financing from NBP should Since BFE no longer serves as the central union be in the context of the general program avail- for the CBs, there is uncertainty about the able to all banks and all sectors on uniform 237 terms and conditions. In addition, the terms Introducing professional bank management and conditions for the counterpart funds gener- expertise. Perhaps the most important measure ated from the foreign food assistance programs to be taken at the level of the institutions is to should be adjusted to market levels (especially introduce management expertise for operating the interest rate). If the government considers in acompetitive market environment. ForBFE, it necessary to provide support to poor farmers such expertise might be provided through a beyond the benefit they would receive from an small group of advisors with suitable experience increase in demand which would result from, in market economies. At the same time, train- say, a food stamp program, a targeted income ing at foreign banks and banking institutes subsidy might be considered. In any case, the should be provided to existing managers with subsidy should not be provided through the appropriate qualifications and for the next credit system because of the discriminatory and generation of managers. In the case of the CBs, distortionary effects. members need to exercise their rights through the supervisory councils to replace unqualified Financing excess commodity stocks. The managers who were imposed on them under the present situation of excess stocks of agricultural previous regime. Technical assistance for CB commodities may be aggravated at the time of managers should be provided under the foreign the fall harvest. The fixed interest rates now in assistance programs, and training should be effect for the second half of this year, together provided at foreign institutionsandthe proposed with forward prices announced by the agricul- domestic banking institute.3 tural marketing agency, may provide sufficient incentive for farmers and merchants to hold Repatriating profits. At present, returns on stocks, and there may be a case for accommo- foreign equity participation in banks are not dating the resulting credit bulge within the allowed to be repatriated by the foreign inves- macro credit ceilings for the economy. However, tors. While this is not the only obstacle to any losses resulting from the marketing system foreign participation in banks, it is a major one, should be borne by the budget and should not be and it is lilkely that the direct involvement of a burden on the banking system. If this mar- foreign banks will be important to the develop- keting system cannot be introduced in time for ment of a suitable banking system in Poland the fall harvest, the government may need to overthe medium term. Therefore an appropriate utilize budget funds to procure commodities. modification in the legislation should be made to allow the repatriation of bank profits. Commitment of government to reform of rural banks. While the government has indicated its Establishing information systems. Basic in- intention to reform the financial system andhas formation on loan approvals, commitments, dis- initiated a variety of measures at the sectoral bursements, repayments, etc., currently is not level, it needs to reaffirm its commitment at the available in a timely manner for BFE or the level of individual institutions and proceed ac- CBs, and systems to provide such information cordingly. In the case of BFE, the government should be introduced as quickly as possible. A should exercise its rights as majority shareholder major con straint on the collection of appropriate to ensure that prompt action is taken to begin information is reported to be the control which the rehabilitation of the bank. With respect to the Central Statistics Office (GUS) exercises. the CBs, the government should act to promote Apparently, BFE cannot even collect data from their development through such measures as its own branches without having the format ensuring that: obstacles are not placed in the approved by GUS. The relevant regulation way of establishing regional banks; suitable should be changed immediately to remove GUS technical assistance is provided for the from theprocess, and systems shouldbe designed strengthening of CBs and the formation of the and implemented for BFE and the CBs which regional banks; BFE provides appropriate sup- utilize the existing manual and partially com- port to CBs which remain associated with it; puterized capabilities of the institutions. Sub- and associated CBs are not prevented from sequently, more complete management infor- terminating their arrangements with BFE and mation systems should be introduced in con- joining regional banks. junction wit]h the computerization programs. If 238 NBP is coordinating the computerization pro- framework of tvhe bgankin 7aw7 without any grams for banks, NBP should ensure that there special privileges, There area ivaius options for is adequate flexibility for meeting the informa- developing the system (see p endix 13.2), but tion needs of individual institutions. Technical it appears that regioe.al b -n is would best meet assistance should be provided to BFE and the the needs of CBs, ..an.. i'"dtiaives to form such CBs for the design and implementation of the banks reportedly a.re under way in Poznan, information and computer systems. BydgoszcziTorun, and Rzeszow. The regional banks should be foe Ps joint-stock compa- Creating separate BFE and CB structures. In nies, since they th en would be able to attract view of their separate histories, different own- other investors, in I' ding foreign banks. As ership structures (BFE's majority ownership by regional apex insfitutiors for the CBs, these the government), and different sets of clientele, banks would provide access /o NBP refinancing it seems likely that BFE and the CBs will evolve facilities, assist in the ipgrading and comput- into separate institutional structures, and such erization of accownting systemns, provide train- developmentshouldbe encouraged. Somegroups ing for managemre .t armd staff, coordinate the of CBs apparently are in the process of estab- retention of external ud s, etc. (Those CBs lishing their own regional banks, and although which remain associated with BFE during the some 1,400 of the 1,660 CBs reportedly have transition period should _-e__ ve similar assis- signed agreements of association with BFE, tancefromBFE.) Theragonalbanksalso should most of them probably do not have any alter- develop their ow brancl -networks for deposit natives atpresent. Additional groups of CBs are mobilization and for lendingto larger rural and likely to form regional banks over time. In the urban borrowers. Some degree of uniformity in meantime, both BFE and the CBs which remain the regional banks shou]d be achieved for pur- associated with it will benefit from the rela- poses of developing a well-coordinated coop- tionship. Eventually, the separate BFE and CB erative banking system and to facilitate the structures will be in a position to provide a full formation of a national apex institution at a range of financial services to the rural sector, in later stage. hanageaen t information, ac- competition with each other and with other counting, auditiing, and computerization systems banks. should be considered i ti-sr especE. In order to BFE has a base of clients and branches on address C B develcpinent -> stematically at the which to build a separate existence. It should individual bank ard regcnaa levels, it might be focusinitiallyonitstraditionalelientsandshould desirable for a nation-l development program seek to meet the full range of their financial (or pernaps regional progans) to be prepared. needs,includingrestructuringorliquidation, as Foreign cooperative orgaYizations and banks appropriate. It should also give attention to might provide assistance Mo CB task forces in expanding its client base by providing financial formulating sucht progaro Ts. services to larger farmers, processing enter- prises, and trading enterprises in the private MEDIUM TERM sector. Subsequently, BFE should extend its reach to smaller clients and develop its opera- Expanding the s:ppiy &f credit. In the me- tions in other sectors, becoming a full-service dium term, as the price shook fades, stability is commercial bank. BFE's branch network of achieved, the private sector expands, and en- some 95 offices affords it national coverage, terpriserestructilring po,ceeas, he demandfor which gives it an advantage over existing com- creditwiliriseadReDan- ea_swillneedtoincrease mercialbanks. In addition, itwillhave apresence their efforts to meet this demand. They will in towns and villages during the transition need to gie special a .teni to satisfying the periodthrough theassociatedCBs. BFE'sbranch requirements for pu, noises such as land trans- network should expand gradually, in accordance actions and for clents suti, as private sector with its capabilities, to allow it to reach clients enterprises whih wer.e nt significant in the in towns and villages directly. past. BFE probably is n'he best position to The CB system should be completely inde- finance land transaetYona because of the size pendent of government, should determine its and diversificato of l il portfolio, and because own evolution, and should operate within the of its potentiai ab'ilit y I mobilize long-term 239 resources. Such transactions could be financed begin to extend its branch network, as appropri- directly and through refinancing of CB loans. ate. As BFE demonstrates its ability to operate BFE will need to make a substantial effort to on a profitable basis in the new environment, gear itself up for lending to the private sector the government should sell its shares to the because of its previous lack of experience with private sector. the sector and with the assessment of the cred- itworthiness of enterprises operating under Strengthening BFE and the CBs. In order to competitive market conditions. The CBs will operate successfully as profit-oriented, risk- also need to expand substantially their capacity assuming financial intermediaries in a com- for assessment of enterprise creditworthiness. petitive market environment, BFE and the CBs will need to undertake major institutional de- Mobilizingadditional resources. BFE and the velopment programs. The magnitude of BFE's CBs will need to undertake major efforts to task is considerably greater because ofits lack of mobilize additional resources in order to expand experience with the private sector and the the credit supply. In part, these resources will problems of its social sector clients. But the come from foreign sources, in the form of both large number and disparate capabilities of in- equity investments and debt financing, and in dividual CBs also complicates their situation. part from NBP refinancing. But the major BFE and the CBs will need to adjust to the portion will need to come from households and changes occurring in the financial sector, in- enterprises. Savers will need to be provided cluding the introduction of new accounting adequate incentives to hold financial assets, standards and systems, new auditing standards and thus the banks will need to offer a range of and procedures, computerization programs, and products which provide a satisfactory return in prudential regulations. real terms and are suited to the needs of their They also will need to acquire professional clients. Furthermore, banks will need to mount management expertise, as discussed above. In deposit mobilization campaigns to inform sav- addition to the training of managers, banks will ers about the products they have to offer and to needtoprovidetrainingto all staffwhohave the convince savers of the desirability of holding potential to contribute in the new environment. financial assets. Banks can no longer sit and A particular need is training in the assessment wait for savers (or borrowers) to walk in the of enterprise creditworthiness. door. BFE'sloan portfolio problems will be addressed as described above, and the CBs will also need to Restructuring BFE. BFE is likely to undergo review their portfolios, perhaps in the context of a major restructuring as a result of the assess- preparingthe development programs mentioned ment of its loan portfolio (already initiated un- above and the auditing arrangements. der the special financial audit now in progress) CBs will need to replace the BFE audits with and the disposition of loan losses. Its total more permanent arrangements, perhaps by assets have declined about 50% since 1985 in retaining private sector auditing firms to un- constant terms and are likely to shrink much dertakeannualauditsforgroupsofCBs.4 Where further as loan losses are addressed. Current regional banks have been formed, these audit- thinkingisthatBFEshouldbetransformedinto ing arrangements could be introduced in con- a joint-stock company. Additional capital will junction with those for the regional banks. need to be mobilized from the private sector, BFE's capitalrequirementswillbe considered foreign banks, and/or the government so that in the restructuring process. The CBs' need to the bank can initially help meet the needs of expand their effortsto mobilize additional capital largerfarmsandenterprisesand,inthemedium from members to meet their individual re- term, serve larger clients and participate in the quirements and to establish the regional banks. restructuring of social sector farms and enter- CBs can obtain additional capital through direct prises. The capacity to perform this role will contributions, which many CBs are doing at need to be developed through extensive insti- present, and they could also consider converting tutional development measures (described be- aportionofdepositstoequity,aswellasrequiring low). Provided such measures are undertaken, borrowers to contribute a small percentage of BFE would be in a position to expand its op- loans to equity. erations in the private sector and gradually Multilateral andbilateral assistance programs 240 should be utilized to the maximum extent pos- others will have regional local coverage. They sible to provide support to BFE and the CBs in should all operate under the same prudential their institution-building efforts. regulation and supervision of NBP, and they should receive no special support from NBP or Growth of competition. Although virtual the government. Thus, rural finance should be banking monopolies currently exist at the level an integral part of the financial sector. of large-scale (BFE) and small-scale (CBs) ag- riculture and agribusiness, it appears that Creating a national apex for the CB system. A competition is growing under the present national apexbankfor the CB system should be framework and that intervention to promote established, as a joint-stock company with its competition is not needed. The role of the own branch network, to enable the system to government and NBP should be to provide an compete more effectively for large national cli- environment conducive to the growth of com- ents, to mobilize debt resources on a broader petition, that is, to ensure that there are no scale, to facilitate intemational operations, to obstacles to the growth of competition (includ- represent CB interests with NBP and the gov- ing competition from joint-venture and foreign emient, etc. With the establishment of a banks), that new banks are sound, that there is national apex, the CB system would have full effective prudential regulation and supervision, coverage at the national, regional, and local etc. As noted above, the commercial banks levels. derived from NBP are beginning to finance some state/cooperative farms and enterprises; Introducing a comprehensive deposit insur- other existing banks (for example, Bank ance scheme. If a national deposit insurance Handlowy,ExportDevelopmentBank,andPKO- system is introduced, due attention should be SA) are beginning to finance agro-industry; and given to the needs of the CBs and adequate new banks may become involved in both agri- provisions for them should be adopted. culture and agribusiness (two of the new banks seem to be aimed at these sectors). In time, Endnotes regional banks formed by CBs also may provide competition for larger clients. Some competition This annex was prepared by Orlando Sacay and has developed among CBs, BFE, and commer- Gary Luhman, assisted by Andrzej Scislowski, cial banks for medium-scale clients in localized Bozena Chelminska, and Elizeusz Karp (Na- areas, and this competition is likely to increase tional Bank of Poland - NBP); Tadeusz gradually and extend to smaller clients as well. Wyszomirski, Janusz Dedo, and Stefan PKO (savings bank) also might begin to serve Kobylinski (Bank for Food Economy - BFE); smaller clients in agriculture and agribusiness. and Roman Rak (Rural Solidarity). It draws on Furthermore, banks will be facing competition information provided by a number of organiza- in the realm of personal finance from the bur- tions, especially NBP, BFE, the cooperative geoning credit union movement. banks (CBs), and the World Bank. Establishing a commodities market. As 1. NBPprovidedfinancialservicestotrade money, bond, and stock markets become estab- cooperatives, notably the peasant self-aid coop- lished, attention should be directed to the design eratives (Samopomoc Chlopska), through its and introduction of a commodities market to commercial banking department. provide an alternative to negotiated sales of agricultural commodities and to facilitate the 2. The founding organizations generally establishment of prices. were provincial governments in the case of state farms and MAFE in the case of state enterprises. 3. Abankinginstitute is being established Integrating rural finance into the financial at Katowice with assistance from the French sector. In the long term, the rural sector should government and is scheduled to initiate opera- be served by a range of universal, private sector tions in October of this year. banks, among them BFE and the CB system. Some of them will have national coverage, while 241 _.-amber of private accounsrting anrd tional accounting and auditing standards and -ti-ms are being formred, so-rmne as 2oint wil.II form- part of the basis for an action plan to tl- sc e r gn firms. strer gl-ehr. BFE's management, operations, and financial situation. As part of its program for .urther development of the financial sector, the 4 i;0t !i g ^t Fs S$tei5< t governnm'ent is likely to pursue major initiatives fj-0~ ` BI- * ert3gr IETm t',°E9s Future in accounting, auditing, bank restructuring, and bank regticn and supervision. Accounting standardt.5 for enterprises and banks are to be Environment revised to bring them into conformity with in- ternationai standards, as of the beginning of .5"':'.f: " wil'l lie in the environment of an 1991. BF7 -w1ill need to revise its accounting : 9 » .oi-. n r L dawiI and BFE'sa financial 3 da , ndBEsannual f :.s2a.s; fl a Cumpetitive market env.ironment audit wi'H need to conform to these standards. T'iy may go bankrupt). It must T'he progpEarn of bank restructuring is in the y,l e yoth er dom esticbanks (sincebanf.s early stage of design but is likely to have a major >Joryger limtited in the services they can impact on EFE because ofthebank'sformerrole e> sectors they can serve3, f6reoign as chlannel for government financing of social sii ntcreasingly with other types of sector farms and agricultural enterprises and dtutions. And it rust manage its the resui ng potential losses to its portfolio. _ r i7cl i. abilities in the context of the uncer- The BFF notion plan mentioned above will as- , e-.piogdomesticfinanciainmarket5s sist FFE in -meeting the requirements of the 4d.ron 3of international finance. t. res truct u.rit g program. strive hard to survive in this ervn- -;- o -c' ;'IiS not welI-e qui pped to meetth is Strategy and business plan . e resent. BFE's future also will be aUiy oy the government's policy re- At the same time as it is undertaking actions to :D, FIV4D5bs.dized agricultural credit. This address problems of immediate concern, BFE IiS':APszuces that a targeted income subsid5v needs to develop a strategy for achieving its Aati-ye' nondistortionary subsidy will vision anrd a business plan for implementing !ifA the governm ent decides that a that strategy. This process was initiated when _P,r- o:ropermanent subsidycforfarmers is BFE held a conference ofmanagers to discuss its -talsoassumesthattthegovernment3, future development; and now, a concerted, sus- s fejc-A.ority shareholder, is committed to tainedeforlwillbenecessarytoensurethatthe .oJ 'I I ,.E to develop as an effective, efficient, process continues urntil it results in a well- i-.e<.-t -r.e.financialintermediarv. Withinfthis conceived and fully formulated strategy and ; BFE will need to achieve and plan. The special financial auditwill contribute 9I!-jY l-n.ancial viability to survive, to the processby providinginformation on BFE's "inancial situation which is not currently ianeaal seetor adjustment available, recommendations of measures to improve it, and broader recommendations for the nfor restructuring of the financial sector, organization and management. The review of ndhich iis r!arrently under way and will acceler- BFE undertaken by Rabobank under the ate in ike !llture, will require substantial changes Netherlands3' assistanCe program for Poland will in 13'E. In tihe context of the Agroindustries also contribute to this process (the report is trol t Development Project, supported by the expected shortly). ''-wmfl,Bank, a special financial audit of BFh is The capitalization of CBs presently is very low rowers experience in adjust-ing to a atless than 3% oftotal resources, and additional market environment. Furthermnoye, G.6 Inave capital is needed to allow individual hanks to slartedtolend toagriculturai circlecoop Lf-chrJes operate satisfactorily in the new environnient i ch previously borrowed frornm EW d & n6 andtoestablish the regionaibanks. In the short oeasant self-aid cooperatives -hi. term,CBsneedto obtain additional eapital from c-orowedfrom the commercialbanks .......... r-kdnave members, and many have initiated tis proeess av,en assumed previously outstanding byraisingthevalueofsharesfrora the 1 owlevels t hese ooperatives. Since they ha resulting from past inflation. The payment of tliese entities in the past, they may nt be i, d a dividends providing a positive real ret;,r or position to assess properly their credli- ,v- shares would aid this effort. hn the inedium ness. In addition, some of the past me anr d term, CBs might consider requiring borrewers lon-term loans were made at low Inm to contribute, say, 5% of loans to equity. S-uch a tzrest rates wvhich cannot be convaert. -v- V-0 .,r procedure would provide a foundation fr ex- able rates (as was done in the case of the tSocial panding operations at the base and reggirnal sector), and some loans were mac i' ke ts levels, as well as provide capital resources for ofi nonbanking riteria. Therefore, CJR& neecd to establishment of a national apex bank. Capital iu:ndertake portfolio reviews and adoUres i6'-eS for regional banks might be mobilized mn part of cooperative and enterprise resr fromforeignbanks, especially coopera'Vf e abe- ks, (speciallyregardingthe cooperai vesX which also could provide a range of servicee andi osses. In order to ensure the 6 -',eii technicalassistanceforregion,albanisarit eir fiture portfolios, they need t strength n loax CB shareholders. appraisal, supervision, and collect.ion -:i'J Wit-l regard to rnew types ofborrowers), andt a e Deposit mohiliza tion need to establish appropriate provisions ior potgntial loan losses. In order to meet the expanding credit require- ments of existing clients and those of new cli- 24'i' Institutional development audit and retention of auditors. The CBs will need to pay the full cost of these audits as part In order to perform successfully in the new of their normal operations. Initially, because of environment, CBs will need to undertake sub- the adoption of international accounting and stantialinstitutionaldevelopmentprograms. A auditing standards (at the beginning of 1991) major requirement will be professional man- and the lack of experience of domestic firms in agement expertise. In some cases, unqualified performing audits in accordance with these managers have been imposed on CBs for standards,foreignexpertiseislikelytobeneeded nonbanking reasons, and these managers will in the audit teams. need to be replaced by persons with suitable qualifications. Managers and staff with appro- Development programs priate qualifications will need to be trained for operation in a competitive market environment Because of the large number of individual units in a revamped BFE trainingprogramfor CBs, in involved, it mightbe desirablefor a development otherdomestictrainingprograms, and inforeign program to be prepared for the CB system or banks and banking institutes. A particular perhaps for regional groups of CBs (as with the need is for training in the assessment of enter- program beingprepared by the World Council of prise creditworthiness. Policies suited to the Credit Unions). Such a program or programs new environment will need to be introduced, would need to address issues at the level of the particularlywith regard to financial, credit, and CB and of the regional bank, and could provide personnel management. Management infor- suggestions for the national level as well. The mation, accounting, and auditing systems need programs could provide recommendations on tobe upgraded and adapted to the requirements such matters as strategies, preparation of of the banking system, regional banks or BFE, business plans, management, advice, training, and the CBs'individual situations. information systems, capitalization, deposit mobilization, and portfolio assessments. For- Auditing eign cooperative banks mightprovide assistance to CB task forces in formulatingthese programs. The system of financial auditing for the CBs needs special attention. BFEs responsibility Multilateral and bilateral assistance for auditing the CBs was terminated by the recent amendment to the cooperative law, and Assistance for the CBs will come from a variety the responsibility has passed to NBP. However, of sources. BFE will provide substantial assis- NBP does not have the capacity to perform this tance in areas such as computerization and function and has requested that BFE undertake training for those CBs which remain associated the audits on its behalf, for both associated and with it, at least during the interim (although nonassociated CBs. This arrangement is sat- BFE will need to revise its training program to isfactory for the present but should be replaced meet the needs of operating in the new envi- by more permanent arrangements. Private ronment). Various multilateral and bilateral sector auditing firms should be retained to un- assistance programs will have an impact on the dertake the annual audit for groups of CBs. In CBs - the banking institute to be established the case of CBs thathaveformed regional banks, in Katowice with French assistance is a notable the audit ofthe CB shareholders canbeincluded example. A major source of assistance to CBs in the arrangements for the audit ofthe regional that form regional banks could be the foreign banks. For those CBs which remain associated banks which might become involved with these with BFE, BFE can assist regional groups of regional banks. CBs in preparation of terms of reference for the 248 Annex 14 Agrarian structure, land consolidation, and farmland management Current situation farm size distributed indicated in Table 14.1. Wide regional differences exist, tied to the FARM srrRucruRE different history of Poland's regions, to unequal industrial development and to the extensive Polish farm structure (18.9 million ha) is di- multi-plot character of the private sector. Land vided in three sectors: consolidation has been a slow process. While the majority of land is in private hands - state farms (1,300 central units), with 4.1 and production in a number of sectors is prima- million ha; rilyprivate(such asin horticulture andpigs),the * cooperatives (800 central units), with 0.4 extent of the private sector in the overall million ha; and agribusiness system (inputs to consumer) is * private farms (2.7 million units), with 14.4 very limited. Agribusiness in Poland is over- million ha. whelmingly dominated by the state sector. In- puts, as well as marketing, processingand, until The rural population has been surprisingly recently, all retail, were in the state sector. stable since 1950, still representing 40% of the Overall, average farm size in the private sec- total population. Area per person employed in tor is 6.4 ha with the larger of the private sector farming has been steady at 3.8 ha since 1950. farms(those over 12ha-thatis, the top 30% in Over 75% of the land area is privately operated, size) producing 70% of the output of the private with an average farm size of 6.4 ha and with farming sector. Table 14.1 Farm structure Size No. Area Augerage size (ha) ('000) % (ha, million) % (ha) Very small 1-5 1,108 48.7 2.7 19.9 2.4 Small to medium 5-10 692 30.4 4.4 32.4 6.4 Medium to large 15+ 183 8.0 3.3 24.3 18.0 Source: Institute of Agrieultua and Food Eaoics, Wamw. 249 Fragmentation of private sector holdings is PROJECTED CHANGES IN FARM STRUCTURE extensive,with the average size farm of 6.4 ha divided into some three parcels, varying sub- Polish economists forecast that numbers of pri- stantially by region. Regionally, the smaller vate farms are likely to drop by 500,000 by the farms (3-4 ha average) are in the southern part year 2000 (Szemberg, IERIGZ, et al.). Larger of the country with larger farms (15 ha average) farms are likely to expand (farms over 15 ha, in the northern sectors. According to cadastral reaching an average size of 30 ha). Szemberg data, some 4 million persons own Poland's 2.7 predicts over 66% of the farmland by the year million farms. The 110,000 land registration 2000 will be farmed by operators of farms in books contain a reported 30 million individual excess of 10 ha and will constitute 33% of the parcel numbers (Zrobek 1990). private farm numbers. Another group (RGZ) The extent of very small farming is substan- makes a similar projection with small farmers tial, at over 1 million farms below 5 ha. These (below 2 ha) showing a small increase, the 2-10 small farms have remained relatively constant hafarm size declining, and those farms above 10 despite 20 years of land consolidation efforts. ha doubling in number over the next two de- Such farms are likely to persist and, in a rapidly cades. restructuring economy, probably should con- Very small part-time and retirement farms tinue to exist in the short and medium term to are likely to persist, with the major reduction coming in the full-time farming sector in the * foster social stability; range of 4-15 ha. The rate of diminuation is - provide alternative employment, even at projected al; 2% annually, with a drop in culti- low efficiency levels; and vated farmland from this sector of 500,000 ha, * assure household and local food supplies. 3% of the private sector farmland by the turn of the century. Such farms, often with reasonable housing, The result of this restructuring will be an also provided residency for extended families increase in the average size of farms from 6 to 8 whenhousingis scarce in urban areas and likely ha overall in the private sector, the latter being to remain so. the farm size now prevailing in Italy. With These very small farms are divided by Polish unemployment increasing, it is unlikely that sociologists into peasant farms (older farmers labor shortages in most rural areas will be a nearing or at retirement, producing primarily problem. Structural change will be more likely for home and local consumption) and part-time in northern and central Poland compared with farms, or pluri-active farms. These latter farms the south. include 4.7 family members living on the farm, with some working off farm, compared with 3.5 OPERATIONS OF THE NATiONAL LAND FuND family members in the average small farm un- der 4 ha. These pluri-active farms, Dr. Anna Most farmland in Poland continues to be in Szemberg writes, are 'not in conflict in running private hands. The government, however, over the farm and absorb work of those persons the past 40 years, has attempted to regulate which do not find full employment on the family and, at times, to socialize private land holdings. farm." She argues that with limited off-farm The National Land Fund was organized for this employment opportunities and lack of labor purpose, offering private farmers an opportu- mobility due to housing shortages, the sociologi- nity to sell theirfarm, while keeping their house, cal importance of the pluri-active farm sector of to the National Land Fund in return for a Poland will be important in the 1990s. pension at retirement. Surveys ofthese part-time farm families indi- These policies were recently delinked and cate considerable interest in farm expansion, farmers can obtain a pension of 70% of the especially by sons and daughters (Szemberg, normal pension offered without having to sell 1990). their lands; they can transfer the land to a The definition ofthe family farm was changed successor, sell or lease on the private market. in June 1989 to exclude farms below 1 ha from Currently the National Land Fund manages the national farm statistics. This statistical some 800,000 ha, about 50% rented to private redefinition reduced the number of officially farms. The fund manages little land in the more reported farms by some 250,000. populated south and central regions. 250 The fund's acquisitions have been mostly rently leased land to farmers holding the lease poorer Class 4-6 lands, in small tracts, with no title. Remaining land would be placed on the buildings, in some cases in fragmented pieces. market for auctioning to the private farming In 1988, some 58,000 ha were sold to the fund, sector. The problem is that much of the land is often for cash rather than retirement pensions. in areas of low farmland demand. Complete Private market land sales with bank financing elimination of the fund is not favored. were reported as 12,800 ha in the same year. * Continuingthe fund's operations andfocus- Sales from the fund are structured to bidders ing its operations more deeply on the consolida- on favorable terms to local farmers, particularly tion issue, but delinking its role in land for if the parcel, when added to existing parcels, pensions. There was some support for continu- improves the viability of the parcel currently ation of the fund in its current role, but the owned by the buying farmer. About 75% of the majority of the Task Force felt that the fund's sales from the National Land Fund are for farm current role is too passive. enlargement. * Restructuring the fund into a regional land The price ofthe land for sale is set on the basis management and conservation agency. A con- of the value of 100 kg of rye per ha at the official siderable amount of the land held is lower qual- procurement price. The local government ad- ity land which could be beneficially placed in a ministration determines to whom the sale will long-term conservation program, under perma- be made. The Bank for the Economy(BFE) acts nent grass, and in appropriate cases, in a refor- as agent of the state Treasury, receiving a 5% estationprogram. Existinglandholdingsunder margin on each sale. lease to farmers would be converted in lease/ purchase or direct purchase arrangements. Constraints and potential In addition, this restructured and more re- gionally activist regional land management and PRIVATE SECTOR RESTRUCTURING PATTERNS conservation agency could be constituted to ex- amine regional development alternatives, for In order to create a more orderly and market- farming, in villages and in the rural sector, driven land market for private farms, the gov- particularly in regions where it has had previ- ernment will need to take a number of policy ous operational experience, such as northeast- steps. Currently, farm size is limited by law to ern Poland. 50 ha in central Poland and 100 ha in western Poland. These size limits will need to be in- LAND CONSOLIDATION: DIRECTION AND creased and eventually eliminated. To foster RESTRUCTURING improved sales, the government should con- sider selling or leasing land in smaller blocks to Poland has had a long-term policy of land con- facilitate transfer, for example, in blocks of25 to solidation - the so-called policy goal of improv- 50 ha in central Poland and in larger blocks, ing the agrarian structure. Some 40,000 to perhaps at 100 ha, in western and eastern 60,000 hahave been consolidated annually over Poland. the past decade at a cost of some US$15 to US$75 per ha. RESTRUCTURING THE NATIONAL LAND FUND While the smallest farms have also been tar- geted, the principal effect has been on middle- As the government moves the economy to a size commercial farms that depend mainly on more market-driven structure, the private land farming for a living. These farms, ranging in market is likely to develop. This should make it size from 5-15 ha, are declining in number as easier to transfer farmland via sale and lease/ they are consolidated with official support, purchase to the private sector. bought by larger farms (over 15 ha), or pur- Also, as the farmer pension scheme for land chased in exchange for a pension through acqui- exchange is delinked from farmer pensions, the sition of the retiring farm by the National Land rationale for the current role of the National Fund. Land Fund will cease to exist. Alternative roles Until recently, land consolidation was also for the National Land Fund could be as follows: fostered by restricting access to inputs, operat- ing and development credit, and extension ser- * Eliminating the fund, with transfer of cur- vices;by encouragingolderfarmers to retire and 251 sell their land to the National Land Fund in decades in effective rural farm consolidation exchange for a pension; and by consciously not through buying, holding, and then reselling producing the appropriate-size machinery for lands to improve farm structure in France. smaller farms. The overpowered equipment used on medium-size Polish private farms is Land taxation to encourage land consolida- particularly noticeable. tion. Another option to foster land consolidation These middle-size farms (4-15 ha) are still is a land tax. Such a tax has a number of critically important in Polish agriculture, mak- advantages over other forms of rural taxes: ing up 43% of private farms, cultivating 56% of private sector land, and producing over half of * it is easily understood as it relates to physi- private sector output. cally measurable parameters; The larger farms (over 15 ha) comprise only * it is easily administered as land ownership 8% of private farms, but cultivate 25% of the is normally identifiable and fairly static; arableland,thatis, some3.3millionha-about * it promotes the efficient long-term use of a the same as all the state farms in the country. major resource - land; and On many private farms, land is not farmed * rates of land tax can be adjusted rapidly to contiguously, but rather is divided into a num- influence land usage such as implementation of ber of separate plots. Prior to the recent eco- land protection programs. nomic reforms, Polish economists expected certain trends to continue: stability in the Poland has a number ofmajor advantages vis- peasant and part-time farming sector (farm size A-vis a land tax: up to 5 ha), with suchfarms servingasresidences and retirement homes and providing local and * it already has a land tax legislative mecha- family food security; retrenchment in commer- nism in place (albeit not at meaningful tax cial farms up to 15 ha; and some expansion in levels); farm size of farms in excess of 15 ha. With the * it has a land registration system which reforms and with the likely sale and leasing records land ownership; and availability of state in areas of private farms, it * it has a land capability classification system is likely that farmland holdings by farmers which is known to farmers and on which land holdingin excess of5hawill expand, particularly valuation could be based. those in excess of 15 ha. Current structure and equipment in the Land Administering a land tax. Later in this de- Consolidation Group of the Ministry of Agricul- cade, as industrial development stabilizes and ture enables only 60,000 ha to be consolidated the owners of small farms reach retirement, annually. To expand this capability to 100,000 land on these small farms may not be optimally ha annually, modernization of land consolida- used. Even if the land market were to be tion is necessary. stimulated, it is unlikely that there will be real Using the Global Positioning Systems (GPS) pressure on self-sufficient, retiring small farm- methodology will yield the following: substan- ers to consolidate plot holdings or to lease tial time savings (up to 10 times); increased underutilized plots. Realizing the value of land geodictic accuracy; 60% cost savings and multi- through sales is only attractive if the opportu- purpose output in survey, design, cadastral nity value significantly exceeds the emotional specification, and support data for land regis- risks involved in selling and leasing. If, how- tration, mapping output and basic information ever, unused or unprofitable land is a cash for decision makers. The estimated cost is about liability, then farmers will take steps to reduce US$1 million initially for GPS receivers, field that liability. A land tax would apply just such computers, software and digital mapping tech- a pressure. nology. The Task Force recommends that GPS F-urthermore, if the land tax were adminis- technology be introduced to assist in the land tered not just on area and classification (as is consolidation program in Poland. done in most countries), but on classification An institutional linkage with the French and the ratio of perimeter length to area, then SAFER (Society for the Management of Rural pressure wouldbeappliedto(1) reduce longthin Lands) also be might be considered. This society fields to square fields and (2) reduce many small has been most successful over the past two plots into fewer larger plots. 252 ATrITuDEs ON CHANGES IN AGRARLAN STRUCrURE settlement between regions in Poland. Inter- view respondents, especially younger persons, In recent years, surveys of youth, clerk, and expressed interest in exploring resettlement in peasant attitudes to current and potential other parts ofPoland, but included reservations changes in rural agrarian structure were done on how this might be carried out effectively in at Lodz University. This data is currently being the current situation in Poland. updated. In the opinion surveys of these three Finally, surveys indicated a strong desire classes of rural groups, 'all three categories amoung younger farmers and full-time farmers indicated that poorly managed, financially to cooperate more intensively with state farms, stressed state farming operations should be with less such inclination by older smaller-farm restricted and administratively released oftheir farmers. Interest in cooperating was expressed land"(Pilichowski, Lodz University, unpublished for both horizontal and vertical, for example, paper, June 1990). input provision, tractor rental, marketing and, However, Lodz researchers did not find a in some cases, processing. similar consensus on the management of ineffi- As expected, the updated surveys indicated a cient private sector farming operations. The discrepancy of viewpoints: younger farmers consensus ofinterviewed persons indicatedthat and younger persons in rural areas expressed economic pressures (a more active rural land interest in adapting farming operations; and market, support for consolidation and leasing older farmers expressed their desire to main- law changes) rather than compulsion would be tain the traditional production techniques. a preferred solution. The youth and clerk cat- egory of interviewees favored the economic fos- Strategic recommendations and policies tering of smaller farm consolidation, with older farmers favoring intensified intervention and Overall, farm structure is likely to change support to assist such farmers in managing markedly in the latter years ofthis decade (after traditional, diversified farms. 1995), as the state farm management and own- Interviews also indicated that there were not ership is changed, as cooperatives return their strong views about setting land holding ceilings farm production functions to members, and es- (thatis, maximum peasant farmholdings), with pecially as the private farm sector continues to clerks rather than farmers and youth leaning consolidate, both with modest government as- toward farm size ceilings within areas. For sistance and particularly in light of an aging those favoringfarm acreage ceilings, the recom- group of farm owners and as longer-term op- mendation was for ceilings in the farming area portunities become available in industrial and parish not to exceed 3 times the average size service sector development and employment farm in the area. Thus, if average farm size growth. were 10 ha, farm ceiling size would be suggested But from 1990 to 1995, the overall restructur- at 30 ha. However, these views were held by a ing of the nonfarm industrial and service sector minority of those interviewed, with over 66% of will likely create extensive unemployment and interviewed persons in rural areas suggesting related social dislocations in rural areas. that larger farms (in excess of 20 ha) enabled If a similar and simultaneous restructuringin more economic use of factors of production, the major private sector of the Polish economy, improved efficiency, and improved chances of its private sector farm economy, were to take organization. Concerns with availability offarm place, the likely employment and social disloca- labor were seen as limitations on larger farms, tions would be great. Thus, an adjustment and especially those of a mixed livestock and crop- land ownership restructuring strategy, particu- ping nature. larly for the partial divestiture of the bankrupt Younger farmers and younger members of the and financially stressed state farm sector, is rural population also favored continued pros- proposed-one that is especially phased to take pects of land consolidation. The data from the this labor absorption strategy into account. surveys indicated continued support for consoli- A green model composed of small-scale peas- dation, with older farmers being the principal ant and part-time farms would be fostered to category expressing caution on an expanded take advantage of their potential for rural labor consolidation process. stabilization and their low use of farm chemi- Surveys indicated little support for farm re- cals. These very small and part-time farms 253 come under the category of the government's makes the most sense for sustaining short- and developing the so-called green farm model, a medium-term rural employment, for developing strategy to ensure stability of a minimum input, a market for divesting state farm and national sustainable small farming sector and to stabi- land fund lands, and for supporting a private lize the rural labor force during the upcoming sector short- and medium-term strategy of national economic stabilization adjustment pe- employment and income stabilization. riod. For commercial private farms (15 ha and A limited market of chemical-free farm prod- above), farm size is likely to increase duringthis ucts exists in Western Europe and North period as peasant farmers retire and state and America, especially for higher value products cooperative farms sell and lease land for these such as the small fruit sector. This sector should farmers to add to existing holdings. By the end be encouraged with modest government inter- of the current decade, these farmers are ex- ventions, especially in the provision of support pected to number 500,000, accountingfor 70% of to export-oriented small fruit-processing facili- farm output from an estimated 8 million ha, up ties and locally for an extensive network of from the 6 million now currently harvested. market places and market shops. A rural development model is a related strat- For the smallest of these farms, the Task egy to encourage more urban based industries Force recommends continued focus on land con- to expand or relocate into rural areas to take solidation at current levels (in real terms) of advantage of the substantial part-time farm fiscal support from the government, with em- labor force as well as nonfarm workforce. The phasis on improvedtechnical support, especially rural development model of providing incen- through introduction of GIS (computerized geo- tives for industry to locate in rural areas of graphic information systems). substantial off-farm and part-time workers is For the part-time farming sector, in the short being extensively fostered in Western Europe and medium term, such farms are likely to play by the EC. an important labor adjustment role, as labor is It is an expensive strategy and one that may divested from inefficient state enterprises. In- need to be considered later in the decade at the terim encouragement is needed for these farms conclusion of the current stabilization strategy. to act as a labor sponge. The fostering of large-scale production units A diversification model would be encouraged, (1,000ha and upward) of primarily former state- with private farmers farming efficiently, and farming operations, operated with centrally ap- with support for diversification into alternative pointed administrators, using intensive inputs crops and on-farm processing and cottage in- and farming on a relatively large scale, has been dustries. government policy until recent political changes. The diversification model of assisting full- Wide-scale adoption of this model, however, timeprivatefarmersinconsolidatingtheirfarms, has been rejected by the majority of Polish improvingtheir existing crops, diversifyingtheir farmers over the past 50 years. cropping patterns where possible, and adding The Task Force rejected wholesale support of on-farm small-scale processing and cottage in- this production model for the future agrarian dustries has short- and medium-term benefits. structure of rural Poland, with the exception of This has also been called a pluri-active rural continuing to privatize and restructure the model by Polish sociologists. In a time of limited larger, well-managed farms in western Poland financial resources, itfocuses national farm and whose ownership structure and farm-financing rural policy on fostering productive, efficient system would need to be altered (see Annex 7). farming enterprises, enabling them to sell to a For state farms, a major adjustment in both wider range of more competitive market enter- structure and ownership will occur. It is likely prises and to diversify cropping patterns as that at least; 20% of the state-owned farmland market and price signals indicate. area will be leased or sold over the next 5 years Accompanied by policy measures to create a to private commercial farmers, most living near more competitive input industry, and especially these farms. Furthermore, the ownership pat- more modern and competitive market tern will change, with a variety of approaches infrastructure and assemblyenterprises in rural being used to effect the changes. Principally, areas, this pluri-active diversification model the government needs to immediately specify 254 rules for changes from social property to share andland title registration systems as well as the ownership, in keeping with the legal definition financial system to improve sales, transfer and in recently passed privatization legislation. consolidation of land holdings. Income should be stabilized through programs in dairy and pig Phasing modernization. SHORT TERM AND MEDIUM TERM Land sale and lease markets. Critical to the restructuring of the uneconomic state farms Several legal changes are required in the short and cooperatives is the development of financial and medium terms terms to legalize and im- mechanisms to ensure smoother institutional prove the functioning ofthe private land market support for land purchases and longer-term and to foster legal transfers from the public to leaseholds for expanding private farmers, land the private sector: acquisitions to include purchases from nearby state farms and from retiring (green sector) * Eliminate the ceilings on private sector smaller and less economic farms. holding (currently at 100 ha). In the medium term, consider a higher limit perhaps up to 200 STATE FARM SECTOR ha in central and southern Poland and 400 ha in eastern/northern and western Poland. Legal and accounting changes should be com- - Permitfarmlandtobepurchasedbynatural pleted and major management reorganization and legal persons, reducing the requirement of begun. Leasing shouldbe started andprograms farmer qualifications. The point is to enable initiated to begin the sale of lands to local workers on existing state farms to acquire free- private farmers in areas of private land hold- hold or long-term leases on farmland and to ings. In cases of bankruptcy, operations should enable persons, especially younger farmers, to be closed down, with land and equipment leased enter farming. and sold to private farmers and possibly joint- * Establish up-to-date regulations for long- venture partners, or poorer lands allocated to term leasing offarmland to protect the interests conservation and forestry. of the smaller farm sector of renters and to encourage the renters to invest in the farms. NationalLand Fund. Farmland being sold or leased by the National Land Fund should be PRIVATE FARM SECTOR first sold to farmers in the vicinity of the land being sold and should be sold via an auction or Green sector of smaller farms. Stabilization of biddingsystem. Legislationshouldbepassedto this subsector is valuable as it acts as an em- wind down this fund in 1991 and sell and lease ployment sponge. This sector is mainly produc- its assets by December 30, 1995. ing for on-farm consumption and limited off- The organization of the National Land Fund farm local market sales. should be restructured into a national regional Development of an extensive private town landandconservationmanagementagencythat and rural farmer market system will enable this would control the lands in its portfolio of lower- sector to sell directly. While somewhat ineffi- farm quality and place and manage them for cient in longer-term labor utilization, fostering conservation purposes - in both grass and, in direct market sales is also employment inten- appropriate cases, for forestation. Grazing and sive in a period of increasing rural labor unem- forage cutting would be limited to best manage- ployment. ment practices. As part of this restructuring, consideration of Commercial private farming. The 100 ha re- a pattern of organization and structure along striction on size of land-holding should be re- the lines ofthe successful French SAFER (Soci- moved. The government may wish to set some ety for the Management of Rural Lands) might limits on the size of farms to avoid speculation be considered, maintaining direct linkages to and reselling, say, no purchases in excess of 200 SAFERin the interim medium-term period. For ha during the period of privatization. conservation and reforestation programs, link- Steps should be taken to improve cadastral ages to the Bureau of Land Management and to 255 the Forest Service of the United States Depart- * Development of an improved market for ment of Agriculture might be considered. farmland transactions in Poland, especially for smaller parcels. Some limitations on size of Land consolidation. These efforts would in- blocksmaybenecessary on land sales toprivate clude: farmers and new start-up farmers. This would not be a ceiling on size of land holding, but * maintenance and modest expansion (from rather a restriction on the size of parcel which 60,000 ha to 100,000 ha) of current land consohl- the government would be divesting from bank- dation efforts, expansion ofcurrent modest bud- rupt state farms and from national land fund getary levels (in real terms), improvements in holdings. administrative efficiency, and the addition of * Fostering a rural structure of primarily Global Positioning System (GPS) computer family-owned farms of sufficient size (depend- mapping capability. This capital cost will run ing on the region) to assure a living comparable about US$1 million - modest considering effi- with skilled industrial workers in urban areas. ciency gains achieved. * The sale/lease of lands to private farmers of * complete restructuring in a national re- currently leased National Land Fund lands and gional land management and conservation of state farms located in areas of substantial agency; private land holdings. * final sale and lease/purchase of existing * Development of financial intermediaries to lands; and foster land sales between farmers and from * developing possible linkages with external holdings (land fund and state farms) to farmers. groups such as SAFER in France or the USDA's Bureau of Land Management and Forest Ser- Endnote vice. This annex was prepared by August LONG-TEM TRUCURE AND JMPACT oF Schumacher, Jr. (World Bank), Maria Nowak PRoPosALs (Caisse centrale de cooperation economique/EC), Rysard Zrobek (Agricultural University of The impact of the proposals outlined above are Olsztyn) and Andrzej Pilichowski (Lodz Univer- likely to be as follows: sity, Institute of Sociology). 256 Annex 15 Farm production and profitability Current Situation tural land but contribute little to marketable output because they produce largely for their Poland lies in a transitional climate zone, influ- own consumption. Many of the small farms are enced in the west and north by the Western part-time operations with the household de- European maritime climate and in the east and pending primarily on industrial employment north by the Eastern European continental in- for its income. The hitherto inadequate avail- fluence. As a result, weather is highly variable. ability of agricultural inputs and services to Annual precipitation averages between 500 and private farms has been an additional serious 650 mm over most of the plains, and usually limiting factor to agricultural production. more than 60% of rain falls during April-Sep- Despite these limiting factors, Polish agricul- tember. Over some 80% of the country, total tural scientists have had success in developing precipitation exceeds potential evapotranspira- improved varieties of the major food and indus- tion. Relative humidity can be high in the criti- trial crops, as well as in pig breeding and the calhay, cereal and root crop harvesting periods, maintenance of animal health. Polish farmers complicating operations and often necessitat- have proved willing and able to adopt promising ingpostharvest drying. Topographyisgenerally new genetic material and agricultural technol- flat and favorable to farming, but flatness can ogy, as exemplified by the widespread use of lead to poor drainage, a problem affecting about improved large white pigs and the remarkable 50% of Polish agricultural land. Only about 30% expansion of the area under triticale. This is an of Polish arable area is on soils rated as good, entirely new synthetic cereal crop, with which another30%hasmajorinherentproblems. Soils farmers everywhere are unfamiliar, yet in the are mostly light textured, of low natural fertil- space of only 5 years its use in Poland has risen ity, often with a high water table and requiring from zero to 700,000 ha, making Poland the drainage. Soil acidity is serious in more than world's largest producer. Overall, yields have 60% of the soils and requires corrective mea- risen significantly in the last decade: cereals by sures for optimising crop production. Polish 37%, potatoes 10%, sugar beet 17%, and rape- scientists estimate thatthe overall agroecological seed by 69%, the latter with a major transfor- conditions in Poland are about 30% less favor- mation in quality. Changes in yields, areas, and able to crop production than in most Western production are shown in Table 15.1 (more de- European countries. tailed figures, encompassing all the crops and A further limiting factor to agricultural pro- giving percentage changes, are included in the duction is farm structure. More than one half of appendix). the 2.2 million private farms are smaller than 5 These figures, and those in the appendix, ha. These farms occupy almost 20% of agricul- show some important trends. One of the most 257 M.be 5 Changes in area, yield, and Table 15.3 Research and best farm n in a decade yields in Poland, 1986-88 1979-81 1989 Crop Yield Soil Suitability Class Produc- Produc- Winter wheat 6-8 t/ha I - IlTb Ar-ea Yield tion Area Yield twon Rye 5-6 t/ha Mb - IVb CiT,7 GD'SOha ilha 'OOQt 'OOOha tlha 'OOOt Springbarley 5-6t/ha I-lVa Oats 5-6 tlha la - IVb Al!Pr ee ( S 7,875 2.35 18,466 8,377 3.22 26,958 Triticale 5-6ttha Ilaa-IVb LVfheat 1,525 2.76 4,189 2,196 3.85 8,462 Rapeseed 3-3.5 t/ha I - IVa Rye 2,970 2.07 6,166 2,275 2.73 6,217 Potatoes 3540 t/ha Ilb - V -Saliey 1,362 2.62 3,563 1,175 3.33 3,909 Sugar beet 40-50 tlha I - lb , a ts l , 082 2.20 2,387 803 2.72 2,186 1 itice. 2 - - - 649 3.71 2,404 PRa pesee 259 1.62 434 583 2.74 1,597 9L ato'eq 9,347 16.81 39,508 1,859 18.50 34,391 Sugar.i 461 28.99 13,387 423 34.00 14,374 yields to match those of Western Europe, al- though selective support to lime application and to drainage should open the way to higher yields, 'haveinereasedin all crops. both directly and through improving responses rn he gToup of major crops, yield gains have tothe use of other inputs-especiallyfertilizer !,e- en qt si satisfactory in most of the cereals (in and organic manure. grain egumnes, oil seeds, and sugar beet), while In Poland there are considerable yield differ- Che progress in potatoes has been slow and ences between the socialist and the private < sapdoing. However,inrelativetermsthese sectors. The socialist sector yields are superior >7.MrcsI onotprovideanyreasonforcomplacency in cereals, legumes, and potatoes, while the be seen from a comparison with: private sector yields are higher in all the other crops. The socialist sector tends to have supe- ti average yield potential according to soil riority in high input crops with potential for s-Ui3tab _Hcy classes as estimatedbyILUNG(1988) complexmechanization,asshowninTable 15.5. 7Tabl 15.2) These comparisons indicate that there is still , elds aclhieved in research and on best a considerable potential for yield improvement Ma-~.q.-,i--P~ .musingcomplextechnology(Table in cereals; in fact, under conditions of good crop 1e ,; and husbandry the yield of all the four traditional ational yieid averages achieved in some major cereals could be increased within a few D ra-!.3ean countries (Table 15.4). yearsbyatleastl5to2O%.Themajorconstraints appear to be low levels of fertilizer use, and lack 3eCa,.se of its natural resource constraints it of adherence to the optimal agricultural calen- . be orelaistic, however, to expect Poland's dar, particuilarly to recommended sowing dates. The root crop data also indicate a good potential for improvement: a yield increase over the next Table -16.2 Average yield potential by soil 3 to 5 years of at least 20% in potatoes and 10% s .tability classes in sugar beet does not seem unrealistic, pro- (it /h vided the essential inputs can be used in ad- Percentage SoU A,'bt Grass of Pota- i'osd la.d area Wheat Rye Barley Oats toes Table 15.4 Average yields in selected European countries, 1988 1 .06 - 0.4 5.2 4.9 5.2 4.7 N/A (tlha) 11 0.47 0.07 3.2 5.0 4.7 5.0 4.6 30A4 lia 1.49 0.56 10.5 4.7 4.4 4.7 4.3 28.5 Bar- Rape Pota- Sugar Ilb 2.05 14.1 4.2 4.1 4.4 3.9 27.6 Wheat Rye ley Oats seed toes beet IVa 3.26 1.74 22.5 3.5 3.9 3.7 3.6 25.5 IVb 2.42 16.7 - N/A N/A N/A N/A Czechoslovalda 5.3 3.7 4.3 3.3 2.9 20.6 33.6 V 12.97 1.29 20.5 2.8 2.3 2.6 22.6 East Germany 5.1 2.8 4.2 3.8 2.6 25.8 23.3 VI 1.78 0.47 12.4 s1.8 - - 18 Poland 3.5 2.4 3.0 2.6 2.5 18.6 34.1 TL. 14.M7 4.13 100.0 West Germany 6.8 4.2 5.2 4.3 3.1 31.7 64.8 Table 15.5 Yields by sector in 1988 80%, and rapeseed by over 40%, whereas cereal (t/ha) area changed by only 8%. Potatoes decreased by Percent 20%, sugar beet by 10%, flax by more than 60%, difference tobacco by almost 20%, and forage crops on Total Socialist Private (SsIPs) arable land by 17%. Area under vegetables re- mained virtually unchanged. Cereals 2.90 3.41 2.81 +21 Apart from triticale, attempts to introduce Grain legumes 1.55 1.75 1.51 + 16 new crops (sunflower, soya bean, hybrid maize) Potatoes 18.60 21.20 18.40 + 15 Sugar beet 34.10 30.70 34.80 -12 have had little success. While this does not Oilseeds 2.52 2.53 2.52 0 mean that attempts to diversify the agricultural Fodder (roots) 46.90 41.60 47.50 - 12 economy should be abandoned, it suggests that Hay (grasslands) 5.57 4.09 6.00 -32 for the immediate future Poland should continue to capitalize on its comparative advantage by reinforcing research and extension on wheat, equate quality, quantity, and timeliness. An triticale, rapeseed, potatoes, grain legumes, augmentation of the rapeseed yield of at least fodder crops (includingmaize), andhorticultural 10% in the next few years should not be a crops; and that it should strive to improve its problem, providedimprovementscanbe achieved considerable area of poorly managed permanent in crop nutrition, timeliness of field operations pastures. and crop protection. There is good potential for further improvement in vegetable yields, but Constraints and Potential that is more likely to come from expansion of glasshouse and plastic cover technology, and FARM INPUr SUPPUES AND PRICES improved crop protection, than from agronomy. Development of vegetable yields has been sat- Inadequate quantity, quality and timeliness of isfactory over the past decade; increases were inputs are the greatest constraints to higher between 17 and 50% for the six main vegetables, crop production. To the major deficienciesbelong with the exception of tomatoes where yields insufficient quantities of lime for correcting soil doubled. acidity, inadequate amounts of macronutrient The data in the appendix indicate satisfactory fertilizers for proper crop nutrition, and lack of growth of production in wheat, triticale, and pesticides for pest control, certain areas are still cereal mixtures, but only a small increase in isufficiently drained, and some field operations barley, and a sizeable decrease in oats and rye. are still inadequately or inappropriately Rapeseed production has gone up by over 80%, mechanized. The genetic potential of some ex- sugar beet has remained largely unchanged, cellent varieties cannot be satisfactorily ex- while potatoes have decreased by almost 20%. ploited because of all the above reasons, and Among the minor crops, production of grain because ofinfrequent use ofcertified seed. Long legumes has increased about 2.5 times, tobacco intervals of exchange for quality seed exist no- is up by 13%, hops remained unchanged, while tably in potatoes and rye, and mainly in the flax has plummeted by about 60%. Most of the private sector. The private sector also suffers foragecropsincreasedinproduction only slightly, from lack of advice, or infrequent advice, from although the natural pastures and meadows are extension services. Good production technology believed to harbor good potential for increased is available, as is evident from the very satis- production. Total vegetable production went up factory yields achieved in research stations and by almost 24%, while production in greenhouses on good farms. The technical potential for pro- and under plastic cover (representing only 5% of duction increases in virtually all crops does total production) doubled. Fruit production exist and conditions have tobe created so that it shows a mixed picture, with large variations can be properly utilized. betweenyears: applesincreasedmodestly;there Under the centrally planned economy inputs was a strongincrease in sour cherries; butthere were often in short supply, and preference was was a clear decrease in pears, plums, and given in their allocation to state farms and cherries. cooperatives rather than to the private farmers The appendix also shows that during the de- who manage about 75% of Polish agricultural cade the area of grain legumes increased by land. Inputswereheavilysubsidized,leadingto 259 a situation where yield maximization to meet Due to inflation and the removal of subsidies, production quotas, rather than economically input prices have risen sharply, to levels which optimum use of inputs, was the main goal. Thus have led to cutbacks in their use by farmers. in 1988, fertilizer use in the socialized sector These have extended to seeds, most significantly was approximate to the technical optimum to seed potatoes, which represent about 25% of recommended by research, whereas that in the potato production costs. Because spraying private sector lagged far behind. againstpotato blighthas also been cutback, the Experimental evidence indicates technically repercussions on potato yields could be serious. optimum fertilizer (NPK) levels of 250kg/ha, It is also reported that sales of certified cereal and a similar level of lime (CaO) application, seeds have fallen. Since use of healthy seed of compared favorably with actual 1987-80 aver- well-adapted varieties is the foundation of good ages of 183 kg/ha and 178 kg/ha, respectively. yields, and seed is the most environmentally In the case of NPK the 1986 European average friendlyofallinputs,suchaneconomybyfarmers was 230 kg/ha. It is very important to note that seems most unfortunate. where soils are acid, lime and fertilizer must Generally speaking there is a cost-plus rather both be applied or the benefits of the latter will than a cost-saving attitude to assessing farm be small. profitability in Poland; consequently, little data Fertilizer application in Poland is not well is available to show how costs could be reduced balanced in terms ofthe elements applied, mainly without reducing productivity. Some privately due to weaknesses in formulation by manufac- sponsored research suggests that considerable turers. There are also very large regional dif- economies are feasible in tillage and seeding ferences in levels of application, with those in practices (seed rates seem high, seed treatments the eastern regions being much lower than in inadequate, and plant populations are often the central and western regions. Evidence as to unsatisfactory), that wider use of herbicides the optimum economic levels of use is lacking, could have a high payoff (weed populations are reflecting serious weaknesses in economic re- generally toohigh and treatment costs relatively search throughout Polish agriculture, as well as low), and that possibilities of combining herbi- the production-orientedmentalityofthe socialist cide and fertilizer application and introducing sector. Much therefore remains to be known integrated pest management (IPM) practices before the real potential contribution offertilizer should be explored. Since the current dilemma and lime to agricultural growth can be deter- facing the government with respect to farmers mined, although theoretically it appears con- is to a great extent one of how to improve or at siderable. This knowledge has to be developed least stabilize farm incomes in the face of rising in relation to specific agroecological zones of input costs, without restoring subsidies or in- Poland and farming conditions, and notto broad creasing prices to consumers, cost-reducing national averages or administrative units. approaches should be accorded high priority. Pesticides vary in importance with crops, but herbicides are likely to have a high payoff in LMTATIOs IPOSED ON PRODUCTIIY BY FARm view of the high levels of weed infestation in SIZE AND STRUCTURE most crops, especially in cereals. Andfungicidal seed treatments are one of the most effective as There is also considerable scope for reducing well asthe cheapestmeansof controllingseveral costs, without reducing yields, through more important cereal diseases. Neither herbicides effective mechanization. On unmechanized nor seed dressings are used widely enough- holdings labor costs are higher, and timeliness only about half of the cereal area receives seed of practically all farm operations is more diffi- treatment. This seems to be largely a question cult to achieve - thus, losses are higher both of lack of suitable low volume sprayers for her- during the growing season and at harvest. In- bicide application and of cheap, simple on-farm efficiently designed and serviced machinery, as equipment for seed treatment. Efficient and is the case in Poland, also leads to higher costs safe spraying, particularly of herbicides, is dif- and reduced yields. ficult on small, fragmented holdings, and the The advantages of scale for crops which ben- scattered nature of fields make custom opera- efit most from mechanization (cereals, legumes, tions unprofitable. sugar beets, potatoes) are apparent when yields 260 on large farms in the socialist sector are com- ing operations were at a premium. pared with those in the private sector, where At present these industries have largely been over 50% offarms (1.2 m) are under 5 ha in size. uncoupled from state support, and some are No other large European country has such a having crises of liquidity, as well as worker- high proportion ofsmall holdings. This is another management problems. Their equipment is reason for the lower average yields in Poland, oftenobsoleteandunsuitedtoqualityoperations and one which is less within the power of indi- and their ability to provide effective market vidual farmers to address than other problems linkagestoprivatefarmersisquestionable. Lack of input use. of modern processing capacity for oilseeds is a The future of both the large state and coop- bottleneck to the expansion of rapeseed pro- erative farms (24% of total cultivated area) and duction and thus to increasing home-produced of farms under 5 ha (20% of area), is in doubt; suppliesofconcentratedfeedforlivestock;while however, nearly 60% of the area is under larger the extremely low extraction rates of sugar from private farms, on which the future of Polish beetmaketheupgradingofprocessingstandards agriculture depends heavily. Atthe lower end of a prerequisite for the success of any attempts to their size range there are opportunitiesfor multi- increase sugar yields by breeding. farm-use machinery, but its economics are The weaknesses of the processing industries problematic where farms are fragmented, with are particularly obvious in the livestock sector, small, scattered, and awkwardly shaped fields. especially with respect to milk, and are well Priority must be given in machinery design (or described in annexes 20 and 21. The inability of import policy) to meeting the requirements of the individual dairy cooperatives to finance their such farms, and particularly of custom opera- own stocks at relatively high interest rates tions on smaller units of land. In addition, following the abolition of the cooperative dairy agricultural land and tax policy mustbe directed union and the fall in demand following reduction to action which leads to amalgamation of hold- of the consumer subsidy on milk, have had ings, consolidation of plots, effective custom repercussions throughout this critically impor- operation and other measures which provide tantagro-industry, with farm-gate pricesfalling economies of scale in farming. dramatically and lower purchases by the pro- cessors. Consequent slaughtering of dairy cows MYARKETING AND PROCESSING BOTTLENECKS has caused a corresponding fall in beef prices. Export opportunities for milk are limited by Under the command economy Polish farmers poor quality and lack of an effective export depended very heavily on state-controlled organization. The potential for exports ofpork is marketing and processing outlets for the sale of restricted by inefficiencies in the meat-pro- their products. In the crop sector wheat, rye and cessing industry; and both pig and poultry barley among the cereals, and sugar beet, production is hampered by poorfeed-processing rapeseed, flax and tobacco among industrial andmixingindustries. Theissues are discussed crops are all processed; only potatoes, food le- in more detail in Annex 20, but it is clear that gumes, and horticultural crops can be marketed the built-in inefficiencies of obsolete equipment directly. Even more important, 70% of crop under capacity operation, and lack of quality in output is fed to livestock; and sales of milk feed composition, are now being reinforced by productsand meat are almost entirelydependent problems oftransition from a command to a free on an organized marketing and processingehain. market economy, which are similar to those Under the socialist system all agricultural affecting the dairy industry. Processing margins input manufacturing and agroprocessing in- have become excessively high as inefficient dustries were state-controlled, and some of the plants try to maintain liquidity in the face of latter were owned by state farms or cooperatives. decreased demand for element feed in an Although they tended to give preferential unsubsidized economy, leading to further mas- treatment to farmers in the state sector rather sive cutbacks in demand by producers. The than to private farmers, they seem to have situation is likely to get worse in the short term, provided reasonably secure markets at state- before rationalization and upgraded technology controlled prices. Neither quality ofproductnor restores competitiveness and efficiency to a cost-effectiveness and profitability of process- streamlined industry. 261 For the livestock industry it is clear that the strategic orientation toward supply ofbasic food rationalization of the feed industry, and the for the population and provision offeedstuffs for improvement of supply management and mar- animal production should continue. Presently, kets, are sine qua non to the intensification of about 70% of crop production (including cereals smallholder animal production and the im- and potatoes) directly or indirectly supports provement of economic standards of production livestock production, and the rest is essentially on medium-size farms. For crop production, the used in human consumption. Whether these upgrading of processing standards is no less proportionsshouldremainastheyareorwhether essential, even though the social effects of in- there shouldi be some changes should be deter- efficiency in the main agro-industries are not as mined entirely by market forces. immediately obvious. For the agricultural sec- In technical terms, there is a case to be made tor as a whole, the magnitude of the inefficien- for a number of crop interventions (summarized cies of input and machinery manufacturing and in the table below) which should be tested eco- the product marketing and processing industries nomically, including: is the major obstacle to exploiting the potential for improving productivity and promoting effi- * concentrating cereal development mainly ciency at the farm level. on intensification of wheat and triticale because of their good adaptability to Polish conditions PROBIEMS WITH OTHER SERVICES TO and high yield potential; AGRICULTURE * expanding the production of double-zero rapeseed, while developing varieties with even Most services to agriculture are state controlled better winter hardiness, disease resistance and and either fully state financed or heavily sub- yield potential (accompaniedbyacorresponding sidized. They are also overstaffed. These gen- expansion of crushing capacity); eral comments apply to the research, extension, * concentrating potato production in the most veterinary and artificial insemination (Al) ser- suitable agroecological areas, usually outside vices; although in 1990 farmers have been ex- the wheat and sugar beet zone, and increasing pected to contribute 40% to the costs of Al, and yields through better supply of high quality consideration is being given to privatization of seed, crop nutrition and plant protection. The health services like clinical interventions and potato development program must include vaccinations. breeding high yield varieties with much better The strategy recommended for institutional blightresistance;betteradapted mechanization, developmentis describedin detail in the annexes notably for the private sector farmers who are on research, extension, livestock development the major producers (over 90% of area and and mechanization and will not be repeated at production); and improved marketing services length here. However, in each case substantial and processing facilities; restructuring and streamlining of the service is * concentrating sugar beet production in the proposed, involving consolidation of resources most favorable agroecological areas, breeding and a reduction in staff numbers. The objective for high sucrose content as well as yield, im- is to make the most efficient use of scarce re- proving marketing through introduction of dif- sources, rather than simply to achieve financial ferential payments based on sucrose content; economies, by creating modern management and improving processing facilities, which are structures, eliminatingredundant or ineffective reported to have extremely low sucrose extrac- components of the system, strengthening coor- tion rates of around 12%, while the cultivated dination within as well as between services, and beethybrids are yieldingaround 18% of sucrose; improving linkages between national, regional * increasing the grain legume area, notably and farm levels. Suggestions are also made in private sector farms, from the present 1.1% concemingthe scope for and possible approaches (the socialist sector has 6.4%) of arable land, to to privatization of support services to farmers. at least the national average of 2.4% in order to provide more high value vegetable proteins for STRATEGIC CONSIDERATIONS human and animal consumption and to improve soil structure and fertility; a simultaneous im- Because of Poland's lack of comparative ad- provement in mechanization technologies will vantage in export crop production the present be required, notablyfor the private sectorfarms; 262 * paying more attention to grassland man- sions as to which enterprises orj ia,ani'g sys- agement (natural meadows and pastures) tems are profitable, as a basis for suggesting through better research, crop nutrition, and guidelines for future agricultural statiegy, it is introduction of appropriate harvesting and con- nevertheless all the more necessary to ateempt servation techniques; to do so. Therefore, as a concluding section o * exploringthejustificationforincreasedpro- this annex, a brief review of the probable re- duction of some of the more important minor turns to certain key enterprises and farming crops having either an export or export substi- systems in Poland is presented, based on a tution potential, such as malt barley, hops, model developed by the Agricultural University tobacco, flax and hemp; and ofWroclaw,usingmid-199OPolishproduetprices * increasingproductionofvegetables,flowers, and July 1990 input prices derived from inter- fruits and berries, with a view to supplying national sources and applicable to Poland. potential increased domestic demand, and cap- turing some of the nearby export markets. NATURE OF THE ANALYSIS * The following table summarises the major priorities in crop production up to the year 2000. The calculations were based initialiy on simall private farms of 10 ha or below, wbiehl represent 40% ofthe agricultural land in Poland, and 78% Crop Area Yield Processing of all private farms. Farm sizes of 6 ha 'abrzf the national average farm size), and 10c ha (a Wheat + ++ + likely minimum target size for the futu re) we Fe Triticale + ++ + selected as the basic units of analysis. If eE Other cereals - + + terprises or farming systems did not appear Rapeteed + + +++ profitable at either of these two farm. si;es, e Sugar beet - ++ + analysis was extended to define the minimunrnum Grain legumes ++ ++ ++ size required for a farmer to break even, using Fodder cropss +. + ++ the same parameters for inputs, yields and (incl. grassland) prices. Scenarios are presented in rela Icn "L Vegetables, fruits selected 6 and lOhafarms, both for odad fr poor (predominantly acid) soils. As discussed earlier, Polish farmers do have as wide a range of enterprises X choase These priorities will have implications for from as farmers in countries with more beign research and extension, investments in climates and better soils. The cropping pattai-n agroprocessing, and input supply and services. is dominated by cereals, with nearly all of tihe Greater efficiency in production and processing remaining arable land taken up by fodder erops, will enable Poland to meet its food and feedstuff potatoes and industrial crops. Thus the L$ farm demand at lower unit costs. types discussed here are based on a fairly nar- row range of typically grown crops; the majority Farm Profitability in Mid-1990: A also have a major share of their crop output used Preliminary Analysis for feeding home-reared animals, p-rincipally dairy cattle and pigs - the two main livestock Agricultural profitabilityhasbeen affected since enterprises. 1989 by devaluation of the zloty, rising prices of No attempt was made to introduce exotic farminputsandmachinery,removalofsubsidies, crops or livestock into the farm models since, at high interestrates, andfallingconsumerdemand leastin the short term, they wouldbe unlikely 'o for farm products by urban consumers. The improve returns to farming on a significant situation has become so volatile that it is diffi- scale. However, it was considered worthwhile to cult in July 1990 to make valid comparisons examine farms where there were no animals, as with 1989 or even the first quarter of 1990; the well as various combinations of crops and live- actual status offarmers' incomes, compared, for stock, and situations where animals were sup- example, with the earnings of an industrial ported entirely from home-grown proiuce re:z- worker, is a matter of controversy. sus those where the bulk of their feed evas 'Thus, although it is hazardous to draw conclu- purchased. 23 RESULTS four farms yield only a marginal profit of ZI 380,000 (US$40) a month or less, and all of the Profitability is defined as total costs, including remaining nine farms lose money - up to ZI 15 interest and amortization, minus total revenue million (US$1,578) a year in one case. during one year. All labor is assumed to be * Choice of enterprises and quality of man- provided by the farm family. It is important to agement may be a more important determinant note at the outset that the results are valid only of profitability than farm size. Three of the six to the extent that the relative price structure most profitable farms are only 6-hectare units; does not change significantly. Price instability two are 10 hectares and one is 12 hectares. resulting from changes in import duties, taxes, However, for farms with the same basic enter- removal of subsidies, devaluation, etc., or from prise mix there are indications from sensitivity overproduction within agriculture will obviously analysis that increasing unit size leads to in- have immediate impact on the profitability of creasing net returns. This seems to be due to enterprises. economies of scale, particularly with buildings, The results are summarized in Tables 15.6 labor, and machinery use, although these gains and 15.7 for 18 model farm situations. The maybe lost or reduced when increasingunit size salient points are the following: forces management to add new buildings or buy more equipmnent to cope with the additional 3 Even at present prices and input costs it load. appears possible to make a living equivalent to * Quality of soil is probably more influential that ofan industrial worker from a small private on profitability than farm size since it not only farm in Poland. Five of the 18 model farms holds down yields, but may also force manage- achieve a net profit of ZI 712,000 (US$75) a ment to restrict the choice of enterprises. There month or more, up to ZI 1.9 million (US$200) a is only one poor soil farm in the top six farms month on the most successful unit. Another that yields a reasonable living wage at current Table 15.6 Specifications of model farm units: farming systems and financial returns Animal units Crop units (ha) Finandal data (M Zl) RyeI PeasI Farm Sdil Farm triLL- Sugar Rape- faba Grass Gross Total Number type size Cows Pigs Wheat Barly cae Potato beet seed bean FDder land income costsb:) Pefit Lose 1 good 10 - - 3.3 3.3 3.3 na na 3,987 2 good 10 5 - 2.0 2.0 2.0 2.0 2.0 32,723 39,167 6,444 3 good 10 5* 1* 2.0 2.0 2.0 2.0 2.0 46,761 53,610 6,849 4 good 10 5 1 2.0 2.0 2.0 2.0 2.0 41,898 40,341 1,557 5 good 10 5* 3* 2.0 2.0 2.0 2.0 2.0 64,300 51,971 12,329 6 good 12 4 - 6.0 2.0 3.0 2.0 54,031 45,663 8,368 7 poor 10 3 - 4.0 2.0 2.0 2.0 22,473 36,611 14,138 8 poor 10 3* 1* 4.0 2.0 2.0 2.0 34,899 46,744 11,845 9 poor 10 3 1 2.6R 2.0 2.0 2.0 32,009 37,832 5,823 1.5T 10 poor 10 3 2 l.OR 2.0 2.0 2.0 41,559 38,589 2,969 3.oT 11 poor 10 3 3 4.OT 2.0 2.0 2.0 52,265 42,244 10,021 12 good 6 1 - 2.50 1.25 1.25 1.0 19.505 28,277 8,772 13 good 6 2 1 1.86 1.14 1.00 2.0 29,085 30,422 1,336 14 good 6 2 2 0.7 2.3 1.0 2.0 37,727 31,214 6,513 15 good 6 - 2 1.6 2.3 1.1 1.1 36,807 27,725 9,082 16 good 6 - 4 2.0 2.0 2.0 56,152 33,663 22,489 17 poor 6 1 - 3.0 1.5 0.5 1.0 12,741 27,775 15,034 18 poor 6 1 1 2.OR 0.5 1.0 22,092 27,963 5,871 1.6T l.OT 264 Table 15.7 Order of profitability: 18 farm models Percent Ranking Total costs area as percent Farm Soil cash Gross Total ofgross Gross Number Type Size Cows Pigs crops income costs income returns Comments 16 good 6 - 4 0 2 10 60 +25.5 All crops fed to pigs; legumes improve feed use; no grassland 5 good 10 5 3 20 1 2 81 +13.3 Wheat sold 11 poor 10 3 3 20 4 5 81 +10.0 Rye sold; no grassland 15 good 6 - 2 43 9 18 75 +9.1 Wheat and rapeseed sold 6 good 6 2 2 12 8 12 83 +8.4 Wheatsold 14 good 12 4 - 66 3 4 85 +6.5 Wheat and sugar beet sold 1 good 10 - - 100 0 0 - +4.0 Wheat, sugar beet, rapeseed sold 10 poor 10 3 2 10 7 7 93 +2.9 Rye sold 4 good 10 5 1 20 6 6 96 +1.6 Wheat sold 13 good 6 1 - 42 13 13 105 -1.3 Wheat sold 9 poor 10 3 1 25 12 9 118 -5.8 Rye sold 18 poor 6 1 1 33 15 15 126 -5.9 Rye sold 2 good 10 5 - 20 11 11 120 -6A Wheat sold 3 good 10 5* 1* 20 5 1 115 -6.8 Wheat sold; feed bought 12 good 6 1 - 42 16 14 145 -8.7 Wheat sold 8 poor 10 3* 1* 40 10 3 134 -11.8 Rye sold; feed bought 7 poor 10 3 - 40 14 10 163 -14.1 Rye sold 17 poor 6 1 - 50 17 16 217 -15.0 Rye sold * Feed for livestock purchased. prices, and five out of the seven poor soil farms efficiency of feed conversion by including a le- are among the eight least profitable units com- gume in the rotation to provide high protein. pared with only three of the 11 good soil units. The number of pigs in a farm unit is thus Where farms of similar basic type are delin- directly related to profit or loss. It should be eated on both good and poor soils (models 12 & noted, however, that small family farms are 17: 13 & 18: 2 & 7: 4 & 9), the returns from the likely to be very vulnerable to the pig cycle: a farms on poorer soils are consistently and sig- 15% price reduction per kg of meat reduces the nificantly inferior. Both of the profitable poor return perpigby 20%, andmakes aconsiderably soil farms are 10-hectare holdings, and neither greater difference (nearly40%)to the netprofits is as profitable as the nearest good soil com- from a 6-hectare, 2-pig holding with no cattle parator unit. In general it seems to require at (see Figures 15.4 and 15.5). least 10 ha of land on poor soils to produce a * Increasingthenumberofcattleonaholding return equal to most 6-hectare units on good does not have a beneficial effect comparable to soils. The number of animals which can be kept that of increasing the number of pigs. Among on a better soil farm seems to be the principal the six least profitable farms, two have 5-cow factor determining profitability, especially with units, and two are 3-cow units. The profitability respect to pigs. of farms with the same number of cows is de- * At prices around 820 Zl per kg of meat, pigs termined largely by the number of pigs on those are, at the moment, the most profitable enter- holdings, decliningprogressivelyas the number prise for smaller farms, and dairy cattle are of pigs decreases - whether on good or poor probably the leastrewarding. The top five units soils (see farms 5, 4 and 2 with 5 cows each on in terms of net profits all have at least two pigs; good soils, and farms 10, 9 and 7 with 3 cows and all of the bottom 50% have either no pigs or each on poor soils). It shouldbe noted, however, only one pig. The most successful farm by far, that the value of animal manure has not been with profits nearly twice as high as the next included in the analysis. best, has four pigs fed entirely off 6 hectares, * Farms that purchase the bulk of their feed with no cattle, and no crops sold. It has the for livestock are less profitable than similar second highest gross income, but only the tenth farms that grow all their own feed. highest cost - partly the result of increased * Only one model 10-hectare farm on good soil 265 was assumed to have no livestock with all crops sion work on efficiency and cost saving rather being sold. The net profit on this farm was than the yield maximization and cost-plus ap- modest (about 4 million Zl), placing the farm proaches that have prevailed under the com- seventh of 18. Figure 15.6 presents the profit- mand economy. ability of an arable farm with no livestock and shows that below 8 ha all such farms would lose A CAUTIONARY NOTE money. To achieve a profit of about 1 milllion ZI per month a farm area of 14 ha is needed. The While these findings indicate that farm model- 6-ha farm would lose about 4 million ZI annually ling can be valuable in determining the actual or compared with a 6-ha arable farm with two pigs potential productivity of crop, livestock, or whole- (see Figure 15.5) where, at a pig price of 800 Zl farm enterprises as an aid to formulating price per quintal, a profit of almost 9 million ZI per structures and other policies, it is important to annum can be achieved. Analysis of individual bear in mind its limitations. The results of crop enterprises suggests that at current input- modelling are heavily dependent on the as- output price relationships and on good soils, sumptions made concerning crop and livestock wheat and rapeseed are profitable with break- yields, input-output relationships, and the lev- even points well below existingproductprices of els of investment needed in buildings, equip- 73,000 and 125,000 ZVq respectively (see Figures ment, and imachinery, which determine fixed 15.2 and 15.3). The current potato prices are costs. Unstable price relationships in a volatile already below the break-even point at 12,600 socioeconomic situation imply that the model ZI'q (see Figure 15.1). Rye appears to have a parametersmustbeupdatedfrequentlytoavoid rather low profit margin at 57,000 Zl/q, since its misleading conclusions. It is difficult to cover yields are lower than those of wheat; triticale at adequately all current permutations of crops, a slightly higher price and with higher yields is livestock, and farming systems in a large and in a more competitive position. Returns from a fairly diverse country such as Poland and even grain legume such as peas, with a current price harder to foresee potential new situations sev- about double that of wheat, would be below eral years aLhead. Thus the results, although those from wheat, because grain yields of le- interesting, should be treated with caution as gumes are only about a third of those of modern indicative rather than definitive. The analysis wheat varieties. However, the value of the described here illustrates the principles of de- nitrogen supplied by the legume, and its role as cision-making based on models. Research and an improver of feed conversion ratios in the extension in all voivodships should be equipped animal feed-mix should be taken into account in with similar models and desktop computer fa- the calculations. cilities to allow farmers and advisers to make * One other interesting point emerges from their own decisions based on quantitative data the analysis. Table 15.7 shows the rank order of rather than intuition. the various farm models in terms of gross income and total costs, as well as net profits. It seems that some of the most successful units have Endnote achieved their net profits more through main- taining relatively low costs than through high This annex was prepared by Marian Krol, gross income. This strongly supports the strat- Andrzej Kolodziej, Oskar Honisch, Peter Oram, egy recommendations for research and exten- John Hayward and Wales Mack. 266 Figure 15.1 Profitability of potatoes on Figure 15.2 Profitability of wheat on good soils good soils (X 100) (X 100) 16 21 N13 N2 1 19 10 d 17 1 60 15 -2 ____________________11 12 14 16 18 20 -9 Price (thousands Zl Iquintal) 50 54 58 62 66 70 74 PPice (thousands Zllquintae) Figure 15.3 Profitability of rapeseed Figure 15A Profitability of pigs (X 100) 21 18 19 15 17 12 .215 600So0 600 700 800 900 60 80 100 120 140 Price (thousands Z I kquinta) Price (ZIIkg) Figure 15.5 Sensitivity of a 6 ha farm to Figure 15.6 Profitability of arable land the changes in pig prices with no livestock 10 16 8 ~~~~~~~~~~~~~~12 N 6 4 *~ 8 A 24 500 600 700 800 900 6 8 10 12 14 16 Price (Zl /kg) Hectares 267 Appendix Crop area, production, and yields (1980 & 1988) Crop Area Development ('000 ha) 1980 1988 9 Total cereals, 7,847 8,439 + 8 of which: Wheat 1,609 2,179 + 35 Rye 3,039 2,325 - 25 Barley 1,322 1,250 - S Oats 997 85D -13 Triticale 0 549 (new crop) Mixtures (grain) 737 1,185 + 61 Maize 16 40 +250 Grain legumes 188 339 + 80 Potatoes 2,344 1,866 - 20 Sugar beet 460 412 - 10 Oilseeds (99% rapeseed) 336 478 + 42 Flax 82 31 - 62 Tobacco 52 42 - 19 Hops 2 2 0 Forage crops 2,628 2,188 - 17 Production ('000 t) 1980 1988 % Total cereals, 19,495 26,504 + 36 of which: Wheat 5,089 7,582 + 49 Rye 6,474 5,501 - 15 Barley 3,560 3,804 + 7 Oats 2,434 2,222 - 9 Triticale 0 1,731 (new crop) Mixtures (grain) 1,710 3,387 + 98 Maize 165 204 + 24 Grain legumes (edible) 81 1013 + 33 Grain legumes (fodder) 143 457 +220 Potatoes 42,742 34,707 - 19 Sugar beet 14,149 14,069 - 1 Oilseeds (99% rapeseed) 655 1,206; + 84 Flax 273 108 - 60 Tobacco 80 90 + 13 Hops 2 '2 0 Forage crops 9.055 9.867 + 9 Yield (q/ha) 1980 1988 % Total cereals, 24.8 29.0 + 17 of which: Wheat 29.3 34.8 + 19 Rye 21.6 23.7 + 10 Barley 27.6 30.' + 10 Oats 22.8 26.:L + 14 Triticale n.a. 31.5 (new crop) Mixtures (grain) 25.5 28.6 + 12 Maize (grain) 38.4 53.1 + 38 Grain legumes (edible) 15.6 20.0 + 29 Grain legumes (fodder) 10.8 16.0 + 48 Potatoes 177.0 186.0 + 5 Sugar beet 280.0 341.0 + 22 Oilseeds (99% rapeseed) 19.5 25.5 + 31 Flax 32.8 34.6 + 5 Tobacco 15.9 21.6 + 36 Hops 10.0 10.6 + 6 Forage crops 352.0 469.0 + 33 268 Annex 16 Soil fertility, acidity, and requirements for fertilization Current situation rily natural gas from the Soviet Union and phosphate rock from North Africa, the Soviet Soils in Poland generally have poor fertility. Union, and the United States. Potassiumfertil- Basic nutrients such as phosphorus and potas- izers are imported in finished form from Ger- sium exist at low levels and have to be regularly many and the Soviet Union. Calcium products supplied. Soil organic matter content is low and are readily and easily available in Poland but a regular supply of manure is required to keep their wider use has been hampered by con- organic matter at an acceptable level. Micro- straints in processing and distributionfacilities. element deficiencies are not common at present Organic fertilizers, mainly farmyard manure yields but potential shortages of boron, zinc, (FYM), deserve particular mention. FYM's pe- manganese, copper, molybden and iron may riodic but regular application in required occur to certain crops in some soils. quantities is of the utmost importance to farm An extremely serious problem is soil acidity. production, particularly on the lighter textured Over 26% of all arable soils are classified as very soils. FYM increases organic matter content of acid (pH 4.5 or less) and another 35% are acid soils and provides conditions for better tempo- (pH 4.6 to 5.5). Such soils are largely predomi- rary storage of nutrients and a more gradual nant in northwestern, south-central and eastern release of macro- and microelements; it delivers parlts of the country and reach levels of more around 5-6kgofN and 3-4kgeach of P205, K20 than 80% of arable land in some voivodships. and CaO, and about 1.5 kgMgO per ton applied. Soil acidity has anegative effect on two accounts: FYM further improves soil structure, first, it limits yields because of a lack of CaO as waterholding capacity, and microbial activity. plant nutrient; second, and more important, it Although FYM is widely used, particularly in limits efficiency in uptake by plant roots of other the private sector, it appears that through bet- nutrients. Many soils are deficient not only in ter education of farmers and more efficient calcium but also in magnesium, and additions of distribution equipment the efficiency and ef- substantial amounts of dolomitic limestone are fectiveness of its use could be improved and essential for full utilization of applied fertilizer nitrogen losses reduced. Extension devotes too and production of satisfactory yields. little time to advising on proper production, Fertilizer is supplied to the agricultural sec- storage, application and general husbandry of tor from domestic production as well as from FYM and this should be improved. Other meth- imports. Nitrogen and phosphorous fertilizers ods of organic fertilization, such as composts are produced in at least 12 industrial plants in and green manures, should also be more widely Poland, usingimported raw materials-prima- promoted. 269 Constraints and potential that a national fertilizer subsector study be carried out with the assistance of appropriately The average supply of NPK over the 3-year qualified experts. The team should include a period 1987-89 was 3,435 million (M) t, providing foreign trade specialist, an agricultural econo- about 183 kg NPK per hectare of agricultural mist, two fertilizer industry specialists, and an land. For comparison, the European average in agricultural production specialist. The latter 1986 was around 230 kg/ha, while France used two team members should be experienced in about 310 and West Germany 430 kg/ha. In environmental protection. The team would re- 1988, Bulgaria, Czechoslovakia and Hungary quire aboul 4 weeks of field work in Poland and used 233, 292, and 218 kg/ha, respectively. about 6 weeks for analysis and report writing. The overall, mean, technical optimum level on Research has established that in order to a national basis, as recommended by research compensate for the mean annual CaO used for following several thousand critical field trials, crop uptake and lost through leaching (which is is about 250 kg/ha in Poland. This would indi- about 200 kg/ha), and to provide a surplus for cate a current annual national shortage of NPK soil improvement, it would be necessary to ap- on technical grounds of about 1.2 M t. The ply as a national average about 250 kg/ha of Research Institute of Soil Science and Crop CaOperyear,preferablyintheformofdolomitic Cultivation (ILUNG) atPulawy, estimates(1990) limestone. The mean application rate for1987- that national yield losses due to inadequate 89 amounted to onlyl78 kg/ha. The year 1989 fertilization represent on the average about 3 was, however, a considerable improvement over cereal units per hectare (equivalent to 3 q/ha of 1988, with 30% more of overall CaO production cereals), which would signal a good potential for (4.1 M t compared with 3.1 M t) and a 20% yieldandproductionincreasesunderconditions higher application rate (202 kgfha compared of better fertilizer supply. However, a clear with 169 kglha). The average national yield loss precondition to this level of fertilizer response is due to soil acidity and unsatisfactory lime ap- improvement of soil acidity, followed by main- plication has been estimated by IUNG (again in tenance of favorable soil pH, on more than 60% 1990) at 1.6 cereal units (equivalent to 160kg of of Poland's soils. cereals) per hectare. It is evident that with Optimum economic fertilizer use depends on improved liming alone the technical potential yield response to fertilizer application and the foryield improvements is substantial. Afurther, relative prices of fertilizer and crops. Optimal cumulative yield increase can be expected with economic application levels, thus, vary by crop improved NPK fertilization as stated in the and ecological condition. No analysis of economic previous paragraph. application optima was carried out in the past or Average fertilizer application figures mask a is available at present. Initial impressions are substantial inequality in fertilizer utilization that application levels tended to be too high in between sectors as well as between regions and the socialist sector and too low on private farms, voivodships. For example, the private sector with consequent reduced overall profitability in used in 1987 only 60% of NPK and 57% of CaO the sector. In the future, fertilizer recommen- when comparedwith the socialist sector. Average dations to farmers need to be formulated strictly use in the socialist sector of N, P205 and K20 on economic grounds, based on relevanttechnical has, over the last 3-5 years, been almost identical information, which means frequent review of with the technical (that is, not economic) opti- recommended levels in times of volatile prices. mum as recommended by research. In 1987, Another important issue is the origin of the however, only 83%, 63% and 56% of recom- country's fertilizer supplies and the future of its mended levels of N, P205, and K20 were used fertilizer industry. A comprehensive approach in the private sector. The limited use of fertil- is needed for analyzing the cost and benefit of izer in the private sector is without doubt one of the potentially locally produced fertilizers (in- the major reasons for low yields. The very cluding imports of raw materials and energy), limited use of phosphorous, potassium and lime as compared with the alternative of increased or fertilizer is of particular concern because proper even full imports of ready fertilizers. Such an response to nitrogen can only be expected if analysis is quite complex as it involves foreign these nutrients are available in adequate quan- trade, the fertilizer industry, agriculture and tity. The eastern part of the country uses much the environment. We recommend, therefore, less fertilizer than the western part, as docu- 270 mented by two extreme cases: in 1988/89 the be produced, particularly for large, homogenous voivodship of Nowy Sacz used only 107 kglha of areas that grow major crops. NPK, while Poznan applied 291 kg/ha. Mean * Liquid nitrogen fertilizer, consisting of wa- cereal yields in Nowy Sacz and Poznan were ter-based urea and a mixture ofurea and ammo- correspondingly 2.55 tlha and 3.74 tVha, ofwhich nium nitrate, is being tried in the vicinity of wheat yields were 2.59 t/ha and 4.64 t/ha, re- chemical factories in southern Poland. An es- spectively. timated 5,000 to 10,000 t is being used annually, The following are the major deficiencies in and various pesticides are being added in the chemical composition, type, and physical form process. Technical results are reported to be of some fertilizers currently in use: good, but economic evaluation and comparison with high concentration granular solids is not In 1989, about 12%, or 180,000 t of sulphate available. of ammonia was used. This product is known to A further constraint seems to be in packaging increase soil acidity and its use should, therefore, and storing fertilizers. Potassium chloride, all be minimized in Poland. Ammonium nitrate, lime fertilizer and about 90% of phosphorous enriched with calcium, and another type con- fertilizers are reportedly delivered in bulk. tainingadditionalmagnesium,representedonly Fertilizer storage is said to be insufficient, and 14% of the N supply, while the share of pure as a result potassium fertilizer has to be stored ammonium nitrate was 53%. This has impli- in the open or in pits covered with foils, while cations for soil degradation and for environ- lime fertilizers are stored outside without any mental contamination. covering. Only nitrogen fertilizers and com- * MostfertilizersareproducedinPolandwith pounds are reported to be delivered in bags, low concentrations of nutrients. For example, facilitating storage and handling. The degra- urea (46% N) represented only 21% of total dation of fertilizer in these circumstances rep- supply; in the phosphorous group, the share of resents a serious economic loss and can con- the high concentration triple superphosphate tribute to environmental contamination. (45%) was only 9%; the rest was made up of Another problem frequently mentioned by singlesuperphosphatewithlessthan20%P205. farmers is the unsatisfactory machinery for These figures do not adequately demonstrate fertilizer application and particularly for lime the economic losses due to higher transportation distribution. The machinery circles, which were costs. For example, if in 1989 all the P205 charged with the responsibility of lime appli- delivered as single superphosphate had been cation and were equipped with corresponding transported as triple superphosphate, more than spreaders, have been performing poorly. Evi- 2.7 M t of transport capacity could have been dence of uneven fertilizer application is appar- saved. It is of equal importance that farmers ent; this leads to uneven growth and poor har- could have transported to and spread on the vesting conditions. A clear need exists for high- field only 40% of the total material they had to performance, high-quality fertilizer spreaders. use with the single superphosphate formula- The notion of crop rotations is very familiar to tion. research and extension. However, the closely * Physically, much of the fertilizer is still related concept of fertilizer rotations, so critical delivered in powder form (for example, more to proper husbandry on fragile, light textured than half ofthe phosphatic fertilizer). Fertilizer and infertile soils, does not seem to be commonly in powder form is difficult to store, difficult to applied. The majority of the country's soils apply, and is detested by farmers. Similarly, all require a well-planned and balanced fertilizer potassium chloride comes in the form of crystal regime, based on natural soil nutrient content, salt, again difficult to store for any length of crop rotations, and replacement of nutrients time in usable condition. that have been removed by the crops. For each * Only one compound fertilizer is on the mar- farm there should be established by the exten- ket, although the factory can reportedly pro- sion service (with the help of soil diagnostic and duce any nutrient combination. Itis sold under economic data) quantities, periods, and times of the name Polyfoska and has an NPK composi- application of FYM, lime and industrial fertiliz- tion of 8:24:24. It is apparently in high demand ers. This would promote proper soil husbandry, but the supply covers only about two-thirds of increased yields, and greater economic utiliza- farmers' requirements. More compounds should tion of fertilizers. 271 Strategic Considerations Long-term strategy recommendation Task Force recommendations to the Polish gov- ernment for effective soil fertility management Verify and implement recommendations of are as follows: the national fertilizer subsector study. Short-term strategy recommendations Expected Implications * Recognize that nutrient application on highly acid soils is wasteful; promote and sup- The impact of the above measures is expected to port lime application as an immediate priority; be clearly demonstrated in increased yields, * Promote measures to ensure more equi- production and profitability, and in substantial table access to fertilizers between the state and savings to the sector and to the economy as a private sectors, among voivodships, and among whole. Under the technical assumption of a regions; yield increase of about 4.6 cereal units (460 kg) * Minimize the use of highly acidifying forms per ha, which IUNG estimates will be achieved of fertilizer, such as ammonium sulphate; as a national average using currently calculated * Promote the use of higher concentrate single liming and fertilization levels necessary to reach element fertilizers and appropriate compound those projected yields, on the 8.4 M ha of cereal fertilizers; area alone the incremental production would be * Develop national packaging and handling on the order of more than 3.5 M t of cereals standards for all fertilizers; annually. Another 230,000 cereal units (corre- * Undertake a comprehensive national fertil- sponding roughly to 2.3 M t of cereals) could be izer subsector study, encompassing trade, in- expected to be harvested from the remaining 6 dustry, agriculture and environment; M ha of arable land cultivated under various * Reorientresearch,extensionandfarmnprac- other crops. An extension of an appropriate tices toward the economic use of fertilizers. fertilizerregime to the4Mhaofgrassland could bring in further production increases of about Medium-term strategy recommendations 120,000 cereal units (equivalent to about 1.2 M t of grain). Thus, the gross incremental pro- * Subject to confirmation by the above study, duction that could be expected from these ap- change domestic production of fertilizers to plication rates of lime, organic fertilizer, and higher concentration products and to compound industrial fertilizer is on the order of about 7 M formulations; t of grain equivalent. Actual application rates * Packaging and handling standards; and resulting production responses consistent * Discontinue the use of powdered fertilizer; with maximizing profitability would need to be promote the use of granular formulations; calculated based on current costs and prices, * Instruct the extension service to prepare however. fertilizer rotation schedules based on the need for sustainable and environmentally sound soil Endnote fertility management; * Improve national macronutrient supply to This annex was prepared by Oskar Honisch, economically, technically and environmentally assisted by Marian Krol. optimum levels. 272 Annex 17 Land amelioration Current situation equivalent to drainage. Because of the prevail- ing climatological, pedological and topographi- Poland has 18.7 million ha of agricultural land, cal conditions, many areas are poorly drained. 76% of which is cultivated by some 2.2 million Periodic excess of water in agricultural lands (in 1989) private farmers, and the remaining has been historically one of the factors limiting 24% by various state and cooperative farms. crop production by adversely affecting soil The topography, characterized by an average structure and crop nutrition, and shortening elevation of 173 meters above sea level, is fa- the growing period. To alleviate the problem, vorable for agriculture. The annual precipita- drainage efforts have traditionally been wide- tion exceeds potential evapotranspiration over spread. Subsurface drainage is the preferred most of the country by an average of about 14%; method, based on a herringbone design with a an exception is the central-western belt, ex- central buried collector and subsurface lateral tending approximately between the towns of drains. Compared with drainage, from which Ostroleka and Gorzow, where evapotranspira- almost half of the agricultural land could ben- tion is higher than precipitation by some 9%. efit, irrigation plays a minor role. Irrigation Generally, over most of the country there is works (sprinkler schemes and extensive sub- adequate water storage in reservoirs and un- surface irrigation) serve only about 0.56 million derground aquifers. ha. Land amelioration in the national context In the 1986-90 Five Year Plan, US$581 mil- includes major water management works but lion (1984 constantprices)havebeen earmarked also agricultural water management, consisting for land amelioration, representing 16% oftotal of irrigation and drainage. Land amelioration agriculturalinvestmnents. Economicallyjustified works are, therefore, divided into (i) basic infra- investment levels currently are not known, but structure, consistingofabout73,000kmofmajor are likely to be in the range of US$100-150 canals and river protection works, and of flood million per year. embankments, pumping stations and storage Basic infrastructure (as described above) is reservoirs; and (ii) specific rural infrastructure, paid for entirely by the state. Cost recovery comprising drainage networks of about 290,000 from beneficiaries (farmers) for investment cost km of secondary ditches and canals, and sub- on specific infrastructure is officially required surface drains and collectors. This annex is to be at 15%, but is believed to be in reality less concerned mainly with the specific rural infra- than that. Payment by farmers is currently structure. spread in equal amounts over a 10-year period, In the purely agricultural context, land ame- withoutadjustmentforinflation. Reformofcost lioration in Poland is generally understood to be recovery policy is needed, with a view to in- 273 creasing recovery from beneficiaries, especially dry. This method should be tested further in as there exists inflated demand for drainage Poland. works firom private and nonprivate farms alike. The DLUA is responsible for coordinating all The Department of Land Use and Ameliora- land amelioration infrastructure. At provincial tion (DLUA) of the Ministry of Agriculture and (voivodship) level, the Provincial Boards for Food Economy (MAFE) estimates that, techni- Investment in Agriculture havejurisdiction over cal'v about 9.5 million ha of the country's 18.7 selection and design of specific projects, con- million hLa of agricultural land would benefit struction oF infrastructure, and organization of from amelioration. Of these 9.5 million ha, 6.6 operation and maintenance activities. The Re- milLon ha (of which, 4.3 million ha on arable search Institute for Land Reclamation and land) have already been ameliorated. In 1989 Grassland Farming (IMUZ) performs an im- the, amelioration program actually implemented portant function in research and extension, and inmclhded 129,000haofdrainage, ofwhich38,300 in standardization and promotion of technical hia -was for grassland amelioration. aspects related to land amelioration. Most of '!.e DL TUA estimates that over the next 20 the amelioration works are undertaken under year's some 2.4 million ha (after an exclusion of contract from farmers by 94 state-owned con- i, '0 , r ~Llllion ha was judged clearly uneco- tractorsin cooperationwith 13 equipmentrental J w fe'v,-. agricultural land will require enterprises and five workshop enterprises. drainage, and old structures will have to be However, private sector design bureaus and rehkabilitated on 1.2 million ha. To the latter private contractors are reported to have lately group belong areas in the southwestern and started operating in increasing numbers. western part of the country, where existing Maintenance of drainage and irrigation infra- drainage facilities are reputedly 60-80 years structure is entrusted to some 2,400 district and, in some cases, up to 100 years old. A (gmina) associations for water use and infra- program has been worked out to ameliorate in structure mraintenance. each of the four 5-year periods up to the year The cost of new drainage is currently (mid- 2010 between 0.8-1.2 million ha of land. The 1990) estimatedtobe aboutUS$1,000(ZI 10M) plLan for 1991-95 calls for 800,000 ha, of which per ha of arable land. The cost of draining 70% is arable land and 30% grassland. The grassland tends to be about 16% higher than annLual everage target of 160,000 ha over the that for arable land due to additional infra- next five years is 26% higher than the mean structure required (for example, levelling, roads). achieved over 1986-89 (127,000 ha), clearly in- Laborisestimatedto accountforonlyabout 15% dicating that good planning, organization and of total drainage cost; the foreign exchange fimancing would be required if this target were component is approximately 35%. ta be achieved. However, it is unlikely that amelioration is Constraints and potential justified on tne above large area. Some technical professionals and economists recommend that Among the issues and constraints identified is more attention be paid to the preservation ofthe drainage design, which until recently was based naturalenvironmentandthatparticularlysome on methodology developed in 1978. Standard ecologi cally important swamplands be excluded norms and assumptions have featured strongly from potential drainage. It is obvious that not in design, giving insufficient weight to local only technical, financial and economic, but also conditions and resultingin inappropriate design environmental criteria willhave tobe applied in parameters, for example, the interrelationship future selection of areas to be ameliorated. between depth and spacing of lateral drains. Furthermore, in some areas farmers are con- Technical criteria used in drainage are being cerned that drainage might accentuate drought reviewed again, takinginto account most recent duringdrysummers. Insomecountries,farmers research findings in this field, with a view to are converting their drainage systems to provide introducing improvements. the dual benefit of drainage in the spring and The feedback process between existing fall and subsurface irrigation in dry years dur- drainage networks and the design of future ingthe summer. Thisismainlydonebyinstalling schemes is largely lacking. To collect data on water level control structures in risers and ex- recentlycompleted drainage andimprovefuture ercising water level control when summers get feedback, a drainage monitoring and evaluation 274 program would be useful, possibly under the be the national plastic pipe industry as a step leadership of IMUZ and involving all Provincial toward restructuring and streamlining of the Agricultural Investment Boards. industry to assure adequate least-cost future The method oftrenchless drainage with plastic supplies (including from foreign sources) of pipe is not used much, mainly because of plastic pipes. equipment problems and the high draft power Laying drains and collectors is done with a requirements. Since this cost-saving type of fleet of about 630 drain-laying machines, which drainage seems to be particularly adaptedto the are technically obsolete and in poor repair for lighter soils with a certain clay content, there lack of spare parts. Consequently, drain-laying appears to be good potential for its selective performance is relatively poor at some 450 - 600 introduction, using latest design machinery. haperyearpermachine, representingone-third Methods of land improvement other than to one-fourth of a modern high-performance drainage, for example, bedding, levelling, standard. Questions of supply of new machin- subsoiling, etc., have been given little attention ery (that is, type, source and cost) and of spare in the past. Such methods tend to be less costly parts need to be resolved for future drainage than drainage, although their effects are shorter operations. As a preliminary step, it is recom- lived. These alternatives to drainage should be mended that a detailed inventory of heavy studied and their range and conditions of ap- drainage machineryin the countrybe completed. plicability identified. Some pilot work with The situation with regard to heavy maintenance bedding has already started, for instance, in the equipment for drainage networks is similar to Elblag voivodship, and such efforts should con- that for drain layers and thus should be dealt tinue. It would be desirable for IMUZ to with similarly. strengthen its field experimentation activities, There are signs of inefficiency in the organi- both to gain better insights into land ameliora- zation of drainage contractors, particularly in tion alternatives and to improve the design of operating and maintaining their heavy equip- amelioration works. ment. Private, specialized rental enterprises The criteria used for selecting areas to be which could operate sophisticated workshops drained are weak. The evaluation methodology and procure spare parts more efficiently, should should be improved by establishing an appro- be encouraged. Another source of inefficiency priate framework for financial and economic and high cost is the absence of a competitive analysis of drainage investments. The structure bidding process. Bidding procedures should of the cost of works needs to be desegregated to thus be established and competition promoted; permit analysis of basic cost components, de- private companies should gradually take over termine the impact of taxes and duties, and all functions. assess the foreign exchange content. Yield re- Although drainage is by far the most impor- sponses to drainage should be more accurately tant amelioration work, irrigation has a certain measured, based on more research evidence. role to play as well. Irrigation benefits about Land areas currently identified as requiring 60,000haofarablelandunder some 700 schemes, drainage on technical grounds should be sub- mostly sprinkler systems, in the north and jected to an economic review, first to establish central-western parts of the country, primarily whether drainage is economically justified and, for intensive vegetable production. Additionally second, to distinguish priority areas for imple- there are some 500,000 ha of extensive subsur- mentationto achievethehighestpossiblereturns face irrigation of grassland consisting of open on drainage investments. ditch networks, equipped with regulating gates There are also constraints related to drainage to allow control of the water table for the dual materials which adversely affect the cost and purpose ofirrigation and drainage. Irrigation is effectiveness of drainage works. It might be not expected to make a major contribution to advantageous to give more emphasis in the agricultural development in the near future, as future to plastic materials for drains - and less adequate economic benefits can be derived only to tiles - and to vibrated concrete for collectors. on a minor scale under specific soil and climatic Opportunities for improvement in this area conditions and for certain high-value crops. should be identified through a review of the However, technically, there appears to be a availabilityand costs ofrawmaterialsfor drains potential for further development of irrigation, and collectors. Included in such a review should notably in the driest part of the country, where 275 the average summer precipitation is less than drainage machinery (trench diggers, drain lay- 300 mm. This area is situated in the country's ers, bulldozers) and maintenance equipment central belt and is approximately delimited by (drain flushers, booster pumps) as a basis for the major towns of Gorzow, Poznan, Bydgoszcz, making decisions on gradual replacement by Ostroleka, Warszawa, Sieradz and Leszno. more modem and efficient machines, preferably According to DLUA's estimates, the area com- to be done by the private sector; and prises about 20% of the country's agriculture * Support for privatization of land improve- land. Developmentofirrigationis,however,not ment design bureaus and amelioration con- a high priority and should only be considered tractors. with respect to strict economic criteria and un- dertaken by private investors. MEDIUM AND LONG TERM Strategic considerations Medium- and long-term considerations include: A number of measures have been identified that * Handing over the total drainage design and should be considered in developing a strategy implementation function to the private sector, for land amelioration. Some of them are of an including selling the state-owned drain laying organizational and planning nature with rela- and canal and drain maintenance machinery tively little cost involved, others will require fleet to private entrepreneurs; investments. They are all designed to assist in * Introduction of higher-quality plastic ma- proper selection of drainage areas and in terials for drains and vibrated concrete for col- achievinghigh quality amelioration works. It is lectors; anticipated thatparticularly the introduction of * Gradually increased beneficiary participa- one measure - the higher participation of tion in the recovery of cost for amelioration beneficiaries in covering the investment cost for investments (from the present 15% to about drainage works-will actasaregulatoryfactor 50% as a first step, and to full cost as a second and will ensure that only areas with highest step at a later stage), and allocation of full economic potential will be drained. It is con- responsibility to beneficiaries for covering op- ceivable that under this scenario the annual eration and maintenance cost; and drainage requirement of 160,000 to 180,000 ha, * Modest development of private sector irri- estimatedby DLUAfor the next 20 years, willbe gation in selected areas for selected crops. considerably reduced. Expected implications SHORT TERM Technical and economic benefits which can be Short-term strategic considerations include: expected from drained fields are several. On the technical side, experience has shown that soil in d Establishment of strict economic, technical drained fields dries and warms up about two to and environmental criteria for selection and three weeks faster in the spring, thus extending prioritization of areas to be drained; efficiency of the growing period and allowing for increased drainage must be the prime strategic consider- yields. Mechanical operations can be done un- ation; der more optimal soil moisture conditions and * In support of the above, training at appro- heavier machines and multipurpose equipment priate institutions of 20-30 Polish agricultural can be used with less risk of soil compaction. economists in advanced economic analysis, with Fertilizer is generally less leached and better special emphasis on project appraisal method- utilized by the plants. Harvesting operations ology; can be carried out more smoothly because soils * Introduction of a drainage monitoring and are accessible to mechanization more quickly evaluation program to gather reliable technical after rainfall. After three to five years, soils can and economic data for further work; be generally upgraded by one or two classes (on * More intensive work on land improvement the Polish land suitability scale of eight classes methods which are less costly than drainage, for arable land and six classes for grassland). such as bedding, levelling, and subsoiling; According to data from the Research Institute * Preparation of a detailed inventory of heavy for Land Reclamation and Grassland Farming 276 (IMUZ), the increase in production from drain- Endnote ing one ha of land is on the average equal to about 1.2 t of cereals. This annex was prepared by Oskar Honisch, assisted by Marian Krol. 277 Annex 18 Agricultural mechanization The current situation Polarid r.U1W'7* FARM STRUCTURE AND AGRICULTURAL Number of workers per 100 ha 21 7 MECHANIZATION Number of work horses per 100 ha 6 0 * Northern Continental region of the EC. Because of the problems of owning and operat- ingtractorsandothermechanicalequipmenton It is clear from these figures that if Polish the 2 million farms of less than 10 ha, where agriculture is to move toward the northerii Eu- only one farmer in three owns a tractor, much ropean mechanized system, considerable field work in Poland is carried out by hand or changes are likely to be required in the nature of with animal traction. Thus, there are 1.1 mil- the energy component. In particular, priority lion workinghorses on Polish farms, principally would have to be given to the developmnent of on holdings ofless than 5 ha. Special equipment tractors and equipmentbetter suited to farrns of is still manufactured for animal traction. The less than 10 ha, where fields are often scattered, agricultural labor force is also high: 40% of the small, and irregular in shape. As the cost of Polish labor force is in agriculture. In small labor increases, the energy component will have farming alone there are 2.3 million families, of to shift from manual to mechanized methods if which 35% is fully engaged in farming, and a Polish agriculture is to be economically com- farm labor force of 4 million. petitive. Even though the agrarian structure presents Analysis of the methods adopted by Polish difficulties to mechanization, tractor density in farmers, particularly the smaller ones, with Poland is fairly high. In all there are about 1.1 respect to the major farm operations during the million farm tractors. Tractor ownership is production cycle - land amelioration, tillage, highest on smaller private farms of 5-10 ha seeding or planting, fertilizer distribution, ap- where there is an average ratio of 7.4 tractors plication of herbicides or pesticides, and har- per 100 ha. On bigger private farms the ratio is vesting- shows that the practices adopted are 6.2 per 100 ha; here every farmer has a tractor. often wasteful or inefficient due to farm size and On state farms the average ratio is 2.3 tractors layout (with regard to drainage); outdated per 100 ha. methodsdictatedbyobsolete equipment(tillage); Itis revealingto comparethe current situation lack of precision due to old or inefficient machin- in Poland with that in the northern continental ery (fertilizer distribution, planting, seed treat- region of the EC, where climatic conditions are ment, spraying); high losses during harvesting rather similar, but crop yields are about 40% (poorly calibrated equipment, lack of spares) or higher. during storage (inadequate, poor quality, on- 279 farm storage, lack of drying facilities). Thus tor (AGROMIVA). Parastatal farmers' circles ex- there is great scope for farming improvement ist at the village level. The function of these throughbettermechanization-reducinglosses, monopolistic entities includes sales and after saving money and raising output. sales services such as training of the users, repairs under guarantee, normal repairs and FARMSTEAD OPERATIONS AND AGRICULTURAL spare part supply. Like the manufacturing BUILDINGS companies, they have good facilities as far as buildings and other storage space is concerned. On small farms under 5 ha, farmstead opera- However, their technical equipment and shop tions, storage facilities, andhousingof livestock management is not up to date. Spare part are mainly traditional and at a low technical supply was unsatisfactory in the past; small level. Technical standards and the degree of farmersinparticularreceivedpoorservice. More specialization of facilities and equipment in- recently the spare parts service has become crease progressively as private farms become extremely poor, as wholesale distributors are larger; and the large state farms have good not maintaining their inventory for financial facilities and well-equipped specialized pro- reasons. Sales are only about 50% of estimated duction systems. needs. With the main harvest season about to start, this could be a serious constraint. AGRICULTURAL MACHINERY MANUFACTURING AND Because of the dominance of relatively small SERVICING ORGANIZATION IN POLAND private farms with limited scope for self-con- tained mechanization, the promotion of More than 75% of the tractors and nearly all multifarm use of equipment should have high otherequipmentusedinPolandismanufactured priority in Poland. State-hire services for this in Poland. There are 30 medium- to large-size purposehaveprovedbureaucraticandinefficient state-owned companies with between 1,000 and and are not popular with farmers; private sector 20,000 workers each, and about 300 small, pri- farm machine and equipmentcombinations-a vate workshops. The largest company, URSUS, type of mutual neighbor assistance - have has a manufacturing capacity of 70,000 tractors proved more successful. However, there appears peryear;in 1989,7% of its output was exported. to be much scope for larger and more profes- In 1989, 75,000 tractors were sold including sionally managed operations by private con- some 15,000 imports, mainly from Eastern tractorsorprivatefarm machinerycooperatives. European countries. Due to inflation and highly The present prices of Polish agricultural subsidized equipment prices, the demand was tractors and equipment- of comparable power greater than in the previous year (60,000), but size to those working in the EC - are only about because of lower farm profitability, general 20% of West: European and North American uncertainty in the economy, and high interest prices. Basedconpresentrelativepricesofwheat rates, sales for 1990 are expected to be only and tractors, it is evident that Polish farmers 25,000. Under the central planning system all can pay for a Polish tractor with the equivalent domestically produced equipment and imports of 37.5 tons of wheat; the Western farmer needs were targeted and scheduled according to an the equivalent of double that weight to pay for a annual assessment of farmers' demand, de- Western tractor. There is, however, a great pendingontheavailablesupplyofrawmaterials. difference in design and construction quality State-owned and operated factories were between Polish andforeign equipment; the latter grouped under a central apex organization is far superior. known as AGROMET. In this system of manufacturing to order the Equivalent large farm sectorhad preference; private farmers Price of tractor tons wheat were not allowed to buy tractors prior to 1975. Poland US$3,000 37.5 The specific needs of the small farmer were EC US$15,000 75.0 neglected. Each voivodship has two state-controlled distribution centers for tractors and other For medium- and low-income countries (those equipment; one for the private sector (Zaklad in the early stages of the development of Zaopatrezenia); and one for the state farm sec- tractorization) that need tractors primarily for 280 tillage and transport, Polish tractors and equip- with the 16 other research institutes and nu- ment have some export potential. However, merous laboratories formingthe Polish national Poland's tractors could not find buyers in so- agricultural research system. In addition to phisticated markets. Until recently imports IBMER, other institutes work on aspects of were mainly confined to specialized equipment mechanization, especially the Institute of Crop from Eastern Europe (horticultural tractors, Production and Soil Tillage at Pulawy, and the drainage machines, etc.), but with the present Institute ofAnimal Production at Krakow, which open market economy it is becoming evident specializesinforageharvesting,feedmixingand that Polish farmers are increasingly more inter- mechanization of animal feeding. Some research ested in buying better quality Western tractors is also undertaken at the universities, and by and equipment. Because of the high prices of the Ministry of Industry through an institute new machinery, the secondhand market is ex- (IPMR) at Poznan, which specializes in design panding, especially for imports from Western and construction of agricultural machinery. It Europe. is reported, however, that collaboration among It is in the interest of the farmers, and of the the various institutes under the Ministry of Polish economy, to liberalize the introduction of Agriculture, and between these and the uni- foreign tractors and other agricultural equip- versities and industrial research institutions, is ment that better serve local needs, especially extremely limited. those of the small farmers. Particular attention Regional experiment stations and substations needs to be paid to imports of machines that lead are attached to the national institutes. Some of to cost savings in farm operations, and to those these have a special national task, for example, most suited to multifarm use. the soil tillage station at Wroclaw. Because domestic sales oftractors have fallen IBMER has six divisions (faculties), 21 de- by about 40% in 1990 compared with the two partments, various other units, and three ex- previousyears,surplusstockshaveaccumulated periment and testing stations. In December at factory level; these cannot easily be sold 1989 its staff totalled 672: 129 scientists in- locally even at discounted prices, or readily cluding 20 professors and 47 other staff with exported. I With raw material price increases, PhD degrees. Due to financial stringency, the subsidy reductions and expensive credit, Polish total staff has been considerably reduced from manufacturers face difficult times. Neverthe- its 1987 level of 952. less, this inefficient industry should not be Underthecommandeconomysystem,IBMER protected; trade liberalization and privatization was the only official agricultural equipment should be pursued without special tariffs, bar- testing institute. Without its certificate of ap- riers or duties on imports or export subsidies. proval no equipment could be imported or Such protection will only delay the time when manufactured in Poland. Another official duty Polish manufacturers become competitive and was the planning of the future demand for innovative. The quality of their products must tractors and agricultural equipment. In addition be raised, possibly by seeking joint ventures to research and testing the Institute is in charge with overseas companies. In the long run the of training and technology transfer. In 1987, 21 Polish economy will bear the burden ofattempts inventions of IBMER were submitted for a to safeguard the local industry. patent; 20 requests were granted. Like other Polish institutes of research, IBMER has the PUBLIC SERVICES TO FAJRM MECHANIZATION right to promote candidates for a doctorate in agricultural science. In addition to services provided by the manu- Agricultural mechanization extension. Ex- facturing and commercial sector, the national tension subjectmatter specialists in agricultural research and extension services are involved in mechanization are stationed at national and supporting the improvement of agricultural district levels. However, discussions with pri- mechanization. vatefarmers andWOPR-level extension officers Agricultural mechanization research is the show that the extension service provides insuf- primary responsibility of the National Institute ficient support to the private sector with respect for Buildings, Mechanization and Electrifica- to mechanization. tion in Agriculture (IBMER) at Warsawa. It reports to the Ministry of Agriculture, along 281 Constraints to effective agricultural poorly suited to precision distribution because mechanization they are formulated as soft granules of unstable sizes, or as sticky powders. GENERAL CONSTRAINTS * There is a need to increase availability to small farmers of safe, small-scale, motorized * Farm size and structure in the private knapsack or tractor-mounted sprayers. sector: toomanyfarmsunderl0ha(2.0million); * Haymaking practices often lead to late cut, dispersed, small, and awkwardly shaped parcels over-cured hay. It has been shown that early which make mechanization technically difficult cut, wilted silage gives a much better quality and raise its costs. Poor drainage and poor product, but this depends upon limiting curing agricultural road systems are further cost-in- time after cuttingandrapidlyfillingand sealing creasing factors. silos. Special equipment (rotary cutters, tedders, * An inefficient parastatal manufacturing self-loading tractor trailers with choppers) is industry producing tractors and equipment of needed, and mutual assistance among neigh- poor quality and obsolete design. boring farmers or other forms of multifarm use * A serious and increasing shortage of spare of equipment is required for various corn silage parts for agricultural machines. and high moisture corn treatments, depending on the nature of the product and whether it is for CONSTRAINTS TO MECHANIZED FIELD OPERATIONS cattle or pigs. * Family farmers unable to afford a combine * Lack of a dynamic land consolidation pro- still harvest grain by hand, mowers, or binders gram, including computer programs to help in with stationary threshers. Such methods are calculating the economic feasibility of mecha- labor intensive and lead to grain losses of 10% or nization. more. Even Polish combines, which theoretically * Shortage of ditchless drainage machines should cut losses to below 4%, often have much (for laying perforated plastic pipes) and lack of higher losses due to their age or poor mainte- laser levellers. nance. Family farmers urgently need efficient - Too many tillage operations with traditional small comb"ines or contracted multifarm access implements, leading to: high labor, tractor, and to larger coimbine harvesters. machine hours; high energy costs; soil compac- * Roots and tubers present similar harvesting tion; and unnecessarily prolonged exposure of problems. Significant losses result due to spin- equipmenttoweatherhazards. Moderntractor- ner damage on smaller farms and to old or mounted multitiller sets, which largely avoid poorly operated harvesters on larger holdings. these problems, have been used successfully in Poor preharvest practices (suboptimal row Poland and demand is high, but access to small spacing, poorly aligned rows, insufficient ridg- fields is often difficult. Operation on irregular ing, etc.) can compound losses from inefficient small parcels raises costs; smaller capacity sets harvesting. Further losses can be caused dur- are required for such conditions. ing inefficient mechanized loading of roots and * Seeding and precision planting equipment tubers into trailers and transportation by old is often of low precision due to old age or poor equipment. This is particularly important if design. The match between seed and equipment seed material is being transported. is frequently poor due to lack of cooperation between the seed and machinery industries. CONSTRANTS DUE TO FARMsTEAD OPERATIONS Planters for leafy crops are not available in AND AGRICULTURAL BUILDINGS Poland. Chemical seed treatment against seedborne diseases is inefficiently performed, * Increases in crop yields in the last decade due mainly to lack ofthe inexpensive equipment have overstrained on-farm storage facilities in needed to apply it on small farms. In general, traditionalbarns. Lack of drying andinadequate the needs of the smaller farms have been seri- storage capacity or poor quality storage are a ously neglected. serious cause of losses with stored grain, espe- * Fertilizeris often badly and unevenly spread, cially on smaller farms. Modern metal or hard sometimes by hand or by poorly designed cen- plastic storage containers with forced ventila- trifugal spreaders. In addition, Polish fertiliz- tion are an important requirement. ers, including lime for land improvement, are * Although farm size is likely to increase 282 progressively over time, there is not expected to private family farms. be a rapid transformation of agrarian structure * Cooperation among research institutes of with a concomitant consolidation of holdings the Ministry of Agriculture, and between those and replacement of obsolete buildings and institutes and researchers in the universities equipment. Impetus toward specialization and and other ministries, is unsatisfactory. improvement of facilities is nevertheless likely * The quality criteria applied by IBMER in its to be generated by changes in the nature of machinery testing operations are far below in- market demand, especially for better-quality ternational standards. produce, and the enforcement of quality stan- * IBMER's present structure is inefficient: it dards through price, legislation, or other means. has high administrative overheads because its This in turn will lead to aneedforbetterlivestock nonscientific service units are overstaffed, and sheds with improved feed mixers, milking ma- it has to undertake regulatory duties (for ex- chines, and milk coolers; controlled grain stor- ample, in obligatory machinery testing) which age and drying facilities; cool stores for potato, are not related to research. vegetable, and fruit storage; greenhouses; mushroom barns; grading equipment; and spe- ExTENsIoN cialized transportation equipment. Small, mixedfarmshave limitedopportunities Links between the national and district level toproduceawide range ofhigh-qualityproducts, extension service staff and IBMER are weak. nor can they afford many specialized facilities Extension staff at voivodships, who have spe- for handling and storage. Specialization is es- cialized training in mechanization, are insuffi- sential and must be achieved by cooperative or cientin numberto work effectivelywith research othergroup systems ofproduction andprocessing staff in transferring new technology to farmers. where specialization at the individual farm level is not technically or economically feasible. Strategic recomrnendations CONSTRAINTS AFFECTING THE MANUFACTURE AND SHORT-TERM IMPERATIVES DISTRIBUTION OF FARM EQUIPMENT Agricultural mechanization in Poland faces a Lack of competition in a monopolistic, state- difficult short-term situation in which manu- controlled industry has resulted in production facturing is in transition from state control to of equipment of low quality both in construction private ownership; and distribution and ser- and in performance, as well as to lack of inno- vicing of tractors and farm equipment is shared vation and obsolescence in design. between two other state-controlled organiza- * The same causes have led to extremely low tions, one dealing mainly with state farms and labor productivity in manufacturing and trade the other with private farms. Neither of these comparedwith industryinhigh-incomecountries entities is directly linked to a manufacturer in a with a market economy. Prices of Polish manner comparable with dealerships in market equipment are about 25% of those in the inter- economies. national market due to low wage rates. The farm equipment industry is currently in * The system of production and distributionin crisis: a large stockpile of unsold tractors and Poland favored state farms over the private equipment has developed as demand has fallen sectorinbothsalesofequipmentandafter-sales by 40% since 1989; the scope for exports is service, including the supply of spare parts. limited by poor quality; and manufacturers face serious liquidity problems at a time of high RESEARCH interest rates. In order to cut their losses, they have been retrenching on production of spare * The large gap that exists in Poland, between parts, and, as much farm equipment is old, theory and practice in the design of tractors and there are concerns that there will be serious equipment, has so far not been bridged by re- losses during the forthcoming harvest if the search efforts. supply of spares is not improved. * On-farm research by IBMER has mostly High priority in the immediate future there- been limited to the state farm sector and has fore needs to be given to easing the transition failed to address the practical problems facing from state to private management in manu- 283 facturing and distribution-including the sup- private entrepreneurs. Buildings, workshops, ply of spares - while laying the foundation for and storage space previously occupied by state- full privatization. controlled enterprises mightbe leased to private Priority must also be given to redressing the operators by the government; such leases would past neglect of private farmers by the state- offer an option to purchase after a set period and controlled manufacturing and distribution or- extended credit for modernization of workshop ganizations. This implies both meeting the equipment and establishment of a spare parts most urgent current needs ofprivate farmers for inventory. Manufacturers and importers should tractors and equipment and looking ahead in provide training to managers and operatives research and testingto a situation where quality and might also assist their dealers with loans or of produce will be paramount and farms will be by supplying equipment and spares on credit. more specialized (even if not much larger); and - In order to ascertain the reasons for current where the problems of finding capital for problems, IBMER, in cooperation with staff of mechanizingindividualfarmsmaybemitigated the agricultural extension service, should be by group sharing of equipment (informally or instructed to conduct a survey of the adequacy formally through private machinery coopera- of spare part and after-sales and maintenance tives), or through multifarm operation by pro- services during the coming harvest season and fessional contractors. report its findings and recommendations to the Specific actions that can be taken to achieve Minister of Akgriculture for appropriate action. these objectives include: * Liberalize imports of foreign tractors and agricultural equipment. * Maximize use of available tractors. The Because much of the agricultural machinery level of tractorization of Polish agriculture is produced by Polish manufacturers is obsolete or higher than can be justified socioeconomically. poorly designed, even though relatively inex- For the short and medium term the primary pensive compared with foreign equipment, it is objective should be to make better use of all in the interests ofthe Polish farmers to introduce available resources. Therefore, replacements foreign tractors and otherimplements that serve should be limited to 2-3% per annum and more theirneedsbetter, especiallythose ofthe smaller efficient tractors should be introduced. farmers. Therefore, it is recommended that *improve spare parts and servicingfacilities. imports of new and secondhand agricultural Priority should be given to overcoming the tractors and equipment (including materials present serious constraints in the supply of such as plastics for agricultural use), as well as spare parts, especially the spare part supply for spare parts, should be liberalized completely. the small-farm sector. As a spur to improving product design and In order to achieve this goal a number of quality, Polish manufacturers should not be actions will be needed by the government, that protected by tariffs or import duties. is: * Establish a national agricultural mechani- - Domestic, state-owned manufacturers should zation council to advise government on medium- be immediately required to improve the supply and long-term strategy for the future develop- of spares produced in their plants. ment of agricultural mechanization in Poland, - The government should establish a licensing including both the farm sector and the manu- system for importers and for domestic manu- facturing and service sectors. facturers of tractors and farm equipment. A Such a body should have representation from condition of granting a license would be a sat- thegovernment, farmers'organizations, thefarm isfactory assurance from the firm concerned machinery industry, the agricultural research thatitsproductswillbebackedupbytrainingof and extension services, and universities. Prac- maintenance staff, free servicing and repairs tically oriented foreign experts might be invited under extended warranty, and an adequate in- to assist the council. ventory of spare parts available at short notice The council should advise on the implementa- to customers without surcharge. tion of medium- and long-term recommenda- - Manufacturers and importers should be en- tions, for example, the future development of couraged to establish dealerships at local level the multifarrn use of equipment to give family either through privatization of existing farm farmers better access to the benefits of modem equipment trade centers (AGROMA), or through technology. 284 * Priority should be given to the types of proved systems of forage harvesting and stor- equipment required for the family farm sector. age; (iii) improved and new systems for har- These include small to medium-size tractor- vesting and storing maize; (iv) analysis in co- mounted fertilizer distributors; drum-type seed operation with extension specialists ofthe actual treaters; precision planters; modern portable spareparts supply and other after-sales services; sprayers; rotary cutters, tedders, and rakes; and (v) evaluation oftheperformance ofimported self-loading and unloading tractor trailers; technologies. general-purpose tipping trailers, maize chop- - IBMER should cooperate more closely with pers, and pickers; windrow potato diggers; and other national institutes of the Ministry of hay and grain ventilators and modern plastic Agriculture working on aspects of mechaniza- grain storage containers. Small-capacity pro- tion, as well as with the universities and with cessingequipmentisalsoneeded: mobilemilking industry. It should actively seek to promote and cooling sets to improve quality and mar- interinstitute cooperation, and should, in for- ketability at the farm and local levels for milk; mulating its work program, specify to the Min- mobile grinders and mixers for animal feed; and istry of Agriculture how this will be achieved at grading and packing equipment for fruits and the program and project levels. vegetables. - In order to strengthen its base of knowledge, * Priority should also be given in the short and IBMER should develop linkages with institutes longer term to the multifarm use of agricultural for research on agricultural mechanization in equipment. In addition to the promotion of the the EC and other European countries, and combined use of equipment among neighboring overseas (United States, Australia, Japan, etc.). farmers, encouragement should be given by the - Safety testing for Polish equipment should government to establishing private farm con- be continued by IBMER only where no other tractors and private farm machinery coopera- Polish institution is better qualified to undertake tives. Analysis is needed of the effectiveness of it (for example, safety testing of electric appli- existing operators: their equipment standards, ances should not be done by IBMER but by the operating procedures, and rates charged. Mea- official testing institute for these goods). This sures to assist and extend successful ventures will relieve IBMER of unnecessary regulatory would include extension service advice on ap- duties, allowing it to concentrate on research. propriate equipment, business management * Develop closer linkages between research training and training of operators, establishing and extension in agricultural mechanization. rules of service and safety standards, recom- - Locate, at IBMER, a small but efficient mendations concerning fair rates for contract national extension unit specialized in farm work, and access to credit or bank guarantees. mechanizationtotransfertheresultsofIBMER's * The government should organize training research to farmers and processors and promote programs in multifarm use of equipment, with their adoption. This unit should have linkages the help of experts from European and other to the regional agro-ecological zone stations ad'vanced countries with practical experience in (recommended in Annex 10 on agricultural re- the actual running of contract machinery op- search) as a means of attuning research at the erations. national institutes more closely to local farming * Reinforce research on farm mechanization needs. and postharvest technology. - In order to develop these linkages, voivodship -IBMERshouldbesupportedatapproximately extension offices should each have mechaniza- its current scientific strength so thatits capacity tion specialists in the various areas of activity to undertake an expanded research program is indicated in the future work program ofIBMER not reduced. These should work closely with IBMER and the - IBMER should be required by the Ministry of regional agroecological research staff in Agriculture to formulate a practically oriented transfering technology to farmers. work program for 1991-92 geared to the most urgent needs of Polish agricultural mechaniza- MEDIUM- TO LONGER-TERM RECOMbENDATIONS tion and directed primarily at serving the pri- vate farming sector. This program should in- * Action should be initiated by the govern- clude: (i) reduction of product losses with har- ment to encourage privatization of the tractor vesting and postharvesting equipment; (ii) im- and agricultural equipment industry. This 285 should include manufacturing, wholesale and and the nonscientific services united in one retail trade, maintenance and repair services, departmentofmanagementandadministrative and the parastatal machinery cooperatives and services. I]BMER's research should be regrouped circles. An important step in this direction into five departments in place of the current 21. wouldbe to abolish AGROMETas the dominant These would be: agricultural machinery; agri- public body and grant full freedom to manu- cultural buildings; mechanization systems; er- facturers to select the equipment they wish to gonomics, including safety; and mechanical and produce. Incentives should be provided through civil engineering, including the management of tax holidays, access to credit, or other appropriate the engineering workshop. fiscal measures. Technical assistance should be sought to help ^ Polish agricultural equipment manufactur- IBMER design and implement a revised research ers - united in a private association - should program, lpractically and institutionally well apply for membership in the European Fed- geared to the mechanization needs of small eration of Agricultural Machinery Manufactur- farms. Experience of industrial research plan- ers. ning woulcl be essential for such assistance. * Promotion of joint ventures between Polish e Reorientation and refocusing of extension's and foreign entrepreneurs should be encouraged mechanization effort is also recommended in by the government as a means of accelerating order to devote special attention to: privatization. This might include legislation - growing and harvesting maize for grain (at concerningfreedom of import/export; definition various moisture and maturity levels), and for of rights of ownership of the managers, em- silage; ployees, and foreign partners; and maintaining - making silage in preference to hay; and strengthening safety rules in manufactur- - on-farm. inspection of equipment (especially ing, operation, and maintenance of equipment, crop sprayers), fertilizer distributors, grain and including road safety standards for agricultural potato harvesters, and milking installations - vehicles. including equipment for cooling and transpor- * The government should adopt the EC tation of milk at the farm level; regulations as well as the ISO and EC safety - measuring and identifying the main causes standards on agricultural tractors and equip- ofproductlosses duringharvestand postharvest ment, including universal components. Poland operations and finding ways of reducing them; should applyfor membership with the European - improving arrangements for effective seed Patent Office. treatment at farm level; * The Polish agricultural machinery industry - developing economical on-farm storage for should become fully integrated with the inter- the major crops. national market. Exports of Polish agricultural equipment should be promoted, particularly to These activities should be undertaken in close lower- and middle-income countries. In the cooperation with the appropriate research in- short run, markets should be sought for the stitutes, industry, and farmers' organizations. present large stock of tractors and machinery with due regard to safety, after-sales service, Endnotes and the supply of spares. As the quality of Polish equipment is improved, good longer term This annex was compiled by Peter Oram, using export opportunities appear possible. information provided by Adrian Moens, Jan * Obligatory performance and quality testing Pawlak, ancl staff ofthe Ministry of Agriculture, of agricultural equipment should be abolished IBMER, Institute of Agricultural Scientific Re- in Poland. The new free market will rapidly search, KrEkow, the University of Warsaw, impose its own acceptable quality standards. Agromet, and Agroma. * IBMER should be reoriented as an institute for applied, practice-oriented research with 1. Polish agricultural machinery exports emphasis on the private family farmers. It have always been a low proportion of total pro- structure should be simplified: all scientific duction: about 5% in the case of tractors. staffshouldbe concentrated atitsheadquarters, 286 Annex 19 Agriculture, pesticides, and the environment Overview and current situation taking steps to regulate against industrial pol- lution but should also ensure that agriculture EvmoENmr.R AL POLLUTION AND FARMING itself does not become a source of pollution. Projections of the extent of sulfur damage to Much has been written in the national and forests range ashigh as 50% ofPoland'sforested international press about environmental pol- area by the 1990s. Some 80% of Polish forests lution in Poland and there is great awareness are coniferous and are particularly subject to and sensitivity to the problem at both govern- industrial pollutants, much more than decidu- ment and grass roots levels. Attention has ous species. Nevertheless, the obvious damage mainly centered on the destruction offarmlands to coniferous forests can be taken as a clear and forests near major industrial plants. How- indicator ofpollution levels ofdeciduous forests, ever, the chronic debilitation of the productive farm land, and water supplies. The long-term farmland resource base by heavy metals and implicationsfor agriculture and forthe image of acid rain is a more insidious problem, whichhas Poland'sfarmproduce, particularlyforpotential widespread implications for farming. exports, are serious. The present socioeconomic and political situ- Of immediate concern in the farmlands close ation in Poland is promoting decentralization of to the industrial areas in southern Poland is soil authorityandminimizingeentralizedlegislation contamination from industrial pollution. A and regulation. However, experience worldwide Polish report (Godzik 1987) cites soil tests on has demonstrated that governments must de- vegetable plots with concentrations oflead, zinc, velop and enforce regulations to protect the cadmium, and mercury between "30% and 70% environment, for example, against the indis- higher than World Health Organization norms criminate importation, production, and use of for soil used in growing food." Polish scientists chemicals. estimate that some 700,000 persons in the Up- At the present time, Polish agriculture is not per Silesia industrial region may be at riskfrom a major contributor to rural environmental eatingproduce grown in home garden soils with degradation. Farm chemical use in Poland is unacceptable levels of industrial pollution. only about 20% of levels applied per ha in EC To be competitive in its agricultural exports, countries and chemical use is mostly widely especially when exporting to markets which are dispersed. Industryisbyfarthegreatestsource becoming increasingly food safety conscious, of rural pollutants that have important conse- Poland must demonstrate a commitment to the quences for agriculture. The government is health safety of its agricultural products. 287 USE OF CHEMICALE IN POUSH FARMING Table 19.2 Production and importation of pesticides (1989) Pesticide use Domestic Imports The use of pesticides in Polish farming has Production steadily increased, from 0.63 kg of active in- -tons a.i.- gredientperhectare in 1980 to an estimated 1.64 Iusecticides 500 500 kg of active ingredient per arable ha in 1989. Fungicides 4,500 1,800 This compares with about 6.5 kg of active in- Seed dressing 1,100 gredient per hectare in EC countries. Some Herbicides 9,100 3,400 22,000 tons of pesticides were used in 1989, Miscellaneous compounds 200 300 mostly on cereals, potatoes, sugar beets and Total 15,400 6,000 rapeseed. Domestic production and formulation of pesticides in 1989 reached 15,400 tons and an additional 6,000 tons were imported. Imports According to these figures, 58% of production are now basically free of tariffs. Imported and imports were herbicides. Sales figures of products, in many cases identical to locally pesticides are not available at present but a produced materials, are being sold at 42-50% of comparison of production and use suggests that world prices. there is a mismatch in terms of product needs. The government is encouraging the decen- A review of actual sales and stocks by product is tralization of pesticide purchases. Any organi- needed to determine the status of supplies for zation or individual with foreign exchange can the 1991 season. According to international import pesticides, and business with these or- commercial sector estimates, trends in pesticide ganizations can be on the basis of direct sale or use in Poland are as follows: over-the-counter trade. Similarly, state farms and commercial farmers are increasingly buy- ing pesticides directly from both foreign and Table 19.3 Trends in pesticide use in local agrochemical firms. Poland There is, therefore, afree market in pesticides which must be carefully regulated to protect Type Tons Trend individuals, the environment and the economy. Herbicides 11,500 increasing Fungicides 6,000 increasing Table 19.1 The use of pesticides in Inseticides 4,000 decreasing Poland in 1989 .slightly Poland___________________________ _ in 1989Others 500 increasing Crops Product type Millions of hectares treated Cereals Herbicides 5.2 A similar comparison of these figures with SFeed des 1.9 those in Table 19.2 also suggests that, while the Growth regulators 0 .7 production and use offungicides may be reason- Potatoes Insecticides 1.0 ably balanced, insecticides may be in short sup- Fungicides 1.1 ply and there may be an oversupply of herbi- Sugar beet Herbicides 0.7 cides. Rapeseed Disease and insect 0.6 To assist in crop protection efforts, the EC control donated some US$55 million of crop protection Total 15.6 materials in late 1989. These were distributed through a foundation and three cooperative groups and sold at subsidized prices. Despite According to official estimates, domestic pro- this, demandfor these products is low, with only duction andimports together amountedto about some 20% of the materials purchased as of early 21,400 tons (see Table 19.2), which closely summer 1990. The main reason is ascribed to matched use. There are, therefore, theoretically farmers' unwillingness to purchase expensive very few leftover stocks, although there is no inputs under agricultural marketing uncer- official inventory of old unused material tainty. 288 Chemical input use, for both fertilizers and like most areas of pesticide safety study, is pesticides, varies markedly by category of user. technically very demanding. The work being State farms use more inputs generally, while done consists mostly of residue analysis; little is the majority of private smaller farmers make done on pesticide metabolism, hydrolysis, pho- minimum use ofcrop protection chemicals. They tolysis and leaching. Analytical laboratories also use substantially less chemical fertilizer, are poorly equipped by modern standards. relying largely on their own sources offarmyard Pesticide registration is conducted by the manure. However, although the use of manure Bureau of Pesticide Registration, a special unit hasmanybenefits-itcontributesmuchneeded of one researcher and four technicians in the organic material to sandy soils and helps bind Institute of Plant Protection in Poznan. Con- chemicals in surface layers and minimize sidering the lack of sufficient equipment and leaching into aquifers and rivers - it should be immediate online linkages to the pesticide reg- recognized that careful management of manure istration databases of the EC, the FAO, and the is animportantpart of environmental protection. United States (EPA), there is excessive reliance Grazing animals, by the nature of their feeding on chemical firms' assurances as to safety and habits, tend to concentrate in their bodies any efficacy under Polish conditions. chemical pollutants which may be present on Pesticide residue testing is also undertaken grass andfodder, andthese chemical residues in by the Institute of Plant Protection, conducted their manure can be a potent source of contami- by the Department of Research and Control of nation. Pesticide Residues, with a staff of 14 profes- sionals and technicians supported by regional Pesticide registration staff. There is no effective legislation on the use of Pesticideregistrationisnotastightly controlled restricted products; nor are there enforcement as it should be. The registration process is far laws related to safety practices in the use of such lessstringentthanthatrequiredinmostwestern products. Protective clothing is not readily countries. For example, temporary registration available in Poland. Contract sprayers and of products can be issued for three years without applicators apparently do not need to be certi- evidence of long-term toxicological data, and fied and trained prior to purchasing restricted- based on certificates of registration in countries use products (which are readily available to of origin. Some countries of origin have lax anyone wishing to purchase them off the shelf). registration procedures; it would be safer if Also, there appears to be no enforcement of Poland's requirements were the same as or the safe disposal of older or unused or similar to those in OECD countries. deregistered pesticides and pesticide contain- Toxicology studies for pesticides in various ers. This is a serious concern. It is important stages of development are carried out by the that such materials and containers be disposed Research Institute of Industrial and Organic of properly and, especially, that they not be Chemistry (IPO) both in Warsaw and Pszcyna. dumped in unlined soil pits near aquifers or The facilities at the Warsaw branch are mini- other water resources. mal and not at all satisfactory; those at Pszczyna As Polish agriculture recovers from recent are better, but neither unit is capable of operat- stabilization efforts, increasing use of chemical ing at the internationally accepted standards of inputs is likely. As farm chemical use expands Good Laboratory Practice (GLSP) which would in the coming decade, it is critical that Poland render their studies acceptable in other coun- establish a code of conduct to ensure that: tries. Work on ecotoxicology (that is, effects on birds, * pesticide regulations are brought to interna- bees, aquatic organisms, soil organisms, etc.) tional standards; and for the IPO is done at the Pszczyna branch. * imported and locally produced farm cheni- However, it appears that there are substantial cals meet international standards for registra- gaps in their ability to carry out this technically tion, both on crops grown for domestic consump- difficult work. tion and for export. Environmental chemistry (the study of the fate of chemicals in the environment) is done at Training in careful pesticide use by farmers both theWarsaw and Pszcyzynabranches. This, should be undertaken, especially in applicator 289 protection; groundwater, household wells, and ECoLOGICAL. AGRICULTURE river Drotection from runoff; and sprayer cali- kbration. Training in the proper disposal of The currentrelatively low use offarm chemicals obsolete, unused pesticides is critical, as is the in Poland and the designation ofthe smallholder correct disposal of empty pesticide containers. farming sector as the green sector, may resultin Initial efforts in integrated pest management a targeted niche in Poland and externallyfor the and biological control need to be expanded, development and promotion of green food particularly in those major Polish crops such as products. TIhis market is small and specialized apples, small fruit, greenhouse crops, and po- but likely to grow. tatoes, where experience in IPM techniques has Poland should take steps to place itself ap- expanded in recent years. Informal initial dis- propriately in this market. Given the interest in cussions with local fruit research stations indi- EC and Eastern European markets for lines of catel interest in pursuing initiatives, a step ecologically produced foodstuffs, exploration of Ifiat would likely attract foundation and inter- a classification system for organic production rnational funding support. and processing would be appropriate. This Fe -ticide rotation programs are also needed certification effort is likely to require limited C e - c- st ~resistance. financial resources, which local and external foundations are likely to support once a more T1I-HTS AND ADDITIVES IN ANIMAL formal plan is prepared. Stnrtegic recommendations AcritcalCissue facingmany countnesthattrade in livestock and livestock products is loss of SHORT TERM mar.kets because of unacceptable chemicals in mneat. milk, eggs, etc. In some cases problems Continuous monitoring of pollution levels in arise through the accidental contamination of representativefarmlandandforestsisessential. feedstuffs, particularly with farm pesticides, Small permanent soil and foliage testing sites but in other instances illegal feed additives are should be established throughout Poland, par- itsed. In Poland, there appear to be no regula- ticularly in areas of higher risk from industrial tions covering inspection and control of local emission, but also in relatively uncontaminated and imported animal feeds with high levels of farms and water sources. Such sites should be antibiotic and other chemical contaminants. regularly tested to evaluate changes in con- This is particularly important for the dairy tamination levels over time. Only with such industry, but also affects pork, beef, and poul- continuous records from permanent sites can try. Such legislation is urgently required to objective statistical analysis of the pollution safeagard the livestock industry and to enhance problem be presented for national and interna- its reputation as a provider of health products. tional arbitration. Legislation could be prepared as part ofthe total Soil andfoliage testingforheavy metals should farm chemical regulation package or as a specific be carried ouat in high-risk areas so that farm need oflivestocklegislation;theimportantpoint produce from such areas can be isolated as is that such legislation be prepared quickly. appropriate. This is particularly important for farms selling milk products and fresh export RUP4L WATER SUPPLY PROTECTION commodities. A code of conduct for pesticide manufacture, Most farins use farm wells for water supply for sale, storage, and use and disposal at industrial households and livestock. Anumber of wells are and farm levels should be prepared and imple- not adequately protected from manure runoff mented as it matter of urgency. The FAO's from farm barnyards. Guidelines fBorPesticideRegistration andUsage Improved manure management on farm is should be employed to develop the code of con- important. The recent initiatives of the FDPA duct for Poland. This code should ensure that to introduce small-scale manure disposal tanks pesticide regulations are brought to interna- are a step in the right direction. tional standards and that imported and locally 290 produced farm chemicals meet international the form of classroom teaching combined with standards for registration and use on domestic practical demonstrations. A systematic program and export crops. of training should be undertaken in all Pesticide registration and integrated pest voivodships. Certification of successful comple- management should be upgraded in legislation, tion of the course should be a prerequisite for studies,andresearch. The existing small Bureau authorization for sale and use of more toxic of Pesticides at the Institute for Plant Protection chemicals. in Poznan should be upgraded to a full depart- ment of pesticide registration and control. The * Pesticides should be sold at unsubsidized department should be reequipped and linked rates irrespective of origin. Concessionary im- with FAO, EC and U.S. (EPA) pesticide regis- ports should have no retail price advantage. tration data files. A twinning of this new De- * All pesticide importers and manufacturers partment with an EC or U.S. registration group should be registered; the six Polish pesticide would greatly assist in this process. manufacturers need to be restructured and privatized. MEDIUM TERM LONG TERM The code of conduct should be employed na- tionwideandlegallyenforced. CopiesofPoland's * The Polish government must strengthen its code of conduct should be made available to all regulation of pesticide availability and use. potential importers of pesticides and all major * All pesticides produced and used in Poland international pesticide manufacturers. must be recognized worldwide as conforming to Training programs in safe pesticide use and international standards. integrated pest management should be prepared by research in collaboration with extension. Endnote These programs should be designed for farmers and for staff of those agencies handling, storing, This annex was prepared by John Hayward and and selling pesticides. Instructions should take August Schumacher, Jr. 291 Annex 20 Livestock production sector Summary tunities to diversify into other activities than the small mixed farmer; (v) breeding services, IMPORTANCE which have not fully adapted their program to changing economic conditions; (vi) inadequate Livestock is fulfilling a key role in Polish marketing systems, in particular in the live agriculture: (i) economically, it provides animal sector; and (vii) an inefficient and almost 46% of the value of agricultural production bankrupt milk-processing industry, with low and 50% of agricultural exports, and it uses productqualityandaverynarrowproductrange, 70% of domestically produced grains; (ii) and without the necessary flexibility to look for socially, it is the main source of cash income other markets, or the capacity, under present for small farms; and (iii) ecologically, it credit systems, to finance its stocks. maintains soil fertility on the majority of the Polish soils. SRATEGIC CONSIDERATIONS KEY CONSTRANT The short- and medium-term strategies proposed in this paper are based on the following consid- Key constraints to livestock development at erations: (i) with a rather poor physical resource the farm level are: (i) inefficiencies in input base compensated by a good genetic potential delivery (especially in the feed industry), and excellent health status of its livestock which depresses overall feed use efficiency population, and with the poor quality and image and limits stock numbers to the amount of feed of its products in the world market partly bal- that can be grown on the farm, thus hampering anced by below-the-world-market production intensification and curbing farmers' income; costs, the Polish livestock sector has modest (ii) inadequate management of farm feed comparative advantages in the world market resources; (iii) poor product quality (mainly for dairy and beef, maybe somewhat better for as a result of inadequate quality control and pork. In any case, export should be seen as a the small farm size), which precludes adequate secondary objective and a means of achieving investments in quality improvement; (iv) better supply management and price stabiliza- inadequate supply management, which results tion; (ii) increases in farm size are unlikely over in wide variation in dairy prices and will the next five years, as increased unemployment probably do the same for prices for pigs and intheindustrywillaugmentthepressureonthe poultry in the near future. The drop in milk small farm, as many part-time farmers will prices is hurting above all the medium-size have to rely on their farm as their sole income specialized dairy farmer, who has fewer oppor- source; and (iii) livestock will need to remain an 293 essential part of the agricultural system for the domestic and export livestock trade and the sandy soils in the east and south. strengthening of market infrastructure and market information flows; and (iii) the estab- OVERALL STRATEGY ELEENIS lishment of an industry-financed and managed price stabilization fund, initially for pigs, cre- At the production level, this would lead to the ated and maintained by a levy assessed on all following strategic elements: (i) enable, through pigs at slaughter when the price is above a a greater reliance on purchased feed and less certain reference price; this would be used to land-dependent livestock activities (pigs and partially compensate between periods of high poultry), the intensification of livestock pro- andlowpricesandbetweendomesticandexport duction beyond the number ofanimals the farmer markets, to avoid the worst excesses of the hog can keep on the basis of farm-grown fodder and cycle. cereals. This is especially relevant to small farmers; (ii) consolidate, and subsequently in- Support services. The key strategic elements crease, production efficiency on the medium- forbreeding andveterinary services, to improve size (especially dairy) farms; (iii) improve on- their cost effectiveness and make them more farm product quality, marketing, and supply responsive to present sector needs, would in- management, especiallyforpigs; and (iv)improve clude, for the breeding services: (i) the intro- the efficiency of breeding, health, and research duction of EL new set of selection criteria and services needed by the sector. indices, which includes protein content (cattle) and feed conversion (pigs), and which integrates SPECIFIC STRATEGIES the different indices into one overall economic index; (ii) a separation and privatization of Feeds and feed industry. The development of semen production, insemination and milk re- more efficient feeding systems will be the key cording, and herd book functions (now combined factor in developing sustainable livestock pro- into one organization) into three different or- duction in Poland. Some of the main specific ganizations; and (iii) introduction of full cost elements are to: (i) improve, through research recovery for these services over the next two and extension, the quality of on-farm roughage years. The veterinary strategy focuses on the (especially grass) and conservation methods; (ii) privatization of the private good services and address the structural deficiency of protein the strengthening of the public good services to supplements at the national level, by an in- maintain Poland's excellent animal health sta- depth assessment ofthe comparative advantage tus. The livestock research and extension ofrapeseed processingversus soya meal imports; strategy focuses on (i) the necessary rationaliza- (iii) rationalize the feed-mixing industry, so tion of the institutional framework, greatly re- that compound feeds become competitive with ducing the number of research institutes; (ii) home-grown feeds, and introduce improved increased emphasis on feeds and grassland technology to allow inter alia the use of high- management and economic evaluation of tech- energy compounds, cereals, and oil seed meals nology as key priorities; and (iii) greatly in- substitutes; and (iv) increase quality standards creased industry involvement in extension. and labeling of compound feeds and supple- Theaboveproposalswouldattemptto increase ments. the efficiency of private sector livestock pro- duction in Poland through an active intensifi- Quality, markets and supply management. cation and diversification policy for small- and Improvement of product quality at the farm medium-sizefarms. Itwouldbringaboutthese level and improved marketing will be the key to improvements through a number of interven- maintaining domestic market share and gain- tions, but above all through the rationalization ing increased access to international markets. of inputs and services for the livestock industry. Key aspects would be: (i) increasing the price The proposals would capitalize on Polish tradi- differentials and standards for first class prod- tions and skills in livestock production, would ucts in pigs and beef cattle to include a carcass not require increased state subsidies, and would evaluation; (ii) the privatization and breaking attempt to mitigate some effects of the transition up ofthe present de facto state monopolies in the toward a market economy. 294 The livestock sector the almost exclusive reliance on horne-grown feed, is a severe constraint to future livestock OVERVIEW development, as it: This annex outlines a proposed strategy for the * limits investments in efficiency improve- Polish livestock sector. First, it emphasizes the ments, especially in the areas of feed conserva- economic, social and ecological importance of tion (silage) and quality improvement (milk livestock in Polish agriculture and describes cooling equipment), absolutely necessary if the the key structural and technical constraints to sector is intended to compete with intemational its development. Second, it postulates the basic markets, as it should. This disadvantage would assumptions under which the sector needs to become even more acute if the proposed bigger develop. Third, it identifies the principal strat- price differential for quality milk as part of egies, that is, the development of more intensive dairy sector policy (Annex 21) were implemented; production on small farms and the consolidation * hinders the efficiency of technology transfer and strengthening of ruminant production on and provision of services for a farming system medium-size farms, as the building blocks for already characterized by a risk averse attitude: future livestock production in Poland. Fourth, * limits the number of stock per farm and it provides specific recommendations for the causes competition for feed between different necessary adjustments in the crucial input species. Thesefeedlimitationsareexacerbated services of feed, marketing, breeding, veteri- by an inefficient compound feed industry. As a nary health and livestock research, and exten- result, the present cattle and pig stock on the sion. small farm is too low to provide adequate in- come. For example, a farm of the av erage size IMPORTANCE OF THE SECTOR of 5 ha would provide enough feed for only about three to four cows or 15 fatteners (twice a year), The Polish livestock population of about 10.5 stock levels that are not producing and can- million cattle, 19 million pigs, 67 million poul- not be expected to produce in the future - try, 5 million sheep and 1.4 million horses ful- adequate levels of income; and fills a key role in Polish agriculture, as it: * leads to poor feed conversion (kg of feed per kg growth) because of the prevailing structural * provides 46% of the value of agricultural imbalance in home grown feeds (protein quan- production; tity and quality deficit and mineral deficiencies) * provides 50% of agricultural exports; and thus to an inefficient use of the home-grown * uses 70%oofalldomesticallyproducedgrains: cereals. * is the main source of cash income for 1.2 million small farmers; and However, while the long-term strategy needs to * is the principal source of organic fertilizer, aim for farm size expansion, in the short term an essential inputunder the Polish conditions of the pressure on the small farm can be expected sandy soils and low soil fertility. to increase. A large part of the small farmers are also employed in industry, and with growing STRUCTURE OF PRODUCTION unemployment, an increasing number of hith- erto part-time farmers will have to rely in the Smallfarms. Mostlivestockisraisedon near future on the small farm as their sole about 2 million private farms, of which 1.2 source of income. million farms are small (less than 5 ha) family farms and 800,000 are medium-size, more Medium-size farms. The typical rnedium-size specialized operations. The typical small farm has 5 to 20 cows or 5 tolO sows with farm grows its own feed (cereals and rough- followers. Beef is produced as a by-product of age) to milk up to two cows, keep one to two dairying, and sheep are sometimes kept, al- sows, and to finish the progeny of those sows. though especially in this category we find more Housing is generally inadequate. Livestock specialized enterprises. Those farms are gener- is the principal source of cash for the small ally highly mechanized, as an inheritance from farmer. The small farm size, together with the prestabilization economy when machinery 295 was subsidized. The medium-size farms have those cooperatives that specialize in butter pro- the best genetic quality stock and the best hus- duction. The consequences of the market de- bandry skills, and are critical to future livestock cline andthehigh financing chargeshave mostly and, especially, dairy development in Poland. been passed on to the producers, and, as a Key features of these farms include poor result, farm-gate prices for milk have plum- grassland management and the precarious state meted (60% in US dollar equivalent over the last of the specialized dairy producers, who have two years). This in turn has led to a fall in been hardest hit by the recent drop in price. production, and a 9% drop in sales is reported by About 18% of milk and 30% of the pork and the industry over the first five months of 1990, poultry production come from state farms and compared with the same period in 1989. The production cooperatives, which achieve high sharp drop in producers' price hurts above all levels of production (for example, in milk pro- the medium-size specialized dairy farmers, who duction, 3,996 liters per cow per year versus have fewer opportunities to diversify into other 3,156 liters per cow per year on the private activities than the small mixed farmer. This is farms), although frequently without due regard shown by the March 30, 1990, livestock census for economic efficiency. figures, which, while not yet showing a decline in the total cattle population, show a 5% decline PREsENT SITUATION in the number of cows kept on state and me- dium-size farms, and an overall decline of the The national economic stabilization program number of calves and heifers. A much steeper has put especially dairy and beef production decline has probably been prevented by the under acute stress, as it caused a dramatic extremely low producer prices for cattle. deterioration ofproducerprices and input/output In meat production the situation is more ratios as shown in Table 20.1: varied. Beef production (at least 80% of which comes from dairy cattle) already suffered in Poland from consumer preference that is lower Table 20.1 Approximate prices and feed/ than for pork. It has now been further hit by output price ratios for the main livestock excess dairy cows being slaughtered because of products, 1988-1990 the unfavorable milk price. Beef prices are currently about one-fourth to half of world mar- Price ratio kg ket prices, and at present levels beefproduction Price Percent feedlkg product is unattractive to farmers. On the other hand, (US$/kg) change June June pork production benefits currently from favor- June 1988 June 1990 1988 1990 ablepricerelationshipswith abetterliveweightl feed price ratio (1:7.5) than the 1:5 generally Milk (t) 0.14 0.03-0.08 .60 2 1 foundelsewhere. Thekeyissueiswhetherinan Beef (kg Iw) 1.00 0.16 - 0.50 -50 14 4 Pork (kg 1w) 0.80 0.90 +10 9 7.6 open market economy, the supply and demand Broiler (kg lw) 0.75 1.00 +30 6 6.5 can be adequately balanced, or whether signifi- Eggs (piece) 0.05 0.04 -10 4 3 cant variations, following the classical pattern a. Faringatepriceofbarleyplsappmpriateprnsuppleof the hog cycle, will emerge. The first indica- a. Farmgatepnce of barley plua appropriate prtein 8upple tions of a higlh piglet price and 10% more sows and piglets compared with the same month last year raise fears that substantial overproduction In dairy production and processing, the situ- will emerge in this sector in the near future. ation is critical. The fall in real household Also, a similar situation might arise in poultry income and the reduction of the consumer sub- production. Present feed/broiler price ratios sidy on milk has caused a 10% drop in the are extremelyfavorable, and poultry is currently consumption of dairy products, from the very highly profitable in Poland. This high profit- high level of 270 liters per capita per year. The ability is likely to encourage increased produc- abolition of the Cooperative Dairy Union has tion in the near future. At present prices, suddenly left the individual dairy cooperatives export opportunities are limited; on the con- with the task of financing their own stocks, and trary, there is a possibility that, in the near thatatveryhigh nominal interest rates. These future, Polish markets will attract substantial high financing charges have especially hurt imports. 296 PROSPECTS ing up their dairy industry. * Pork. Low labor cost, good skills, and a The genetic potential of Polish livestock is good, surplus production in cereals and potatoes, the disease status excellent, and Polish farmers combined with an excellent internal market, have first-classhusbandry skills. Furthermore, augur well for pigproduction. Furthermore, pig thelivestocksectorbenefitsfromlowlaborcosts. production is well adapted to small farms and These advantages are balanced with the draw- would provide the necessary organic matter to backs of a short growing season, dominance of maintain soil fertility. Present exports, already poor soils, and severe feed quality constraints. benefitting from a good image and the relative As a result, Polish livestock consistently per- low levels of protection in the world (for ex- forms below its genetic potential, with milk ample, EC import levies for pork in carcass are production of about 3,250 liters peryear (versus currently only one-fourth of those of beef car- potentially 4,500 liters/year); a feed conversion casses), could be maintained and possibly in- of about 4.5-5 kg feed per kg growth in pigs creased, provided the key inefficiencies in the (versuspotentiallyabout3.5kg/kggrowth);and feed- and meat-processing industry are ad- 3.5-4 kg per kg growth in poultry (versus po- dressed. tentially about 2.25 kg/kg growth). * Poultry. The poor status of the Polish feed- On the basis of Poland's physical resource mixing industry and the low winter tempera- base, structure of production, and a rough as- tures mitigate against the development of a sessment of production costs in relation to world competitive broiler industry, as the main world market prices (Annex 1), the following tentative market producers command more sophisticated picture emerges regarding the comparative ad- feed and breeding technologies and are increas- vantages of the different livestock operations: ingly shifting their poultry production to re- * Dairy. With a short growing season and gions with more favorable warmer tempera- small farm size, Poland is disadvantaged to tures. It is, therefore, not expected that Polish produce, at low costs, high quality products for poultry (broilers) can successfully compete in the world market. On the other hand, it is the world market, and the recently introduced expected to maintain for the next decade a importliberalizationmeasuresmightevenopen comparative advantage in lower labor and land the local market for substantial imports. Egg costs. It is, therefore, expected to be able to production seems at par with the world market. produce competitively for the domestic market * Sheep and horses. Although sheep and (except in the case of dumping) and, provided horses comprise a minor part of the livestock quality standards and marketing are improved, industry, sheep have some potential for export export its modest surpluses. Present exports to the Mediterranean countries (Poland has an are severely limited by poor quality products 8,000 ton export quota to the EC) at remunera- and inadequate export organization. Because tive prices. Horses, while declining as a power of the resource base and structural farm limita- source for farms, might continue to be exported tions, export should not be seen as the major to the EC for meat (although in decreasing objective in the dairy sector, but rather as a numbers because of the shrinking herd and in secondary objective and a means of achieving view of Poland's low labor costs), and for recre- better supply management and price stabiliza- ational purposes. tion. * Beef. Beef, as a by-product of the dairy A key issue in this context is to what extent sector, is also dependent on home-grown Polandwillbeableinthenearfuturetoimprove roughage and is, therefore, similarly affected as its volume of livestock exports. Present below- dairy by the short growing season. The small world-market domestic prices for milk, beef, farm size precludes beef cattle as a principal and pork have generated an increase of export farm enterprise, although beef cattle can be volume of over 20% over the first quarter, but easily kept as a secondary activity. More other factors like inferior quality, truncated attractive opportunities might exist for the ex- marketing channels, market unfamiliarity of port of live animals and specific types of inten- potential Polish exporters, and cumbersome sive beef production (veal on the basis of milk export procedures seem to be important con- replacers) and in the export of live breeding straints for the sector to fully realize this poten- animals for dairy production to countries, build- tial. 297 STRATEGIC CONSIDERATIONS trial wage. Additional opportunities might exist in the production of veal on the basis of In designing a strategy, it is assumed that: milk replacer and in intensive beef production on the basis of cereals and silage. Required * for the short term, (i) increases in farm size actions include a rationalization of the feed areunlikely and shouldnotbeacceleratedinthe industry, an improvement of marketing and face of increased unemployment in industry, supply management, and an improvement of which will increase the pressure on the small the support services. farm, as many part-time farmers will have to Forthemedium-sizefarms,measuresurgently rely on their farm as their sole income source; need to be introduced, to avoid a total collapse of (ii) increases in government subsidies are not dairying. Inbrief,theyincludetheintroduction available; and (iii) the relative profitability of and application of(i) stricter quality standards, the different subsectors will not change sub- and (ii) a set of measures (for example, stronger stantially; quality price differentials, concentration on high * for the medium and long term, (i) livestock milk density regions) that would favor the me- mustremain an essential part ofthe agricultural dium-size milk producers. They are comple- system, in particular for the sandy soils in the mentedbya setofmeasurestobringtheproducer east and south; (ii) Poland will maintain its price back to a higher price than present, ra- comparative advantages regarding labor costs. tionalize the processing and marketing chain, Provided quality is improved and inefficiencies and improve exports. For the medium term, the are adequately addressed, there are modest success of this type of enterprise will depend to prospects for exports of dairy, beef, and pork. a large extent on the availability of (i) high quality farm grown forage, which will reduce The preceding analysis and considerations dependence on concentrates; (ii) milking and lead to an overall strategy at the livestock pro- cooling equipment, which will allow the pro- duction level, which would: duction of high quality milk; and (iii) the pro- vision of efficient breeding and health services. * enable a diversification and intensification The specific measures needed to improve feed of production, especially on the small farms; (concentrate and roughage), marketing, breed- * consolidate and, in the medium term, im- ing, animal health and livestock research, and prove the efficiency ofproduction on the medium- extension are described in the following sec- size farms; tions. The specific strategies for other inputs * improve product quality and marketing, to like credit and agricultural mechanization, the make Polish products more competitive in the dairy sector, and agroprocessing and market- world market; and ing are detaiiled in a separate working papers, * improve the efficiency of the inputs (espe- and will be touched upon only if relevant in the cially feed), markets and services (breeding, overall strategy for the sector. health and research) needed by the sector. Feeds and the feed industry For the small farms, the diversification would focus on other agricultural and cottage industry PRESENT SMJATION AND PROBLEMS activity (for example, horticultural production and small-scale food processing) because of Overall feed situation. Most feed in Poland is Poland's comparative advantage in low labor home grown. In 1989, all roughage and about costs.' But for soil fertility considerations, es- 80% of all concentrate feed2 was fed on the same pecially on the sandy soils of eastern and farm that produced it and only about 10% was southern Poland, small farms also need to in- bought from the feed industry. Early 1990 clude livestock. Pigs and poultry have proven, figures show a further decline of the feed indus- in Poland as elsewhere, to be interestingoptions try. While this very high reliance on home- for small farmers, as they are less land-depen- grown feed is fullyjustified for the bulky rough- dent. With an estimated return to labor of age for ruminants and is even quite rational in US$15 per pig fattened (Annex 2), a 30-pig view ofpresentmargins on concentrate feedsfor fattening unit (twice a year) would provide an nonruminants because of the structural defi- income of US$900, or close to the present indus- ciency in protein on the farm, it reduces the 298 efficiency of overall feed utilization and puts cessed, provided the industry can bring its severe limits on the possibility of intensifica- crushing margins to a level at which it can tion, especially on small farms raising pigs and effectively compete with imported vegetable oil poultry. and soya meal. Additional protein feed imports would free some feed cereals for export, thus Protein realizing a classical efficiency gain from trade. Farn-grown fodders. A general deficiency in The feed industry protein (both in roughage and concentrate feeds) severely depresses the overall efficiency offeed Some of the main characteristics of the Polish utilization. Poor grassland management leads feed industry are described below: to low protein contents of grass and hay. More specifically: * The Polish feed industry is about equally divided between members of a state association, long grazing or cutting intervals lead to a Bacutil, which produce a full range of products, sharply reduced protein content of the pasture. and the cooperatives, which produce mainly Research data show a decline in the digestible protein supplements. Together they operate protein content of natural meadows from 10% over 1,100 plants, with a total capacity of about (or good for about 15 liters ofmilk per day) under 9 million tons, but normally operating at about a three-cuts-per-year regime to 7% digestible 50% of their capacity. They employ about protein (or good for about 7 liters per day) under 10,000 persons. Furthermore, some state and a two cuts-per-year regime. The higher total cooperative farms have small mixing plants. grass (dry matter) yield under a longer interval * Most of the feed mills are using obsolete does not compensate for this loss in quality; technology (the newest feed mills are about 16 * the heavy reliance on hay making, instead years old) and are in a bad state of repair. As a of silage, causes further losses of the conserved result, feed quality is poor and inconsistent, and product. Silage making, especially in its there is a severe lack of farmer confidence in prewilted form, is constrained by the heavier feed quality. equipment needs; * Concentrate feeds contain a high %age of * the extreme fragmentation of the parcels cereals. Cereal substitutes (tapioca), coarse (up to eight lots per farm) precludes grazing, grains, and oil meal substitutes (corn gluten) and makes the production of farmyard manure are notused, and although underpresentexport necessary; and constraints (including an export ban on wheat) * the rather high input in N fertilizer (60-80 itmightbe more attractive to include cereals, an kg N per ha per year) on private farms could at increased use of cereal substitutes and coarse least in part be replaced by the development of grains in the feed could be considered when the grass/clover mixtures, provided the appropriate constraints are alleviated and domestic cereal clover cultivars would be identified. prices move closer to the world market prices. Technically, such a shift would benefit feed Concentrate feeds. In concentrates, the abso- utilization, especially of poultry feed, which is lute deficiency in the quantity (estimated in now deficient in energy. 1989 at about 600,000 tons or the equivalent of * Up to 1989 concentrate feed was so heavily 1.4 million tons of soya meal) and quality of the subsidizedthatprotein-enrichedcompoundfeeds protein are the prime causes of the 30-50% couldbe sold attheprice of cereals, thusproviding higher feed conversion rate (that is, Polish pigs an incentive for farmers to purchase these bet- and poultry require at least 1 kg feed more per ter feeds. This subsidy is now eliminated and, kggrowth than elsewhere). Thus, for the same as a result, demand has plummeted below the amount of pork and broiler production, 3-4 mil- already weak feed industry capacity utilization lion tons more cereal are required than neces- in normal years. Overall demand for the first sary if protein quality and quantity were opti- five months of 1990 has fallen to only 44% of the mal. A (partial) solution to this problem could demand for the comparable period last year, lie in increasing the oil crushing capacity for and some mills are working at only 10% capac- rapeseed, of which now only 500,000 tons of the ity. The fall in demand was about the same for total 1,500,000 tons produced in Poland is pro- all feed categories, including the feeds for the 299 currently profitable pig and poultry industry. In the mediium to long term it is recommended The industry was further hit by the very high that: nominal interest rates during the first months of 1990. * enabling mechanisms (joint ventures) and * In an effort to maintain liquidity, feed mills commercial creditbe provided for investmentin have greatly increased their prices, which now technologies like pelleting, the use ofanimal fat, are more than double the cost ofthe ingredients, the production of minerals, and the production and even triple for protein supplements (versus of milk replacers for steer fattening in con- a processing and distribution margin of 20% in junction with the dairy industry; Western Europe). At these margins, it is not * cereal substitutes be increasingly incorpo- attractive for the farmer to purchase compound rated in compound feeds, with due regard for feed, and it is clearly more attractive for him to economic considerations; use his own feed (even if that means 25% higher * local capacity for rapeseed extraction (and, feed use); only if feed costs come down 25% over hence, production of local rapeseed meal as a the farm gate price of the cereals will it become protein supplement) be increased, provided the economically justifiable for him to purchase earlier studies of the comparative advantage of feeds from the feed mills. rapeseed extraction over the import of soya * The envisaged privatization of state farms meal and vegetable oil are also confirmed under (which in 1989 purchased over 60% of the pro- current input/output price ratios; duction of the feed mills) and the proposed * the research and extension effort on grass- importation under the EC ffood aid program of land management and conservation be consid- 40,000 tons compound feed will most likely lead erably strengthened; and tofurtherdropsin demandforconcentratefeeds. * the development of vertically integrated production (the feed enterprise providing the Thus, it seems likely that a substantial ra- piglets or day-old-chicks and extension provid- tionalization and reduction of capacity, followed ing a minimum price guarantee for the finished by a technology upgrade, will be necessary to product under a subcontract with the farmer, enable the remaining feed mills to produce at although the risk remains for the farmer) be acceptable capacity rates and become again encouraged in pig and poultry production, to competitive with home-grown feed. give the feed mill industry a direct interest in producing high quality feed, and to provide RECOMMENDATIONS farmers with guaranteed outlets for their pro- duce. In the short term it is recommended that: IMPACT * the process of rationalization be allowed to take its own course, accelerating decentraliza- The short-term impact ofthese measures will be tion and privatization of the state enterprises industry contraction. A number of feed mills (Bacutil) and cooperatives involved in the sec- will close, increasingunemployment and limiting tor; the availability of balanced feed in some re- * stricter quality standards be introduced gions. The latter in turn will increase the use regarding key nutritional parameters (energy, of cereal-only rations, and therefore further digestible protein, essential amino-acid compo- depress temporarily the already poor feed con- sition, minerals, and growth promoters), that version rates. It is, therefore, essential to labelingoftheseparametersbemadeobligatory, accelerate the adjustment. The medium- to and that an industry-based control system be long-term impact would be positive. Improved established to enforce these standards; quality control, lower processing margins, and * the contents of the feed component under increasing specialization should increase the the EC food aid program be modified from demand for high quality feed, and the impact on compound feed to essential ingredients not the production efficiency is expected to be posi- produced in Poland (amino acids, growth pro- tive. The proposed vertical integration would moters, and vitamins). result in a decrease in public funding for ex- tension, as tlhe industry would take over this task. Finally, the proposed introduction of 300 cereal substitutes would push cereals into cash * inappropriate quality standards, especially crops and broaden the basis of Polish agricul- for the pork export market, which demands a ture. leaner animal of lower live weight than is ac- ceptable as first class under the present grading Livestock markets and supply system; and obviously inadequate enforcement management of prevailing standards, as 99% of the pigs were classified as first class (although in 1989, under PREsENT SITUATION AND CONSTRAIN1 government monopoly); and * poor sanitary standards, especially in the The development of more efficient market smaller, privately owned meat works. channels will be, together with improved feeds, the key to a balanced growth of the livestock RECOmENDATIONS sector. Livestock trading and slaughtering, was until the recent introduction ofthe economic For the pig, poultry, and beef industries, the reforms, the monopoly of the state, and still short-term strategy would imply: remains heavily dominated by the state. For example, over the first month of 1990, the state * introduction of an industry-financed and - bought for the domestic market 78% of all ani- managed price stabilization program for pigs, mals (and in some voivodships 90%) and for which would impose a levy (3-4%) on all animals export 90% through one company, ANIMEX slaughtered, to be used to alleviate the worst Purchasing is done on about 3,000 markets or excesses of the hog cycle. It would therefore directly from the farm on the basis of a fixed- serve as a partial (about 50% of price differen- price scale according to live weight and some- tial) transfer payment (i) between periods of timesexteriorconfirmation. Livestockprocess- high and low prices, and (ii) between market ing for export (mainly canned ham) is carried sectors (domestic versus export market) to bal- out in 29 large USDA-approved state slaugh- ance supplies. The reference price below which terhouses; for domestic consumption, processing no levy is assessed would be set by the industry is done in 45 large slaughterhouses and a large (producers and meat works) and tied to the cost number of small meat works. The meat-pro- of production of the most efficient producer and cessing industry employs about 90,000 persons. to world market prices. It would be financed Key constraints to the system are: exclusively from a levy on the pigs and would require no state subsidy. It would be audited by the de facto monopoly of the state in live- an independent audit firm. The 3-4% level of stock exports - and in certain regions also in the levy would be low enough not to cause domestic livestock trade-stifles a transparent evasions of slaughterhouses. The partial price transmission, leads to inefficiencies, and character of the transfer payment would pro- is, for example, one of the major reasons for the vide a buffer mechanism, but would not prevent excessive (60%) differencebetween border prices some cyclical movements. As such a fund is and farm-gate prices for live animals; working satisfactorily in the Republic oflreland, * the absence of any supply management an early visit by a Polish delegation there to system threatens to cause major fluctuations in become familiar with the details of such an producer prices, especially for pigs, where the operation would be recommended; first indications of a substantial oversupply, * the breakingup of the livestock export com- according to the hog cycle, are appearing. Such pany, to allow other livestock exporters to enter, wide price gyrations would be a major impedi- andthereviewonaregionalbasisofthedomestic ment to an expansion of pig production by livestock markets, abolishing de facto state smallholders and a major threat to long-term monopolies, wherever they prevail; consumer loyalty and market share; * the introduction of an industry-enforced * the lack of flexibility of existing meat-pro- improved grading system, which for first-class cessing plants, which are all geared to the pro- export pigs sets 105 kg live weight as the upper duction of one product (canned ham) and, as live weight limit and a maximum of 5 cm total they are all about 15 years old, use outdated back fat at the two normal measurementplaces technology; as the minimum requirements. The grading ^ lack of adequate market information; system for slaughter cattle seems correct - the 301 key issue here seems the correct application of * Sire selection. Production of the dams of the existing scale; and the bulls selected for insemination seems not to - the stronger enforcement of sanitary regu- reflect the production level ofthe superiorfarms lations, especially for small private meat works. in Poland. Foreign semen with superior geno- types is little used (20% of inseminations). For the medium term this would imply: * Selection criteria. In cattle, the goal of increasing the fat content of the milk is no * improvement of market infrastructure, longer necessary, in view of the current butter mainly to develop current livestock purchasing surpluses in Poland and in the world. In pigs, points into efficient markets and livestock auc- although data are recorded for the most im- tions; portant efficiency parameter - feed conversion * development by the Ministry of Agriculture - this information is not properly dissemi- of an active information dissemination service nated. There is no economic evaluation of the on market prices and volumes; different c'haracteristics. * increased involvement, through active pro- * Organization. Milk recording, selection motion, of private traders in livestock exports; and artificial insemination are covered by the * increased investments, through the private same organization. Furthermore, the produc- sector and commercial credits, to keep the export ers have limited influence on breeding policies slaughterhouses and meat works up to inter- and overall sire selection. The 52 autonomous national standards and increase their product state insemination centers are too numerous to range and flexibility. permit eff'ective bull selection and achieve economies of scale. Considerable savings could IMPACT be obtained by reducing the number of centers; 0 Staffing. The 8,504 inseminators carry out The price stabilization program would require an average of 718 inseminations per year. This no government subsidy and would lead to in- number should be about 2,000, even taking into creased smallholder production and thus reduce account preNvailingpoor telecommunications and social suffering incurred by the increasing un- transport. employment. The provision of market infra- * Farmer participation. Farmer participa- structure and market information is a public tionin sire selectionfor individual inseminations good and would require additional state funding, is minimal. This is the result of (i) continuing although only in limited amounts. The pro- subsidies (about 60% of the costs, that is, 50% of posed tighter quality standards and market insemination and 75% of milk recording costs) liberalization, combined with increased slaugh- that induce farmers to see insemination and terhouse investments from commercial sources, milk recording as free and therefore notvaluable; would lead to increased exports of high quality and (ii) lack of advice by the extension service products. Without the latter, Poland might lose regarding appropriate attention to sire selec- its export markets. tion. Support Services Recommendations. In view of the above, short- term recommendations are to: BREEDING SERVICES * Increase the fee charged to producers to Present situation and problems. The Polish 60% of the total costs for insemination and 50% artificial insemination (AI) service is technically for milk recording; of high quality, but breeding policies are * Prepare an action plan to separate and suboptimal and have not been adapted to recent privatize the semen production, insemination, changes in demand conditions and efficiency and milk recording and herd book functions, requirements. The technical efficiency is now covered by one organization, among three demonstrated by the good (72% for cattle and different organizations. Private operators (in- 80% for pigs) nonreturn rates and high (80%) cluding, but not restricted to, the herd books) share ofthe cattle population covered (only 10% wouldproduice orimportthe semen. Thiswould of are covered). Major efficiency concerns are: include a reduction in the number of breeding 302 stations. The proposed chambers of agriculture ANDIML HEALTH SERVICES or the dairy centrals in the regions with high dairy production density would take responsi- Present situation and issues. The Polish live- bility for the actual insemination and milk re- stock sector benefits from excellent animal cording. And private breed-specific herd books health. The country is free of the main conta- would continue with the herd book activities gious diseases and can, therefore, export live and eventually take over semen production; animals and meat to most parts of the world, and including the EC. The main disease constraints * Introduce a new set of selection criteria and include management diseases like mastitis, indices that include protein content (cattle); internal parasites, and mineral imbalances as a more completelydisseminatethefeedconversion result of environmental pollution. An eradi- data; and integrate the different indices into one cation program for leucosis is under way and 10 overall economic index on the breeding value of ofthe 52 voivodships are now free of the disease. the sires. Until now, veterinary care has been the re- sponsibility of the state, and provided mainly The proposed strategy for the medium term: free of charge at a cost of US$15 million (1989). The key proposed policy includes privatization * Increasethefeetobechargedtotheproducer of private good services (presently requiring for AI services to 80% in 1992 and to 100% in 70% of budget) like clinical interventions and 1993. Milk recording fees should be increased vaccinations, combined with the introduction of gradually to full cost over a 5-year period; full cost recovery for these services. Public good * Implement the action plan proposed above services (requiring the remaining 30%), like concerning the rationalization and privatization sanitary control, food inspection, and further of the service; eradication of leucosis, would remain in the * Openpossibilitiesforotherprivateoperators public domain. (veterinarians, the regional dairy centrals) to become involved in the service; and, The main issues include the: * Strengthen the extension effort to increase farmers' awareness ofthe value of sire selection. * pace of privatization, including the need for an intermediate decentralization of responsi- This medium-term strategy would need to be bility to the local governments, before launch- refined in the long term. ingfull privatization atthe level ofthe individual veterinarian; Impact. The introduction ofthese measures can * conditions under which private veterinar- be expected to decrease farmers' participation ians could start; in the service, but accelerate overall genetic * employmentopportunitiesforveterinarians progress. The January 1990 introduction of (including 300-400 new graduates each year) 40% producer contribution (although to some and, in particular, for veterinary technicians, extent confounded by the general dairy crisis) who cannot be absorbed in the private sector. has been followed over the first three months of The present coverage of one veterinarian per 1990 by a 15% drop in the service compared with 1,400-1,800 cattle is too dense to provide an thesameperiodlastyear. Afurtherdropeanbe adequate income for a private veterinarian. expected. However, this will not affect overall genetic progress if the selection intensity is It appears that little gain can be made by an improved along the lines proposed above, and if intermediary step, and that immediate and full at least one-quarter of the cattle and 5% of the privatization of the privatizable services would swine population remain in the service (to pro- be preferable. Itis therefore recommended that vide adequate trickle down of improved genetic in the short term: material toward the rest ofthe population). The cost recovery and privatization would signify a * an action plan be prepared to define the saving of Zl 70 billion in 1991 and ZI 150 billion conditions of transfer. As it is essential that (June 1990 rates) afterwards. private veterinarians be fully represented in the preparation of such a plan, a national order 303 of veterinarians should be created immediately with 40 scientists and 100 technicians, which to represent the private sector. The minimum carries out basic research in animal nutrition. size of veterinary practices in different parts of the country should be established, and then A preliminary review indicates that: actual practices established. Allocation ofthese practices (including existing housing, equip- * Livestock research, with an estimated 20% ment, and vehicles) could be on the basis of an ofthe tota]l agricultural research budget and the auction for interested, certified veterinarians. same share of scientists, seems tobe underfunded Additional incentives (tax relief and subcon- in relation to its contribution to agricultural tracting of certain public sector tasks like meat GDP, the technology gap and its capacity to inspection) could be envisaged, and; generate results; *a manpower requirement study be prepared * Livestock research in Poland has focused on before year-end, with the possibility of an im- intensive modern production methods, at the mediate limitation on the number of students expenseof'smallholderproductiontechnologies; admitted to the veterinary schools or the closure has given priority to breeding over nutrition (for of some faculties. example, most animal husbandry research at Krakow is directed toward genetic improve- Impact. Experience elsewhere has amply shown ment); has neglected grassland research; and that producers are quite willing to pay the full has given only scant attention to the economics price forveterinary services of good quality. No of new tec]hnologies. negative impact on the animal health situation would therefore be expected. An adequate Livestock extension, carried out by the Agri- public sector capability in preventing and con- cultural Progress Centers (WOPR), has similar trolling infectious diseases would need to be problems of large farm and production maxi- maintained, however. The program of mization focus. Similarly, livestock extension privatization would result in savings for the seems to be a second class citizen, as reflected in public sector of about Zl 100 billion (1990 prices) the number of livestock specialists and the per year. general crop orientation of the field extension staff. The influence of the industry (producers, IJVESTOCK RESEARCH AND EXTENSION feed, and processing) on the focus and operation of the service and the content of its message is Present situation. Livestock research is cur- weak. rently spread over a large number of institutes: Recommendations. In this context, it is recom- * theInstituteofAnimalHusbandryResearch, mended (in addition to the recommendations headquartered in Balice near Krakow with 12 included in Annexes 10 and 12 on agricultural experimental stations throughout Poland, research and extension) that: which, with 350 scientists and 300 technicians, is the main livestock research institute, con- * the institutional framework for livestock be centrating on breeding and nutrition; restructured, consolidating the different insti- * the Veterinary Laboratory in Pulawy, with tutes into far fewer and merging all production 150 scientists and 450 technicians, involved oriented institutes with agroprocessing insti- mainly in disease prophylaxis and food hygiene; tutes, so that the total livestock food chain is * the Feed Evaluation Laboratory in Lublin, covered. TIhis would involve closing a number concerned mainly with industrial feed mixing of substations and reducing staff, but at the and the use of additives in animal feed; same time the budgetary allocation per scientist * the Poultry Institute in Poznan, with 30 would increase. With an increased importance scientists and 500 technicians, involved exclu- oftheproduction andmanagement type diseases, sively in poultry breeding and feeding research; one could argue thatveterinary research should * the Dairy and Meat and Fat Technology also be merged with livestock production re- Institutes, both in Warsaw, involved mainly in search. ]However, the need for specialized the processing side of livestock products; and equipment and laboratories, and the need to * the Institute of Animal Nutrition in War- maintain units of a manageable size, might saw,belongingto the PolishAcademy ofScience, necessitate a continued separation of produc- 304 tion and veterinary health research. In that the same time maintaining soil fertility. They case, a close cooperation mechanism needs to be would not require increased state subsidies. established. The proposals would capitalize on Polish tradi- * a Livestock Research Strategy be devel- tions and skills in livestock production and oped, which will review present status and de- attempt to facilitate the transition toward a fine the main priorities for future research. A market economy. key element of this strategy would be to deter- mine how to make the research more relevant to Endnotes the small farmer, with special attention in livestock production research to feeding and This annex was prepared by Cornelis de Haan, grassland management and conservation (for assistedbyZdzislawPiasek, FranciszekBrzozka, example, varietal research on clovers and other Jan Malkowski, Tadeusz Kowalski, and John protein sources, such as beans, etc.), silage McCarrick. making for the small farm, appropriate animal housing, and the economic evaluation of these 1. Specific measures might include the technologies. eventual introduction of special investment * besides the reorganization proposed in An- support for intensification (not restricted to nex 12, on extension, the possibility of sub- livestock) as part of the unemployment benefits contracting specifickey extension programs (that for former part time farmers now being redun- is, the installation of chilling equipment on dant. medium-size dairy farms, better compound feed use with available farm feed resources, and 2. On the basis of the feeding value (Oats issues related to the vertical integration in the Units). pig and poultry industry) to dairy and feed mill industries, should be explored. Conclusion Appendx The above proposals attempt to set the frame- Approximate production cost and mnr- work for the next decade and seek to intensify ket prices of nmain livestock products smallholder production and consolidate and (US$/kg live weight equivadent) improve production on medium-size farms. They World would bring about these improvements through Market Production market EC a number ofinterventions, but above all through Product price cost fo.b. price price the rationalization of the feed industry, the improvement in supply management and mar- Milk 0.03 -0.09 0.10 0.14' 0.35 kets, and the reorientation of the other support Beef 0.12- 0.50 n.a. 1.OOb 2.00 services to farmers' needs. The proposed pack- Pork 0.90 0.75 1.00' 1.50 age would aim to alleviate the impact of price Broilers 1.00 0.70 0.8_ 1.20 volatility in the dairy sector and the general a. Based on New Zealand export prices. increase in unemployment by providing alter- b. Baed on Australia pnme beef pices. c. Based on Chicago market prices. native forms of livestock production, while at d. Base on New York prices. 305 Annex 21 The dairy sector Summary of dairy strategy stations have declined in numberfrom 30,000in 1970 to the present level of about 10,000 (al- BACKGROUND though this number is still too high). The Polish dairy sector is of major economic and PRESENT sITUATION social importance. With an annual production of 15 billion liters, dairy represents 19% of This important sector now faces serious prob- agricultural GDP and 32% of the contribution of lems, partly as aresult ofdeep-seated structural livestock to GDP. It is a major source of income problems, and partly as a result of the national for 2 million farmers - two-thirds of the farm- economic reform program. The structural prob- ingcommunity. Besidesdirecton-farmemploy- lems are: ment, the dairyindustry, with 712 plants spread throughout the countryside, provides over * the small average farm (5.2 ha) and herd 110,000 jobs and is thus a major source of rural size (2.4 cows per farm) with 1.1 million farmers employment. Finally, milk and milk products having only one to three cows and producing are an important part of the diet of the Polish 30% ofthe milk, 0.3 million farmers with four to population. With 270 liters per year, per capita 10 cows, and only 7,500 farmers with more than consumption is among the highest in Europe, 11 cows. This small farm size puts severe limits and over 10% of the average household income on investments in improvement of production is spent on dairy and dairy products, giving the efficiency - for example, feed conservation, dairy sector an important sociopolitical dimen- livestock housing, and milk quality improve- sion. ments - as described in the following para- Trends over the last two decades show a graphs; gradually declining cow population (25% * the severe imbalances in livestock feed since 1970) compensated for by a propor- supplies,causedbypoorgrasslandmanagement tional increase in production per cow, which and conservation, and exacerbated by an inef- now stands at about 3,250 liters per cow per ficient feed mixing industry. Poor grassland year. Over the last 20 years, the amount ofmilk management, especially the Polish practice of processed has almost doubled, from 37% of total long grazing and cutting intervals, leads to low production in 1970 to 73% in 1988, with a much quality roughage deficient in protein and ad- greater supply from private farms. This is equate for a production of only five to 10 liters partially caused by an increase in the numberof per cow per day, whereas grass in this envi- suppliers, which rose from about 1.2 million in ronment should provide for at least 15 liters of 1970 to a current level of 1.4 million. Collection milk production per day. Further feeding value 307 losses (on average, 10% of protein) result from quality and can be sold in the world market only the predominance of hay making (80% of all at a severely discounted price, normally at 40- fodder conserved), rather than silage making. 60% ofU.S., European, andCairns Groupprices, Finally, the feed mixing industry, with low as shown in the Table 21.1 below. productivity and high overhead costs, cannot supplement these deficiencies with a competi- tive concentrate feed of reliable quality; * the poor livestock housing conditions and Table 21.1[ First quarter 1990 world lack of adequate machinery and equipment, market and Polish export prices of resulting from the small farm size; dairy products * the extreme fragmentation of milk collection, with 1.4 million farmers delivering on average (US$/ton) 12 liters of milk per day to 10,000 milk assembly - World market Polish export points, greatly increasing collection costs and impairing quality control and improvement; Skim milk powder 1,200 350-750 * the precarious status of the dairy processing Whole milk powder 1,250 860-900 industry: 712 plants, over 500 of which are more Butter 1,350 600-950 than 30 years old, are operated by 323 dairy Low-fat cheese 1,900 Gouda cheese 1,700 1,100 cooperatives, generally function with unclear Casein 2,700 1,500 ownership and management responsibilities, and operate commercially with a very narrow product range. Over the last years, investments Economic reform has exacerbated these prob- have not kept up with need and, while low labor lems and led to a situation of acute stress: costs could enable some smaller units to main- tain their production costs at reasonable levels, * the draLmatic reduction of the subsidy on production costs are not nearly so critical in the milk products from US$1 billion in 1988 to an dairy sector as product mix is in determining estimated UJS$70 million in 1990, together with viability and the ability to pay farmers a com- a fall in real household income, caused a drop in petitive price. This will become increasingly the consumption of dairy products of 9% over important under the recently introduced, more the first five months of 1990; liberal import regime. This imposes a much * the application of the remaining subsidies higher requirement of scale, and new invest- to low-fat milk (although recently changed) ments, once the industry has been rationalized, stimulated the production of butter; are necessary; * the liquidation of secondary cooperatives- * the inappropriate price structure, which hitherto responsible for stock management and gives only a very low weight to quality (equal to financing -- left the widely scattered primary the payment of 1% fat), no weight to milk pro- cooperatives in disarray over stock manage- tein content, and only a minimum premium ment and export, leading to the present large (Zl30-Zl50 per liter) for winter milk, despite a number (260) of small exporters and to price high peak to valley ratio of 1.6:1, which even cutting to gain access in the highly cartelized seems to have increased over the last years. The world market for dairy products. While Lacpol, absence of any weight given to milk protein a federal cooperative with 72 dairy members, content is repeated in genetic improvement and claims to be responsible for 40% of dairy exports artificial insemination (Al) services, where up with sales of US$100 million, there are at least to now the main breeding goal has been to 10 other state or quasi-state agencies exporting increase the fat contentin addition to milkyield; some dairy products and 250 private exporters and operating without any form of bonding or licens- * the inadequate quality enforcement, which ing, thus damaging the image of Polish dairy means that on average about 80% is classified as products in the world; and Class I milk, whereas independent tests showed * the extremely high nominal interest rates, that only 30% would classify as Class I accord- coming at a time of peak production - under ing to a strict application of the standards. normal conditions also a time of stock building - put many primary dairies in great financial As a result, Polish dairy products are of low difficulty. 308 As a result, dairies producing butter were first to address the current stampede selling, confronted with extremely high financing especially of butter stocks. If no support mea- charges for a product that, because of poor sures are taken, it is likely that this present quality, could not be exported and which they distress selling of butter in the domestic and are now disposing on the domestic market at world markets will continue, resulting at the one-third of the milk-equivalent price of those end of the peak season in much lower stock producing cheese, skim milk powder, or other levels than required to bridge the winter season. exportable products. Over 50 of the dairies The necessity of importing substantial quanti- producing for the collapsed butter market have ties at much higher world market prices over gone bankrupt and several more are facing the the winter is then a real threat. This undesir- samefate. Asthecooperativespassedthefinan- able situation might be prevented by the intro- cial crisis on to the producers, a wide range of duction of a set of measures (described below) producer prices emerged (Zl300-ZI900 per liter). that would lead the industry to conserve their This compares with a world market equivalent stocks. price ofZl1,350 perliter, a producerprice under the relatively undistorted market of New Medium and long term. The Polish dairy Zealand of ZI 1,800 equivalent per liter, and a industry's strength lies in the husbandry skills U.S./EC subsidized price of Z13,500 equivalent of its farmers and the excellent disease status per liter. and good genetic potential of its herd - factors The lower producer price range in Poland of Zl which could put the industry on a par with many 300-600 per liter, paid by dairies producing other producers in the world. The Polish dairy butter (frequently with two to three month de- sector also benefits from low labor and energy lays) severely threatens the solvency of the costs, and the low income levels of its farmers, supplying farmers, affecting above all the more which give the Polish dairy sector a margin of specialized medium-size farmers. These farm- advantage over some of the more efficient pro- ers depend more heavily on milk and are more ducers. Demandprojections canbe summarized likely to be hurt in their farm investments by as follows: high interest rates than are the small one-to- three-cow operations. However, medium-size * For the domestic market, dairy product farmers have the best genetic stock and suffi- consumption is expected to equalize at Western cient scale to justify the crucial investment in European levels over the next decade, which, milk quality improvement. They are therefore when combined with population growth, sug- the cornerstone of future dairy development, gests that the market will notregain even by the and the substantial reduction in this category of end of the century the consumption levels of the dairy farm, which threatens to occur, would 1980s. have a long-term negative effect on the future * For the world market, much will depend on development of the sector. (a) how successful the major dairy exporting countries will be in maintaining restrictions on PROSPECTS their own production and continuing their sat- isfactory performance of the last years in the Short term. Management problems and finan- management of exports and export pricing; (b) cial issues relating to the normal summer peak whether the current Uruguay round of nego- stock (rather than a mismatch between supply tiations of the GATT will be effective in liber- and demand, as often argued) seem to be the key alizing trade; and (c) to what extent Poland is issues. Although the analysis is hindered by able to improve product mix and quality and inadequate information on the present stock evolve a structure capable of carrying stocks position of the different dairy products, present and matching supplies to the market. With information shows that the 9% fall in demand present comparative advantages, modest pros- has already been followed by an adjustment of pects exist for expanding current volumes 11.3% in the supply purchased by the dairy slightly and using exports as an effective supply industry. If amore detailed inventory of current management tool to stabilize prices. stock levels would confirm, as expected, that the levels are normal - or even below normal for the time of yearl - then it would become crucial 309 OVERALL STRATEGY tional Dairy Institute in coordination with the recently established Agricultural Marketing Within this overall framework, the strategy Agency (ARR). It would be stored by the indi- would be to produce a full range of high-quality vidual dairies at their cost and risk, in bonded competitively priced products; this will allow warehouses. Stock movements would be under the industry to hold the domestic market and the supervision of ARR. The state guarantee export as opportunities arise, and at the same wouldbe dependent on the industry's assurances time provide a viable income from milk pro- that (a) itwill implement anew pricing structure, duction to the maximum number of farmers. increasing the premium for quality and reduc- This strategy would need to satisfy its principal ing the premium for fat; (b) it has made satis- stakeholders, that is, (i) the consumers, who will factory arrangements to avoid a recurrence of want a reliable supply of a full range of competi- present market conditions in 1991; and (c) it will tively priced products; (ii) the farmers, who will implement a quality improvement scheme. This want security and the opportunity to earn a price guarantee should enhance the collateral comparable income; (iii) the dairy industry value of stocks andfacilitate theirfinancing. On management and staff, who will want attractive the other hand, the price levels chosen are such working terms and conditions; (iv) bankers and that it is not expected that any government investors, who will want the security of loan subsidy will actually be required. repayment and adequate returns on their in- vestments; and (v) the government, which will The second immediate task will be to start want to withdraw as soon as possible from the restructuringthe industryto arrive at economies sector (in operational and subsidy terms). of scale, greater product flexibility, and better To achieve these objectives, a number ofshort- export organization. To that effect, a rapid term tasks are necessary to (i) restore industry move to a syistem of regional rationalization is confidence; (ii) start restructuring the industry; recommended, to be induced by granting dairy (iii) improve quality; and (iv) rationalize ex- licenses on EL regional basis to up to a dozen ports. These short-term tasks would need to be equal milk pools created through the amal- complemented by medium- to long-term mea- gamation of existing dairy cooperatives (giving sures to address the structural production and these milk pools exclusivity of collection and industry constraints identified above. These processing in their regions for a fixed period - tasks and measures are discussed in detail be- say two years). These regions would be selected low. on the basis of milk density and social and infrastructural integrity. Immediate actions in SHORT-TERM oBjECTs this respect would include: The first task will be to restore industry confi- * the recruitment of technical assistance to dence and, especially, to stop stampede sellingif preparetheplansandprospectusfortheregional this would lead to deficits in the winter. It is milk pools with the goal of winning the support therefore proposed that: and participation of farmer investors, bankers and government staff and to assist the amal- * the industry immediately make an inventory gamated cooperatives in the initial management of available stocks; of their business; * the industry set a credible and viable milk * the immediate clarification and rational- target price - one that would reflect the dis- ization of the ownership of the existing dairy countedexportpriceavailablefordairyproducts cooperatives, attributing the total net worth of other than butter; the existing cooperatives to the original sub- * the state guarantee until spring 1991 ex- scribers in proportion to their share of initial portable butter stocks atthe set price level up to capital. Those continuing in the dairy industry the world prices minus 20%. At current prices would be issued shares in the new rationalized this would provide a guarantee of about cooperatives upto their share value and might US$1,000 per ton of unsold butter in March be required to subscribe for further shares, 1991. The guarantee would only applyto butter depending on the investment requirements. of exportable quality, as certified by the Na- Those not continuing in milk production or as 310 members of the new cooperatives would be is- cally justifiable herd size is a 4-cow unit. With sued redeemable loan stock for the value oftheir the price differential for first class milk pro- holding in the new cooperative; posedabove,theequipmentispaidbackinthree * the passing by the government of dairy years; and licensing legislation, which would underpin the * this quality improvement campaign be sup- amalgamation of the dairy cooperatives and ported with an active extension campaign, fo- enforce the collection and processing exclusive- cusing on (a) farmers with problems meeting ness of these milk pools for two years; thequalitystandards-tohelp them toimprove * the passing of cooperative legislation, reit- milk hygiene; (b) small farmers, who want to erating the ownership rights of shareholders continue with milk production -to increase the and enabling the amalgamated cooperatives to scale of the milking operation with technologies enter into joint ventures, supply management, such as group milking and a milk bank, and to licensing franchises and technology transfers assist this class of farmers in introducing the with international partners. use of chilling equipment at an affordable price; and (c) farmers who want to abandon dairy The third task would be to start improving production - to advise them on alternative quality standards. This would include changes enterprises, for example, horticulture and more in the price structure and a well-directed in- intensive pig and poultry farming (see Annex vestment program, supported by concentrated 20). extension efforts. More specifically it is recom- mended that: The final immediate task would be to ratio- nalize imports and exports. This would include: * the price differential for Class I milk be increased to 30% over the value of basic milk; * passing antidumping legislation, in accor- * stricter enforcement of the prevailing in- dance with GATT regulations, imposing a ternational standards be introduced. In the variable levy to adjust for the subsidy of the short term, it may be necessary to support the exporting country; dairies in ensuring that payments are based on * suspending all food aid in the form of dairy quality, by applying a system of random checks products; byanindependentinstitute (the Dairy Institute, * creating a dairy or food export promotion forexample);andto excludefromthe government board for information and coordination of dairy support program those dairies whose milk or food exports to improve the image of Polish classifications (and therefore payments) are not dairy or food products in the world market; supported by these random tests. It could be * launching a study to review possible export expected that in 1991 about 40% of the milk coordination mechanisms. This would mean would fall into Class I; assessing the efficiency and profitability of ex- * an industry-supported quality logo be in- isting state export enterprises and their role, if troduced; any, in future exports, versus the desirability of * payment for the protein fraction be at about an industrywide food export joint venture, 50% ofthe value ofthe milk, thushalvingthe fat subject to antitrust legislation. The move from premium; a dairy export enterprise to a food export consor- * testing procedures be adjusted so that milk tium would bringabout significantintersectoral contaminated with antibiotics can be detected synergies as meat, dairy and horticulture before it is bulked up and that strict suspension products are drawn from the same stores using rules be applied to suppliers of milk containing similar transport and financing arrangements, antibiotics; complying with the same customs and import * commercial lending be encouraged for the requirements, and, in many cases, being offered improvement of chilling facilities on farms (es- to the same customers. Such a food export timated at US$200 million ), in the dairies agency could also provide a ready-made forum (estimated at US$100 million) and in the dis- in which voluntary industry stabilization levies tribution and stock management (estimated also could operate and within which stock financing atUS$100million). Fortheon-farminvestment and management or public warehousing func- in chilling equipment, the minimum economi- tions could be discharged more cost-effectively, 311 thus freeing up the capital of individual firms, interim step could be the establishment of a which would otherwise be committed to work- subsidized school milk program; ing capital, for quality improvement, product * theindustryimplementovera3-yearperiod development and growth. the investment program; * the AI services reorient their selection pro- IMPACT gram toward a stronger emphasis on protein production and integrate the different selection These measures should lead to more competitive criteria into one overall selection index, taking and sustainable industry. On the positive side, into account the relative economic value of the it should lead over the next year to a more stable different production traits; and market, that is, to a narrower producer price * the state develop a strong extension pro- range, with the average producer price reach- gram for grassland improvement as the basis ing, or coming close to, the present top price ofZl for cost-effective milk production. 900 per liter. It should also improve quality and reduce the present 40% price discount for Polish LONG-TERM STRATEGIES dairy products in the world market. On the negative side, these measures could squeeze out In the longterm, the emerging dairy cooperatives the small producer and those dairy cooperatives could get involved in other food-related activi- which cannotincrease qualityandbroaden their ties; have a stronger farmer focus, integrating product range. The small farms would be put other farmers' input services into their package under pressure through the greatly increased of services; or, through joint ventures, acquire price differential for quality milk, as the size of access to other dairy markets outside Poland. their operations would notjustify the necessary These activities need to be supported by an investments in quality improvements. The ra- active product and market research program. tionalization of the dairy industry in milk pools will exclude producers in lower milk density Introduction areas and will render a substantial number of existing plants and processing facilities redun- Economic restructuring has had a traumatic dant. The rationalization will lead, however, to impact on the dairy industry. In 1988, ZI 760 more efficient on-farm production and process- billion were paid to farmers for raw milk. The ing. But, as supply and demand are in a precari- state paid Zl 653 billion in subsidies to dairies ous balance, care should be taken to monitor that offered dairy products for sale to consum- supply and demand so that policies can be ad- ers,realizingintotalZI447billion. Inthatsame justed as the market develops. year, butter and cheese imports accounted for 12.5% and 7%, respectively, of domestic market MEDIUM-TERM STRATEGIES requirements while approximately 1% of do- mestic production was exported. Recommendations for the medium term are During economic restructuring in 1989, sub- that: sidies were r emoved, with the exception of a subsidy applied to low-fat milk. This exception * the industry further rationalize assembly waslaterextendedtostandardizedmilkbecause and processing plants in the milk pools under of declining butter prices. The withdrawal of the new structure; dairy subsidies from all but liquid milk led to a * the state encourage, after the 2-year exclu- reduction in government spending on dairy sivity for the regional dairies in the milk pools products froim almost US$1 billion to about has elapsed, the entry of new enterprises to US$70 million. Milk accounted for almost half develop niche products and markets and thus the food subsidy allocation. maintain a competitive industry; The situation was further exacerbated by the * the industry agree on an industrywide stock liquidation of the secondary cooperatives re- management and export structure, in accordance sponsible for stock management and wholesal- with results of the study on export coordination ing, by very high interest rates, and by inad- mechanisms (recommended above); equate storage capacity. The market was left to * the state abolish the milk subsidy. An balance supply and demand even as the stock 312 management and marketing of the dairy coop- which, presently, accounts for only approxi- eratives was dismantled. The resulting level of mately 6-10% of industry revenues. uncertainty and indecision was not conducive The determinants of world market prices, for the dairy industry to address the issue ofhow however, will change over the next decade and best to cope with market changes and sudden wlhether they will be favorable or not for Poland adjustment needs. is a matter of some conjecture. In any event, to The result is that dairies producing butter for cope with the world market situation, Poland the domestic market - hitherto topped up by must protect its domestic market from the va- imports - saw no other remedy than to dispose gariesofhighlyprotectedanddiscountedforeign of products at prices that could onlyjustify one- markets, while positioning itself to compete third of the raw milk price paid by those produc- profitably in foreign markets where possible. ing cheese, skim milk powder or other export- To summarize, the present problems of the able products. This lower price linked to the dairy sector arise from a combination of factors: collapsed butter market and inadequate stock- withdrawal of subsidies, high interest costs, financing threatens the solvency of those dair- milk harvest effect arising from seasonality, ies and the supplying farmers and is the central and abolition of the traditional storage and cause of the present crisis in the dairy industry. stock management system carried out by coop- The problemofthe dairies can onlyberesolved eratives. As a result of these changes, the through rationalization and adaptation of pro- underlying weaknesses of the sector - poor duction, restoring order in stock management product quality and poor industry structure - andmarketingcapacityandfocusingonquality. have been exposed, and sales are possible only The impact on milk producers is heaviest on the at a deep discount for key commodities on both more specializedhigh-inputdairyfarmers whose domestic and export markets. liquidity was already seriously strained by If four essential actions are taken, the price of premature repayment of loans in the face of in Class I milk can be brought back to Z1 900 per interest rate increases in December 1989. The liter (or even higher at present world market subsistence smallholder milking one to three conditions), thus offering good prospects for cows on low inputs is less likely to be hurt over farmers with an average-size farm milking four the long term by the economic squeeze. Indeed, cows or more. The four essential actions are: he may not be exposed to it at all because the problem applies mainly to butter production. * immediatelysupportingastockbuildupwith The viability ofthe dairy industry depends on a target price of ZI 900, and restructuring the an improvement of product quality at the export pricing system; level. This can only be done by building an * investing in the production of Class I milk industry based on farms of sufficient scale to on farms right through the assembly processing, invest in quality milk production. Such an distribution and retail system (with a full chill investment can only be justified by having a chain), so that this investment can be converted price structure that sufficiently differentiates into better products and, hence, higher milk among qualities so as to remunerate that in- prices for farmers; vestment. Only on this basis can the domestic * restructuringthedairyindustrybycreating market be maintained and the full world mar- strong farmer-controlled regional dairies and ket price for exports be obtained. facilitating their involvement in external joint Through a combination of market manage- ventures since these organizations must quickly ment and rationalization ofprocessingcapacity, make the shift from a command to a market it is possible for the dairy industry to pay ZI 900 economy; per literfor allfirst-qualitymilkwithoutfurther * creating an industry-based stock manage- subsidies or other forms ofgovernment support. ment and commodity export mechanism to en- With effective export marketing and improve- able recoveryfromthe presentdeeplydiscounted ment in quality, it is possible to further increase position of Poland's major dairy commodities. this basic price by ZI 500 at today's discounted world market prices. This would allow the government to withdraw the 400 ZI subsidy that currently applies to about 15% of milk 313 Production strategy cluding contaminants that result in rejection of large product batches. DAIRY iNDusmy cOMPErITIENESs The second challenge facing the Polish dairy industry is tD close the ZI 600 quality perception It is difficult to assess the competitiveness of gap between the world market price (which is any dairy industry today given the distortions the result of US$10 billion in export subsidies in world markets. The world market price for spent worldwide) and prices received by Polish dairy products - resulting from U.SJEC dis- dairy exports. This is not merely an internal posalpolicies-hasfallendramaticallyoverthe dairy industry issue. It extends across all food past year. The outlook is that production re- products and includes wider quality stock strictions and some fine-tuning in the support management and marketing considerations. mechanisms will enable the major dairy-ex- With good market and product management, portingcountries to stabilize worldmarketprices the quality of products sold on the domestic and perhaps bring about a recovery. In the market can be brought into line with that of longer term, a liberalization of trade in agri- other European countries at or under world cultural commodities, including dairy products, market prices. This is the best form of market is envisaged, whether or notthe currentUruguay protection, although it will require the support Round ofGATT negotiations, duetobe concluded of effective antidumping legislation. This com- by the end of 1990, achieves its ambitious goal. bination of forces would leave the Polish dairy Even if the goal is not achieved, trade restrictions industry uniquely positioned to trade profitably will be less effective in curtailing the movement in an unprotected and unsupported dairy mar- of consumerfood products in international trade. ket, provided it can resolve its twin problems of But if protectionist policies in agriculture con- product mix and product quality, while creating tinue unabated, it is unlikely that production of a structure capable of carrying stocks and agricultural commodities for subsidized export matching supplies to the market. The funda- will be expanded. In either case, the likely mental economic reason for Poland's position is result is that world market prices will tend to not any inherent advantage in milk production equalize within and between the major dairy or high productivity. Rather, lower income markets and, thus, increase to somethingnearer levels give the 4-cow Polish dairy farmer a the full cost of production in the most efficient margin of advantage over the 120-cow New industry. Zealander. Achieving this position requires Presently, remunerations of Polish milk pro- comparable quality, however. As the economic ducers are in the range of ZI 300-900 per liter. situationimproves,this advantagewillbe eroded The lower price reflects today's value of butter on the highly distorted domestic market, and the higher price the value of Polish skim milk Table 21.2 Polish dlairy competitiveness powder, casein, and cheese on the export mar- ket. The returns at this higher price are compa- Zlotys rable to returns for pig, poultry, and grain pro- US/EC price 3,500 duction at prevailing prices and would be suf- New Zealand price 1,800 ficient to sustain supplies. Thus, at ZI 900 milk Distorted World price 1990 1,400 is competitive with other farm enterprises. The Base price 1990 -provides returns ZI 900 price, however, reflects a 40% discount comparable to other farm products 900 applying to dairy commodities from Eastern Discounted price 1990 - unsustainable 300 Europe relative to prices in the United States, Europe, or Cairns Group countries (Australia, New Zealand, etc). This is based on a perceived as better income alternatives arise, and greater quality differential and on disorderly exporting. productivity will be required of dairy farmers to The first challenge facing the Polish dairy achieve comparable incomes. This continuous industry is to reorganize its supply and pro- process of adjustment is likely to gradually cessing capacity to close the Zl 600 domestic concentrate the national cow herd in fewer price gap within the industry. This requires hands, rather than threaten the dairy self-suf- improving milk and product quality and ex- ficiency of Poland. 314 DAIRY INDusTRY sTRucTuRE lower differential applying to quality than for 1% fat. Seventy-nine percent of milk is paid for Agriculture accounts for 28% of employment, as Class I but independent assessments suggest 12% ofexports, and 13% ofGDP. Milk is a major that not more than 30% complies with the 4- income-generating activity for two-thirds of the hour methylene blue test, which is the main farming community and for the 113,000 em- yardstick used to determine milk quality. ployed in milk processing. Consumers spend The dairies produce, according to their capac- 10% of their income on dairy products -hence, ity, a range of products for the local market with the social, economic, and political importance of some marginal volumes goingfor export. In the dairy. past few years, exports have been outweighed Dairy product consumption at 270 kg/head by imports by three- or fourfold. Because of the p.a. isamongthehighestinEurope. Itdeclined combination of donor aid in the form of milk in the first months of 1990 by about 9%. It may products and the impact on demand of the re- be expected to equalize at European levels over moval of subsidies combined with high interest the next decade, which, when combined with rates, many dairies have been forced in 1990 to population growth, suggests a market that will seek export outlets for unsuitable products and/ not regain - even by the end of the century - or to dispose of them on the domestic market the consumption levels of the 1980s. In March because they lack either the physical or finan- 1990, food accounted for 50% of consumer cial capacity to carry stocks. This has resulted spending. Meat and dairy products account for in unprecedented price cutting for Polish dairy 45% of spending on food, half of which is for products-both on domestic and exportmarkets. dairy products. The product mix is the result of a combination Over 15 billion liters of milk (accounting for of investment restrictions and output maximi- 19% of agricultural output) are produced in zation to match the domestic market, and im- Poland by some 4.8 million cows, and 2 million portminimization. Thefollowingprofile emerged farmers. The marketed portion sold for process- from these factors: inghas doubled over the pasttwo decades. Over the same period, the cow herd and milk output Mostliquidmilk is presented in one-liter bottles, have fallen by 1 million head and 1 billion liters, at 2% fat, unchilled, although one plant is offer- as has the average herd size - even though ing cartons, a few offer sachets at a higher price, farm size has increased from 4.7 to 5.2 ha. and at least two importers are offering UHT Today, 1.4 million farmers offer milk for sale, milkinplasticbottles. Thegovemmentsubsidy accountingfor 84% of the milk that is processed. of Zl 400 per liter, applied until recently to low- The balance is sold by state and cooperative fatmilk,onlyaccentuatesthefatproblem. Apart farms. from price and margin controls on milk and The averageyield per cow has been risingvery cheese, no other governmentrestrictions or sup- gradually and is now about 3,165 liters/cow, ports apply to the dairy sector. with average sales per cow estimated to be 900 liters less. Thirtypercentofthe milk is provided by the 1.1 million farmers who own one to three cows. Three hundred thousand farms have four Table 21.3 Product mix cows or more and account for 55% of milk sup- plies. Only 7,500 farmers carry more than 11 cows. Seasonality varies by region from 2.5 to 1 Percent of Mak in the northeast to 1.3 to 1 in the southwest and Product and Supplies Output averages 1.6 to 1. There is evidence of an increase in seasonality over recent years. Skim milk powder* 53.4 204,000 tons Milk is assembled in average lots of 12 liters Liquid milk 15 2.5 billion liters per day, through about 10,000 milk assembly Cheese 10 360,000 tons points to 712 plants (500 of which are over 30 Quark 9 years old), operated by 323 dairy cooperatives. Cream 8 The milk is graded according to quality and fat Other 10 content and is paid for on that basis, with a *equivalent to 264,000 tons of butter 315 Table21A Polishmilkproductiontrends The evidence of the past few years is that seasonality is on the increase. Given the 1970 1988 unsustainable margins (average supply price of Cows (m) 6,082 4,806 ZI 595 per liter), this trend is likely to be accel- hMlk output per cow 2,384 3,165 erated this year unless some corrective action is Milk output (million) 14,499 15,177 taken. Purchase of milk 5,309 10,949 Stock levels should be higher this year if the of which market demand from the latter part of 1990 state farms 4,100 9 ,034 until the new milk season is to be met from Percentage of production offered for sale 36.6 72.6 domestic supplies. Were the market to be sup- Percentage of fat 3.35 3.63 plied from imports, this would represent at Number of suppliers (000) 1,189 1,399 today's world market prices a dramatic increase Milk assembly points 31,236 9,749 in the average consumerprice since world prices Milk carriers 16,239 31,611 of which, motors 13,131 are runnng substantially ahead of prevailing Price per liter (ZI) 2,64 69,45 Polish prices, particularly in butter and skim Percentage of first class total 33 79,5 milk powder. of which The outcome of the present situation could private farms 77.0% well be a stampede out of milk production. state farms 81.5% Therefore, the market situation requires a steadying influence to restore butter prices and to build up stocks. This, however, cannot be Table 21.5 Polish milk supply network achieved imimediately because of difficulties relating to product quality, stability, and shelf- Supplier size (thousands) life, and the additional problem arising from 0 -4,000 iters p.a 1,070 contaminants (including antibiotics) resulting 20 - 50,000 liters p.a. 315 in the disposal of batches of rejected products. over 50,000 liters p.a. 7.5 These problems further weaken an already se- Membership of cooperatives (thousands) 323 riously weak market. The rigorous enforcement Dairy plants 712 of quality standards is likely further to reduce Membership of cooperative councils 6,900 supplyto well below the level ofdomestic demand Membership of suppliers in the short term. The situation is therefore Committees 72,186 critical and in need of immediate and sensitive Number of advisors 2,149 handling. ItTmustbe emphasizedthatthis isnot Milk as percentage of sales 86.6% Dairy retailing - shops 315 a problem that subsidies can solve, that we are Cocktail bars 47 not facing a problem of oversupply, but rather one of a lack. of stock management to meet a Assembly points seasonal situation exacerbated by poor quality By volume (liters per day) adhg neetrts 0 - 1,000 1,738 and high interest rates. 1- 6,000 7,214 over 5,000 797 PRODUCTION STRATEGY AND CONSTRAINTS By equipment Own water 8,755 Despite the serious problems mentioned above, Refrigeration 7,039 the Polish dairy industry has a number of stra- tegic strengths on which to build a viable and competitive future: SUPPLY AND DEMAND CONDMONS * the excellent cattle husbandry tradition, Despite the very substantial price rise for dairy the large number of dairy farmers, and the products in 1990 arising from the combination relatively low cost of milk production in the of high inflation and withdrawal of subsidies, private sector; the data for the year to date suggest that the fall * the excellent disease status of the Polish in supply has in fact been greater than the fall herd and its good genetic potential; in demand (see Table 21.5). Imports in 1990 * the capability of on-farm concentrate feed were insignificant. production provided that the market comple- 316 Table 21.6 Dairy product market adjustment (January - March 1989 and 1990) Consumption Quarter March Amount (kg) January February March Total Adj., % Adj., % Weighting Milk 1989 13.80 13.27 14.67 41.74 1990 12.67 11.97 13.33 37.91 -6.6 -9.1 20 Butter 1989 0.71 0.66 0.75 2.12 1990 0.66 0.62 0.72 2.00 -6.6 -4 50 Cheese 1989 1.18 1.15 1.29 3.62 1990 0.97 0.93 1.05 2.95 -18.5 -18.6 20 Market 5 month 3 month Adj. January - May adj., % adj., % March Total Milk Supplies 1989 4A billion liters 1990 3.9 billion liters -11.3% -8.7 -8.4 ments it with appropriate supplements; * the low labor, transport, and energy costs; Table 21.7 Milk utilization * the large domestic marketfor dairyproducts. (tons) Though not an advantage as such, one can 1970 1988 1989 also add that the dairy industry will benefit for Total supply 5,309 10,949 11,305 some time from the lack of higher income alter- Liquid milk (M liters) 483 2,580 natives. Whole milk powder 14,600 49,500 49,400 Taking these strengths into account, it is Sktm milk powder 20,100 168,900 175,000 possible to envision thatthe Polish dairyindustry Cear 91,700 266,800 would be capable of producing a full range of Regional cheese 43,000 124,700 412,000 world class dairy products; satisfying the do- Cottage cheese 69,000 312,000 mestic market; and availing itself of export Processed cheese 14,000 23,800 opportunities as they arise, while providing the Condensed milk 5,000 20,400 opprtuit toear adecent income from milk Milk drinks 63,800 107,000 opportunity to earn a decent income from milk Casein 18,800 23,800 32,700 production to the greatest number of dairy Calf milk replacer 3,500 38,800 farmers. However, the dairy industry must satisfy its main stakeholders. Consumers will want reli- and fiscal terms, but also to ensure consistency able supply of a full range of quality products and adequacy of supplies for consumers and to competitively priced. establish the dairy industry on a basis that will Farmers will want security- the opportunity maximize its contribution to social and economic to earn an income comparable to other agricul- development. tural and nonagricultural activities. Dairy in- dustry management and staff will want at- Prerequisites. To satisfy the requirements of tractive working terms and conditions and ca- these stakeholders in a realistic manner and to reer opportunities. pursue the vision described above, a number of Bankers andinvestors will want stable repay- prerequisites must be met: ment of loans and the opportunity of return on investment. The government will want to with- * Enforceable milk quality and hygiene regu- draw from direct involvement in the sector at lations that reflect the value of quality in the the earliest opportunity, both in operational premium paid must be developed. This will 317 Table 21.8 Milk markets If these conditions are met, this will inevita- (tons) bly lead to the following: Exports 1970 1988 1989 * Milkfor processing will cease to be an option Butter 12,400 - - for many smaller producers of poor quality milk Cheese 2,200 5,100 700 in lower milk density areas furthest from pro- Skim milk powder - 44,200 39,900 cessing facilities and markets. Casein 5,400 12,300 7,100 * A substantial number of existing assembly and processing facilities will become redun- dant. * There will be international involvement in Table 21.9 Domestic consumption the Polish dairy industry, whether throughjoint (kg per capita per year) ventures, liicence franchise, or technology trans- fer agreements. 1970 1988 Liquid milk (liters) 45.0 66.7 Critical success factors. Some elements in the Butter 3.8 7.6 chain of the dairy industry are of strategic Cheese 1.6 3.5 importance in the restructuring process. Cottage cheese 2.1 7.9 Cream 2.8 6.9 Inputs. Expanding dairy farmers need a good support service and an uninterrupted flow of least-cost, high-specification inputs. This will mean that milk farmers will need to invest in require: milk cooling storage. * A new cooperative legislation framework * rationalizingtheveterinaryandAI services; within which to resolve the ownership issue and * rationalizing and developing the feed restructure the dairy industry must be passed. supplement concentrates, fertilizer, and other e Provision for licensing or other control of farm input sectors, including farm machinery; dairy processing plants must be made, both to * access to credit for dairy farmers investing ensure standards and to establish a critical in quality. mass at the level of the industry. * An industry-guided market management Grassland. Better grassland management mechanism must be developed, in order to help and conservation is essential to low cost milk match total volumes and product mix to avail- production. This will require special attention able market conditions; this must be combined from the extension service. with strict legislation that prevents dumping. * Reliablecreditfacilitiesforfarmers,proces- Quality. A chill-chain from farm to retailer sors and retailers must exist, as well as a climate and cleaner, higher quality milk are essential to within which they can undertake repayment improved products. This will require invest- commitments. This requires a high level of mentin training and in plants, and enforcement predictability and confidence. of standards through stiff penalties imposed by o Industry commitment to rationalization at the dairies (on delinquent farmers) and by the the assembly and processing levels, with the governmen; (on delinquent dairies). It will also aim of increasing milk density and consolidat- require an industry-regulated quality assurance ingthe processing capacity (but with continuing campaign. strong farmer ownership involvement), must exist. Scale. Sinice the objective is to maintain the * Finally, a well-focused extension service maximum number of farmers in milk produc- must be put in place for both categories of tion consistent with the development of an in- farmers affected: ternationally competitive industry, this will - those who have a future in quality milk require scale and density at the production production; level, and scale and product spread at the pro- - those who must seek alternative enter- cessing level. prise. To achieve this, milk assembly must be ra- 318 tionalized by a combination of extension and and result in higher quality milk. price measures, assisting those with no future * The existing electricity system may exclude in quality milk production to identify alternative on-farm refrigeration in some key areas. enterprises and offering a price premium based * The payback from this investment and for on quality and credit terms to those who must the parallel investment in processing will arise, invest in quality and expansion. New technolo- through the market, only if quality improve- gies that help reduce costs of small farm assem- ments are transmitted to stocks and to the bly (such as milk banks, together with group market place. It is therefore essential that milking) should be examined. farmers, in making their investments, be as- At the processing level, rationalization can sured that the proper industry structure to only proceed after new cooperative legislation ensure market recovery and a premium for has been passed. This legislation should recog- quality are in place. nize the prior right of dairy farmers to organize * Many smaller dairy farmers who cannot dairy processing, provided they can combine achieve quality milk will receive an uneconomic milk supply, management, plant, and money in milk price. In the longer term, there will be no a proposal for a strong, stable dairy enterprise. future in dairying for them except that provided Transferring facilities to new cooperatives (or by the local market. jointventures)shouldtakeaccountoftheexisting Although these constraints are formidable, to equity, distinguishing between past and future neglect them would be to continue to undermine shareholders by converting to loan stock. Thus, the viability of Poland's dairy industry with in providing for the rationalization of the dairy unacceptable quality standards. This would industry in a given region, the net worth of have disastrous consequences for dairy farmers, existing dairy cooperatives would be attributed for the dairy industry, and for consumers in the to the original subscribers in proportion to their long term. share of capital. Those who will continue in milk production SPECIFIC ACTIONS would then be issued shares in the new ratio- nalized dairy cooperative to the extent of that Targetprice. The immediate task is to restore value and may be required to subscribe for order and stability in product quality and pric- further shares depending on both investment ing. This requires industry coordination to and membership requirements. Those who will determine stock levels and demand-supply po- not continue in milk production or as members sitions until next springandto fix a winter price of the new cooperative would be issued redeem- premium to suit the situation. The traditional able loan stock in proportion to the value oftheir premium of Z130-50 will have no effect in en- holding in the old cooperative. hancing winter supplies. Given the growing seasonality and the likelihood of shortages, a Constraints. The major production constraints more realistic premium is warranted by market in pursuing the approach outlined above are the conditions. To that effect, a sustainable target following: price should be set. At Z1900 per liter of Class I milk, dairying Volumes will inevitably suffer as quality compares about equally with alternative farm standards are enforced, possibly threatening activities. This seems to be, given todays' condi- supply adequacy and raising new market tions, the minimum price at which commercial problems. milk production can be undertaken even by * The investment levels for on-farm cooling Poland's most efficient dairy farm. This price is and storing of milk is substantial. This comes at broadly reflected in the domestic market price of a particularly bad time for all dairy farmers. dairy products with the major exception of but- Such investments in milk refrigeration are un- ter, the sales price of which should be doubled to likely to be a financially viable proposition for justify ZI 990/liter to producers. This price also farmers with fewer than fourcows. Otheralter- reflects the discounted exportprice available for natives, including reliance on higher hygiene dairy products, with the exception of butter, standards, direct delivery (rather than collec- some of which is exported at prices 50% lower tion), group refrigeration, and milk banks, can than the general 40% discount that applies to alsobe considered, providedthey are self-fimding Polish dairy products. Setting a target price of 319 Zl900 per liter, therefore, would give transpar- Enforce quality standards. Dairies must im- ency to the pricing system, distinguishing be- mediately adjust their testing procedures to be tween those dairies capable of meeting the tar- in a position to reject contaminated milk before get price and those that, through inefficiency or it is bulked up and apply suspension penalties to poor product quality, cannot. suppliers of milk containing antibiotics. Such a price, however, cannot be achieved International standard milk tests are used in even by the most efficient dairies without first Poland but they are not enforced. These stan- restoring market stability. Restoring market dards should be enforced with a substantial stability will require the combined efforts ofthe premium over the base price for Class I milk. industry and the government in order to make Class II milk should be priced so as to ensure it more attractive (or feasible) for dairies to balance. A quality extension service should carry seasonal stock surpluses. then be focused on those farmers having diffi- To that effect, the following mechanism is culties meeting the standards. proposed. The government should meet with It may be necessary in the short term to the dairy industry and outline the broad strat- support dairies in enforcing payment based on egy for industry rationalization and ask, as a quality, applying a system of random checks on matter ofurgency, thatthe industryidentifythe milk samples by the Dairy Research Institute, appropriate target milk price for Class I milk and to exclude from any government-supported and establish the present stock position. The program those dairies that do not meet quality government should offer to support the target standards during the tests. price by guaranteeing key dairy products of exportable quality up to the equivalent of the Milk pricing. As a matter of urgency, it is target price. essential to revise pricing within the constraints This price guarantee should enhance the col- of the market as follows: lateral value of stocks and boost industry con- fidence, therefore making it possible to carry * target gprice at about ZI 900 for Class I milk, stocks at the level necessary for seasonal stabi- which, as indicated above, should be agreed to lization. This would remove the surfeit of stocks by the industry and require govemment un- on the domestic market and stop export sales derwriting; under that price. The government should only * a winter milk premium reflecting the 1990- provide this guarantee if the industry agrees to 91 winter circumstances; three conditions: * a protein fraction representing about 50% of the value of the milk, halving the fat premium; * to implement a new pricing structure, in- * a premium for Class I milk of about 30% of creasing the premium for quality and reducing the value over basic. the premium for fat; * to make arrangements satisfactory to the Each dairy should set its price, within these government to avoid a recurrence ofthe present parameters, with reference to the target price, market conditions in 1991; which is based on prevailing discounted export * to implement fully the quality testing sys- prices for stable commodities. Dairies with tem outlined below and to institute a quality higher value added products and marketing/ assurance campaign. processing efficiency should be able, in time, to exceed this target price by a considerable mar- The government's risk could be covered by gin. sampling all dairy products going into storage under the guarantee scheme and inspecting Quality program. The higher milk price will dairy stocks in storage. It should exclude prod- probablybe earnedby up to 40% ofmilk suppliers uctsthatdo notmeetminimum export standards. in 1991. But dairies have an obligation to adjust The role of seasonal stock management would the price structure along the lines mentioned revert to the industryby the summer 1991 stock above to assist farmers in meeting the new buildup and may in time become the task of a standards. This will involve organizing a major wider food export corporation. quality campaign supported by an investment and credit package devised to be repayable through the quality premium within a 3-year 320 period. It would be appropriate for the govern- tinguishable from export market requirements. ment to seek grant support from donor agencies This will enable the industry to export without to reduce the cost to farmers of installing refrig- discounting and, in time, to face competition on eration and storage equipment. the domestic market. * Management. In the past, management Management. Apart from quality, the key focused on technical performance and on social management actions to be taken at the farm and political requirements dictated by the level are the following: planned economic system. The new situation involves a significant shift in management cul- * assist in financial management those farm- ture and skills. Provisions must be made to ers who are considering borrowing to expand in meet these requirements. The summary dairy dairying, accounts presented in Table 21.10 show the * assist farmers in grassland management extent to which the concepts of management and conservation. This is central to least-cost information systems, financial control systems milk production and seems to be the weak link and cost/profit centers must be developed. in the Polish system; * assist farmers unable to meet the quality Table 21.10 Dairy profits, 1988 standards and having no long-term future in milkproduction in seekingalternativeventures. Loss Z1546.7 billion + 171% These farmers may in the interim find local Subsidy Z1653.4 billion outlets, but in time they will need alternative profit Z1108.6 billion + 139% cash enterprises if they are to stay in farming; Subsidies as percentage of sales: 169.3% * design and implement a new extension pro- gram, in which these farm management issues * Investment. Table 21.11 summarizes the would be the central focus, to assist in the investment program for 1988. It is highly di- stabilization of the dairy industry and the rural verse and clearly not sufficient to meet the sector. needs of the industry, which has many obsolete and inadequate plants and equipment. New Processing and marketing strategy investment will be required for quality en- hancement, assembly and processing rational- DA=RY sECTOR ISSUES ization and realignment ofthe product mix with the market. Caution is in order so that invest- The dairy industry has been operated until ment can be increased without threatening the recently by a network of primary and secondary supply-demand balance and, therefore, the vi- cooperatives. The secondary cooperatives were ability of the industry. dissolved and placed under government man- * Newproducts and packaging. Though there agement in early 1990, liquidators were ap- has been some new product development in pointed, and new elections for cooperative com- recent years (see Table 21.12), it will be neces- mittees were called as a first step in the transi- tion of cooperatives toward a market-oriented Table 21.11 Dairy industry investment, operation. Further changes are necessary to 1988 complete this transformation, and new industry structures must be developed to replace those designed to serve the past planned economy. Mauildinegy 121billionZI The present institutional vacuum has contrib- Transport 4.5 billion Zi uted in no small way to the many problems of the dairy industry (high variance in milk prices Totalb 63.8 billion Zi () received by farmers, collapse of the butter market, etc.). Note: Investment in 2,024 aeparate pr4ects including 25 new The following issues must be resolved under dairies; 27 large modernization prgects; and 205 building prqecta the new institutional structure: a. Tof dairy tzai prt fleeti 12,602 vehicles. This investment involves replacing 635 of the vehides with 86W vehicles of which 784 were new. Tranport involve 28% of the wok force. * Product quality. Standards for the domes- b. At the aveage 1988 exchange rate, this is equivalent to tic market must, for practical reasons, be indis- US$100 million. 321 Table 21.12 New Dairy Products, 1988 and the need for capital are the major chal- lenges, assuming quality enforcement. Salad cream Longlife cottage cheese RATIONALIZUTION OF THE DAIRY INDUSTRY Iow-fat favored cottage cheese Sem-meture cheese The present, dairy structure broadly reflects the Instant SMP Kortowski cheese country's administrative structure: ultimately Low heat W all the components were supposed to combine Cheese made from WMP into a dairy monolith. It is not surprising SMP milk additives therefore that the individual dairies fared rather Utra fl_tration SMP badly after the liquidation of the cooperative union. The prewar structure of the dairy indus- sary to extend and develop considerably the try was based, as in other countries, on emerg- range of product and packaging options if rela- ing regional dairies designed to match a milk tively free market conditions are to prevail in pool to a maLrketplace as cost-effectively as pos- the domestic market. This will require flexibil- sible. ity [f:ssponse on the part ofthe dairy sector and To facilitate the emergence of the new milk of t-i.e peckaging, printing, and retail sectors. pool structure requires guidelines or rational- ization proposals to provide a framework within Scale and competitiveness. The main dairy which amalgamation andacquisitions couldtake products require large-scale production to place. Once this initial restructuring is in place achieve economies of scale, particularly as andtheindustryisstabilized,marketconditions quality and hygiene standards increase. The will determine future mergers and acquisitions scale required is greater than that of individual and the establishment of new dairies to develop production plants: each milk pool must reflect new products for niche markets. the broad market mix and achieve scale in each Because labor costs are low in Poland and product in order to offer a competitive milk price labor productivity is a key determinant of the to it suppliers in all circumstances. The scale economics of scale, smaller units could survive required for market competitiveness is even better in Poland than in Western economies for greater. This suggests an integrated regional some time to come. However, production cost is approach to rationalization rather than a func- not nearly as critical a factor in the dairy sector tional or plant approach. as product mix in determining viability and e Competition. Alively market-with choices ability to pay farmers a competitive price. This available for retailers and consumers as well as imposes a much higher requirement of scale. forfarmers-is essential in the dynamics of any industry. This must be taken into account, side Options. The dairy industry could be left to its by side with scale, ifthe industry is to be respon- own devices over the next few years to achieve a sive to change, and it is essential for competi- more rational balance of scale, product mix and tiveness. market position. A number of large, efficient - Stock management. Seasonality of supply units would emerge and many weaker dairies imposes special requirements in terms of stock would fail, p;robably precipitating in the process management if both its suppliers and customers the failure of large numbers of milk suppliers. are to be well served and the industry is to find But this approach is unlikely to ensure, in all stability. Stock management requires occa- regions, supplies for the market in the short sional access to international markets and a run, and is not consistent with industry stabil- steady, predictable access to warehousing ity and investors' confidence. transport and stock finance. This must be done Another option is to pursue a lower scale of at the industry level but does not require gov- rationalization. This is likely to lead to plant ernment involvement. investment, which will be written off in a few years as the domestic market becomes more Of all the issues raised, management has the exposed to competition and a greater premium highest priority since it conditions rationaliza- is placed on competitiveness. tion of theindustry,betterproduct development A national structure for milk procurement and market management. Meeting this need and pricing -- including contracts on quotas - 322 could be established, with farmers selling milk require considerable emulation and assistance, to each dairy plant in accordance with its pro- but will not require financial support beyond duction options. But this is unlikely to lead to that available through technical assistance and the adaptation of the product mix to market commercial means. The best form of support circumstances. that the government could provide would be to Finally, regional rationalization based on pre- introduce new dairy processing legislation and vailing scale requirements could be facilitated issue licenses exclusively to newly emerging by granting dairy licenses on a regional basis dairies. and giving exclusivity for a fixed period. This The scale of the investment needed to mod- option seems to represent the most balanced ernize plants and improve product mix and approach to improved competitiveness, compe- quality can only be determined in the context of tition and stability. It presents, however, a new the commercial prospects of the emerging dairy challenge to cooperatives that will need to cooperatives. But it is unlikely to be an invest- maintain effective farner involvement in what ment of less than US$100 million within the will be large organizations. dairies or less than US$200 million in providing refrigeration and storage on dairy farms. In Regional rationalization. Milk production in addition, up to US$100 million in warehousing Poland is concentrated in a belt across the and chilled distribution - with some provision center of the country from the northeast to the for additional seasonal stock-carrying capacity southwest. Consumption per head is greater in - is required. This suggests total investment the northwest and west. More information requirements of up to US$150 million per year would be required before conclusions could be over the next three years to bring Polish dairy offered as to the broad regional lines likely to products up to the international quality base give the best dairy structure. But it is clear that line. If this one-time investment is successful in the southeast and northwest are the main defi- bridging the gap between Polish dairy product cit areas and that the supply belt is across the prices and discounted world market prices (the center suggesting that a cartwheel-shaped re- alternative source of supplies), the annual ben- gional structure might emerge. Such a shape efit could be several times the level ofthe invest- would have the disadvantage, however, of frag- ment. menting the areas of highest milk density and intensifyinginterregional dairy competition both MARKIING ISSUES for supplies and market in the center. The regions shouldbe designed to coincide with milk Marketing will, of course, become a central pools and consumer markets rather than with management function of each of the emerging geography. They should have social, dairies. The first task facing managers is to infrastructural, and cultural homogeneity. make the best of the products they have. Then Whatever shape the regions would ultimately they will need to achieve a steady improvement have, they should reflect commercial reality and in product quality, presentation, and range; and combine coherence with scale. This might re- to encourage investment by wholesalers and sult in approximately eight to 12 regions, the retailers in chilling to ensure that quality is final shape of which will be determined by the maintained throughout the chain. Over time, amalgamation decisions ofexistingcooperatives. the market for chilled, cultured and dessert These decisions would result in the emergence products will expand, and market leaders will of up to a dozen new regional dairy cooperatives develop strong brand positions. This process formed from the amalgamation of selected ex- may result in further market-driven rational- isting dairies. These new cooperatives should ization amalgamations. If the Polish dairy in- be structured so they could accommodate joint dustry is not well structured, the dominant ventures, supply management, and license brands are likely to be based on imports. franchise and technology transfer agreements Withoutadequateprovisionfor seasonal stock with appropriate international partners. This financing and management, however, the task would accelerate necessary changes in manage- of domestic market development will be impos- ment, product, and plants that the new market sible. The market overhang of summer stock situation demands. buildup threatens any investment in quality or The emergence of these regional dairies will product development. While this is part of the 323 marketing function, it cannot be tackled by Table 21.13 Dairy imports firms actingunilaterally and, therefore, involves (tons) some level of industry coordination. Commodity 1988 International trade. Table 21.13 shows levels Butter 36,460 of recent dairy imports with the breakdown by Cheese 8,248 commodity and source. Table 21.14 lists the Processed cheese 1,920 main outlets for Polish dairy exports, and Table SMP 5,879 21.15 sets outtheprevailingworldmarket prices WMP and formula 3,507 and the prices now being realized for Polish Source exports (at presentmarket and discounting con- Butter and powdered milk Cheese ditions). These figures clearly point to the need for corrective action and for a more structured Netherlands (butter only) Netherlands market management. Norway West Germany Finland Soviet Union West Germany (butter only) Finland Export marketing. While dairy exports are Ireland Norway likely to be marginal in the foreseeable future, a Switzerland link between the Polish dairy industry and the New Zealand world market is nevertheless of critical impor- Austria (powdered milk only) tance to the stability of both producer and con- sumer prices. In the recent past, imports substantially ex- Table 21.14 Main export markets for ceeded exports, but in the last few months there Polish dairy products has been an increase in export discounting. While Lacpol, a federal cooperative with 72 ToW dairy members, claims to account for 40% of Cheese Casein SMP (tons) dairy exports with sales of US$100 million, there are at least 10 other state or quasi-state USA Japan Austria 13,245 agencies exporting dairy products and a further Gernany Algeria 4,000 France Japan 13,260 250 private exporters operating without any USA Tunisia 4,724 form of bonding or licensing. These exporters Netherlands Netherlands 1,500 undercut each other, and this situation is re- Italy Sri Lanka sponsible for the discounting observed today. Mexico Syria Ironically, although there is increased competi- Switzerland tion among the whole range of export agents, Gelmavi 427 the competitiveness of Polish dairying has been seriously eroded. The previous pattern of export sales was based sulting in low grade or even unstable products on stock management positions taken by the and extends beyond butter into cheese, skim Central Union. Since its liquidation, 326 indi- milk powder, and casein. vidual dairies are left to make their own deci- sions on stock disposal. Given the very high Options. Under the restructuring proposal interest rates, the very low domestic butter mentioned above, a small number of strong prices, the large number of newly independent dairy cooperatives are likely to emerge. They butter producers, and the seasonal pattem of will have dlirect responsibility for their own milk supply, these dairies must decide for the marketing operations and will concentrate on first time whether to carry increased butter the domestic market, as will most of the emerg- stocks for winter sales or whether to take the ing niche product producers. It will be their netted back value realized on the depressed responsibility to decide on what basis they can domestic market. This represents a discount of best discharge their market responsibilities with up to 50% on prevailing world market prices. respecttocommodityexports asthe need arises. The problem has been exacerbated by Theymaychoosetoactindependentlyorthrough nonenforcement of milk quality standards, re- one of the existing agents (parastatal or private) 324 Table 21.15 World market prices and of the business of existing state and quasi-state Polish prices for dairy products agencies. It should be established whether - (in US$, per ton) jointlyorindividually-theyrepresent ameans by which individual firms can delegate their World Polish stock management and commodity exports re- SMP 1,200 350-870 sponsibilities. WMP 1,250 860-900 In any event, branded consumer-ready prod- Butter 1,350 600-850 ucts should be the subject of direct transactions Low-fat Cheese 1,900 - between the dairy and the customer, whether Gouda 1,700 1,100 domestic or foreign. If after assessment, it Casein __ 2_700______ appears that the existing quasi-state export Note: World SMP and WMP prices are equalized by the efTect of agencies offer little or no real export-marketing EC export restitution in an effort to reduce fat surpuls. advantage, their dissolution should not be fur- ther delayed. Firms should make their own arrangements on a voluntary basis within their or through channels created by joint-venture own sectors to coordinate export sales. As the partners. exports in the dairy and other key sectors are However, bringing prices of Polish dairy likelytobevariableoverthenextfewyears-as products back to world market levels from their domestic supply and demand settle down under presentdeeply discounted position is unlikelyto the new market regime - this is unlikely to be result from such a multiplicity of independent the most cost-effective or stable form of export channels given the managed character of the arrangement for the dairy sector (or for any world dairy products market. There is, there- other food exporter in similar circumstances). fore, an urgent need to rationalize the present However, it will represent a considerable im- export marketing system and to assess the vari- provement over the present situation. ous options. These are: If, after assessment, it appears that the quasi- state food export agencies, through rationaliza- * the dissolution of existing export boards; tion and restructuring, provide a good basis on . the establishmentofastate-sponsored dairy which the industry could build a strong food or food export promotion board; export agency, it would benefit from significant * the facilitation of a (food-industry-wide or intersectoral synergies since meat, dairy, and sectoral) commodity exportjointventure subject horticulture products are drawn from the same to antimonopoly legislation; stores using similar transport and financing * the rationalizationofexistingstate orquasi- arrangements, complying with the same cus- state export boards, offering all or part of the toms and import requirements and, in many equity to prospective food supply firms and cases, being offered to the same customers. other investors. The restructured export agency could also provide a forum in which voluntary industry Whatever the option finally adopted, it is stabilization levies could operate and within essential to the interests of the industry to which stock financing and management or pub- require exporting agents to be bonded in order lic warehousing functions could be delegated in to ensure that their capital adequacy matches a cost-effective manner, thus freeing up the the scale of transactions they undertake. capital of individual firms which would other- The overall objective of the export rational- wise be committed to working capital. Such an ization process should be to rapidly provide for agency could also create over time a commodity coordination and information - with the least futures market as part of its stock funding further disruption in dairy exports - so that system. exports can be undertaken in the context of the Despite the range of advantages that would prevailingstockanddomesticmarketsituation, apply to such an agency, it could become bu- while at the same time reducing the role of reaucratic and monopolistic (even under anti- public organizations as fully and quickly as trust legislation and without any special statu- possible. How this can bestbe achieved can only tory powers) and this should be a cause of great bedetermined afterafull appraisal ofthe quality concern. How best to achieve the objectives of 325 minimum state involvement and maximum in- agree on the terms of govemment support. In dustry marketing effectiveness is a matter of the absence of a cooperative union, the industry practical assessment to be made by the indi- personnel who would have the authority to vidual exporting firms. As for the government, negotiate mty be difficult to identify. However, it should reappraise its role in food exporting it should be possible to find them among the and rationalize it in pursuit of these objectives, dairies forming the supreme council or in the 72 with a view to speeding up the privatization dairies which are members of Lacpol. process and maximizing industry marketing efficiency. * Technical assistance for dairy industry ra- tionalization should be provided in two key SPECIFIC ACTIONS areas: - the preparation of plans and prospects for Short term. Even if the recommendations pro- regional groups of dairies, the object being to posed in this document were fully and speedily win the support of farmers, investors, bankers, implemented, they could not resolve the imme- and government for the new, changing regional diate problem of the industry, which is to build dairies; the summer butter stock to meet the winter - managementconsultancyanddevelopment demand. Nor could they dissuade commercial programs in each of the newly emerging dairy dairy farmers from leaving milk production at cooperatives. prevailing prices. * It will be necessary to provide the legislative framework within which this restructuring can * The most immediate requirement for re- take place, including: storing industry stability is to set an attainable - cooperative legislation recognizing the andviable targetmilk price. Aprice ofZl 900 for ownership right of shareholders; Class I milk is suggested with additional provi- - food hygiene legislation; sion for winter premium. This will be financed - milk processing licensing to regulate dairy through enforcement of the tests reducing the processing; fat premium. - legislation in the areas of taxation, owner- * Such actions will involve government action ship and prcivision for tax treaties in order to in the form of guarantee of export-quality butter facilitate investment. stocks at a price level sufficient to justify ZI 900 perliter(uptoworldpricesminus2O%)untilthe Medium term. The industry must in the me- spring of 1991. This would suggest a price dium term: guarantee of less than US$1,000 per ton for butter (the world price is US$1,350 and the * rationalizeitsassemblyandprocessingplant Polish discountedpriceisUS$600). The govern- network under the new structure; ment would not be involved in financing the * agree on an industry-wide stock manage- stocks, but the process would require samples ment and export structure. (Whether that in- and warehouse inspection. The guarantee should volves investing in a new food export company only be given by the government if the industry emerging from the rationalization, and fulfills the following conditions: privatization of state and cooperative export - agreement on the target price and imple- agents, or mierely an informal dairy industry mentation of the revised milk pricing system, network, is a decision to be made by the indus- based on enforced quality tests; try.) - establishment of a dairy industry quality logo to apply to products that meet voluntarily As these developments take place and order is implemented standards; restored to the market, it should be possible for - industry agreement for 1991 on stock the government to eliminate milk subsidies (an management without government support; interim step which could be considered is a - introduction of a credit scheme for farmers subsidized school milk program). investing in quality. The dairy industry is part of a chain of inter- In order to discuss these conditions, an industry dependent industries and services. While the forum should be convened as soon as possible to immediate focus must be on eliminating the 326 internal bottlenecks, it will be necessary in the production system. The strengths of Polish medium term to give more attention to critical dairy farmers and of the Polish dairy industry, linkages, including: therefore, must be translated into transparent pricing and quality advantages for their prod- * adequacy of electricity and water sources on ucts. farms to supportamodern quality dairyindustry; Because dairying is both land and labor inten- * rationalization of essential input services; sive, this enterprise is often viewed in Europe as * development of domestic sources of dairy the backbone of a smallholder rural economy. equipment; For this reason and because of the importance * development of the packaging and labeling for consumers of dairy products, dairying is sector; extensively supported throughout the world at * development of public warehousing and the both the production and market levels. wholesale and retail sector; The Polish dairy sector is not in need of gov- * development of private transport, mainte- emient financial support. Rather, Poland's nance, catering and other support services, in- dairy sector requires better product quality and cluding banking and insurance. better marketing. Despite prospects of freer world trade, the world dairy market is highly Long term. In the longer term, the regional distorted, volatile and generally unfavorable to dairy organizations emerging are likely to be- producers. Making quality improvements de- come involved in other food sectors through pendent on the world market, therefore, is un- acquisitions in order to develop a food product likely to serve the interests of either producers range and enhance their market positions. The or consumers. The best tools to improve quality alternative is to build a strong regional farmer and marketing are, on the part of the industry, network resulting in the integration of farm domestic market management and, on the part inputs in the regional dairies. A third possibil- of the government, protection against dumping ity in the long term is that - through joint and other legislative safeguards. ventures - many of these regional dairies be- The current situation in the Polish dairy sec- come involved in the dairy sector outside Poland tor requires industry coordination in order to sellingnewly developed products in exportmar- maintain a reasonable balance of supply and kets. demand at prices below those at which dairy It is important to allow new entrants into the imports can enter the country and to manage industry to ensure the development of niche stocks in a way that balances seasonal supplies products and markets and maintain a diverse and thus ensures a stable year-round price. and competitive dairy industry. This will re- These functions can be performed without gov- quire an active policy of encouraging and fa- ernment involvement in any well ordered in- cilitating product and market research and de- dustry provided that it is supported by velopment. antidumping legislation. The role of public Dairy farmers will seek to increase their in- entities in the dairy market should be ratio- comes through increased productivity. This will nalized in the shortest possible time, taking this involve a continuous process of on-farm invest- framework into account. ment and is likely to result in significant further concentration of dairy production in fewer farms. Endnotes As this process eliminates the dairy option for smaller farmers, it is essential to develop other This annex was prepared by John McCarrick, alternatives for these families, in agriculture or assistedby Leonard Kalinowski, Karol Adamik, elsewhere in the rural economy. Cornelis de Haan, Jean-Jacques Dethier and August Schumacher. The summary of dairy Conclusions strategy was written by C. de Haan. In a market economy, the right of consumers to 1. Taking into account that Poland's imports choose on the basis of perceivedvalue outweighs this year are insignificant, compared with nor- the technical and social considerations of the mal imports of 40,000 tons of butter per year. 327 Distributors of World Bank Publications ARGEiTNA FINLAM YIhCxo Ferrutkaion odec: CaroelBacb,.siL Ak.ewtecl. Illjakeupp. INPOrE haoeruudoa ScbOIpdm sUvi Gawi.G,samSm P.O. Bo 128 AprtadoPo.W22-860 P.O. Bx 4109f PFdA& 165S,4t 81ook 4S13/465 SP40101 l40I01m dww. C 1333 BuooAfes Hdeoki 10 Jommenwi 202. 4 AUSTRALJA,PAPUANEWGUINEA. PRANCS drEtg M54aid. M.rocne SPAIN FII SOLOMON ISLANDS, Wad Bk Pubt 12 nte Mozt, Ed. d'Azf M nmdi-Prn LUkbo SAL VANUATU, AND WESTERN SAMOA 6S, aef d'>i- Crabc. 1eO37 DA.BodkaJomrdls 7SI16Pr.d 2tDI Mded 6" Whiteoe Road NETHERLANDs 1tidom 3137 GERMANY, FEDBRAL RPUBLIC OF hwO. vubhkadmbv. UhuSa hSEad 05 AODE Victdori UNO Vc1g P.O. o 14 e de C-d 391 ?Tpelod1u AD. 55 7no1 BA Loc1e, WNlr9eBm AUSTRI .1530 Brmn I Codd and Co. NEW ZEALAND SEI LANKA AND TIE MAIDIVES Grebu 31 GREECE HiD liby rar nd x-radon Se-Ie A.1011 Wimt KBMB PvaeBc P.O. Box 244 24, IppodamouiSb.de P1.ti. Piulewd N-lxu 100, BoO C ye1.m A. Gardme BAHRAIN Atl-1163 Audd-e Maw ha Bd1SiRo RRech and Czmntay Coloo 2 A_odO LUd. GUATEMALA NICBRIA P.O. BDox 22102 1irari.t PidraSeat. UIvan, Prm Liited SWEDEN Maim.w-317 5k C.e 7-55 ThMCrwoaBuidimgtjctd.o -gdertoiw BANGLADESH Goatamla City Privade mall Eq 555 tuitto PF M Io B5eoK6t35 BANCWESli e,,,,a Cily Du~~~~~~bdm EqO dxom 12, BSo I1616 A Shame Sedety OODAS) HONG KONG0 MACAO NORWAY HouS, Rod dl6 Ada MM01 d. NwvoNndImati Omter Fomno rieu u* Dhamootd B/Arm 6 FL 146 Prfnt Edward SEo Deplmlt W--e.p WihaamAB Dhake 1209 Road, W. P.O. So,t 6125 EBieted Ra 31014 Kowloe N46M ad. 6 S-10425Staddm BRonaaf' Hoeg Kat 1546, NrAteSd Samk OMAN SWITZERLAND CEi±uogs E4X0 HUNGARY MEMURB IfocSe-tkmSw FarmqieId KinIttu P.O. BSa 1613, Sob Airport LUrmhi Pyat 74, K.DA Avewe P.O. BOX 14e M%.rai , O. Gnmj Kubh 139 Budqapt 62 CasePomtit 1 PAIaSTAN CH1211 Goon.aII EBLCIUM INDIA MtzS*Agency Join Dt L1y Aled PubHh- Piote Ltd. 65, S}tahrah;4DL _dAzaan Av. du Rd 202 751 Mount Road P.O. Bot No. 29 Ufrihe Pyaot 104D Bruaas Mdm .6000G2 Leaoe3 SenS deAboncn,nts BRAZIL Cases rtu e ,3312Ll REAZIL Saudi C~~~~~~~~~~~~~~~~~~kW ~~~PEU CH 1I2 Lauaaune PubbtoccesTle3aitemadmals ISJ.N. Hledia Marg EdlIOOt De.no lSA Lida. Bollord iAp.tdo 3824 TANZLNIA . SPexo PGaJ 199 Boibay . 40D08 LA cd Uinbenty Po 01555.O ianz"SI P.O. BOXt R" 13/14Aef AU Road PHIIINBS Pares.iam CANADA Now DeMd - 110 022 N Bal Stae Laiffasa701 RizalAvwnme TILAND CP.. IS01BueAmpere 17 Cdttamj.v Aue P.O. BoX 1934 CmfralDt tSoillhoeto SAdimft Qu9ec Cslutt - 700 072 MetroMi*b 3D6 Silm. Road 14B SB6 Byd m BI,1 3VN4 C2MA~~~~~~~~~~~] debodBgItemrttdnlB.&Center 3i1od.1 9h-. ,**~**~ Ilk Main Rood Gandhhg 5d4 HRem F ib 1 fe %uildiog TlNAD & TOAGO, ANTIGUA Chbw Rntia & Brnm Publ" Bangie- SW0 X9 AyAi Avame, Maid BARBUDA, BARlWADOS, Hmm MelroMann DOMLY1A,CGRBNADA,CGUYANA, S.DeFoSlDmOgjte 3.5.1129 KKipda Cra Road JAMAICA, MONTSERRAT, ST. Bd10 Hydbed - SC0G27 POLAND XITTS & NEVIS, ST. UCXIA, ORPAN ST. VINCENT AGRENADINES COLOMBM A Prwthat FbRa 2ntd FLo Pl1 Kla NVAidt hxea LId& NearThakoreEBaul Navrao$a Ct2131Wows f9wasts ApwtadoAe 3490 Ahmaedaba d 3M009 E Be" D.E. PORTUGAL Trizidad. Weat lattdi P44.1. imae LA"&i Pauoga COTE D'IVOIR 16-A AHok Mu Ru Do Car- 70-74 TURKEY Cotked'BdiUm etde. Dnuim Limkow-2260D1 12COLamr H. iatKtp. AS. Ahicoo (CIDA) tia Cadded No 469 04 BS. 541 DIDONESLA SAUDI ARABIA. QATAR Soyea& A%djanO4Plaww P hIndrlirv Uoied JMmrBonkSt4 e lalnti IL SIun Rtiba 37 P.O. OB 319° CYYRUS P.O. Bot 181R y1dh11471 UGANDA MEMIR bhwn%admseSaott Jahata Pt"t U-do Sop P0 SO B 2J1 MEMU Ioinason Sernle. P.O. Box 7145 Nkod. ITALY .°v dalS Klk Lime Cmhnkmaria Su-A) SPA AlAl'S DENMARK Via Boweteto toF, 120/10 AlDabne Caemer UNITD ARAB EMIATES SmehodaUthabr Cadla Post1e0552 Ph* 11For MEMRBGulfCO RomaoemA11411 5125 Flwooot P.O. Sox 7188 P.O. Skoot 6097 DK19i0Pntermmg C1JAPAN Rtyodh SO Box6W DOMYWCAN REPURUC astr BSok Smvt H# Abdlh A lu B,,ddieg UNTM XINCDOY EtttaTa,C.porA. 3743 H-go3nCh Se, Bmonkye4 113 Kig Skated Sceot MiaiofoU td. Roeoaxaddo abab]da IC f-.304 Tkyo P.O. Box 396 P.O. Box 3 Apwbtado Pl 2190 Daummn AIm. H G O34 2PG SimoDeo RENVA Englnd AhtcsBookS-tBm(EA) Lid. 33. MAnetd HeetAwad Soot ELSALVADOR P0 Onx 45245 P.O Bo. Soo URUGUAY PuAxd Naiob j3dde InihltioNacma del Ubo Areaka MWAd Em qunAna*j #3MO S. enee 1116 SdIdoSISA..P aPo KOREA.REURUC OP S1NGAPORE.TAIWAN.MYANMAF. Mumtetbdeo Sun Stvadr PFM Ko Book C tton DRUMNB PO. Iko, 101. Koweghanmuwn h4bno.djtPub p oin VENEZUELA EGYPr, ARA RERPULUC OF Seout Privat Ld. ti tit dd ERte Al Abram 02406 l1t.Pot-LPa hlutlrUl Apido. 44217 AIGalaaSC o XUWAIT 116. Caras 1060-A Cio ME YRBha mMS 24 New htdurb Rood P. DO Bxt 465 Si', Is1953 YUGOSLAVIA S Ckae_bt Slotot MALAYSLA SOUTH AFRICA, OTSWANA P O. Sos 36 Cuho U dMarityolda-Coopeatwe Fprairlii Tog RqxA&lke Booktop. Limilad CkSd niveJotoyPcSoohen YU.1llDEd1Irade P.O. Bo 1127, lJalu PnhW Btw Ahlee Ku" tLam P.O. Bo 1141 CapeTowOn8X IBRD 20500R ; IJB T5 :; Ido ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~20 2 4 B3altic : Sea -<--~ ;; U . S. S.j - R. A, _ As , k 'C - , YoK±Yologrod r `StUPSK GD 7NE Z t a SwmeXis~~cn ; C I k,tX/-!}0< ' ¾YLDZ >TON 9/DS5 i ?ffi5k\ _ IN };0~~; t1/ / Rad 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 ze.D: ECiN / 0 L A - N D A mf V PI. . A , - * fa ' KYD G OS Z q / /' -- / Pr W d C apito TRCIU~~~ ~ -. BA Y Y K National Capitni 1~ ~~ ~- 52ZEOA ' K _i.g,_ 3 --r'l _?/ , Major< Port | ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ N del' GOR / gFZO j , , -SIRT1WC - ;>! g , eIfOMETER5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(Wj6.. \t2z sj-}y<- GORZOW f-0TR~Q !CAO Cities and Town ia = 10>eWtEKOPOSK/- MILE5~ ~~~~~~~~~~~ Ri-200* v o. WTtE< , y.4 O4NA - 22. ? ~ ~~ K; >N>WEOCUoW& \ 7~~~~ ~3CK, P-i-C (Wa.ew6dztwo) B-udonies Lii "4ARSAW<½(Tro aoae 5 KONiNR ~~~~~~~~~~~~~~~(WARSZAWA) I .-EkCD-.~ 2 ZIELONA` ~- 5es1e~ ~ - -: /6 o0PODLAAIIL UKYUOLAI ~ o GORA 1'K_E½j2'V8E too/i, 6LFDTNO - R124FCZN PiOT'RKOW AO0iNRY- TRBUALKtN WA, ~~,IEGNJ , AELC% >CE~iA LEONCA %tWROClLA{W ~ YDLN EMR SWEDEN- - - To Poor' 'oN' o~~~~~~~~~oa 0~~CZ;STOCHOWA (ZMS 0 ~ ~ ~ ~ ~ ------' t~~~~~~~~~?ARNOWR I jl~~~ P"h' fir -" -U.S.S.R. "'/ 32 50, T. I - 'r - 'y OW*GERMANY ( P O L A N D N EELO / O A/ IAIA N 0 POMYE ooo 'tN'-- OVII ~~~~ROSNO~~~~~~~~~~~ -iOMOETER$ S 'IO .\rJ __________ L - 20J0 AUSTRIAT Q''0L.r.J To Do,oo - I NWIYTDR,D>D> k, -~~~~~~~~~~~~ HUNGARYf ruins V "4' - '½ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ROMANIA -0 Nook 1 2 ODD ODD A Kt ITALY- in' is 20' A 1 ~~~~~~~~~~~~~~~~~~~~~Ii '', YUGOSLAVIA ' __________ ~~~~~~~~~~~~~~~~~~~2'22' f24' OCTOBER 19D Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'lena ICokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1, Marunouchi 3-chome Chiyoda-ku, Tokyo 100, Japan Telephone: (202) 477-1234 Telephone: (1) Facsimile: (202) 477-6391 40.69.30.00 Telephone: (3) 214-5001 Telex: WUI 64145 WORLDBANK Facsimile: (1) Facsimile: (3) 214-3657 RCA 248423 WORLDBK 47.20.19.66 Telex: 781-26838 Cable Address: INTBAFRAD Telex: 842-620628 WASHINIGTONDC ISBN 0-8213-1708-3 $19 9';