ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

DIRECTORATE FOR FOOD, AGRICULTURE AND FISHERIES

COMMITTEE FO AGRICULTURE

 

AD HOC GROUP ON EAST/ WEST ECONOMIC REALATIONS 

IN AGRICULTURE 

 

Review of Agricultural policy and trade developments

in LATVIA in 1994

 

AGRICULTURAL POLICY AND TRADE DEVELOPMENTS IN LATVIA IN 1994

1. MACROECONOMIC SITUATION

Since 1994 some satbilisation in macro- economical situation can be observed. Most economical indicators suggest that the decline in economic activity almost has bottomed out and that a recovery is under may. 

However in 1995 real GDP has declined by 1.2 % under previous year’s level after some increase in 1994 by 0.6 %. Growth in real GDP is expected to be only in 1996. 

Inflation in 1995 has reached level 16.9 % comparing with 23.7 % at the same time period in 1994 (in September it was 1.8 %). The prices on some foodstuffs have increased, as well as on cultural events and medical care. 

Budget deficit is continuing to grow. If in 1994 it was LVL 37930 thsd, during first nine months it has reached level of 54 milj. or 3.95 of GDP, and Government is going to extend it till 80 till the end of the year.

 

Substantial progress has been made in structural reform in Latvia, in particular the strengthening of financial supervision and the privatisation of many enterprises of the economy. This process is almost completed in agricultural sector in 1994. New legislation on “general” privatisation was introduced in 1994 and newly established Privatisation Agency has started in April 1994. 

A large proportion of Latvia’s trade continues to be with the CIS. For example, Russia is still the largest trading partner and in 1993 accounted for about 30 per cent of exports, and 33 per cent of imports. However, trade with Sweden, the Netherlands and Germany is likely to grow as more and more trade is reoriented to western markets. Although Latvia ran trade deficit in the first half of 1994. It is expected by Ministry of Economics, trade balance will stay negative till year 2000. 

Several developments will probably improve Latvia’s trade balance in the coming years. The Most Favoured nation status agreement with Russia came into effect on 1 June 1994, and is likely to have a significant impact in facilitating trade between the two countries. In addition, Latvia signed a Free Trade Agreement with the EC in July 1994, this Agreement  has come into force on 1 January 1995. Along with Estonia and Lithuania, Latvia is currently in the process of negotiating an Association or Europe Agreement with the EC. Trade between the three Baltic countries has been relatively small in recent years. Latvia with a small open economy, stands to gain from a liberal trading system. One of the important medium term goals of the Latvian Government is to implement such a system.

The official rate of unemployment at 6.6 per cent in 1994 remains the highest of the three Baltic countries. The true rate of unemployment, however, is probably much higher when hidden unemployment is taken into account. The rate of unemployment is likely to grow as structural reforms continue to be implemented in 1995. In June 1993, Latvia introduced the national currency “lats” (Ls), with a fixed exchange rate to the Latvian rouble, but with a free floating rate to foreign currencies. As of October 1993, the lat became the only currency in Latvia. The exchange rate has been very stable in 1994, ranging from 0.57 to 0.54 Ls per US dollar, and has not changed per SDR during 1994.

2. SITUATION OF THE AGRICULTURAL SECTOR

Agriculture is an important sector in the Latvian economy. In 1994, the sector accounted for about 22 per cent of GDP, 20 per cent of employment. The increase in agriculture’s share of GDP largely reflects the relatively greater decline in output in the non-agricultural sectors in the economy. Historically, as in the case of Estonia and Lithuania, the livestock sector has been overdeveloped with the objective to increase exports of milk, meat and their products to Russia and other republics of the former SU. At the same time, farm inputs such as feed grains, fertilisers, and machinery supplied at low prices from Russia and CEECs.

The sector continues to experience a serious price-cost squeeze. Since the deregulation of prices in 1991, the price of industrial inputs have increased about five times faster than price of agricultural products. In the case of oil products, prices increased about seven to eight times faster than producer prices. In 1993, the nominal farm gate prices were on average about 100 per cent above the 1992 level for all livestock products. However, in real terms, farm gate prices declined significantly. During the first five months of 1994, nominal livestock prices increased on average by about 20 per cent, but declined by 5 to 10 per cent in June. Grain prices fell by more than 50 per cent in 1993. In overall terms, beef, milk and grain prices are substantially below world market levels.

3. AGRICULTURAL PRODUCTION AND FOOD CONSUMPTION

In the period 1990 to 1994, agricultural production declined by over 45 %. Livestock production showed the largest decline, especially beef and pork production which fell by more than 55 per cent. Crop production also declined, especially wheat, coarse grains and sugar beet, while production of potatoes and vegetables increased.

It is illustrated in fig.1. 

 

Fig.1. Dynamics of Latvian Agriculture output in 1989-1994

The share of agricultural output attributable to crops increased in 1993. More specifically, total grain production increased by about 8 per cent to 1.2 mln. tonnes. Almost all of this increase was due to a higher output of course grains. Barley, which accounts for about half of all coarse grains increased by about 5 per cent in 1993, while rye production increased by about 16 per cent. In relation to other crops, sugar beet production fell by about 35 per cent, but the production of potatoes and vegetables increased by more than 12 per cent.

In 1994  the area sown to crops decreased by 17 %, production was lower also due to reduced input usage, especially fertiliser. Moreover, the adverse effects of the late summer drought will compound the fall in output. Grain production was by 27 % lower as in 1993, potatoes- by 18 %, sugar beets- by 23 %.

Livestock

Total meat production continued to decline reflecting the large fall in livestock numbers in recent years. In 1993, meat production declined by a further 22 per cent compared to 1992, and in 1994 by 35 % to 1993. In 1993 the largest decline occurred in pig meat production with a 33 per cent fall, while beef production declined by about 11 per cent. Beef was by far the most important meat and accounted for almost two-thirds of total meat production. It is expected, the decline in pig production is stopped till the end of 1994. The further development of beef production is problematic still now. It is characterised by same number of pigs in 1994 as in 1993, and by advanced decline of cattle compare with decline of number of cows. 

In 1993, milk production also declined by about one-fifth. In 1994 milk production continued to decline and was 82 % form 1993 year’s level. 

The recent changes in the structure of production reflects the difficult economic conditions in Latvia. The large reduction in the livestock sector reflects the reduced demand for meat and dairy products from the CIS. In addition, domestic demand has also, fallen, due to declining real incomes and to the elimination of consumer subsidies as well as to increasing of meat imports, which increased in five times during 1994. On the supply side, the cost of imported feed grains and energy has increased. Farmers have adjusted by reducing the size of their breeding herds and by adopting less intensive production methods. The decline in demand and consequently prices for products together with increased input costs has created a difficult income situation for many farmers.

Food consumption

The per capita consumption of the main livestock products continues to decline, in particular meat and meat products, milk and dairy products. On the other hand, the consumption of cereals, potatoes and vegetables increased in 1993. The average share of household income spent on food remains high by international standards at 43 % in 1993. However, this share is likely to decline substantially as the economic conditions improve and real disposable incomes increase. 

4. AGRICULTURAL TRADE

Trade flows

In the past, Latvia has been an important source of meat and dairy products for Russia and other CIS countries. In 1989, over 550000 tonnes of dairy products and 62000 tonnes of meat were exported. When the industry was at its prime, agricultural and food exports accounted for over 25 per cent of total exports. In 1993, Latvia exported only 29 000 tonnes of meat and about 300000 tonnes of dairy products. In the short run, a further decline of agricultural exports can be expected due to the large decline in livestock numbers.

Latvian agriculture specialised in the production of meat and dairy products and large volumes of grains were imported. In 1989, grain imports were at their highest, in the order of 1.3 mln. tonnes. During the early 1990’s grain imports fell dramatically and in 1993 imports accounted for less than one per cent of the 1989 import volume with some increasing in 1994. The major reason for this decline has been the rapid restocking in the livestock sector and the fall in production. Imports of fertilisers and farm machinery have also fallen substantially. For example, in 1989 fertiliser imports amounted to 470000 tonnes, and about 3000 tractors were imported. However, imports of  fertilisers in 1993 were less than half the level of 1989, and tractor imports were less than 10 per cent.

Towards the end of 1993 and during the first half of 1994, Latvia experienced a fundamental change in terms of the composition of imports. Official estimates indicate that Latvia imported about 3700 tonnes of meat products and over 4400 tonnes of milk products. Preliminary estimates for 1994 suggest that the level of imports of meat and dairy products exceeded the total level of imports in 1993.

Trade Relations

Latvia has expanded its bilateral trade links by signing free trade agreements with the Scandinavian countries. As in the case of Lithuania and Estonia, the most important development has been the Free Trade Agreement with the EC signed on the 18 July 1994. The Agreement  is due to come into force on 1 January 1995. Latvia, along with Lithuania and Estonia have a six year transition period to adjust their industries to competition in a Western European environment. The EC will eliminate restrictions on trade in industrial products from Latvia as of January 1995, except for some sensitive areas. In the case of agriculture and food products, the Agreement provides for reciprocal concessions in trade. In addition, Latvia is currently negotiating possible early membership of GATT and as such would bound by the disciplines of the Uruguay Round, relating to market access, domestic support and export subsidisation.

Tariff barriers

Latvia had very liberal trade policy till middle of 1994. Customs tariffs were introduced in 1993, but they remained low, and it leaded to dramatic increase in imports of grain, meat and milk products, which caused also decrease in domestic demand. Due to it tariffs were changed not once, as it is illustrated in table 1. The main problem till the middle of 1994 was the basis to calculate custom duty, while reference prices on the world market prices were introduced. Now it is set by law, that value of goods will be calculated in world prices used by EU, in case they will not be set, in Latvian wholesale prices. 

Table 1

Development of customs tariffs to agricultural imports in Latvia

Commodity Till 01.03.94$/kg Till 01.12.94Ls/kg Since 01.12.94 generally Ls/kg.

to FTA

with EU Ls/kg FTA

with EU in 2000

Ls/kg

Live animals 15 % 15 % 40 % 30 % 24 %

Meat (beef) 0.3 15 % 40 % 30 % 24 %

Butter and cheese 0.7 30 % or 0.3 55 % 45 % 36 %

Skimmed milk powder 0.3 15 % or 0.1 40 % 30 % 24 %

Grain 0.3 30 % or 0.075 0.075 0.075 0.067

Sugar 0.2 0.12 0.12 0.12 0.1

Feed 15 % 30 % or 0.075 0.075 0.075 0.067

In 1994, import tariffs on food products ranged from 0.5 to 30 per cent. More specifically, the tariff on meat and meat products varied from 15 to 30 per cent, milk products 15  per cent and 30 per cent on butter and coarse grains.

Tariffs are set and can be changed only by Parliament, and it is long process. 

Some other measures

Some influence on agricultural trade have also Regulations “On protection of domestic foodstuff market” , approved by Government in 17.01.95. 

5. AGRICULTURAL POLICY DEVELOPMENTS

Structural policies

Between 1990 and 1993, the Latvian Parliament passed several laws pertaining to land reform and the privatisation of agricultural production and service enterprises. The main function of land reform was to create a new structure of rural land tenancy based on private property rights. The reforms permitted the restitution of land titles to former owners and the allocation of land plots to those living in rural areas.

In Latvia, land reform can be divided into two phases. In the first phase, all land petitioners including former owners who possessed the land before Latvia was occupied in 1940, present users and new land petitioners submitted their requests for land allocations before June 1991. From this list of applicants land has been restituted to eligible owners. The second phase started in January 1993 and in this phase, land users could obtain or renew their land ownership rights. Ownership rights to land is established based on the land survey documents. However, an important principle guiding land reform was to create a framework of land ownership where the land user and owner are one and the same.

The law on “Land Privatisation in Rural Areas” was passed in July 1992. This law outlined the regulations for restructuring the legal, social and economic relations in the countryside regarding land use and ownership. It established the procedure for carrying out the reform, defined the provisions for submission of land claims, and set the regulations for restitution of land ownership rights. This law also regulated the second stage of the land reform. Subsequently the law on “Privatisation of the Agricultural Enterprises and Collective Fisheries” was passed. This law regulated the privatisation of non-land assets.

The restructuring and privatisation of agriculture has led to fundamental changes in farming in Latvia. In 1990 state farms accounted for about 31 per cent of agricultural land use and collective farms a further 61 per cent. By January 1993 almost 40 per cent of land was operated by some form of statutory company, a further 21 per cent as peasant farms and less than 2 were in the form of state farms. 

Bu January 1994 these numbers changed to 24 % as to statutory companies, 28 % to private farms and 24 % to other private users. 

The number of peasant farms has grown from 7500 in 1990 to 58300 in January 1994. These newly established peasant farms are quite small on average with 11.8 ha of agricultural land of which 7.2 ha are arable land. In addition there are about 113000 household plots and 115000 subsidiary farms which on average are less than 5 ha.

At the beginning of 1994, there were just over 100 state farms and about 1100 farms in some form of limited liability or stock company. At the end of 1994 only 193 of statutory companies established on the basis of former collective and state farms were continuing their activities on permanent basis. The rest part were either liquidated already or had approved decision on liquidation.

On 1 April 1993, the Land Title Register was set up under the Supreme Court and its task is to register changes in ownership. The first land title was registered on May 31 1993. It is envisaged that the registration process will take several years to complete. 

There is not yet an effective land market in Latvia. 

The private sector has been growing steadily, and has increased its contribution to total agricultural output from 40 per cent in 1992 to 60 per cent in 1993.

There was a special law regulating the process of privatisation of non-land assets in the agricultural sector, which  came into effect on July 1 1991. Change in ownership has been more rapid in rural areas of Latvia than in other branches.

There were several another laws on privatisation of another enterprises of food and agricultural sector. 

In generally, privatisation in these branches was running faster as in overall economy. It led to the following results. Milk processing industry is privatised already, last two meat processing enterprises and one bakery will be privatised in march 1995. 

Credit policies

There is some shortage of both short term and long term credits for producers in Latvia. Private farmers who have already started to produce need short-term working capital, which is only available at commercial banks at a very high interest rate (120-180 per cent in 1992 and 60-80 per cent in 1994). Long term credits are not available to agriculture through the commercial banks, except for a small amount from international loans at interest rates of 15 to 17 per cent. The situation is made even more complicated by the delayed payments to farmers for products they have delivered to the large processing plants. In many cases, this delay can be up to five months. 

New special state credit agency “Rural Credit” was established in the beginning of 1994 to distribute international loans. And one another credit agency “Rural development fund” was established in the end of 1994 to mobilise state efforts to provide some financial support to rural and agricultural development. 

Support policies

1. Prices 

Price reform in the agricultural sector started in March 1991, before which prices for the major products were state administered prices. Contract product prices were to be determined by negotiations between producers and processors. Minimum producer prices were introduced at levels well below market prices and almost all subsidies to producers, processors and traders were abolished. While producers were free to sell their products, their outlets are limited by the persistence of state-owned and inefficient downstream processing monopolies. The government set limits on the profit margin for the food processing sector and limits on the mark-up for distributors and retailers. These controls were removed in July 1992. 

2. Inputs’ support 

In mid-1992 diesel fuel subsidies were provided to assist the harvest and the planting of winter crops. In addition, compensation for loss of production due to drought was given to producers in the most severely affected regions.

3. Subsidies 

Subsidies were introduced in 1994 according to law ‘On State budget’. Total fund to 1994 was 6.6 million Lats or 1.1 million per month, and it was 1.5 % of agricultural output in 1993 or 5.8 USD/ha. Introduction of subsidies was in close relation with increasing of VAT also on foodstuff since June 1994, which was not covered by increasing of producer prices. These funds were used mainly to support livestock breeding as well as high quality seed breeding. Some amount was paid also to support agriculture in some special regions (through flax production support). 

At the end of 1994 some deal from total subsidies’ fund was used to support producer prices through export subsidies to rue (which exceeded internal market demand) as well as butter and cheese. It required 1535 th.Lats. 

Is expected 13.2 million Ls subsidies (or the same 1.1. million per month) to agriculture in 1995, 6.3 mil. to crop production and 6.85 mil. to livestock production. Mainly they will be used to support quality in the both directions, but 1.6 mil.Ls are expected to increase competitiveness Of Latvian agricultural products on external markets. 

4. Grain Sector’s control 

The State Grain Office has been brought under the control of the Ministry of Agriculture after being blamed for permitting a rapid bread price rise. The Office, will continue to regulate the supplies and imports of grain and is also responsible for setting up a grain reserve. 

6. SUMMARY AND OUTLOOK

The decline in economic activity in Latvia bottomed out in 1993, and growth returned in 1994. Growth in GDP in 1994 is expected to be at least 4 per cent. Tight monetary and fiscal policies have brought inflation under control, but remains high compared to OECD countries. The rate of unemployment at almost 7 per cent is the highest of the Baltic countries, but is likely to increase as restructuring of the economy continues and hidden unemployment becomes more explicit. Latvia is expected to have a budget deficit of about 2 per cent of GDP in 1994. Russia continues to be Latvia’s main trading partner, although there has been some reorientation of trade to western markets.

The agricultural sector has retained its relative importance in the economy and in 1994 accounted for over one-fifth of GDP. Within agriculture, the livestock sector has continued to decline. Farmers incomes continue to be depressed by the cost price squeeze in the sector. Farm inputs are priced at world prices while farm product prices are depressed by the inefficient processing sector.

Restructuring and privatisation of land and non-land assets proceeds, but at a rather slow pace. In overall terms, the level of privatisation in the agricultural sector is higher than in Estonia or Lithuania. The major difficulties facing family farms relate to lack of credit for working capital and investment and low product prices.

In summary, the upturn in the economy is expected to gather pace in 1995 with an increase in GDP of at least 5 per cent. The budget deficit will remain on the same level- 2 % from GDP in 1995. Inflation which appears to have levelled out at about 30 per cent in 1994 will fall while the rate of unemployment will increase in 1995. The decline in the agricultural sector is likely to bottom out, but the rebalancing between the crop and livestock areas will continue. With increased pressure on farm incomes, there is likely to be some efforts to increase protectionism through subsidies or other measures.