ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

DIRECTORATE FOR FOOD, AGRICULTURE AND FISHERIES

COMMITTEE FO AGRICULTURE

 

AD HOC GROUP ON EAST/ WEST ECONOMIC RELATIONS 

IN AGRICULTURE 

 

Review of Agricultural Policy, Market and Trade Developments 

in Latvia in 1995

 

Review of Agricultural Policy, Market and Trade Developments 

in Latvia in 1995 

1. GENERAL OVERVIEW OF ECONOMIC AND AGRICULTURAL DEVELOPMENTS

General economic developments 

In the end of 1994 some stabilisation in macroeconomical situation could be observed already. Most economical indicators suggested that the decline in economic activity almost has bottomed out and that a recovery is under way.

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 has reached level 24 % in 1995 comparing with 36 % in 1994. It remains to be as lowest level in the Baltics. The prices on foodstuffs have increased by lower level- only by 19 %, while on clothing- by _25.6 %, transport _by 21 % and medical care by 33.9 %. It means, some continuation of changes in price structure is taking place, and it is one of the main reasons for inflation. 

 

Figure 1. Dynamics of consumer price index in 1993-1995 

Budget deficit is continuing to grow. If in 1994 it was LVL 37.9 mln., during first nine months it had reached level of LVL 54 mln. or 3.95 % of GDP, and about LVL 89.9 mln. or 3.8% of GDP in the end of the year (preliminary data ). Approved deficit for 1996 is 59.8 mln.LVL. 

Serious crisis in banking sector can be mentioned as one of the reasons for decrease of these financial indicators. Some five banks from the top 10, including the largest one "Bank Baltija" were announced as insolvent. Total loses are evaluated on the level of LVL 250- 350 mln. 

Current account of the balance of payments for the first half of 1995 continued to be positive. It was LVL 56.1 mln. But it was reached only due to big positive saldo in part of services, trade balance was negative at the level of LVL 90.9 mln.

Structural reform is being continued in Latvia. Newly established (in 1994) Latvian Privatisation agency (LPA) started to operate. Till October 1995 Agency was given to manage by 374 different objects to be privatised. For 300 of them the rules of privatisation have been approved till November. Also such big companies as “Universal Bank of Latvia”, “Latvian Airlines”, ”Latvian shipping company” are transferred to LPA. 

Privatisation process was almost completed also in agricultural up- and down- stream sectors in 1995, after the privatisation of the most of grain processing enterprises. Only few of them continue to operate as state owned. Privatisation of agricultural enterprises was finished already earlier. 

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, Germany and Finland is likely to grow as more and more trade is reoriented to western markets. Trade between the three Baltic countries continued to be relatively small in recent years. Latvia continues to have a trade deficit in part of goods and some positive balance in part of services in 1995. It is expected this trend will be followed in 1996. 

Free Trade Agreement with the EC came into force since January 1,1995. In 1995 Latvia has signed Agreement on Association with the EC. Now it should be ratified by EU member states' Parliaments.

Growth of the official unemployment rate has stabilised on the level 6 to 7 %. Currently it is 6.1 %. The true rate of unemployment, however, is probably higher when hidden and unregistered unemployment is taken into account. 

Latvia national currency “lats” (Ls) continued to have a free floating rate to foreign currencies. The exchange rate has been quite stable also in 1995, ranging from 0.51 to 0.54 Ls per US dollar. It has not changed per SDR since January 1994, despite on significant banking and financial crisis, taken place in 1995. 

Situation the agricultural sector

Agriculture is an important sector in the Latvian economy. In 1995, the agri food sector accounted for about 18.9 % per cent of GDP. Share of agriculture was 8.3 % as to compare with 7.8 % in 1994. Share of agricultural employment was 17.4 %. Since 1992, when was the top, number of employed people in agriculture has decreased by 30 thsd. or by 17 %. It shows, agriculture as a sector has fulfilled a role of buffer for structural changes, and now some shift to other branches is taking place. But number of employed people remains to be high as to compare with dynamics of area sown and number of livestock (See Figure 2). 

 

Figure 2. Dynamics of usage of resources in Latvian agriculture in 1990-1995

The sector continues to experience consequences of the restructuring of national economy and trade relations. Level of state support to agriculture has decreased significantly. It is one of the main reasons to decrease of agricultural exports- prices were uncompetitive in the European market. Also quality and marketing skills had to be improved. Some success in this field has achieved now. In 1995 agri-food exports have increased by 70 % reaching 216.3 mln. USD and exceeded imports by 27.8 mln. USD in reverse to 1994, when agri-food trade balance was negative. 

2. AGRICULTURAL PRODUCTION AND FOOD CONSUMPTION

In the period 1990 to 1995, agricultural production has declined by 50  %. Livestock production showed the largest decline- almost by 60 %. It is illustrated in Figure 3. 

 

Figure 3. Dynamics of Latvian Agriculture output in 1989-1995

Despite on still continuing decrease in agricultural output in 1995, there are some signs, indicating certain recovery. Last year was the first after start of restructuring, when  eggs and pig production started to increase. The same is true also concerning fertilisers use. 

Crops 

The share of agricultural output attributable to crops after some decline in 1994 continued to increase in 1995, despite volumes of production of almost all crops decreased. 

Grain production clearly reflects changes in grain market. After 1992 price increase for grains significant increase of area sown by grain for marketing, as rye and wheat, could be observed in 1993. But due to large volumes of shadow imports and delays in payments, it declined in 1994. Improvements in grain market, caused by implementation of law “On Grain Market and State Grain Reserve” have lead to stabilisation. There was some increase in wheat production to meet domestic consumption, while rye area continued to decline due to lack of demand. (See Figure 4). In 1995 grain marketing prices continued to grow, almost reaching level of 1992. It caused increase in area under winter crops for 1996 harvest. 

Barley and outs production was following to volumes of meat production more as to situation in grain market. 

 

Figure 4. Dynamics of structure of area sown by grains in 1990-1995 

Barley, which accounts for about half of all area under grains decreased by about 24 per cent in 1995 compare with 1994. Due to low yield caused also by dry weather, share of barley in total grain harvest was only 40 % instead of 53 % in 1994. 

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.

Table 0-1

Changes in area sown under main crops in 1995 

1990 1994 1995 1995/1994=%

Sown area yield Sown area yield Sown area yield Sown area yield

Total grain 685.9 23.6 489.1 18.4 411.4 16.9 84.1 91.6

Wheat 141.5 26.3 94.6 21.1 109.6 22.2 115.9 105.5

Rye 130.7 24.8 62.7 18.1 40.4 17.6 64.4 97.6

Barley 308 22.6 266.5 18.1 203.3 14.0 76.3 77.4

Oats 82.4 21.4 54 16.5 45.6 16.1 84.4 97.5

Sugarbeets 14.7 298.7 12 190.2 9.5 263.2 79.2 138.4

Potatoes 80.3 126.5 80.4 130.0 75.3 114.7 93.7 88.3

 

Potatoes production decreased by 17 %, rapeseed - by 50 % in year 1995.

Livestock production 

In 1995 livestock production had even deeper decline as crop production. But it was caused by decrease in cattle production- milk and beef. Production of pigs and eggs increase by 8.7 % and 17 %, respectively. It shows some improvement in sector. But situation still remains complicate. Change in structure of livestock is continuing. 

 

Figure 5. Changes in herd size and production of livestock products in 1990-1995

Total meat production continued to decline reflecting the large fall in livestock numbers in recent years. Only in year 1995 number of pigs has started to increase. Changes in number of cattle, especially cows, do not allow to forecast significant increase in beef production for next few years. Structure of cattle herd also shows significant changes not on favour of beef production, compare to milk. Mostly it reflects difficulties in marketing possibilities for beef. Price for cattle is almost twice lower as for pigs. 

Table 0-1

Recent changes in livestock production 

1990 1994 1995 1995/ 1994=%

Cows thsd. 535.1 311.9 291.8 93.6

Other cattle thsd. 904.2 238.9 244.1 102.2

Pigs thsd. 1401.1 500.7 552.3 110.3

Poultry 10 thsd. 1032.1 370.0 410.2 110.9

Production

Milk 10 thsd. 189.3 100.1 94.4 94.3

Beef thsd.t 125.1 68.1 47 69.0

Pig meat thsd.t 138.2 53.9 58.6 108.7

Poultry thsd.t 40.3 11.4 10.8 94.7

Eggs 10 mln. pieces 81.89 35.99 42.1 117.0

In 1995, meat production declined by a further 13 per cent compared to 1994, and in 1994 by 35 % to 1993. In 1993 the largest decline occurred in beef production with a 31 per cent fall. The further development of beef production still is problematic. It is characterised by increased number of pigs in 1995 compare to 1994 and 1993. Advanced decline of cows compare with decline of number of other cattle gives some hopes the bottom in cattle production is reached now (see Table 0-1). 

Changes in structure of meat production are illustrated in Figure 6. Decrease of pigs and poultry share in total meat production, taken place in 1992-1993 and was caused by sharp increase in grain based feed prices, has stopped in 1994. After pigs and poultry price adjustment their production has started to increase, but more on industrial bases as compare to cattle. 

 

Figure 6. Changes in structure of meat production in 1990-1995 

In 1995, milk production also continued to decline by another 6 % compare to 18 % decline in 1994. 

The recent changes in the structure of production reflects the difficulties in economic conditions for agricultural production in Latvia. Generally agricultural production still is unprofitable. 

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 has stopped to decline. Almost for all main products, except potatoes, slight increase can be observed. Approximately the level of 1993 per capita consumption is reached. It shows some improvement in living standard of population. Share of household income spent for food has decreased by another 1 % in 1995, but still remains high by international standards. However, this share is likely to continue to decline as the economic conditions improve and real disposable incomes increase. 

 

Figure 7. Development of food consumption by different products 

3. AGRICULTURAL TRADE 

Trade flows 

Towards the end of 1993 and during the first half of 1994, Latvia experienced a fundamental change in terms of the composition of imports and exports as well. 

It concerns the both- structure of products and structure of trade partners by countries. 

1. Structure of trade by products 

a) Exports 

As statistics show, structure of exported products has changed significantly within 1993-1994. (See also Figure 8). The share of dairy produce and also meat has declined from 57 % in 1992 to 41 % in 1995. It was replaced by fish products and sugar confectionery. Also within group of meat and its products share of industrially processed meat products has increased. Partly it can be explained also by lack of available meat resources produced by Latvian agricultural producers. Business of meat processing industry is largely based on imported unprocessed meat. 

It shows also increasing competitiveness of processed food comparing to primary agricultural products in line with advantages of see located country. 

 

Figure 8. Changes in structure of agri- food exports by groups of products

b) Imports 

Also structure of imports has changed. Share of sugar and cereals that were 20.2 % and 26.4 % in 1992 respectively, now has decreased to 11 % and 4.1 % in 1995. It is replaced by fish and beverages and also by other products (see statistical annex, table 8).  

Official estimates indicate, that Latvia imported about 4800 tonnes of meat products in 1995. Since 1994 Latvia continues to be as net importer of meat. 

2. Structure of trade by countries 

As concerns countries of partners, structure of trade remains quite stabile. The share of CIS is still dominating in agricultural exports, while concerning imports it can not be said. 

a) exports 

Some recovery in trade relations with CIS, and especially with Russia can be observed in 1995. Agri-food trade with this region has increased in relative and absolute terms. Also some increase - by 1.6 %, can be pointed out concerning export to EC 12. (See Figure 9) 

 

 

 

Figure 9. Changes in structure of agri-food exports by countries

b) imports 

Total volume of agri- food imports has continued to increase in 1995 by the same speed, as in 1994, reaching volume of 188.5 mln.USD. As the main trade partner still is EU-12. Together with new member countries Finland and Sweden imports from EU to Latvia count 49.8 % in 1995. 

 

Figure 10. Changes in structure of agri-food imports by countries

These figures give some basis for assumption, generally new more adjusted patterns of international agri- food trade have been created in 1993-1995, and there will not occur sharp changes in next few years. 

4. AGRICULTURAL POLICY DEVELOPMENTS

Structural policies

1. Institutional and organisational framework of the privatisation process

As it was said in earlier reports, during time period 1990- 1993, the Latvian Parliament passed several laws regulating 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. 

Subsequently the law on “Privatisation of the Agricultural Enterprises and Collective Fisheries” was passed. This law regulated the privatisation of non-land assets.

There were also number of special laws to provide privatisation in up- and down- stream industries, passed in 1992-1993. Only some amendments to them were done in 1994-1995. Their  general idea was to give some preferences to farmer co-operatives during process of privatisation of grain processing enterprises. 

Process of privatisation in these industries is almost completed. Only few, less significant or unprofitable enterprises are left to be privatized or liquidated. 

2. Changes in structure of agricultural production 

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 1995 almost 47 per cent of land was operated by family farms and less than 2 per cent  were as state farms. 

The number of peasant farms has grown from 7500 in 1990 to 64264 in January 1995. These newly established peasant farms are quite small on average with 12.1 ha (compare to 11.8 ha in 1994) of agricultural land. 

In addition there are about 113000 household plots and 115000 subsidiary farms which on average are less than 5 ha. 

3. Policies related to the restructuring of the former state and collective farms

There were no special structural policies to restructure former state, now corporate, farms. 

Credit policies

There is some shortage of both short term and long term credits for agricultural producers in Latvia. Situation was already improved in the first half of 1995, when interest rate for long term credit resources felt down to even 16 %. It is significantly lower as compare to 60- 80 % in some previous years. But deficit in state budget has made any available capital resources much more expensive, and current long-term interest rate fluctuates between 25-40 % for long term credits. 

Credits are available to agriculture also through the special State credit institution ‘Laukkredits” (Rural credit), which was established to maintain World Bank’s credit line for agriculture. These credits have fixed interest rate 14 %. Some resources are still available. It is necessary to meet strong requirements to get this credit. 

Support policies

1. Prices 

Government does not provide any special price support policy, except tariff barriers. But together with low purchasing power of population they allow to maintain lower prices within internal market as to compare to prices on imported products on the border. 

Even that only measure, what is expected by a law,- to set minimum guarantied prices for grains is not realised in recent years. 

Government set only prices to purchase grain for State grain Reserve in amount of 60 thsd.tonns from 1995 harvest. But this idea  was not implemented due to higher prices offered by grain processing companies. It was caused by serious grain deficit in 1995 and strong competition among different private companies (including privatised enterprises) within market. 

2. 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 and was poor quality to meet bread production requirements) as well as butter and cheese. It required 1535 thsd. LVL. But it was exceptional case, and there are no ideas to continue this policy. 

There were 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  are expected to increase competitiveness of Latvian agricultural products on external markets. 

In fact, due to big unexpected deficit in State Budget, actual payments of subsidies in 1995 were not more as 6 mln.LVL. or the same level as during half of year in 1994. In 1996 years  budget there are forecasts for 8 mln.LVL for agricultural subsidies. 

3. Inputs’ support 

Part of subsidies was used to support lower prices for high quality seed and livestock purchases. It was only support measure of this type in 1995. 

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. 

5. Taxes 

There are some tax relieves to stimulate agricultural production in Latvia. 

a) income tax 

Until last amendments private individual farmers, householders and private auxiliary farmers were not liable to pay income tax on incomes earned in agriculture. In other activities income tax is set at 25 per cent of taxable income. 

According to the new version of the law  also agricultural profits are taxable. Currently personal income tax should be paid from profit from agricultural activities exceeding 3000 Ls and from all other profits. 

Private farmers should pay personal income tax if their annual income does not exceed 45000 Ls. 

Enterprise income tax (current law since 09.02.1995. in force since 01.01.1995., last amendments since 12.10.1995)

Since 1995 those private farmers whose turnover in the previous year is less than 45000 Ls are exempt from profit tax they may choose  to pay personal income tax.  Other agriculture enterprises have a tax discount of Ls 10 per hectare of land used in agriculture. They also can choose so called small enterprises discount rate 20 % from calculated income tax. 

b) Social tax

Since new law on Social tax came into force in 1996, farmers have to pay higher social tax as earlier - 22 % instead of 19 5. General rate still is 37 %. 

The individual  farmers, who are not employees, have to pay the social tax for themselves and for the  members of their family employed on the  farm.  The tax is calculated at a rate of 19 per cent from at least two minimal wages.(Table III - 7)

6. Demonopolisation, restructuring in the up- and down- stream industries. 

The only policy in this field beside general antitrust legislation until now was privatisation of monopolistic state owned processing and service system. Now this process is finished primarily, and the further restructuring in this branch is left to decision of new owners and market competition. 

7. Farm investment policies. 

There is no any special investment support policy to agriculture in generally and for farms, particularly

Agricultural trade policies 

1. Trade Relations

In 1995 Latvia has signed also agreement on association with EU. In part of trade relations it refers to earlier approved FTA, which came into force on 1 January 1995. Latvia, along with Lithuania and Estonia have a six year transition period to adjust their agriculture to competition in a Western European environment. In the case of agriculture and food products, the Agreement provides for reciprocal concessions in trade. 

To expanded its trade links Latvia has signed free trade agreement with EFTA on December 7, 1995. It replaced the existing before bilateral  agreements with particular EFTA countries. 

Now Latvia has started to negotiate with CEFTA countries to sign bilateral FTA with them. 

As particular problem remains free trade by agricultural products with other Baltic countries. In opposite to industrial products, where agreement came into force since April, 1994, there is no final conclusion in terms of agricultural products. Differences in agricultural policies continue to be as a main obstacle. 

Currently Latvia is 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.

2. Tariff barriers

There were no big changes in tariff barriers in 1995. 

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. 

Some influence on agricultural trade should have also Regulations “On protection of domestic foodstuff market”. They were approved by Government in 17.01.95. They  give MOA duty to monitor at agricultural market and in a case of serious distortions to introduce additional protection measures. But this mechanism was not used in practise during 1995. Thus, why it is difficult to evaluate its impact. 

There are no import quotas. Licensing is being provided only for supervision purposes taxation legislation be followed and quality assurance be guaranteed. 

5. ASSESSMENT AND OUTLOOK

The decline in economic activity in Latvia bottomed out in 1995, and growth in GDP is expected to start slightly in 1996-1997. Tight monetary and fiscal policies have brought inflation under control, but remains high compared to OECD countries. 

Latvia is expected to have a budget deficit of about 3.8 per cent of GDP in 1995. 

Russia continues to be Latvia’s main trading partner, although there has been some reorientation of trade to western markets.

The agri- food  sector has retained its relative importance in the economy and in 1994 accounted for over one-fifth of GDP, while share of agriculture in GDP is only 8.3 %. 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.

In summary, after some crisis taken place in 1995, the prognoses for future development of Latvian economy are not so overvalued more. They show increase in GDP for next year 1996 not more as 3 %.  The budget deficit will decrease to the level 3 % from GDP in 1996. Inflation and rate of unemployment will remain on level of 1995. The decline in the agricultural sector is likely to bottom out. With increased pressure on farm incomes, there is likely to be some efforts to increase protectionism through subsidies or other measures, but they will be restricted by lack of State budget or other financial resources. 

In 1995 agreement on Latvian association with EU was signed, which gives signals on possible joining to this Union in the near future. 

As the main tasks for agricultural policy in next few years can be mentioned the following:  to develop agricultural structures acceptable also under EU, to improve production safety and quality, to give some investment into Latvian rural development policy.