Policy Papers

  • 14.12.2012

    Increasing the Competitiveness of the Dairy Supply Chain in Ukraine: Role of the Government


    In 2012 Ukraine experienced two flashes of dairy trade disputes with Russia. First time in February and then in early fall Russia suspended imports of cheese from several Ukrainian dairies. The formal reasons for trade restrictions from Russia’s side were ensuring food safety and quality. As Ukraine exports about 40% of its dairy products, and about 70% of these exports goes to Russia, this dispute has been quite critical for the sector. This has not been the first dairy conflict in the history of both countries since the break up of the Soviet Union, nevertheless Ukraine keeps exporting its dairy exports mainly to Russia.

    This reflects not so the failure of the sector to learn the lesson and diversify its dairy exports’ structure, but rather more fundamental and persistent problems that inhibit the sector from increasing its competitiveness and diversifying its exports accordingly.

    These fundamental and persistent problems include: i) shortage of human capital, ii) limited access to credits, iii) limited access to modern agricultural technologies, iv) not reliable budget support programs, v) inefficient taxation system in agriculture, vi) rigid, outdated and overly complex food safety and quality system, More fundamental problem is, however, a strong misconception of the Government of Ukraine (GoU) and policy makers about the linkages in the dairy supply chain and about appropriate policy measures to foster the development of the whole supply chain. Minimum raw milk farm-gate prices have been one of the many evidences of this misconception. Negative economic consequences of this measure for the whole supply chain are well documented in the economic literature. Nevertheless, last spring minimum prices were introduced against the background of the dairy conflict with Russia. This spring already two draft laws1 suggest introducing minimum raw milk prices. Other examples of inadequate government measures are abound and, unfortunately, are rather a rule than an exception.

    Generally speaking this puts under the threat the sector’s growth perspectives even when world dairy markets are expected to stay bullish and offer splendid opportunities, e.g. see the OECD Agricultural Outlook (OECD, 2012). At the same time the international prices for feed crops, fuel and fertilizers are likely to increase as well. The net impact of high dairy output and input prices on dairy sector competitiveness will depend on how efficiently inputs are converted into output along the dairy value chain, i.e. on efficiency and productivity growth. In this regard the following steps should be taken to tackle the fundamental problems of the dairy value chain and boost its efficiency and productivity:

    i) Re-assessing the role of agricultural education and research system as well as the scope for reforming this system would have positive long-run effects as human capital plays a vital role in modern agriculture in determining productivity and competitiveness.

    ii) By committing to non-interventionist trade and agricultural market policy the GoU would gain back a trustworthy from the sector and eliminate a sizable risk from the sector.

    iii) Complete refusal from minimum farm-gate raw milk prices would allow the dairy sector to reap the greatest benefits from the bullish world dairy market, would force inefficient farms to improve their production efficiency and reduce costs or exit.

    iv) Taxing the profits of agricultural enterprises and treating agriculture/dairy farming the same as other sectors rather than supplying them with preferential Fixed Agricultural Tax would have positive long-run effects, as it is impossible to efficiently manage a modern agricultural enterprise without detailed and accurate accounting. Also, the privileged taxation of agriculture does not come at no cost since other sectors must be taxed correspondingly more to maintain a given level of budget revenues.

    v) Improving access to credits via widely used instruments as: microfinance, co-operative banks, credit guarantee schemes, and supply chain financing. More important, however, commitment to oninterventionist trade and agricultural market policy (see ii above) will eliminate a sizable risk from investments in agriculture/dairy supply chain. Legally required professional bookkeeping systems coupled with investments in education and training for the bookkeepers would tackle the problems of the lack of creditworthiness, financial illiteracy of farmers, lack of sector-specific knowledge with the loan officers in the banks.

    vi) Complete refusing from Import Substitution Policy would foster competition and better access to new agricultural technologies. International experience of pursuing Import Substitution Policy proved to be a failure. Coupled with different problems, in the end, the countries pursuing this policy grew more slowly than the others, not adopting it. Moreover, this policy is against WTO rules as it clearly discriminates among domestic and foreign products. As far as agricultural machinery and equipment are concerned, the discrimination between domestic and foreign agri-machinery and equipment in the state support programs should be eliminated.

    vii) Harmonization with international food safety and quality standards, streamlining and simplifying regulatory procedures is critical for penetrating other dairy markets and diversifying Ukrainian dairy exports.

    viii) Facilitating the development of agricultural cooperatives could decrease the costs of collection and transportation; improve the quality of raw milk, support household and small dairy farms.

    Attached file  (258.9 kb)
    Authors:  Nivievskyi Oleg
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