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Interview with Ruslan and Lyudmila to learn their methods for success (assisted by Sergei Kiral, Land O'Lakes, L'viv) I. INTRODUCTORY COMMENTS on UKRAINIAN REALITY by the author How did they do it? How did "Ruslan," the leader of the farming operation, and "Lyudmila," the accountant and business manager, starting with 86 hectares of winter wheat and canola in the fall of 1996, build up a large private farming operation in Western Ukraine, complete with modern imported equipment, to where in three years they were farming 486 hectares of land with the potential to more than double that in 1999? Why is this remarkable? Ninety percent of the farms in Ukraine are losing money according to the Ukrainian Ministry of Agriculture. Most of the farm land is owned and farmed by collective farms (or the same thing called by a different name) with many obstacles in the path of private family farmers who try to make an honest living tilling the rich Ukrainian soil. Credit is almost impossible to get. Farming takes a large capital investment in equipment plus generous amounts of working capital for planting, growing, harvesting and marketing. Expensive farm equipment and adequate amounts of working capital are needed to farm 486 hectares of land. Ruslan and Lyudmila did it. Can others? How? How can Western assistance programs be designed to help them? Why are we interested in hearing their story? Knowing the methods that Ruslan and Lyudmila used to become successful as private family farmers can be particularly valuable in designing humanitarian aid programs to assist them and others like them. The information gathered can also be valuable for private (probably foreign) investors who are desperately needed to help finance the struggling Ukrainian private farmers. Ukrainian reality: If we're interested in trying to help improve the productivity of agriculture in Ukraine, it would be logical for us first to understand the structure of Ukrainian agriculture. Farming in Ukraine is done mainly on former collective farms that go by the name of joint ventures or collective agricultural enterprises (CAE's). These CAE's are huge and are that size simply because of governmental decrees. They didn't grow to their huge size because of any natural growth that resulted from experimenting in the market place to discover the most profitable economy of scale (the main determinant of farm size in the USA). In fact, these CAE's have proven to be very inefficient in the allocation of the limited factors of production (land, labor, capital and management) and don't maximize profit. This has left Ukraine as the "basket case" of the world instead of allowing it to realize its potential to become the "breadbasket" of Europe. Something needs to change! Salvaging these money-losing collective farms is not the answer. They have never been efficient. Because of a fatal flaw in their design (called lack of motivation due to no private ownership), they never were and never will be efficient. Collective farms are not natural, not sustainable and can survive only with government subsidies. They were established and have survived, at unbelievable personal sacrifice by several generations of Ukrainians, by relying on government subsidies and brutal, deadly, freedom-destroying force. (Read, "The Harvest of Sorrow" by Robert Conquest.) We should let collective farms die a natural death, and the sooner the better, for until they do and are replaced by economically "right-sized" private farms, Ukrainian agriculture cannot become globally competitive. During the last several years several hundred of these collective farms have been converted to Lease Enterprises (often accomplished with USAID funding) where the Lease Enterprise owner (and operator) is customarily the former collective farm director. He once again controls almost all of the land, buildings, equipment, livestock and working capital of the former collective farm in a new single entity with a new name and a new legal structure. This is legally a private farm but it is run too much like the old collective farm to be called a private family farm. These Lease Enterprises aren't anything like the private family farms that are the backbone of U.S. agriculture. While the new Lease Enterprise is generally more efficient and productive than the former collective farm from which it evolved, in this author's opinion, because of its old management and large size, which often exceeds two to four thousand hectares and has lots of livestock, it is not likely to become as globally competitive as if the land were divided into smaller more efficient farms and farmed by true private family farmers. More wealth would be produced from the same resources if there were several smaller Lease Enterprises operating per former collective farm rather than having one huge Lease Enterprise surrounded on its periphery by a few struggling inefficient private farmers who were former collective farm workers who wanted their freedom. Having more than one Lease Enterprise per collective farm would encourage competition and reward good management at the expense of poor management, thereby creating more wealth. On the other end of the size scale from Lease Enterprises are former collective farm workers with land titles that give them ownership to three to five hectares of farm land. Rather than lease their small parcels of land to the new Lease Enterprise, they choose to farm it themselves. They usually try to lease additional land from non-farmers who own similarly sized plots. These are true private family farmers, but they are severely handicapped by their small inefficient size of operation. Unless they can expand their small farms into larger ones, they won't become efficient producers of agricultural products and therefore the creation of wealth from Ukraine's resources won't be maximized. While most Lease Enterprises are too large to be efficient, this class of private farmer is too small. There is obviously a need for "right-sized" private farms. Fortunately, in between these two extremes in size are private family farmers who have adequate amounts of land and livestock to farm efficiently. They got started earlier when the rules and conditions were different and/or by some means (1) got the financing to farm more hectares and (2) became good enough business managers to work successfully in spite of all the obstacles, including knowing how to get over the government hurdles. This is the group of farmers that has the most potential to allow Ukraine's agriculture to become globally competitive. It is logical, therefore, that we focus our attention on these "right-sized" private family farmers who are big enough to be efficient. (We don't need to worry about them getting too big to be efficient as they won't get bigger than is economically efficient because the competitive forces of the market place won't allow it.) The owners/operators of these farms are adequately motivated because they own the factors of production (except for the land, which is another issue that needs to be resolved in favor of private ownership if Ukraine is going to maximize the wealth creating potential of its agriculture). Compared to (1) inefficient collective farms, (2) over-sized Lease Enterprises and (3) undersized small private farms, this fourth group of properly-sized private farms has the greatest potential to make Ukrainian agriculture globally competitive. This group of Ukrainian private "right-sized" farms will create wealth for Ukraine just as privately owned, properly sized farms have allowed the United States to become the most efficient and productive agricultural country in the world. Ukrainian farms of 100 or more hectares in size (usually with some livestock) can be farmed efficiently by private family farmers. In the author's opinion, they are the "properly-sized" or "right-sized" farms on which Western humanitarian aid givers should focus and to whom they should provide help. Ruslan and Lyudmila fit into this category. Allowing successful private farmers like Ruslan and Lyudmila to rent land from collective farms could also put them into a position of earning enough profit to eventually buy the land they farm from the collective farm. The money received, first for the renting and then the purchasing of the land, could be distributed equitably to each vested collective farm worker, just as the land is presently being divided equitably among vested workers under the Lease Enterprise plan. This would seem a more logical way to be fair to and to cash out the collective farm workers than dividing the collective farm into hundreds of small three to four hectare parcels and then waiting for them to be recombined into a viable size for an efficient farming operation. Collective farm workers could rent as much land as they could finance and farm, just like other private family farmers, and therefore collective farmers would be potential operators and then owners. It is more reasonable to expect private family farmers to pay adequate rent to the land owners than would a Lease Enterprise operator and then, when the land is sold, to pay them a fair market price for their land. (This is because there would be more competition to farm and then to buy the land. Land ownership laws would need to be changed to allow this method of private ownership.) This approach would be a more direct step to transfer the land from a collective farm to right-sized private family farmers than the present Lease Enterprise method where a lot of former collective farm workers own small pieces of land with the likelihood of them being economically successful, unlikely. [This approach to breaking down the inefficient collective farms into economically viable private farms is somewhat similar to the "Land Management Company - Private Farmers Credit Union" approach proposed by this author in a widely circulated 15 December 1997 discussion (37 pages) of Lease Enterprises. This topic was expanded later in the last section of his book-length treatise (251 pages) of August 1998 entitled, "An Animal Nutritionist Looks at Contemporary Macro-Economic Issues affecting Russia, Ukraine, the United States and Japan" where methods of privatizing farm land was discussed. A copy will be sent upon request.] The author's suggested methods of privatizing collective farms propose that the huge collective farms go directly to an economically viable right-sized private farm without the inefficient intermediate step of having hundreds of former collective farmers owning three to four hectare pieces of land that must then be recombined in order to be farmed efficiently. Fairness to the farm worker and the benefits to Ukraine are taken into consideration and addressed in these proposals. After this discussion on Ukrainian agricultural reality, it is apparent that Ruslan and Lyudmila fit the desired profile of private farmers who could privatize Ukrainian agriculture by first renting land and then buying it. They could ultimately help make Ukraine globally competitive in agriculture. We therefore need to study Ruslan and Lyudmila's methods and encourage other Ukrainians to do likewise. This approach to privatization assumes that there is plenty of farm land to rent in Ukraine. Availability of farm land. Many collective farms in Ukraine are in such poor financial shape and are so short of working capital (to say nothing of their depreciated farming equipment and unmotivated workers) that their directors, having little other choice, are willing to rent out some or all of the CAE's land at what appears to be (to a Westerner) bargain basement prices to those who can pay them in either cash or barter. There is no problem for private family farmers to get more of the world's most wonderfully productive farm land - IF THEY CAN FINANCE IT! Unfortunately, it is extremely difficult for Ukrainian private farmers to get adequate financing. The track record of both collective and private farmers paying back input-based loans is not encouraging. In fact it is alarming! Without financing, it is very difficult for small private farmers in Ukraine to become economically successful. This makes Ruslan and Lyudmila's apparent success in beating the old collective-farm-oriented system that currently controls Ukrainian agriculture remarkable and worth investigating. Their success is particularly significant, since they started with no land, no equipment and very little money only three years ago. Starting in 1996, Ruslan and Lyudmila formed a partnership, obtained financing, rented land from collective farms, acquired modern equipment and are making money because they are good entrepreneurs. By learning how they succeeded, we can hopefully help others to do the same. Helping Ukrainian agriculture to become globally competitive is the major objective of Western humanitarian aid programs that are focused on helping Ukraine to develop its agricultural potential. We should walk in Ruslan and Lyudmila's shoes. We need to get some rich Ukrainian soil on our boots and to talk to those who farm this land so that we can decide who we can and should help and how. II. THE INTERVIEW with Ruslan and Lyudmila Here is Ruslan and Lyudmila's story as it was told to the author and Sergei Kiral (project coordinator and senior interpreter for Land O'Lakes in L'viv) in several very open, but confidential, conversations. After obtaining this information, I'm convinced that with some targeted help from the givers of Western assistance, such as USAID's Land O'Lakes Western Ukraine Initiative, other private family farmers who commit to intelligent hard work using "honest" means (with a slight "situational" ethics adjustment that is acceptable in Ukraine but not in the USA) can succeed. Following is Ruslan and Lyudmila's story. Ruslan was born in Dobrosyn village, Zhovkva raion, L'viv Oblast. He graduated from the L'viv Agricultural University with a degree in mechanical engineering. He worked as a combine operator and tractor driver on a local collective farm, starting at the young age of 16 years. He knows the collective farm system very well, having worked there eight years. He also worked at a poultry farm and the L'viv meat processing plant. He and his wife have a 17-year-old son who studies at the L'viv Agricultural University. Ruslan's mother worked for a collective farm. Since 1996 Ruslan has farmed with Lyudmila. Lyudmila was born in L'viv where she went to secondary school, graduating "with distinction" in the English language. (She didn't converse in English with me so Sergei translated.) Lyudmila graduated first in her class from the L'viv Trade and Economic Institute with a degree in accounting. She entered the work force as an accountant with UKRKOOPSPILKA, the Ukrainian Cooperative Union that united almost all of the state-owned and state-run retail outlets, as well as some cafes, under the central control of the state. During her 15 years of work there she became the chief accountant, a very revered position. She supervised 15 other accountants and dealt with huge amounts of money; as much as 100 million rubles when the average monthly salary was 150 rubles. Lyudmila's grandparents were farmers in Ukraine before Stalin's forced collectivization of Ukrainian agriculture. (It is estimated that 14 million Ukrainian people died during this collectivization effort, either from forced starvation, from being shipped to Siberia or from being executed for their sin of being successful farmers.) Lyudmila feels she has farming in her blood. Her grandparents farmed 10 hectares of land, which they owned, plus her father managed land owned by others. Her grandfather enjoyed bee-keeping. Lyudmila's husband is a mechanic. Lyudmila and her husband have a 14-year-old son and a 9-year-old daughter. Ruslan and Lyudmila have known each other for years. Several years ago they discussed the possibility of going into farming together. Eventually they formed a partnership. They knew that agriculture was the last place most investors put their money, but they still decided to try it. (She didn't say whether this was because they thought farming provided a greater challenge or because it was an untapped market - perhaps both.) Ruslan and Lyudmila started their farming partnership in 1996 with $15,000 of money borrowed from family and friends plus $10,000 borrowed from the L'viv Credit Union (LCU), which is managed by Oksana Semenyuk. (Land O'Lakes plays a supporting role here including the publishing of the LCU's paper. A Western Ukraine Initiative program gives banking advice to the L'viv Credit Union.) Ruslan and Lyudmila originally paid the L'viv Credit Union 60 percent annual interest. After the rate increased to 90 percent they paid the loan back as they couldn't afford to pay that much for money and haven't borrowed more from them. Lyudmila suggested that LOL loan money at reduced rates to the LCU so that in turn money could be loaned in large amounts at reduced interest rates to people like Ruslan and Lyudmila. They paid $18,000 interest on the $15,000 principle they borrowed by the time interest and principle was paid off. Legal structure: Ruslan and Lyudmila formed a limited liability company with two founders. If they did not have this legal structure, having more than one owner would make it a collective farm. They each own 50 percent of the business. Land ownership structure: Ruslan and Lyudmila hold leases to seven different, unconnected plots of land, the largest piece of which is 170 hectares. The fields are located within an area of 60 square kilometers. It is reported that many landowners have heard of Ruslan and Lyudmila's success and want to lease parcels of land to them. All profits are re-invested in farm development. Lyudmila said they are building their equity but are short of working capital, not an uncommon situation for many farmers worldwide. Employees officially earn, including Ruslan and Lyudmila, 50 hryvnia per month. [There are 3.55 hryvnia per U.S. dollar (Dec 98) making the official monthly pay $14.] Unofficially, while during the winter the workers' salaries usually do not exceed 50 -70 hryvnia per month, during the planting and harvesting season the pay is 70 to 500 hryvnias based on the amount of work each employee does. This cash payment represents about 50 percent of a worker's salary with the other 50 percent paid in barter with such commodities as flour, wheat, other grains, seeds, etc. Acres Farmed. In 1996 and again in 1997 Ruslan and Lyudmila farmed 87 hectares of winter wheat and canola. In the spring of 1998 they farmed 486 hectares (150 of winter wheat, 100 of winter canola and 236 of spring canola). In 1999 they will farm 786 hectares (150 of winter wheat, 100 of winter canola and 536 of spring canola). Ruslan and Lyudmila are considering farming an additional 300 hectares (for a total of 1086 hectares) in 1999 - 2000. One collective farm, with unusually productive soil, will lease 300 hectares for seven years in return for a $3000 upgrade to the road into the collective farm village plus 200 kg of grain per hectare each year for the next seven years. Ruslan and Lyudmila are considering it. This land is very productive with predicted yields of 3.0 to 3.5 tons of wheat per hectare, so the lease payment is a seemingly modest six to seven percent of the crop yield. This seems like a real "steal" in comparison to the one-third of the crop yield (minus one-third of the crop-increasing inputs such as fertilizers and sprays) commonly paid to landowners by tenants in the USA. Rent payments to collective farms for the leased land are due by 15 December. Ruslan and Lyudmila showed us farmland covered with snow that was being plowed around the clock by three different tractor drivers working in sub-freezing (minus 15 to 20 degrees centigrade) weather. A large Case-International Harvester tractor (Model 5150) was pulling a "Famarol" plow that was turning four furrows per pass. Because of the deepness of the fertile Ukrainian soil, the plowing depth was greater than what is usually seen, at least in the author's native state of Oregon. Lyudmila remarked that conventional wisdom says that they shouldn't be plowing during these conditions, but their experience shows that it pays them to use their plowing equipment to the fullest extent possible and to seed in February (if the weather turns warm) rather than later. Historically, the earlier seeding has produced better yields for them. This is a good example of Ruslan and Lyudmila's continual questioning of how things are done - not only economically, but also technically. Lyudmila remembers stories told by her mother, that she calls "people's knowledge" because it was accumulated from many generations of farmers. One year Lyudmila's grandparents defied tradition and seeded in late November. When the winter frosts came, their neighbors predicted that the seed would not germinate and that they would not see any sprouts in the spring. When warm weather arrived these same neighbors were surprised to see new green growth, proving that it was possible to plant seed into frozen ground and still get a crop - sometimes. On the day of our visit, the moisture content of the soil we saw being plowed was perfect. The texture was remarkable, with the rich black soil turning easily and breaking apart when "massaged" ever so little. Because of the excellent soil texture, the field, while appearing quite rough, was almost ready to plant. The only additional tilling needed will be done by the drilling equipment when the seeding is done later. Ruslan and Lyudmila have 12 full time employees and seasonally employ another five to 10 workers. While this number of employees is substantially more than you'd expect to find on a comparably sized farm in the United States, it is only a fraction of the number that you find on most collective farms. Ruslan and Lyudmila are increasing the productivity of their workers by providing modern farming equipment for them to use. With the modern farming equipment that Ruslan and Lyudmila have available to them, they can farm 1,500 hectares. In addition to their own leased farmland, they do custom farming to keep their equipment fully utilized. They have investigated the feasibility of vegetable farming and find that they could sell 2,000 metric tons of onions. Lyudmila's research shows that vegetable farming would be very profitable for them. She's looking for a joint venture partner with whom to raise 50 hectares of vegetables, including onions and garlic. She'd like to feed the vegetable by-products to hogs, so she is also looking for a joint venture partner with whom to raise swine. A visit to their farm reveals a huge 1,200 square meter multi-purpose farm building under construction. Income from this year's crops was enough to erect the walls and to build a roof. They hope to have enough income from custom farm work and services to put in the floor and to dig drainage ditches around the facility. They are looking for someone to help them with the concrete and asphalt in return for bartered grain and other commodities. They need $10,000 to complete this shed. They are willing to borrow $10,000 for two years at a 20 to 25 percent annual interest rate. So where did two private family farmers in business only since 1996 get the financing to build a 1,200 square meter shed, to acquire modern machinery and to farm 486 hectares with the expectation of doubling this acreage in 1999? Thank Land O'Lakes in L'viv and their Western Ukraine Initiative (WUI) and their sponsor, USAID, for providing the critical and vital contacts that have allowed Ruslan and Lyudmila to become successful private family farmers. How were the important business contacts made? In November of 1997 the WUI held a study tour, taking Western Ukrainian private family farmers who were partners in the Western Ukraine Initiative, to Poland where they and potential Polish business suppliers and partners were introduced. Lyudmila pursued these potential business partners. (No one else in the group took advantage of this opportunity.) As a result, she and Ruslan were able to obtain much-needed farming equipment at favorable lease rates as well as to find markets for their crops. (According to Lyudmila, participants in these international study trips must aggressively pursue their leads if they expect to get results.) While other factors have been important for Ruslan and Lyudmila's success, the Western Ukraine Initiative's contribution of introducing potential international business associates to them was a critical link. This is a genuine success story attesting to USAID's, LOL's and WUI's effectiveness in helping private family farmers to succeed in the competitive "jungle" of Ukrainian agriculture and agribusiness. Without this help from the United States taxpayers, this success story of Ruslan and Lyudmila would not have happened. Finding a person who would lease them modern farming equipment was the key to Ruslan and Lyudmila's success. Prior to meeting the Polish businessman, they were leasing equipment from another supplier at unfavorable rates. The Polish equipment supplier visited Ruslan and Lyudmila, evaluated their farming operation and liked what he saw. He was impressed with the quality of the canola seed they had produced and bought it, paying $180 per metric ton. (The price had been $220 per MT the year before.) Ruslan and Lyudmila sold $90,000 of spring canola and $20,000 of winter canola to the Polish businessman. Here's the history of how the leased equipment was obtained: The first trip to Poland on the WUI program was in November of 1997. Ruslan and Lyudmila completed negotiations for the farming equipment in March of 1998. The equipment arrived from Poland on 28 April of 1998. This was a little late to realize maximum yields, with the late planting hurting production and causing some financial problems. As a result, the Polish equipment provider is extending the terms of Ruslan and Lyudmila's lease. They have agreed that Ruslan & Lyudmila will pay 15 percent of what is due now and another 15 percent in the spring when they receive income from custom work. The other 70 percent of this year's payment will be extended into an additional firth year of their original four year lease at 10 percent interest. Lyudmila said both sides are willing to make compromises from the original agreement since there are many issues involved, including unexpected changes by the Ukrainian government. The leased farming equipment was supplied without a down payment, a mystery that even the American Ambassador to Ukraine, Mr. Steven Pifer, questioned when he and high-ranking USAID officials visited the farm in the spring of 1998. This is the first time the Polish equipment dealer has operated in this manner. He doesn't even supply equipment to Polish buyers without a substantial down payment, which attests to the favorable impression Ruslan and Lyudmila made on him and his realization of what is actually possible for private family farmers in Ukraine to finance in the present economic situation. The Polish businessman leased the following equipment to Ruslan and Lyudmila:
Since there was some risk to the equipment supplier, Lyudmila says this risk was reflected in the leasing fees. Lyudmila is a realist and doesn't expect something for nothing. This was the only way that Ruslan and Lyudmila could have rented the equipment as they didn't have enough money for a down payment. They could have purchased the equipment for considerably less money from a Hungarian supplier but a 20 percent down payment was required, and they couldn't afford it. Equipment payments: The $163,000 of equipment (all but the combine) is leased for four years with an option to buy. The annual lease payment is $40,750 (4 x $40,750 = $163,000 so the interest charge, as usual, is included in the lease - purchase price). The combine harvester payments are based on the number of hectares harvested with a charge of $85 per hectare. With 486 hectares to harvest, the annual payment will be $41,300 per year and more next year based on the increased number of hectares that Ruslan and Lyudmila will farm. They also have two Soviet-made Neva combines that are used for custom harvesting on collective farms. If they used the leased Case International combine harvester, they would pay additional payments to the owner of the combine (but also harvest more of the crop). You will notice grain and oil seed drying equipment listed. Ruslan said that if you have 100 hectares or more of canola, you should have your own drier. Canola, particularly spring planted canola, must be harvested before all the seeds are mature because if you wait until they are all dry, too much early maturing seed will shatter and you will lose it. Drying must be done within a few hours or days after harvest to keep them from going sour (rotting). (These green immature seeds are also high in chlorophyll, which darkens the resulting oil when crushed. This requires oil refining capabilities to increase customer acceptance of the canola oil.) Ruslan and Lyudmila do custom grain and oil seed drying. They'd like to do more of it. They can dry 50 to 60 MT per day based on seed moisture content at harvest. They're using the drier at only five to 10 percent of its capacity. They charge between 2.70 to 4.50 hryvnia ($0.76 to $1.27) per one percent moisture reduction per metric ton of grain or oil seeds. The average drying fee charged is 3 hryvnia ($0.85) per one percent moisture reduction per MT. They could dry 1,000 to 1,200 metric tons per month in addition to what they now dry. Since drying must be done soon after harvest (how soon depends upon the moisture level of the crop at harvest, of course), custom drying canola is not a year-around opportunity for Ruslan and Lyudmila to earn money. From a wider perspective, this custom drying capability allows other farmers in the area to raise canola and therefore gives them the option to raise a crop that doesn't have to be sold through state channels (sugar beets go to state-owned sugar refineries and wheat and other grains customarily go to state-owned grain elevators.) Ruslan and Lyudmila could buy and resell (or broker) the canola brought to them for custom drying so that they could perform the typical functions of a private country elevator. This would be a welcome addition to the undeveloped agricultural infrastructure of this area and would help private family farmers to become successful, as it is not advisable to raise canola unless there is the capability available to dry it soon after harvest. The importance of harvesting with a good combine: Canola seed is small and dense and is difficult to capture and contain. (There should be lots of duct tape available.) Soviet style harvesters leave 30 to 40 percent of the seed in the field. (The same is true for wheat and other grains, so improved harvesting equipment would do wonders for Ukraine's crop yields.) Poor seed recovery may be partly the result of the way the combine, regardless of origin, is set and used. If the operator is paid for hectares covered, you can expect the driver to pay little attention to the combine settings and to travel at a speed too fast for the harvester to have good seed recovery. Paying a percentage of the crop harvested to those doing the harvesting, or motivating them with some other incentive to insure that a high-crop-recovery job is done, would mean more of the crop reached the market. Western combines generally recover significantly more of the crop than do Soviet style harvesters and therefore may justify their higher cost. (Soviet style combines too often do a good job of throwing a lot of seed out the back of the combine along with the straw and chaff and thus over-seed next year's crop.) It would be necessary to figure the difference in cost of the domestic versus foreign harvesters and then compare the increased cost of owning and operating the foreign combine to the value of the additional crop that could be harvested to see if buying a foreign combine is a good economic decision. Having this option assumes you have the money to buy the foreign machine. Setting a harvester correctly and running it properly is good advice in all countries and with all machines and should be done regardless of the combine's country of origin. The payment to the Polish equipment dealer is made from Lyudmila's Ukrainian bank account. She owes no debt to the government of Ukraine, which is important or they'd raid her bank account to collect their money. She pays the Polish equipment supplier in U.S. dollars, not Polish zlotys. Ukrainian hryvnia are changed to dollars, which takes about two days at the Ukrainian bank. The U.S. dollars are then wire-transferred to a bank in Poland. Payment could be made by barter with canola but this requires many certificates and therefore "special favors" for those issuing the certificates, so Lyudmila prefers paying in dollars. This is leased equipment with a special customs permit that allows it to be in the country for less than one year. Since the equipment is allowed in Ukraine only on a temporary basis, to avoid extra taxes the equipment is driven back to Poland once a year. (You could assume that they pay extra taxes on the stationary Polish dryer.) The Case IH combine-harvester was returned to Poland at the end of November (1998) for maintenance and repairs. It will be driven back to Ukraine in May or June. Since the tractors and other farming equipment must also be returned to Poland once a year, but are being used the year around, they will be driven across the border and quickly returned, perhaps on the same day. (Talk about man-made obstacles for efficient operation!) When the equipment is returned to Poland and the $40,750 yearly lease payment has been made, the equipment is worth less (it's worth less whether the lease payment is made or not) so it returns to Ukraine at a lower valuation, which is favorable for reducing taxes. One of course asks about the problems at the border to bring in this equipment. Lyudmila says that everything is done legally. "There really aren't many problems." You must get a signed contract with a L'viv government official for the importation of equipment valued at over $100,000. It costs $20 for one hour of the custom officer's time plus a $30 declaration fee. Additional pieces of equipment, after the first one, cost $15 each. In other words, if a tractor is declared, that declaration costs $30. If a plow is also brought in on the same trip, that costs an additional $15. Before entry you prepare an official declaration with appendices to show all the pieces of equipment to be imported. It usually costs about $150 to $200 for them to get across the border with the several pieces of equipment that they import at one time. Customs fees are paid in cash. Lyudmila has not had to pay a bribe to get the necessary letter from the local government officials that allows the equipment to cross the border. Likewise, at the border she pays what is legally required in cash but she hasn't had to pay anything additional in bribes. Lyudmila claims that she "has no need to bribe anyone at the border." Lyudmila thinks that people who pay bribes "do so only because they do not know their rights." Government people sense this "ignorance of the law" and become arbitrary in their demands. Ignorance of the law therefore becomes expensive. Lyudmila has developed long-term relationships with the appropriate government officials, which has proven to be helpful to her and Ruslan. She deals quietly with the raion government officials. They arrange the border crossing with the oblast government. She doesn't need to know the top oblast officials involved. She must convince the local raion officials that she is using the equipment for farming and needs it right away. Since she is dealing with an international company, high ranking Ukrainian officials must give authority to move the equipment across the border. With the appropriate letters and attachments ready at the time of the border crossing, the equipment can cross into Ukraine from Poland without problems and without a long wait in line. Lyudmila says she never pays a bribe in cash and instead barters for special favors with free goods and services. This includes giving a government official a sack of flour, a bag of potatoes, plowing of their garden plot, harvesting their crop, etc. She reasons that since the government doesn't pay a living wage and the government people who help her, need to earn a living, she is obliged to help them. Her supportive approach to them encourages government officials to help her when she needs their help. By operating in such a supportive manner towards them, they have a good attitude towards her when she needs their services. She gave an example of an in-kind bribe where she was offered ammonium nitrate in either 50 or 500 kg sacks. She paid the person in charge thirty-hryvnia worth of flour for the lighter sacks and thus saved a 200 hryvnia charge for special equipment to load and unload the heavier sacks. (You wonder if the business owner lost out here as it undoubtedly cost him more to sack the fertilizer in 50 kg regular sacks than in 500 kg super sacks. It was probably state owned, so who cares?) Lyudmila commented that "Ruslan grew up in the area, so he knows the people there, knows who should be contacted and about what kind of issues. We achieve everything using fully legal/legitimate procedures as specified by law or other instructions." She was surprised with the quick and easy way their business was registered. Lyudmila commented that because government officials are accustomed to receiving free farm produce from collective farms (such as a sack of potatoes or a side of beef) in return for special favors, the raion officials favor the collective farms. This puts private farmers at a disadvantage. She argued that private farmers must adapt, since they're outside the "in" group of collective farmers, meaning that private farmers also need to give special favors to those in government if they hope to compete with collective farms for government favors and support. Lyudmila says collective farms are reluctant to support private farmers and are reluctant to support Ruslan and Lyudmila in particular. It costs Ruslan and Lyudmila the equivalent of about $2000 per year for in-kind bribes paid in the form of free goods and services. They never pay in cash. If they farmed more than 486 hectares of land, as they plan to do, the amount paid in bribes would increase a little, but not proportionally, because they would deal with the same people doing the same jobs. If they double the hectares farmed, Lyudmila expects the cost of bribes to go up about 20 percent. There is apparently a fairly fixed cost for government favors which is not very unit dependent. The $2000 of in-kind payments go to 40 to 50 people ($50 to $40 a piece yearly average) such as the head of the raion department of agriculture, deputy heads, sales people who may then lower the price of what they're selling (a nightmare it would seem to the owner of the business), other functionaries, etc. Lyudmila calls Ukraine, "primitive" saying, "You pay the government for a certificate and then you have to bribe the government people involved to issue it." Lyudmila pays sanitation people to leave her alone. The more successful the farm is, the more government people there are who try to get in on the action and the more favors they request. She said this extra in-kind payment is a "government" cost that could take five to ten percent of the profit. The author made the comment to Lyudmila that if all the "special favors" were paid to the government in the form of official permits and fees (like is done in the USA), rather than by-passing the government treasury by paying directly to the employees, that the government could afford to pay their people a decent wage and their employees wouldn't have to solicit bribes. Lyudmila answered coldly, "I don't need to have anyone tell me how it should be. I know that, but I have to be realistic and work with the way it really is rather than trying to change the system." She thus gives special favors to government people to expedite the paper work. Tax people aren't much of a problem as they know it is difficult for private farmers to earn much of a profit in agriculture. The tax collectors like to go where there is more money. Lyudmila shared "the tax people know what the profit figures should be so you can't fool them very easily. You must pay them what is due them." The Mafia has not been a problem for Ruslan and Lyudmila. The Mafia came and asked for a percentage. Ruslan has a friend who took care of this by showing them the books, convincing them that there was no extra cash and thus talked them out of trying to extract money from the farming operation. The Mafia, like tax collectors, is interested in profitable operations. Since Ruslan and Lyudmila run a legal operation, the Mafia didn't have a "wedge" to extract undeserved funds. Ruslan kicks out the simple gangsters but tries to deal with the serious ones by describing the actual situation to them. Lyudmila tries to minimize all costs in a legal way by knowing the rules and then holding government officials to them. She says you can bribe the raion officials, but it gets harder and more expensive at the oblast level, and even more costly at the national level, such as for loan guarantees, so she tries to operate "legally" and mainly with the local raion officials. Lyudmila claims that everything is done in a legal manner with "reasonable" extra "payments" for government work. (This was referred to earlier as "situational ethics," a common fact of life that is learned at an early age where, even at the high school and particularly at the university level, students are encouraged to bribe teachers for grades, acceptance into prestigious schools, etc.) Lyudmila is very much the realist who knows the system within which she must work and the people in it that will help her accomplish what she needs to have done. She knows how to work within the system in order to create value from their private farming partnership. As she said, "You can go in through the 'door' or you can beat yourself up trying to break down the 'wall'." She prefers the easier approach of "walking through the door" saying she uses the "Dale Carnegie" approach. Lyudmila adds, "People need to know what they're doing no matter what their job." She advised people "to work hard all the time looking for ways to make improvements." When you talk with Lyudmila about raising canola and other aspects of farming you become convinced that she knows what she is doing. Lyudmila and Ruslan do their own experimentation, such as trying different application levels of fertilizer, evaluating the results and making subsequent adjustments. They have found that it is profitable to fertilize winter canola. Lyudmila is cerebral and not bombastic and perhaps even a little bit retiring, but she knows what she wants and has the intelligence, training and experience, intestinal fortitude, determination and tenacity to work for what she wants until she gets it. Lyudmila divides people who take fees into the following categories:
Lyudmila gives the following suggestions on how to make something happen when working with government officials:
The raion government helps them, or at least doesn't cause them trouble. There was pressure at first with the government telling Ruslan and Lyudmila what to grow but they don't do so now. She thinks the raion agriculture department should support them with knowledge instead of giving them so many directives and asking for so much data, such as what crops are seeded, how many hectares planted, yields etc. (These are the same complaints heard from farmers in the United States about the USDA asking them too many questions. Statistics gathering is an important function of the USDA. It is done with the hope that private farmers and those in agribusiness will use the accumulated agricultural statistics to adjust more quickly to changing market conditions. This rapid adjustment is an important characteristic of a proper functioning market economy and therefore statistics gathering and dissemination should be encouraged. REC.) In making decisions, Ruslan and Lyudmila work fairly autonomously in their respective areas of responsibility but they discuss the big issues jointly. Neither of them seemed to make decisions by being "pushy," but instead by looking at the facts and having a respectable discussion. When asked if they used Western Generally Accepted Accounting Practices (GAAP) to make financial decisions, she said there is no need to know GAAP accounting as it is similar to Soviet accounting. She uses the traditional accounting methods in which she has been trained. She would like to have a computer on which to do accounting. Now she does the accounting all by hand. Lyudmila commented that in making decisions on what to plant that she and Ruslan consider the field, cropping history, the soil characteristics, soil analyses, marketability of various crop options, barter potential, etc. She said that the author's recent news article with suggestions on how to develop the Western Ukraine feed and livestock industry stimulated her to focus on hog raising. She wants a joint venture for pigs and is looking for a "real" partner that will work with them. Inputs: Lyudmila was asked to talk about how they obtain inputs such as seeds, fertilizers, chemicals, fuel, etc. They use their own seeds, although with canola, new "double zero" seed needs to be purchased when the erucic acid and glucosinolate levels exceed the accepted norms. They buy fertilizers from Agroservice Company. Fuel is bought from Agroservice and Dak "Khlib Ukrainy" (Bread of Ukraine - a state-controlled wholesale grain company). All chemicals are purchased from Agrobusiness, a state-controlled joint stock company. Most of these companies will provide trade credit but they normally require a 20 percent down payment. There is a wide choice on where to buy supplies but availability depends upon how much money can be paid at the time of purchase. Ruslan and Lyudmila need to buy fertilizer soon. They could save 30 to 40 percent if they pay cash rather than work on trade credits. With loans they could buy fertilizer and fuel at discounted prices and with the savings pay the interest charges and still have money left over. They'd like to do large volume purchasing. They are willing to pay 20 percent annual interest for dollar loans of $35 to $70 thousand with interest-only paid the first year with principle and interest due after two years. Barter is a part of marketing but she says they could save around 30 percent of the cost of fertilizer if they had cash at the time of application rather than resorting to barter. When asked about the challenges of buying inputs she mentioned: (1) Lack of working capital
Most farmers, including Ruslan and Lyudmila, can't afford to buy supplies directly from the producers (at lower prices) because of their (Ruslan and Lyudmila's) small purchasing volume. She supports the idea of procurement cooperatives but realizes that some starting capital is necessary to get them operational. She mentioned that perhaps the L'viv Credit Union could help them. Lyudmila questions the economic feasibility of having local farmer-owned canola oil pressing facilities. She feels that if large multi-national commercial operators with facilities in Ukraine and nearby countries continue to enlarge (such as installing oil refining capability to go with modern oil seed pressing plants) that it will be very difficult for smaller oil seed press operators to compete. She thinks small capacity presses may be reasonable today due to the current low labor costs but an association of growers is needed to make it profitable. She urges private farmers to build a professional operation rather than settling for primitive and non-competitive processing plants. Ruslan and Lyudmila were dues-paying members of the local Private Farmers Association (PFA) until this year when the president of the PFA said that Ruslan and Lyudmila are too big to be private farmers. He has discouraged them from continuing as members. (Sounds a little strange and like a throw-back to the old Soviet days of people being concerned when anyone became larger or more successful than the average.) She says they are presently on bad terms with the Private Farmers Association. It becomes obvious that there are two distinct jobs to do on Ruslan and Lyudmila's farm: (1) The actual production function of farming done by Ruslan and his crew.
It appears that one of the reasons for the success of Ruslan and Lyudmila is that they have a separation of duties and both know and do their jobs well. While one person could be responsible for these two distinct functions (and it may be preferable to have one person with the ultimate authority), it is important that both functions be done adequately. That usually requires some help, particularly in Ukraine with large government paperwork load. Lyudmila was asked about her and Ruslan's future plans. Her answer: "that depends on the economic and tax environment. We are determined to continue our business development. In the next three years we plan to continue making the equipment lease-purchase payments so that we will finally own the equipment ourselves. We also want to obtain more equipment, facilities and other resources and finish the grain storage facility. We then want to move into animal raising. If we manage to obtain some help (loans or investments), the accomplishment of our plans would certainly be accelerated." Lyudmila talked about their challenges, including the lack of working capital, remarking that they find ways to survive by delaying payments, bartering, etc. Lyudmila was asked how Land O'Lakes and the United States Agency for International Development could help them and other private farmers. She mentioned:
III. CLOSING COMMENTARY by the author I'm very encouraged by what Sergei and I learned from our visit with Ruslan and Lyudmila. They show a pathway others can follow to become successful Ukrainian private farmers. It is significant that they have separated their management responsibilities into:
It is important to recognize that managers must be competent and know what they're doing. This requires continual updating of knowledge concerning government rules and farming practices. Private family farmers need to be good adult learners so that they can be successful innovators. It is welcome news to find that by knowing the rules and demanding that government officials honor them, a well-informed and forceful person can get the government part of management accomplished with a minimum of "under-the-table" encouragement. Bartering agricultural goods and services in return for government expediency is a way of life in Ukraine. While we in the West can't really endorse this practice, it was encouraging to learn that bribes by private family farmers can be bartered for in-kind services without ever paying in cash and that bribes represent a relatively small part of the business expenses or revenue. This removes some of the mystery. Cash bribes are apparently paid by those who don't do their homework and instead try to take the easy, but expensive, way out by paying under-the-table cash to officials. Capital from some source is required for private family farmers to become large enough to be efficient. Unfortunately, the track record for the paying back of credits, particularly loans in the form of crop production inputs, is so unsatisfactory in the aggregate that even multi-national agribusiness companies in Ukraine are withdrawing from this practice. This is a national tragedy for Ukraine as it exacerbates an already debilitating cash flow problem for Ukrainian agriculture. This is reflected in the present buyer's market for leasing land. Low farm lease payments are a sad testimony to the lack of competition in Ukraine to farm the land. This lack of competition indicates the inability to farm and sell the production for a profit as well as the inability to get credit for the production function of farming in the first place. For these reasons, it is predicted that more land will lay idle than usual in Ukraine this year, which suggests an increased opportunity for those that can get financing. Because of the inability to get production credit loans and thus the prospect of more Ukrainian farmland being left idle, some prognosticators are predicting a food shortage in Ukraine within two to three years. During our interview, we learned that in 1997 Ruslan and Lyudmila were able (because of Land O'Lakes' Western Ukraine Initiative - funded by USAID) to meet a potential investor that eventually leased them enough modern farming equipment for them to farm 1,500 hectares of land (their own plus custom farming). Land O'Lakes and other Western humanitarian aid providers like them, can facilitate the growth of private family farming in Ukraine if they:
It is important to realize that Ruslan and Lyudmila were able to become successful private family farmers by just such a program as outlined above. Obtaining the necessary farming equipment is obviously important in order for a farmer to become successful. Looking at the importance of modern equipment from a macro-economic standpoint, in order for a population to enjoy a high standard of living, the productivity of labor must be high. That means that people must be willing to work and when they do work, they must get something done. Accomplishing more per labor hour requires education and training. It also requires capital investment in machinery that significantly multiplies the productivity of the workers. Ruslan and Lyudmila are increasing the productivity of their workers by supplying modern farming equipment for them to use. They are helping to create wealth in Ukraine while they increase their own equity. I was encouraged by Lyudmila's claims that inputs are not a problem as long as you have money to pay for them. In fact, with money, she says, there are many different options from which to buy supplies and to buy them at substantial discounts. This means that if we help private farmers to find alternative crops that are profitable to grow and then help them to process and/or market their production at a profit and for cash, they will have enough money to solve their own supply problems. Focusing on the input side of agriculture may only increase the "constipation" of the marketing side of the production function. Our attention should be focused on finding alternative crops and improving the profitability of processing and marketing of agricultural production. Simply said, if farmers can sell what they grow at a profit and receive the cash (by avoiding state control) they can solve their own economic problems. Lyudmila is a trained Soviet accountant and in our interview said she did not endorse Western accounting. I suggested that she should use Western GAAP accounting:
May I get a little philosophical? When you hold the fertile black soil of Ukraine in your hand and see it break apart like the finest potting soil you can buy, you can't help but wonder why Ukrainian agriculture and Ukraine, with 40 percent of the world's most fertile soil, are not both prospering? I'm for sure not the first to ask this question and to ponder why U.S. agriculture is so productive and so profitable with so few of our people engaged in production agriculture (less than two percent) while Ukraine is on the other end of the economic scale and suffering - and continuing to slide into even greater poverty? If this rich soil were located in a country with a political and economic climate such as in the United States, I'm sure Ukraine would be exporting many times more agricultural products than it imports and Ukraine would be prospering. This would be far different from the present dire economic condition of Ukraine and Ukrainian agriculture. Accomplishing this high productivity and profitability is of course the objective of many Western programs that are focused on assisting agricultural development in Ukraine. Our summary and call to action is very brief. From our conversation with Ruslan and Lyudmila it appears possible for honest, hard working, informed private family farmers who work "smart" to become successful and to create wealth for themselves and for Ukraine (and to do it "honestly" by knowing the rules and demanding that government officials adhere to them) if they can convince someone with access to capital to believe in them enough to buy into their "dream" and to provide financing. This is possible but certainly not easily accomplished. Western humanitarian aid givers should focus on ways that they can do these two things:
The above approach would be an honest and effective way for Western humanitarian aid givers to proceed. By helping people like Ruslan and Lyudmila we are helping private farmers rent underutilized collective farm land, farm it efficiently and profitably and later buy the land with their profits. This would be a direct and fair transfer of land from collective farms to private family farmers without the intermediary step of many people owning small parcels of land that would need to be re-assembled in order to have a farm size that was efficient to farm. This makes the support of people like Ruslan and Lyudmila even more justified as we attempt to help modernize and privatize Ukrainian agriculture with the hope that it will become globally competitive. Roy Chapin, Ph.D. Animal Nutritionist 11145 Chapin Lane, Amity, Oregon 97101
Assisted by Sergei Kiral
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