1. Agrarian structures after 20 years of transition: Determinants, trends, and challenges Alfons Balmann

2. Some stylised facts Actual farm structures strongly differ from expectations –"western type" family farms play almost nowhere a particular role In general: dualistic farm structures –large and very large farms relatively small in numbers high share in land and capital intensive production (e.g. cereals, granivores) often successors of former collective (and state) farms –subsistence, semi-subsistence and small farms huge in numbers high share in labour intensive production (e.g. potatoes, vegetables, dairy) motives: self-employment, self-sufficiency –shares vary among countries –shares changed only gradually after first years of transition

3. Some stylised facts Source: FAO

4. Ukraine: dairy production years large farms subsistence farms delivered to processors total production Some stylised facts Source: Mykhaylenko 2008

5. Some stylised facts Source: Agrarbericht 2007 Farm sizes and their land shares in Germany (2005)

6. Explanations Path dependence –farm structures change very slowly sunk costs for assets and human capital, market frictions, … with the exception of "catastrophic" events (bifurcations) –institutional change is slow new institutions "don't fall from heaven" but evolve existing institutions in transition economies deviate from textbook assumptions –interdependence of structures and institutions institutions and policies in favour of status quo existing structures affect institutional change  structures are outcome of their history not of their superiority  surviving large farms  emerging (semi-)subsistence farms

7. Surviving large farms Profit orientation necessary for survival  Employment reduction of successors of collective farms abolishment of public services reduction of hidden unemployment reduction in livestock production –But employment reduction and profit orientation somewhat delayed existing assets for livestock production (sunk costs) identity of ownership and employment (sunk costs of human capital) avoiding competition with newly/re- established farms legitimisation strategy of managers  to some extend "job maximization strategy"

8. Emerging subsistence farms Households continued farming as in socialist times Employment reduction of successors of collective farms Missing alternative employment opportunities in rural areas  Subsistence, semi-subsistence and small farms –a strategy to generate at least some income from own resources (particularly if land and local markets available) –but (in general) rather a by-product of transition than a perspective (limited land availability, financial resources and market access)

9. Explanations Path dependence –western structures outcome of their history not of their superiority  biased view of own reality in the Western World  transferring western "paradigm" to transition economies was misleading

10. Explanations Technological change –ever increasing capital intensity –ever increasing knowledge intensity  agriculture as "biological manufacturing" (Boehlje 1999)  investment and production driven by venture capital! Globalisation –agriculture part of global food chains –"supermarket revolution" also in transition countries  farms have to be compatible with standardisation trends  farms need strong local partners along the chain  Both in disfavour of small farms, in favour of large(r) farms!  Both processes continue!

11. Where are we heading? Traditional problems –Agricultural treadmill –Quasi-fix production factors –Existing inefficiencies (farm level, sector level) –Structural deficits

12. Specific case: Germany "Political philosophy": competition of alternative farming types –agreement of governing coalition in 1990 –integration of successors of LPGs in the main farmers' union "Deutscher Bauernverband" Huge financial support of East German agriculture EU membership

13. Selected figures of German FADN farms (financial year 2007/08)  Significant differences between East and West size differences intensity differences Specific case: Germany

14. Selected figures of German FADN farms (financial year 2007/08)  higher labour intensity per ha in the West  slightly higher labour intensity per ESU in the East Specific case: Germany

15. Selected figures of German FADN farms (financial year 2007/08) much lower capital use in the East very low equity in the East, particularly of large full-time farms  deficit in venture capital in the East Specific case: Germany

16. Selected figures of German FADN farms (financial year 2007/08)  higher profits in the East  partly due to lower rental prices  but: leverage effects Specific case: Germany

17. Selected figures of German FADN farms (financial year 2007/08)  in general, higher productivity of larger farms  particularly high productivity of very large corporate farms Specific case: Germany

18. In the East –farms are efficient and profitable no ruinous competition on the land market –but sector "suffers" from limited venture capital potential value added not exploited higher vulnerability (hired labour, land and capital need permanent payments) In the West –farms are well equipped with equity capital –but suffer from low profitability structural deficits ruinous competition

19. Productivity and profitability  higher profitability because of lower costs (labour, land)  but: lower yield levels and lower prices

20. Productivity and profitability Efficiency of large wheat farms in Ukraine 2008 (DEA)

21. Productivity and profitability Efficiency of large wheat farms in Ukraine 2008 (DEA)  huge productivity potentials  important: management, capital endowment  less but also important: size, legal form Groups of farms Technical efficiency (CRS) Allocative efficiency Scale efficiency All 0.550.890.96 Region Kyiv0.510.890.96 Poltava0.560.900.96 Cherkasy0.570.890.96

22. Productivity and profitability Profitability of wheat production in Ukraine 2006

23. Where are we heading? Traditional problems –Agricultural treadmill –Quasi-fix production factors –Existing inefficiencies (farm level, sector level) –Structural deficits Recent trends –Globalisation and verticalisation –Biological manufacturing –…–…

24. Globalisation and verticalisation International structural change in the pork chain Denmark (2007) –34 % of all pigs in facilities with more the 5000 pigs –20 % of all pigs in facilities with more the 10000 pigs US pork production (2002) –70 % of pork from vertically integrated systems –53 % of all pigs in facilities with more the 5000 pigs –2008: 40 % of all sows held by the 10 largest enterprises Smithfield Foods –USA: > 1 mill. sows –Poland: about 83.000 sows, >1 mill. hogs in 2008 produced –Romania: investments in pork chain with capacity for 4 mill. hogs

25. Source: KSH, AKI Pork production in Hungary after EU Accession Globalisation and verticalisation

26. Pork production in Hungary after EU Accession (Nyárs, AKI) Farm level –genetic heterogeneity, few breeders which can deliver high quality piglets –mainly outdated stables (often 20-25 years old) hygienic deficits and high veterinary costs high labour input necessary Underdeveloped processing sector –coordinated actions require huge financial flows Macroeconomic deficits –high interest rates, restricted land market,… Geographical disadvantages –high costs of protein feed (while grain is relatively cheap) –high transportation costs to import markets

27. Globalisation and verticalisation German pork chain Relatively successful But: in Eastern Germany –pork production relatively low  low value-added, low employment –reasons enormous capital needs and low equity of existing farms public resistence against large facilities of external (alien) investors But: in Western Germany –structural deficits of the farrowing sector hog feeders demand for large units of homogenous piglets from one farm farrowers are relatively small

28. Increasing knowledge intensity of modern agriculture Example: farrowing / piglet production in Saxony In 2006 average profit per sow was 300 € higher for farms with more than 1000 sows compared to farms with less than 600 sows Success factors lower costs + higher revenues strong positive correlation of number of sows and piglets per sow Biological manufacturing

29. Increasing knowledge intensity  Economies of size result from better managing human capital and know how rather than just from decreasing average costs for facilities division of labour competent managers specialised employees knowledge transfer through supply chain Biological manufacturing

30. Increasing capital intensity Financial needs to create one job in livestock production in Germany hog feeding: 1 125 000 € facility per 2500 places at 350 € each, current assets 100 € per place farrowing: 675 000 € facility per 250 sows at 2300 € each, current assets 400 € per place dairy farming: 300 000 € facility per 50 cows at 4000 € each, current assets 2000 € per place Biological manufacturing

31. Changing conditions of agricultural production Emerging markets –bio-energy, fibres, … –emerging countries with fast growth New competitors New technologies: bio-technology, … Climate change Supermarket revolution and increasing vertical cooperation  Agriculture in CEE is part of a globalized world What are the challenges?

32. Agriculture is a difficult business –market and weather uncertainty –treadmill, quasi-fixed factors, ruinous competition Towards the knowledge-based bio-economy –"biological manufacturing"  R&D, innovation, skills  enormous demand for venture capital Vertical integration/cooperation –amplifies opportunities and threats Societal perception of modern agriculture –"modern" farmers are a small minority, even within the sector –slow and uncertain policy responses and institutional changes