Executive Summary of Interview with Ruslan and Lyudmila – private farmers

Executive Summary by Roy Chapin, Ph.D., Animal Nutritionist, assisted by Sergei Kiral, Land O'Lakes, L'viv

I. INTRODUCTORY COMMENTS on Ukrainian reality by the author

Ruslan and Lyudmila (aliases) farm 486 hectares of land in Western Ukraine (1998). They expect to double this in 1998 - 1999. This is remarkable in Ukraine where most of the land is farmed by collective farms, 90% of which are losing money. Ruslan and Lyudmila (R&L) have leased farming equipment (Case-International Harvester combine, two Case-IH tractors, tilling equipment, drill, sprayer and crop drying equipment plus a Belarus tractor) from a Polish businessman, which makes it possible for them to farm 1,500 hectares (their own plus custom work) We are interested in how these two private farmers have been able to obtain adequate financing to farm this large acreage during a time that both farm credit loans and foreign investments have been almost non-existent in Ukraine. By knowing their methods, it is hoped that Western humanitarian aid programs can be improved and developed to help other private farmers (PF's) in Ukraine.

Land in Ukraine is farmed mostly by collective agricultural enterprises (CAE). Lease Enterprises (LE) have been developed on several hundred former collective farms (CF's). The LE owner/operator (usually the former CAE director) leases the three to five hectares of land owned by each former CF worker plus their property shares (buildings, equipment, livestock and working capital) and farms it all as a large private farmer. While this is an improvement over the former CAE, the author feels that the Lease Enterprise usually is too large to be run as efficiently as "right-sized" private farms.

Some former CF farm workers choose to farm their own small parcels of land and any land that they can rent from their family and friends These private farms are usually too small to be efficient. A few private farmers have been able to rent 50 to 100 hectares or more of land from CF's. These can be run efficiently. The author suggests that USAID programs should focus on these "right-sized" or "properly-sized" farms as they have the potential to be more efficient and to produce more wealth than the CAE's, LE's and undersized PFs. Successful PFs potentially could buy the land they farm from CFs, making the transition to private farming fair to all and avoid having CFs broken into small parcels that would need to be re-assembled in order to be farmed efficiently. Farm land is available to rent from CAE's if the renter can finance it. Obtaining adequate financing is a big obstacle in Ukraine. How did Ruslan and Lyudmila overcome this lack of financing and grow to their present size (expected to be over 1,000 hectares this crop year) since starting their farming partnership in 1996?

II. THE INTERVIEW with Ruslan and Lyudmila

Ruslan, a mechanical engineer with farming experience runs the farming operation. Lyudmila, an accountant, is responsible for business management including accounting, financing and working with government officials. They started their partnership (50 -50) in 1996 with $15,000 borrowed from family and friends and $10,000 borrowed from the L'viv Credit Union. On the 786 hectares that they are farming this crop year (1998 - 1999) they are raising 150 hectares of wheat, 100 hectares of winter canola and 536 hectares of spring canola. Equipment, valued at $313,000, was leased from a businessman that Lyudmila met during a farm tour to Poland in November of 1997. The tour was organized by Land O'Lakes (LOL) and their Western Ukraine Initiative. This project is funded by the U.S. Agency for International Development (USAID). The equipment from Poland arrived in Ukraine on 28 April 1998. It was lease - purchased on a four year pay-out that has been extended to five years. There was no down payment required. In addition to the equipment already mentioned, Ruslan and Lyudmila are building a 1,200 square meter multi-purpose farm building. This is being financed from operational income. Ruslan and Lyudmila custom dry grain and canola, which provides some much-needed agricultural infrastructure in their region. Local farmers can raise crops that they know may need to be dried at harvest. R&L can also serve as buyers or brokers of grain and canola, thus serving the functions of a country elevator.

There is no problem at the border to import the farm equipment from Poland into Ukraine because Lyudmila has the paperwork prepared in advance. No bribes are paid at the border. She encourages government cooperation by developing good long-term working relationships with local government officials, who she feels are underpaid. Lyudmila gains their cooperation with modest in-kind bribes, such as flour, potatoes, working their gardens, etc. Bribes are never paid in cash. In-kind bribes paid to 40 to 50 people cost R&L about $2,000 per year. This represents five to 10 percent of their farming profit.

In addition to the in-kind gifts, Lyudmila gains the cooperation of government officials by knowing the rules and demanding that the officials follow them without being arbitrary. Cash bribes are unnecessary and are paid by those who don't know the Ukrainian laws. Lyudmila suggests that in order to make things happen you need to:

1. Know what you want
2. Know your rights
3. Demand that government officials honor the law
4. Know who does what
5. Pay in-kind bribes only if their is no other way out

Ruslan and Lyudmila don't have much problem with tax collectors or the Mafia as everything is done in a legal manner. Ruslan and Lyudmila have separate responsibilities and work autonomously within their specialty [(1) production farming - Ruslan and (2) business management - Lyudmila] to make the small decisions. They make the big decisions jointly. Lyudmila does the accounting by hand according to Soviet accounting principles, which she doesn't consider to be much different from Western Generally Accepted Accounting Principles (GAAP). They decide what to plant after considering, cropping history, soil characteristics, soil analysis, marketability of various crops, barter potential, etc.

Inputs are not a problem to obtain, with a choice of suppliers if you have the money to pay for them. There are substantial discounts of 30 to 40 percent for cash versus barter at harvest or buying on credit. Challenges include the (1) lack of working capital and (2) knowing the various options of where to buy inputs. Ruslan and Lyudmila have been members of the Private Farmers Association but have been discouraged from continuing their membership because of the large amount of land that they farm. Their future plans are to continue farming, pay off the equipment, raise livestock and vegetables and to continue to grow in size and profitability.

Lyudmila suggests that LOL and USAID can help private farmers by:

1. Introducing private farmers and potential businessmen to each other
2. Providing legal training on Ukrainian laws so that farmers know what they can demand from government officials rather than resorting to bribes
3. Supplying technical advise
4. Making office equipment available
5. Teaching Western GAAP accounting via computers
6. Influencing the modernization of government trade rules

III. CLOSING COMMENTARY and CONCLUSIONS by the author.

I'm convinced that with targeted help from the givers of Western assistance, such as USAID's Land O'Lakes and their Western Ukraine Initiative, other Ukrainian private 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 in farming. Ruslan and Lyudmila have shown a path that others can follow to become successful private family farmers in Ukraine.

It is important to separate the job of farming into,

1. Production agriculture
2. Business management and accounting

One person can do both but it is important that both jobs are done well. Ruslan and Lyudmila separated the jobs, taking primary responsibility for doing one each.

Capital from some source is required for private farmers to become big enough operators to be efficient. Most potential private family farmers in Ukraine don't have adequate capital and since farm credit is not available, a logical source of capital is foreign investment. This could be in the form of leased equipment as is the case with Ruslan and Lyudmila. It is important that Western humanitarian aid programs focus on introducing private Ukrainian farmers and potential foreign investors. The author suggests:

1. Identify private family farmers that would be worthy business partners.
2. Identify potential foreign and domestic business partners.
3. Provide venues for private farmers and potential investors to get acquainted .
4. Communicate the benefits of working together to both parties.
5. Follow the negotiations to determine what works and what doesn't work and then teach what is learned to others.
6. Provide a forum for private farmers and businessmen to learn Ukrainian government laws.
7. Become known as a "marriage broker" so that private farmers and potential business investors come to LOL and USAID to meet each other.
8. Become a source of information on the economic feasibility of raising and processing alternative crops. R&L became successful because of the above.

An important lesson learned from this interview is that buying inputs is not a problem for Ukrainian private farmers as long as they have money to pay for them. This suggests that Western assistance programs should focus on helping Ukrainian private farmers find and raise alternative crops that are profitable and to encourage value-added processing and marketing of what they raise. If Ukrainian farmers can sell what they grow and process at a profit and collect the cash (by keeping their production free of state control) they can solve their own economic problems.

I suggest that Western GAAP should be taught and used as it will:

1. Help in the financial decision making process (by using income and balance statements, cash flow projections and enterprise and whole farm budgets).
2. Facilitate communication between Ukrainian private farmers and potential Western investors. If Ukrainians expect to attract Western money, they need to talk in the Western accounting (GAAP) language of Western business.

In summary, Western humanitarian aid givers should focus on ways that they can,

1. Play "marriage broker" between
   1. private - probably foreign - capital and
   2. private domestic family farmers/ private agribusiness
2. Provide a means for private farmers to obtain business law information so that they can deal effectively with Ukrainian government officials. PFs should know the rules and demand that government officials follow them.

Ruslan and Lyudmila fit a profile of private farmers that can rent land from CFs, earn a profit by farming it more efficiently and eventual buy it, avoiding the unnecessary step of dividing CFs into small parcels that must be re-assembled in order to farm efficiently.

Roy Chapin, Ph.D., Animal Nutritionist
11145 Chapin Lane, Amity, Oregon 97101
Phone: 503-835-7317
Fax: 503-835-3333
E-mail: <[email protected]>

Assisted by Sergei Kiral
Project Coordinator and Senior Interpreter
Land O'Lakes' Farmer to Farmer Program
E-mail: <[email protected]>