Crisis in agriculture in the 1990s

As a result of the markets of the former Soviet Union collapsing, Estonia was left with a large excess supply of agricultural produce. Western markets remained closed to Estonian agricultural products, mostly for two reasons —high customs barriers and non-compliance of our products with the requirements and practices abroad. Producer prices in Estonia fell to a level up to 50% lower than prices on world markets and became insufficient to cover production costs.

The OECD review of agricultural policies in Estonia in 1986–1996 stated: “Farmers were lacking in both working capital and investment capital. Agriculture was considered to be a high-risk sector with a low rate of return on capital. Furthermore, borrowing was complicated due to an underdeveloped banking system. Strict financial policies resulted in high interest rates rendering the agricultural sector subject to a shortage of liquidity and mounting debts… The period of 1992–1993, which was a period of major macro-economic reforms and dramatic, sometimes even chaotic reorganisation, ended with the agricultural sector being subjected to hidden taxes of 50% on the average.” [1]

The economic situation of the agricultural sector, the structure of agricultural enterprises, land use and employment all underwent significant changes as a result of reforms. By 1992, 7,029 farms and, by 1995, 13,513 farms had been re-established. Farmers who started work earlier proved more successful than others — they were able to adjust to changes faster, they acquired capital assets needed for production more quickly, they were able to learn more about managing enterprises, economy and marketing. Unlike in industrial enterprises where the old division of tasks was preserved after privatisation, in the agricultural sector a gap occurred between existing and required skills and knowledge as a result of privatisation and structural changes. Collective farms had employed specialists in very narrow fields, such as agronomists, economists, engineers, cattle breeders, tractor drivers. A wider and more universal range of skills and knowledge were needed in farms and re-established agricultural public limited companies and private limited companies.

A few years after the beginning of reforms, workers of former successful collectives began to lose interest in the development of enterprise in the field of agriculture, incl. the re-establishment of farms and creation of new farms. There were several reasons for this. Numerous farms, agricultural public limited companies and private limited companies which attempted to commence work as independent holdings three to four years after the beginning of economic reforms were unable to survive because conditions in the business environment had significantly deteriorated and income had decreased to the extent that it was impossible to obtain fuel, fertilisers, animal feed, etc. in order to continue production. The principles and measures of agricultural and trade policies implemented in newly independent Estonia differed considerably from the practices of developed countries, incl. the European Union and the United States.

During the years 1992–1995, the subsidisation of agriculture in Estonia was strongly negative. [2]

Agricultural policies can also be assessed by way of comparing the amount of subsidies to the value added. In most developed countries, agricultural subsidies constituted one-third of the agricultural value added (wages + profit + depreciation and amortisation of fixed assets) during the years 1999-2001, for example, the figure was 32% in the US and 33% in the European Union but in 2001 the corresponding figure was only 7% in Estonia. Taxpayers in developed countries have realised that it would not be fair to expect farmers alone to pay for the acquisition of expensive machinery (combine harvesters, grain dryers, seeders, plant protection machines, etc.) the price of which may reach up to five to six million kroons per farm, and to bear the costs of gaps in production occurring due to weather conditions and natural phenomena.

In 1996–2001, as a result of low producer prices and small subsidies, investments in Estonian agriculture amounted to 11% in respect of the value added which is 2.5 to 3 times less than in most European countries (25–30%) and four times less than in Sweden and Finland.

Political choices were often affected by forces not interested in increasing the competitiveness of Estonian agriculture. In Estonia, as in other Central and Eastern European countries, there was a lack of information about the nature of food production and the agricultural system in a market-oriented economy. According to Roger Norton, an expert of the FAO, the obligation to pursue a liberal economic policy which was, in fact, more liberal than prescribed by the OECD norms for trade policies, resulted in the re-structuring of relative prices and stimuli in favour of servicing sectors and to the disadvantage of production, incl. agriculture….

Although low producer prices were depicted as being beneficial to the consumer, this was not true. Studies conducted at the Estonian Institute of Economic Research have revealed that, contrary to information in the press, consumers did not benefit from low producer prices because the level of consumer prices was not directly related to the level of producer prices but to the purchasing power of the consumer. Low producer prices were, above all, useful to the food industry and intermediation companies.

In addition to an unfavourable economic environment, the development of agricultural enterprises and farms was affected by contradictions between the objectives and principles of the land reform and the agricultural reform. Conflicts arose between the rights and interests of those who acquired the assets of collectives and those who applied for the land. Those who were going to re-establish farms had, for the most part, a right to the return of land and workers of the former collectives were entitled to buildings constructed during the last fifty years and agricultural machinery. But the technology and powerful machines of collectives were unsuitable for the needs of new and re-established farms.

According to international monitoring (Situatsionsbericht 2002, DBV, Bonn), in Central and Eastern European countries, total agricultural production decreased most in Bulgaria where it fell 55% during the years 1990-2000, followed by Estonia with 54%, Latvia with 53% and Lithuania with 37%.

[1] Hidden taxes meant that trade and financial policies facilitated the outflow of capital from the agricultural sector mainly by the suppression of producer prices in the internal market and devaluation of currency rates.

[2] A negative subsidy means that losses, arising from prices in the internal market being lower than the international reference prices and taxes, exceed agricultural subsidies.

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