- Email: [email protected]
The Polish agricultural marketing system: A policy perspective on developments
l"~U TTEIRWQ II~IE I N E M
A
RTH N N
Food Policy, Vol. 20, No. 1, pp. 51-57, 1995 Copyright ~) 1995 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0306-9192/95 $10.00 + 0.00
0306-9192(94)00005--0
Viewpoint
The Polish agricultural marketing system: a policy perspective on developments 1 Wanda Chmielewska* and Derek BakeF
*SAEPR, The Agricultural Policy Analysis Unit of the Ministry of Agriculture and Food Economy, Warsaw, Poland *Department of Agricultural Economics, Wye College, University of London Polish transition to a market agriculture has in many respects been rapid. Following initial liberalisation, strong political support for farmers has resulted in increasing protection in the form of state price intervention, import barriers and subsidised credit. Poor financial performance in farming and processing persists, and the full independent development of a dynamic food marketing system continues to elude Poland. Further developments require commitment on behalf of profit-seeking agents to investment in the functions of the market. This commitment will be occasioned by a clear policy stance. Government must recognise the role and importance of this development, and channel it effectively by removing existing distortions to investors' incentives. A role for government remains in provision of public goods and in attention to specific problems of transition. Keywords: e c o n o m y in transition, E U accession, market development, protection, development initiatives
Introduction
The agricultural and food industries in Poland have made rapid adjustments as economic transition has progressed. Much has been achieved in demonopolisation and market liberalisation. The challenges of foreign imports and investment, m a r k e t price relationships, and hard budget constraints place further demands on the sector to develop in a competitive and flexible fashion. Imminent accession to the E u r o p e a n Union (expected by some as early as 2000) is an increasingly strong, and potentially conflicting, influence on Polish agricultural policy. This viewpoint outlines problems in the Polish agricultural marketing system, describes current 'The views expressed in this viewpoint are those of the authors and do not necessarily reflect or represent the views of the Government of Poland nor of the Agricultural Policy Analysis Unit. Comments by Andrzej Kwiecinski, and by an anonymous referee, on earlier drafts are gratefully acknowledged. Judgements made, and any remaining errors, remain those of the authors. 51
The Polish agricultural marketing system: W. Chmielewska and D. Baker
policy initiatives, and offers alternative approaches. References cite deeper discussions of some of the issues raised. The agricultural sector is central to the Polish economy. There are over two million Polish farms, employing 25% of the workforce, and 35 000 food processing firms which employ a further 15% of the workforce. In food retailing, 160 000 outlets employ 400 000 people and account for 40% of all retail sales. There are 58 000 restaurants and catering units employing an unrecorded number of people. Food retailing and restaurants are a dynamic private sector, and food processing is a major destination of foreign investment. Poles spend, on average, 40% of their income on food. These various interested groups often have conflicting commercial and political claims to make on Poland's government, a coalition in which a rural party holds a strong position. Poland's recent economic policy includes most elements commonly associated with economic and social transition: macroeconomic reform, price liberalisation and the phased removal of subsidies, and commercialisation and privatisation of the state sector. The adjustment of the agricultural sectors during the last five years has taken place within the consequent adverse macroeconomic environment. Competition from cheap imports, trade restrictions, and radically altered relative prices, have profoundly changed domestic product delivery requirements, both for demand and supply. As Poland is generally close to self-sufficient levels of production in most major commodities, slow population growth requires that improvements in Polish agricultural productivity are accompanied by developments in export markets. Alongside reform, there is a trend back toward the protection enjoyed by Polish agriculture under Communism. Between 1988 and 1990, average net producer subsidy equivalent (PSE) fell from 24 OVoto around - 1 8 OYo, but rebounded to 16 OYoin 1993. 2 This commitment to producers welfare is, however, restricting the development of the marketing system. The commitment must instead come from the agents using the system.
The condition of the agricultural and food industries Farm incomes have fallen considerably since transition, by as much as 60% in many cases. Aggregate production of most commodities .fell sharply after transition, and although there is some recovery towards late 1980s levels, farms are now highly diversified, and marketed surplus represents a small and declining share of production. While Polish farms are overcapitalised due to the former artificially low cost of machinery, low levels of on-farm investment are reported. Only 10% of Polish farmers are currently adding to their capital: the majority are consuming capital to survive. Part time farming is widespread, particularly on the very small farms. Restructuring of Polish manufacturing has impacted rural areas: part-time farmers were given low priority as factories shed staff (Krzyzanowska, 1994) and underemployment in agriculture has resulted. Agroindustrial gross margins and net profitability have continued to fall, 2pSE estimates are drawn from studies at the Institute of Agricultural Economics (IERiGZ) in Warsaw. They include the implicit impact of exchange rate policy: undervaluation in early 1990, followed by overvaluation in recent years, would indicate that the amplitude of changes in overall protection for agriculture may have been smaller than the PSE figurc suggests, although the direction of change is unambiguous. :~For a description of Polish agrarian structure see Szemberg (1994).
52
Food Policy 1995 Volume 20 Number I
The Polish agricultural marketing system: W. Chmielewska and D. Baker
although in isolated sectors (oilseeds, distilling, brewing and tobacco) there has been recent improvements. Capacity utilisation is reported to be well below the level required to achieve economies of scale. This is partly due to state enterprises' having been located and equipped with little consideration of market-related product flows and consumer requirements. Another factor has been the rapid entry of private firms in some sectors, particularly meat processing. Competition amongst new entrants is partly restricted by the continued presence of (often bankrupt) state and cooperative firms, which privatisation law provides with strong incentives to remain in business. The slow rate of privatisation is the most visible indication of an unwillingness to invest. Small amounts have been invested by firms, directed mainly at new technology and to conform with foreign market requirements (Chudoba, 1993; Urban, 1994). Agroindustry is highly indebted, and so is particularly vulnerable to the current high costs of finance. Between farmers and processors a network of marketing channels is developing, being most advanced in the meat sectors. Privatisation of state facilities has in some cases sufficed, but in others the requirements of the market environment make the existing plant and functions obsolete or inadequate. Contracting is not widely used, due in part to its inadequate legal status, the poor profitability of storage (Dethier and Fry, 1994), and government price guarantees. Sales to consumers occur from farms, wholesalers, processors and retailers. Farmers strive to eliminate market intermediaries by various marketing activities such as farmers' markets. The system must then contend with large numbers of small marketed volumes, which creates difficulties in grading and product assembly in the marketing chain and high transaction costs per unit. Cooperatives have a vastly reduced role. Their processing functions have largely been filled by the private sector, but their market facilitation role remains unfilled and many new market functions associated with the price-oriented environment have not developed. Many cooperatives remaining in business have firstly shed their service role, and secondly pursued the interests of employee-members: the legacy of attitudes to central planning provides little support to cooperatives, even amongst producer-members. Aside from dairy processing, cooperative structures now dominate only in rural finance and credit institutions. Agricultural finance is provided by cooperative banks, many of which have performed very poorly since deregulation in 1990. Recent reforms have proposed a pyramid banking structure (under BGZ, an umbrella organisation of cooperative banks) which pools individual banks' assets and liabilities. Most investigations of credit use by farmers and processors reveal an aversion to the use of commercial credit. Processors finance investment out of retained profits, and late payment to suppliers by processors is apparently widespread. Agricultural economics research in Poland confronts serious data problems. The Polish central statistics agency (GUS) focuses on state institutions and large firms. In contrast, many Polish agroindustrial firms, especially new entrants, are very small (1-5 employees), and the majority probably have about 20 employees. The state is increasingly less dominant in most sectors. A further statistical limitation concerns investment levels: firms' capital expenditures are often treated as operating expenditures in order to reduce tax liability. Agroindustrial data is found amongst industrial classifications, while agricultural data concerns farms. Market information, and the requisite system of product quality standards, is in its infancy in Poland. Aside from GUS, market statistics are derived from a variety of sources, but these are not widely used by the sector as a whole. The advent of commodity exchanges, and some regional and national market information initiatives demonsFood Policy 1995 Volume 20 Number 1
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The Polish agricultural marketing system: W. Chmielewska and D. Baker
trate some recent progress. With the expansion of the communications network, this will develop a national price discovery mechanism. In the meantime, there is much uncertainty for both entrepreneurs and analysts: the nature of competition, technology, and investment can only be guessed at. Price instability underpins the agricultural sector's call for support and market intervention.
Policy Polish post transition economic policy has instituted market price as the central feature of economic activity and resource allocation. Poland's agricultural policy, on the other hand, is increasingly centred on price support. Ostensibly a price stabilisation measure, the state market intervention agency (ARR) has brought Polish domestic prices steadily closer to world prices. A R R defends minimum prices for wheat and rye, and supports milk prices by action in the butter market. A R R purchase and sales can also be used in the pork and sugar markets. The price levels being supported are uniform throughout the country and during the season, 4 and are not inflation adjusted within the season. A R R maintains a network of licensed purchase, sale and storage agents, who are fully reimbursed for storage and other expenses, and also supplied with credit where other sources are not available. There are few incentives for arbitrage by trading agents, and hence price formation processes are restricted. This distorting set of incentives has been recognised by A R R in its sugar operations, where assistance will in future take the form of commodity-based loans rather than guaranteed payments. ARR's terms of reference include a development role in the emerging Polish market. To this end it has taken equity in commodity exchanges, and boosts market liquidity by strategic direction of sales and purchase arrangements, and finances purchases by its agents. Subsidised credit for seasonal purchases by farmers and processors is available from the budget, largely channelled through the BGZ. The task of funding the modernisation of Polish agriculture through long term investment is being addressed by a government agency (ARMA) which offers loans at a reduced rate of interest through similar channels. In the Polish banking sector at large, there persist large margins between deposit and loan rates, which drives businesses away from banks in general, and the use of formal credit facilities in particular. Pervasive taxes provide further incentives for informal accounting procedures which further disguise the database and limit policymakers' ability to define problems. Border measures were originally introduced in response to dumping by the EU, US, and other large producers. As domestic prices have risen, widespread border protection has been introduced, culminating in a set of CAP-like variable levies in June 1994. Negotiated quota access to EU agricultural markets has not yet yielded the return Poland had hoped for (Kwiecinski, 1994) and episodic trade disputes continue, even as EU accession negotiating positions are prepared. Two policy approaches to EU accession, and hence harmonisation of Polish agricultural policy with the CAP, have been advocated both at home and abroad: 5 the direct application of CAP instuments to Poland; and the pursuit of efficiency and production according to comparative advantage in preparation for CAP adoption 4Milk prices are an exception: higher Winter prices are used to encourage a seasonal spread of production. 5To present examples from foreign commentators, the former approach is taken by Nailer and van Stolk (1994).
54
Food Policy 1995 Volume 20 Number 1
The Polish agricultural marketing system: W. Chmielewska and D. Baker
in the future. Whichever approach is used, harmonisation must address the CAP as it will be at some point in the future, rather than its current form. As in most of Europe, there is strong political support both for domestic food self suffiency, and for agricultural exports. The design of the new system of variable levies includes the facility to dampen domestic price fluctuations by guiding trade flows. Combined with the increasing influence of ARR's domestic market intervention, and the perception of market intermediaries as expoitative and unproductive, however, these policies are preventing development of the dynamic system of product flows upon which the trading system ultimately depends. While Government is committed to producers' welfare, the developing food processing and distribution industries is denied the extra volume, variety and quality of imported product. Despite the perception that farmers need protection from commercial exploitation, formal farmer representation has been slow to develop. 6 The role of cooperatives under the former system was an amalgam of representation, processing, and the delivery of products and services. Collective behaviour is now being again recognised as having some merit, albeit grudgingly in some circles, and efforts are being made to assist the remaining cooperative structures and to develop new forms of collective behaviour. Such efforts are often targeted at marketing and processing, in which cooperatives do not necessarily provide the most effective functions, rather than commercial and political representation. In consequence, new institutions which have adopted the role of lobby groups are soon to receive legal incorporation as professional organisations. Some fundamental aspects of the agricultural marketing system will not spontaneously appear in Poland. Frequently cited examples of underprovided public goods include market information, product grading standards, training, and transport and communications facilities. Government's role in these aspects of market develompent has been channelled through the existing extension service (ODR), which has adapted towards new roles, and away from production advice. Simpler policy applications to laws on contracting and the establishment of commodity exchanges are also underway. Rationalisation of the state's statistical operations are in progress. Conclusions Polish agricultural policy has taken many positive steps toward instituting a modern agricultural market. Much of the pain of adjustment has now been borne, but the fundamental benefits have yet to materialise in the form of domestic gains from trade through specialisation. The next stage of development requires clear statements of the extent and form of government involvement in the markets and the social, financial and administrative aspects of agriculture. The parameters of agricultural enterprise are then established: it is then up to agents to commit to the system with investment in pursuit of profits and subject to risks. The agricultural market system is in essence a mechanism for minimising transaction costs as agents enter and exit the marketing chain in response to price margins. Constructive policy will encourage this development, but three realisations are necessary: first, that market intervention and subsidisation disrupts the ~The aforementioned political trends in favour of rural interests have arisen largely through political party structures, with minimal influence from direct farmer representation. Thanks are due to the anonymous referee for drawing the authors' attention to this matter.
Food Policy 1995 Volume 20 Number 1
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The Polish agricultural marketing system: W. Chmielewska and D. Baker
developing marketing system; second, that there are significant market failures to be corrected; and third, that the transient problems of structural adjustment are distinguishable from the lasting effects of altered price ratios. Market intervention is overriding price formation processes, and disguising investment incentives. Further, the state's role as a financier of last resort allocates scarce capital away from its best uses. Over time, this can lead to a worst-case scenario: the wrong agents handling the wrong product at the wrong time in the wrong place, for the wrong reasons. The crucial component of a functioning marketing chain is competition amongst processors for farm product, and this is a sound medium-term development objective for Poland. With no reward for private storage and transport, the farmers facing episodic changes in administered prices, the level of investment and commitment is unlikely to improve. Price intervention is not the source of all problems: there is widespread dissatisfaction in the fruits and vegetables markets, where minimum prices are not used. This market requires the provision of public goods. These include, but are not limited to, a legal framework for contracts, encouragement of producer representation in both commerce and legislation, institution of standards and information systems, and a commitment to training and extension. Earlier authors described this, the primary task for Polish agricultural policy, as the provision of an 'enabling environment' (Debattisse et al., 1991) within which agents would invest and operate. Channelling resources directly into existing institutions (e.g. to preserve cooperatives as the natural agency of processing and marketing activity) is of less use than the provision of public good elements of the enabling environment (e.g. market information), which allows market participants to compare costs and benefits amongst commercial options, including the use of intermediaries. The third realisation prompts a commitment to development, and recognition that the losers from transition are the concern of social welfare, not agricultural policy. Accelerating the privatisation of state processing and the further reform of bankrupt cooperatives will bring forward the entire process. The reform of the agricultural finance system provides an opportunity to combine development (through A R M A modernisation loans) with market forces (by using only those banks which satisfy performance criteria). Substantial resources have been committed to offsetting the costs of transition, but this must not be followed by a policy which compensates those who are unprofitable market operators.
References Chudoba, L. (1993), Investment activity in the process of restructuring the food industry, Problems in Agricultural Economics 4. Debattisse, M., Dethier, J.-J. and Henry, R. (1991), Privatisation and restructuring of the agricultural marketing and processing sector, in ASAL supporting Vol II, The Agricultural Marketing and Processing Sector. The World Bank, Washington, D.C. Dethier, J.-J. and Fry, J. (1993), Recommendations to Improve Agricultural Marketing and the Operations of the Agencja Rynku Rolnego. The World Bank, Washington, D.C. Krzyzanowska, Z. (1994), Reakcja rolnikow na zmiany warunkow gospodarowania, Wiadomosci Statystyczne 5. Kwiecinski, A. (1994), Poland's membership of the European Union by the year 2000: a realistic objective? Conference paper presented at Towards 2000: Agribusiness and the Food Industry in Central and Eastern Europe. Budapest, Hungary. Nallet, H. and van Stolk, A. (1994), Relations between the European Union and the Central and Eastern European Countries in matters concerning agriculture and food production, Report to the 56
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The Polish agricultural marketing system: W. Chmielewska and D. Baker
European Commission, in The lOth Report to the House of Lords Select Committee on the European Communities: The implications for agriculture of the Europe Agreements. HMSO, London. Szemberg, A. (1994), 'Demography and Agrarian Structure' in Proceedings of Annual Outlook Conference on Production and Economic Situation of Polish Agriculture in 1993 and Forecast for 1994. Warsaw, 21-22 June. Urban, R. (1994), Aktualna sytuacja i mozliwosci poprawy stanu ekonomicznego przetworstwa spozywczego, Przemysl Spozywczy February.
Food Policy 1995 Volume 20 Number 1
57
A
RTH N N
Food Policy, Vol. 20, No. 1, pp. 51-57, 1995 Copyright ~) 1995 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0306-9192/95 $10.00 + 0.00
0306-9192(94)00005--0
Viewpoint
The Polish agricultural marketing system: a policy perspective on developments 1 Wanda Chmielewska* and Derek BakeF
*SAEPR, The Agricultural Policy Analysis Unit of the Ministry of Agriculture and Food Economy, Warsaw, Poland *Department of Agricultural Economics, Wye College, University of London Polish transition to a market agriculture has in many respects been rapid. Following initial liberalisation, strong political support for farmers has resulted in increasing protection in the form of state price intervention, import barriers and subsidised credit. Poor financial performance in farming and processing persists, and the full independent development of a dynamic food marketing system continues to elude Poland. Further developments require commitment on behalf of profit-seeking agents to investment in the functions of the market. This commitment will be occasioned by a clear policy stance. Government must recognise the role and importance of this development, and channel it effectively by removing existing distortions to investors' incentives. A role for government remains in provision of public goods and in attention to specific problems of transition. Keywords: e c o n o m y in transition, E U accession, market development, protection, development initiatives
Introduction
The agricultural and food industries in Poland have made rapid adjustments as economic transition has progressed. Much has been achieved in demonopolisation and market liberalisation. The challenges of foreign imports and investment, m a r k e t price relationships, and hard budget constraints place further demands on the sector to develop in a competitive and flexible fashion. Imminent accession to the E u r o p e a n Union (expected by some as early as 2000) is an increasingly strong, and potentially conflicting, influence on Polish agricultural policy. This viewpoint outlines problems in the Polish agricultural marketing system, describes current 'The views expressed in this viewpoint are those of the authors and do not necessarily reflect or represent the views of the Government of Poland nor of the Agricultural Policy Analysis Unit. Comments by Andrzej Kwiecinski, and by an anonymous referee, on earlier drafts are gratefully acknowledged. Judgements made, and any remaining errors, remain those of the authors. 51
The Polish agricultural marketing system: W. Chmielewska and D. Baker
policy initiatives, and offers alternative approaches. References cite deeper discussions of some of the issues raised. The agricultural sector is central to the Polish economy. There are over two million Polish farms, employing 25% of the workforce, and 35 000 food processing firms which employ a further 15% of the workforce. In food retailing, 160 000 outlets employ 400 000 people and account for 40% of all retail sales. There are 58 000 restaurants and catering units employing an unrecorded number of people. Food retailing and restaurants are a dynamic private sector, and food processing is a major destination of foreign investment. Poles spend, on average, 40% of their income on food. These various interested groups often have conflicting commercial and political claims to make on Poland's government, a coalition in which a rural party holds a strong position. Poland's recent economic policy includes most elements commonly associated with economic and social transition: macroeconomic reform, price liberalisation and the phased removal of subsidies, and commercialisation and privatisation of the state sector. The adjustment of the agricultural sectors during the last five years has taken place within the consequent adverse macroeconomic environment. Competition from cheap imports, trade restrictions, and radically altered relative prices, have profoundly changed domestic product delivery requirements, both for demand and supply. As Poland is generally close to self-sufficient levels of production in most major commodities, slow population growth requires that improvements in Polish agricultural productivity are accompanied by developments in export markets. Alongside reform, there is a trend back toward the protection enjoyed by Polish agriculture under Communism. Between 1988 and 1990, average net producer subsidy equivalent (PSE) fell from 24 OVoto around - 1 8 OYo, but rebounded to 16 OYoin 1993. 2 This commitment to producers welfare is, however, restricting the development of the marketing system. The commitment must instead come from the agents using the system.
The condition of the agricultural and food industries Farm incomes have fallen considerably since transition, by as much as 60% in many cases. Aggregate production of most commodities .fell sharply after transition, and although there is some recovery towards late 1980s levels, farms are now highly diversified, and marketed surplus represents a small and declining share of production. While Polish farms are overcapitalised due to the former artificially low cost of machinery, low levels of on-farm investment are reported. Only 10% of Polish farmers are currently adding to their capital: the majority are consuming capital to survive. Part time farming is widespread, particularly on the very small farms. Restructuring of Polish manufacturing has impacted rural areas: part-time farmers were given low priority as factories shed staff (Krzyzanowska, 1994) and underemployment in agriculture has resulted. Agroindustrial gross margins and net profitability have continued to fall, 2pSE estimates are drawn from studies at the Institute of Agricultural Economics (IERiGZ) in Warsaw. They include the implicit impact of exchange rate policy: undervaluation in early 1990, followed by overvaluation in recent years, would indicate that the amplitude of changes in overall protection for agriculture may have been smaller than the PSE figurc suggests, although the direction of change is unambiguous. :~For a description of Polish agrarian structure see Szemberg (1994).
52
Food Policy 1995 Volume 20 Number I
The Polish agricultural marketing system: W. Chmielewska and D. Baker
although in isolated sectors (oilseeds, distilling, brewing and tobacco) there has been recent improvements. Capacity utilisation is reported to be well below the level required to achieve economies of scale. This is partly due to state enterprises' having been located and equipped with little consideration of market-related product flows and consumer requirements. Another factor has been the rapid entry of private firms in some sectors, particularly meat processing. Competition amongst new entrants is partly restricted by the continued presence of (often bankrupt) state and cooperative firms, which privatisation law provides with strong incentives to remain in business. The slow rate of privatisation is the most visible indication of an unwillingness to invest. Small amounts have been invested by firms, directed mainly at new technology and to conform with foreign market requirements (Chudoba, 1993; Urban, 1994). Agroindustry is highly indebted, and so is particularly vulnerable to the current high costs of finance. Between farmers and processors a network of marketing channels is developing, being most advanced in the meat sectors. Privatisation of state facilities has in some cases sufficed, but in others the requirements of the market environment make the existing plant and functions obsolete or inadequate. Contracting is not widely used, due in part to its inadequate legal status, the poor profitability of storage (Dethier and Fry, 1994), and government price guarantees. Sales to consumers occur from farms, wholesalers, processors and retailers. Farmers strive to eliminate market intermediaries by various marketing activities such as farmers' markets. The system must then contend with large numbers of small marketed volumes, which creates difficulties in grading and product assembly in the marketing chain and high transaction costs per unit. Cooperatives have a vastly reduced role. Their processing functions have largely been filled by the private sector, but their market facilitation role remains unfilled and many new market functions associated with the price-oriented environment have not developed. Many cooperatives remaining in business have firstly shed their service role, and secondly pursued the interests of employee-members: the legacy of attitudes to central planning provides little support to cooperatives, even amongst producer-members. Aside from dairy processing, cooperative structures now dominate only in rural finance and credit institutions. Agricultural finance is provided by cooperative banks, many of which have performed very poorly since deregulation in 1990. Recent reforms have proposed a pyramid banking structure (under BGZ, an umbrella organisation of cooperative banks) which pools individual banks' assets and liabilities. Most investigations of credit use by farmers and processors reveal an aversion to the use of commercial credit. Processors finance investment out of retained profits, and late payment to suppliers by processors is apparently widespread. Agricultural economics research in Poland confronts serious data problems. The Polish central statistics agency (GUS) focuses on state institutions and large firms. In contrast, many Polish agroindustrial firms, especially new entrants, are very small (1-5 employees), and the majority probably have about 20 employees. The state is increasingly less dominant in most sectors. A further statistical limitation concerns investment levels: firms' capital expenditures are often treated as operating expenditures in order to reduce tax liability. Agroindustrial data is found amongst industrial classifications, while agricultural data concerns farms. Market information, and the requisite system of product quality standards, is in its infancy in Poland. Aside from GUS, market statistics are derived from a variety of sources, but these are not widely used by the sector as a whole. The advent of commodity exchanges, and some regional and national market information initiatives demonsFood Policy 1995 Volume 20 Number 1
53
The Polish agricultural marketing system: W. Chmielewska and D. Baker
trate some recent progress. With the expansion of the communications network, this will develop a national price discovery mechanism. In the meantime, there is much uncertainty for both entrepreneurs and analysts: the nature of competition, technology, and investment can only be guessed at. Price instability underpins the agricultural sector's call for support and market intervention.
Policy Polish post transition economic policy has instituted market price as the central feature of economic activity and resource allocation. Poland's agricultural policy, on the other hand, is increasingly centred on price support. Ostensibly a price stabilisation measure, the state market intervention agency (ARR) has brought Polish domestic prices steadily closer to world prices. A R R defends minimum prices for wheat and rye, and supports milk prices by action in the butter market. A R R purchase and sales can also be used in the pork and sugar markets. The price levels being supported are uniform throughout the country and during the season, 4 and are not inflation adjusted within the season. A R R maintains a network of licensed purchase, sale and storage agents, who are fully reimbursed for storage and other expenses, and also supplied with credit where other sources are not available. There are few incentives for arbitrage by trading agents, and hence price formation processes are restricted. This distorting set of incentives has been recognised by A R R in its sugar operations, where assistance will in future take the form of commodity-based loans rather than guaranteed payments. ARR's terms of reference include a development role in the emerging Polish market. To this end it has taken equity in commodity exchanges, and boosts market liquidity by strategic direction of sales and purchase arrangements, and finances purchases by its agents. Subsidised credit for seasonal purchases by farmers and processors is available from the budget, largely channelled through the BGZ. The task of funding the modernisation of Polish agriculture through long term investment is being addressed by a government agency (ARMA) which offers loans at a reduced rate of interest through similar channels. In the Polish banking sector at large, there persist large margins between deposit and loan rates, which drives businesses away from banks in general, and the use of formal credit facilities in particular. Pervasive taxes provide further incentives for informal accounting procedures which further disguise the database and limit policymakers' ability to define problems. Border measures were originally introduced in response to dumping by the EU, US, and other large producers. As domestic prices have risen, widespread border protection has been introduced, culminating in a set of CAP-like variable levies in June 1994. Negotiated quota access to EU agricultural markets has not yet yielded the return Poland had hoped for (Kwiecinski, 1994) and episodic trade disputes continue, even as EU accession negotiating positions are prepared. Two policy approaches to EU accession, and hence harmonisation of Polish agricultural policy with the CAP, have been advocated both at home and abroad: 5 the direct application of CAP instuments to Poland; and the pursuit of efficiency and production according to comparative advantage in preparation for CAP adoption 4Milk prices are an exception: higher Winter prices are used to encourage a seasonal spread of production. 5To present examples from foreign commentators, the former approach is taken by Nailer and van Stolk (1994).
54
Food Policy 1995 Volume 20 Number 1
The Polish agricultural marketing system: W. Chmielewska and D. Baker
in the future. Whichever approach is used, harmonisation must address the CAP as it will be at some point in the future, rather than its current form. As in most of Europe, there is strong political support both for domestic food self suffiency, and for agricultural exports. The design of the new system of variable levies includes the facility to dampen domestic price fluctuations by guiding trade flows. Combined with the increasing influence of ARR's domestic market intervention, and the perception of market intermediaries as expoitative and unproductive, however, these policies are preventing development of the dynamic system of product flows upon which the trading system ultimately depends. While Government is committed to producers' welfare, the developing food processing and distribution industries is denied the extra volume, variety and quality of imported product. Despite the perception that farmers need protection from commercial exploitation, formal farmer representation has been slow to develop. 6 The role of cooperatives under the former system was an amalgam of representation, processing, and the delivery of products and services. Collective behaviour is now being again recognised as having some merit, albeit grudgingly in some circles, and efforts are being made to assist the remaining cooperative structures and to develop new forms of collective behaviour. Such efforts are often targeted at marketing and processing, in which cooperatives do not necessarily provide the most effective functions, rather than commercial and political representation. In consequence, new institutions which have adopted the role of lobby groups are soon to receive legal incorporation as professional organisations. Some fundamental aspects of the agricultural marketing system will not spontaneously appear in Poland. Frequently cited examples of underprovided public goods include market information, product grading standards, training, and transport and communications facilities. Government's role in these aspects of market develompent has been channelled through the existing extension service (ODR), which has adapted towards new roles, and away from production advice. Simpler policy applications to laws on contracting and the establishment of commodity exchanges are also underway. Rationalisation of the state's statistical operations are in progress. Conclusions Polish agricultural policy has taken many positive steps toward instituting a modern agricultural market. Much of the pain of adjustment has now been borne, but the fundamental benefits have yet to materialise in the form of domestic gains from trade through specialisation. The next stage of development requires clear statements of the extent and form of government involvement in the markets and the social, financial and administrative aspects of agriculture. The parameters of agricultural enterprise are then established: it is then up to agents to commit to the system with investment in pursuit of profits and subject to risks. The agricultural market system is in essence a mechanism for minimising transaction costs as agents enter and exit the marketing chain in response to price margins. Constructive policy will encourage this development, but three realisations are necessary: first, that market intervention and subsidisation disrupts the ~The aforementioned political trends in favour of rural interests have arisen largely through political party structures, with minimal influence from direct farmer representation. Thanks are due to the anonymous referee for drawing the authors' attention to this matter.
Food Policy 1995 Volume 20 Number 1
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The Polish agricultural marketing system: W. Chmielewska and D. Baker
developing marketing system; second, that there are significant market failures to be corrected; and third, that the transient problems of structural adjustment are distinguishable from the lasting effects of altered price ratios. Market intervention is overriding price formation processes, and disguising investment incentives. Further, the state's role as a financier of last resort allocates scarce capital away from its best uses. Over time, this can lead to a worst-case scenario: the wrong agents handling the wrong product at the wrong time in the wrong place, for the wrong reasons. The crucial component of a functioning marketing chain is competition amongst processors for farm product, and this is a sound medium-term development objective for Poland. With no reward for private storage and transport, the farmers facing episodic changes in administered prices, the level of investment and commitment is unlikely to improve. Price intervention is not the source of all problems: there is widespread dissatisfaction in the fruits and vegetables markets, where minimum prices are not used. This market requires the provision of public goods. These include, but are not limited to, a legal framework for contracts, encouragement of producer representation in both commerce and legislation, institution of standards and information systems, and a commitment to training and extension. Earlier authors described this, the primary task for Polish agricultural policy, as the provision of an 'enabling environment' (Debattisse et al., 1991) within which agents would invest and operate. Channelling resources directly into existing institutions (e.g. to preserve cooperatives as the natural agency of processing and marketing activity) is of less use than the provision of public good elements of the enabling environment (e.g. market information), which allows market participants to compare costs and benefits amongst commercial options, including the use of intermediaries. The third realisation prompts a commitment to development, and recognition that the losers from transition are the concern of social welfare, not agricultural policy. Accelerating the privatisation of state processing and the further reform of bankrupt cooperatives will bring forward the entire process. The reform of the agricultural finance system provides an opportunity to combine development (through A R M A modernisation loans) with market forces (by using only those banks which satisfy performance criteria). Substantial resources have been committed to offsetting the costs of transition, but this must not be followed by a policy which compensates those who are unprofitable market operators.
References Chudoba, L. (1993), Investment activity in the process of restructuring the food industry, Problems in Agricultural Economics 4. Debattisse, M., Dethier, J.-J. and Henry, R. (1991), Privatisation and restructuring of the agricultural marketing and processing sector, in ASAL supporting Vol II, The Agricultural Marketing and Processing Sector. The World Bank, Washington, D.C. Dethier, J.-J. and Fry, J. (1993), Recommendations to Improve Agricultural Marketing and the Operations of the Agencja Rynku Rolnego. The World Bank, Washington, D.C. Krzyzanowska, Z. (1994), Reakcja rolnikow na zmiany warunkow gospodarowania, Wiadomosci Statystyczne 5. Kwiecinski, A. (1994), Poland's membership of the European Union by the year 2000: a realistic objective? Conference paper presented at Towards 2000: Agribusiness and the Food Industry in Central and Eastern Europe. Budapest, Hungary. Nallet, H. and van Stolk, A. (1994), Relations between the European Union and the Central and Eastern European Countries in matters concerning agriculture and food production, Report to the 56
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European Commission, in The lOth Report to the House of Lords Select Committee on the European Communities: The implications for agriculture of the Europe Agreements. HMSO, London. Szemberg, A. (1994), 'Demography and Agrarian Structure' in Proceedings of Annual Outlook Conference on Production and Economic Situation of Polish Agriculture in 1993 and Forecast for 1994. Warsaw, 21-22 June. Urban, R. (1994), Aktualna sytuacja i mozliwosci poprawy stanu ekonomicznego przetworstwa spozywczego, Przemysl Spozywczy February.
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