The Soviet food complex in a time of change - includes related articles on the economics of the USSR and on farming in the Soviet Union

The Soviet Food Complex in A Time of Change

A cartoon published recently in the Soviet newspaper Ekonomicheskaya Gazeta shows a store clerk facing a customer in an empty aisle under a "Meat Department" sign. The clerk is saying, "The people complained about the empty shelves, so we removed them."

The mood of frustation behind this cartoon reflects the USSR's longstanding and complex food problem. The Soviets cannot put enough food on the shelves for a population with money to spend. Fixed retail prices, high production costs, and inadequate and misdirected investment in food processing and distribution have left their mark on Soviet society.

But today there is hope that political and economic reforms under way in the Soviet Union will provide solutions to some of these problems. Undoubtedly, increasing farm production is not enough. More attention must be paid to reforming the entire economy. Consumer demand should be curtailed, and a more flexible marketing system set up to make processing and distributing farm commodities more efficient.

The increasing political and economic autonomy of the Soviet Union's 15 republics may also play a role in getting the country out of its present quagmire (see box). With greater independence from Moscow, individual republics have more control over their business affairs. More direct ties with these republics may present some American firms with new opportunities for doing business in the USSR.

The Union of Soviet Socialist Republics (USSR)

Only half of the Soviet Union's 288 million people are Russians. Another 20 percent, including the Byelorussians and Ukrainians, are of Slavic origin. The rest come from a variety of different backgrounds. There are Balts, Georgians, Armenians, and Muslims from Central Asia, among others. In all, there are over 100 different nationalities in the USSR who speak a language other than Russian as their native tongue.

The USSR's 15 republics have been held together since the 1918-20 civil war by strong rule from Moscow. Mikhail Gorbachev's policies have encouraged growing economic decentralization and the formation of independent social and political action groups. In the non-Russian republics, this has meant greater freedom to trade abroad, without going through Moscow. "Popular Front" movements - advocating expanded economic and political autonomy - have emerged in several republics. These sentiments are strongest in the Baltic republics of Lithuania, Latvia, and Estonia. Economically advanced and independent from Russia between World Wars I and II, they were reincorporated into the USSR in 1939.

Fixed Retail Prices Create

Excess Demand

The Soviet food situation began to stagnate in the 1970's when Leonid Brezhnev was leader of the Communist party. Food production and per capita consumption deteriorated over the decade. By the mid-1970's, the Soviet Union had become one of the world's largest importers of bulk food commodities. Each year during the 1980's, the USSR has imported from 28 million to 55 million tons of grain, 4 to 5 million tons of sugar, about 1 million tons of meat, and significant quantities of oilseeds, butter, eggs, fruits, and vegetables, as well as many tropical products.

Despite imports and Government subsidies, consumers still have to wait in long lines for food, especially fruits, vegetables, and livestock products.

The problem with food shortages seems to belie gains in consumption made since the mid-1960's. According to official Soviet data, in 1988 the average citizen consumed half again as much meat and fish, over twice as many eggs (slightly more than the average American), and more milk than in 1965 (table 1). Although the official figures may be exaggerated, it appears that the average Soviet is eating better today than 20 years ago. [Tabular Data Omitted]

But many Soviets simply do not believe that the quality of their diets has improved. Consumers probably would be surprised if more knew that their average red meat and poultry consumption is on par with that of Sweden or Britain (table 2).

Table : Table 2. In 1985-86, Soviet Red Meat

          and Poultry Consumption Was Like
          That of the United Kingdom or Sweden
Country            Pounds        Index(2)
                 per capita(1)
United States       270.4          100
East Germany        217.2           87
Belgium             209.1           84
West Germany        209.1           84
France              198.7           80
Ireland             186.8           75
Czechoslovakia      186.1           75
Austria             182.3           73
Switzerland         181.0           73
Denmark             180.4           73
Hungary             173.5           70
Italy               167.1           67
Netherlands         162.9           66
Greece              152.8           61
Bulgaria            150.6           61
Spain               147.5           59
United Kingdom      141.9           57
Iceland             138.0           56
Finland             135.8           55
Poland              135.3           54
USSR(3)             132.5           53
Romania             125.6           51
Sweden              120.3           48
Norway              105.5           42
Yugoslavia          101.8           41
Portugal            101.5           41

(1) Slaughter weight. (2) Percent of U.S. consumption. (3) The United Nations Economic Commission for Europe discounts Soviet meat consumption data for slaughter fat. Information published in Pravda in 1988 suggests additional discounts, which would put the Soviet figure closer to the Swedish level of consumption.

Source: The United Nations Economic Commission for Europe.

On the whole, food shortages in the USSR are occurring at levels of consumption that are high by world standards. The problem is controlled retail prices combined with the rising incomes of many citizens. This situation produces excess demand that an inadequate distribution system cannot service.

The Soviet Government has regulated retail prices for many years. Guaranteed, low, and stable prices have long been vaunted as an advantage of socialism. Retail food prices in State stores have remained unchanged since the 1950's for such staples as sugar, bread, and cooking oil and since 1962 for livestock products. Prices are still controlled in cooperative stores, but at higher levels. Food is more costly in farm markets, where prices are determined largely by supply and demand.

According to official sources, in 1987, 66 percent of food (by value) was sold in State stores, 25 percent in cooperative stores, and 9 percent in collective farm markets. The USSR's policy of cheap food mainly benefits those living in large cities because State stores in these areas are better stocked. Soviets living in small cities and the countryside often do not have access to State stores. They have to depend on the consumer cooperative network and farm markets for their food purchases.

The other factor contributing to food shortages is rising incomes. In the 1960's, incomes started to increase faster than labor productivity when the State relaxed wage controls. Such phenomena can be regulated in capitalist countries by restrictive monetary controls. However, the USSR is just beginning to establish a modern banking system and has not learned how to control its expanding money supply under new economic conditions. Deficit spending by the Government - estimated this year at 10 to 11 percent of Soviet gross national product - has also affected people's incomes. As money incomes grew, so did demand. Fixed prices, unable to rise except under limited circumstances, could not check demand.

"We have everything, but nothing is available" is a common expression Soviet urban dwellers use to describe shortages of food and other consumer items. Buyers armed with more money than they can spend quickly snap up available products. Shelves then remain empty most of the time. To better understand this situation, Americans may recall U.S. price controls in the 1970's. Large amounts of gasoline, for instance, were being sold, but there still were lines and spot shortages.

Production Gains Have

Been Costly

After Brezhnev came to power in 1964, the Communist party doubled the share of the nation's total investment in agriculture over a 10-year period, reaching about 28 percent, an exceptionally high figure by any developed country's standard. Investment has remained about the same since then. Soviet tractor production now exceeds American output sixfold, and combine production is 16 times higher. Fertilizer application far exceeds amounts used in climatically similar areas of North America.

Although the Soviet economy has produced large amounts of farm machinery and other farm inputs, they are of poor quality and limited selection. To rectify the situation, Party Chairman Mikhail Gorbachev has proposed removing most State control from the farm supply business.

According to his plan, requiring the sector to be profitable would make equipment and agrochemical manufacturers more responsive to the needs of socialized farms, and farm operators more cost conscious and demanding in what they buy (see box). Socialized farms would be responsible for their costs. Credit and financial bailout would not be offered automatically. The most inefficient farms would either be broken up and leased or incorporated into more productive neighboring ones. However, it has yet proven politically infeasible to implement the plan and stop all subsidies.

Farming in the Soviet Union

In the USSR, food is produced on large "socialized" farms. There are approximately 50,000 of these farms, and they account for about three-quarters of the value of Soviet agricultural production. In 1987, the average socialized farm consisted of 26,000 acres, with 10,000 acres of cropland. (In comparison, the United States had approximately 2 million farms in 1987, averaging 461 acres. Of these, about 300,000 farms - with sales above $99,999 and sizes ranging from 1,278 to 2,304 acres - accounted for three-quarters of U.S. farm sales.)

Although differences between them are now small, socialist farms are technically of two types - collective and State. Both types are generally diversified operations with activities ranging from fruit and vegetable production to raising livestock and grains. Historically, workers on collective farms received a share of profits, instead of fixed wages. Under Brezhnev, however, collective farm wages became guaranteed, like State farm wages. The Government subsidizes unprofitable collectives as well as State farms, so they can meet payrolls and make investments.

About 3 percent of the land on socialist farms is allocated to workers as "private plots." In 1986-88, private production accounted for 26 percent of total Soviet farm output, including over half the potatoes and fruit and a quarter or more of the vegetables, meat, milk, and eggs. In 1989, two-thirds of the people living in rural areas kept private livestock.

The "private" sector has become increasingly intertwined with the public sector. A decade ago, the State began allowing more animals to be kept privately if they were sold back to the socialized farm. In the past 2 years, socialized farms have begun to "lease" land, machinery, and livestock to individual families and other small groups.

Farm workers often oppose leasing, either because it would remove the income guarantee they now have or because the farm has often not fulfilled its responsibilities. For example, farms have sometimes refused to make agreed upon payments to leaseholders.

Although some of the more radical reformers would like to destroy the existing system of State and collective farms, it is now rare - occurring mostly in the Baltic republics - that a farm lease exists outside of the socialized farm structure.

Farm productivity has also suffered from two decades of policies to raise and guarantee farm wages without sufficiently tying them to work results. To improve productivity on socialized farms, Gorbachev has tried to write new farm labor contracts with smaller groups of workers who can more easily be held responsible for their output and are paid accordingly. However, these smaller groups, called "contract brigades," have not been successful. Local officials have often merely adopted the name "contract brigade" without changing the way work is organized and compensated.

Last year, the Government tested long-term "leasing" of land to families or other small groups of farm workers. In certain regions, leases have been effective in increasing productivity and lowering costs, especially for livestock operations. However, experience with leaseholds is still limited, and the conditions for their widespread introduction do not yet exist.

Costly and ineffective farm supplies and poor farm labor incentives have contributed to soaring farm costs during the last 25 years. As a result, Government food subsidies have grown tremendously. The State has had to make up the difference between higher prices paid to farms for many crop and livestock products and lower fixed retail prices.

In 1985, subsidies were already twice the retail price of beef, lamb, and butter and about equal to the retail price of pork and whole milk (figure 1). Similar subsidies exist for bread, bakery products, and sugar. Only a few basic food commodities, including vegetable oil and alcoholic beverages, now provide the State with positive revenues. This year, subsidies will reach $143 billion.

Processing and Distribution

Are Poor

Because the cost of farm production has grown so much, the USSR is trying to reduce large post-harvest losses as a way to increase consumption. According to Soviet estimates, about 20 percent of grain production is lost or spoiled on average each year due to poor harvesting, drying, transportation, and storage. Preserving this amount would eliminate the need for costly grain imports. Likewise, more complete and timely processing might save much of the 40 percent of protein in milk that is presently not available for human consumption. (In the United States, less than 5 percent of milk protein is lost during processing.)

The relative inattention paid to post-harvest food handling can be seen in a comparison between the Russian republic and the United States. In 1985, the resources used for processing and distributing beef, pork, lamb, milk, and butter accounted for 7 to 12 percent of the total resources employed to bring these items to Russian consumers. In the United States, processing and distributing costs (the U.S. farm-to-retail price spread) for these five products averaged around 50 percent.

The Soviets are beginning to realize that they do not devote enough resources to post-harvest tasks. At the February 1986 party conference that ratified the current 5-year plan, Gorbachev maintained that reducing on-farm losses after harvest would increase food consumption by 20 percent. He also suggested that the expenditures required to eliminate such losses would only be one-half to one-third the cost of boosting farm production by the same amount.

The current 5-year plan, which covers 1986 to 1990, calls for investment in food processing equipment to increase by two to three times the amount planned for the economy as a whole. The annual investment in food processing equipment, which averaged only $3.5 billion in 1985-87, is expected to reach $7 billion by 1990 and $12 billion by 1995. The party has boasted that the $61 billion allocated for equipment purchases in 1988-95 would exceed all such investment made in the previous 40 years.

However, Soviet critics report that actual investment in food processing equipment has fallen behind the 5-year plan by at least 15 to 20 percent, despite imports and an interesting "guns-to-butterchurns" development. In 1988, eight ministries of the Soviet defense industry took over responsibility for the design and manufacture of domestic food processing equipment. That year, the defense industry had 345 factories and 205 research institutes and design offices working on equipment for the agroindustrial complex.

The defense ministries seem to have superior scientific and managerial talent and priority for materials acquisition, which could make a significant difference in producing higher quality food processing equipment. The new research and investment effort is aimed at providing appropriate, small-capacity equipment to farms and small cooperatives. The defense ministries were able to produce $1.69 billion of equipment for the agroindustrial complex in 1988, compared with the $1.42 billion manufactured in 1987.

Flexible Pricing Is Needed

The Soviet Government has not yet endorsed a system of truly flexible price incentives to guide investment in post-harvest food handling, a prerequisite that Western economists consider necessary for the USSR to achieve its objectives. In Western countries, storage and processing activities are guided by prices that vary seasonally and geographically.

Soviet farm and State retail prices for livestock and products are fixed throughout the year; vegetable and fruit prices vary by rigid schedules. Only higher transportation expenses to Siberia and the Far East are taken into account. Consequently, there are few incentives to distribute goods widely. Also, because many items are priced far below cost and sold easily, there is no reason to incur additional expenses to store or transport them. (Centralized control of prices requires more people and materials than the Soviets have ever allocated for the task.)

The USSR invested heavily in food processing during the 1970's, but the effort failed, raising questions about whether current attempts will succeed. In 1971-75, for instance, the processing capacity for sugar grew at an annual rate of 17,200 tons per day and that for cheese rose by 52,200 tons per 8-hour shift (table 3). However, equipment quality was poor, and much of the capacity was added in the wrong places, without proper consideration for the availability of raw materials and transportation. Many decisions were centrally made, based on political criteria. Despite what is probably better investment planning today - for example, operations are being designed on a smaller scale - incentives have not yet seriously changed for the better. [Tabular Data Omitted]

The Soviet Union had expected to adopt significant price reforms by 1990, but retail and industrial price revisions have been postponed. Only farm prices are tentatively scheduled to be changed during the first part of next year. Fruits, vegetables, and potatoes are to be sold at contracted prices. But the authorities in each republic have the right to cap these prices, and inflationary pressures almost guarantee that this will often happen. Grains and livestock products will continue to be sold primarily at fixed State prices.

If the Soviets do not adopt relatively free market pricing, their planning and allocation system will quickly recentralize. This is already occurring. State plans meant to be jettisoned in 1987 have been retained, and resources that were to be distributed freely through wholesale markets are still allocated centrally.

With continued centralized allocation of resources, the competition necessary to improve quality and coordination will not develop. Continued rationing of farm inputs will make it difficult for new enterprises to get started. A recent photo in the Soviet newspaper Izvestiia illustrates how poor resource allocation can hurt farm reforms. It showed a lease farmer with a tractor he had purchased, but the caption noted that he could not get fuel to run it. Such problems are a major reason for the slow spread of leasing.

Glasnost May Help

If the economic reforms of the 1980's resemble past attempts, the political reforms do not. Out of glasnost - or openness - may come true economic reform. Today, economic problems can be discussed openly. There is a new Parliament, with many members who won their seats in contested elections, and new political associations that are permitted to articulate their interests. Several points regarding this new climate are worth mentioning: * For the first time last November, the Government admitted to a growing budget deficit. This year, knowledgeable Soviet economists estimate the deficit to be about $197 billion or higher. This revelation has focused attention on the conditions of excess demand, which must be controlled for price reforms to take place. * The budget deficit, which is due in large measure to losses by State enterprises (including farms), is creating pressure on the Government to cut subsidies. The Government is allowing cooperatives to function in more areas of the economy, such as light industry and the trade and service sectors. It is also increasing the practice of leasing State enterprises and assets, as well as selling State property, except land, to collective or quasiprivate groups. Many restaurants, some small factories, and parts of farms are leased. People have also been able to buy facilities and equipment from the Government, ranging from apartments to farm machinery. * Although raising retail prices is politically risky, the benefits of the USSR's cheap food policy - fixed retail prices at levels below cost - are increasingly being questioned. Nearly 40 percent of the meat available per capita in Moscow is reportedly sold to people from out of town. Food subsidies - applied to products sold in State stores - are available mostly to those in large cities and workers in privileged institutes, who have relatively high incomes. According to a study published in Pravda a year ago, per capita consumption has declined by 30 to 35 percent since 1970 among the nation's 43 million poorest citizens, who earn less than $123 a month. This is why retail price reform, and corresponding gains in minimum wages and pensions, are needed. (A raise in pensions was approved by the new Parliament in August.) * Projected agricultural reform, while still not envisaging retail price increases, will change the location of subsidies from the processing to the retail level. This will bring about a new set of wholesale food prices and could set the stage for further beneficial price reforms. Moving subsidies further down the food pipeline may make it easier some day to remove them entirely.

Greater Regional Autonomy

The Soviet republics are scheduled to receive more autonomy in setting food policies, including some control over the level of food subsidies within their own distribution networks. Regional authorities could raise food prices, thus lowering subsidies and government expenditures. The republics will also have more responsibility for the supply of food to their own populations.

The republics, and individual enterprises within their borders, have already been given greater freedom to engage in international trade. Republics are looking outward for buyers because the ruble, which is received from internal sales, is becoming increasingly valueless. Some farms have exported high-value food products and light-manufactured items and have been able to purchase valued imports.

Ultimately, should regional economic autonomy be sustained, centralized allocation diminished, and the value of the ruble reestablished, conditions will be more conducive for internal agricultural trade. In the meantime, reforms still present special opportunities for Western firms wishing to do business with individual republics in agricultural and food processing equipment, high-value foods, and the products of rural manufacturing.

Economic barriers and distortions within the USSR may also create special conditions for Western trade in bulk commodities with the republics. Bulk commodity trade is still mostly centralized, under the control of "Exportkhleb" in Moscow. However, the organization is under increasing public attack.

PHOTO : Figure 1. In 1985, Government Subsidies for Some Meat and Dairy Products Were More Than Their Retail Prices

PHOTO : Retail prices for staples, like the bread being made in this bakery, have remained the same since the 1950's.

COPYRIGHT 1989 U.S. Government Printing Office
COPYRIGHT 2004 Gale Group