Analysis of the Agrarian Sector of Donetsk and Luhansk Oblasts and Adjacent Rayons of Zaporizhzhya

USAID Agricultural and Rural Development Support project

ANALYSIS OF THE AGRARIAN SECTOR OF DONETSK AND LUHANSK OBLASTS AND ADJACENT RAYONS OF ZAPORIZHZHYA OBLAST Report on Research Findings

2017

The survey was conducted by the USAID Agriculture and Rural Development Support Project.

The Analysis of the Agrarian Sector of Donetsk and Luhansk Oblasts and Adjacent Rayons of Zaporizhzhya Oblast was made possible through support provided by the U.S. Agency for International Development (USAID) through the Agriculture and Rural Development Support (ARDS) project. The authors’ views do not necessarily reÀect the views of the United States Agency for International Development or the United States Government.

More details about the USDAID ARDS project are available at https://www.facebook.com/USAID.ards/ 2017

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CONTENTS RESEARCH AIMS AND OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 OVERVIEW OF THE AGRARIAN SECTOR IN ZAPORIZHZHYA OBLAST . . . . . . . . . . . . . . . . . . 8 OVERVIEW OF THE AGRARIAN SECTOR IN DONETSK OBLAST . . . . . . . . . . . . . . . . . . . . . . 10 OVERVIEW OF THE AGRARIAN SECTOR IN LUHANSK OBLAST . . . . . . . . . . . . . . . . . . . . . . 13 MEAT, DAIRY, AND HORTICULTURE MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 MEAT AND DAIRY PRODUCTS MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 HORTICULTURAL PRODUCT MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 FISH MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 HONEY MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

MARKETING AND LOGISTIC CHANNELS OF A LOCAL MARKET . . . . . . . . . . . . . . . . . . . . . . . 21 MARKETING CHANNEL MODELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 PRODUCT SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 DISTRIBUTION CHANNELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SHARE OF PRODUCTS SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

MARKETING CHANNELS OPTIMIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

INSTITUTIONAL DEVELOPMENT OF FARMING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 CHALLENGES FOR FARMING DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 PRIORITY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

PRODUCER NEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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RESEARCH AIMS AND OBJECTIVES The goals of this research within the USAID Agricultural and Rural Development Project (ARDS) implemented by Chemonics International Inc., were: Ɣ Assessment of the current status of the development of the local agrarian market, the capacity of local small and medium-sized enterprises (SMEs) and cooperatives to complete it, and obstacles and ways to eliminate them; Ɣ Development of proposals for increasing the capacity of SMEs and cooperatives to develop value-added chains, market saturation, and development of agrarian product markets in Luhansk and Donetsk Oblasts and rayons close to the confrontation line in Zaporizhzhya Oblast.

RESEARCH OBJECTIVES Ɣ Desk research on the structure of the agrarian sector of Donetsk and Luhansk Oblasts (Ukraine Government-controlled areas), and rayons close to the confrontation line in Zaporizhzhya Oblast (Berdyansk, Bilmak, Huliaypole, and Rozivka rayons, and Berdyansk city). Ɣ Collection of primary data about the production, processing, and sales of products in the region, and determination of the needs of agricultural producer target groups. Ɣ Development of recommendations for increasing the potential for SMEs, large enterprises, and households to develop value-added chains and prospects for local agrarian product markets. Ɣ Analysis and assessment of marketing and logistic channels for the formation of a local market for horticulture, meat, and dairy products. Ɣ Characterization of the institutional development of farmers’ organizations in the region, their capacity to represent the interests of farmers and landowners, and their activities. Ɣ Determination of the needs for urgent and long-term support to agricultural producers in Luhansk and Donetsk Oblasts and rayons close to the confrontation line in Zaporizhzhya Oblast, the status for provision and effects of military actions on the situation for production, processing, and other resources. Ɣ Determination of the needs of target groups of agricultural producers, including women and 4

small farmers, regarding acquiring skills and knowledge in ef¿cient business management. Ɣ Proposals and justi¿cations for ways to improve marketing and logistic channels for local market development; the most economically-suitable locations for creating agricultural production/processing units to improve value-added chains; and provision of required foodstuffs to the region.

RESEARCH PROCESS The research was conducted by SYNERGY DEVELOPMENT CONSULTING LLC in consortium with Business-Accelerator Agrochallenge LLC and MLC Group LLC, in May-June 2017.

The de¿nitions of SMEs and agricultural service cooperatives (ASCs) used by ARDS and in this research are: Small agricultural enterprises are enterprises having staff employees in addition to family and seasonal employees. A small farm must have more than 10 but less than 50 family and seasonal workers, and no more than 50 full-time or part-time employees, including family members. Small non-agricultural enterprises in rural areas shall have more than 10 but less than 50 full-time employees. Small agricultural enterprises must focus their activities on the sale of goods in existing channels. Small-sized agricultural and non-agricultural enterprises are capable of presenting ¿nancial statements on sales of goods for three or more years with an annual turnover not less than 1 million hryvna (UAH) but not exceeding 15 million UAH. Medium agricultural enterprises must have 50 or more seasonal and part-time employees.

Staff employees at medium-sized enterprises must play a leading role in certain managerial and technical solutions. Non-agricultural medium-sized enterprises must have at least 50 workers at one of the locations included in the program. Enterprises with a smaller number of employees located in the program territory may also be considered. Medium-sized agricultural and non-agricultural enterprises must present ¿nancial statements on sales of goods for at least three years for an amount exceeding 15 million UAH, but not to exceed 100 million UAH, annually.

An agricultural service cooperative is a legal entity set up by agricultural producers (individuals and/or legal entities) that have voluntarily united through common membership in order to conduct business and engage in other activities related to the production, processing, storage, and sales of horticulture, stock-raising, forestry, and ¿shery; the delivery of goods and materials for members; and the rendering of services to satisfy economic, social, and other self-government needs.

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The following was completed: Ɣ Desk research, including analysis of previous research ¿ndings on similar topics and other informational sources; Ɣ Meetings with key stakeholders on the agrarian market, including state and local authorities and representatives of international technical and humanitarian aid projects; Ɣ Interviews with representatives of medium, small, and micro enterprises of the agrarian sector and private household farms.

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INTRODUCTION The war in Donbas is causing steadily deteriorating economic indicators for the development of Donetsk and Luhansk Oblasts, which is accompanied by the loss (destruction, plunder, etc.) of assets in the agrarian sector. Assessments of the value of destroyed components of production, municipal, social, transport, energy, and other infrastructure for the agrarian industry are estimates due to the impossibility of inspecting sites located on non-Government controlled area. Direct economic losses in the country’s agrarian sector are estimated at over 30 billion UAH, due to the social, political, and military situation.

The conÀict, which has been ongoing for more than three years, caused a sharp increase in prices for food, fuel, transport, seed, fertilizers, fodder, and other agricultural and household needs. Economic conditions and the lack of reliable safety guarantees are decreasing people’s capacity to adapt. In the ¿rst two years of the conÀict, external aid to residents of Eastern Ukraine consisted primarily of direct distribution of foodstuffs, based on international humanitarian response standards.

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OVERVIEW OF THE AGRARIAN SECTOR IN ZAPORIZHZHYA OBLAST

There are 31 SMEs producing or processing meat, dairy, and horticulture products in the Bilmak, Rozivka, Berdyansk, and Huliaypole rayons. Stock-raising, horticulture, and gardening are not necessarily the main type of activities for SMEs, but they have the capacity and are engaged in them. Processing enterprises comprise eight percent of the total number of agricultural enterprises, enterprises, and accordingly, 92 percent are producers of agricultural products.

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It is important to highlight that business SMEs make up a signi¿cant part of the general structure, having increased by 6.5 percent, while the number of production cooperatives decreased slightly, by 7.9 percent. Reforms are underway in production and ownership forms for the most competitive and ef¿cient forms of business incorporation in the agrarian sector.

The structure of agriculture SMEs in surveyed rayons barely changed in the last three years.

The number of agrarian SMEs decreased slightly from 2014 to 2016, by just 1.5 percent.

The cumulative volume of agricultural lands covered by potatoes and vegetables has remained almost unchanged over the last three years. There are no of¿cial vegetable producers in the surveyed rayons, and fruits are only grown by SMEs in Berdyansk rayon. Meat and dairy products are produced in all four rayons. The location of Berdyansk rayon lends itself to a concentration of ¿shing and aquaculture SMEs. Major processing capacities in the research area relate to ¿sh products, which account for 62.5 percent.

Zaporizhzhya oblast produced enough products for the oblast’s residents: 52.8 percent of meat and meat products; 26.7 percent of milk and dairy products; 31.1 percent of potatoes; and 32.1 percent of fruit and berries.

The major barrier to increasing yield is the inef¿cient use of mineral and organic fertilizer.

Financial hardships in agricultural enterprises resulted in a decrease of the proportion of lands treated with mineral fertilizers over the last three years, from 77.6 to 73.8 percent. The use of mineral fertilizers has certain disadvantages: pollution of ground water, the atmosphere, and surface soils; and nutritional chemicals in mineral fertilizers are not completely utilized by agricultural crops. Organic fertilizers do not have these disadvantages, but are limited by production volume. The use of organic fertilizers for agricultural crops in Zaporizhzhya Oblast is insigni¿cant, and the fertilized area decreased from 0.7 percent in 2012 to 0.4 percent in 2016.

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OVERVIEW OF THE AGRARIAN SECTOR IN DONETSK OBLAST

Donetsk Oblast is an administrative and territorial unit of Ukraine, with an area of 26,517.5 square kilometers (4.4 percent of the total area of Ukraine). The city of Donetsk was the administrative center until June 2014. The Donetsk Oblast State Administration was Âżrst temporarily relocated to Mariupol, and has been located in Kramatorsk since October 2014.

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Donetsk Oblast has around 1.4 million hectares of agricultural land, including 1.3 million hectares at the disposal of agricultural SMEs and households in the Government-controlled area. Arable land accounts for about 82 percent, and hay meadows and pasture ¿elds for almost 16 percent. Generally, agricultural land has high natural soil capacity, with favorable conditions for horticulture and raising livestock. There are about 1,400 agro-SMEs with different forms of ownership and business patterns, generating around three percent of Ukraine's gross agricultural production. A wide range of agricultural goods are produced in the rich "chernozem" (black soil).

Prior to 2014, the Donetsk economic area was an inter-regional powerhouse, which included Donetsk and Luhansk Oblasts. Accounting for 8.8 percent of the territory, the Donetsk economic area produced 25 percent of the industrial products and eight percent of the agricultural products of Ukraine. Heavy industry prevailed in the region. However, the Donetsk economic area was not able to fully meet its food product needs, as consumption exceeded production.

There is a high proportion of agricultural lands, 75.5 percent of the region, which is 3.3 percent higher than average for the country. However, the arable land is lower than average; croplands decreased 17.3 percent from 2002 to 2010, and decreased another 20 percent since 2014 in the Government-controlled area. Before 2014, grains dominated almost 50 percent of the region's crop. The 2008 ¿nancial crisis affected the region to a larger extent than Ukraine in general.

Agriculture in the surveyed rayons specializes in grain (winter and spring wheat, corn, and grain), industrial crops (sunÀower), horticulture, fruit, and berries. According to of¿cial statistics, vegetables (cucurbits and potatoes) account for 6.1 percent and feed crops for 4.8 percent of the 2016 crop (Government-controlled area). The 2016 potato yield for all categories of SMEs (Government-controlled area) was 11.54 tons per hectare, and for vegetables (¿eld and greenhouses) 14.5 tons per hectare.

The predominant livestock are swine, dairy and meat cattle, poultry, and sheep. 130,000150,000 live weight tons of meat; 230,000-250,000 tons of milk; up to 70 million eggs; and 70 tons of wool are sold in the oblast. Meat production/processing is nominal in each rayon; however, 58 percent of all registered SMEs are in Bakhmut, Velyki Novosilky, Maryinka, and Pokrovsk rayons.

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As of 2016, the volume of agricultural production compared to 2014 decreased by 34.7 percent: Ɣ Potatoes: 396,800 tons, almost 49 percent decrease; Ɣ Gross vegetable: 210,000 tons, 2.3-fold decrease; Ɣ Fruit and berries: 108,800 tons, almost 15 percent decrease; Ɣ Meat production: 131,500 tons, 13.4 percent decrease; Ɣ Milk yield: 227,900 tons, 19.5 percent decrease; Ɣ Eggs: 629.4 million, 2.6-fold decrease; Ɣ Cattle: 72,200, 23.7 percent decrease, including cows: 37,600, 24.0 percent decrease; Ɣ Swine: 445,000, 7.1 percent decrease; Ɣ Poultry: 3.7 million, 35.4 percent decrease.

Volnovakha and Maryinka rayons primarily produce milk, based on the number of registered SMEs. Kostyantynivka, Yasynuvata, Manhush, and Nikopol rayons have no milk-producing SMEs at all.

Only Volnovakha rayon has no registered horticulture producers. Fruit and berry producers are in Nikopol, Oleksandrivka, Pokrovsk, Slovyansk, and Lyman rayons, but no vegetable producers.

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OVERVIEW OF THE AGRARIAN SECTOR IN LUHANSK OBLAST

Luhansk Oblast is an administrative and territorial unit of Ukraine, with an area of 26,684 square kilometers. In September 2014, the oblast administrative center was relocated to Severodonetsk.

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There are 1,062 agro-industrial SMEs and 45,200 private household farms (9,900 employees) working in agricultural production in the Government-controlled area, including 98 legal entities producing and/or processing meat, dairy, and horticulture products. Thirty-seven large and medium enterprises and 83 small enterprises produce foodstuffs.

Meat producers/processors are in each rayon (Government-controlled area). However, 70 percent of all production/processing facilities are in the central rayons of Bilokurakino, Starobilsk, Svatove, and Bilovodsk.

All categories of meat production have decreased by 6.1 percent, and currently 26,000 tons are produced (21,600 tons by private households; 4,400 tons by SMEs). Meat production declined due to the decrease of livestock from 2016 to 2017: Ɣ Cattle: 19.8 percent decrease (51,400), including cows: 10.7 percent decrease (25,900); Ɣ Swine: 11.5 percent decrease (60,500); Ɣ Poultry: 25.6 percent decrease (1,135,400).

Livestock have decreased due to the lack of slaughtering houses, an insuf¿cient number of processing enterprises and, as a result, a lack of market.

There are three meat processing and meat production enterprises, with a total capacity of 3,600 tons per year: Lyubiy G.V. PE (Svatove rayon), “Voronyanski Kovbasy” PE (Popasna rayon), and “Pryvillya” Agro¿rma PAE. Meat processing enterprises have reduced production volumes: meat (fresh, refrigerated) is down by 6.1 percent, and sausage products are down by 5.4 percent. In the ¿rst half of 2017, 50 tons of sausage were produced.

Milk producers/processors are more proportionally distributed throughout the oblast. Milk production decreased during the ¿rst half of 2017 by 22.9 percent, compared to the previous year, and currently amounts to 113,800 tons: Ɣ Private households: 78,600 tons, 27.4 percent decrease; Ɣ Agricultural SMEs: 35,200 tons, 10.7 percent decrease.

Dairy products are produced by six enterprises, with a collective capacity of 135,000 tons per year: Ɣ “Redan” Agroprocessing Enterprise Public JSC; Ɣ “Bilovodskiy MRZ” Private JSC; Ɣ “Prodgrupservice” PE; 14

Ɣ “Starobilskiy Zavod ZNM” Public JSC; Ɣ “Aidar” LLC; and Ɣ “Markivka Cheese-Processing Plant” LLC. Nineteen percent of the total gross milk production is transferred for industrial processing, with a range of over 90 products. Based on information from the Oblast State Administration's Department of Agroindustrial Development for six months of 2017, dairy-processing enterprises: Ɣ increased whole-milk output, including processed liquid milk, by 39.9 percent (2,950 tons); Ɣ increased sweet butter production by 17.2 percent (1,200 tons); Ɣ reduced yogurt production by 13.8 percent (420 tons); and Ɣ reduced cheese by 3.2 percent (300 tons of hard cheese, 80 tons of fresh lactic cheese).

Horticulture producers/processors are in the rayons bordering Russia, and Kharkiv and Donetsk Oblasts: Milove, Markivka, Novopskov, Bilokurakine, Troitsk, Kreminna, and Novoaydar rayons.

The majority (82-83 percent) of horticulture products in the surveyed rayons are produced by private households, which is similar to national averages. There are rayons in Luhansk Oblast that have the historical capacity for horticulture and gardening, and private households are active in Stanytsya Luhanska and Novoaydar rayons.

Major challenges in the agrarian sector of Donetsk, Luhansk, and Zaporizhzhya Oblasts (surveyed rayons): Ɣ A general slowdown of economic activities in the region due to the ATO. This downward trend affected both the agrarian market and the agricultural sector, as well as lack of interest from prospective investors. Ɣ Mining of agricultural lands bordering the ATO. Many ¿elds in the region have been mined and are covered with destroyed military hardware, and thus cannot be cultivated, resulting in signi¿cant losses for farmers and the agrarian sector in general. Based on of¿cial data, more than four years of work and more than $5 billion are needed to de-mine all territories (Donetsk and Luhansk Oblast).

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Ɣ The majority of agricultural producers grow grains, legumes, and oil seeds.

Other types of agricultural economic activities are not represented at all, or represented by very few producers. Ɣ According to experts, up to 30 percent of the grain crop yield is lost due to low agricultural mechanization. Signi¿cant losses are caused by failure to comply with agro-technical conditions for sowing and harvesting, as well as poor crop treatment. Organic fertilizers for agricultural crops were practically unavailable in recent years. Ɣ Low prices for produce, which leads to cattle and cow stock reductions in private households. Private households produce a vast amount of milk and meat with little use of modern technologies. Ɣ Lost competitive advantages in horticulture and fruit growing due to outdated technologies; the almost complete loss of infrastructure for procurement, storage and sales of raw material; and decrease in land area. Ɣ A very low number of enterprises processing agricultural products. Ɣ Adverse ecological conditions, which have a detrimental effect on the development of agriculture and the prospects for maintaining high quality standards for production. Donetsk Oblast is the most polluted region of Ukraine. Ɣ Issues with human resources, in particular, a decrease in the number of employees in agricultural enterprises. The sharp decrease may be attributed to low wages and payment arrears.

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MEAT, DAIRY, AND HORTICULTURE MARKETS The market for meat, dairy, and horticultural producers/processors consists of two basic elements: (1) of¿cially registered persons working in accordance with the respective industry classi¿cation system code, and (2) private households, who produce and sell their own products, but about whom there are no of¿cial statistics (how many, kinds of activity and products, production volumes, etc.). Private households produce the majority of products, primarily horticultural products, and saturate local markets. Further research on the marketing and logistics channels of local markets needs to be conducted in these two groups.

As of 2017, there are 239 legal entities within the research area producing and/or processing meat, dairy, and horticultural products, including 110 entities in Donetsk Oblast, 98 in Luhansk Oblast, and 31 in the Bilmak, Rozivka, Berdyansk, and Huliaypole rayons of Zaporizhzhya Oblast. Ɣ 16 percent are processing enterprises; Ɣ 84 percent are producers; Ɣ 94 percent are SMEs; Ɣ 71 percent produce/process.

Exhibit 1. Producers and Processors, by Oblast

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MEAT AND DAIRY PRODUCTS MARKET

Cattle and swine are the primary meats produced for sale; however, private households breed poultry almost at the same level due to the lower time required for production, making faster results possible. Ɣ Compared to 2016, swine had the greatest livestock expansion, at 35 percent, while the greatest livestock reduction was poultry. However, this was not a reduction in the number of poultry-breeding households, but rather changes in the aggregate livestock values per private household. Ɣ Characteristic features of private households focused on the sale of products in addition to satisfying their own needs have not changed since 2016. On average, private households have 2 - 4 cows, 2 pigs, 50 - 100 poultry birds, and up to 30 sheep.

(See Exhibit 2.) Ɣ Sixty-eight percent of private households raising livestock for meat sell more than 50 percent of their product, and sell 77 percent of milk production.

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PRIVATE HOUSEHOLDS FOCUSED ON COMMERCIAL PRODUCTION Smallholders focused on selling their produce in average have

2-4

head of cattle

50-100 head of poultry

2

pigs

Up to

30

head of sheep

On average, private households have 2-4 cows to sell milk.

Exhibit 2. Private Households Focused on Commercial Production

Ɣ 44 percent of private households and 23 percent of SMEs had a reduction in livestock in 2016, compared to 2015.

Seventy percent of SMEs and private households maintained or increased milk production volumes in 2016. Ɣ On average, milk yield per cow for private households is 3.28 tons per year, while for SMEs it is 4.01 tons.

HORTICULTURAL PRODUCT MARKET Ɣ The main production facilities are located in six Luhansk Oblast rayons (Bilokurakine, Markivka, Novoaydar, Kreminna, Troyitske, Popasna), and in 11 Donetsk Oblast rayons (Bakhmut, Kostiantynivka, Velyka Novosilka, Dobropillia, Manhush, Maryinka, Yasynuvata, Oleksandrivka, Nikolske, Slovyansk, Lyman). In Zaporizhzhya Oblast, fruit production facilities are located in Berdyansk rayon.

HORTICULTURAL PRODUCT MARKET, BY OBLAST Volume of every vegetable crop production by producers from mentioned oblasts beetroot

57

ve vegetable m marrow

potato

60 86

Ɣ Potatoes, cabbage, beets, carrots, and onions are the main crops cultivated by SMEs. Garlic, cucumbers, tomatoes, radishes, and eggplant are cultivated primarily by private households. Ninetynine percent of vegetables cultivated by SMEs and private households are on open ground.

31

45 86

6 25

50

43

cucumber

tomato

20

57

31

30

radish

Ɣ There are rayons with historical capacity for horticulture development. Before 2014, Slovyansk rayon (in particular Chervonyi Molochar) had 300 hectares of land designated for vegetable production.

Currently, local farming SMEs are working to restore production to pre-war levels.

Velyka Novosylivka rayon has capacity for fruit growing and berry cultivation, with existing fruit-production SMEs (in particular, apples). In Luhansk Oblast, private households are active in Stanytsya Luhanska, Novoaydar, Novopskov, Kreminna, and Starobilsk rayons.

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86

ccabbage

carrot

25

63

43 71

onion

5

40

88

71 Zaporizhzhya Obl.

25 Donetsk Obl.

31 Luhansk Obl.

Exhibit 3. Horticultural Product Market, by Oblast

CITIZENS SELLING MORE THAN 50% OF PRODUCE

68%

64%

vegetables

77%

meat

33%

fruit

60%

milk

berries

Exhibit 4. Citizens Selling More than 50% of Produce

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Ɣ Apples are the main focus in fruit growing, whereas other surplus seed fruits are sold to farming enterprises, and delivered to Donetsk and Luhansk Oblasts from Zaporizhzhya and Kharkiv rayons, or are imported. Ɣ Private households who sell more than 50 percent of their products are cultivating vegetables (64 percent), berries (60 percent), and fruits (33 percent). The latter con¿rms the lack of development of deliberate fruit cultivation for sale, but available surplus may be sold at local markets. Ɣ Strawberries and raspberries are the main berries cultivated and sold at local markets.

FISH MARKET Ɣ There are few SMEs and private households in commercial aquaculture and/or ¿shing, with up to 950 hectares of leased water reservoirs. The main kinds of ¿sh cultivated in local ponds are silver carp, carp, pike-perch, pike, crucian, and white amur. Trout and red-¿nned mullet are not common. Azov goby and sprat are ¿shed. Ɣ There is limited access to information on water reservoir leaseholders, and, as a result, a lack of information from rayon and rural authorities on the types of economic activity conducted, whether recreational or ¿sh production. Ɣ Fish is one of the main products that is regularly delivered into the oblasts. Local ¿shing is not realized on the local market at full capacity.

HONEY MARKET Ɣ According to producers, honey extraction is one of the most sustainable areas of agricultural activity. Beekeepers were affected by loss of sales markets, Àuctuations in product prices, problems with production facilities, and, to a lesser extent, unfavorable weather conditions. Ɣ Eighty percent of producers focused on honey sales own 10 - 50 beehives. Ɣ The average cost of honey production (according to producer estimates) is 32 UAH per kilogram, whereas the wholesale price is 23 - 55 UAH per kilogram, and the retail price is 33 - 180 UAH per kilogram.

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MARKETING AND LOGISTIC CHANNELS OF A LOCAL MARKET

MARKETING CHANNEL MODELS A marketing channel is an integrated network of all market stakeholders united by the product, including producers, agents, processors, and buyers. There are several models in the research area, and available models are used in parallel by producers to sell their products.

EXISTING LOCAL MARKET CHAINS FOR FRUIT-AND-VEGETABLE AND MEAT-AND-DAIRY PRODUCTS

PRODUCER

CONSUMER

This model is typical for 63% of small holders and 58% of producing SMEs

PRODUCER

PROCESSOR

SALES NETWORK

CONSUMER

20% of small holders and 47% of producing SMEs use this channel to sell their products

PRODUCER

WHOLESALE MEDIATOR

PROCESSOR

SALES NETWORK

CONSUMER

This model is typical for 48-50% of small holders and of SMEs

PRODUCER

SALES NETWORK

CONSUMER

This model is typical for 19% of SMEs and small holders

PRODUCER

OWN SALES NETWORK

CONSUMER

14% of SMEs use this channel. As a rule, it is a sales point located at a production facility.

Exhibit 5. Marketing models by types of product.

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Model 1: Direct sales to consumer Ɣ Production and sale of the product directly to the ¿nal buyer within one oblast. Ɣ Typical for 63 percent of private households and 58 percent of producing SMEs. Ɣ Product transportation is done exclusively for the purpose of sale within one settlement or to the regional center market place. Ɣ Collection, slaughter, etc. is done at the place of production, i.e., within the same settlement.

Marketing models by types of product.

Producers focused at different sales channels, part 1 Percentage of product

Wholesale intermediaries

54

End consumers

49

Processing companies

59

38

49

59 42

21

Wholesale intermediaries

7

24

End consumers

34 60

21

46

Processing companies

4

65

34

17

Producers in general

Private households

SME

Exhibit 5.1. Marketing model #1 by types of product

Model 2: Sales to processor Ɣ Twenty percent of private household products and 47 percent of SME products are sold through this marketing channel. Ɣ Direct contact with the processor ensures sustainable procurements of raw materials and a higher price per unit. Ɣ This model is not representative of the horticulture market in the researched area, as the existing processors of vegetables and fruits process their own raw materials, rather than buying from private households. Ɣ Products are moved on the meat and dairy market at every new segment. Ɣ The sales network focuses on several rayons, reducing the ¿nancial burden for transportation and increasing the bene¿ts of each segment from the sales of raw material/product.

22

Marketing models by types of product.

Producers focused at different sales channels, part 2 Percentage of product

Wholesale intermediaries

56

End consumers

56

Farmers markets

67

35

End consumers

13

17

63 70

25

55 61

17

Wholesale intermediaries

Farmers markets

67

50

83 25

25 Producers in general

SME

Private households

Exhibit 5.2. Marketing model #2 by types of product

Model 3: Sales to wholesale agent Ɣ Both private households and SMEs have about 48-50 percent focus on wholesale agents. Ɣ The Àexibility of continuation is the distinctive feature. Ɣ The producer is usually not aware of further sales of his/her products with regard to the channels and geographic coverage. Ɣ Most wholesale agents in Donetsk Oblast are local, but traders from Zaporizhzhya Oblast are active in southwest rayons (Velyka Novosilka, Nikolske, Manhush), and from Kharkiv Oblast in northern rayons (Lyman, Slovyansk, Bakhmut, Kostiantynivka, Oleksandrivka, Dobropillia, Pokrovsk).

Marketing models by types of product.

Producers that deliver their produce for processing Percentage of product Portion of products supplied for processing

62%

97%

Portion of products supplied for processing

71%

98%

15%

13%

50 26 26 Meat

Luhansk Oblast

18

15 5

Milk

Donetsk Oblast

Exhibit 5.3. Marketing model #3 by types of product

Ɣ Most wholesale agents in Luhansk Oblast are local, with regular traders from Kharkiv Oblast, and occasional traders from Zaporizhzhya Oblast. Ɣ In addition to the local wholesale agents and closest neighbors, there are also transit dealers from other oblasts, such as Dnipropetrovsk and Kharkiv, who travel occasionally to buy livestock.

Model 4: Sales to external sales network Ɣ Up to 19 percent of SMEs and private households are focused on this marketing channel. Ɣ Sales networks in this context means supermarkets, shops, and markets as further product distributors.

Model 5: Sales to own sales network Ɣ Used by 14 percent of enterprises; popular among horticulture producers. Ɣ Requires one’s own sales outlet, usually located at the production facilities. Ɣ Product movement is almost eliminated or reduced to a minimum within one settlement.

23

The ¿rst, second, and fourth models are the top-priority channels for reproduction and development in the research area.

The number of segments in every chain affects both the ¿nal product price and bene¿ts for each participant. The main purpose is to increase the sale cost of raw materials by including the processing stage in the chain, and, as a result, sales of ¿nished products, but not raw materials.

PRODUCT SALES With regard to the analysis of the product sales as one of the marketing channel segments directly affecting product prices, it is important to make distinctions between categories of producers.

The ¿rst category includes small private households whose land designated for vegetable production and fruit growing does not exceed 0.5 hectares, and who have an average number of livestock for the region. These producers are focused on the sale of surplus products cultivated/ produced. Deliberate cultivation and/or production for sale is not typical. Their main function is compensation of a certain type of product in shortage at the local level. Their sales region is usually limited to a village, and sometimes to markets in the rayon center, no more than 50 kilometers away from the household. Transport links adjacent to the settlement can open another sales channel: sales from home to transit buyers. Typically, 100 percent of product sales are within the home rayon. The exception is private households located close to large cities, such as Mariupol, Kramatorsk, Slovyansk, and Pokrovsk, who can sell in those markets to retail buyers.

The second category includes private households who deliberately cultivate/produce for sale, have 0.5 hectares of land, and/or a number of livestock exceeding the average for the rayon. These producers are focused on the sale of their own products to end buyers through independent trade in rayon markets (or in city markets), and on product sales to wholesale agents.

The third category includes enterprises and big private households who are 100-percent focused on satisfying buyer needs and having more diversi¿ed sales channels, including shops/ supermarkets, their own sales network, processing companies, etc.

These groups are “ideal types,” with some variations possible in practice. However, they enable segmentation of the producer market and determination of speci¿c problems for certain target groups.

24

DISTRIBUTION CHANNELS The region’s producers are focused directly on end-buyers and wholesale agents.

AVERAGE SHARE OF PRODUCTS SOLD THROUGH EVERY MENTIONED CHANNEL Percentage per every type of

Private households typically sell their own product per every channel Processing products to wholesale agents who have 13% 15% 98% 70% companies strong links with processing companies, Own retail 53% 70% 95% 70% chain supermarkets, and shops, and who accept Wholesale 40% 76% 81% 77% risks and incur an obligation to settle all intermediaries problematic issues, suggesting a lower 45% Supermarkets 19% 56% 80% price than with direct communication.

22% 29% 7% 30% Shops On the one hand, the production sales 63% 42% 62% chain continues, which results in a cost 76% Farmers markets increase, from which cash dividends are End retail consumers 70% 74% 64% 74% not obtained by the seller. On the other hand, the existence of this segment is the Exhibit 6. Distrubution channels sales shares result of current market self-regulation.

The minimal number of processing companies in the region does not help facilitate the production of one’s own products by either private households or SMEs. The loss of large markets, the reduction in customer purchasing power, lack of product quality certi¿cates, and insuf¿cient conditions for quality production are all factors which require producers to ¿nd ways to minimize risks and earn at least minimal pro¿t. Wholesale agents ensure immediate payment for the product, and eliminate transportation costs for product delivery and the need for subsequent sales. In other words, this channel has many bene¿ts. However, the risk of monopoly on product purchase options and on determination of the sales price is increased without any alternative.

Another important factor is that wholesale agents are usually not registered business entities, making it impossible to trace the direction of product exports from the region and routes of product movement within the territories.

25

SHARE OF PRODUCT SALES PRODUCT SALES GEOGRAPHY

The majority of horticulture, meat, and dairy products produced in the oblast are sold within the oblast. Other oblasts focus primarily on ¿sh, due to the lack of product availability at local markets in neighboring oblasts, as well as a better price.

Share of products sales in/outside oblast for Donetsk and Luhansk Oblasts, % 16 84

23

100 100 100 100

77

13 87

Donetsk Oblast

16

15

20

28

10

20

90 42 84 85 80 80 Berries grown in Donetsk, Luhansk, and 72 58 Zaporizhzhya Oblasts have the lowest sales outside of these oblasts. The region’s berry needs are met by private households, Luhansk Oblast albeit not completely. The oblasts' needs for vegetables, in particular potatoes and onions, are also not fully met, and sales network representatives purchase them in Exhibit 7. Product sales geography northern oblasts. The needs for meat and dairy products are satis¿ed by the available producers; however, the presence of national retail networks (supermarkets), and branded retail chains (Nasha Ryaba, Havrylivski Kurchata, etc.) predetermines the delivery of processed meat and dairy products from other oblasts.

Outside Oblast

In Oblast

Minimum changes are observed in the four rayons of Zaporizhzhya Oblast since 2014. Donetsk and Luhansk Oblasts have new sales centers as the result of business and private households re-pro¿ling from non-Government controlled areas.

Donetsk, Luhansk, and large cities close to the oblast centers (Horlivka in particular) used to be key sales centers until 2014.

The loss of the possibility to sell their products forced producers to search for new territories, and they primarily refocused on Mariupol, Kramatorsk, Slovyansk, Starobilsk, and Severodonetsk.

However, the capacity of these cities does not match the sales opportunities previously available in Donetsk and Luhansk. Therefore, in addition to regional refocusing since 2014, producers both reduced production volumes and simultaneously searched for new markets in neighboring oblasts.

26

CONCLUSIONS 1. The ¿ve main models for delivering products to buyers in the region have been identi¿ed by analyzing marketing channels for the local horticultural, meat, and dairy markets.

The models may be selected and applied at the same time by a producer. On average, 70 percent of producers and processors focus on one marketing channel. More options are observed among fruit producers, a quarter of whom are focused on three or more distribution channels.

2. SME and private households focus on saturation of the local market with essential products.

On average, more than 75 percent of meat, milk, vegetables, fruit, and berries produced by this category remain in local markets, sometimes as much as 100 percent for private households. This market structure has the highest accessibility level of producer to the endbuyer. However, it is highly dependent on the transmission capacity of certain distribution channels, and is advantageous for its fast adaptation to changes in the market. Parallel focus on several distribution channels increases the adaptive capabilities of producers and, as a result, reduces the risks associated with the consequences of losing one of them.

3. The distribution network channel, including shops, supermarkets, and special-purpose sales outlets, remains poorly utilized, primarily due to: (1) supplies not conforming with the distribution network’s demands (volumes, quality standards, delivery speed, non-cash payments, etc.), and (2) the network conditions do not meet producers’ expectations, especially private households (payment deferment for shipments, non-cash settlements, mechanism of acceptance of goods in sales outlets, product refund, etc.). Activating a marketing channel that facilitates the direct entry of producers/processors into distribution networks (model 4) is one of the top priority areas for the researched territories. However, it requires efforts to improve product quality and product endorsement, justi¿cation of advantages from diversi¿cation of distribution channels, etc.

4. Focusing on one’s own network through permanent sales outlets (model 5) is also rarely applied. The naturalness of products, local production, environmental friendliness, and limited volumes are key advantages for agricultural producers compared with large enterprises.

27

MARKETING CHANNELS OPTIMIZATIONS Value-added is related to production, processing, and sales, and involves an increase in the price of products passing through each cycle.

In analyzing meat and dairy value chains, there is a critical shortage of slaughterhouses, only 40 percent of the needed amount. Furthermore, a major portion of slaughterhouses fail to meet the requirements for upkeep and repair. Active slaughterhouses are available in processing companies in Luhansk Oblast (6), Donetsk Oblast (3), and in four rayons of Zaporizhzhya Oblast (1). Eight more enterprises have moveable slaughterhouses, six in Donetsk Oblast, one in Zaporizhzhya Oblast, and one in Luhansk Oblast. Private households may have separate premises where it is possible to slaughter or chill milk, but these are generally not dedicated facilities for these purposes.

Meat and dairy processing enterprises in Donetsk Oblast are in Bakhmut, Velyka Novosilka, Maryinka, Nikolske, and Slovyansk. Kostiantynivka rayon and Mariupol both have meat and milk processing enterprises, but in Pokrovsk there are only meat processing enterprises.

In Luhansk Oblast, milk processing is in Bilovodsk, Markivka, Novoaydar, StanychnoLuhanske, Starobilsk, Bilokurakine, Kreminna, and Troyitske rayons. In the Zaporizhzhya Oblast research area, milk processing is in Bilmak, Huliaypole, and Berdyansk rayons; and meat processing is in Berdyansk city. A distinctive feature is that meat (beef and pork) is purchased from Kharkiv producers through a sales network (specialized shops), which have their own sufficient capacities in Donetsk Oblast. In Oleksandrivka and Dobropillia rayons, products from local enterprises are low quality, and there is a lack of local purchase points for raw materials from private households. Sales network representatives in these rayons emphasize the lack of technical possibilities to travel around villages searching for cattle stock, but if agricultural cooperatives were available, they would refocus on local producers.

Considering the possibility of referring local private households to a retail sales network and the interest of distribution system representatives, these oblasts have potential for meat processing.

Stanytsya Luhanska and Novoaydar rayons are potentially interested in milk processing.

In 2014 – 2015, there was a sharp decrease in the livestock population due to military activities, but there is potential for restoration to pre-war numbers. However, remoteness from traditional milk procurement centers means there is a need for mini-processing. Velyka Novosilka rayon 28

and settlements close to Maryinka rayon are geographically far away from Mariupol and Kostiantynivka, where the closest milk processing companies are located, but have rural councils with a quite sustainable livestock population. An initiative to set up a mini-processing factory in Komar village was announced by internally displaced persons, who had a similar business prior to being forced to relocate from non-Government controlled areas.

In addition to cattle and pigs, goat breeding is another possibility for facilitating livestock development, particularly for milk and cheese production. There is an upward trend in the number of households breeding goats (Nikolske rayon), and the number of private households focused exclusively on the sale of their own products. Hand-crafted processing of raw materials (Mariupol) is a good example of support for limited forms of livestock breeding. Fundamental advantages of goat breeding are the lower energy consumption for livestock feeding and the higher price on milk, and, accordingly, of ¿nished products. Mini-farms dealing with aviculture, rabbit, nutria, and quail breeding already exist in the region and can close the circle of production, processing, and sales within one territory, thus increasing bene¿ts for producers and end-buyers. These are promising forms of livestock breeding.

In the sphere of horticulture products, there are several rayons with historically developed agricultural activity, including rayons with increased employment of the population in horticulture. Ɣ Luhansk Oblast: Stanytsya Luhanska, Novoaydar, Starobilsk, and Kreminna Ɣ Donetsk Oblast: Slovyansk and Velyka Novosilka Stanytsya Luhanska, Novoaydar, and Slovyansk rayons are in the process of restoring pre-war volumes of land for vegetable production. However, sales remain primarily in the non-Government controlled area. Sales were focused on that region prior to 2014, and currently all attempts to refocus to Severodonetsk remain unsuccessful due to oversaturation of the market with similar products from private households in the neighboring oblasts. Meanwhile, there is stable demand for a product delivery system within the non-Government controlled areas, enabling the producers to sell at higher prices. These territories are potentially promising from the point of view of support to local producers and availability of vegetable and fruit mini-processing shops.

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RECOMMENDATIONS #1

Pork processing should be located in the Velyki Novosilky rayon, as producers are located within 70 km in Maryinka, Oleksandrivka, Volnovakha, Rozivka, Bilmak, and Huliaypole rayons. Primary processing should be established in these rayons, including a slaughtering facility, meatcutting facility, and freezing facility.

#2 Poultry processing should be located in Lyman, Pokrovsk, and Bilmak rayons due to comparatively large production volumes (up to 3,000 tons).

Donetsk and Zaporizhzhya Oblasts Pork

Production

Donetsk and Zaporizhzhya Oblasts Poultry meat processing

Production

30

Donetsk and Zaporizhzhya Oblasts Milk processing

Production

Donetsk and Zaporizhzhya Oblasts Vegetables

Sales

#3

Milk processing should be established in Volnovakha rayon, as large volumes are produced there. The neighboring Maryinka, Nikolske, and Rozivka rayons have large production facilities.

#4

Vegetable processing should be in Velyki Novosilky, Kostyantynivka, and Lyman rayons, near to the markets in Kramatorsk, Bakhmut, and Slovyansk.

31

#5

Fruit processing should be in Kostyantynivka, Velyki Novosilky, and Bilmak rayons due to the availability of large production facilities.

Donetsk and Zaporizhzhya Oblasts Fruts

Sales Production

#6

Luhansk Oblast Pork

Pork processing, including a slaughtering facility, meat-cutting facility, and freezing facility, should also be established in Bilovodsk rayon, as producers are quite close, in particular, in Milove, Markivka, Novopskov, Starobilsk, and Novoaydar rayons.

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Production

Luhansk Oblast Cattle

Processing Production

Luhansk Oblast Milk

#7

Cattle processing should be in Markivka rayon, since production facilities are available in neighboring rayons (Novopskov, Bilovodsk and Markivka), and large sales markets are nearby (Starobilsk, Novopskov, Rubizhne, Severodonetsk, and Lysychansk).

#8

Milk processing should be in Svatove rayon, where large volumes of milk are produced.

Sales Production

33

#9

Luhansk Oblast Vegetables

Vegetable processing should be established in Novoaydar rayon, as processing is not available in any of the neighboring rayons. Novoaydar and Stanytsya Luhanska rayons are leaders in vegetable production in Luhansk Oblast, and markets are available nearby in Starobilsk, Severodonetsk, Lysychansk, and Rubizhne.

# 10

Sales Production

Luhansk Oblast Fruits

Fruit processing should be established in Starobilsk rayon, as it is the in the center of the oblast, has good transportation connections, and has large production facilities.

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Sales Producers

Luhansk Oblast

# 11

Fish, Honey

Fish processing should be established Kreminna rayon, as markets are nearby.

in

Sales Production

# 12

Donetsk Oblast

Honey processing in the surveyed region is not available at all. Two projects should be considered: processing facilities in Maryinka rayon (Donetsk Oblast) and Bilokurakine rayon (Luhansk Oblast).

Honey

Sales Production

# 13

Lamb meat and rabbit meat producers should be supported in the majority of rayons, as this contributes to diversiÂżcation of meat products, and these niche products have a comparatively high proÂżt margin.

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INSTITUTIONAL DEVELOPMENT OF FARMING

CHALLENGES FOR FARMING DEVELOPMENT Seventy percent of the target group assess the status of farming development in the region as “somewhat insuf¿cient” or “absolutely insuf¿cient” for effective activities, including the vast majority of private household respondents. Local authority representatives are more optimistic in assessing the current conditions. (table below).

ASSESSMENT OF THE CURRENT CONDITIONS FOR THE DEVELOPMENT OF FARMING / ENTREPRENEURSHIP IN THE REGION

Response options

All respondents, %

Producers / processors, %

Small households, %

Sales, %

Authorities, %

Available conditions are suf¿cient for the development of entrepreneurship

5.5

7.2

3.5

4.1

10.0

Available conditions are somewhat suf¿cient for the development of entrepreneurship

21.2

21.7

17.6

28.6

24.0

Available conditions are somewhat insuf¿cient for the development of entrepreneurship

40.5

37.8

40.2

40.8

46.0

Available conditions are absolutely insuf¿cient for the development of entrepreneurship

29.9

31.9

36.6

22.4

14.0

Dif¿cult to say

2.9

1.4

2.1

4.1

6.0

Total

100

100

100

100

100

36

The lack of state programs to Top 10 Farming Challenges, % of Respondents support farming is the primary challenge cited by SMEs and private households. The lack No programs on agribusiness support on the 56.6 national level of a comprehensive vision Growth of prices for production means and raw 55.9 materials and balanced strategy for No programs on agribusiness support at domestic 47.9 market facilitating farmers’ activities Depreciation of production means and premises 45.3 both in the surveyed region Loss of sales markets on the territories currently 44.7 and in the country overall not controlled by the Government High costs associated with introduction of modern / 44.4 affects other issues related to innovative technologies High national taxes 42.8 the development of SMEs and Lack of information on available state support and private households, including 41.8 how to obtain it high national taxes and underHigh interest rates on bank loans 36.3 developed transportation Underdeveloped transport infrastructure 33.4 infrastructure. The latter is of special signi¿cance for Luhansk Exhibit 8. Top 10 farming challenges Oblast, as the less-developed northern oblasts experience additional problems. Support to producers, processing cooperatives, etc., will not result in high ef¿ciency due to the lack of infrastructure for product sales.

“Non-interference” by the state authorities and local self-government in business development processes is also an important issue. Entrepreneurs and private households express concern about possible state interference in the process of the allocation of international donor funds, inÀuencing the selection of bene¿ciaries for ¿nancial support, and, as a result, a lack of transparency in the interactions between businesses, authorities, and international donors.

In this triangle, the authorities, as a rule, are perceived as a source of potential risk.

All challenges for more than a third of the region’s SMEs and private households are typical for the rest of the country, as well. However, the lack of unique challenges does not indicate a lack of need for action on systemic changes in state policy to impact the sources rather than components of the issues.

37

PRIORITY ISSUES Loss of markets in non-Government controlled areas is the priority issue identi¿ed by representatives of the three oblasts. Additional conditions that worsen the situation include tax burdens, lack of a systemic state policy, limited possibilities for product sales, additional losses, and the need to decrease production volumes.

In addition to the priority issues, the following are notable: Ɣ Staf¿ng issues, including lack of personnel with the required experience and quali¿cations is more prevalent for medium-sized businesses in Luhansk Oblast; Ɣ Risk of loss of production facilities due to illegal takeover is cited more often in Donetsk and Luhansk Oblasts; Ɣ Complications with obtaining loans and frequent changes to legislative regulations are the main challenges for Donbas, but less so for the neighboring Zaporizhzhya Oblast.

The assessment of farmer and entrepreneur associations in the surveyed area is controversial.

The low level of business engagement in such institutions, which presently amounts to almost 25 percent, is a priority. Cooperation is more typical for medium-size businesses, whereas small businesses focus on self-supported resolution of problems. Naturally, the situation is much worse for private households: 3.5 percent of rural enterprises are members of farmer and entrepreneur unions.

Key reasons for aversion to joining unions and associations include: Ɣ lack of information on the institutions representing the interests of businesses and private households; Ɣ lack of bene¿ts for the enterprise/farm from participation; Ɣ lack of awareness on the part of prospective members on the practical activities of unions; Ɣ lack of membership proposals from the associations; Ɣ lack of time to engage in such activities.

38

Seventy-one percent of the target group are not sure that such associations can effectively protect their rights, an important indicator of the lack of trust. The target group cite skepticism about ef¿ciency, transparency of membership fees, openness of the membership procedure, and doubts about the actual objectives of the associations.

However, major areas for association activities needed by the target group include: Ɣ awareness raising and consultation activities; Ɣ support in product sales; Ɣ agent functions, e.g., in interactions with authorities; Ɣ support in implementing business activities, such as procurement of production means, material support, etc.; Ɣ protection of enterprise and private household interests.

39

PRODUCERS NEEDS Production means and prices are among the top 10 challenges identi¿ed by both businesses and smallholders. Major short-term needs of local producers/processors are related to speci¿c technical issues enabling increased labor productivity. At the same time, establishing cooperatives with equipment to service households is important.

The long-term need to equip processing lines and slaughterhouses is important for private households and SMEs that are already engaged in “home-made” processing, or have facilities and suf¿cient production volumes. Suf¿ciency, in this case, is determined based on the proportion of what stays with the private households for their own consumption, and what is transferred for sale.

A general increase in production prices, which Àuctuates from 88 to 146 percent, affects production pro¿tability. However, the key factor deciding to increase or reduce production/ processing depends upon the assessment of market potential.

A change in production suppliers is partially related to their location in the non-Government controlled areas, but is not completely predetermined by this. The main reasons include better market proposals and better product quality.

Product certi¿cation issues are currently long-term needs for the target group, given the ambiguity of the procedure for enterprises and farms, and the low level of awareness regarding quality standards.

Relevance of Acquiring New Knowledge in the Agrarian Sphere, % by Enterprise Size 54.8 47.1

28.6 23.5 17.6 11.9

Interest in acquiring new 5.9 4.8 5.9 0.0 business-related knowledge is Very relevant Rather relevant Rather Absolutely Difficult to say one the indicators of a business NOT relevant NOT relevant entity’s readiness for further ■ Small enterprises ■ Medium enterprises development, and is evidence Exhibit 9. Relevance of Acquiring New Knowledge in the Agrarian Sphere, of its Àexibility and adaptability. % by Enterprise Size Private households are often more hesitant about the need for training, claiming suf¿cient knowledge and experience, but also citing lack of ¿nancial resources. This is typical for the regions focused primarily on 40

the preservation of their own business. For organizations working in the information and education area, it is important to emphasize accessibility of new approaches to economic management, and the feasibility of introducing them in Donetsk and Luhansk Oblasts.

Opportunities for Acquiring New Knowledge in the Agrarian Sphere, % by Enterprise Size 46.3 41.2 32.4 29.3 19.5

17.6

2.9 Sufficient

Somewhat sufficient Somewhat insufficient

Completely

4.9

5.9

Difficult to say

opportunities opportunities opportunities insufficient Fifty-six percent of SMEs, opportunities private households, sales ■ Small enterprises ■ Medium enterprises representatives, and authorities indicate there are suf¿cient Exhibit 10. Opportunities for Acquiring New Knowledge in the Agrarian Sphere, % by Enterprise Size opportunities available for acquiring new knowledge. However, almost 30 percent of small businesses indicate that such opportunities are “rather not suf¿cient.” Small businesses do not have extensive organizational structures, requiring functional duties to be performed by a few people, which results in a lack of resources, primarily time (17 percent of SMEs and private households consist of only one permanent employee, and 76 percent have up to 10 permanent employees). Accordingly, the “loss” of an employee for training is equivalent to the termination of business operation, which signi¿cantly limits the mobility of micro and small enterprises and private households in terms of acquiring new knowledge in the agrarian sphere.

Other problems for a segment of SMEs and private households is limited access to information, lack of information to search for available proposals, and the closed nature of information. For example, if an event is organized though the state executive authorities, information may be available to a limited number of business representatives.

Participants in the agricultural markets of Donetsk, Luhansk, and Zaporizhzhya Oblasts see no potential for further development, are mostly satis¿ed with the current situation and are afraid that investments in development will not have any impact.

For minimization of development risks for agricultural enterprises and companies, the following ecosystem is suggested: Ɣ Personnel training and development programs; Ɣ Renew advisory services by establishing Regional Competence Centers on key problems of agricultural service cooperative development in the region at the rayon level; 41

Ɣ Establish an agricultural cooperative network, including assistance in managing cooperatives; Ɣ Promote cooperation between agricultural producers and processing factories; Ɣ Facilitate optimization of agribusinesses performance; Ɣ Product quality management; Ɣ Financial and credit programs, and state and regional agriculture development programs, which is the most acceptable form of support to producers, as suggested by the survey respondents about what is needed nationally, based on grants or compensations per every liter of milk or kilo of meat realized.

42