Chapter 4
THE STRUCTURE OF AGRO-INDUSTRY

I. Basic Characteristics of Agro-industry and the Forest Industry

A. Introduction

Estonia is traditionally a foodstuff-producing country which has always been able to feed its own people. Between the two world wars, the Republic of Estonia exported foodstuffs through Eesti Võieksport (Estonian Butter Export), Lihaeksport (Meat Export) and other export organisations to Europe and beyond. The agricultural industry in Estonia was superior to that of its competitors in Finland and the other Baltic countries. The forest industry, the products of which were similarly sold in many places in Europe, was also up to standard.

Estonian agro-industry today is not as competitive as it was in that period. It is undergoing a period of critical change, involving ownership of the industry, technologies of production, and restructuring markets. The context is one of sharply reduced profitability in the sector in recent years, loss of market share, and increased unemployment, both in the agro-industrial sector and in the primary agricultural sector.

According to expert assessments and official statistics, current employment in Estonian rural areas is as follows:

The estimated total figures for jobs in agro-processing industries (rural and urban plants combined) are:

At the same time, the total of people left unemployed in agriculture and agro-processing by the restructuring process, or in other words the shortfall of jobs, is 39,707, a very high proportion of the rural total. Characteristic features of the Estonian meat, dairy and grain industries include high fixed costs, obsolete technology and inaccurately calculated storage and distribution costs caused on the one hand by inadequate accounting for general inflation in the economy and on the other by low profit margins.

It is understood that closing excess and inefficient production capacity in agro-industry has been a necessary part of the economic restructuring process, and that economic growth eventually will create new jobs to replace those which have been lost. Nevertheless, while some industries have succeeded in improving their efficiency, most of the surviving segments of the agro-industrial sector are in deep crisis, unable to generate profits or find the investments necessary to become more competitive.

Compared to 1992, the production of full-cream milk products, fish products, soft drinks, crude spirits, beer, sawn timber, timber-based boards and fertilisers in Estonia had increased by 1995. In the same period, the production of meat products, butter, bakery products and pastries, flour, animal feed, cellulose and paper decreased, often drastically. Compared to 1990 levels, the production volume of foodstuffs in Estonia had decreased by 1995 as follows (in %):

Foodstuffs make up one third of all Estonian industrial output. According to figures from the Association of Estonian Foodstuff Producers, there are 440 firms operating in Estonia producing foodstuffs and drinks. The foodstuff industry provides employment for approximately 25,000 people. The Association of Estonian Forest Industry Enterprises represents enterprises with an approximate total turnover of two billion EEK. Some 13,000 people work in these enterprises alone.

The forest industry is of particular importance to the Estonian economy, for example in 1994 providing 7.3% of total industrial output. The export of timber and timber products accounted for 12.2% of the total value of exports in 1995 (in 1994 the figure was 10.2%). As a comparison, the corresponding figure from pre-war Estonia could also be quoted; in 1935–1936 it was 36%. In the section of this report dealing with the current situation of and the development prospects for the Estonian timber industry, forest industry enterprises are surveyed, including those involved in logging and/or producing cellulose, paper, timber-based boards, plywood, processed sawn timber, furniture, carpentry and buildings for assembly.

In order to analyse in this Chapter the situation and determine strategic possibilities in the industries processing milk, meat, grain, bakery, spirits, beer, malt, flax, potato, vegetable and garden products, as well as in the agricultural engineering, fertiliser and forest industries, information was requested in written form from 15 producers' associations and 67 enterprises.

B. Agro-Industry

1. Equipment Supplies and Services

During the period in which Estonia was part of the Soviet Union, a large and powerful industry supplying and servicing agriculture and processing agricultural products was created. Equipment and special servicing were provided for Estonian agriculture by Eesti Pollumajandustehnika (EPT - Estonian Agricultural Engineering) and Eesti kolhoosiehitus (KEK - Estonian Kolkhoz Building Bureau), which had subordinate institutions at municipal level. The Estonian Kolkhoz Building Bureau was indeed a cooperative organisation but its administration was under State control.

During the course of the reform, EPT created some 130 joint-stock companies on the basis of enterprises. In virtually all county EPTs an independent joint-stock company was formed on a departmental basis. These companies continued to perform the same operations, such as equipment servicing, plant maintenance etc. Initially these joint-stock companies continued to operate as tenants in the same rooms and buildings and with the same equipment. Today the majority - 110 joint-stock companies - have been privatised and only 20 still operate as tenants. Fields of operation have also changed over the years; there are producers of equipment and agricultural technology, suppliers for foreign firms, and so on. A small proportion, amounting to some 5%, of the agricultural equipment and technology produced in Estonia is exported. Similar changes in terms of restructuring and privatisation have occurred in KEK.

2. The Dairy Industry

There are currently 35 dairy enterprises operating in Estonia of which 2 are refrigerating plants with primary functions of storing produce and making ice-cream. By the end of 1995, all 11 large dairy enterprises and their departments had been privatised. Meat was also processed in two of them. There were 36 separate departments subordinate to the 11 large dairy enterprises. Several privatised dairy enterprises have since ceased operations and it is probable that more will be forced to do so in the near future.

In terms of the technological standard of their equipment, the enterprises currently in the best condition are Paide Piimakombinaat AS (Paide Dairy Combine Ltd), Mulgi Meier AS (Mulgi Dairy Ltd), Põlva Piim AS (Põlva Milk Ltd), Pärnu Piimatoodete Kombinaat AS (Pärnu Dairy Products Combine Ltd) and Saaremaa Liha-ja Piimatööstus (Saaremaa Meat and Dairy Plant). AS Tapila Laeva dairy has been formed in Tartu county and uses Finnish equipment.

Pärnu Piimakombinaat AS (Pärnu Dairy Combine Ltd), Keskühistu Tartu Piim (Tartu Milk Central Cooperative) and Saaremaa Meat and Dairy Plant are in financial difficulties. The main debts are to the Privatisation Agency, to producers and for power. AS Võru Juust (Võru Cheese Ltd), which employs 290 people, is also facing problems. Competition in storing milk, especially in winter, is particularly affecting this. The critical storage volume is 47–50 tons per day. Considering the closeness of the larger dairy enterprise Põlva Milk Ltd, a reduction in milk production together with the necessary storage could cause problems. There is currently a market for their cheese.

In our closest neighbouring countries - Denmark, Sweden and Finland - the production, processing and selling of milk occurs in a cooperative form. In Estonia the concept of cooperative enterprise has not yet gained enough support. As a result of privatisation, few milk processing units became cooperative property and those that did were not enterprises with contemporary technology, although such enterprises did exist in the republic. In order to achieve better results in the dairy industry, 10 dairy cooperatives formed Keskühistu Eesti Piim (the Estonian Milk Central Cooperative) on 24 October 1995. Seven of the cooperatives belonging to the central cooperative have their own processing industry. The objective of the central cooperative is the specialisation of its members to reduce production costs and, according to the market situation, change nomenclature operationally. The export of dairy products is organised cooperatively (1).

In 1996 the shareholders of the largest Estonian dairy producers, Mulgi Dairy Ltd, Põlva Milk Ltd, and Paide Dairy Combine Ltd, formed a merged business union with the name Ühendatud Meiereid (United Dairies). AS Topmilk has a majority holding in the concern. In November 1996 it took Pärnu Dairy Products Combine on a long-term lease. Saaremaa Meat and Dairy Plant also intends to join the concern so as to cooperate with the dairies in Viljandi, Paide, Põlva and Pärnu in exporting products and improving export conditions. The turnover of United Dairies in 1996 was 1.04 billion EEK. 1997 turnover is forecast to be 1.5 billion EEK and the consolidated profit 20–30 million EEK. The market share of the concern in Estonia is 40%.

Because of the deficit of raw materials and the large reserves of milk processing capacity there is very strong competition in the buying up of unpasteurised milk (see Appendix 1). At the same time a large volume of milk is sold by the producer directly to the consumer or at open markets. According to figures from the Estonian Statistical Office, 41% of all milk sold to dairy enterprises in 1995 was of the highest class.

The number of cows in the country has decreased by 109,500 or 36.9% since 1990. The decrease in the number of cows in agricultural enterprises was not compensated for by an increase in their numbers on farms and in households. In addition to this, the average amount of milk produced per cow has decreased by 624 kg when compared to 1990. Milk production has decreased in the same period by 501,100 tons or 41.5%.

The decrease in the buying-up of milk for industrial processing has been even greater:

The volume of milk produced in 9 months in 1996 was 22,580 tons less than in 9 months in 1995. However, the buying-up of milk increased by 7,089 tons in the same period. The constant increase in the nominal purchasing price of milk (1,266 EEK/ton in 1993; 2,109 EEK/ton in 1995) has most probably begun to have an effect, reversing some of the previous decline in real prices, as also has the fact that dairy producers have begun to make more regular payments for raw milk.

The production of milk in households has not particularly increased; it made up 30% of total milk production in 1995. Due to the relatively low production volume, the majority of dairy producers are not able to invest in milking and cooling plant equipment and this considerably reduces the quality of the milk. The cost of the transportation of one kilogram of milk is also very high because of the increase in all transport costs. Another problem is that depreciated equipment on farms and rotten low quality feed causes bacterial contamination. Statistical data on the number of cows and the production and buying-up of milk over the last five years are presented in Appendix 2

Equipment is also depreciated in many dairy enterprises and therefore many dairy products do not meet European Union requirements. Standards and standard documents for the structure of dairy enterprises which would bring them into accordance with EU requirements are lacking. The development of equipment and a system of laboratory control for milk and dairy product analysis in line with EU requirements, as well as the certification of dairy enterprises, has progressed slowly. Financial aid is necessary to speed up this process. Even at the time when a total of 1,183,000 tons of milk were bought yearly for industrial processing, the full potential of the existing dairy industry was not being exploited, as shown by the following figures on percent of capacity utilisation:

In connection-with the privatisation of the dairy industry, a number of smaller industrial enterprises which were closed in 1990 have once again begun to work. Dairy enterprises in Pärnu county did not cease operations after the new Pärnu Dairy Products Combine was set up. In fact new dairy enterprises have also been formed.

Because of the lack of unpasteurised milk and the competition between dairy producers, no agreements have so far been made between producers on specialisation. It now seems that an improvement in the situation is observable (Central Cooperative “Estonian Milk”, United Dairies).

A widening of the product range and an improvement in product quality have achieved certain success in the dairy industry. New products have been introduced, such as: butter and vegetable fat blends, drinking yoghurts, curd creams, the ice-cream range “Jäälill”, flavoured spreadable creams, long-life (UHT) milk and flavoured long-life milk, chocolate-coated curd creams, powder mixtures, yoghurts, and the packing of butter in aluminum foil including 10-gram packs.

The quality of Estonian cheese satisfies international trading requirements. The main problems are concerned with various taste and smell defects and those on the surface of the cheese (mould), as well as fluctuating quality. A large proportion of lines continuously producing butter are in relatively good condition. However, equipment for the production of cream and the packing of butter leaves much to be desired. Work must be carried out to extend the shelf-life of full-cream milk products.

The consumption of milk products in the domestic market has decreased considerably. In 1990 one person consumed an average of 487 kg of milk products but in 1995 the figure was 291 kg. Recommended consumption is 370 kg. From the point of view of healthy eating, low quantities of drinking milk, curds, ice-cream and yoghurt are consumed in Estonia.

Over half of all dairy products are exported (57.6% in 1995 and 53.9% in the first half of 1996). The export of dairy products made up 4.8% of the national export total in 1995 and 29.4% of the total export of agricultural products.

Expressed in value terms, the total export of dairy products in 1995 was divided as follows:

The main export markets for milk products in 1995 were:

There are no quality problems in the export of powdered skimmed milk and mixtures, and the whole range meets the “Extra Grade” quality requirements. The sales price fluctuates with world market prices.

Butter, cheese and sour cream are the main exports to Russia (67.4% of cheese, 51.9% of butter and 94.3% of sour cream). However, the Russian market is characterised by large price fluctuations, increased tariffs and instability (the restricting of the import of agricultural products and the establishment of import quotas, etc.).

The characteristics of the production and export of milk and dairy products are presented by the data in Appendix 3.

3. The Meat Industry

Output of the meat industry has contracted by nearly 80% since 1990. The privatisation of the 10 large enterprises in the meat industry reached its conclusion in 1995. Together with the restructuring of meat industry enterprises, a large number of small meat producers founded with private capital have also come into being. According to the State Veterinary Board, there are 169 small or grade HI enterprises, of which 10 are small slaughterhouses, 24 are enterprises with combined activities and 35 are enterprises producing meat products. In addition to these, there are 15 grade II enterprises, of which 5 are small slaughterhouses which are in operation periodically 2–3 times per year. Of the small abattoirs, 85% are situated on animal farms of agricultural enterprises where, in the main, only animals reared on those particular farms are slaughtered and processed.

Only Rakvere Lihatööstus (Rakvere Meat Plant) is close to European Union requirements on the standard of production hygiene and technology. Approximately 50% of the projected production capacity is utilised. In terms of capacity, this enterprise would be able to process all animals sold to the larger plants.

From a regional political point of view and taking the level of technology into consideration, rehabilitation of the Saarermaa Meat and Dairy Plant has been given priority. In order to bring the Saaremaa Meat and Dairy Plant up to European Union requirements, investments to the extent of 20 million EEK are needed for technological reorganisation.

The yearly critical minimum limit of the raw material used in the Saaremaa meat plant is 2,500 tons. It is no longer possible to get such large quantities of animals from Saaremaa. Some of the animals are currently brought from the mainland but intense competition will put an end to that possibility because of the necessary additional expenditure on more expensive transportation. The enterprise has been granted an 11 million EEK bank loan of which 1.7 million EEK of interest is paid yearly. Investment obligations for 1996 were 4.0 million EEK and for 1997 they are 5.0 million EEK. Other additional expenditures of some 1.5–2.0 million EEK on Saaremaa are for such things as diesel fuel, black oil, supplementary materials, ferry trips etc.

With the situation as it is, the continuation of work in this plant is economically questionable. Operations could continue for some time with the processing of additional cheaper imported meat. The Saaremaa Meat and Dairy Plant is at a critical point. The cessation of meat and milk processing would create further difficulties for agriculture on the island. A total of 460 people work in the Saaremaa Meat and Dairy Plant, of whom 185 work in the meat plant. Following the cessation of work, their situation would become critical.

The Saaremaa Meat and Dairy Cooperative has requested the following from the Estonian government:

1. regional aid;

2. aid through a reduction in the burden of taxation;

3. a favourable loan to reduce interest charges on the privatisation loan and to accelerate the circulation of current assets;

4. favourable loans to agricultural producers.

The Tartu and Tallinn meat plants no longer slaughter animals themselves due to low efficiency. Meat (largely imported) is processed into meat products. The Haapsalu, Paide and Võhma meat plants have ceased operations. The Valga Meat Plant continues to work satisfactorily although it does not meet EU hygiene requirements. 300 workers are employed and 30 tons of meat is processed a day.

The Pärnu Meat Plant has a labour force of 150. The relative importance of slaughtering has reduced many times over but imported meat is now also processed. The equipment in the plant is old. The equipment in Võru Meat Plant has also become obsolete. Previously, sick animals were processed. The plant is currently finding it difficult to remain competitive; 92 people are employed there. Investments worth 50 million EEK are needed in this plant to be able to slaughter animals and process meat in accordance with EU hygiene regulations. The largest of the new smaller meat plants are AS Adavere and AS Karree (in Viimsi); 95–100 people work in each of these. The equipment for meat processing is sufficiently up to date.

The total amount of slaughtered cattle in 1987–1989 was 189,000–190,000 tons, of which 175,000–177,000 tons were sold to plants and 13,000–14,000 tons or 7–7.4% was either consumed at home or sold at market. As can be seen from Appendix 4, a large proportion of meat is either consumed at home or sold at market. This total also includes the production of small enterprises which are not in the enterprise or business register. In former State or collective farms (now cooperatives or privatised farms) 110 slaughter points are working .

There has been a sharp reduction in production of domestic livestock for processing. Several plants where the slaughter of animals no longer takes place use imported raw materials of dubious quality for the preparation of meat products which are then subsequently sold in shops as Estonian products. The proportions of imported meat products in shops in May 1996 were as follows: poultry 38.3%, tinned meat 17.5%, smoked sausage 2.8%, cooking sausage 1.2% and smoked meat 1.0%.

Meat cooperatives were formed in 1993 with the objective of giving the producer control over the local meat industry. In order to coordinate their activities, upon privatisation the cooperatives formed Eesti Kesklihaühistu (the Estonian Central Meat Cooperative). Pärnu, Paide and Valga County meat cooperatives were successfully privatised and their purchase contracts were signed in April–May 1994. Subsequently a purchase contract was also signed by the Saaremaa cooperative, which purchased the Saaremaa Meat and Dairy Plant. Hence, of the meat cooperatives, Pärnu, Valga and Saaremaa cooperatives are operating and they have formed joint-stock companies on the basis of privatised enterprises.

The sales volume of the Valga Meat Plant has continually increased; in 1993 it was 54 million EEK and by 1995 it was 110 million EEK. Raw material is purchased from all Estonian counties and the produce is prepared only from domestic raw materials. Valga County Meat Cooperative has directed all profits gained from processing towards modernising production (2).

Although the majority of Estonian processing industry firms are languishing in growth difficulties, some of them have taken steps towards uniting under a common administration. In this way, for example, Estonian food industry enterprises are joined together by ETFC Grupp (ETFC Group), to which belong Rakvere Lihakombinaat (Rakvere Meat Combine), Tallinna Piimatööstus (Tallinn Dairy Plant), Kalev Epeks and Tartu Külmhoone (Tartu Refrigerating Plant). The 1996 turnover of the concern was expected to exceed one billion EEK.

The five leading Estonian meat processing enterprises have decided to implement a common export organisation by March 1997. The meat plants in Rakvere, Saaremaa, Adavere and Valga plus AS Karree are participating in the project. The main export markets will be Poland, Ukraine, the other Baltic countries and the St Petersburg region of Russia. According to the project, each enterprise must specialise in a specific product. While strengthening Estonia's meat export capacity is a positive development, a concern has arisen that coordination among these five major firms could give them the opportunity to dictate the purchasing price of agricultural products to the producers of raw materials, so making these producers dependent entirely on the discretion of the processing industry: Another possibility to be opened to them will be dictating retail prices because industrialists and marketing organisations normally cooperate and work together.

4. The Grain Industry

The privatisation of grain industry enterprises came to an end in 1996, when RAS Viljandi Viljasalv (Viljandi Grain Bin Plc) was the last to be privatised. During the process of reforms, the feed mills of the State or collective farms were also privatised. Large mills and concentrated feed plants prepare flour products for the foodstuff industry and retail sales, produce animal feed and are purchasers, processors and storers of grain.

Today the large mills and concentrated feed plants no longer find themselves with a monopoly. There are over 50 grain mills in rural areas, of which a large number have contemporary equipment bought from Denmark. These are able to supply commerce and bakeries with quality grain products. AS Sangaste Linnas (Sangaste Malt Ltd) is the first German-Finnish grain processing enterprise. The newest high-technology equipment is used in the mill, which produces flakes from grain. New enterprises producing animal feed have also been set up.

Investigations carried out as part of the PHARE programme in 1993 came to the conclusion that the capacity for grain processing was greater than the domestic requirement and it was recommended that the majority of mills etc. where grain processing was carried out should be closed down by 1998 on equipment-technological grounds (3). It was however recommended that the following be retained:

• rye mills to a total yearly production of 60,000 tons instead of 100,000 tons;

• wheat mills to a total yearly production of 70,000 tons instead of 106,000 tons;

• concentrated feed plants to a total yearly production of 450,000 tons instead of 1 million tons.

All the larger grain processing enterprises are currently operating at a level below their full capacity.

There is not presently any correct reporting of production volumes or product nomenclature in Estonia. The bases for the data presented here are surveys and expert assessments.

It should be stressed that the production volume of large mills in 1995 was equivalent to only 31% of the 1991 figure. The production volume of graded flour and groats mills was only 14% and that of concentrated feed plants 24%. Production capacity utilised in mills was 15.6% and in feed plants 14.6% (Appendix 5).

The equipment and technology in the flour industry enables the production of quality products. Compared with EU countries, the products of the groats industry are very limited (only oat flakes and 3–4 sorts of barley groats and peeled barley). The concentrated feed industry has become technically and technologically outdated and does not meet European standards, with a few exceptions. For example, the Tartu Grain Bin Cooperative concentrated feed department in Elva does meet European technological requirements.

At the beginning of the current year, the large Swedish cooperative Odal used its Estonian subsidiary Farm Plant Eesti AS to buy the Taebla Concentrated Feed Plant. AS PROVIMI-Valga is a cooperative enterprise producing premixes. It has an annual capacity of 5,000 tons of feed supplements and it does meet European requirements on standards. Mineral and vitamin feed is produced by AS AICO.

The concentrated feed industry is connected to the development of local animal husbandry. A result of the restructuring of agriculture, there has been a considerable reduction in the numbers of animals and in the production of animal husbandry products. The structure of feed rations has changed for the benefit of home-produced feed. The cost of mixed concentrated feed has risen, meaning that it is no longer financially feasible for individual farmers to purchase it (4). A survey carried out by the Concentrated Feed Industry Research Centre shows that 75% of animal rearers use their own home-produced grain and mixed feed (5). The kind of agricultural production towards which Estonia has developed will clearly also require considerable alterations in the concentrated feed industry. It may become economically more feasible to purchase supplementary feed of guaranteed quality and mix it with home-produced grain flour.

The 17 directives of the Valge Raamat (White Book, pp. 145–148) deal with the conditions for using and trading feed. The existence of the relevant administrative structures and legislation is a prerequisite for the implementation and fulfilment of the requirements stated therein. It is necessary that the Feed Law currently being prepared be passed and that a State Feed Register be created under the administration of the Ministry of Agriculture (7). Standard acts for the accreditation of the quality control laboratories of producer enterprises are under preparation.

According to data from the Concentrated Feed Industry Research Centre which shows the content of protein, calcium, crude fibre and toxicity in mixed concentrated feed, it can be seen that a significant proportion of mixed concentrated feed does not meet consumption standards (see Appendix 8). Two-thirds of the types of mixed concentrated feed prepared for cows have a level of protein corresponding to consumption standards. Starter feed for pigs meets the same standards in ¾ of all cases. However, zootechnic requirements for protein are not met in over half of the cases of fattening feed for pigs. The protein content in mixed concentrated feed for laying hens has been sufficient for the most part. Protein is the most costly ingredient in feed and it can therefore be concluded that expenditure was made for the right reasons.

Upon analysis of the data, it can be seen that variations appear here too. Excessive crude fibre content in the mixed concentrated feed for chickens and pigs most probably led to additional feed expenses which then were reflected in lower levels of production profitability.

Many protein feeds made from animals contain an abundance of raw ash, calcium and phosphorus. Deviations from consumption standards must be eradicated. One possibility for this would be to exchange some of the animal protein sources (raw materials) for vegetal sources.

The vitality and practicality of cooperation can be seen from the experiences of the grain cooperatives currently operating in Estonia in organising the sale of grain and also in the managing of privatised enterprises (Ühistu Tartu Viljasalv (Tartu Grain Bin Cooperative), Saarte Teraviljaühistu (the Islands' Grain Cooperative), Jõhvi Teraviljaühistu (Jõhvi Grain Cooperative), Valgamaa Teraviljaühistu (Valga County Grain Cooperative), and Läänemaa Teraviljaühistu (Lääne County Grain Cooperative). See reference (8).

There are currently very large volumes of imported wheat flour and rye flour circulating in the domestic market. The result of this is that mills could be completely shut down in the near future and that there will no longer be anything to do with domestically produced grain. From the figures of the Estonian Statistical Office it can be concluded that the production of bread in Estonia in 1995 fell by 38% when compared to 1991 and the production of flour fell by 70%. In 1993 a total of 86,000 tons of flour were produced in Estonia, in 1994 the figure was 64,100 tons and in 1995 a mere 49,500 tons. Over 35% of rye flour is produced by cooperatives.

The figures quoted show that the reduction in flour and bakery products has not been proportional. Compared to our time under occupation, our production of bread has significantly decreased because we no longer have to feed the sizeable numbers of military personnel that were present previously. At the same time, another probable reason for the decrease in consumption is low purchasing power.

The total of wheat and wheat products imported into Estonia in 1995 and re-calculated into grain was 78,000 tons while the figure for rye and rye products was 21,600 tons. Taking the demand for rye and wheat in the domestic market into account, then the volume of imported wheat and wheat products is exceeding the magnitude we require while the import of rye and rye products makes up 35–40% (12).

5. The Production of Malt, Beer and Spirits

Some 30 sorts of beer are produced in Estonia. There are 7 beer producers in the country and they produced a total of 45 million litres of beer in 1995. The Estonian market is divided between them as follows:

It should be noted that the market share of imported beers in Estonia has increased in recent times and is currently around 12% (the increase compared to the 1994 level is 33%).

Total beer consumption rose by 7% in 1995 and consumption per head increased to 36 litres. A total of 53 million litres of Estonian and foreign beer was consumed in Estonia. The consumption of beer produced in Estonia increased by 5.4%.

In 1995 consumers preferred Estonian beer to imported beer in nine cases out of every ten. Considering the facts that the average Danish beer drinker consumes 127 litres of beer a year, the average German 140 litres and the average British beer drinker 102 litres, it can be seen that there is development potential in the Estonian beer market. Figures from the 1980s show that Estonians are "beer-friendly"; at that time the average Estonian consumed up to 60 litres of beer a year.

What are the future prospects for the Estonian beer industry? The reorganisations within the European beer industry have led to a considerable reduction in the number of breweries and beer firms. Production is now centred in large companies. These changes have primarily been caused by increasing competition which, in turn, has brought about the need for production and the distribution system to be rationalised and the market of each firm secured.

Only Germany has maintained the traditional structure of beer production. There are over 1,100 small producers who produce beer only for their local area. The State awards considerable taxation inducements to such small producers. However, it appears that the German model for beer is not realistic in Estonia. In the future there will therefore only be room for 2–3 local beer producers in the Estonian beer market as mass production, together with its distribution networks and advertising campaigns, will have a major economic effect on the beer industry.

Much has been done in recent years in the Estonian beer industry to increase competitiveness, to satisfy the consumer and to improve the "beer culture". The quality of some Estonian beers is very close to world requirements and they have found foreign markets. For example, Saku beer is already available in Finland and to an extent in the USA.

Good tasty beer comes only from barley. If the barleycorns correspond to the quality requirements then it can be hoped that good quality malt, a prerequisite for the preparation of good beer, will also be obtained from the grains. A good type of barley for beer does exist in Estonia, Elo, which has also gained approval in Finland.

Malting takes place in three locations in Estonia - in Rakvere Linnasetehas (Rakvere Malt Plant), Saku Linnas (Saku Malt) and Tartu Õlletehas (Tartu Brewery). The latter malts only for its own use. The yearly production capacity of light beer malt is 15,500 tons. This requires 500 tons of quality beer barley which is about 6–7% of the total 1996 barley harvest. A total of 13,506 tons of malt were produced in the three Estonian malt plants in 1995. 8,853 tons were sold domestically and 4,650 tons (35%) were exported. Imports totalled 4,051 tons or 31.8% of consumption.

Unfortunately, the situation changed dramatically in 1996 because of the lack of beer barley. For example Saku Malt Ltd was not able to buy a single ton of beer barley from within Estonia. They have had problems with the quality of the raw materials obtained from local producers and with inconsistency in fulfillment of the terms of contracts. They are negotiating for the purchase of 1,800 tons of beer barley for next year but that would only comprise 30% of the plant's requirements.

In connection with the above, the use of imported malt in Estonia has increased 3,954 tons, or 42.8% of consumption in the first nine months of 1996, especially in Saku Brewery, and the export of malt products has decreased. The beer producers currently utilise some 60% of the malt production capacity. The remaining malt should be exported. Estonian malt could be sold to Latvia and Lithuania where there is a 30% shortfall of malt. They presently import very high quality malt from Denmark and France.

A common pricing system has been implemented by the Estonian malt producers. The main price is set at 2.2 EEK/kg and rises as high as 2.5 EEK/kg depending on the quality. The producers consider this beer barley price to be fair; it is equivalent to the one set in Finland.

There are two producers of spirits in Estonia (Rakvere and Moe spirits plants), whose annual production capacities are approximately 5 million litres of spirits each. Around half of this is consumed in Estonia and the remainder is exported. Grain is used in the production of spirits but in 1996 only 40% of the contracted volume was obtained from within Estonia, even with a purchasing price of 1,800–1,950 EEK/ton.

6. Potato Processing

There are 9 enterprises dealing with potato processing in Estonia:

1. AS Viru Siirup (Viru Syrup Ltd) - production of syrup in the Kadrina plant, drying and packing of starch in the Rakvere plant. Around 30 people work for the enterprise.

2. AS Tarvastu Tärklisetehas (Tarvastu Starch Plant Ltd) - production of starch; around 20 employees.

3. AS Nurga - production, of starch in Pajusi, Jõgeva county.

4. Painküla starch plant which consists of two parts:

   • Production of starch is at a standstill awaiting privatisation. Approximately 8 people at work administratively. Equipment is becoming technically obsolete.

   • PepsiCo Eesti, which purchased the part of the Painküla starch plant for preparing chips and crisps from the Estonian Privatisation Agency. The existing part of the plant had been reconstructed and equipped with modern technology.

5. AS Vents - A potato nut production line is being installed and will commence operations shortly. Five people will be employed.

6. Ääsmäe potato processing - main products are potato waffles and potato crisps. Approximately 20 people are employed.

7. AS Pöialpoiss (Tom Thumb Ltd) - a potato puree line is being set up with 3 workers.

   Spirits plants:

8. Rakvere spirits plant - approx. 50 employees.

9. Moe spirits plant - approx. 50 employees.

The raw material for the production of starch in Estonia is the potato. Some of the starch produced is used as a sweetener in the production of starch syrup. The domestic Estonian starch industry was formed to supply the local foodstuff industry with starch and syrup and so, in connection with the significant reduction in demand from the foodstuff industry, mainly bakeries, which began in 1992, the production of starch and syrup has also fallen.

Although the quality and price of Estonian potato starch and syrup are equivalent to world market levels, producers have been unable to make any headway into foreign markets by exporting starch. Following the reduction in domestic demand, the volume of starch produced fell by 2.3 times (from 1,600 tons to 700 tons) and the volume of syrup by 16.3 times (from 4,900 tons to 300 tons). See Appendix 6.

The existing production capacity would permit the production of 5,000 tons of starch syrup and 1,900 tons of dry potato starch per year. Therefore, in 1995 only 6% of the syrup production capacity and 37% of that of starch were utilised. In total, 5,200 tons of potatoes were used for starch production and 2,400 tons for syrup production in 1995: in aggregate 7,600 tons, or 1% of the total potato harvest.

The need of the starch industry for potatoes is covered by “industrial potatoes” grown on farms in the vicinity of the starch plants. As the plants are located in different areas, the area supplied does not exceed a radius of 100 km. The potatoes used as industrial potatoes are those types which are cultivated in Estonia.

For years, one problem was the relatively low starch content (13–15%) of these potatoes. So as to further the cultivation of starch-rich types of potato, a potato purchasing system was implemented on the part of starch producers in 1990. The system means that payment to suppliers is for the starch content and not for the volume of potatoes. The implementation of this system has been successful; the average starch content of potatoes supplied in 1995 was 16%. Despite this improvement, problems do still remain in the Estonian potato processing industry, such as the shortage of potato types with a high starch content, the unstable quality of seed potatoes and the low potato yield.

Between the commencement of monetary reform (1992) and 1995, the wholesale price of starch had risen by 2.5 times and that of syrup by 1.9 times (see Appendix 7), much less than the increase of the overall price index for the economy.

The development prospects for the potato processing industry are somewhat vague. The main problems are the low price of imported starch, the abundance of potato products in the domestic market and therefore competition with imported products. Illicit alcohol production also poses a sserious problem for legitimate enterprises.

7. Flax Processing

There has been a long tradition of cultivating and processing staple flax in Estonia. Between 1928 and 1938 an average of 8,000 tons of high quality flax fibre was produced in Estonia every year. In the period following the Second World War flax fibre production decreased considerably, a trend which has continued in recent years. In 1990 the area used for flax cultivation was 1,670 ha and the total yield of leached stems was 3,082 tons. By 1995 those figures had fallen to 185 ha (a reduction of 9 times) and 161 tons (19 times) respectively.

The main reasons for the reductions in the area planted with staple flax and in the total yield are the lack of economic incentives, problems with marketing and selling the produce and the suspension of operations at the main consumer of flax fibre cultivated in Estonia, Pärnu Flax Mill. Until the reforms, there were four primary flax processing enterprises in Estonia: the flax plants in Pärnu, Põlva, Võru and Abja. Today, only the Võru plant is still at work, producing staple flax as well as ropes and some speciality products.

A development plan for the years 1994–2000 was compiled in 1994 in order to further flax cultivation, its primary processing and the export of flax fibre, as well as to solve national policy problems concerned with these processes. Implementation of the plan commenced in 1994.

The main tasks of the development plan are:

1. To realise applied research into the elaboration of environmentally-friendly and effective development technologies for flax cultivation and technologies for flax processing as well as their implementation in production.

2. To develop a flax seed cultivation system and bring it into line with EU and OECD requirements.

3. To elaborate standard acts for the cultivation and processing of flax, taking EU legislative acts as a starting point.

4. To advise flax growers and supply producers with informational material.

In 1995, resources from the State budget totalling 1 million EEK were used to address important national problems connected with the cultivation and processing of flax, such as the implementation of applied agro-technology research and the steps necessary for this, including the carrying out of field tests, the development of a system for seed cultivation, the elaboration of standard acts etc.

There will not be any further State support for the cultivation and processing of Estonian flax. Neither will support be applied to the selling of staple flax, whether at home or abroad. There are no barriers to importing staple flax; it can be imported by declaring the price at customs. Some limitations on the export of staple flax exist, however, in the form of customs tariffs imposed by other countries.

With the changes in the flax industry, Estonia has lost at least US$32–36 million from the export of flax textiles. This would have helped to improve the Estonian balance of trade deficit considerably, not to mention the development of flax cultivation and the employment situation in South Estonia.

Nevertheless, expert assessments forecast that the area planted with flax will increase in the coming years as a new foreign market for staple flax has been located. The development plan for flax cultivation, its primary processing and the export of flax fibre forecasts that in 1997 the area planted with flax will increase to 1,500 ha and the yield of dew-retted leached flax stems to 6,750 tons. It is anticipated that by the year 2000 the area planted with flax will be 3,000 ha, the total yield of dew-retted leached flax stems will be 12,500 tons and that a modem line for the primary processing of flax with a productiveness of 30,000 tons of dew-retted leached flax stems per year will either have been or be being installed.

In 1992 and 1993 Pärnu Linakombinaat (Pärnu Flax Combine) refused to purchase flax fibre produced in the raw flax mills in Võru, Põlva and Abja because it was.more expensive than that produced in Belarus and Ukraine with State support. In this way, the source of raw materials built up over the decades was destroyed. Pärnu Flax Combine has been privatised and is now owned by “Herdmans”, an Irish firm which is not interested in Estonian flax.

In order to guide Estonian flax cultivation out of its current crisis situation and to restore the primary processing and exporting of flax, the southern Estonian flax growers formed Keskühistu Eesti Lina (Central Cooperative "Estonian Flax") on 14 April 1993. The flax growers and primary processors intend to use the Võru and Põlva flax plants to introduce their produce onto the world market. They plan to commence the preparation of so-called non-textile products (flax oil, flax batting, etc.). The objectives of the central cooperative are to expand the area planted with flax to 5,000 ha in the coming years and so to ensure that the V5ru raw flax mill will have the necessary supplies of raw materials.

Applied research into flax cultivation and processing is carried out by the Estonian Land Cultivation Institute, the Estonian Agricultural University and Mooste Experimental Station.

8. The Processing and Selling of Oil-Bearing Crops

It is intended that environmentally-friendly and economically effective agro-technologies as well as processing technologies for the preparation of the seeds of oil-bearing crops for human food, animal feed and industrial products be put into operation by Kesk-Eesti Õlikultuuride ühistu (the Central Estonian Oil-Bearing Crop Cooperative), Eesti Õlitaimeühistu (the Estonian Oil Plant Cooperative) and Eesti Seemneviljaühistud (the Estonian Seed Grain Cooperatives) with State support.

9. The Processing of Fruit and Vegetables

Taking the current economic situation into account, it is necessary that agricultural producers should find directions of development which would enable our production potential to be utilised. That potential includes a relatively more favourable climate and cheaper energy and workforce as compared with the Nordic countries. The production of fruit and vegetables creates good prospects in every respect for the development of smallholdings in those areas which do not favour mass production because of their natural peculiarities (Southeastern and Southern Estonia and the areas alongside Lake Peipus).

Fruit and vegetables make up as much as 40% of the human diet. Fruit, berries, vegetables and the produce of apiculture are, from the point of view of healthy eating, extremely valuable foodstuffs containing an abundance of necessary minerals and vitamins. In 1994, 14 kg of fruit and berries and 52 kg of vegetables were produced per head of population in Estonia (23% and 47% of the optimal consumption levels respectively). Research shows that 20% of the total fruit and vegetable harvest is unreaped due to outdated cultivation equipment, leading to an average loss of potential income of 20 million EEK every year.

One of the branches of horticulture with the best prospects is berry growing. Great attention should be paid to growing strawberries and raspberries, as well as to cultivating forest or wild berries (bilberries, cowberries, cranberries, blackberries).

In the next four to five years, a total of 900–1,000 ha of strawberry patches with a production capacity of 6,000–7,000 tons of berries per year should be established, along with 400–500 ha of raspberries with a capacity of 2,000–2,500 tons per year. In the longer term, the total area of strawberries could exceed 2,000 ha with a production capacity of 12,000–14,000 tons per year. For raspberries the relevant figures are 900–1,000 ha and 4,500–5,000 tons. As much as 4,000–4,500 tons of berries could be purchased by the existing foodstuff industry (the majority of which would then be exported to other countries), 1,000–1,500,tons could be exported as fresh berries, and 1,000–2,000 tons would be consumed in Estonia.

Berry growing is suitable both as the main activity of a smallholding and also as a sideline for a large-scale producer. The average size of a berry growing farm should be around 10–12 ha. Approximately 700–800 farms could apply themselves normally to berry growing and jobs would be provided for some 15,000–17,000 seasonal workers in the summer.

Exhausted milled peat fields would be suitable for the cultivation of cranberries, cowberries and blackberries. There are around 3,000 ha of such land in Estonia at the moment and another 19,000 ha still in use for peat production. One possibility for a new berry culture could be the arctic bramble (Rubus arctius), the cultivation of which is most widespread in Finland and which is valued as a raw material in the liqueur industry (the price of 1 kg is 60–80 FIM).

A survey carried out in February 1996 by berry growers showed that the largest berry consumers in Estonia are AS Felix in Põltsamaa, AS Saarek, AS Marjakasvatus (Berry Growing Ltd), AS Salvest in Tartu, AS Külmari in Põlva, Valio Eesti in Laeva, Tallinna Piimatööstuse AS (Tallinn Dairy Plant Ltd) and the "Karme" wine factory in Karksi Nuia. The above-mentioned firms are involved in freezing berries, preparing jams, candied fruit jellies and wines and producing dairy products (berry yoghurts etc.).

In addition to the domestic foodstuff industry, several foreign foodstuff industry concerns have also begun to show a real interest in the development of Estonian berry growing (Saarioinen OY from Finland and Felix from Sweden). In 1995, Saarioinen OY began to make concrete contracts for strawberry growing with Estonian producers. It is quite possible that the area of contracted strawberry and raspberry patches will be increased to 300 ha. Estonian, Finnish and Swedish trading houses, interested in the export of fresh berries to the Nordic countries, have come into being.

The following factors have hitherto slowed the development of berry growing in Estonia:

• the lack of a suitable foodstuff industry until 1994;
• the scarcity of long-term low-percentage loans for establishing berry gardens;
• the scarcity of suitable planting material or its high cost;
• the fact that agricultural producers were poorly informed about prospective development directions in Estonian horticulture, and the lack of new cultivation instructions in Estonian.

The area, both open ground and that under cover, planted with vegetables has fallen in recent years. The reduction in the area of greenhouses has been caused by. increasing energy costs. Because of this, the total production of greenhouse vegetables has fallen by 73% compared to 1993.

The main open ground vegetables are cabbages, carrots, common red beet and swede, whereas in greenhouses it is mainly cucumbers and tomatoes which are grown. The natural prerequisites for vegetable growing (suitable tilth) are better in Estonia than in Finland. The total production of vegetables is approximately 78,000 tons per year. With investments in modern production equipment, the total yield of vegetables could increase by 15–30%.

Alongside traditional agriculture, the growing and processing of herbs (both for medicine and for seasoning) is becoming ever more important as a source of livelihood or additional income. Over 80 types of herbaceous plants which it is possible to grow in Estonian conditions and which are both possible and necessary to cultivate in order to maintain natural resources are mentioned in the supplementary to the Medicine Law which has now come into effect.

The project “Estonian herbs” is being started and it envisages:

• That data about the growing of and primary processing equipment for herbs be collected and made available, thus enabling an increase in the relative importance of quality domestic produce in the market.

• The solution of problems connected with the primary processing of herbs on production farms and in other agricultural enterprises.

• That an overview of the Estonian herb market be made, so informing growers and processors about imports, exports, sales volumes and prospects.

• That an increase in the importance of herb growing as an alternative source of livelihood should be encouraged. This would, in its turn, improve employment in the countryside (for example, hand-packing 1,000 kg of medicinal herbs would provide a full-time job for one person for 70–80 working days and would also further local development in terms of an inflow of money to the countryside).

• The encouragement of the use of locally-grown herbs, thereby increasing their share of the domestic market and enabling an improvement in the balance of trade. For example, increasing domestic medicinal herb production by 1,000 kg would mean a 100,000 EEK drop in imports.

There are presently no exact data as to the size of the market but it could be estimated to be 20,000–40,000 kg of dry medicinal drugs. Since domestic produce is about three times cheaper than import, it can be anticipated that demand for domestic medicinal herbs will increase. Their share of the market in the year 2000 could be some 40,000–50,000 kg of medicinal drugs and teas. At current prices that would mean 8–12 million EEK. To achieve this volume, it would be necessary to grow medicinal herbs on at least 15–20 ha. Approximately 50% would come from natural places of growth and seeds (flax, caraway etc.) would constitute some 10,000 kg and plant roots another 10,000 kg.

The seasoning market is almost entirely occupied by importers, with the exception of freshly consumed green herbs.

By expanding the growth of both types of herbs we would create additional jobs (not just in the actual herb growing work itself but also in packaging, the preparation of packaging, the selling of the product etc.). There would also be indirect effects, such as the maintenance of herb growing traditions, the provision of practical educational advice, the compilation of fundamental material on local herb cultivation, an increase in the popularity of herbs both amongst local consumers and foreign tourists etc.

Floriculture was the first branch of horticulture to begin to develop on the principles of a market economy. The objective is to continue the cultivation of greenhouse cultures, above all the cultivation of flowering potted plants and summer flowers suitable for growing outdoors, decorative plants and ornamental trees and shrubs.

Over 70% of summer flowers are exported, along with potted plants and outdoor plants.

Potted plants grown in Estonia have several advantages over those bought in from abroad:

• Low prices because there are no international transport costs, which make up 50–60% of the total cost of plants and flowers.

• Better quality because they are fresher and will stay fresh longer. The quality of many plants and flowers suffers during long periods of transportation.

Parks, open spaces and farm gardens have to be kept in good order and consequently the demand for young ornamental trees and shrubs has increased in recent years. Growing a proper young (bedding-out) plant takes several years and therefore the volume being offered by nursery gardens is currently shrinking. The shortfall could be offset by importing young plants from more southerly countries but this entail a considerable risk because it is not at all certain that they would survive an Estonian winter.

Apiculture is one of the oldest fields of activity in Estonia and the interest of the Estonian people in it has been maintained to the present day. There are around 3,500 beekeepers and 30,000–35,000 hives in Estonia at the present time. The average harvest of honey per hive in 1994 was 15–20 kg. Those were good harvests for Estonian circumstances, thanks to the weather.

For apiculture as a whole, there are several problems which require resolving, above all the spread of disease, eugenics, selling of the produce, pollination etc. The breeding apiary currently being run by RAS Eesti Seeme (Estonian Seed Plc), for the breeding of Harku-Järve queens and the experimental eugenics apiary, probably should be State-run.

10. The Fisheries Industry

The fisheries industry is one of the most important branches of the Estonian foodstuff industry. Around 120 fish processing enterprises had been registered by 1995. In 1990 a total of 82,000 tons of fish were processed in Estonia. In 1993 the figure was only 22,000 tons. The production volume of the fish processing industry began to increase again in 1994 and by 1995 it had already reached 33,924 tons. Approximately 8,000 people work in the industry. The processing of fish and production of fish products made a gross profit of at least 100 million EEK in 1995 and a net profit of 25 million EEK. Some 60–65% of all 1995 sales were exports.

Eesti Kalaliit (the Estonian Fishing Union) is a new organisation uniting fish processing enterprises, the main objective of which is to aid the development of the fish industry. As of 01/01/1996, 16 larger fish processing enterprises had joined the union.

A development plan for sustainable fisheries is being worked out, as is an Estonian fishing law. From the point of view of rural life, rural management and also agriculture, the development of coastal and inland fisheries, fish breeding and local enterprises processing fish products are especially important. These particular branches of the fisheries industry could be used as a sideline alongside agricultural production.

A detailed analysis of questions connected with fisheries is found in Chapter 9 of this Strategy.

C. The Forest Industry

1. Introduction

Prior to reindependence, the structure of the Estonian forest industry conformed to what was the market of the Soviet Union. In the middle of the 1970s, the export of sawn timber from the Baltic republics was put to an end. Estonia specialised in the production of wholly wooden furniture for the Soviet market. The products all were made and shipped in accordance with the requirements of a centrally planned economy.

Following Estonia's declaration of reindependence in 1991, the number of sawmills increased rapidly. Privatisation was commenced and new firms were formed. Forest combines were divided into smaller parts and separate firms were created on the basis of their production workshops and departments. There were already 600 sawmills in Estonia in 1994. Small volumes of doors, windows and wholly wooden furniture also began to be produced at the sawmills.

By the beginning of 1996, there were a total of 2,589 enterprises in Estonia which had declared their primary or secondary activity to be the felling and sale of wood and 3,164 enterprises which had declared their primary or secondary activity to be the production of sawn timber. In 1995 alone, 434 new enterprises involved in the felling and sale of wood and 358 involved in the production of sawn timber were registered:

At the start of 1996, Eesti Metsaliit (the Estonian Forestry Association) consisted of 31 enterprises with a total of 4,000 employees and a total net sales turnover in 1995 of approximately 700 million EEK. In addition, 27 enterprises with a total workforce of 8,000 people and a net sales turnover in 1995 of one billion 210 million EEK are members of Eesti Puutööliit (the Estonian Carpenters' Association).

The members of Eesti Paberiliit (the Estonian Paper Association) are four paper producing enterprises with a total of around 1,000 employees and a net sales turnover in 1995 of 80 million EEK. In connection with the putting into operation of new machinery in the Kohila plant, the forecast turnover for 1996 was 250 million EEK. As there are large amounts of pulpwood available in our wood market, it is logical that the director of the Kohila Paper Factory, Riho Pihlapuu, has begun consultations with the Finnish firm “PH-Consulting” to find out the possibilities of building a cellulose factory with an annual production of 200,000 tons in Paldiski. Estimates for the cost of its construction vary between US$300 and 500 million.

2. Logging and Transport

The standing forest reserve is 287 million m³ with/an annual increase of 9.2 million m³ or slightly more. The predominant kinds of forest are spruce, birch, pine, grey alder and aspen. According to the survey of Metsakorralduskeskus (the Centre for Forest Management) carried out in January 1996 (Appendices 11, 12), the total volume of felling in all forests could be 7.8 million m³ per year, of which 6.0 million m³ per year is industrial round timber. The contribution of the State forests would be 3.0 million m³ per year of industrial round timber (1.7 million m³ per year of logs).

The felling and sawing of industrial round timber in both State and private forests is currently reaching a level of 3.4 million m³ per year, mainly due to an increase in felling volume in State forests. Together with the supply of industrial round timber from private forests, the total could in the course of time reach 3.8 million m³per year. In the near future, the supply of logs will increase to 1.9 million m³ per year and then gradually reach a level of 2.1 million m³ per year. However, if private forest owners increase their felling volumes to the absolute maximum possible, then the log yield could reach 2.5 million m³ per year in the next 5–10 years.

Since 1991, the government has been implementing a programme of land restitution, enabling former private forest owners or their descendants to recover property which was in their possession. The proportion of private forests could easily be 40–50%. One sixth of the land to be returned has so far been handed over to its private owners.

A survey of private forest owners (in October 1995) showed that round timber made up 89% of timber sold and sawn material or that sold as a finished product 2.8%. It is important to note that pulpwood, not logs, comprises a large part (71%) of the total of round timber sold.

When selling felled and sawn timber, the owners more often than not (54% of cases) prefer to sell timber as round timber as that is the easiest with current conditions. Given a free choice, almost half (49%) of private forest owners would sell their timber sawn while just over a quarter (26%) would prefer to sell it as a finished product (9).

Data about the actual use of timber in Estonia are not at all precise. Existing data show that the local timber industry consumed 620,000–660,000 m³ of round timber in 1994 and that secondary processing enterprises consumed another 100,000–300,000 m³.

Due to the intense price competition at auctions, enterprises which process less than 5,000 m³ per year are unable to compete for timber with sawmills and timber brokers backed by foreign capital. The average price of logs at their place of processing was 500 EEK/m³ in 1995 but by the end of the year the price was approaching 600 EEK/m³. According to data from the directors of Estonian sawmills, the appearance of foreign capital has raised the price of standing forest by at least 10%.

Being as around half of the felled timber is exported, export prices are tending to dictate the price of local round timber. The highest price level was reached in 1995 during a period of particularly large foreign demand.

The Estonian timber market is now under the control of subsidiaries of Finnish and Swedish concerns. The eight most important players in the Estonian market are AS Lumiforest (a subsidiary of the Enso Group), AS Mets ja Puu (a subsidiary of Thomesto Sverige AB), AS Metsind (which belongs to the Finnish forest association), the Swedish firms Modo, Stora and Södra, as well as AS Sylvester and AS Forestex, the last two being local enterprises based mainly on Estonian capital. Previously signed contracts with western factories have been replaced by the sale of timber in ports and harbours, an activity which reduces the profits of the local enterprises.

Estonian sawn timber was exported to more than 15 countries in 1994. Exports to three countries in particular - Great Britain, Finland and Sweden - comprised 65% of the total. Estonian sawn timber has its largest market share in Great Britain, where it makes up 1.5% of the annual consumption of sawn timber. Estonian processing industries are having serious difficulties in obtaining adequate supplies of logs. The reasons for this are discussed in section II below.

3. The Production of Sawn Timber

According to official statistics, the total output of the Estonian sawmill industry in 1994 was 310,000 m³. The average output per sawmill increased from 700 m³ in 1993 to 840 m³ in 1994. Approximately 10% of the firms accounted for 60% of the total output. They had a total of 1,000 employees, which averages out to 32 per sawmill.

About 20% of the total of softwood timber sawn in 1994 was processed by joint ventures or by enterprises under direct foreign ownership. In 1996, partial or total foreign capital accounted for almost 30% thanks to two recent investments (AS Toftan's vertical log frame in Sõmerpalu and AS Sylvester's in Imavere). Joint ventures have been set up with Swedish, Finnish, British, Canadian, Danish and Swiss firms. The main investors are retailers, foreign timber processors and private individuals.

The sawmill industry is spread over the whole country. This is very important from the point of view of employment because Estonia finds itself in a situation where economic activity is mainly centred on the capital city. Small sawmills are spread around the country even more.

Two thirds of Estonian sawmills use the Soviet frame saws R-63, R-65 and R-75 from the 1970s and early 1980s. The circular saw is also widespread (30%); band saws and milling saws make up the remainder. Around 70% of the sawmills have some drying chambers but they accommodate only 30% of the total output. A shortage of specialist drying knowledge leads to an abundance of drying defects (bending, cracks, blue spots, ugly colouration etc.). Investment in faster machinery and more modern production lines would dramatically improve productivity and for the most part also quality.

The Estonian sawmill industry is characterised by long marketing and sales chains. It is usually domestic and foreign intermediaries and resellers who communicate with the industrial end-user. It is typical of the system that the goods are sold by one intermediary to another before they reach the final consumer. Because of the long chains, the Estonian sawmill industry directors have insufficient information and knowledge about marketing and the end-user, even though 18% of exports are sold directly to the clients.

4. The Production of Timber-Based Boards and Glued Boards

The production of timber-based boards is very concentrated: plywood is produced by one enterprise, fibreboard by one and chipboard by one. As in the sawmill industry, production volume fell considerably around the turn of the decade but now appears to be increasing again (Appendix 13). There are five major producers of glued boards in Estonia. As well as these, there are also small firms who produce glued boards in addition to their primary activity.

Glued boards are semi-finished goods for the furniture industry, the main raw material of which is pine timber. The preparation of 1 m³ of glued boards requires 3.0–3.5 m³ of sawn timber. Firms bought the sawn timber either as undressed boards or as standard sawn timber measuring 50 mm × 100/125/150 mm and with a length of 3–6 metres.

During 1995, the volume of glued board exports increased to 60% of total output. Different enterprises have different marketing strategies: some are strongly export-oriented, exporting 95–99% of their output, while others export a mere 5–10%. The most important markets for glued boards are Germany (43%), Sweden (34%), and Norway (18%). Smaller volumes are also exported to the Netherlands, Poland, Denmark and Great Britain. In Estonia, glued boards are sold directly to the industrial end-user.

5. Furniture Production

Furniture production is the main activity of 188 firms. The furniture produced ranges from garden furniture to soft furniture. The size of the firms varies considerably; the number of employees ranges from 20 to in the hundreds and turnover from 200,000 to tens of millions EEK.

The main raw materials for the furniture industry are chipboard and fibreboard. Sawn timber and glued boards are also widely used. The supply of raw materials of a suitable quality has been hampered both by financial problems and a lack of sorted sawn timber.

Furniture producing enterprises are clearly export-oriented: approximately three quarters of their total output is exported. The main markets, according to the financial turnover of the exports, are Finland and Germany. The majority of clients in the export markets are wholesalers. An advantage for Estonian producers in the domestic market is their 25% lower prices compared to their western competitors.

6. Buildings for Assembly

There are 33 producers of buildings for assembly in Estonia. Output consists mainly of various types of log houses, from summer cottages to residential houses. The production of buildings makes up ¾ of their turnover; the remaining output is windows, doors and garden furniture. The enterprises are small, with 10 to 60 employees and a sales turnover ranging from the hundreds of thousands to a few million EEK. Sales turnover increased by 50% in 1995. Full use of the existing production capacity would enable production volume to be somewhat increased.

Sawn timber makes up 99% of the raw materials used by the producers of buildings for assembly. Only one of the firms uses a small amount of glued boards. The firms prepare two thirds of their required sawn timber themselves (including wall material). Around 60–70% of the material is spruce and the rest is pine.

The producers of buildings for assembly are quite strongly export -oriented. The main market is Germany (81%). Sweden is in second place but its total is less than a tenth of that exported to Germany. The remaining exports went to Denmark, Italy, Switzerland and Finland.

7. Joiners' Products

Joiners' products include windows, doors, window panels, laths and glued board joists. There are some 200 firms with such product lines but there is no precise information as to their financial indicators.

Sawn timber is usually supplied by the producers and timber-based boards by intermediaries or the producers. The firms have certain qualitative and quantitative problems with the supply of raw materials:

• there is little quality branchless sawn timber available;

• there is a lack of sorting according to quality and of directions for the designation of reasonable product ranges;

• the inexactness of sawing requires “spare” material to be bought;

• log prices are high.

The majority of enterprises producing joiners' products are mainly active in the domestic market. Approximately 70% of windows, doors, laths and glued board joists are sold in Estonia. The production of window panels is strongly export-oriented - 95% are exported. In 1995, 80% of glued board joists were exported.

Window panels and glued board joists are sold primarily to Germany. Windows and doors are sold to Latvia and Lithuania and in smaller volumes to Russia and Sweden. Laths are mainly exported to Germany. Exported goods are generally sold to the end-user, with the exception of windows and panels which are sold through agents or wholesalers. In the domestic market, products are sold directly by the producer to the final consumer.

II. Issues and Constraints Affecting the Sector

A. The Dairy Industry and International Trade

One problem with the exporting of dairy products is that none of the Estonian dairy producers are of such a standard that they could apply for European Union certification. At the same time, the cost of bringing all Estonian dairy producers into line with EU requirements cannot be economically justified. Preliminary estimates show that enabling just 8 Estonian dairy producers to fulfil these standards would cost approximately 380 million EEK.

Entering new markets is a very long-term process with substantial demands for financial expenditure. Simply taking part in the ANUGA food fair in Cologne in 1995 cost 300,000 EEK. In the majority of markets (including Ukraine) we have to compete with butter and cheese donated by other countries.

Four of our dairy producers have now been granted import certificates to Brazil. An export programme must be compiled in order to develop exports. One part of this would be an export programme for agricultural products, including dairy products. It is necessary to accelerate the compilation of legislation encouraging exports (legislative acts arising from the Food Law, hygiene requirements for the production and processing of dairy products, etc.) and to set up control laboratories and certification organisations.

As a first solution, it is necessary to find financing for the State programme “Milk” in 1997. Foreign aid must be used for assisting dairy producers achieve certification and for the training of sales representatives.

As opposed to the strongly protected domestic markets of other countries, the Estonian market was free from restrictions of trade in 1995 and 1996. Expressed in value terms, the import of dairy products into Estonia in 1995 increased by 2.3 times compared to 1994.

According to expert assessments, the volume of dairy products imported into Estonia is equivalent to 130,000 tons of full-cream milk or 30.2% of all dairy products consumed in the country. It is now necessary to eliminate distortions in our domestic market caused by imported dairy products which were given export and production subsidies in their country of production. It is a generally known fact that often when importing foodstuffs into Estonia a very low, often inaccurate, border price is declared. The idea of fair competition cannot be spoken about in such cases as when in August 1996 a total of 57.1 tons of butter were imported with a price of 3,920–3,970 EEK per ton. International studies have shown that, with the exception of sugar, dairy products are the agricultural commodities whose international prices are most affected by subsidies to producers in industrialised countries. It has been estimated that if agricultural price subsidies were eliminated in all countries, the international prices of dairy products would rise by 53% (22).

The analysis presented in Chapter 2 shows that Estonian dairying has a strong competitive advantage vis-a-vis imports, in spite of the dramatic fall in its production. Therefore, with appropriate policies, it should be possible for domestic production to replace some imports and perhaps to recover some export markets.

An increase in product quality would be especially important in order to enable locally produced dairy products to compete in the domestic market with dairy products imported from other countries with the support of those countries (butter-vegetable fat blends, yoghurts, ice-cream).

It is planned that dairy product classification and requirements for the ingredients of dairy products will be worked out on the basis of material from FAO and IPE.

B. Issues for Alcoholic Beverages

The business activities of the producers of alcoholic drinks are affected both by the attempts of the government to rebalance the State budget through new tax rates and also by its liberal trading policy.

The growing amount of excise tax revenues in the State budget has had an unexpected direct effect on domestic producers. According the Law on Alcohol Excise, the rates of excise on domestically produced beer will increase even more and become the same as those placed on imported beer. As a result of this, the price difference between Estonian and imported beers will disappear and competition will increase in our beer market. This will be possibly be accompanied by negative effects both on the cultivators of barley for beer and on the beer producers themselves, who already have suffered a significant contraction of production.

The principles behind Estonian policy on alcoholic beverages are not as yet prescribed in law. As opposed to the customs of the Nordic countries, problems connected with the production and sale of alcohol are treated relatively liberally in our country. This has brought about a profusion of both legal and illegal alcohol producers and sellers in quite a short period of time. It should be noted that last year there were around ten Estonian alcohol producers worthy of note (not including beer producers), each one of which had its own market share, not to mention the more than 180 wholesalers, some of whom imported considerable volumes of alcohol into Estonia. The result is that we have reached the point where the average consumption of alcohol per head of population is the same as in the 1980s.

However, the sale of legal spirits in Estonia has fallen by an average of 50% during the last two years. This is a result of the sharp increase in alcohol excise and, following on from this, the appearance on the market of large volumes of illegal vodka. The given situation has itself considerably disrupted the normal operations of the spirits industry. There has been a continuous excess of capacity The expansion of exports has latterly somewhat relieved the situation.

The Union of Estonian Foodstuff Producers believe that it is necessary to ensure that good quality crops can be obtained on time and that so-called large grain purchasing organisations should therefore be put in place. It would then be possible to conclude long-term contracts with them in the following quantities: 15,000 tons of barley for beer production and malt export, and 30,000 tons of grain for the production of spirits. The contracted quantities would be derived from the financial situation, depending on price formation, and would take into consideration other relevant factors arising from the free market economy.

C. Fruits and Vegetables

Prerequisites for fuller development of the fruit and vegetable subsector are:

• the development of apiculture and of branches of horticulture which are both suited to Estonian conditions and economically viable;

• that the importance of using and consuming domestically produced horticultural and apicultural products should be explained to the population at large;

• the identification of which types of plants are both suited to the Estonian climate and soil conditions and economically viable; as well as the purchasing of their highly propagated planting material (seeds etc.);

• the maintenance of a gene bank of types of plants valuable to Estonia;

• the licensing of nursery gardens and their certification (recognition) so as to guarantee the quality of the planting material on sale;

• the elaboration and complementing of horticultural and apicultural product standards to meet European Union requirements;

• the modernising of the control system for horticultural diseases and pests as well as for soil analysis;

• the further development of integrated production (IP-cultivation) and the implementation of environmentally-friendly and economically efficient technologies for obtaining ecologically cleaner produce;

• an increase in the production of competitive and exportable horticultural and apicultural produce;

• the clarification and forecasting of market demand;

• an increase in the volume of honey produced by each hive with the help of new apicultural enterprises and by better utilisation of the honey harvest land;

• research into the effects of different horticultural cultivation technologies on the agro-ecological state of the environment;

• the creation and elaboration of a public horticultural and apicultural database;

• the continuation of applied horticultural and apicultural research;

• the organisation of horticultural and apicultural competitions, conferences and exhibitions as well as seminars and practical training days;

• the publication of the latest information materials on horticulture and apiculture, including the issuing of speciality reference books and instructional material, training films, advertisements etc.

In order that the horticultural plan can be successfully implemented, it is necessary that all the above-mentioned measures be implemented as a complete set. Without growth in general horticultural profitability and competitiveness, it will not be possible to achieve the stated aim of covering the needs of the domestic market with domestic produce. Also, the agricultural advisory services will play an essential role in carrying out some of the above recommendations.

D. Problems in the Supply of Timber

There are several objective reasons as to why the majority of wood processing firms are not able to obtain logs. Firstly, the Estonian timber business system is out of date and underdeveloped. The current system is grounded in State forest auctions of short-term felling permits. Because timber can only be obtained for a short period of time and because competition is fierce, enterprises cannot systematically plan their own supply. Sawmills only have short-term timber supplies: the felling areas purchased guarantee the supply of raw materials for only one month and the average consignment of felled and sawn timber lasts for less than a week. This therefore forces the purchase of all sorts of volumes and selections of timber at any price.

Secondly, the Estonian round timber market is characterised by exports. Pulpwood is exported due to the lack of paper and cellulose industries. It has been suggested that the export of logs for sawing should be restricted, for example by prohibiting the export of finer logs which are currently exported as pulpwood. The benefit of such export restrictions would be felt only by those limited Estonian sawmills which are able to use fine logs (for example those which are equipped with modern milling saws). Latvia has for example implemented an export tax on unprocessed timber which:has helped small and old-fashioned domestic sawmills in that they no longer have to invest in modern production equipment. However, by the same token such restrictions have the effect of delaying necessary technological modernisation of the industry, so in the long run their effect on the industry's competitiveness probably would be negative.

Thirdly, the current standard of logging and transport is considered to be low. It is not possible to supply timber according to the production schedule. Many logs obtained from brokers and logging firms have already turned blue in interim storage or in the forest. In addition to this, the brokerage and logging firms normally have inadequate knowledge in designating the selection of timber and in carrying out felling, the result of which is that they deal only with trees of certain heights (for example 6m). And fourthly, the timber supply is affected to a certain extent by the unfinished process of land reform because, before receiving full owner's rights to an area of forest land, the owner is only permitted to carry out a very limited volume of felling and sales.

E. The Nature of the Privatisation of Agro-industry

The privatisation of Estonian processing industries and enterprises offering agricultural supplies or special services has taken place mainly according to two laws:

1. The Law on the Privatisation of Small Enterprises (13 December 1990). The law was amended in 1992 to extend its effect to all enterprises with a value not exceeding 600,000 roubles. When the Estonian kroon was introduced in June 1992, the value was set at 600,000 EEK.

2. The Privatisation Law (17 June 1993). This formed the Estonian Privatisation Agency for the privatisation of medium-sized and large State enterprises.

Public auctions were organised for the privatisation of small enterprises. The privatisation of large enterprises was effected through the Privatisation Agency on the basis of closed competition.

Slightly different rules were enforced for the privatisation of enterprises in the agricultural, processing and service sectors compared to those in other sectors. They are prescribed in paragraph 32 of the Privatisation Law. According to this, preference in the privatisation of the dairy, meat and grain industries was indeed given to cooperatives of agricultural producers but, nevertheless, the privatisation process in essence created a situation in which the development of cooperatives of agricultural producers, processors and marketers was slow. This occurred because the large socialist State or collective farms were either liquidated or being liquidated and their successors - partnerships, cooperatives etc. - were weak financially and did not have a developed vision of the future. The fanning economy, which was at that at time still considered a priority, was only just beginning to be formed. Chapter 6 discusses this problem extensively and the need for more support, of an advisory and financial nature, in the formation of enterprises and cooperatives for agricultural services and processing.

The World Bank and the OECD have criticised the process of privatisation of agro-industry for giving priority to cooperatives of producers (under Article 32 of the Privatisation Law) and therefore, in the present circumstances, resulting in newly privatised firms that are weak both financially and in management expertise.¹ There is some truth to this criticism but three factors must be borne in mind: i) The sharp increase in agricultural and agro-industrial unemployment which accompanied the economic reforms (see section I above), ii) the existing tradition of cooperatives, and iii) the progress which is now underway of converting some of these agro-industrial cooperatives into shareholding companies, or their sale to such companies. Another criticism could have pointed out that the Government and foreign donors took no measures to provide the new processing cooperatives with technical assistance, especially in business management, nor were they provided with advice and encouragement for converting themselves into shareholding companies and inviting strategic investors into their operations.

Another serious problem with this privatisation process is that it placed many restrictions on the newly formed enterprises, in regard to maintaining specified levels of employment, making specified investments, retaining production facilities in locations that may have been unfavourable, and other aspects of their operations. These restrictions have undoubtedly weakened the profitability of the new firms, cooperatives and shareholding companies alike.

¹See the report “Survey of Estonian Agricultural Policy 1986–1996,” Centre for Cooperation with Economies in Transition. OECD.

F. Formation of Oligopolies and Monopolies

Some elements of the agro-processing industry have thus far been able to concentrate their capital quicker than others and have taken one step further in the development of viable businesses. Joint ventures, larger concerns and monopolies have begun to be formed. Some indicators of the leading firms in the food processing industry are as follows:

1) AS ETFC Grupp. (ETFC Group Ltd). Formed at the beginning of 1996. The joint and equal owners are AS Talinvest and AS Epeks. AS Talinvest brokers financial investments in securities in the Baltic States. In terms of equity, it could apply for a banking licence. The chairman of the council is Jaak Roosipuu and the managing director is Peeter Saks. AS Epeks is involved in the production of foodstuffs and drinks. The company director is Toomas Kõ;uhkna.

The composition of the controlled firms is: AS Epeks, AS Rakvere Lihakombinaat (Rakvere Meat Combine Ltd., capital stock 377.2 million EEK, company director Peeter Maspanov, owner of 71% is chairman of the Board of AS Rakvere Lihakombinaat Toomas Kõuhkna), AS Kalev (company director Märt Vooglaid), Tallinna Piimatööstuse AS (Tallinn Dairy Plant Ltd, chairman of the Board Oliver Kruuda), AS Saare Õlu (Saare (Island) Beer Ltd) Tartu Külmhoone (Tartu Refrigerating Plant) and Epeks Tootmise AS (Epeks Production Ltd., company director Tarmo Kõuhkna).

The 1995 figures for the larger enterprises in the firm were:

The net sales turnover of AS ETEC Grupp in 1995 was 1,208 million EEK (the forecast for 1996 is 1,430 million EEK).

2) AS EKSEKO (chairman of the council Heino Prümägi is also on the Board of Tallinna Piimatööstus and owner of 1/6 of the shares of the daily newspaper “Sõnumileht”, member of the Board Toomas Kõuhkna, managing direction Peeter Ergma). Capital stock is 4.9 million EEK. Rakvere Lihakombinaat would like to buy a majority holding. The net sales turnover in 1995 was 66.1 million EEK and the profit 1.8 million EEK. Turnover in 1996 was approximately 50 million EEK with a loss of 15 million EEK. In October 1996, debts stood at 35 million EEK During 1996, a loan was received from AS ETFC Grupp to the extent of 8 million EEK. The relative importance of EKSEKO in supplying Rakvere Lihakombinaat should increase from 27% (November 1996) to 50% by the end of 1997. It is planned to award 16 million EEK to EKSEKO and the Pärnu pig farm during 1997 within the framework of the EU PHARE programme. It is also planned that the number of pigs will be increased during 1997 to 50,000 (from the current 30,000).

3) Ühinenud Meiereid (United Dairies) (Põlva Piim AS (Põ;lva Milk Ltd) Paide Piimakombinaat AS (Paide Dairy Combine Ltd), Mulgi Meier As (Mulgi Dairy Ltd)). Chairman of the Board Aivar Pärgmäe.

Recent figures for the enterprises in United Dairies were:

AS Top Milk (Mulgi Meier) has had the Pärnu Piimatoodete Kombinaat (Pärnu Dairy Products Combine) on lease since November 1996.

These monopolies created have already begun to exert their own will on some producers, dictating to them agricultural product purchase prices which are favourable for these monopolies. For example, as at 23 January 1997 the following purchase prices are in force for milk: elite (the very best) 2.75–3 EEK/kg, higher class 2.40–2.90 EEK/kg, I class 2–2.60 EEK/kg (10). The given price levels will have fallen even further by the time of the grazing period. Farmers in countries where agriculture is developing contemporarily compare the purchase price of milk with expenditure on diesel fuel. The sales price of milk is considered normal if it is at the same level as the price of diesel. Diesel for tractors currently costs 4 EEK/1 on average in Estonia.

Estonian farmers view the situation as follows: “All essential purchases have become 20–30% more expensive but the price of milk has fallen by 10–15%. If the profitability of the dairy industry begins to fall, then they attack milk prices immediately. It's the easiest way for them” (10).

On the other hand, it must be recognised that the processing industries themselves have faced a situation of deteriorating profitability and lack of international competitiveness, as has all of the agriculture and food sector (see Chapter 2). In this sense, macroeconomic policy has created a situation of economic conflict between two sectors which should be natural partners, food producers and food processors.

G. Industry's Position in regard to Policy

The Estonian Bread Association claims that the hitherto open liberal trading policy and strong competition has not encouraged bakeries to use domestic raw materials. The unlimited import of finished products as well as dumping prices have led to a situation in which pasta is hardly produced in Estonia at all any more and the reduction in the production of biscuits and semi-finished flour products is catastrophic.

The Bread Association believes the following State decisions to be at fault for creating this situation:

• the 1993 customs restrictions placed on raw materials coming from Russia but not on finished products;
• the continuing non-establishment of limit prices at the border,
• the lack of quality control at the border,
• the lack of serious aid (credit, loans, leasing, guarantees etc.) for land cultivators;
• the lack of subsidies and grants for Estonian farmers;
• the lack of a State agricultural policy;
• the long-term tax exemptions granted to buyers upon the sale of processing plants to foreign capital.

The Bread Association sees the following as the main solutions:

• the replacement of the open market ideology with a free market ideology;
• the encouragement of the production of primary commodities in Estonia and from Estonian raw materials;
• the implementation in Estonia of such market protection rules as apply in Europe and around the world;
• State support of agricultural producers and of the export of their products;
• the enforcement of limit prices and suitable quality control at the border,
• the guarantee of equal competition in the domestic Estonian market and the ability to compete with dumping prices;
• the ending of the harmful attitude towards Estonian agricultural and industrial producers;
• the resolution of customs questions with Russia at State level.

Since 1992, the Bread Association has publicly expressed its fear that initially Estonian agriculture will perish and that it will be followed by processing industry. There will then follow social problems, budget and balance of trade deficits, unemployment, the decline of the banks, a depression and even doubt over the continued independence of the country.

The Estonian Foodstuff Industry Association has proposed what it considers to be the key methods by which the State could help:

1. The working out and implementation of measures for safeguarding the development of plant cultivation and animal husbandry and the increase in the direct production of food to such a level as would guarantee that the needs of the population for Estonian produced plant and animal products are met

2. The strengthening of the quality supervision of imported foods, food additives and supplements at the State border.

3. The elaboration of laws for the implementation of customs tariffs and on dumping.

4. The organisation of a statistical survey on the production of agricultural products and foodstuffs.

5. The elaboration of a State advertising and export programme for foodstuffs produced in Estonia and an increase in State support for the export of Estonian foodstuffs.

6. The acceleration of the implementation of regulations resulting from the Food Law and the Packaging Law as well as the elaboration and establishment of an Alcohol Law, Hygiene Law etc.

It is a requirement for the production of quality and competitive foodstuffs that legislation regarding Estonian foodstuffs is improved in line with EU legislative acts.

H. Exports and Imports of Agricultural Products

The indicators which best characterise the situation of the agricultural and processing industry are undoubtedly those of the export-import situation. In order to gain a better understanding of this question, it is necessary to recall the economic policy of the Republic of Estonia before the start of the Second World War. The agrarian ideas and experiences of the time of independence were described in a document discussed by the government of the Republic of Estonia on 21 October 1936 entitled “Põllumajanduse ja kalanduse arendamise juhtimise põhimõtted” (Principles for guiding the development of agriculture and fisheries). This contained not only the directions of agricultural development but also all the most important means for achieving the established goals.

Taking into account the many tasks performed by agriculture in the Estonian economy, in the life of our people and in guaranteeing our future, particularly in terms of feeding the people, providing them with creative livelihood-earning work, increasing their economic power and multitude, and maintaining their mental and physical strength and health, it was considered necessary to determine that State agrarian policy would develop agriculture along the lines of certain agreed principles, increasing its productive and competitive capacity and realising this by expanding the cultivated and settled area in the countryside, rationalising the production of agricultural products, maintaining their position in the domestic market and opening new foreign markets to them, and encouraging independent activities of farmers, as well as their professional and cultural development. It was with this kind of directed and encouraging agrarian policy, which did not seem either to farmers or non-farmers to be an aiding and favouring policy or social welfare policy, that attempts were made to achieve the maximum results for the minimum expense (12; 13).

At that time if was understood that agriculture was (and is) an age-old branch of material production which provides vital foodstuffs for the population, vital raw materials for reprocessing industries and commercial products which can be exported. The agricultural orientation of the Estonian economy was caused by the scarcity of natural resources in the country, because the main riches here are fertile soil and forests. It was also understood that the best way to develop production is to use such resources as already exist locally.

In this way Estonia became a country exporting agricultural products. This was encouraged by the possibility farmers had to operate freely on their and their family's farms, the rapidly implemented process of land reform and a suitable agrarian policy aimed at encouraging farmers. (See the historical discussion in Chapter 3.)

In short, a situation arose where for example in 1938, 58% of the total export income of the whole country was derived from the export of agricultural products. If forest and forest products are added to this figure, then the total from agriculture and the forest industry was 82.1%. There was a balance of trade surplus and the needs of the population for agricultural products were totally satisfied (with the exception of those requiring cultures which could not survive in Estonian conditions). Then, as now, contacts with our neighbour to the east, Russia, had to be given up and markets found elsewhere, primarily in Western European countries.

In the period 1928–1938, the turnover of foreign trade in Estonia increased more than five times. Upon our freedom from the occupation of the Soviet Union (Russia) in 1991, we were mainly involved in the export of forest products. The export of processed timber and furniture also increased to a certain extent, as did the processing and re-export of semi-finished goods from the textile and metal industries.

The majority of imported goods are clearly unavoidable - fuel, machines and means of transport, but the increase in their volume is actually lower than the increase of many other categories of imports. The import of metals, chemical products, paper products and even furniture has increased even faster. The import of clothes and food has also increased and has played a part in the formation of a growing balance of trade deficit.

It has been attempted to use the export of foodstuffs as an indicator of the healthy state of agriculture and even of over-production, as agriculture accounts for approximately 20% of the total export volume. However, upon closer examination the situation is not at all rosy in this regard.

Firstly, the total volume of the export of foodstuffs and its share of total exports is decreasing. Instead, the volume of imports and so the deficit of this type of product is growing (Appendix 10).

Secondly, not all foodstuffs are agricultural products. Over one third of the volume of exported foodstuffs is composed of fish and tinned fish. The proportion of genuine agricultural products fluctuates around the 10–11% mark.

Thirdly, considerable consignments of coffee, tea, sugar, bananas and other products not producible here are exported from Estonia. This process is re-exporting, which can indeed be profitable and provide services for businessmen but is of very little use to the Estonian economy. The proportion of products prepared from our own agricultural raw materials is limited to only 6–7%.

It can therefore be concluded that the possibilities, for the export of agricultural products are somewhat limited due to the reduction in production volumes. Exports are remaining at the same level or even decreasing in the majority of product groups while imports are growing and the overall balance is increasingly in deficit.

Dairy products (powdered skimmed milk, cheese, butter etc.) are now our only exports worth mentioning, as long as the production volume is maintained and a breakthrough can be achieved in foreign markets. Meat production already is in steep decline: imports have captured a part of the market and domestic production is only continuing to survive by using imported raw materials. In the first half of 1996, even the import of tinned meat and sausages exceeded meat exports.

Part of the negative balance in the group containing plant cultivation products is understandable. There is an unavoidable need to import coffee, tea, sugar, cocoa, citrus and exotic fruits etc. As has already been mentioned, traders have also been trying to benefit from their re-export. The peak of that activity was reached in 1994; since then the possibilities have reduced. Now the import of alcoholic and soft drinks and all sorts of other products (chocolate, pastries etc.) is rising. The ever increasing import of grain and flour, a consequence of the neglect of agricultural policy in recent years, is also having its considerable effect on the balance of trade deficit

The third largest product group is that of vegetable and animal fats (cooking oils and margarine). Their import is increasing rapidly because a large proportion of the Estonian population has become consumers of cooking oil in the current economic situation. Some of the imports are re-exported but the volumes are stabilising. Small quantities of crude rape oil are also exported. As stated, in addition to agricultural products, the term foodstuffs also includes fish products. Their trade balance is positive, although some fresh fish and tinned fish are being imported in significant volumes.

The main problem for the foreign trade of agricultural products is then how to increase exports and also how to keep imports down to reasonable quantities (13). Factors contributing to the rapid deterioration of the agricultural balance of trade undoubtedly include the inefficient technologies utilised on many farms and in many processing plants, and also the relative lack of business management experience in agriculture and agro-industry. Nevertheless, the fact that the negative trend in net international trade affects such wide range of products, including manufacturing outside the agro-industrial sector, suggests that the explanatory factors are not only those which are specific to particular products. They also include aspects of the macroeconomic environment, as explained rather fully in Chapter 2.

The survey carried out by the OECD into Estonian agricultural policy between 1986 and 1996 shows that Estonia has the most liberal agricultural policy in the world: the total support given to agriculture (PSE) in 1995 was -2%. At the same time, the average figure in OECD member countries was 41% and in European Union countries 49% (11). To sum up, the support given to agriculture by the Estonian government in 1994–1995 was zero or even less. This reflects the government's open market policy.

The deputy director of the OECD, Herbert Raidl, described Estonia's efforts towards an open market economy as extremely positive. Minus 2 is, from the OECD's point of view, a very good result because he believes meagre support for agriculture to be the main way of making this particular branch of the economy more effective. Although the survey stressed the need to increase the pace of land reform and the restructuring of processing industry enterprises, the OECD also warns against the implementation of a policy of protectionist price support through financing from budgetary resources (14).

In assessing former and current economic policy in agriculture, it should be noted that the producer and the processor remain viable and capable of development as long as there are buyers interested in the products offered in the market. If Estonian products cannot compete in the market, then they find themselves at odds.

Estonian farmers are accustomed to dealing with major shocks. In 1940 Estonia was cut off from the western market and in 1991 the eastern market also disappeared. However, the seriousness of the present situation is illustrated by the fact that the Estonian farmer is now losing the domestic market too. In 1995 a large volume of cheap rye (with a price of 0.70 EEK/kg) and wheat flour (with a price of less than 2 EEK/kg) was imported into Estonia from Russia. The appearance of this cheap imported flour on the market exemplifies the situation that is causing the cultivation of grain to no longer be profitable for our farmers. At the same time, looking the other direction toward the West, in industrialised countries, 40–45% of farmers' production costs are covered by State support. It is natural that such products can also be sold at dumping prices in Estonia.

I. Investment and Financing for the Reconstruction of Agro-industry

Over the course of the last five years, Estonian agriculture and its processing industry have mainly utilised the technical basis (i.e. machinery) left over from the Soviet farming households and enterprises. According to data from the National Inspectorate of Agricultural Machinery, the situation in terms of the tractors being used in Estonian agriculture as of 01/01/96 was as follows (19): tractors which had been in use for up to three years made up 4.07% of the total number, tractors from four to eight years old 27.22%, nine to fifteen years old 33.53% and over fifteen years 35.18%. The average useful working life of a Soviet tractor was said to be eight years, after which time repair and maintenance costs made their further use questionable. This means that only 31.29% of the tractors being used by Estonian farmers in 1996 were actually fit for operation. Farmers do not have the possibility of buying new tractors because the financial resources for investment are lacking (see Chapter 5).

The situation is identical with regards to combine harvesters, agricultural trailers (e.g. ploughs, drills etc.) and other equipment. The Institute for the Mechanisation of Estonian Agriculture has the same opinion. According to its forecasts, 95% of Estonian combine harvesters and 79% of tractors will be more than ten years old by the year 2000 (20). The equipment in use in the processing industry is generally of a standard which does not permit the production of exportable goods. Estonian abattoirs and meat industry enterprises are not considered to be up to EU standards, nor are dairy plants and other processing facilities.

A major constraint on the development prospects of agro-industry is the lack of sufficient financing for the needed investments. Although the PMKF is providing some financial resources at low interest rates (via the banking system), the needs are greater yet. Without new investments, which bring new technologies of production with them, agro-industry's prospects of becoming generally competitive again will be dim.

III. Policy Objectives for Agro-Industry

In the present situation of crisis in Estonian agro-industry, the objectives of policy are the following:

1. To improve the efficiency and competitiveness of agro-industry, as the only way to ensure its survival in the longer run.

2. To provide an economic environment of improved price-cost relationships, which will increase profitability and therefore permit the extensive investments needed to rehabilitate the industry in technological terms. It must be remembered that this is a very capital intensive sector.

3. To improve the economic conditions of agriculture itself, so that the supply of raw materials to agro-industry is assured. Extensive analyses of the needs in this respect, and recommended measures, are found in Chapters 2, 3, 5 and 6 of this Strategy.