Determinants of potato producer prices in the peasant-driven market: the Ukrainian case

Purpose. Potato is one of the most important crops to ensure food security globally; potato growing is also a source of income and livelihood for the poorest, especially in developing countries. In view of this, studies on factors affecting potato prices could stimulate agripolitical measures in food security, rural wealth, potato industry and small farms' development. This paper aims to explore whether the factors affecting potato prices for business entities and farm households operating in the same (but peasant-driven) market are different. Based on the available statistical data and the research background, we focus on the relationships between wages, production (yields and harvested areas), and potato producers' prices in Ukraine.

Methodology / approach. Using the cross-sectional data on potato producer prices, harvested area, and yields of enterprises and households, and average monthly wages in Ukrainian regions for 2018-2020, we used a system of simultaneous equations to model behavior of potato producers' prices (for enterprises and households) through the two-stage least squares method.

Results. The Ukrainian potato industry is featured high rates of potato self-provision (through subsistence farming) and the dominance of farm households at the market, allowing exploring trends and factors of peasant-driven potato market development. The results obtained through modelling of an interrelation of potato producer prices indicate different potato price determinants for enterprises and households: price in enterprises adjusts to fluctuations of potato yields in both enterprises and households (calculated average elasticities are -0.27 and -0.55, respectively, indicating the more significant influence of the latter); households ' price responds to changes of enterprises' potato prices and average monthly wage rates (with average elasticities 0.49 and 1.35, respectively).

Originality / scientific novelty. Research results empirically evidence that households' dominance and a large portion of food self-provision constrain the potato industry development. This enhances a better understanding of subsistence farming's impact on markets and food industry development and extends the theoretical framework of households ' economics and peasant-driven market functioning.

Practical value / implications. Understanding the role of households in the slow (obstacle) development of the potato industry reveals the need for a policy promoting storage and potato processing capacities development that could mitigate the adverse effects of peasant-driven market performance, decrease price vulnerability, and facilitate potato industry growth.

Key words: peasant economy, potato industry, price determinants, subsistence farming, price of fresh potato.

Introduction and review of literature

Being a staple food for more than 1.3 billion people worldwide, the potato is the third most important crop given food security (after wheat and rise) [1]; it has diverse distribution patterns and, being cultivated in areas with high levels of poverty, malnutrition, and hunger, provides food, employment, and income for the most vulnerable groups of the population, especially in developing countries [1-6]. Given this, studies on factors affecting potato prices could stimulate agripolitical measures in the field of food security, rural wealth, potato industry, and small farms' development.

Studying potato industry development, scholars identify different factors affecting potato producer prices: demand growth [7], consumption (per capita, for feed), quality [8], losses during the storage [7], weather [2; 9], output, area, yields, logistics, market infrastructure, general economic conditions [5; 8; 10], production costs [9], world oil prices [2], labour and land inputs [4], etc. Taking into account that these factors are rather general and influence the pricing of different agricultural commodities, a set of product features should be highlighted, explaining the specificity of development in fresh potato market and price fluctuations: the potato is locally grown and consumed [1; 2], a perishable commodity with no residual stock between seasons and is not subsidized, as a rule [11-15]. Therefore, the fresh potato's price, being less dependent on global price fluctuations [1; 2], hardens with the new harvest and adjusts even to small changes in supply and demand following an “inverse demand function” [11-14]. The abovementioned studies and the obtained results are essential in view of food security provision and development of appropriate policy measures, but, being focused on the organized potato market, don't provide insights on potato pricing strategies applied by farm households and factors affecting these decisions, so they are not sufficient to support policymakers concerning the measures to ensure food security, income, and livelihood for the poorest, especially in developing countries.

Unlike business entities, peasant farmers underreact to market signals [16] and, making decisions on farm development and pricing, rely instead on certain expectations and beliefs, then forecasts and calculations [17; 18]. This is explained by the dual role of farms as producers and consumers of products [20-21], conditions of their functioning, i.e., an imperfect (or even missing) markets of goods and production factors [19; 22-24], and information asymmetry [25-27]. At the same time, it is the inseparability of production and consumption processes in farms that determines the specifics of their behavior and decision-making regarding production, consumption, sales and pricing [28; 29]. Due to inseparability, individual, intra-household factors [23; 30], much more important are the motives of farming [31], features of resource evaluation and results through “shadow prices” [31-33], which cause a weak connection between production decisions of farming and economic incentives [23]. Farm household economics is also closely linked to the labour market and labour economics [21; 23]. Labour market failures are one of the factors leading to the expansion of subsistence farming [24; 31], which in this case plays an important social role in ensuring food security and employment [34; 35]. This, together with the fact that labour is the most critical input in the production of basic food, causes the close interrelation of prices and wages [16]. The dual nature of the farm household determines the dual relation between wages and food prices: wage increase can lead to an increase in food prices both by stimulating demand and increasing production costs [36-42]. The latter is a more critical reason for increasing food prices [43]. Moreover, in the case of missing food and labour markets (typical for most peasant economies [44]), food prices will rise with rising wages [37]. Because of its close relationship with the labour market, the wage rate is expected to be a significant issue concerning the farm household pricing decisions as a measure of opportunity costs of labour, and the value of the labour involved in farm household production [33; 45]. For potato production (due to its high labour intensity in farm households), the relationship between labour resources, wage rates, and farm households' decisions i s critical: an increase in wages can lead to a curtailing of new potato growing technologies implementation [46] and even to a general decline of production volumes [41]. At the same time, there are no studies concerning the wage influence on farm househol ds' prices for produced potatoes.

The purpose of the article. This paper aims to explore whether the factors affecting potato prices for business entities and farm households operating in the same (but peasant-driven) market are different. Based on the available statistical data and the research background, we focus on the relationships between wages, production (yields and harvested areas), and potato producers' prices in Ukraine.

Data and methods. Research data involve average annual data from the State Statistics Service of Ukraine on potato producer prices, yields, harvested areas, outputs and sales by enterprises and peasant farms for 1995-2020 to overview the industry and market long-term development trends, to outline the main actors and their power at the Ukrainian potato market. Data on foodstuffs' consumption and shares of foodstuffs produced by private farm holdings in Ukraine in 2020 are used to illustrate the peasant- driven nature of the Ukrainian potato market and the subsistence farming spread in this sector. To identify the main factors affecting potato producer prices at agricultural enterprises and farm households, the data on potato producer prices, yields, harvested areas and average monthly wages for 24 Ukrainian regions for 2018-2020 (from the State Statistics Service of Ukraine) by different types of producers was used. Due to many missing values and outliers, the final sample constitutes a cross-section of 44 observations. To eliminate the impact of inflation on economic values, nominal wage rates and prices were deflated with the GDP deflator (2018 = 100). We applied GRETLe-git (Ver. 3) to find the parameter estimates of the simultaneous equations system modelling the potato producers' prices behaviour (for enterprises and households) through the two-stage least squares (TSLS) method [47; 48].

Results and discussion

Overview of the Ukrainian potato industry and market. Since 2011, Ukraine produces more than 20.0 million tons of potatoes annually and is one of the leaders in world potato production. In 2019, in the rating of world potato producers, Ukraine ranks fourth after China, India and Russia with the production of 20.27 million tons. It enters “the world top three” on harvested area of potatoes (after China and India). At the same time, Ukraine is only 95th in the world ranking of countries by potato yield, with 3.3 times lower yields compared to the world leader - Kuwait [50]. The low average yield is explained by the dominance of potato production in farm households.

Rural and urban households are the leading potato producers in Ukraine. With lower yields compared to enterprises, households harvest potatoes in areas that are more than 75 times larger than agricultural enterprises' areas. For example, harvested areas of potatoes in households was 1308 thousand hectares, while in enterprises - only 17.2 thousand hectares in 2020 [51] (Figure 1).

Figure 1. Harvested area of potatoes and yields by types of producers in Ukraine

Source: authors' elaboration on data of State Statistics Service of Ukraine.

Within the first fifteen years of Ukraine's independence, industrial production of potatoes (by harvested areas) gradually decreased: from 112.3 thousand hectares in 1995 to 16.4 thousand hectares in 2006. A revival of the industrial output in 20072012, typified by an almost doubled increase in harvested areas of potatoes in agricultural enterprises (from 21.6 thousand hectares in 2007 to 39.4 thousand hectares in 2012), was accompanied by the state support for vegetables and potatoes' storage infrastructure development resulting in the more than double increase of capacity of potato storage facilities (up to 650 thousand tons during 2009-2012). However, an abolishment of state support for the potato industry in 2012 caused a decrease in industrial potato production up to 17.2 thousand hectares in 2020. By applying modern technologies, industrial producers significantly increase potato yields: from 5.5 t/ha in 1995 to almost 23 t/ha in 2020, exceeding similar indicators in households by 46 %. Being relatively stable from 2000-2019, households' average potato yield amounts to only 14 t/ha with a standard deviation of 2 t/ha (Figure 1). potato business market

To give a complete picture of households' engagement in potato production, it is expedient to point out that about 8315.3 thousand households in Ukraine have land plots as of the beginning of 2020 (56.2 % of all households). It is every third household in urban areas (36.0 %) and almost all in rural settlements (98.5 %), with 0.3 ha of land used per urban household and 2.8 ha per rural on average. Rural households' average share of potato sown area amounts to 11.8 % of the total area under crops per household [52].

The per capita consumption of potatoes (for all purposes) fluctuates on average at 136.3 kg per year [53]. Potato is an important element of the diet of an average Ukrainian: the annual consumption of fresh potatoes as foodstuff amounts to 72 kg. The urban household spend for potato 3.1 % of total food expenditures in average, while rural household - 5.5 % (the sum of total expenditures amounts to 4675.48 UAH and 4694.28 UAH respectively) [52]. Members of rural households consume 1.6 times more potatoes compared with urban ones (Figure 2). According to 2020 statistics, 99.8 % of potatoes consumed in rural households are self-produced; members of urban households satisfy their needs in potatoes as foodstuff by their own production for 19.1 %. Potato is the only food product in the Ukrainian economy characterized by such a level of self-provision (58.5 % on average), as it is shown in Figure 2.

According to the state statistics [54], the following households demonstrate the highest level of potato self-supply, compared to the average (58.5 %):

1) consisting of more than five persons (84.3 % of the consumed potato is produced in private farm holding);

2) having the income of self-employment as the main source of household's functioning (75.7 %) (for those where the wage is the primary source of income, the level of self-provision is the lowest - 53.4 %);

3) having women at the age of 36-58 (64.9 %) and/or men at the age of 60 and older (67.3 %) in their composition. In urban settlements, the same groups of households demonstrate the highest level of self-provision (22.5 % and 25.9 %, respectively). In rural areas, households composed of women aged 18-58 years and/or men aged 18-60 years and older produce 100.0 % of the potatoes consumed, while the average self-provision of potatoes is 99.8 %.

Among households without children, the highest potato self-provision is typical for households consisting of only one person of beyond working age (64.6 %) and households composed of two or more persons, where there are both persons of working age and beyond (63.1 %). Households having employed persons in their composition satisfy needs in potatoes for food on their own for 56.6 % on average; households composed of two employees have the lowest level of self-provision (49.7 %), while those consisting of three and more employees have the highest self-provision (79.3 %). Households without employees in their composition also show a high level of selfsupply of potato (64.9 %) [54].

The abovementioned testifies the peasant-driven and subsistence nature of potato farming in Ukraine. Growing potato (and consumption of self-produced food) is not only the case for households consisting of elder people - availability of labour, employment and income opportunities determine the engagement of household's members in subsistence potato farming.

Figure 2. Characteristics of foodstuffs consumption and self-provision by households in town and rural areas in Ukraine in 2020, per household in average

Source: authors' elaboration on the data of [54].

Putting up to sale at the organized market only a small share of output (about 2.5 %), households, nonetheless, dominate in the potato market with on average doubled sales volume compared to enterprises (Figure 3), thus increasing uncertainty, risk, and price volatility.

Figure 3. Development trends of the Ukrainian potato industry and market by types of producers: production volumes and sales*

Note. *Data on potato sales available only since 2010.

Source: authors' elaboration on data of State Statistics Service of Ukraine.

Potato producer prices' dynamics are more volatile as compared to the ge neral change of agricultural products' prices in Ukraine at both enterprises and households (Figure 4), with noticeable acute fluctuations in households' potato prices.

The above illustrates the peasant-driven nature of the Ukrainian potato market and lays the foundation for further study of price determinants for agricultural enterprises and farm households producing potatoes.

Figure 4. Indices of producer prices for agricultural products and potatoes by enterprises and households

Source: authors' elaboration on data of State Statistics Service of Ukraine.

Modelling of potato price determinants by type of producers in Ukraine. Table 1 summarizes the cross-sectional data used in the study. Initially, taking deflated potato producer price of households and enterprises (RPH and RPE, UAH/t) adjusted with the GDP deflator as dependent variables, we used independent variables of area harvested by households and enterprises (AH and AE, ha), the yield of households and enterprises (YH and YE, t/ha) to present the production volumes - according to the approach [2; 11; 13]. RAMW variable is the deflated (with the GDP deflator) average monthly wage (UAH).

Table 1 Description of the Ukrainian potato industry and market data