The Country’s Food Security Depends on Development of Small Business in Agriculture

The food embargo on goods fr om the US, the EU, Norway and Australia made the Russian authorities look for additional funding of the agro-industrial complex. The Ministry of Agriculture says it is important to increase the volume of subsidies this year by 50% to Rb 252.5bn, while in general till the year 2020, to nearly Rb 1.8 trillion.


Who will receive those funds? In Russia, there are different agrarian structures varying fr om personal subsidiary plot to holdings which include numerous agrarian entities. All the agricultural producers make their own contribution to the country's food security.


On the one side, in the past few years the production of households' farms has been falling though they still produce 41% of all the agricultural products. An exception is vegetables and potatoes which are still largely grown by rural residents themselves. From 2008 till 2014, at households' farms production of pork fell by 345,000 tons (30%), while at farm enterprises, by 25.500 tons (33%). It is to be noted that in the Belgorod Region rural residents used to keep 110,000 hogs, while at present that number has shrunk to less than one hundred hogs. They did it against their own will in order to reduce the risk of a disease that poses a danger to large agrarian complexes. Farm enterprises develop dynamically, but so far they produce 10% of all the agricultural produce. Agricultural entities account for 49% of production; it is to be noted that a larger portion of those entities are small business enterprises and not the units of agricultural holdings.


On the other side, there is a concentration of production with individual holdings. It is a paradox that investments in one entity result in growth in production, but increase at the same time the risks related to the country's food security. For example, the VAMIN agro-holding (the Republic of Tatarstan) is the largest milk producer in the republic. At present, it is in the state of bankruptcy. As it is known from practice, there have been virtually no cases of preservation of production with an agricultural entity being in a state of bankruptcy. To prevent the failure of the VAMIN, the government of the Republic of Tatarstan has to control that process and stimulate those who carry on production within the frameworks of other entities.


At the same time, the present aid program to agricultural producers can be aimed at support of large agrarian holdings which are in an advantageous position not only as compared to small farms, but also entities of a different scale of production. It is justified by the fact that monopolization of production with large companies strengthens their position as lobbyists in selection of different measures of support, including those beyond the frameworks of government programs. It is to be noted that the larger the holding, the higher is its share in production and the extent of the government's dependence on it: what if something goes wrong with the holding? Particularly, it is topical in the present situation. The government will have to support them.


Such a position does not appear justified. A limited number of holdings – despite the fact that they are the largest ones -- does not comprise all the agricultural producers. The more so, there is a problem with debts on loans which were extended earlier. There are plenty of entities which lack opportunities to lobby. It is to be noted that even in hog breeding in addition to 20 holdings which produce over 50 % of pork among agricultural entities and farmers there are many other entities and farm enterprises. Also, there are households' farms which produce over 20% of pork in Russia. Those farms with different volumes of production and situated in different parts of the country need the government's support, as well. Decentralization of production by different entities and small farms provided that veterinary requirements are met will promote resistance of production to diseases and contribute to reduction of a burden on the environment. Dispersal of production by individual agricultural entities without a merger into a holding will contribute to higher stability of agricultural production: in case of a debt problem the whole large system remains intact, except for only one producer that fails. Preservation of individual agricultural entities, farm enterprises and households' farms will make the agrarian structure more diversified, ensure employment at vast territories of the country and promote the competitive edge of producers.


In addition to the above, there are no such large companies in the world which would have numerous agricultural units of their own. There are large companies which work with thousands of independent farmers. Those companies produce fodder, develop technologies, process agrarian produce, engage in breeding of livestock which is later handed over to agricultural producers and do many other things. They are powerful entities and the government does not provide them any support. It is individual agricultural producers that the government renders aid to. At the same time, it limits the extent of aid for a single producer so that many other producers could develop, as well.


It is worth reminding that in the 1994-1998 hard period small agricultural producers happened to be that "cushion" which prevented production from shrinking even further. At present, the situation is rather complicated, too. So, it would be inexpedient to support the large business alone. All the agricultural producers – both small and bigger ones -- should have the right to receive it.

Firstly, prior to distribution of additional budget funds it would be important to determine which lines of support were efficient. If the Ministry of Agriculture is not able to carry out such calculations, a question arises why they did not ask experts to prepare such calculations for them? If there are no such calculations at all, why should they give somebody a greater amount of aid? Certainly, all those things should have been done as early as 2013 after completion of the 2008-2012 State Program, however, it is not late to do it now.


Secondly, it is important to ensure a broad access to aid. If farm enterprises – the only type of agricultural producers which demonstrated growth in milk production – are willing to participate in the program, they all should be rendered support. It is desirable to render aid to several farmers which are neighbors so that they could cooperate and deliver large supplies of milk to a plant. Thirdly, it would be useful to introduce limitations on the amount of aid provided to an individual entity and a holding. For example, no matter how many entities are united into a holding they should not receive more state subsidies than it is stipulated with taking into account subsidies received within a year by other entities of the holding.


At present, interest rates on bank loans keep growing. Interest rate subsidizing was one of the major measures of support. At present, it is important to understand whether it is worthwhile to give ever more state funds to commercial banks through subsidizing the interest rate, particularly, in conditions of long-term lending. It is hardly expedient: ever more funds will be thus spent actually on support of the banking sector and the access of new participants to state support is being reduced. It seems it is more important to subsidize purchasing of new equipment. The more so, farmers do not receive subsidies on loans for building of roads of the complex, they need tractors and equipment.

If additional support is provided within the frameworks of the existing measures of support, it is important to understand that there are the following two limitations:


1. Condition of co-financing of support by regions. It is to be noted that not all the regions will be able to review their budgets. According to the standard procedure, it means that agricultural producers of those regions will not receive that support.


2. Russia has introduced sanctions and limited the import of products from a number of countries. However, Russia did not withdraw from the WTO and it has to comply with the terms. In 2014, the size of the Aggregate Measurement of Support (AMS) cannot exceed $8.1bn. which is the equivalent of Rb 216.5bn at the exchange rate of Rb 37.4 for a US dollar. It means that Russia's obligations can be already violated. The more so, regions carry out their financing of the support (beyond the frameworks of the state program) which is almost an "amber" one; costs are taken into account in calculation of the AMS.


It is obvious that to overcome those limitations it is important to (1) abandon the institute of co-financing; (2) review definitions of support measures and mechanisms and terms of provision of support in order to transfer as much support as possible into the "green' basket. It will exclude a portion of the support from the AMS calculation. It is important to lim it regions in provision of the "amber support". In future, it is necessary to adopt a procedure for quoting the measures of the "amber" support and the turnover of quotes between regions. At present, there is a lack of time to do that, so it would be easier to lim it regions in providing the "amber" support out of their budgets.


Also, there is a problem related to transaction costs in effecting of subsidies and subsidized loans. It is a serious limitation which prevents farmers and owners of personal subsidiary plots from receive the aid. At present, an individual official is needed to execute subsidies as it is a time-consuming process. An agricultural entity may afford to employ such an official, but not a farmer or an owner of a personal subsidiary plot. Due to the above, it would be expedient to consider the prospect of making simpler the procedure for execution of subsidies and subsidized loans. For example, it would be better to give up the practice to prepare a new standard package of documents in order to receive a different type of a subsidy as it is an expensive and time-consuming process. It would be useful to form a single package and submit it to a district department of agriculture which directs it with use of an electronic signature to relevant offices which issue subsidies.

Natalia Shagaida, Director of the Center for the Agricultural Policy