The tools for stimulating the agricultural sector are almost the same in all countries, adjusted for local specifics and financial potential. The peculiarity of the Russian agro-industrial complex is that it is very developed, but practically uncompetitive without state support.

In modern conditions, vertical integration is the competitive advantage of Russian agro-industrial companies
Photo: Denis Vyshinsky, Kommersant / buy photo

Volatile grain

In the face of depletion of global land resources, agriculture is transforming from a subsidized secondary sector of the economy of developed countries into an industry of strategic importance.

The agro-industrial complex model of almost any developed country has evolved under the influence of geographical, climatic, historical factors, as well as government support measures in force in each country. As a rule, development was of an evolutionary nature, without sharp changes.

The set of tools for stimulating the development of the agro-industrial complex is almost the same all over the world and differs only in national characteristics and the potential of the financial systems of different countries. We are talking primarily about financial instruments: long-term loans, low interest rates (a consequence of high competition between banks), support from specialized export agencies (loans, guarantees, etc.), as well as a developed insurance market. In general, protecting the domestic market and stimulating production in most developed countries is most often carried out by non-market mechanisms - subsidies per unit of cultivated area or kilogram of products. We can also mention customs and tariff regulation, which creates preferences for domestic producers. On the EU market, for example, there are many prohibitive measures regarding the goods that we produce or are going to produce (various types of meat and meat products). These include quantitative quotas and increased, and essentially prohibitive, import duties outside the quota.

Experts believe that there will be no stability in the food market in the foreseeable future for a number of reasons. In addition to general economic global processes, changes in the agricultural sector itself should also be taken into account. This is primarily an increase in consumption associated with population growth. Thus, analysts from the American Land Institute and the US Department of Agriculture believe that in order to meet the demand for grain, its production in the world should increase by more than 1 billion tons by 2025 - from 2 billion in 2010 to more than 3 billion tons, which corresponds to production growth over the past 40 years. “If the rate of production growth does not correspond to demand, this will be reflected in prices,” says the president of the National Union of Agricultural Insurers, Korney Bizhdov. “It should be taken into account that the increase in consumption occurs against the backdrop of the growing involvement of agricultural land in the production of biofuel, the depletion of global land resources - fertile soils and water, an increase in natural disasters due to ongoing climate change.” All these are factors that will determine the development of agriculture in the coming decades.

And now, according to Korney Bizhdov, one of the main trends affecting the economics of the agricultural sector of all countries is the volatility of world prices. For example, from the mid-1980s until 2007, grain prices were relatively stable; their growth exceeded 50% only once—in 1996. But in 2007, the era of cheap food ended. Over the course of a year, grain prices tripled, in 2009 they fell by half, to the level of 2008, and in 2011 they doubled again.

National recipes for growth

Maintaining profitability at an acceptable level, along with preventing overproduction, which can lead to a collapse in prices, as well as solving social issues of the rural population - these are the main tasks of governments and companies involved in the agricultural sector in developed countries. For example, in the United States, most agricultural support comes from food aid, which accounts for approximately 2/3 of the total agricultural budget. At the same time, the United States periodically adopts an agricultural bill, which represents a detailed plan for the state’s interaction with farmers and its area of responsibilities to them.

Brazil has achieved one of the most impressive results in the development of agriculture over the past 20 years, says Alexander Korbut, vice-president of the Russian Grain Union (RGU). In Brazil, to expand access to credit resources for seasonal field work, since 1994 they have been using a certificate of agricultural products (Certificate of Rural Product, CRP) - a special financial document. It allows agricultural producers to obtain financing not only from banks, but also from value chain participants, such as fertilizer and seed suppliers. The result of the introduction of CRP was an increase in the volume of lending to agricultural producers to $5 billion annually, while before 1994 there was virtually no commercial bank financing in the Brazilian agro-industrial complex. As a result, today Brazil has solved the problem of hunger and has become one of the world's largest food exporters, supplying more than $100 billion.

The experience of South Africa is also noteworthy, where after 1990 there was a difficult period of transition from a state-controlled economic sphere to a free market system with a sharp reduction and gradual abolition of subsidies and free services to farmers. As a result of the work of the banks, a new system and corresponding organizations were formed - management companies that took on risk management, insured the crop, hedged price risks on the stock exchange, negotiated directly with exporters of commercial products, provided methodological support and agronomic advice to farmers. Agricultural cooperatives also did the same work, building value chain financing. Banks, given that farmers are becoming efficient and more reliable business entities, preferred to finance those included in this chain. With the support of the state, exchange trading in commodity derivatives - futures and options - was launched, and crop insurance mechanisms were improved. In fact, a risk management system was created in the agricultural sector, integrating all market participants and allowing to protect the agricultural producer from price risks by hedging on the stock exchange and from weather risks by insuring crops. As a result, a profitable production system and a form of its financing have been built while minimizing state support, and government intervention is carried out exclusively by market methods. The country has become an exporter of a number of agricultural products. “Although we must admit that the initial stage of this program was painful - a significant part of the farmers were unable to work in these conditions and went bankrupt,” notes Alexander Korbut.

Among its closest neighbors, the experience of Belarus is indicative, which has achieved high results in agriculture: the country is completely self-sufficient in grain, there is no agricultural equipment older than 10 years, and a system of agricultural towns has been created.

Stolypin's heirs

The Russian model of agro-industrial complex development is dominated by extremes, including Stolypin’s agrarian reform, collectivization, a sharp transition to a market economy, as well as an extremely low degree of use of the achievements of the “green”, agrochemical, technological and information revolutions. “As a result,” says Oleg Kolomiets, project manager of the Agricultural Complex practice of the NEO Center consulting group, “today’s Russian model of the agro-industrial complex has a collective and at the same time unique character, which continues to be formed under the influence of market trends and current government support measures.”

Speaking about the similarities of agricultural models, we can draw a parallel with the North American, Canadian, Australian and New Zealand models, where the size of farms is comparable to ours, but at the same time different organizational and production forms. The scale of enterprises in turn dictates the need for vertical integration, which is another similarity. A similar situation is observed in the form of land use. In Russia and the USA, as a rule, there is a mixed type of ownership, in which, along with the land in the property, significant areas are additionally rented. In the EU, most households own land. The Russian model was formed after the collapse of the USSR and the collective farm system, when all land property was distributed in the form of shares among small owners (former collective farmers). Then part of this land was consolidated into land banks by medium and large agricultural holdings, many of which built vertically integrated production facilities. In modern conditions, vertical integration is a competitive advantage of Russian agro-industrial companies, since it allows significant savings on costs and ensures stability in conditions of high price volatility in all segments - from crop production and feed production to the market for commercial animals and finished meat processing products. “Modern agricultural policy was formed after the 1998 crisis, when the devaluation of the ruble played the role of a universal measure of protection against imports, ensured an increase in the profitability of agricultural production and sharply increased the orientation of investors towards the development of agriculture in Russia,” says Alexander Korbut. “At the same time, the undoubted merit of the agricultural policy of the 2000s in that it provided support for the emerging new competencies in the agricultural sector.”

In Russia, industrial agricultural producers, small and medium-sized farms and personal subsidiary plots coexist and compete. For agro-industrial companies, the strategic direction of development is to increase efficiency and productivity, since extensive growth due to the return of abandoned land to production has its limits. And for farmers and small producers, the only way to survive in competition is to develop cooperation, reduce costs and diversify business, since building an effective vertically integrated production is possible only if you have serious resources, both financial and managerial.

In Russia, in the early 2000s, the state chose a development path based on import substitution (that is, a position of protection rather than promotion) and maintaining food prices at a level corresponding to the purchasing power of the poorest segments of the population, and livestock farming, with limiting price dynamics sales of agricultural products. At the same time, the level of income was maintained by increasing subsidies; as a result, the profitability of agricultural activities today is determined by the scale of budget support. There was also a second way - a relative increase in sales prices of products while curbing inflation and reducing the polarization of household incomes by developing mechanisms for targeted support for the most vulnerable segments of the population, but it was not accepted.

In general, as experts note, with the production indicators of reindustrialized farms corresponding to the world level, but with lower costs of labor and land resources, domestic products (with the exception of grains, industrial and oilseeds) are still uncompetitive without state support.

Elena Grigorieva

Wide field for state support