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On the contrary, budget allocations to supporting small-scale farming in the framework of the State program shrank from 4.4% in 2008 to 3% in 2009. The share of smallholders in credit subsidies fell from 10% in 2008 to 7% in 2009 disregarding the fact that individual private and household farms continue to account for over 50% of the gross agricultural output, including over one half of meat and milk outputs, for 88% of potatoes and 78% of vegetables produced in the country.

In 2009 the amount of subsidized credits and loans to smallholders reached 94.3 billion rubles (Table 9). As compared with 2008 the reduction of newly received funds totaled 7 billion rubles and affected all types of smallholders except supply, marketing, purchase and processing agricultural consumer cooperatives. The principal borrowers are household farms since the launching of priority National project Development of agrifood sector they have got thousand credits to the amount of over 60 billion rubles (54.6% of all credits issued to smallholders).

Table The amount of subsidized credits and loans received by smallholders in 2009, million rubles Agricultural consumer Household Individual priTotal cooperatives (less credit farms vate farms cooperatives) Subsidized credits received in credit institutions 93387 60157 26853 Subsidized loans received in agricultural credit 2242.4 1136.1 798.1 consumer cooperatives Total subsidized credits and loans 94316 61293 27651 Credits and loans received in 2008 48 256 26 231 18 038 3 Credits and loans, received in 2009 41 384 22 634 14 693 4 Structure in 2009, % 100 54.6 35.5 9.Source: RF Ministry of Agriculture.

Serious hindrances to smallholders participation in the program of subsidizing credits to agriculture are a long and complicated procedure of opening a credit (especially taking into account transaction costs, i.e. transportation expenditures and time loss) and the lack of collateral or its shortage. According to data of the annual sociological and expert study of State programs implementation in 2009 the period from a respondents application to bank to an actual receiving of credit averaged one month. Due to the above-described complications only one out of three smallholder applicants got subsidies; for household farmers this indicator is even worse 15%.

Agricultural cooperation developed at slow pace as well. According to data submitted by the RF regions, by January 1, 2010 5905 agricultural consumer cooperatives were registered Section The Real Sector in Russia, including 1912 credit, 1126 processing and 2867 supply and marketing cooperatives. The support provided to cooperatives is absolutely insufficient. The key problem of the Russian system of rural credit cooperatives has always been the shortage of working capital for granting loans to their members but nothing is envisaged in the State program to solve it.

An attempt to address this problem was made in the framework of Priority National Project Development of agrifood sector when Rosselkhozbank contributed its funds to the share capitals of selected cooperatives as an associated member. But this practice has not become widespread (according to the banks data within 3 years of the National Projects and State Programs implementation contributions were made in share capitals of 85 agricultural credit consumer cooperatives in 26 regions). Another option may be the 100% subsidizing from the federal budget of the RF Central Banks discount rate on long-term (up to 30 years) credits and loans for the replenishment of mutual financial assistance fund of credit cooperatives of the third (federal) level. It would be rational to envisage the subsidizing from the federal budget of not less than 50% of interest rate on credits and loans paid by credit cooperatives of the second (regional) level in case that the remaining 50% will be covered by co-financing from the regional budgets.

In their turn, in addition to subsidized interest rate non-credit cooperatives need investment credits for purchasing machinery and equipment. In many regions (Saratov, Astrakhan oblasts, Chuvash republic, Krasnodar kray) agricultural cooperation is supported from the regional budget under the program of small and medium business development in the framework of agreement with the RF Ministry for Economic Development.

The development of small business could have helped to mitigate the aftereffects of economic crisis and to expand employment opportunities in rural areas but the anti-crisis efforts were focused on supporting large systemically important agricultural enterprises, Rosselkhozbank and Rosagroleasing.

3.5.6. Situation on selected agricultural and food markets I. Market of grain Basic trends The combination of two factors low prices for grain and credit crisis had a negative impact on the market.

For two years in succession the crop of grain in Russia has been record high and well above the domestic market demand. In 2008 108.2 million tons of grain were produced; the 2009 net grain output is preliminarily estimated at about 97 million tons (Table 1). Given the extremely large carryover stocks of 19.7 million tons, the beginning stocks in 2009/2010 MY are record high (Table 2). The domestic consumption of grain in Russia does not exceed million tons. So, in the last two years its supply was about 40% bigger than demand. In the new 2009/2010 MY production will exceed domestic consumption by 20 million tons and the market surplus of grain taking into account carryover stocks will be about 40 million tons.

RUSSIAN ECONOMY IN trends and outlooks Table Gross output of grain in 2002-2009 (weight after primary processing, thousand tons) Estimate 2002 2003 2004 2005 2006 2007 Grain 86612 67199 78092 78187 78625 81796 108179.0 96300including Wheat 50609 34104 45413 47698 45006 49390 63765.1 60500Barley 18739 17968 17180 15791 18093 15663 23149 17600Corn 1563 2113 3516 3211 3669 3953 6682.3 3900Source: Sovecon.

Table Supply/demand balance for grain: estimates and forecast (million tons) 2009/2007/08 2008/(forecast) Supply (resources) Beginning stocks 8.3 7.85 19.incl. intervention stocks 1.45 0.2 8.market stocks 6.85 7.65 11.Production 81.8 108.2 97.Imports* 1.1 0.6 0.Total 91.2 116.65 117.Consumption Domestic consumption 70.0 73.5 77.Exports* 13.35 23.5 19.5-21.Total 83.35 97.0 96.5-98.Intervention purchases - 8.05 2.0-2.Ending stocks 7.85 19.65 19.6-20.incl. intervention stocks 0.2 8.25 9.3-10.market stocks 7.65 11.4 9.3-11.*including flour in grain equivalent.

Source: Sovecon.

Food wheat #3 Food wheat #4 Feed wheat Feed corn Source: Sovecon.

Fig. 1. Average monthly prices for wheat and corn (EXW Northern Caucasus), rubles per ton (VAT included) July July Oct.

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March March Jan.Jan.July Section The Real Sector The excess of grain supply over domestic demand is one of the factors exerting pressure on market prices. In 2008/2009 MY domestic prices for grain were low as compared with previous years. In October 2009 the price for food wheat #3 (EXW Northern Caucasus) was rubles per ton (VAT included), in 2008 5450 rubles per ton, in 2007 6785 rubles per ton (Fig. 1). In this situation prices could be supported by state purchases or export supplies.

In 2008/2009 MY 8 million tons of grain to the amount of 38.58 billion rubles were purchased for the intervention reserve (Table 2). In the current marketing year 9.5 billion rubles were allocated to making state purchases and according to estimates their volume wont exceed 2.5 million tons. This is very little when compared with the grain surplus of 40 million tons. So, due to their small scale state purchases of grain are unlikely to be the drivers of domestic prices in 2009/2010 MY.

As to the export of grain, in 2009 it was constrained by a number of factors: the oversupply of grain on the world market, the still unsettled logistical problems of the Russian grain market and the stricter requirements of world importers to the quality of wheat.

In 2008/2009 MY the dominating trend on the world market was the reduction of demand for grain whose consumption was affected by the global crisis that resulted in the building up of world carryover stocks and their greater pressure on the world prices (Table 3, Fig. 2). In 2008/2009 MY the situation on the world market was determined by high wheat crop (682.8 million tons) and much smaller consumption not exceeding 639.3 million tons. According to the USDA forecast, the 2009/2010 MY wont only start with high supply but will also end with large carryover stocks (Table 3). This means that the saturation of the world market in the new marketing year will remain high and will hinder the strengthening of the world prices. In this situation the competition between countries-suppliers of grain to the world market will stiffen.

Given low world and domestic prices the competitiveness of Russian grain in 2008/MY was supported by ruble devaluation. As a result about 18 million tons of wheat where exported. In 2009/2010 MY export supplies are unlikely to be supported by weaker ruble.

Table World supply and consumption of wheat (million tons) Consumption for Production Trade Consumption, total Ending stocks feeding 2006/07 595.7 115.6 105.9 615.6 127.2007/08 610.7 116.4 96.3 617.0 121.2008/09 682.8 142.6 112.7 639.3 164.2009/10 forecast 671.9 124.5 111.9 648.3 188.Source: USDA.

Export activities of Russian traders are also hindered by unsettled infrastructural problems of the market. The first of them is connected with grain transportation, i.e. the growth of railway tariffs and the shortage of railroad cars. Exports mainly consist of grain from southern regions of Russia that is shipped through the Novorossiysk port. Meantime the delivery of grain from Siberia or Altai where yields are rather high is economically unjustified because of the high transportation costs.

Next problem is the shortage of elevators. In the coming 2009/2010 MY the combination of good crop and high carryover stocks will aggravate the problem of grain storage. Besides, elevator enterprises prefer not to participate in the programs of state purchases since their experience shows that the state delays payments for the storage of reserves.

RUSSIAN ECONOMY IN trends and outlooks So, the entire infrastructure of the market (from storage to transportation) needs adjustment in accordance with the countrys potential for exporting grain. Otherwise, Russian export grain will be uncompetitive due to the high logistical costs. At present a program for developing infrastructure and logistical support to the Russian food market is being worked out whose target is to expand opportunities for agricultural commodities storage and marketing.

The oversupply of grain on the world market made the problem of its quality more acute.

Narrow markets and strong competition let buyers set rigid requirements to the quality of grain including infestation by chinch bug. For instance, Egypt that in 2008/2009 MY accounted for 27% of the Russian wheat exports has set stricter requirements to crop infestation by this pest. Out of all regions of Russias South only Krasnodar kray produces wheat that meets the new quality requirements. Small supply of adequate quality wheat in Russias South may result in the extending of export supply zone up to Western Siberia free of the chinch bug problem. This will inevitably require the solution of logistical problem of this market mentioned above.

wheat US, HRW #2 wheat US, SRW #2 wheat Argentine corn US #2 yellow corn Argentine Source: FAO.

Fig. 2. World prices for wheat and corn, dollars per ton, FOB.

Its obvious that next year the problem of grain quality will become even more pressing.

The deficit of funds due to the economic crisis has curbed opportunities for applying pesticides and adequate quantities of fertilizers, for the purchase of machinery and other inputs.

In the situation of tough competition on the world market the issue of expanding the geography of export and entering new markets needs to be addressed.

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March March Jan.Jan.July Section The Real Sector State regulation At present the state regulation of grain market is limited to intervention purchases that are expected to be a weak support for the market in the current year. The observed negative trends on the grain market call for additional government measures for its stabilization. As noted above, efforts should be made to expand export supplies including upgrading of infrastructure, development of new promising markets and improvement of Russias grain competitiveness by quality parameters.

An open joint-stock company United Grain Company (UGC) was set up in order to develop elevator capacities, transport and port infrastructure of the domestic grain market and to enhance the countrys grain export potential. The company is 100% state-owned. It was formed in 2008 by transforming the federal state unitary enterprise (FSUE) Federal agency for food market regulation (affiliated to the Ministry of Agriculture) into a joint-stock company. From 1997 the FSUE operated as a state agent for carrying out state purchase and commodity interventions aimed at regulating agricultural and food markets. Authorized capital of UGC will incorporate assets of 31 joint-stock companies in 19 regions, with the share of state in the capitals thereof being not less than 25%. Among the most attractive assets are: the Novorossiysk factory of bakery products, six elevators and three grain terminals in Norossiysk, Eysk and Kaliningrad ports. The summary grain bunker capacity of UGC will exceed 3 million tons.

The company will act on behalf of the Russian Federation as the largest grain exporter, participant of international tenders and supplier of grain in the framework of international humanitarian programs. It will engage in construction of grain elevators and export port terminals. The forming of its own railway car fleet is planned for transporting grain by rail.

The UGCs strategy is currently being drafted. Already next year the company plans to export about 4 million tons of grain. Most likely this will be the grain from intervention stocks.

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