Following a long recession rooted back in the Soviet period, the Russian flax sector started to demonstrate positive trends after 1998. The growth is due to a more intensive primary agricultural production and a considerable modernization of processing plants. Regional re specialization of flax production is underway: the West Siberian region becomes one of the major producers of flax fiber while its processing is traditionally concentrated in the European part of the country. Growth in the sector is not so much conditioned by domestic demand as by foreign de European Commission (2005). Biomass Action Plan [SEC(2005) 1573], Brussels.
European Commission. (2006). Prospects for Agricultural Markets and Incomes in the European Union. 2006 2013. Directorate General for Agriculture. Brussels.
RUSSIAN ECONOMY IN trends and outlooks mand for raw material, the product of primary or the initial stage of secondary processing. It is generally known that prices for raw materials on the world markets are very volatile making the situation in the Russian flax sector very unstable. After the period of growth, in 2006 the output of flax reduced by one third.
Livestock production The situation in Russian livestock production is generally worse than in crop production. Livestock inventories continue falling; the output of basic livestock products is either slightly reducing or marginally and unsteadily growing. However, efforts targeted at the accelerated development of this sector that were made in 2006 resulted in some improvements (Fig. 50 and Fig. 51).
Fig. 50. Gross output of basic livestock products, million tons* 2001 2002 2003 2004 2005 2006 cattle incl. cow s hogs sheep and goats Source: Federal Service of State Statistics.
Fig. 51. Livestock inventories as of January 1, thousand heads Section The Real Sector Despite generally poor performance of the livestock sector, some sub sectors therein are quite rapidly recovering. In particular, poultry meat production grew by an average 17% a year throughout the surveyed period (Fig. 52). Intensive feeding of hogs is growing as well; in 2006 their inventories started to increase no ticeably (Fig. 51). Thanks to the intensive feeding of poultry and hogs the total meat output in 2006 was up 4.6%15 (in recent years the share of households in the output of pork and in hog inventories is steadily falling meaning that production increase is provided by large farms applying intensive technologies).
The upsurge of pork production in 2006 resulted in the drop of purchase prices: they lowered by 2% (in nominal terms)16 after rising by 1/3 in 2005. This raises doubt about further production growth and inflow of investments in the sub sector.
Farms of all types, slaughter w eight Corporate farms, live w eight Source: Federal Service of State Statistics.
Fig. 52. Production of poultry meat in Russia, thousand tons The country’s averages of livestock productivity are steadily improving (Ta ble 57); annual milk production per cow is already well above the pick figures of the Soviet period.
Table Livestock and poultry productivity in Russia 2000 2001 2002 2003 2004 2005 Annual milk production per 1 cow, kg 2343 2553 2808 2979 3070 3292 Annual egg production per 1 laying hen, pieces 264 273 279 285 292 301 Source: Federal Service of State Statistics.
In some regions intensive feeding of hogs and poultry grows at the rate far ex ceeding the average Russian indicators. For instance, in 2006 production of pork and poultry meat in Moscow, Belgorod and Penza oblasts, Krasnoyarsk and Stav Federal Service of State Statistics.
RF Ministry of Agriculture.
1986-RUSSIAN ECONOMY IN trends and outlooks ropol krays grew by 130 160%. These regions form as specialized zones of hog and broiler production. Similarly, regions specializing in dairy production emerge – they are characterized by accelerated (as compared with the country’s average) rates of growth and higher productivity indicators.
3.5.2. Financial performance of farm producers Since 1999 the financial performance of Russian agriculture is steadily im proving. The share of profitable farms is growing as well as their profitability. This process was mainly determined by the after effects of 1998 crisis. The only excep tion was 2002 when agriculture was affected by the sharp drop of prices received by farm producers. Besides, the sector benefited from much stronger government support and growing investments. The farm debt rescheduling campaigns also contributed to the improvement of performance indicators.
A qualitative leap in farm producers’ financial performance took place in 2004:
its positive balance remarkably grew and the share of profitable enterprises ex ceeded 50%. The number of farms having overdue debts and the size of these debts are steadily decreasing.
It’s generally believed that the most important factor of better financial per formance of farm producers is the implementation of farm debt rescheduling pro gram effective since 2003. According to data of the RF Ministry of Agriculture by October 1, 2006 agreements on debt rescheduling were signed by 12388 agricul tural producers (about 40% of their total number and 64% of the ones having over due debts). From October 2005 the number of entities participating in the program is actually stagnant since few new agreements are signed while the dropping out continues. Accordingly, the amount of restructured debts reduces. Overall 80.6 bil lion rubles of participating farms’ debts were restructured including 41.6 billion ru bles of fines and penalties of which 29.7 billion rubles were written off. At the same time 12570 agricultural producers cannot participate in the financial recovery pro gram: almost 5 thousand enterprises go through the bankruptcy procedure, 4.thousand are unable to make current payments according to the rescheduling terms and the rest cannot join the program due to other reasons. Besides, 3.thousand agricultural producers lost the right to participate in the program having failed to meet current commitments; moreover, in almost one thousand enterprises rescheduling was suspended.
The process of bankrupting farm producers is rapidly intensifying: while in 2004 3455 bankruptcy proceedings against agricultural entities were initiated, by early November 2005 6210 bankruptcy cases were under examination. In months 2006 4970 bankruptcy proceedings were initiated. It had a positive effect on the sector’s average financial performance (Table 58). In 2006 the share of profitable entities in agriculture for the first time exceeded the corresponding figure in economy at large (67.4% in January September 2006). The sector’s general profitability increased two fold, net profits – by almost 30% while credit indebted ness fell by 20%.
Section The Real Sector Apparently the improving financial performance of the sector at large is due to the increase of efficiency in the upper producer groups, their higher attractiveness for investors. Investments in fixed capital continued to grow (by 43% as compared with January September 2005) although in 2005 they had already more than dou bled. Foreign investments in agriculture also grew at higher pace: their amount enlarged by 30% as compared with the previous year (in 2004 – by 20%). Begin ning from 2002 the amount of foreign investments grows not only in food industry but also in primary agricultural production (Fig. 53).
So, it would be a mistake to think that the observed improvement of agricul tural producers’ financial performance is entirely due to the implementation of farm financial recovery law.
Table Financial performance of agricultural producers Jan. Sept. Jan. Sept. 2000 2001 2002 2003 2004 2006 as % of Profitability of goods, works, services and 6.3 9.3 1 2.7 6.4 7.5 14.9 assets sold, % Profit less loss, billion rubles 16.1 25.6 1 2.2 34.7 32.6 41.8 Share of profitable entities, % 47 44 42 49 62.2 59.6 71.7 Number of entities having overdue credi 23.9 23 21.8 18.9 16.5 13.3 10.6 tor indebtedness, % Overdue creditor indebtedness, billion 144.1 162.9 162.3 149.9 113.9 85 67.1 rubles Source: Federal Service of State Statistics, www.gks.ru 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Jan.Sept.
agriculture food industry Source: Federal Service of State Statistics, www.gks.ru Fig. 53. Direct investments in the agrifood sector, billion rubles (constant 1995 prices) RUSSIAN ECONOMY IN trends and outlooks 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Jan.- Sept.
Forei gn investm ents in in c l. F D I agric ulture Source: Federal Service of State Statistics, www.gks.ru Fig. 54. Foreign investments in Russian agriculture, million US dollars 3.5.3. Structural adjustment of Russian agriculture The basic trend in the current farm structure development in Russia is the sharp polarization of both large corporate farms and small producers.
Corporate farms – heirs of collective and state farms differ greatly by their performance indicators. For instance, unit production costs at farms located within one area (i.e. in relatively homogeneous conditions) may differ dozens times. Our study embracing 6 regions of the country and 4 basic products revealed that in the three surveyed years (2000 2003) the frequency distribution curve of farms by unit production costs has an apparent right tail. An example of such distribution is shown on Fig. 55.
It should be noted that the mode values of unit production costs of basic products are far below (as in the grain case) or comparable with the world indica tors (as in case of milk, major kinds of meat and sugar). This means that at pro ducer level the most part of farm sector is quite competitive.
What are the basic causes of this “tail” Why don’t production factors outflow from “tail” farms to the mode or advanced farms One of the reasons is the state support of insolvent farms. This support is pro vided not in the form of direct subsidies but through various kinds of “producer fi nancial recovery” schemes succeeding each other throughout the reform years.
The latest law on financial recovery was adopted in 2002 and came in force after the period examined in the study. However, before 2002 farm debts were also regularly written off (“restructured”) and efforts were made to preserve financially unstable producers. The practice of creating farms “doubles” got widely spread – the actually bankrupt enterprises transferred to them their assets that were not en cumbered by debts. In early 2000s up to 40% of registered agricultural producers in fact didn’t operate which was largely the effect of this practice. Such farm policy results in forming of the right tail of low profit producers and thus reduces the sec tor’s average efficiency. Moreover, the disappearance of non efficient producers Section The Real Sector from the market would free a market niche for the most efficient ones that would be able to enlarge production and hence to further improve their efficiency.
X axis – unit production costs, Y axis – frequency.
Source: E.Serova, O.Shick. Soft budget constraints as a factor of financial insolvency of Russian agriculture. In: Proceedings of the II Congress of Russian association of agricultural economists.
Fig. 55. Distribution of corporate farms by grain unit production costs:
the Rostov oblast case (rubles per 100 kg, 2000) Why do then agrifood sector administrators adhere to the policy that pre serves the status quo with non profitable producers The principal cause behind that is the two so far unsolved problems: the lack of efficient farm bankruptcy mechanism and the absence of strong rural development policy targeted at the creation of alternative rural employment. An efficient farm bankruptcy mechanism should tackle several key problems: the maximum preservation of production com plex integrity or at least production resources in agriculture, rational utilization of valuable farmland and most importantly – the ensuring of income sources for rural population in the affected areas. The world practice offers solutions for these prob lems but we cannot afford discussing them in this paper. Still, the current Russian policies evidence that so far the only way out is recognized – preservation of non efficient farms somehow addressing social issues. Unfortunately, this is a blind al ley undermining competitiveness of the sector at large.
On the other hand, small individual producers (in Russia – household farms) are also extremely polarized. Our study based on the results of pilot census con ducted in 2005 in 6 districts of 3 Federation’s constituent members (in the frame work of All Russia Agricultural Census) allowed us to estimate the extent of this po RUSSIAN ECONOMY IN trends and outlooks larization. Pilot census data were used to construct households’ distribution curve by gross agricultural output. The results were similar in all the surveyed districts – from 42 to 71% of households produce less than 5% of the respective district GAO.
On the average they possess less than 0.1 ha of land and have no livestock or poul try. Fig. 56 illustrates the trend using one district as an example. No doubt, such households are purely subsistence plots producing farm products for personal consumption; sporadic sales of their output account for a small share of family money incomes. On the other hand, about 20% of household farms produce over ј of the district GAO. These are surely market oriented commercial producers, actu ally individual private farms that do not register as such just in order to avoid taxa tion and to preserve access to concessionary services of large “mother” farms.
‘ 0 1000 2000 3000 4000 5000 6000 7000 households Source: E.Serova, T.Tikhonova. Who is the actual agricultural producer among Russian household farms In: Proceedings of the II Congress of Russian association of agricultural economists. Mos cow, 2006.
Fig. 56. Distribution of household farms by gross output in one of the surveyed districts The land market in agriculture got actually paralyzed after the adoption of new land legislation in 2001 2002 due to the extremely high transaction costs. The law on agricultural land transferability is constantly corrected and supplemented in the State Duma: as of now about 65% of the original text has been amended but the situation remains actually the same.
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