Agriculture: Growth amid poverty
Konstantin Skuratovich

Summary

The year 2010 proved quite successful for Belarusian farms. Despite the unprecedented heat last summer, gross farm output increased from 2009, profitability went up, and the share of loss-making farms fell. At the same time, production costs soared, and so did debts of the sector to the national economy.

Because of their low paying capacity, farms remain the weakest link in the chain of settlements between economic entities and the largest and least reliable borrower. The problem of technical modernization of farms is tackled chiefly through additional lending. Belarusian agribusiness is up against a new challenge – to increase production volumes and exports.

Tendencies:

• Increase in farm production and reduction in losses of Belarusian farms are not enough to cut the combined debt of the sector;
• Agribusiness, the largest borrower of all branches of economy, pays its workers the lowest wages;
• Government keeps increasing loans to the sector to promote further growth in production and export.

Growth in output amid growing debts

According to the National Statistical Committee, overall farm production reached BYR 30.8 trillion in 2010, an increase of 2% year-on-year in comparable prices. Belarusian farms reported BYR 16.6 trillion in revenues, up 17.5% on the year, production costs went up 12.5% to BYR 13.4 trillion, and net profit hiked 54.8% from 2009 to BYR 1.9 trillion. Sales margin increased to 4.2% from minus 0.2%, the number of loss-making farms fell to 20 from 32 (their share went down to 1.2% from 1.9% of the total number of farms), and net loss dropped to BYR 39.7 billion from BYR 45 billion.

At first thought, last year proved rather successful for Belarusian agricultural enterprises. Despite the abnormally hot summer, the country managed to increase farm output from previous year’s level, saw higher profits, lower losses and smaller share of loss-making farms. One thing that is alarming is the substantial increase in production costs, which will inevitably entail a rise in food prices. The financial results of Belarusian agricultural organizations are traditionally a matter of concern. As of January 1, 2011, farms’ receivables were at BYR 2.2 trillion in current prices, a rise of 29.4% from January 1, 2010. Overdue receivables went up by BYR 26 billion to BYR 489 billion, and their share in total receivables rose to 22.4%. Although gross production increased 2% year-on-year in 2010, the growth was discounted by poor financials: overdue credit commitments of Belarusian farms rose 16.7% in 2010 to reach BYR 2.2 trillion. Agricultural enterprises therefore accounted for 35.9% of total overdue debts under loan agreements in the country. Overdue payables exceeded receivables 4.6 times as of January 1, 2011.

As of January 1, 2011, farms were responsible for 32.3% of overall arrears of taxes and dues, and social security payments in the country and 66% of overdue loans. Due to their insufficient paying capacity, farms appear to be the weakest link in the chain of settlements between economic entities and the largest and least reliable borrower (although the share of agribusiness in the country’s GDP is below 10%).

Respites, preferences, debt remissions

The financial performance of the agricultural sector seems quite poor, however, in reality it is even less satisfactory, given the large share of farm produce made by private households and farmers. According to BelStat statistical committee, farmers and private households account for a third of the entire agricultural output in the country. We cannot provide precise statistics here, however, since all the remaining indicators are taken from official sources, we will have to draw this conclusion. In this case, the share of state-controlled (“organized”) agribusiness in the country’s GDP stood as low as 6-7% in 2010, with overall output amounting to BYR 20-21 trillion in value terms.

When assessing the financial standing of Belarusian farms accountable to the Agriculture Ministry, we have to bear in mind that all of them were allowed to repay current liabilities in installments within 10 years of March 1, 2010, when a corresponding presidential ordinance came into effect. The overall debt of Belarusian farms was cut by BYR 1.6 trillion, to BYR 7.7 trillion. Overall liabilities of domestic farms stood at BYR 20 trillion as of March 1, 2010, and by the end of the year, farms’ total debt must have exceeded BYR 22 trillion.

Judging by the current financial situation in the sector and trends of the previous couple of years, we can make a definite conclusion about the prospects of financial rehabilitation of agricultural organizations. As of today, there are no prerequisites for major improvements in farms’ financial health.

Nevertheless, Belarusian agribusiness has very ambitious targets to meet. Prime Minister Mikhail Myasnikovich set the agricultural sector a task to increase export of produce to USD 7 billion annually by 2015 while ensuring at least a USD 4 billion trade surplus. Such a foreign trade breakthrough would be an extremely tough task even if Belarus were able to keep a very high pace of agricultural production and secure sustainable financial performance. However, as Myasnikovich himself had to admit, “the economic situation in the sector is bad… outrageous.”1 The premier worries about the impossible debt burden on agricultural producers and calls on the government to “deal with it.” How can this problem be addressed? Thus far, the relations between farms and creditors have been built on a most simple scheme: decisions would be made to reschedule loans, the debt would not be pegged to the inflation rate and farms would easily repay it within a few of years. Alternatively, a “zero option” was used: debts would be written off to offer borrowers a clean slate for further relations with creditors. The government would also resort to increasing procurement prices of farm produce in a bid to balance the debtor-creditor relations. 

Mixed economy, modifications in statistical recording, farm production in the private sector

Belarus has a mixed agricultural economy, with state organizations (experimental facilities, institutes, seed and breeding farms, subsidiary and test/experimental units with educational and scientific facilities), agricultural production cooperative societies and other organization having the same legal status, farm enterprises, personal subsidiary plots and gardening cooperatives. The law has prohibited the authorities to interfere with the work of organizations that are not subordinate to the Agriculture Ministry; however, statistical agencies keep adding their production volumes to the figures reported by state-controlled farms accountable to the ministry to have gross farm output figures. At the same time, the responsibility for meeting production targets lies with the ministry, region and district executive committees.

Back in the 1990s, when partial liberalization of land relations resulted in a sharp increase in production by the private sector, administrative and controlling agencies seemed quite satisfied with improved statistics. However, market reforms were phased out shortly afterwards; the situation was further deteriorated by depopulation trends, especially in rural areas. In the period between the two population censuses of 1999 and 2009, rural population fell by 645,000 people, or 21%, to 2.439 million people. In that decade, the number of rural households, key agricultural production units, dropped 18%, or by 1,041 units2 . These precise figures are not good enough to determine the real reduction in the rural production potential, because the natural loss of population is caused by ageing. Senior citizens residing in the countryside are not only demotivated, but also incapable of working on their personal subsidiary plots as intensively as before.

It appears the initiative expressed by then Agriculture Minister Semyon Shapiro – to set growth targets for agribusiness annually without including the combined output of private plots – became quite popular with professionals despite the fact that the government dismissed it. The minister claimed the target should be modified, because the output of private subsidiary plots kept falling, and the process was unstoppable. Since private plots account for 36% of the gross farm output in the country, the tendency toward a farm production cutback (by around 5% year-on-year) in the country may only be offset by at least a 19% increase in output by farms subordinate to the ministry3 . The Agriculture Ministry is naturally unwilling to bear responsibility for the farms and plots that it cannot influence directly. In addition, officials could have major concerns about the authenticity of statistical information about the output of private subsidiary plots. The thing is that statistical data are taken from registers compiled by village councils based on the information that households provide on a voluntary basis, therefore, there is sufficient room for manipulation (village executive committees that are supposed to report relatively favorable statistics are virtually forced to fudge figures).

Common sense finally prevailed, when the Council of Ministers issued resolution No. 88 to oblige BelStat to conduct random tests of private plots and use the findings as the basis for reports on farm production. According to BelStat specialists, some 600 plots must be surveyed to get objective information (about 0.3% of the total number). Surveys will be conducted by 80 professional interviewers-statisticians who will receive bonuses of BYR 875,000, or USD 290, in addition to their monthly wages.

The proprietors of subsidiary plots are expected to take part in questionnaires voluntarily; they will be paid one base unit of BYR 35,000 a month. Surveys of this kind conducted abroad proved quite efficient4 , and Belarus hopes the global experience will help it receive authentic statistics of farm output by private subsidiary plots.

Budget cooperatives, compensations, low incomes

Given the prevalence of cooperative organizations in the agricultural sector, it would be more reasonable to address incomes of cooperative members rather than wages, or at least split the incomes received in advance to pay compensations and those received at the end of the business year. Since farms quite frequently report losses instead of profits, cooperatives do not pay their members any bonuses, however, they do not make deductions from the sums already paid, either.

It is for that reason that the specifics of economics within a cooperative were neglected long ago, and all incomes received by members of production agricultural cooperatives are accounted for as “wages”. This illustrates the complete isolation of members of cooperatives from participating in management processes. In fact, cooperatives have been transformed into state-controlled budget-financed organizations, where wages are paid on the so-called “leftover principle”. In other words, the size of wages is hardly pegged to economic performance; it is simply pushed toward the level of compensations paid in other sectors.

For example, in the first quarter of 2010, monthly wages in Belarusian agribusiness averaged BYR 652,000, 62.7% of the average wage in the country and 55.6% of the average wage in the manufacturing sector. In the fourth quarter, the nominal average wage reached BYR 936,000, up 43% from the start of the year, but the proportion remained unchanged: 64.5% of the average Belarusian wage and 58.9% of the average wage in industry.

Agribusiness ranked last by the size of wages in the national economy in the fourth quarter of 2010, behind public catering with BYR 1.005 million and non-production public services with BYR 1.013 million. Based on sample surveys of households, the average per capita disposable incomes in towns and urban-type settlements were at BYR 781,000, 30% above the average income in rural settlements. On average, the share of lower-income households (with disposable incomes below the minimum subsistence level) in Belarus stood at 3.4%: 2.7% in towns and urban-type settlements and 5.4% in rural settlements.

Technical retooling: financial problems and efficiency

In 2010, the Belarusian president signed an ordinance on the national program for supplying agribusiness with modern machinery and equipment and construction, maintenance and modernization of agricultural facilities for 2011-20155 . The program came into effect on January 1, 2011 and is implemented based on the following scheme. The Agriculture Ministry and region executive committees adopt annual equipment procurement plans and submit them to state-run Belagroservice, which is responsible for bulk purchases financed from bank loans that are extended against the security of the government and region executive committees.

In 2011, loans are provided for the period until July 1, 2019 and are to be repaid starting January 1, 2012 in equal monthly installments without interest payment. The machines and equipment purchased under this scheme (on financing lease terms) are transferred to agricultural organizations6 .

The government thus confirms its adherence to the policy of facilitating technical re-equipment of domestic farms by way of concessional lending. The problem is urgent for Belarusian agribusiness: the physical infrastructure of most farms is outdated, and more and more machines and tractors need replacements.

Availability of farm machines in Belarusian farms7 (late 2010, units)

*Not including tractors with mounted earthmoving, reclamation and other machines

However, the main objective of the campaign to re-equip the agricultural sector is to introduce innovative sophisticated technologies, advanced energy-saving solutions and methods to increase the efficiency of the use of material and energy resources rather than to simply make up for decommissioned machines and equipment. Apart from organizational matters, in which the country has accumulated substantial experience (albeit quite ambiguous, experts say), Belarus will also have to address very serious technical challenges. It is planned to focus modernization efforts on domestically-produced machinery, which, some experts claim, is better than foreign analogues or at least has comparable characteristics. Many operators of equipment and independent experts disagree, though.

The key problem is financing, and in the next five years, drastic measures will be called for to tackle it. During a meeting with the newly appointed government, Lukashenko admitted that there were serious defects in the action plan to implement the State program for restoration and development of the village, and emphasized the problem of efficiency. “Agriculture has not yet reached self-sufficiency and is far from self-financing.”

The president was dissatisfied with the range and quality of farm produce, low increase in exports and absence of visible progress in approaching new markets. According to him, agribusiness is capable of achieving financial sustainability by doubling revenues by 2015, increasing profits at least nine times on the 2010 level and boosting profit margin to 11%8 . The trend observed in the previous years continues: the authorities demand improvements in efficiency while setting ambitious gross production targets.

Conclusion:

The year 2010 did not see any new methods to tackle the traditional problems of Belarusian agribusiness. The key performance indicator is the growth in farms’ gross output, and the main instrument to attain the targets is the bank loan. The debt of the sector grows much faster than production volumes and export proceeds. In the meantime, farms that are not subordinate to the Agriculture Ministry account for a third of farm output and do not require budget injections, partial payment of interests on bank loans from budget funds, debt remissions and other traditional measures to “support the village”.

The Belarusian agricultural sector is therefore split into two subsystems with polar organizational systems. On the one hand, there are formally independent farms subordinate to the Agriculture Ministry that enjoy state resources either free of charge or at reduced rates; on the other hand, there are private farms and private plots that are independent of the state both de-jure and de-facto. The latter are mostly small commodity productions (farms) or subsistence plots (households), however, they do produce added value. On the contrary: agricultural organizations mostly report net losses (negative added value) – this conclusion can be drawn from comparisons of the value of output and costs.

All programs to promote agricultural production target exclusively the farms subordinate to the Agriculture Ministry and offer the good old solution – production growth through increases in lending volumes. The poor results registered in the past few years show what the prospects of the sector look like.