Governor Misharin has left farmers in the Sverdlovsk region high and dry

16.06.2011 — Analysis

In 2011 the Sverdlovsk region planted an extra 1,500 hectares of potatoes. Officials were trying to curb the escalating price for this popular product, which had tripled in the previous six months. But farmers aren't expecting prices to decline, even if they have a good harvest. Why? Because of the policies of local officials who don't pay enough attention to the agricultural market. As these columnists for "RusBusinessNews" have determined, the region missed its chance to modernize its farming practices and is now at risk of losing its agricultural industry.

Ilya Bondarev, the minister of agriculture for the Sverdlovsk region, claimed that 10,700 hectares of potatoes will be planted in 2011, which is an increase of almost 1,500 hectares over 2010. He says that almost all the major farms in the region are increasing their planted acreage in order to avoid potato shortages this fall. After the extraordinarily dry summer of 2010, the resulting harvest was poor, which created an upheaval on the market and thus an unprecedented rise in prices. Potatoes with a production cost of 2-3 rubles per kilogram were selling in stores for 45 rubles/kg.

As it turned out, the Sverdlovsk region was not prepared for such a price jump. Retail sales networks accused local potato producers of price speculation, while farmers countered that oil industry workers up north were prepared to pay 100 rubles a kilo for their current crop. Governor Misharin decided that the public itself was much to blame, claiming they had gotten too lazy to grow their own potatoes at their garden-plots like they had in Soviet times. The regional leader decided to combat rising prices for this staple food, which often acts as a substitute for bread, by bringing in imports, and suddenly the stores were selling spuds from Egypt, Turkey, and the Netherlands. "Now they know what they can do with their expensive potatoes," - Misharin threatened the farmers.

The government's actions helped lower the price of potatoes to 30 rubles a kilogram, and to further this success, they decided to plant even more hectares in 2011. But a new disaster struck before the sowing began - the price of local seed potatoes jumped by four times in comparison to the previous year's price, which made them almost as expensive as the elite, imported varieties. Farmers predict that there is no way consumers will be able to buy potatoes from this latest crop for less than 40 rubles a kilogram. This is approximately what they cost in Germany (one euro a kilo), where incomes are much higher than in Russia. This is just one more example of the government's ineffective management of the Russian agricultural sector.

In developed countries, the state guarantees farmers a certain level of income while also making sure that the market price for agricultural products is not completely inconsistent with what it costs to produce and sell them. Regular monitoring of agricultural expenses and revenues allows the government to set the farming subsidies, which are rising each year. According to experts, subsidies represent up to 50% of the value of output in the EU, 70% in Japan and Finland, and 3.5% in Russia.

And the Sverdlovsk region is an outlier even among Russian regions. During recent hearings in the regional Duma, Deputy Anatoly Sysoev claimed that government support for agricultural producers did not exceed 1.6%, which would mean that the Central Urals lags behind the Tyumen region (4.8%), Bashkortostan (3.6%) and other neighboring regions. Of the two ways listed above to regulate agriculture, making production more profitable or restricting prices, neither is adequately utilized in the Sverdlovsk region. The processing industry determines the market policy and also gets the majority of the public subsidies. According to Anatoly Sysoev, the reduction in the market price alone cost farmers two billion rubles in 2009 and 1.3 billion in 2010.

Deputy Ilya Gaffner points out that the agricultural industry also uses ancient, Soviet-era equipment. The former governor of the Sverdlovsk region, Eduard Rossel, approved a program to build modern cattle barns and improve farming practices, but he preferred to invest public money in questionable projects, such as the construction of a building for the regional legislative assembly. Aleksandr Misharin, the new regional leader, picked up that baton and decided to bury 5-9 billion rubles in the swamp by building a new exhibition center. As usual, such budgetary expenditures meant that there wasn't enough money to invest in the rural areas.

This lack of cash resulted in a lack of competitiveness. The potato market in the Sverdlovsk region has recently fallen under the control of producers from Tyumen, who managed to eke out a decent crop even during 2010's dry weather by using better equipment and industrial crop-production technology. Potato farmers in Perm, who are in their third year of the Perm Potato Project, can also offer a cheaper product. Not only does their regional government subsidize their production, but they were also able to significantly increase their harvest by buying fertilizer and superior seeds. According to Tatyana Kayukova, the deputy director of Oven, LLC, some varieties of potatoes can produce up to 59,000 kilograms per hectare. She predicts that their industry will be able to offer potatoes to dealers for ten rubles a kilogram this fall, which will be 50% cheaper than the price demanded by farmers in Sverdlovsk. It's no wonder that Perm sells up to 20% of its potato harvest in Ekaterinburg.

Grain is also very expensive in the Sverdlovsk region, which, combined with ancient poultry-farming equipment, is resulting in an uncompetitive poultry industry. According to Ilya Gaffner, the production cost of a single chicken is 20% higher than its sales price, the results of which could be seen in the market very quickly. Currently the Argayashskaya poultry farm (Uralbroiler CJSC) sells more chicken in Ekaterinburg than in its home region of Chelyabinsk.

The business community believes that officials in the Sverdlovsk region failed to modernize their rural areas and now need to make up lost time quickly by investing heavily to lower the production cost of agricultural products. The authorities need to make a decision - either make farms more profitable, as they do in the EU, or put limits on the market participants' desire for a high rate of return, for example, by allocating 10% of the sales price to the retailer, 30% to the processor, and 60% to the farmer.

Elena Stafeeva, the executive director of the Urals Union of Livestock Breeders, non-commercial partnership, believes that the amount of government support needs to be tripled, if the goal is to motivate farmers and stimulate the industry. It takes a long time to recoup an investment in an agricultural project - about ten years - and outside investors are hesitant to open up the cash spigots for long periods if the risks are high. Public subsidies would help reduce the payback period to a more acceptable 7-8 years, and then bank loans could be used to modernize production.

But officials decided to go their own way. In early 2011, they promised to compensate farmers for up to 50% of the cost of new machinery, equipment, and other inventory. The farmers were happy and took out bank loans to begin modernizing. Then it was discovered that the Sverdlovsk regional government had officially decided to subsidize only 19% of the cost of a combine, 15% of a tractor, and 10% of a planter. As Elena Treskova, a deputy in the Sverdlovsk regional Duma, confirms, the industry fell into a black hole of debt.

The farmers are beginning to grumble. The truth is that Governor Aleksandr Misharin's administration has left them high and dry. Officials from Moscow who came to the Sverdlovsk region to work temporarily are showing interest in buying agricultural products outside the region. And no one seems to be in a hurry to invest public money to support local farmers. After all, everyone knows that if you want a garden you can feed yourself with, you need to plan it in the winter - by the time summer comes it's a bit too late.

Konstantin Dzhultaev, Lyudmila Maslova, and Vladimir Terletsky