The harvest blues

03.10.2011 — Analysis

Farmers in the Urals are sounding the alarm.  This year’s grain harvest was pretty good, but it just might ruin them.  Prices have fallen so low that they will have to sell below their production costs.  As usual, the government’s subsidies are running behind schedule, and farmers think the whole subsidy system is flawed.  As these columnists for RusBusinessNews have determined, the Russian countryside is being held hostage to the state’s economic policy, which is wittingly or unwittingly lobbying for the interests of grain exporters and bread producers.     

In the Chelyabinsk region, they are eying the rain clouds with despair.  Anna Taskayeva, the executive director of the Union of Farm Holdings and Agricultural Cooperatives, told RusBusinessNews that so far only half of the cultivated land has been harvested.  The grain collection centers are not accepting moist grain and drying facilities are in short supply.  But the rain isn’t even the biggest problem - a ton of grain that costs an average of 4,500 rubles to produce can only fetch 3,500 rubles on the market.    

They’re seeing a similar problem in other parts of the Urals.  Buyers are only offering 2,500 rubles/ton in the Tyumen region, even though farmers claim that grain costs at least 3,500 rubles to produce.  They can’t sell their wheat at such fire-sale prices because they need to pay off the bank loans they took out to buy equipment, seeds, and fertilizer.     

The government has several ways of helping the farming industry.  Crop producers are offered discounted fuel almost everywhere during the harvesting and sowing seasons, as well as subsidies for purchasing combine harvesters, loans against their grain harvest, and so on.  In addition, the Russian government has in recent years begun to regulate the purchase price of grain, using the commodities exchange to raise or lower that price based on crop yield.  Federal help has been late in coming this year, and Mikhail Yurevich, the governor of the Chelyabinsk region, has not ruled out the possibility of the region buying the grain for itself.  Vladimir Yakushev, the head of the Tyumen region, has already decided to subsidize the agricultural industry for every hectare of arable land that is sown.    

Naturally the farmers are grateful for the state’s assistance, without which they would have gone under long ago.  But they can’t resist pointing out how ineffective that assistance is.  For example, the discounted fuel is a problem.  The diesel they are offered is either very low quality or it comes with an unattractive price.  And the farmers are particularly dissatisfied with the way the purchase prices are regulated.    

After the government’s intervention in 2009, grain prices on the commodities exchange fell to as low as 2,000 rubles per ton.  Many farmers were unable to cover their losses and did not do any planting the next year.  The resulting shortage, worsened by the drought, led to a sharp increase in grain prices in 2010.  So the agricultural industry took out loans and sowed away in the spring of 2011.  They got a decent crop, but prices collapsed again.  Agriculturalists warn that these wild price swings not only keep them from expanding their operations - it means they end up just barely hanging on.    

The director of a farm holding in the Tyumen region told RusBusinessNews that farmers are caught in a vicious circle.  It’s bad to get a small harvest but it’s even worse to get a good one, since there’s nothing to do with the harvested grain.  The industry can’t plan its production.  When cereal growers are doing their planting, they can’t even begin to predict what kind of price they’ll get for their wheat crop (but the cost of fuel and electricity are known in advance).  Farmers just leave price setting out of their calculations, explaining that their product is too socially indispensable.  The state uses purchasing agents and interventions to keep the cost of grain down to a socially acceptable level, but for some reason the bread in the stores just keeps getting more expensive.  Farmers are quick to claim that this arrangement mostly benefits the dealers from the Russian Grain Union who ship the crop overseas, as well as bakers who can skim a profit off the grain through their retail networks.     

Thus, many farmers are suggesting that the way to set an economically rational price for grain is by regulating how much is planted.  Each region’s consumption level of bread, and thus grain, is well known.  It’s not too difficult to calculate the annual amount of grain that is produced, since the amount of sown acreage and the yield per hectare do not vary greatly.  So the state could determine in advance the amount that needs to be purchased: for example, 15,000 tons at 5,500 rubles per ton.  Cereal growers could use this number to calculate how much land to plant.  Then any extra that they produce would be their headache to deal with, not the state’s.     

But Andrei Savchenko, the chairman of the Union of Peasant (Farm) Holdings in the Sverdlovsk region, claims that this system would be difficult to implement in the Central Urals, which grows mostly feed grain.  He thinks that what farmers need isn’t subsidies, but a market where they can sell their own products, much like oil and energy producers do, rather than having to hand over their crop at the grain elevator in return for a set price.  If the state fears that the Russian public is too financially vulnerable to risk an arrangement like this, then it needs to start using economically rational prices throughout the economy, not just in the fuel and energy sector.    

Andrei Savchenko is confident that the price of a ton of grain wouldn’t fall below 4,500 rubles, and if the government finds that price unacceptable, then it needs to notify the farmers ahead of time so they don’t plant any more.  But the reality is that everything gets done Russian-style.  Public officials demand that a certain amount be planted - the farmers obey and then suffer losses that are not fully reimbursed by the state.  As a result, agricultural laborers earn no more than 5,000 rubles a month, which is five times lower than the average wage in the Sverdlovsk region.  However, Andrei Savchenko thinks that the real issue isn’t the purchase price for grain, it’s the entire economic state of the rural areas.    

The Union of Peasant (Farm) Holdings made their case to the governor of the Sverdlovsk region, Aleksandr Misharin.  He agreed that something needed to be done, but farmers aren’t aware of any real decisions that have been made.  But if things continue as they are, Russia will be cursed with a backward agricultural industry that isn’t interested in high crop yields.   

Lyudmila Maslova and Vladimir Terletsky