The WTO has not yet wrung us dry

05.06.2013 — Analysis

The authorities in the Sverdlovsk region are promising to adopt an appropriate strategy to develop the agricultural industry.

The plans to double the share of local products in the food market by 2020 seem almost Napoleonic in scope. Agricultural producers believe that officials will find this no easy task - better to slowly but surely drag the village out of the swamp, and it's important to them that the plans not veer off into utopia.

In recent years, food producers from other regions have actively encroached on the Sverdlovsk region food market. The local share of this 420 billion-ruble consumer "pie" is quite modest - only 67 billion. Given this state of affairs, any discussion of regional food security (i.e., independence) is nothing more than hot air.

The first step to solving a problem is admitting you have one. A "mobilization" of the village has been announced in the Sverdlovsk region. The government is calling upon local producers to wrest their territory back from their competitors, and it is ready to back them. The goal is very specific - to double the share of local food in the Sverdlovsk regional market within seven years, which currently stands at only 16%.

According to Mikhail Kopytov, the minister of agriculture and food, meeting this target will require annual investment of at least three billion rubles into agricultural processing, as well as the launch of seven to ten large-scale projects. In turn, the regional prime minister, Denis Pasler, claims, "It's easy to draw up a strategy, but what we must do is listen to the producers and find out what they need in order to achieve the stated goal."

Agricultural producers are willing to assign tasks to the officials, but only if they are listened to as well as heard. The problem in the village is uncultivated land. And ripening has to happen at the roots, that is, with the raw materials. Take the dairy industry for example. According to Igor Pekhotin, the chairman of the Dairy and Processing Industry Union of the Sverdlovsk Region, in theory, factories are ready to increase their annual capacity by 20%. But to make that happen, they need their own raw materials and those are lacking. In 2012 almost half of what they needed had to be purchased from neighboring regions! "And entrance into the WTO means that producers will be tempted to switch entirely over to European powdered milk, which is several times cheaper. Thus the real task is actually to support livestock breeding and maintain a local base of raw materials," claims Igor Pekhotin confidently.

So what happened to all the milk from the Sverdlovsk region? Let's look at the numbers: there used to be 150 privately owned cows in the statistically average village of Bitimka, today there are only five. It got to the point in the village that it was cheaper for the locals to buy milk at the store than to feed Daisy. The head of one farm business says that in the early 2000s the cooperative expanded its dairy-processing operations - at that time each ruble of production cost would yield four rubles at the sale of the finished product. But here's today's arithmetic: the net production cost of milk is 15-16 rubles, which increases to 24 rubles with the addition of commercial expenses (packaging and shipping), and then the business sells it for 25 rubles. Try to live off one ruble!

The problem is that life is becoming many times more expensive while the amount of financial support for the village remains frozen. For several years, that milk has been subsidized at three rubles per liter, although the price of feed has doubled in just the last year. Farmers think a reasonable level of support for agriculture should include annual adjustments equal to at least the official rate of inflation.

According to Vitaly Dunin, the chairman of the Sverdlovsk Union of Producers and Processors of Potatoes and Vegetables, one of the biggest problems in vegetable production right now is the dependence on imported seeds. Russia is almost entirely limited to seed potatoes from the European Union and is in a state of complete dependency for its vegetables. A ban on those imports, which Rosselkhoznadzor has repeatedly suggested, would destroy domestic vegetable production. "We could scrape by for a year without the seed potatoes from abroad, but as far as the vegetables - everything would immediately grind to a halt," he emphasized.

Led by Mr. Dunin, the Belorechensky Agro-Industrial Combine, CJSC, in conjunction with Kartofel (Potatoes), LLC and the Urals Scientific Research Institute of Agriculture, presented the regional prime minister with a business plan to establish a plant breeding center, which would make it possible to reduce the number of imported seeds by more than half. The cost of the project will be 300 million rubles and its originators expect to receive 30% of this amount from federal and the regional coffers. Pasler Denis promised that the project will not be put "on the shelf" and will be presented to the Russian government. With a bit of luck, the plant breeding center could begin operations in 2015.

Price hikes are another major problem - in a market economy a rich harvest can become a disaster for agricultural producers. If they overproduce they have to sell below cost. "We are still swallowing our losses from 2011, when an excellent potato harvest was taken from the fields at 5-7 rubles a kilo, carrots at 5-6 rubles, and the price of cabbage dropped back to three rubles - the level it was at in 1992," complains Vitaly Dunin. He thinks that in the event of force majeure, farmers need compensation for their direct expenses in order to get through the tough times. That is the path that the Tyumen region, in particular, took in 2011.

This brings up another question - a lack of refrigerated storage space for vegetables in order to help preserve the quality of agricultural products until the new harvest. Vitaly Dunin notes that a way could be found to import them, if the government would compensate 40% of the costs. The regional prime minister suggested using the Ministry of Industry and Construction to resolve the problem. "Builders are needed who specialize in the construction of industrial facilities of this kind, to pique interest in the prospects of new building sites." Pasler called on the heads of municipalities in areas with the most highly developed vegetable production to draft documents for participation in targeted programs for the construction of storage facilities.

The situation with milk and vegetables is actually a partial victory for the Sverdlovsk region. Those who raise beef cattle are in the most dire straits. Here we don't even have to look to Europe for an example - one can be found with our neighbors in Urals Federal District. In the Central Urals, 50% of the cost of replacing equipment at livestock-breeding operations is compensated, plus 30% of the cost of building and renovating facilities, but the Tyumen region pays for 90% and 70% of those expenses.

Cheaper products from abroad, where support for the agricultural industry is many times higher, are already sticking in the throats of local producers. Russia's entry into the WTO will finish them off. Our livestock breeders won't have a chance of making a profit when faced with discounted prices from overseas. All previous efforts to salvage pig and poultry farming could be reduced to nothing in one fell swoop.

"Customs duties on pork have been reduced from 40% to zero, and on live pigs from 40% to 5%, which resulted in massive imports of cheap pork and the collapse of purchasing prices on the domestic market," states Minister Mikhail Kopytov. This is in addition to the fact that Russian pork is one-third more expensive than European by live weight.

In the wake of a two-fold increase in the cost of feed and a 20% decline in the purchasing price of pork, that industry is surviving only by the skin of its teeth. Sergei Emelyanov, the chairman of the Meat Union of the Sverdlovsk Region, told RusBusinessNews that many businesses will go under without long-term support from the state. Government purchases of grain at a fixed price are particularly essential. According to industry representatives, provision should be made for the secured purchases of grain and the formation of a food reserve, not only at the national, but also at the regional level. This will make it possible for farming businesses to increase sowing, while at the same time regulate the cost of feed. If farmers can sense stable ground under their feet they will be able to make strategic plans.

This is being heard from poultry farmers as well, who have also taken a beating from the WTO. Currently poultry plants can get credit on favorable terms: the state takes care of the total interest payment of 8.5%. But after a couple of years this rule will be abolished, and businesses are already having to cut back on their investment plans. "They're afraid that later they won't be able to repay the loans on their own. And the level of wear on their equipment is already currently 50-55%. They need to update their production facilities in order to stay competitive," explains Mikhail Kopytov.

During the economic crisis the authorities in Sverdlovsk needed emergency assistance. In order to preserve their population of livestock and poultry, producers were given additional subsidies. Livestock breeders also got paid five rubles a kilo for the products they created and sold, and poultry farmers got four. Payments are calculated based on the volume of production from January to May 2013.

The authorities also simultaneously adopted long-term measures to support the breeding and raising of beef cattle. In particular, nucleus breeding farms will see their expenses compensated at the rate of 7,430 rubles per animal per year, and  breeding farms - 5,228 rubles. In general, the regional budget is allocating 146 million rubles to support these areas between 2013 and 2015. At the same time, the process of allocating land to construct livestock farms is being improved.

"The most important thing is that the people living in these villages feel some stability. At one time we bought equipment and were waiting for compensation from the state, but then power changed hands in 2009 when Misharin became governor and they "forgave" all debts owed to us..." says the head of an agricultural production cooperative.

Now the government of the Sverdlovsk region is promising agricultural producers that they can have confidence in the future. A relevant regional program for 2013-2020 is intended to soothe these sore points. The Strategy to Develop the Food and Processing Industry, which is currently being fine-tuned, will work in tandem with it. At Denis Pasler's insistence, representatives from industry unions, academics, and government officials will gather at the negotiating table in order to work together to make balanced decisions. The authorities promise to take control of the entire "food chain" - from field to consumer, meeting regularly with the producers, processors, and retailers. A resident of the region should eventually be able to see the substance of this investment in Urals villages right on his own table, and at the head should be sitting our own local produce.

Lyudmila SOLODKOVA