Problems in Agriculture: Prices, Middlemen, Skills and Credit

In a crisis, and given the devaluation, the cost of technological equipment simply becomes unaffordable. We do not produce technology ourselves, so in this situation, for the sake of the country's development, we need to support industries that depend heavily on labor inputs, and agriculture is one of them.

Agriculture is a very difficult, low-margin industry. It has none of the fabulous profits of the oil business.

Drip irrigation makes it possible to minimize the risks of weather dependence and to reduce the cost of production by raising yields and cutting the water and fertilizer costs per hectare.

This post is about some of the problems in agriculture that must be solved if we are to make any major progress.

1. Selling prices. Last year a lot of onions were planted, and there was heavy overproduction. At the start of the harvest, onions were sold at KZT 30–35 per kg from the field. But everyone was waiting for a higher price, and almost everyone put their onions into storage. What happened next? In winter, when sales began, onions were already selling at KZT 25. In spring, because they were at risk of spoiling completely and the early onion crop was coming in, they went for KZT 10–15, and at the end of April they were simply given away to the public for free, because disposing of onions later costs a lot of money. Storage also causes losses from shrinkage, which is another 10–15%. In total, all onion producers suffered heavy losses last year.

Naturally, this year the planted area fell by almost half. But thanks to good rains, many farmers got a good harvest. Yet another problem has appeared: many producers are finding disease in their onions, which means those onions will not keep. This raises a further issue. Because of it, nobody wants to store them and everyone is dumping onions on the market, which is crashing prices right now. Poor-quality onions can already be bought for KZT 25–30, which is below the cost of production for many. Seeds, fertilizers, spare parts, fuel and hoses have all become more expensive, while the price is lower than last year. But in winter there will be a terrible onion shortage and the price will rise even higher. As a result, ordinary farmers suffer, and this clearly calls for state assistance: the state should buy up fruit and vegetable produce when prices are low and store it until prices rise.

2. The gap between wholesale and retail prices. The price of onions in the field is now KZT 35. Go into any store, any market, or look at the vendors near your home, and you will see onions priced at KZT 70–150 per kg. Logistics to the city come to around KZT 3 per kg. Delivery across the city to the stall adds another KZT 2–3. That puts the vendor's cost at about KZT 41–42. Yet they sell for at least KZT 70, which gives the middleman a margin of around 100%. The producer's direct production cost, excluding administrative expenses, is around KZT 25–30, which yields a return of only about 15–30%. Add administrative and financing costs, and it gets even worse.

This is because our markets and large retail chains are monopolized (alas, the antimonopoly authorities can only chase retail fuel sellers, and no more), while there are thousands of onion producers, since many farmers grow just 1–2 hectares each. Accordingly, this is a buyer's market. Ordinary farmers have no access to retail sales, and large onion producers cannot afford to go into retail because it is inefficient. This can be resolved only with the help of the state, first of all by helping to export produce, which would raise onion prices and force local middlemen to cut their margins. Alternatively, the monopolization of the retail market, which already exists de facto in Almaty and Astana, must not be allowed.

3. Skills. Personnel decide everything, in agriculture too. Agricultural education is among the worst in the country. There are no proper specialists. Uzbekistan has far more of them. Yet in Soviet times our agricultural institutes were among the best in the Union. Now one gets the feeling that these institutes work more to supply staff for the Ministry of Internal Affairs than for the agricultural sector. Secondary agricultural education has simply died. While the whole world already uses the most advanced technologies in agriculture, our students are still studying from textbooks of the 1960s. There are zero innovations, and students who come to work on farms have to learn everything from scratch. There is absolutely no link between production, science and education.

4. Financing of agriculture. Obtaining working capital for agriculture from second-tier banks is practically impossible. To them we are unprofitable businesses with high risks and low collateral. The collateral coefficient is 0.2–0.3. KazAgro, like all state development institutions, is ready to help, but bureaucracy eats up all of its assistance. It demands the same collateral, all the documents, appraisals, and so on and so forth. This makes such financing accessible only to large producers, because many peasant farms cannot afford to keep proper accounts and so on. Different mechanisms are needed here, and advance purchase of the future harvest through the social-entrepreneurial corporations (SECs) could be a good solution.