Agriculture: Debts, Cooperatives, and Programs Drawn Up in Offices

Agriculture is a very complex business, and it faces enormous problems.

What matters most in agriculture is yield, productivity, and product quality. Until we achieve high yields, talk of import substitution means talk of piling additional debt onto the sector and worsening the position of farmers and farms.

These days, only the lazy fail to talk about the problems of agriculture. The sector has supposedly been growing rapidly for the past five years. But what is it costing us? The sector's debt is growing much faster than the sector itself. This means the growth is extensive, built on government money, and we are approaching a financial collapse in the sector.

The most recently approved program, Agribusiness 2020, does nothing to resolve the fundamental issues. No one has carried out a deep analysis of the sector or of the causes of its inefficiency. Doing so would require a huge amount of field research, involving many research institutes, experts, and consultants.

All our consultants are big Western firms that know how to draw beautiful pictures, but hardly any of them will go to a collective farm to do real analysis. Yet they are paid very large sums for those pictures.

We all understand by now that the mega-holdings have simply turned into highly inefficient farms. There are many reasons for this, and there is no point listing them. But here is one simple example. Depending on the source, the debts of agroholdings range from $3 billion to $4.5 billion. Even just to cover interest on the loans at a market rate of 10% per year, a profit of $300–450 million is needed. Not even KazMunayGas earns such profits. Our agroholdings have never come anywhere close to them. And no matter how much more money they are given, it will have no effect.

In general, we are fond of extremes, and we have suddenly decided to support cooperatives and the self-employed on a mass scale. Cooperation is an important mechanism for developing agriculture, and it is needed, but not in the perverted form that has been devised here. From a macroeconomic standpoint, there is no point in supporting household plots, since they have no capacity to introduce high production standards, mechanization, and crop rotation.

Cooperation should not be compulsory, along the lines of "join together and we will give you money, otherwise you get nothing." Cooperation should be evolutionary and strictly voluntary. For example, farmers can cooperate in marketing. They can cooperate in purchasing fertilizer and fuel. They can cooperate in storage. But for that, we simply need to create the right conditions rather than resort to the stick.

That is why in agriculture it is not enough simply to hand out money and dream up programs in offices. A huge amount of work is needed, and it has to be work in the field.

We need to determine the optimal farm size and the optimal crop rotation. There are many nuances, for example, the utilization of combine harvesters, of the elevator or grain-receiving facility, and of tractors. There is the optimal stock of spare parts for repairs, the so-called repair fund, which depends on the frequency of breakdowns and the amount of machinery. There is the optimal acreage from the standpoint of manageability. And so on.

We need to determine the amount of value added at each stage of the downstream processing of agricultural products, and consider where there is potential for export growth for each product.

Then we need to analyze what farm size is optimal in terms of yield.

Then we need to understand how much vertical integration adds to resilience, for example grain–flour–pasta, or feed–meat–sausages. And so on.

Furthermore, there are products that simply cannot compete on yield, and no matter how much money we pour into the given technology, Western counterparts will be more efficient. For example, government agencies often look at greenhouses purely in terms of cost per square meter. That is why we build greenhouses from the last century. The right approach is to look at returns per square meter, taking into account service life and depreciation. And you will be surprised to find that the more advanced the greenhouse, the greater the benefit by a wide margin.

And we need to go through this exercise for every product made in Kazakhstan.

We need to untangle the issues of logistics and sales, since the price can triple between the field and the store shelf.

There are a great many nuances. Here, however, all programs are written in offices and in the fantasies of officials who have no idea what agriculture is, how to develop it, or where efficiency lies.

We measure things in terms of how many hectares were sown, how much was harvested, and how much livestock we have. This is pure Soviet thinking. But nobody looks at profitability. For example, the Agrarian Credit Corporation is now lending to agriculture at 11.5%. They do not stop to think that under current conditions borrowers will not be able to earn enough to pay that interest. And that means generating non-performing loans. Here, the interest rate for the sector is determined on the basis of the National Bank's rate and the cost of funding. That makes sense for commercial banks, but not for state financial institutions, which exist for entirely different purposes. Instead, take the profitability of the sector as a whole, determine it, and derive the optimal rate. It will be far below 11%. Or else do not restrain inflation, so that nominal returns can cover the interest. On the one hand, we want inflation of 6% (and practically all agricultural products are in the consumer basket), and on the other, we lend money at 11.5%. This means that either labor productivity must rise, which current conditions do not allow, or inflation must exceed the loan rate. Any second-year economics student will tell you this.

And there are a huge number of such distortions.

Unfortunately, the Government (no offense intended) no longer has a single person from production, a single economist from production, or a single financier from production. It is all homegrown civil servants.

Sorry for such a long post.