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AGRIBUSINESS:
THE NOTORIOUS DEBTOR
Konstantin Skuratovich
Summary
Belarusian agriculture and its agribusiness as a whole succeeded in increasing exports and improving their foreign trade figures in 2011. However, the country's main foreign trade partner, the Russian Federation, accused Belarus of unfair competition. Russia adopted the national food security concept and imposed quotas on deliveries from Belarus, thus restraining this country's efforts to develop its agriculture.
The problem is further aggravated by the fact that the Belarusian administration fails to pay sufficient attention to alternative large consumers of its produce. The capacity of the domestic retail market is limited by low household incomes. The financial status of many agricultural organizations is also poor.
Trends:
• Further increase in food exports is limited by the capacity of the traditional consumers;
• Agribusiness remains the largest nonpayer in the national economy; there are no prerequisites for improvement;
• The state keeps subsidizing agriculture and provides concessional loans with a view to further increasing production and exports.
Export: smaller share amid growing output
Food exports mostly increased as a result of the growth in supplies of poultry (by USD 81.3 million), pork (by USD 64.9 million), milk whey (by USD 36.3 million), cheese and curd cheese (by USD 35.3 million), beef (by USD 35.1 million), milk and cream (by USD 34.9 million), and frozen fruit and berries (by USD 34.6 million)1. At the same time, imports of pork went up by USD 102.6 million, of apples by USD 26.8 million, of vegetable oil by USD 17.7 million, of potatoes by USD 16.6 million, and of frozen fish by USD 15.9 million.
The author makes use of the data available on the website of the National Statistical Committee (BelStat): http://belstat.gov.by/.
The year 2011 therefore saw positive changes in the food trade pattern; however, if it is a trend, then how stable is it? Unfortunately, the answer cannot be positive.
Last year, amid the impressive increase in export supplies in absolute terms, the Belarusian food industry recorded only a 7.5% increase in production year-on-year, whereas in 2010, gross food production went up 10.7% compared to the previous year. Experts attribute the reduction to the lower return on investments in agribusiness.
As far as the choice of foreign trade partners is concerned, Belarus is having colossal disproportions: in 2011, Russia accounted for 73% of all Belarusian food exports, other CIS countries for 13%, and foreign countries beyond the CIS for 14%. Some 92% of Belarusian dairy exports and 99.7% of its meat exports went to Russia.
Belarusian food-processing companies and farms appear to be unable to access the European market and "the rest of the world". Very few Belarusian companies enjoy access to those markets, as they are involved in international projects. This lopsided nature of trade and self-isolation (which is already a matter of principle) from other partners and markets stand behind the peculiar choice of foreign food trade priorities by official Minsk.
The Belarusian government knows well what the problem is. Prime Minister Mikhail Myasnikovich called the food export structure "poor" at a meeting of the Council of Ministers, which addressed the performance of the "sustainable village development program" for 2011 (86% of export supplies were sold in Russia, 6% were delivered to other CIS states, and only 5% were sold outside the CIS). The premier instructed the government to diversify foreign sales outlets. It is a classic example when it is quite easy to demand, but is it quite hard to execute, although it is high time both to demand and execute. During the same meeting, the premier reminded the participants that Russia had passed a food security doctrine and planned to meet its domestic poultry and pork requirement independently in the near future. This is what the chief of government recommended: "You have to take this into account, integrate with Russian producers and also with Kazakhstan colleagues." This is odd advice, because the first premise makes it clear that Russian producers would like to fill the niche with domestically-produced goods, meaning that Belarus will have to be looking for markets outside the
Common Economic Area in order to increase food exports to USD 7.2 billion annually by 2015 and to reach a USD 4 billion foreign trade surplus.
Subsidies are inefficient, but will remain in place
Early in 2011, Prime Minister Mikhail Myasnikovich ordered the government to deal with the debts of agricultural organizations, which had to repay BYR 18.1 trillion in loans as of December 1, 2010 and had accumulated BYR 2.2 trillion in overdue accounts payable. Agribusiness accounted for 35.9% of the country's overdue accounts payable, 32.3% of the total tax and social payments arrears and 66% of all loan debts in 2010. The performance of the agricultural sector was not impressive: with revenues at BYR 16.6 trillion (up 17.5% from 2009) and production costs of BYR 13.4 trillion (up 12%), agricultural organizations reported net profits totaling only BYR 1.9 trillion (an increase by 54.8% from the previous year).
This means farms were short of money to pay their debts, and there was no way for them to earn this money in 2011. There were rumors as early as February that a devaluation of the ruble was inevitable and that prices might increase uncontrollably. However, no one could imagine what effects the "financial turnaround" policy would have. It appeared that the degree of numbers changed, while the structure of debts remained the same.
In January-November 2011, revenues of agricultural organizations increased 67% on the year to BYR 23.7 trillion from BYR 13.6 trillion, production costs went up 60% to BYR 18.2 trillion from BYR 11.4 trillion, and net profits rose 87.8% to BYR 3.1 trillion. Payables reached BYR 16.6 trillion, up 35.7% year-on-year, overdue accounts payable amounted to BYR 2.9 trillion, and loan debts went up to BYR 20.2 trillion. Revenues are still well above overall costs, and agricultural organizations are short of their own funds to repay loans (fresh ones, taken out to finance current operations).
Based on Belstat statistics, agricultural organizations account for 24.3% of the total overdue accounts payable in the country and 39.6% of the overall loan debts. Belarusian farms have overdue
payables six times the size of overdue receivables; therefore, agriculture remains the weakest link in the system of mutual payments. It is the most unreliable partner and it threatens the stability of the entire economic system.
Despite this poor performance of the agricultural sector, the Belarusian government announced that state support for agribusiness would remain. In July, at a conference in the town of Smolevichi, Prime Minister Mikhail Myasnikovich said that the state would continue to support dairy stock farming in order to increase annual milk output to 10.5 million tonnes2. At the same time, the premier noted that there were segments in farming capable of developing independently. Also, farms should make use of preferential loans and subsidies more efficiently. According to Myasnikovich, the share of agriculture in GDP went down from 12.6% to 7.5% during the last five years, meaning that the sectors not receiving as much financial support as agribusiness managed to grow more than farms.
Households: resource base shrank
Food imports accounted for 4.3% of all import supplies in 2011, down from 5.4% in 2010, and the share of foods in consumer imports decreased to 28.1% from 33.4%. This said, one should keep in mind that in 2011 disposable household incomes rose 50.8% year-on-year, while prices for consumer commodities and services went up 53.2% in the same period. In other words, the resource base of household shrank. Understandably, the share of spending on foods in the total consumption expenditures increased to 41.3% in 2011 from 39% in 2010. This means food exports went up due to the narrowing of the internal market, which became a planned consequence of two devaluation moves in 2011.
The reductions in solvent demand in the internal retail food market caused the government to artificially contain the increase in purchasing and retail prices, which makes the financing of agricultural organizations and processing enterprises more complicated.
M. Myasnikovich: state support for agriculture must remain // Available at: http://naviny.by/rubrics/economic/2011/07/ 16/ic_news_113_372 444/.
The increase in export supplies of foods was accompanied by a reduction in imports. Analysts have found that food sales were progressively falling in the second half of the year. The structure of demand in that market segment changed dramatically. In early 2011, the population was overwhelmed with inflationary expectations and stocked up on long-lived food products. However, in autumn, sales of foods fell to the level observed in early 2011. Specialists expect retail sales to keep falling in the first six months of 2012 as a result of the consumer boom recorded in the first three quarters of 2011. Most retail companies do not expect increases in domestic consumer demand in the foreseeable future.
However, Belarusian producers have no access to other markets, or, to be more precise, no one ever paved the way for Belarusian food exports to alternative foreign markets. The Belarusian authorities were developing the access to markets of exotic countries, whereas partnership proposals from close European neighbors, especially the former Socialist countries, were simply ignored. The former Soviet bloc started integrating into Europe by adopting European production and processing standards, while Belarus tried to survive by reserving the best Soviet practices, i. e., those which were considered most efficient. Belarus has indeed succeeded in improving the quality of its products, and Russian consumers often prefer Belarusian-made foods to those domestically produced.
The International Green Week Berlin, the world's largest exhibition of agricultural and food companies, which took place in 2012, featured a Belpischeprom stand, which officially represented Belarus with alcoholic beverages made by five distilleries and food concentrates made with the use of solutions developed fifty years ago. At the same time, Russia had the second-largest stand at the expo (after Germany) and officially announced its ambition to become a leading global food exporter.
Belarus has been losing both external and internal economic incentives to the development of its agribusiness, judging by the current status of the agricultural sector and its prospects. The official authorities reject any critical remarks citing increases in gross production. However, the growth in gross output is achieved mostly through changing food prices, which rise every year building on increases in costs of raw materials and energy sources. There is no other explanation (except the price factor) of the seven-fold increase
in annual revenues of the agricultural sector (to USD 3.76 billion from USD 505 million) in 2000 — 2011, given the fact that meat and dairy products output reported by the official statistics agency was far less impressive.
Also noteworthy is the fact that the share of foods in Belarus' overall exports decreased to 9.3% in 2011 from 12.6% in 2010; in other words, the food trade trend was directly opposite to the one originally planned.
Conclusion
In 2012, the Agriculture Ministry is supposed to reach a USD 1.7 billion trade surplus, an increase by USD 195 million from 2011. In order to reach the target, the ministry will have to not only see to it that produce exports increase 11% year-on-year, but also that the growth in imports by 8 percentage points reduces.
An important factor to stimulate exports is the diversification of the commodity structure of foreign meat supplies, especially the shift of the focus to products with a higher processing rate. Currently, Belarusian meat exporters operate as slaughterhouses for foreign consumers, while "boned meat accounts for less than 5% of exports, to say nothing of semi-finished meat products." Belarus should also pay more attention to its traditional exports, which have been losing their positions in foreign markets (for example, potatoes and other vegetables).
Equalizing procurement prices with neighboring regions of the Russian Federation would also help Belarusian agribusiness increase its revenues and boost its profitability; however, these calculations seem logical only from an accountant's point of view. If Belarusian and Russian procurement prices are brought closer, Belarusian households will become more vulnerable, producers will be faced with new sales problems, which might have unfavorable social and political consequences.
Such consequences could include a new upsurge in food inflation. The ministry must be aware of this possibility and admits that price increases alone will not help the sector. The country needs to work on "reducing production costs, introducing modern, energy-saving solutions and maintaining strong technological discipline."
To maintain effective discipline, Belarusian agricultural enterprises can improve their management quality, which does
not require direct financing, whereas cost-cutting and energy efficiency will not do without the acquisition of new machines and solutions.
The medium- and even short-term prospects of Belarusian agriculture depend almost entirely on politicians and on which policy will dominate in the development of the national economy as a whole. As for agribusiness specialists, they did the best they could, and given the framework, in which they had to work, they did a pretty good job.
