CC BY
105
UDC 331.5
SMALL BUSINESS DEVELOPMENT AS A FACTOR OF HIGHER COMPETITIVENESS OF AGRICULTURAL PRODUCTION
Kravchenko T.S., Volchyonkova A.S.*, Candidates of Economic Sciences
Esina Y.V., Senior Lecturer Orel State Agrarian University, Orel City, Russia *E-mail: a-erinskaya@yandex.ru
ABSTRACT
Nowadays, small business plays an important role in assessing the gross domestic product of the agricultural industry. This is possible thanks to the active state support, which is aimed at developing small and medium business. However, its further development is impossible without creating conditions and mechanisms which contribute to the better interaction between small farms and other subjects of the economic relations. The purpose of this study is to spot the factors and priorities for the state agrarian policy that enhance the competitiveness of farms in the agricultural sector. The authors reviewed the results of the farms’ economic activity. The main information source is the Federal State Statistics Service (Russat). To investigate the causes and factors determining the efficiency of their economic activities, the authors interviewed some farm directors of the different administrative districts of the Orel region in the period from 2012 to 2014. The authors determined the role and economic significance of the further development of the small farms in ensuring the competitiveness of the agriculture sector. The detailed analysis of the conditions of their economic activity in the municipal districts of the Orel region revealed the key deterrents: the underdeveloped farming material and technical base, lack of financial resources and unavailability of long-term credits, low-skilled managers, lack of the agricultural service, difficulties of product sales and high risks in the production. It is necessary to develop the organizational and economic mechanism of the state regulation for achieving financial stability and higher competitiveness of small farms in the agricultural sector.
KEY WORDS
Farms; Economic efficiency; State program; Subsidies; Government support; Russian Federation.
Modern agricultural policy of the developed countries sticks to such directions as higher competitiveness of agricultural production, sustainable rural development and ecological safety of products and the environment. As practice shows, the implementation of these directions is possible only in the mixed agrarian economy where farms take their social and economic niche.
Despite the active government’s participation in the development of Russia’s farming through special-purpose funding, this direction of maintaining agricultural production is in its infancy.
There is a need for a serious research that will enable to assess the current state of small business in the rural areas and to identify main guidelines for its further development. A set of policy documents aimed at improving farms’ efficiency should be worked out.
Nowadays, the study of experience in developing effective mechanisms in the government regulation of small farms activities in the AIC is of current interest. That is why the aim of this study is to validate the promising directions of farming development under modern conditions of the state regulation of the agricultural sector.
For many years Russia has been a country with a mixed agrarian sector. However, farms, as a form of small business in the rural areas, began developing only in the early 90s of the twentieth century and are not still developed at a proper level. One of the main reasons for such a protracted crisis is the lack of state support for small business development in the rural areas.
However, even after 2006, when the Russian government put into practice the first large-scale Agricultural Development Programs (Priority National Project «AIC Development»), and the agricultural industry received huge grants and subsidies for the development, a large number of farms turned out to be unprofitable. The imperfection of price regulation in the agricultural market played a crucial role at that time.
As a result, according to all the indicators of agricultural production farms did not compare favorable to agricultural organizations of the different legal forms. Due to low production profitability farmers could not afford to buy seeds of high quality. It resulted in low crop yield. In the years of good harvest farmers could not sell their products due to excess supply. That’s why a question about models of direct interaction of producers and consumers is of utmost importance.
At present, in the most regions of the country there are various programs for supporting the entrepreneurship development. However, there are some problems that hold back the development of small business. As Spasskaya N. V. (2013) notes, the reason lies in the imperfection of the legislation in terms of regional development and implementation of programs for supporting small business. An important role in this situation could play «...the applied researches related to the assessment of entrepreneurial activity, business environment, monitoring and evaluating effectiveness of their activities» (Chepurenko, 2013). However, the analysis of the scientific literature showed that it is necessary to update the scientific studies that would assess the current state of small business in the agricultural sector and spot the main challenges to their effective functioning.
MATERIALS AND METHODS
In the paper the totality of all farms is classified according to the methodology of the Federal State Statistics Service (Russtat): agricultural organizations, farms of population and farms.
The main subject of analysis is farms, which are defined in the Federal law № 74-FL of June 11, 2003 as ‘an association of citizens related by kinship, who have a property in common ownership and jointly carry out productive and other economic activity, based on their personal involvement’ (unincorporated). To get a clear picture of their economic activity the official statistics were analyzed from 1992 to 2013. The crucial data are collected from papers presented by the State Statistics Service, its territorial body for the Orel region, regulatory legal acts of the Russian Federation Ministry of Agriculture and the Department of Agriculture for the Orel region. The average annual growth (reduction) was calculated to study the dynamics of basic production indicators and to identify emerging trends. In the paper we constructed the forecast of volume of agricultural production by farms on the basis of the linear regression method using the application package «Statistica 7.0».
For the analysis of conditions under which farms exist we used the federal and regional government programs for agricultural development for the period from 2013 to 2020, of the Ministry of Agriculture of the Russian Federation and the Government of the Orel region, as well as other legal documents concerning the state support for small business.
Providing consultancy services on doing business in the period from 2012 to 2014, we interviewed 200 directors from the different Orel districts. Their answers were taken into account while analyzing the reasons for low efficiency of the economic activity.
RESULTS AND DISCUSSION
When faced with difficulties and problems of development, farming found its social and economic niche in the field of agricultural production, with a great share in the country’s GDP. Table 1 presents the share of farms in agricultural production in Russia (according to RusStat).
In general, one can see a steady growth in the structure of the agricultural output by farms. The production has increased steadily for the last twenty years; the average annual growth is 11%. Along with this, during the period under consideration the role of agricultural
organizations in ensuring the country’s food security has been much diminished, and the decrease in the share of output in its total national volume proves it.
Table 1 - Structure of agricultural output by types of farms in the Russian Federation (at current prices, as a percentage of farms of all categories)
Types of farms years The average annual rate of growth (decrease), %
1990 1992 1995 2000 2005 2010 2011 2012 2013
Farms of all types 100 100 100 100 100 100 100 100 100 -
Agricultural organizations 73,7 67,1 50,2 45,2 44,6 44,5 47,2 47,9 48,7 98,2
Farms of population 26,3 31,8 47,9 51,6 49,3 48,3 43,8 43,2 41,1 102,0
Farms 1,1 1,9 3,2 6,1 7,2 9,0 8,9 10,2 111,2
Source: the Russian Statistics Committee, 1990-2012.
Largely the development of farming in the Russian Federation coincides with global tendencies in enhancing the role of farms in the agricultural sector of the developed countries.
In 2012, by the structure of agricultural production on farms plant breeding prevails and accounts for 74.4% and livestock industry accounts for 25.6% (Fig. 1).
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0 10,0
0,0
80,3 78 9 80,0 77 9 70 0
75,9 70,1 „ 75,9 1 - 75,5 77'9 -■ ■ 78’°
iiiiililliiiii
production of plant growing
■ production of animal 22,0 husbandry
1992 1995 2000 2001 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 Source: the Russian Statistics Committee, 1992-2012 Figure 1 - The structure of agricultural output on farms in Russia
In comparison with Russia, the European countries are characterized by small land size. However, nowadays there is a process of farms consolidation in Germany. The average size of agricultural land belonging to a household was 56 hectares in 2010. In addition, the proportion of enterprises owning land plot of over 100 hectares, was 55% (Demidova, 2011). In Russia a size of land plot in the federal districts varies greatly but it is 136 hectares on average.
At present farming is developing quite successfully. In 2013 the share of farms accounted for about 10.2 % of the output of all agricultural products, which was 1.2 higher than in 2012. In the Central Federal District the share of farms accounted for only 6.1%. In the Orel region the index was slightly higher - 8.5% in 2013, that was 0.7 % more than in
2012. This underlines the important role of the region in the development of agricultural production in the Central Federal District (Table 2).
Table 2 - Agricultural production on farms (at current prices, million)
n/n The Russian Federation (RF) Central Federal District (CFD) The Orel region The Orel region, % of
RF | CFD
2012
Farms of all types: 3340537 839370,5 39065,8 1,2 4,7
including farms 297472,3 49764,3 3057 1,03 6,1
2013
Farms of all types: 3790822 976736,1 48578,1 1,3 5,0
including farms 386937 59832,8 4110,4 1,1 6,9
Source: Russtat, 2012-2013; Orelstat, 2012-2013.
For the period 2005-2012 the output produced by farmers increased 3.5 times, in the Orel region - 2.9 times. The production volumes forecast (Fig. 2) shows positive dynamics of its change in the country and in the Orel region. So, it is expected that in 2014 the agricultural output will be worth 363.65 million rubles, in the Orel region - 316.5 million rubles. However, the rates may be slightly higher due to inflation.
bln. rubles
Source: Orelstat, 2005-2012 Figure 2 - Dynamics of growth of agricultural output in the Russian Federation and the Orel region
At present, there are some prospects for active development of small business in the Orel agricultural sector. Despite the fact that the number of farms doesn’t change, production volumes are quickly growing.
The dominant sector is crop production: in 2013 its share was 93.2% and compared with 2012 it increased by 2.9 %, livestock production - 6.9%, it decreased by 2.9 % compared with 2012. The reasons for it are the high material and labor costs in the livestock industry and the risk in producing pork products. For example, death of animals because of the African swine fever epidemic that affects the production of pork and has a negative impact on the financial state of small business in agribusiness of neighboring regions. It is worth noting that the proportion of farms in the total cereal production was 16.6%, vegetables
- 7.6%, potatoes - 7.4%, dairy products - 4.4%, livestock and poultry in live weight - 3.9% (Table 3).
At the same time the number of employees in farming in the Orel region is more than 47.3 thousand people, it is about 30% of the employed population in the rural areas (Parakhin, 2012).
Table 3 - The share of agricultural output in total production volume (at current prices, as a percentage of agricultural production)
n/n Farms of all types Agricultural organizations Farms of population Farms
2012 | 2013 2012 | 2013 2012 | 2013 2012 | 2013
Production of plant growing
The Russian Federation 49,0 53,2 46,1 50,0 46,9 50,7 74,4 78,5
The Central Federal District 51,6 53,9 43,8 45,3 59,4 63,4 85,7 86,9
The Orel region 64,1 72,2 69,6 76,8 44,0 54,6 90,2 93,1
Production of animal husbandry
The Russian Federation 51,0 46,8 53,9 50,0 53,1 49,3 25,6 21,5
The Central Federal District 48,4 46,1 56,2 54,7 40,6 36,6 14,3 13,1
The Orel region 35,9 27,8 30,4 23,2 56,0 45,4 9,8 6,9
Source: Russat, 2012-2013, Orelstat, 2012-2013.
By 2014, the number of farms fell to 431 units compared to the year 2011 - 536 units. However, livestock capita on farms increased in the region: cattle increased by 2% compared with 2011 and by 5% compared with 2012, sheep and goats - by 1.2% and 1% respectively.
Production of plant growing takes the largest share in the agricultural production, as the costs of reproduction are much lower. Thus, the data show that farms have a significant impact on the development of agriculture, and in particular on the creation of gross production in the country.
The studies conducted on farms’ state in the Orel region show that the existing problems complicate the positive directions of farming development. The survey shows that 80% of farmers think that the main reason for their ineffectiveness is the weak material and technical base; 65% - lack of financial resources; 73% of respondents note difficulties in sales of manufactured products; 38% - lack of the agricultural service nearby and 54% of respondents indicate other factors determining the high risks in agricultural production. While 20% of respondents admit that they are not good at conducting agricultural production due to the lack of necessary background and misunderstanding of its economic component. The price disparity between the agricultural industry and other sectors of the economy plays a significant role as it determines the low efficiency of production on farms.
Besides, agriculture is characterized by highly labor-intensive production and unequal labor intensity during a year.
The following aspects define both the range of the key problems and mechanisms for the implementation of various investment projects and directions of the state regulation of the agricultural producers’ activity, and refer to characteristic features of agriculture. They are as follows:
- due to the fact that wages in the agricultural sector are considerably lower than the average level, agricultural labor is not prestige, especially for young highly-qualified specialists. It results in a phenomenon - known as «ageing» of personnel;
- lack of employees effective incentive system and inability to provide a comfortable and safe environment. It leads to a lower level of motivation;
- farmer’s labor, especially during the important seasonal work, is characterized by non-normalized duration of shift, which leads to its high intensity;
- agricultural labor is very hard as manual labor prevails. Besides it’s characterized by a high degree of moral and physical deterioration of agricultural machinery and equipment, and absence of scientifically based labor organization;
- significant reduction in the labor force. It leads to higher employees’ work-load and results in higher not only physical but also moral and psychological pressure on them under
conditions of weak technical and technological modernization. That is a deterrent factor of efficiency increase of agricultural labor (Proka, Volchyonkova, 2012).
Thus, agricultural production is influenced by various factors. Their degree and direction of impact determine specialization, time of individual production processes, the level of productivity of livestock and crop yields.
Although the government supports agricultural producers, many agricultural enterprises find it difficult to compete in the agro-food market and maintain an appropriate level of profitability due to low prices for agricultural products.
Regulating the pricing policy is of utmost importance to agriculture. In the U.S., Canada, the European Union the governments provide subsidies to farmers who grow crops. Moreover, there are some special trade programs aimed at modernizing agricultural production and especially its basic element: agricultural production.
The system of state regulation of agricultural production in the countries with the free market economies is complex and flexible; it formed and developed for more than ten years. This flexibility allows agricultural producers to work equally well at different times, characterized by a sharp excess of demand over supply, and vice versa.
Thus, in the economically developed countries there are some kinds of government regulation and support for farms’ economic activity.
Subsidizing agricultural production is wide-spread. They practice subsidizing agricultural production in the form of compensatory payments for their participation in various development programs of production and regulation of the agricultural market. In the developed countries the share of subsidies for compensating costs in agriculture is the highest one.
Adopted in 1957 the Common Agricultural Policy (CAP) is the main regulator of agricultural development in the European Union. Its main instruments are:
- government intervention, allowing to regulate the supply and demand in the market for agricultural products, and, therefore, the price level for maintaining producers’ financial stability;
- tariffs and quotas on imported goods;
- quotas on agricultural production;
- taxes on non-use of land suitable for agriculture.
Recently, in the European countries, the main instrument of agricultural policy has become direct subsidies per hectare of production without any limitation in production volumes and prices of its implementation. It’s practiced in Russia too. Having joint the World Trade Organization in summer, 2013, some necessary adjustments were made in the State program of the agricultural development and regulation of markets for agricultural products, raw materials and food for the period 2013-2020 and ways of subsidizing crop production. Since 2013, the Russian government has been practicing «unrelated» subsidies in order to maintain profitability of agricultural producers. Thus, «the rates of subsidies per 1 hectare are calculated using an index that takes into account the state of soil fertility and the intensity of using cultivated areas. Subsidies are inversely proportional to an indicator of soil fertility, which has a corrective effect on the size of grants» (Yur'ev, 2013).
However, in Germany the issue of perspective development of the agricultural sector is topical. The European Union is about to conclude a Free Trade Agreement with the United States of America, which implies a significant reduction in farm subsidies.
The second most important form of support for agricultural development, which is also widespread in Russia, is a program of lending secured by future production (or harvest).
These ways of support are reflected in the state programs for development of agroindustrial complex as one of the most effective methods of controlling through the development of target indicators of the economic activity.
Russia's accession to the WTO and the need to ensure the competitiveness of agricultural products were the main prerequisite for updating small business entities in the agrarian sector of the economy. The State Agricultural Development Program, aimed at supporting small business entities, stimulates the activity of farms, family livestock farms, and forming agricultural consumer cooperatives.
The purpose of the State Program of agricultural development and regulation of markets for agricultural products, raw materials and food for 2013-2020 is « to improve the competitiveness of Russian agricultural products in domestic and foreign markets on the basis of innovative AIC development», to optimize its institutional structure, to create a favorable environment for business development, to increase the industry’s investment appeal.
It is worth mentioning that in this program there is a sub-program «Support for small farms», which provides the following main activities:
1. Support for novice farmers
2. Development of family livestock farms
3. State support of small farms lending
4. State support for agricultural consumer cooperatives
5. Assistance in acquisition of land ownership to farmers
To support small enterprises the comprehensive program “Development of farms and other small businesses in the countryside in the Orel region for 2012-2015” has also been developed. The program provides subsidies for part of the agricultural producers’ costs of payment of interest on credits and loans. Its aim is to increase productivity and ensure financial sustainability of farms and other small businesses in the rural areas.
In 2012, to stimulate the development of agricultural small business in the Orel region it was decided to choose 5 livestock farms and 18 farms which were at an early development stage. The winners received 42 million rubles from the federal and regional budgets. The money is used for reconstruction livestock buildings. They bought 107 heifers, and are about to buy 45 heifers by the end of the year. Beginning farmers purchased 5 tractors, 16 equipment trailers, 1 car, 59 cows and heifers. In addition, they spent money on construction and reconstruction of livestock buildings (The Orel public information centre, 2013). In 2012 farmers cultivated about 1 thousand hectares of land. The farmers’ land acquisition costs were partly reimbursed from the federal and regional budgets (Kravchenko, 2013).
In 2013, within the framework of competition «Development of family livestock farms» the grant was given to 7 farms (116 % of the plan) and 19 new farmers (105 % of the plan). In July, 2013 they received 43.27 million rubles. The money helped them construct and reconstruct 11 livestock buildings and their facilities. They bought 390 cows and heifers, 363 sheep, 18 tractors, 43 units of trailer equipment, 3 trucks. Farmers are responsible for creating 75 new jobs (105 % of the plan). However, it should be noted that the planned amount of funding is insufficient due to the large number of enterprises that need a grant.
Acquisition of land ownership by farmers is being carried out successfully. In 2013 1 294 hectares of agricultural land (129 % of the plan) went over to private ownership with the state support of 218.6 thousand rubes including 73.1 thousand rubles from the budget of the Orel region.
Within the framework of the program «Development of agricultural consumer cooperatives» in the second quarter of 2013 , two new agricultural consumer cooperatives called «RegionMoloko» and «Soskovskoe moloko» were opened. The efficiency of the program is obvious, 56 refining and marketing cooperatives were registered on 1st October, 2013 (103% of the target indicator).
Since 2014 activities for the development of family livestock farms and support for beginning farmers, subsidizing the land acquisition costs are included into the state regional target program «Development of agriculture and regulation of markets for agricultural products, raw materials and food in the Orel region for 2013-2020». In 2014 budget costs required for development of family livestock farms are 6 million rubles, for support of new farmers - 7,731 million rubles; and 7 million rubles are given for developing agricultural cooperatives.
In 2014 20 new farmers will receive 1.5 million rubles, if the sum of the requested subsidy is less, the number of farmers may be increased. According to the program «Development of family livestock farms» two farmers can receive 10 million rubles, or even more if the sum requested will be lower.
However, public funding of agricultural development in Russia is not enough in comparison with Europe where 325 Euros per 1 ha of cultivated land are spent. In addition the EU supports local producers - about 80 Euros per hectare of farmland. Thus, general budget support in the EU accounted for 405 Euros per 1 ha. In Russia, with its great land resources, some of which are not used, the subsidy is 37 Euros per 1 ha. However, comparing these figures it should be noted that in the Russian Federation apart from per hectare subsidies to agricultural producers agreed by the State program of agricultural development and regulation of markets for agricultural products, raw materials and food for the period from 2013 to 2020, there is a certain number of other support measures: subsidizing interest on credits and loans, refunding partial costs, purchase of elite seed varieties, state support for the greenhouse crop, small farms and economically significant programs in the Russian regions.
Having analyzed the measures of state support for agriculture in Russia, we assume that production of environmentally friendly products may be one of the most promising areas for farming. That will allow farms to find their niche in the agricultural market. However, in the country there is no necessary legal regulation of this kind of production, propaganda of environmentally friendly products, and specific measures of the state support. Therefore, the main task for the Russian science is to develop effective mechanisms for organizational and economic interaction between farms and the government, which will improve the efficiency of the state support for agricultural production.
CONCLUSION
Thus, the government support allows farms to grow rapidly, increasing production volumes every year. The modern agrarian economy gives small business the economic freedom in their business activities. Well-developed small business and farming lead to a better economic situation in the region and the country as a whole, and there is complete food security of the country. However, it is necessary to develop a farm policy that will allow farms to become economically stable subjects of the mixed agrarian economy.
Thus, at the present stage of development of the agricultural sector, there are many different areas for the state support, but farms being one of the forms of small business in rural areas are one of the most promising ones.
However, the government should take measures to solve all the problems which put obstacles in the way of increasing the effectiveness of their operation. Therefore it is necessary to revise the amount of financing, and to develop the organizational and economic mechanisms that contribute to: improving the procedure for crediting of small farms; higher availability of social and engineering infrastructure; development of counseling service in the rural areas; dissemination of ideas and cooperative organizational and legal assistance in establishment of cooperation between farmers and private households.
These areas will help determine a strategy and tactics of economic reforms, as well as develop target programs for small enterprises in the agricultural sector based on the results of the state agrarian policy in Russia.
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