Precis jeremy franks

RESTRUCTURING FARM BUSINESSES IN RUSSIA: EVIDENCE FROM A FARM SURVEY

J.R. Franks,1 Zemfira I. Kalugina2, Olga Fadeeva2 and Irina Davydova

A report prepared in accordance with the terms and conditions of the Farmers Fund Charitable Trust Travel Fellowship.

Affiliations 1

School of Agriculture, Food and Rural Development, University of Newcastle upon Tyne.

2 Department of Sociology, Institute of Economics and Industrial Engineering, Russian Academy of Sciences, Siberian Branch, Novosibirsk.

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FOOD, FARMING AND RURAL LIVELIHOODS: THE RUSSIAN WAY.1 Jeremy Franks1, Zemfira I. Kalugina2, Olga Fadeeva2 and Irina Davydova 1

School of Agriculture, Food and Rural Development, University of Newcastle upon Tyne.

2 Department of Sociology, Institute of Economics and Industrial Engineering, Novosibirsk.

The Farmers Club Charitable Trust Travel Fellowship was used to finance a survey of farms in Suzun rion, which is about 200 km south of Novosibirsk City, Russia (Figure 1).

Undertaking this ambitious research project would not have been possible without the help of my research team. Dr Irina Davydova acted as translator, project manager and researcher. Professor Zemfira I. Kalugina and Mrs Olga Fadeeva (both rural sociologists working in the Department of Sociology, Institute of Economics and Industrial Engineering, Novosibirsk) organised the research visits, transport and accommodation, and smoothed our way with a mixture of expertise and opportunism that was beautiful to behold. Without their help this research could not have been undertaken.

U.K. farmers are told that the solutions to their financial problems lay in improved technical efficiency, capturing production and marketing economies of scale, cultivating more effective inter-farmer co-operation (i.e. change the size of production unit without necessarily changing ownership), investing in added value activities and increasing offfarm earnings. Failing this, the best advice is to devise an exit strategy. Russian agriculture is already characterised by many of these features; what then can U.K. farmers learn from Russian farmers?

Introduction.

Agriculture in Russia is recognisably the same as in Europe and the U.K. Farmers produce the same types of crops and livestock, food-processors use much the same processes and agronomists and veterinarians keep watch for similar diseases and pestilences. U.K. farmers would recognise the (translated) name of all inputs and products, and could find prices and costs of all products and inputs.

In other respects Russian farming is different. Large areas of the country suffer wider seasonal swings in temperature which constrains some aspects of farming, such as the use of winter crops. The traditional farms (large-scale enterprises, LSE) are much larger, on average over 10,000 ha. They were all co-operatives, and most are now jointly owned.

Private farming was permitted once more in 1992, but there are still few private farms the backbone of the U.K. farming sector. The villages are distinctly different, most houses face onto the main road and nearly all have barns for housing livestock and a large This article is taken for a more detailed report “Restructuring of Farm Businesses in Russia: Evidence from a Farm Survey� that can be acquired directly from the Farmer Club.

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vegetable garden. These productive units, often supplemented by access to common grazing, are called lichnoe podsobnoe hoziastvo - or LPHs to you and me.

Most farm employees depend on the food sold from their LPH to supplement their agricultural wages. Interestingly, most food produced in Russia today comes not from LSEs or private farmers, but from these LPHs. They can be large, but typically average about 10 ha, and typically include livestock. Although the share of farmland in LPHs is only 9%, these productive units (which are not registered as a private farm but which are clearly in the private sector) produced 69% of potatoes, 50% of meat and 42% of milk in 2001.

Farming in Russia.

Farmland was privatised in 1992. Ownership of the former collective farms (sovkhoz and kolkhoz) was allocated to villagers and farm workers in the form of property- and land-shares. Each shareholder could farm their land-share themselves. Many did, but the majority did not. As a result most of the former collective farm units remain largely intact and are often managed by the same Farm Director, albeit under a different constitution with, for example, formal elections for the position of Farm Director. In effect, many sovkhozes and kolkhozes were simply reclassified as some class of LSE. Hyper-inflation, currency devaluation, uncertainty about the interpretation of the Law on Land Reform (1992), and resistance to introducing this law at the oblast (regional) level all conspired to give the privatisation of land a slow start. Although the number of registered private farmers peaked in 1995, the area of land farmed by private farmers continues to increase.

Introduction to the farm survey.

The research team visited eight farms. These farms were classified under four different business forms/titles; Joint Stock Company, private farm, municipal enterprise or holding company (“urban capital�) (Table 1). We tried to visit a successful farm and a failing farm from each business form. The information gathered during the visits was supplemented by interviews with Municipal Officers in each village and with Rural Development Officers stationed in Suzun, the market town of Suzun rion.

Table 2 shows some details of the cropping and livestock and the large average size of the surveyed farms, in terms of labour employed and hectares farmed. Productivity was low, whether measured per labour unit or per hectare. Average milk yields across Russia are 2,600 litres per cow; the farms we visited were achieving 3,800 litres per cow per year. Land had been left fallow to improve fertility, and many crops looked short of a herbicide or two.

Survey findings.

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The survey produced information on inter alia technical efficiency (see above), cooperative structures, problems farming large farm businesses, management objectives and the importance of value added enterprises.

Farming in Russia was collectivised in the 1930s. However, collectivisation through force means that the LSEs do not conform to the Western notion of a voluntary cooperative. Today’s LSEs are production orientated co-operatives. It will be a major challenge to re-orientate them towards becoming service orientated co-operatives. A major problem with the LSEs is that, although they are jointly owned, their members appear not to share a joint objective, as shown by the extensive free-riding behaviour as workers prioritise effort to their private LPH. The incentive to free-ride, coupled with the large work force, makes labour management difficult. Private farmers have reduced their labour force and invested in machinery, but LSEs do not have the financial reserves to adopt this approach.

Without exception, the managers we interviewed were skilled and successful businessmen. All were recognisably western in their appraisals of the financial performance of their farms. But there were clear difference between the management techniques and attitudes displayed by LSE and by private farm managers. The private farmers were more prepared to change their farming systems. They employed fewer people and they prioritised profit and growth. Whereas managers of the LSEs prioritised the survival of the farm-village complex and the retention of the long-standing symbiotic link between the LSE and the local village or villages - from which the farm traditionally drew its labour. This can be illustrated by one of many examples. Many LSEs produced bread in their value added enterprise for sale to local villagers at below cost price. The farm business bore the full cost, which was acknowledged as a social security type payment, but accepted because of its role binding the village to the survival of the farm.

It is this link between the LSE and the village that is the key to understanding food production in Russia. Workers often receive low wages (and rarely receive a dividend payment for their shares), but receive “payment in kind” in the form of fodder, cereals and piglets, and the use of machinery and equipment. This provides the raw material for the productivity of the LPHs. The economic activity of the LSEs also provides income and support for pensioners because, besides providing subsidised bread, these farms support other local services, such as hospitals and transport, and they take responsibility for repairing and maintaining local utilities.

The private farmers we spoke to determinedly resisted absorbing most (but perhaps not all) of these “non-productive” costs. Because of this, if the Authorities allow LSE to fail they would be left with a serious social welfare problem to finance.

But this is precisely what they appear to be intending to do. Farm profitability has been very variable since 1992, but in most years a majority of LSEs have reported losses. In response, the Government has introduced several debt restructuring programmes, the most recent being the “Financial Healthification Programme". Until now, managers have felt protected from bankruptcy by these debt restructuring programmes and, in all

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probability, the expectation of another round of debt restructuring has removed much of the incentive to improve efficiency and declare a profit. This has reduced funds available for investing in the business. But the current debt restructuring programme appears to be much tougher. The Authorities are excluding some of the least viable LSEs from the programme, effectively allowing them to go bankrupt and the land to be used by private farmers. If this policy is pressed, the survival of the village will increasingly be linked to the profitability of, rather than to the social service functions provided by, the LSEs. The regionalised food processing system collapsed in the mid 1990 along with many of the economic structures in the command economy. Many LSEs responded by setting up their own food processing added value enterprises producing sausages, smetana, pelmini, pasta and butter. These were successful for a while, but lost the competition with cheaper imports, and now almost exclusively provide low cost and subsidised food for local villagers.

Conclusion.

Are there any lessons from this study for U.K. farmers? Two factors covered by the research also feature strongly in U.K. farming, they are factors over which farming and individual farmers have little influence: • •

A major constraint on farming in Russia has been the macro-economic climate in general and the exchange rate in particular.

Uncertainty over key policy decisions prevents entrepreneurs making changes and reduces confidence in agricultural and rural policy.

Lessons gleaned about farm business management include: • •

Clearly getting large without maintaining a clear business focus will not help profitability; simply being large is not sufficient.

Although LSE farms are jointly-owned, many remain impoverished. Cooperative ownership per se is no defence against the decline in farming prosperity.

Members of the LSEs do not appear to share sufficiently similar values and objectives, as demonstrated by the free-riding behaviour of members who prioritise work on their own household plot/LPH. This will need to be addressed for the co-operatives to reinvent themselves as market-orientated, service co-operatives. Their aim should be to coordinate the supply of raw materials so as to take costs out of the food processing and distribution chain, and to integrate forwards into the food chain. Achieving these objectives is likely to require re-structuring of the ownership-reward system, perhaps even a shift away from equal to equitable treatment based on the capital each member has invested in the LSE. In Russia, private farmers have adopted innovative management practices – especially with respect to employment – and as a consequence they have been more successful in 5

raising labour and land productivity. They are also reluctant to absorb social costs.

These attitudes give them a clear competitive advantage over the jointly-owned LSEs. It is clear these entrepreneurial private businesses are well placed to compete with European farmers in the production of raw farm products. As LSEs are allowed to go bankrupt, more resources will become available to the private farming sector. Given economic stability, the new wave of privately farmed, more technically efficient farms will begin to dominate the new agricultural landscape.

The private farming sector can certainly absorb considerable areas of land, but will not want to employ much of the low skilled labour thus released. What the consequences may be for rural employment and village structure remains unclear. In Russia, more so than in the U.K., agriculture is the cornerstone to the rural economy. How the Authorities cope with the social consequences of the transformation from collective to private farming will be a major determinant of the success of their policy to privatise farming.

The U.K. does not have a large and clearly defined “weak sector� on the verge of releasing resources to the expansionist ambitions of the technically most efficient farmers. U.K. farmers need to be more proficient at resource allocation. Those farmers who make the most beneficial use of their resources will be among the survivors; this means diversification of farm-type assets and off-farm employment for family- and farmlabour into sectors where returns are higher than they are in farming.

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Figure 1. Suzun rion and the study area.

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Table 1. Summary of management characteristics.

Business type

Status of head of business

1

JSC-closed

2

Private

Director -elected Self employed

3

JSC-closed

4

Private

5 6

Municipal enterprise JSC-closed

7

JSC-closed

8

Holding company

Case code

Director elected Self employed Director nominated Director appointee Director elected Director nominated

Management structure

No. of restructurings since 1992

Attitude to provision of local social services*

No of changes in main managers since 1992

MC and GA

2

SS

0

Partnership with one other MC, RC and GA

1

WS

0

2

SS

0

Partnership with one other Employee of the state, MC. Employee of private farm MC and GA

0

D

0

3

VSS

0

>=2

Not able **

3

1

VSS

0

>=3

D

1

Appointed by Holding Company

MC = Management committee (nominated by director, ratified by GA); RC is revision committee (elected); GA General Assembly (property shareholders) VSS is very strong support, SS is strong support, WS is weak support, D is disregards.

Number of restructurings, includes changes of names as well as changes of legal business form. * Ranked by the research team, directors’ responses have not been confirmed from independent sources. ** Had supported village activities and infrastructure in the 1990s when the JSC was profitable, now supports only school and local surgery (dom kul'tury).

JSC open and closed are commonly classified under the generic term large-scale enterprise (LSE).

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Table 2. Summary of Farm Business Production and Growth.

Case code

Size 1992

Size now

Work force 1992

Work force now

Private farmers in the village (initial and current)

Arable

Milk

ha

ha

Full time workers

Full time workers

No.

ha

litres million )

1

10,800

10,700

400

400

4/4

7,800

5.3

1200

3600

800

2

250

4,311

Na

Na

4/4

4,500

0

0

0

0

3

12,000

10,500

340

315

100/24

3,900

3.0

866

3000

1200

4

140

140

0

10

100/24

140

Na

Some

0

481

5

10,441

8000

400

200

10/3

8,000

Na

800

1,200

0

50/10

2,800

0

0

0

0

3/1 (4/2)

5,800

3.3

1,000

1,100

500

0

0

0

0

11,4 00

6

5,000

2,800

100

50

7

17,000

18,500

420/450

300/350

8

0

0

296

110

Na

Livestock (nos.)

Milk

Cattle

VAE

pigs

       

Case 3; uses 700 ha of abandoned land for pasture (free of charge) in the neighbouring rion.

Case 5; reported substantial reduction in number of dairy cows and fattening cattle compared to 1992.

This farm had about 1,000 sheep.

Case 6; in 1992 this farm was a specialise cattle finishing farm, with 5,000 ha of land in total, and over 3,500 cattle for finishing.

Case 7; includes 1,500 ha of land rented in a neighbouring Altai oblast. The director reported increase of output since 1990 Case 8; is considering leasing arable area in 2004 to supply their livestock feed requirements.

VAT - value added enterprises.

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