Many regions of Eastern Europe, the Greater Caucasus and Central Asia have good opportunities for the development of modern agricultural production such as a unique richness of nature, relative proximity to major product markets, competitive cost of resources and state support for farmers.
Analysis shows that in the structure of market participants, a significant share belongs to family farms and farms that have small plots of land on which, for objective reasons, it is impossible to organize effective production of cereals, corn and sunflower. The main products of their production are vegetables, fruits, berries and nuts of poor quality and in short supply which they are forced to sell on the local retail market at low prices and, as a consequence, despite significant government support and favorable external conditions, such farms are economically inefficient, their incomes not only do not allow to invest in development but also rarely cover the needs of simple reproduction.
Along with the fact that in many European countries, the production and processing of agricultural products on small farms is not only an important economic sector but also is a locomotive for its development, significant potential in most regions of Eastern Europe, the Greater Caucasus and Central Asia in this area is underused.
Why is this happening?
Due to the nature of production (simultaneous influence on the final result of the complex factors, that is the quality of the soil, necessary amount of water for irrigation, manpower, electric power, paved roads and professionals), the main suppliers of fresh vegetables, fruits, berries and industrial quality nuts on the domestic market and for export are farms that produce products by intensive technology (using drip irrigation, a full fertilizer complex, PPP and effective special equipment), which allows them at a minimum risk to achieve high profitability of production and generate from a small area a cash flow sufficient for reproduction and development. The operating profit of such farms, depending on the crops grown, is 100% or more per season which makes this activity an attractive business.
However, there are few such farms with respect to the total number of agricultural landowners, and their multiplication is constrained by the high initial costs for creating plantations for intensive production (depending on crops, from $ 10,000 to $ 50,000 per hectare). The lack of funds among farmers along with the absence of a state (or other) system of project management and financing of an agrarian business together with insufficient own initial capital is the main explanation of the current state of affairs in this area.
Attempts to use available financial instruments of banks do not bring success for the following reasons
– each of the farms is able to produce such a small quantity which does not attract a large wholesale consumer (“with a reputation”!) with whom a forward contract could have been accepted by the bank as a reliable proof of source of funds for repaying the loan;
– small farms do not have collateral sufficient for banks to obtain a loan;
– small farms lack own funds to co-finance in the state programs for supporting entrepreneurship;
– the lack of quality storage, processing and pre-sale preparation of products. Due to a small product quantity produced by one farm the construction of infrastructure facilities for these purposes is unprofitable;
– the lack of wholesale purchasing system makes farmers who ventured into the cultivation of vegetables, fruit, berries or nuts to sell their products at retail markets or by a small wholesale from the field with that unnecessarily competing with each other which makes it impossible to make a profit and as a result attract market financing.
Thus, the high demand of the profitable wholesale organized market remains unsatisfied. The low profitability of the local unorganized retail market prevents the establishment of a very profitable but investment-intensive production exacerbating the abovementioned problems of the industry.
Is there a way out of the current situation?
Yes, and it is successfully demonstrated by many European countries.
Since the main problems are of an organizational nature, their solution lies in establishing an effective system of organization of the sector by stimulating cooperation manufacturers through the integration of the sales of finished products, the supply of planting material, machinery, fertilizers and plant protection products, creating agronomic systems and engineering support and training.
An important element is establishing a single project office of the system consolidating management tools for state support of the agroindustrial complex on one site in the framework of the overall strategy for the development of the industry in the region.
The establishment of such a system is a complex task which can only be done by the state or an agent authorized by it in cooperation with professional private companies on the terms of public-private partnership under a special state program.
Family farms and small agricultural enterprises should be the basis of the system.
An existing or specially created Agency can be the integrator of the system and its management center, possibly with the participation of private capital, a private company authorized by the state or an industry association of farmers.
By fulfilling his function the integrator
– develops the structure of the system and the rules of its operation;
– forms the system, creating territorial clusters of its participants;
– organizes effective interaction of the participants of the system among themselves and with the integrator, centrally coordinates the relationship of the basic participants of the system with local government bodies and local self-government;
– consults centrally on agrarian and engineering issues including creation of plantations and production process, supply of planting material, fertilizers and plant protection products, equipment and services for some types of land cultivation;
– provides financing for the activities of the core participants through direct lending, pre-payment of supplies, deferred payments, leasing, factoring, provision of guarantees and sureties, organizes project financing and independently or together with others creates and uses other financial instruments;
– acts as an operator and / or coordinator of federal, regional and local programs to support the agro-industrial complex and a regional agency for attracting and supporting investors in the agro-industrial complex, serves as the project office for reforming the industry;
– acts as the customer and purchaser of the products of the basic participants of the system, creating a single conveyor for its production, processing and storage on the basis of common internal standards of the system, thus ensuring large unified product consignments of vegetables, fruits, berries, nuts and processed products;
– stores and processes purchased products at its own facilities and attracts third party contractors;
– organizes the activities of its own and coordinates the work of the involved parks of agricultural machinery, machinery and equipment to provide services to the territorial clusters of the system;
– sells the system’s products offering large unified product consignments of vegetables, fruits, berries, nuts and processed products both on the domestic market and for export.
The basic participants of the system who are the family farms and small agricultural enterprises should
– be located in naturally favorable climatic zones and with the purpose of creating regional clusters be located at a reasonable distance from each other;
– have equal land plots with an area of 5 hectares each;
– be located at a reasonable distance from surface water sources that are sufficient for the needs of the regional cluster;
– have access to roads with a hard surface and the ability to connect to electrical networks;
– have a sufficient amount of labor resources.
The basic participants of the system
– at the expense of own resources attracted independently or provided by the integrator under the guidance of the integrator establish plantations of intensive cultivation of vegetables, fruits, berries and nuts;
– process on the basis of operation layout provided by the integrator on the plantations using planting material, fertilizers, PPP and other material resources provided by the integrator;
– use the machinery and some land processing services provided by the integrator;
– supply the integrator with the products produced under its management under the preliminary long-term contracts;
– in coordination with the integrator, reinvest some of the profits received to improve their own plantation and into joint projects with other base participants and with the integrator (creation and expansion of capacities for storage, processing and transportation of products, training of personnel and solution of socio-economic problems in rural areas).
The system after it is being established works on the basis of cost accounting. The irretrievable allocation of budget funds is not required.
Experience shows that a system organized in this way quickly awakens the entrepreneurial energy of a wide range of participants, allows a large number of family farms and small agricultural enterprises to work successfully offering the domestic and international markets a significant quantity of quality products with a large share of value added which positively affects the economic situation in rural areas, solves many social issues of the rural communities.
alllagro.com suggests to consider the possibility of creating in your country a system of cooperation of small commodity producers on the principles described above.
We are ready to participate in this work providing the necessary knowledge, experience and specialists.