RUSSIA: POLICIES FOR AGRI-FOOD SECTOR COMPETITIVENESS AND INVESTMENT Agriculture Global Practice The World Bank Group Russia: Policies for Agri-Food Sector Competitiveness and Investment Despite advances in agricultural production, TFP, and trade balances, Russia continues to lag behind many comparator countries in measures of crop and livestock productivity. This report aims to provide a vehicle for dialogue with government on agrifood sector collaboration to address this situation. It identifies policy recommendations to address selected challenges and to support the government's aim of attracting investments in the agri-food sector, approached from the point of view that increased productivity will improve the competitive ness of agri-food value chains, result in higher profitability, and encourage more investment, including FDI, in Russian agriculture. In practical terms, this report identifies three areas in which the public sector may be able to use policy and programmatic interventions to spur productivity, competitiveness, investment, and exports: investing in broadening productivity gains in priority sectors, strengthening value chains and value-addition in the food industry, and promoting human capital in rural areas through capacity building in agricultural sciences and farm management to improve labor productivity. Some progress has been made, but more is needed. Russia: Policies for Agri-Food Sector Competitiveness and Investment Agriculture Global Practice The World Bank Group © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. 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Contents Contents Acknowledgments ................................................................................................................................ 1 Introduction and Summary .................................................................................................................. 2 Agriculture and Food: Challenges of the New Growth Sector .................................................. 6 Can the New Producer Type Be the Growth Engine?................................................................. 11 Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors ............ 18 The Performance of Dairy Farms....................................................................................................... 19 The Performance of Pig Farms .......................................................................................................... 24 The Performance of Corn-Producing Farms .................................................................................... 27 The Performance of Soybean-Producing Farms ............................................................................. 30 Food Processing: A Potential New Driver of Agriculture Growth .............................................. 32 Factors Determining Employment, Estimation of Technical Progress, and Returns to Scale ............................................................................................................................................... 37 Factors Explaining Productivity Growth in Food Enterprises .......................................................... 38 Policy Context: Can It Unleash the Potential? .............................................................................. 41 Conclusion ............................................................................................................................................. 49 References ............................................................................................................................................. 50 © 2017 Agriculture Global Practice. The World Bank Group iii Russia: Policies for Agri-Food Sector Competitiveness and Investment Boxes Box 1. Enabling the Business of Agriculture: Russia’s Comparative Performance ......................... 4 Box 2. How the Russian Agri-Food Sector Responded to Recent Economic Shocks ............................................................................................................... 7 Box 3. Foreign Direct Investment in the Agri-Food Sector ................................................................ 8 Box 4. Types of Agriculture Support Measures in the Russian Federation ...................................... 42 Box 5. Public Investments Encourage Technology Transfer and Broaden Productivity Gains: Learning Organizations that Support Innovation for Small and Medium Farmers in Mexico ...... 45 Box 6. A Funding Mechanism that Supports Linkages in Agri-Food Value Chains and Foster Innovation: The China Technology Transfer Project ........................................................................ 47 Box 7. Designing Education and Skills Policies for Agri-Food Sector .............................................. 48 Figures Figure 1. Growth in Food and Agriculture Sector Value-Added, 2003–16 ...................................... 6 Figure 2. Mixed Growth Rate in Value-Added, 2012–16 ................................................................... 6 Figure 3. Agri-Food Trade Balance Average, 1998–2015 Percent share in total value of agriculture exports ........................................................................... 9 Figure 4. Agri-Food Imports: High-Value Food Products ................................................................... 9 Figure 5. Agri-Food Exports: Commodities ......................................................................................... 9 Figure 6. Agri-Enterprises: Share of Agricultural Output by Type, 2000–16 Percent shares of total value of agricultural production ................................................................ 11 Figure 7. Agri-Enterprises and Family Farms: Specializations, 2015 Percent share of total output by farm type ..................................................................................... 12 Figure 8. Share of Milk Production: Farms of 10 to 100 cows of IFCN Standard Classes .............. 13 Figure 9. Growth of Dairy Enterprise Revenue since 2007 ............................................................... 14 Figure 10. Growth of Pork Enterprise Revenue since 2007 .............................................................. 14 Figure 11. Pork Sector: Investment Growth as Fixed Asset and Revenue Growth, 2007–16 (2007 = 100) ......................................................................................................................................... 15 Figure 12. Dairy Sector: Investment Growth as Fixed Asset and Revenue Growth, 2007–16 (2007 = 100) ......................................................................................................................................... 15 Figure 13. Assets Turnover for Enterprises that Stated Dairy/Cattle Breeding as their Core Business, by Enterprise Size, 2008–16 Average ........................................................................ 17 iv © 2017 Agriculture Global Practice. The World Bank Group Figures Figure 14. Russia’s Agriculture TFP Growth Rate, 1991–2013 ........................................................... 18 Figure 15. Dairy Farm Revenue: Russian Farms and Comparator Farms ....................................... 21 Figure 16. Cost Comparison of Typical Dairy Farms ....................................................................... 21 Figure 17. Dairy Farm Productivity ..................................................................................................... 22 Figure 18. Pork Prices, 2000–15 .......................................................................................................... 24 Figure 19. Production and Consumption, 2000–15 ......................................................................... 24 Figure 20. Animal Inventories, 2000–15 ............................................................................................. 24 Figure 21. Russian Pig Farms with Favorable Market Prices Exhibit Overall Positive Profits .......... 25 Figure 22. Total Costs of the Pig Enterprise (Factor and Nonfactor Costs) .................................... 26 Figure 23. Breakdown of Nonfactor Cost Components of the Pig Enterprise .............................. 26 Figure 24. Short- and Medium-Term Profits of Finishing Enterprises ................................................ 26 Figure 25. Labor Productivity ............................................................................................................. 27 Figure 26. Capital Costs ..................................................................................................................... 27 Figure 27. Corn Yield across Farms in Comparator Countries, 2015 .............................................. 28 Figure 28. Corn Production Costs, 2015 ............................................................................................ 29 Figure 29. Corn Production: Total Costs and Gross Revenue, Including Decoupled Payments, 2015 .................................................................................................................................. 29 Figure 30. Soybean Production, 2015 ............................................................................................... 31 Figure 31. Soybean Production: Total Cost and Gross Revenue, Including Decoupled Payments, 2015 .................................................................................................................................. 31 Figure 32. Depth of Food Manufacturing Sector: Food Manufacturing Value-Added/Agriculture Value-Added, 2005–14 Average .......................................................... 32 Figure 33. Composition of Food Sector Employment, 2010–15 Average ........................................................................................................ 34 Figure 34. The Ratio of the Average Wage in the Industry to the Country’s Average Wage, 2000–15................................................................................................................................................ 34 Figure 35. Output and Gross Value-Added per Enterprise in Food Enterprises ............................ 35 Figure 36. Changes in Employment and Labor Productivity in Food Enterprises, 2005 and 2015..................................................................................................................................... 35 Figure 37. Trends in Labor Intensity in Total Manufacturing and Food Enterprises, 2005 Prices ... 35 Figure 38. TFP Index in Food Enterprises and Total Manufacturing, 1998–2015, 2005 Prices ........ 37 Figure 39. Capacity Utilization (Investment/GVA) in Food Enterprises, 1998–2015 ...................... 39 Figure 40. General Services Support Estimates, 2009–14 ................................................................ 44 © 2017 Agriculture Global Practice. The World Bank Group v Russia: Policies for Agri-Food Sector Competitiveness and Investment Tables Table 1. Labor Productivity of Enterprises that Stated Dairy/Cattle Breeding as their Core Business ...................................................................................................................................... 16 Table 2. Labor Productivity of Enterprises that Stated Pig Farming as their Core Business .......... 16 Table 3. Spatial Trends, Size, and Growth in Food Processing and Total Manufacturing in the Russian Federation, 2005 Prices .............................................................................................. 33 Table 4. Partial Productivity and TFP in Food and Aggregate Manufacturing in the Russian Federation, 2005 Prices ........................................................................................................ 36 Table 5. Partial Productivity and TFP in Food Manufacturing in the Russian Federation, 2005 Prices........................................................................................................................................... 39 Table 6. Directions of Financial Support and Volumes from Federal Budget of the Russian Federation in 2016................................................................................................................. 43 Acknowledgments Acknowledgments base Analyses; and Appendix 3: Benchmarking Pro- duction Systems and Costs for Pork, Dairy and Crop This report was prepared under the guidance of An- Production in Russia. dras Horvai, Country Director for the Russian Fed- eration, and Julian Lampietti, Practice Manager, Agri- The team coordinated with representatives from culture Global Practice at the World Bank. The World the Ministry of Agriculture of the Russian Federation Bank team comprised Artavazd Hakobyan (Senior and is grateful for the support of Maxim Markovich Agriculture Economist) and David Nielson (Lead Ag- and Vladimir Volik. The team is also grateful for the riculture Economist). The extended team that pre- support of the Federal State Statistics Service of the pared detailed background reports and analyses, Russian Federation, which provided an extensive which form the empirical basis for the findings of this database that formed part of the analyses. The team report, includes Seema Bathla (Jawaharlal Nehru benefited from a visit to Tambov Oblast and from in- University, New Delhi), Claus Deblitz and Yelto Zim- terviews with selected agricultural producers, and is mer (agri-benchmark Network), Torsten Hemme and grateful to the Tambov Administration for assisting Amit Saha (IFCN Dairy Research Centre, Germany), with the visit. Dmitriy Zemlyanski (Lomonosov Moscow State Uni- versity), Sergei Lamanov (Infrastructure Economics The team is very grateful to Per Pinstrup-Andersen Center, Moscow), Alina Pugacheva (New Economic and William Sutton for their detailed comments and School, Moscow), and Dmitri Rylko and Daniil Khot- suggestions on the early draft of the report, and ko (Institute for Agricultural Market Studies – IKAR). to the peer reviewers Rob Townsend, Christopher Their contributions form the detailed technical sec- Brett, and Christopher Miller for their valuable com- tions of the report that are available separately as ments. Appendix 1: Policies for Accelerating Productivity Growth in Food Processing Enterprises in the Rus- Last but not least, the team is very grateful to Irina sian Federation; Appendix 2: Financial and Eco- Prusass and Valencia Copeland for their assistance nomic Indicators and Productivity in the Dairy and throughout the process, and to Hope Steele for her Pig Sectors of Russian Agriculture: RUSLANA Data- excellent editorial support. © 2017 Agriculture Global Practice. The World Bank Group 1 Russia: Policies for Agri-Food Sector Competitiveness and Investment Introduction and Summary veloped relative to the agribusiness industries found in countries at comparable levels of development. Recent studies indicate that total factor productiv- Agriculture’s share of Russia’s overall gross domes- ity (TFP) in Russian agriculture has risen consider- tic product (GDP) falls between 4 and 5 percent— ably since the early 1990s. In fact, agricultural TFP comparable to the shares found in most Organisa- rose rapidly from a very low base during the 1990s tion for Economic Co-operation and Development and 2000s (roughly 5 percent per year during that (OECD) countries. However, Russia’s downstream period) and has continued to rise, albeit at a slower agribusiness sector accounts for only 2 to 3 percent pace (under 2 percent per year), since (Rada, Liefert, of GDP—potentially well below the comparable per- and Liefert 2017). The steep decrease in TFP growth cent share that would be found in other OECD na- rates in agriculture is consistent with the situation in tions. the overall economy and poses challenges for long- term growth (World Bank 2017b). However, produc- In light of the situation described above, this report tivity increases helped rebound agricultural produc- examines selected issues and challenges for agri- tion, which in recent years has reached and even food sector competitiveness and foreign direct in- surpassed pre-transition levels. At the same time, vestment (FDI) in Russian agriculture. Its purpose is Russia shifted from being dependent on imports for to serve as a vehicle for dialogue with government key commodities to being an important agricultural on agri-food sector collaboration. To this end, the re- exporter. As Rada, Liefert, and Liefert demonstrate, port identifies policy recommendations to address the recovery in production levels (and the recent selected challenges in the competitiveness of agri- turnaround in agricultural trade) was accomplished food value chains and to support the government’s with significantly lower levels of input use in Rus- aim of attracting investments in the agri-food sector. sian agriculture than had been employed before the The analyses and background studies that under- transition (including, significantly, reduced acreage pin the recommendations are approached from the of land in production). In fact, in the aggregate, input point of view that increased productivity will improve use initially fell even more steeply than production. the competitiveness of agri-food value chains, result Since the initial decline in the early 1990s, input use in higher profitability, and encourage more invest- has leveled off and in some areas begun to climb ment, including FDI, in Russian agriculture. slowly. The analyses utilize two methods to identify policy Despite advances in agricultural production, TFP, issues relevant for competitiveness and investment and trade balances, many crop and livestock pro- in Russian agriculture. The first method addresses ductivity measures in Russia continue to lag behind the extent to which farms in Russia could reach those recorded in comparator countries. Crop yields competitiveness—defined by attaining high produc- remain below those found in Europe and North tivity and profitability levels, comparable with similar America. The same holds true for productivity in live- farms abroad. This is approached through careful stock enterprises, though with substantial variation comparative analysis (benchmarking) of typical and between farm types. Additionally, the downstream successful large modern farming operations in pork agribusiness sector remains substantially underde- production, milk production, and corn/soybean en- 2 © 2017 Agriculture Global Practice. The World Bank Group Introduction and Summary terprises. The second method examines the produc- 9 Investing in broadening productivity gains in tivity and scope for expanding post-farm food pro- priority sectors. A number of agricultural sub- cessing and manufacturing. This is approached by sectors are catching up with international com- analyzing food manufacturing industry data and es- petitors in terms of productivity and are close timating factors influencing TFP at the sectoral level. to achieving competitiveness. The evidence from this report shows that this is certainly the The focus on untangling factors that affect the pro- case for large agribusiness in the pork and ductivity and profitability of agriculture and food dairy sectors. These sectors have acquired sectors is especially relevant in view of the World new modern technologies, replacing old and Bank’s recently published Systematic Country Diag- obsolete technologies as more financial re- nostic (SCD), which pays special attention to the is- sources became available both from public sue of productivity in the Russian economy (World and private investments. The pork sector over- Bank 2016). The SCD concludes that declining pro- all has strongly benefited from investments and ductivity growth due to structural constraints is one technology modernization. The dairy sector is of the major impediments to the development of the trailing because large agribusiness is unable to Russian economy. This report intends to add to the expand its level of production to fulfil domestic knowledge of factors that affect productivity in the demand, is highly price-dependent for profits, agri-food sector of Russia. and the small and medium dairy sector has not benefited much from investments or technolo- In agreement with the Ministry of Agriculture, the re- gy modernization opportunities. Going forward, port is focused on identifying areas in which policy more broad-based productivity gains would be actions might lead to sustainable investments—es- achieved and growth would be maintained by pecially FDI in the agricultural and food manufactur- introducing policies that support the spread of ing sectors—and catalyze growth in competitiveness innovation and technology throughout the en- and exports. Therefore the report does not cover all tire agriculture sector. of the many aspects of agriculture and food sector development in Russia. More background details 9 Strengthening value chains and value-addi- on the sector are widely available in the current lit- tion in the food industry. For an economy as erature, which includes the analyses of regulatory advanced as the Russian economy, the food frameworks that are part of the World Bank’s En- manufacturing industry is unusually small com- abling the Business of Agriculture (EBA) series. See pared to the agriculture sector and to the rest of Box 1 for a summary of Russia’s comparative perfor- the economy. But it is productive. Productivity mance in the EBA assessment. growth in food manufacturing has slowed, but is still higher than productivity in total manufac- The report identifies three areas in which the public turing, thereby showing prospects for sector sector may be able to use policy and programmatic expansion. However, it is unclear why the sec- interventions to spur productivity, competitiveness, tor is not expanding, and more importantly why investment, and exports. These areas are the fol- it is not supporting growth in the agriculture lowing: sector to a greater extent. To help understand © 2017 Agriculture Global Practice. The World Bank Group 3 Russia: Policies for Agri-Food Sector Competitiveness and Investment Box 1. Enabling the Business of Agriculture: Russia’s Comparative Performance Russia is included among the 62 countries in the Enabling the World Bank’s Business of Agriculture data col- lection. When compared with the average of these countries, Russia scores higher in all indicators except for transport. However, perhaps of greater relevance, Russia can be compared with other countries in its region or its income level. Across the full range of topics, Russia scores higher than other countries in Europe Central Asia region. When compared with other high-income countries, it scores well below their average. Such comparisons highlight areas places where its regulatory framework can be streamlined to achieve better policy outcomes, including for productivity and profitability. Tables B.1 and B.2 summarize Russia’s performance within each of these groupings. Table B1. Russia Compared with Europe and Central Asia Topic Seed Fertilizer Machinery Transport Markets Operations Above average Above average Above average Below average Above average Quality control Below average Above average Above average — Below average Trade — Below average Below average Below average — Table B2. Russia Compared with High-Income Countries Topic Seed Fertilizer Machinery Transport Markets Operations Below average Above average Below average Below average Below average Quality control Below average Below average Above average — Below average Trade — Below average Below average Below average — Source: World Bank 2017a. Note: — = not available. this, the analyses in this report show that the long-term productivity gains in the agri-food backward linkages of food manufacturing to sector is the availability of skilled labor. The the agriculture sector are not strong. Adequate labor market does not seem to be able to re- infrastructure and effective modern public poli- spond to the potentially high demand for high- cies that support food manufacturing–agricul- ly skilled farm labor. Low wages indicate that ture linkages and stronger value chains would there might be deficiencies in the labor mar- strengthen the performance of agriculture and ket, because labor demand for skilled workers the rural economy in general. is filled by unskilled workers, including foreign migrants. Generating rural employment and 9 Promoting human capital in rural areas filling the supply gap for skilled workers in the through capacity building in agricultural sci- agriculture and food manufacturing industry ences and farm management to improve la- would require direct and indirect employment bor productivity. An important constraint for generation, particularly at the regional level, 4 © 2017 Agriculture Global Practice. The World Bank Group Introduction and Summary with improved access to and improved quality next section presents issues of productivity and of education and other services. competitiveness at the farm level, investigating in greater detail farms that produce dairy, pork, corn, The next section considers the challenges of new and soybeans. The next section looks at food pro- growth in the agriculture and food sector. This is cessing as a potential driver of agricultural growth. followed by a look at whether the new type of pro- The report concludes with a consideration of the ducer can be a successful engine of growth. The role and potential of policy. Russia: Policies for Agri-Food Sector Competitiveness and Investment Agriculture and Food: the country’s total manufacturing, and less than 2.0 Challenges of the percent of its GDP.2 New Growth Sector The agriculture sector has shown resilience to the re- Russia is a major producer of agricultural commodi- cent economic crisis with a gross value-added (GVA) ties and plays an important role in global food mar- growth rate of 3 percent in 2015 and 3.6 percent in 1 kets. It has the largest expanse of agricultural land 2016 against the general decline of the economy of in the world. Russia is ranked fifth in the world by 2.8 percent and 0.2 percent, respectively (Figure 1). agriculture value added and seventh by total for- The food and beverage manufacturing sector re- eign direct investment (FDI) inflows in the agriculture corded an impressive 4.7 percent growth, albeit sector. The country is the world’s largest producer after consecutive two years of decline (Figure  2). of barley; the fourth largest producer of wheat, and The overall food sector’s growth was the result of most recently its largest exporter; the second largest its quick transformation, which took advantage of producer of sunflower seeds; the third largest pro- groundwork set forth by the government support ducer of potatoes; the third largest producer of milk; programs and policies of recent years. These poli- and the fifth largest producer of eggs and chicken cies have boosted the production of important com- meat. Domestically, the share of the agriculture modities—namely grains, poultry, and pork—and value added is 4.3 percent of GDP. Agriculture and ensured that domestic producers and food manu- food manufacturing value added together comprise facturers are protected from outside competition. In 6.3 percent of GDP. The agri-food processing sec- addition to government support policies, the cheap tor contributes 13.5 percent of the value-added of ruble and favorable weather have helped to trans- Figure 1. Growth in Food and Agriculture Sector Figure 2. Mixed Growth Rate in Value-Added, Value-Added, 2003–16 2012–16 6,000 5 Rubles, thousands Percent 5,000 4 3 4,000 2 3,000 1 2,000 0 2011 2012 2013 2014 2015 1,000 -1 0 -2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -3 Agriculture and hunting Forestry Fisheries Agriculture value-added growth Food and beverage manufacturing Tobacco manufacturing Food and beverage manufacturing value-added growth Source: ROSSTAT database. 1 The data presented are from the FAOSTAT database. 2 ROSSTAT database. 6 © 2017 Agriculture Global Practice. The World Bank Group Agriculture and Food: Challenges of the New Growth Sector form the agri-food sector into one of the major prior- sures—through sanitary and phytosanitary border ity sectors in the country. controls helped the sector boost production and do- mestic market access (Box 2). Nevertheless, policy In 2015 and 2016 Russia produced a record harvest makers are struggling to identify improvements to of grains, especially wheat, and became the larg- public policies that would continue boosting sector est exporter of wheat in the world. The response to performance. The key policy challenges faced by the Western sanctions—so-called countersanctions, the Ministry of Agriculture are how to boost export devaluation of the ruble, and restrictive trade mea- performance and how to ensure that industry is com- Box 2. How the Russian Agri-Food Sector Responded to Recent Economic Shocks A recent combination of economic shocks resulted in a deterioration of terms of trade for the Russian agri-food sector over the course of the past three years. The first shock was the depreciation of the ruble exchange rate, resulting from the drop in global oil prices. The Russian ruble lost 46 percent of its value between July and December 2014. The decline boosted the price competitiveness of commodity exports (Shagaida and Uzun 2016), which registered a record volume in the 2015–16 export seasons, pushing Russia to the top place in grain exports. At the same time, major agri-food producers and exporters complained that their costs of production suffered because their inputs and technology investments became more expensive. According to the Bank of Russia’s survey in May 2016, more than 80 percent of agri-food producers interviewed would have preferred a stronger ruble in order to reduce the costs of imported technology and other inputs for their production (Bank of Russia 2016). The second shock was the decline in consumer incomes, which led to reduced consumption. Food purchases constitute significant share of average household expenditures, and the average share of food expenditures in total expenditures rose to 38 percent for the whole population in 2014. Consumers switched to less expensive food products. The net effect from consumption decline has been difficult to measure, but recent research sug- gests that food retail trade declined considerably.a The third shock was the decision by the government to embargo imports from those countries that imposed sanctions against Russia as a result of the political crisis around Ukraine. According to some experts, the effects of these measures were significant in that they reduced the availability of certain food items (fresh fruits and vegetables, cheeses and other dairy products, and so on). Russian suppliers shifted to alternative markets in the search for substitute channels for food products. The domestic sector response has been relatively quick, ex- panding production, but with a time lag required to substitute domestic supply in absence of investment growth (World Bank 2017b). This is probably the biggest shock, which created market imbalances and significantly reduced the availability of key food products. Domestic prices responded. As a result, food prices increased; they are still above international levels for several key food products. Such imbalance created a favorable envi- ronment for key domestic subsectors (dairy, pork and poultry, beef), which in turn benefited from more directed government support programs. Note: a Based on the data from the Analytical Center for the Government of Russian Federation. 2015 “Results of Food Embargo”. World Bank Group. 2017b. Russia Economic Report, No. 37, May 2017: From Recession to Recovery. World Bank, Washington, DC © 2017 Agriculture Global Practice. The World Bank Group 7 Russia: Policies for Agri-Food Sector Competitiveness and Investment petitive. These require more investment, specifically balance to have narrowed in 2014 and 2015. Exports FDI that could bring the benefit of new technologies have picked up overall since 2007. The annual rate and market access (see Box 3). of growth in agri-food exports is impressive, at 7.66 percent, compared to agri-food imports at 0.16 per- What leads policy makers to confront these impor- cent during these years. However the average share tant challenges? Although export trends have been of agri-food exports in total exports has remained at positive recently, they have remained mainly con- 1.96 percent in 2007–15, whereas agri-food imports centrated in the grain sector. Exports of poultry meat continue to hold a sizeable share in total imports (av- products and some processed food products (mainly eraged 16.33 percent in the same period), indicating confectionary and condiments) are relatively limited. the country’s high level of demand for food imports The remainder of the sector is mostly domestic. It is (Figure 4). This demand remains high even though important to highlight the fact that net agri-food trade there has been a consistent decline in the share of flows have always been negative. The trade patterns agri-food imports in total imports—from as high as depicted from 1998 to 2015 in Figure 3 show trade 24 percent to almost 14 percent during this period. Box 3. Foreign Direct Investment in the Agri-Food Sector The Russian agri-food sector has attracted considerable investment in the recent decade (Figure B3.1). The food manufacturing sector, including beverages and tobacco, received around 4.0 percent of all FDI, and the agricul- ture sector received around 0.4 percent of FDI. Such FDI performance compared positively with other countries, and Russia has been consistently in the top 10 countries with the most FDI in its agriculture sector (Figure B3.2). However, experts suggest that a considerable part of agri-food sector FDI was due to round-tripping—that is, Russian investments undertaken by Russian investors from foreign jurisdictions. Given the large market size, the majority of FDI in the food manufacturing sector has been market-seeking, therefore limiting potentially larger scale trickle-down effects for technology transfer and productivity gains (Kuznetsov 2012). Figure B3.1 FDI and Fixed Capital Investment Figure B3.2 Top 10 Countries with FDI Inflows in Agriculture, 2000–13 12,000 1,000 US$, millions US$, millions 10,192 10,000 9,417 9,423 8,770 800 8,000 6,959 600 6,000 400 4,000 2,000 934 200 548 667 656 598 496 0 0 2010 2011 2012 2013 2014 I-IIIQ 2015 Arg ina Ind na a Uru il ay de a ion a Gu pt la s esi ysi an ma y Bra gu ti Ch rat Eg Gh ren ssi Mala on ate FDI: Agriculture, forestry, and fisheries Fe an Fixed capital investment: Agriculture, hunting, forestry, and fisheries Ru Source: Bank of Russia and ROSSTAT database. Source: FAOSTAT database. 8 © 2017 Agriculture Global Practice. The World Bank Group Agriculture and Food: Challenges of the New Growth Sector Figure 3. Agri-Food Trade Balance Average, 1998–2015 Percent share in total value of agriculture exports 800,000 25 Rubles, billions Percent 700,000 20 600,000 500,000 15 400,000 300,000 10 200,000 5 100,000 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agri Exports Agri Imports Share agri exports in total exports Share agri imports in total imports Source: Authors’ estimates, based on COMTRADE data The composition of agri-food trade has not shown tutes beef, fruits, and vegetables, whose combined any significant change over time. A bifurcation of the share in total agri-food imports has varied from 5 to value of exports and imports before and after 2007 20 percent. Strong government support of the pork shows that the commodities having a relatively high- and poultry sector since the early 2000s has helped er share in total agri-food exports include cereals nearly eliminate their imports. (43 percent) and edible oils (12 percent) (Figure  5). The share of some of these commodities in total The domestic consumer demand for cereals may agri-food exports is found to have dropped slightly not have strong prospects for growth, although during 2007–15. The agri-food import basket consti- there is still untapped potential for feed grains. With Figure 4. Agri-Food Imports: High-Value Food Figure 5. Agri-Food Exports: Commodities Products Tobacco, cigarettes & cigars Tobacco, cigarettes & cigars Water, wine & vinegar Flour, brans & oilcake Extracts & preparations of coffee, soups & icecreams Water, wine & vinegar Vegetables preserved & fruits juices Extracts & preparations of coffee, soups & icecreams Sugar & molasses Food prepration & bakery Edible oil, fats & glycerine Cocoa beans, butter & chocolate Sunflower and other oilseeds Edible oils, fats & glycerine Banana, grapes & other fruits Potatoes, tomatoes & other vegetables Sunflower & other oilseeds Milk, cream, butter & bird's eggs Cereals: rice, barley, wheat etc. Meat of bovine animals & poultry Milk, cream, butter & bird's eggs 0 5 10 15 20 0 10 20 30 40 50 Percent Percent 2007–15 1998–2006 2007–15 1998–2006 © 2017 Agriculture Global Practice. The World Bank Group 9 Russia: Policies for Agri-Food Sector Competitiveness and Investment increasing per capita incomes, consumer demand cause quality and animal health issues pose major is likely to shift to high-value produce such as fruits challenges. and vegetables, dairy, beef, and processed food, for which the country is highly dependent on imports. To boost export performance, and to ensure that the Consumer demand is high in fruits and vegetables, industry is competitive both domestically and inter- but Russia’s fruit and vegetable production, though nationally, the Russian agri-food sector must contin- picking up, is far from becoming a competitive sec- ue to improve productivity; expand food processing tor. On the other hand, poultry and pork production and manufacturing with much stronger linkages to have achieved self-sufficiency levels, but are yet agricultural production; and substantially increase to demonstrate competitiveness internationally be- value addition in agricultural production. Can the New Producer Type Be the Growth Engine? Can the New Producer Type Be agriculture sector. They are sometimes called agro- the Growth Engine? holdings and are perceived to be the driving force behind productivity (Davydova and Franks 2015) Russia’s agrarian structure may help explain some and production growth. They also dominate the ex- of the successes of recent agricultural sector per- port of commodities. In many respects, these large formance and the challenges it faces. The agrarian agro-holdings are extremely concentrated vertical structure in Russia is based on three types of farms: businesses that own the most-advanced technol- (1) agri-enterprises—large industrial farms with large ogy. The value chains are limited to each individual land and livestock holdings; (2) emerging family agri-holding, and spillovers of technology beyond farms—individual farms operated by family famers the borders of the holding are rare. and limited hired labor; and (3) household plots— small land plots adjacent to rural homes. Around half Agri-enterprises and family farms tend to specialize of agricultural output is produced by agri-enterpris- in the production of grain, oilseeds, and other indus- es (Figure 6). Although many agri-enterprises are trial crops that require high levels of mechanization, nearly the same in terms of the area farmed and in while household plots generally produce potatoes, management and technology used as the collective vegetables, fruit, and milk for self-consumption and farms of Soviet times, since 2000 more-advanced sale in local markets (Figure 7).3 The largest share agri-enterprises have emerged. These enterprises of household plots (78 percent) specializes in the can mobilize investments, utilize advanced technol- production of potatoes, but these farms sell only ogy, and import better management practices in the 17 percent of their production. The share of house- Figure 6. Agri-Enterprises: Share of Agricultural Output by Type, 2000–16 Percent shares of total value of agricultural production 100 Percent 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Agri-enterprises Households Family farms Source: ROSSTAT database. 3 This discussion is based on Grosclaude 2016. © 2017 Agriculture Global Practice. The World Bank Group 11 Russia: Policies for Agri-Food Sector Competitiveness and Investment hold plots in vegetable production was 68 percent The trend of increasing the share of agricultural out- in 2015, of which 16 percent was sold. By contrast, put, especially grains and meat, by agri-enterprises agri-enterprises sold 83 percent of their produc- is expected to continue because agri-enterprises 4 tion and family farms 77 percent. In livestock, spe- are likely to continue to achieve further productivity cialization has also emerged. Poultry is produced gains as a result of policies and support programs mainly by agricultural enterprises. Pork production is that give them better access to technology and capi- gradually specializing in agri-enterprises by pushing tal. However, emerging family farms and the small to household pig farming out of business as a result medium farm sector present the opportunity to fill the of animal health and bio-safety concerns. Neverthe- production gap in subsectors where agri-enterprises less, households were responsible for 39 percent have a weaker competitive advantage, and which of all livestock production, of which 46 percent was are higher-value subsectors—namely fruit and vege- commercialized. They were also responsible for 46 table production, and even small-scale milk produc- percent of total milk production, of which 31 percent tion. For example, in the milk sector, policy-driven was commercialized. In general, the share of output farm structure consolidation is seeing an increase of agri-enterprises has increased in total production. in farms with 10–100 cows (Figure 8). Few of these For example, in 2013 agri-enterprises contributed farms register as agri-enterprises—the majority are 47.6 percent of gross agricultural output. Their con- registered as family farms. The bigger commercial tribution increased to more than 52 percent in 2016 dairy farms have seen marginally declining trends. (Figure 6). Since 2007, family farms with a herd size of 10–100 Figure 7. Agri-Enterprises and Family Farms: Specializations, 2015 Percent share of total output by farm type 100 Percent 80 60 40 20 0 Grains Sugar beets Sunflower Potatoes Vegetables Livestock Milk Eggs seeds and poultry Agri-enterprises Household Plots Family Farms Source: ROSSTAT database. 4 Agri-enterprises and family farms are fully commercial. The statistics show only the share of primary production sold. If the primary production is pro- cessed on farm, it is not reflected in the statistics. Most agri-enterprises are integrating up in the value chain and are acquiring processing facilities, which allows them to process their own production. 12 © 2017 Agriculture Global Practice. The World Bank Group Can the New Producer Type Be the Growth Engine? Figure 8. Share of Milk Production: Farms of 10 to 100 cows of IFCN Standard Classes 14,000 Number of cows/size class 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1–2 >2–10 >10 - 30 >30–100 >100–300 >300–1,000 > 1000 Source: IFCN International Farm Result Database 2016 Comparison Network (IFCN), http://ifcndairy.org/ cows are replacing household farms with fewer than present analyses included 3,340 dairy farms and 10 cows. In the sectors where small and medium 506 pig farms—each of these farms was recorded farms have a comparative advantage for increasing in the RUSLANA database and reported these two production and productivity, large agri-enterprises sectors as their area of primary economic activity, can build linkages with such farms by transferring respectively. This sample contains only registered technology, creating out-grower schemes and pro- agricultural enterprises, including almost all agro- moting cooperation (see Box 5). holdings. It is not a comprehensive sample that rep- resents all agricultural producers in Russia because On the other hand, in the pork production sector, it leaves out household plots and, most importantly, where large commercial farms have benefited from it also leaves out commercial family farms. It likewise investment support and higher prices, farm consoli- leaves out other agri-enterprises that have mixed dation is taking place and the sector is being domi- production systems and do not report either pork or nated by large mega-farms. The 10 largest compa- dairy as their main economic activity. However, this nies now control around half of the pork production sample provides a snapshot of the operations and the country. performance of the most commercially oriented but also technologically diverse agricultural producers. The RUSLANA database provides a basis from which to assess the performance of farms in two priority For the pork production sector, the sample repre- livestock sectors: pork production and dairy farming. sents almost 70 percent of national pork production. These sectors are considered priority for agricultural For the dairy production sector, it represents more development, and they have been the focus of fed- than 50 percent of national production. As such, eral agricultural policy attention since the 2000s. the sample provides a characteristic picture of the The data sample employed for the purpose of the performance of small, medium, and large agri-en- © 2017 Agriculture Global Practice. The World Bank Group 13 Russia: Policies for Agri-Food Sector Competitiveness and Investment terprises. The RUSLANA database reports financial These revenue growth rates are partly driven by performance in the form of the balance sheets of the growth in domestic prices in Russia, but also partly agri-enterprises. Thus physical production indicators by technology utilization. The impact of domestic cannot be analyzed with this database. The financial prices on revenue growth has been particularly results give a picture of revenue growth, investment strong since the imposition of food import restric- performance, and labor productivity. They also help tions in 2014. High revenue growth is leading to enhance an understanding of where the weakness- a transformation of the pig industry, which is now es are and where public policy attention would be dominated by medium- to large-scale enterprises. necessary to support the sectors’ growth. The largest 10 pork producers represented 46 per- cent of total slaughter in 2015. Although the Rus- Both dairy and pork agri-enterprises have demonstrat- sian pork production sector is still less concen- ed significant growth since 2007 (Figures 9 and 10). trated than it is in several comparator countries, it Total revenue growth between 2007 and 2016 was is certainly trending in this direction. On the other more than 200 percent for the dairy and more than hand, despite the strong revenue performance of 1,000 percent for the pig agri-enterprises, respec- large dairy companies, such transformation does tively. The largest share of revenue growth reported not (and will most likely not) take place in the dairy large agri-enterprises with averages of 40  percent sector because that sector is more capital intensive per annum in the dairy sector and 150–200 percent and, usually, better financial and production perfor- per annum in the pig sector. The sample distinguishes mance can be achieved in small- to medium-sized the size of agri-enterprises based on their annual rev- dairy enterprises. Figure 12 shows the dairy sector enues as reported in the RUSLANA database. growth rate, which is much lower than that in the Figure 9. Growth of Dairy Enterprise Revenue Figure 10. Growth of Pork Enterprise Revenue since 2007 since 2007 400 5,000 Percent revenue change, based on 2007 revenue Percent 350 4,000 300 250 3,000 200 150 2,000 100 1,000 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 > 1,000 mln RUB 500–1,000 mln RUB 100–500 mln RUB All enterprises > 5,000 mln RUB 1,000–5,000 mln RUB 50–100 mln RUB 10–50 mln RUB 1–10 mln RUB 500–1,000 mln RUB 100–500 mln RUB 10–100 mln RUB < 1 mln RUB does not function 1–10 mln RUB < 1 mln RUB does not function Source: RUSLANA database (courtesy of the Infrastructure Economics Centre, IEC_rus). Note: The RUSLANA database reports only cattle breeding enterprises since there is no separate reporting of milk/dairy enterprises. It is assumed that the majority of these enterprises are engaged in milk production. 14 © 2017 Agriculture Global Practice. The World Bank Group Can the New Producer Type Be the Growth Engine? Figure 11. Pork Sector: Investment Growth as Fixed Figure 12. Dairy Sector: Investment Growth as Asset and Revenue Growth, 2007–16 Fixed Asset and Revenue Growth, 2007–16 (2007 = 100) (2007 = 100) 50 2.5 Growth rate, times Growth rate, times 40 2.0 30 20 1.5 10 0 1.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenue Fixed assets Revenue Fixed assets Note: Revenue performance improved with the price hike of 2014–15. Source: RUSLANA database (courtesy of the Infrastructure Economics Centre, IEC_rus). pork industry (Figure 11). Both in terms of invest- the pork production sector, in the past 10 years la- ments and in terms of revenue performance the bor productivity has grown by more than four times. milk industry is different from the pork industry. This reflects technological advances of the sector, which has invested considerably in new production Profitability in both the dairy and pork sectors has technologies. However, part of the growth in rev- been growing, though in both sectors its growth rate enue per employee—an indicator used to measure has been declining since 2007. The main drivers for labor productivity in Tables 1 and 2—could be the profitability in these two sectors are the relatively high revenue growth from increased prices. Furthermore, domestic prices for both pork and milk and relatively part of the increase in labor productivity may be at- low domestic prices for feed, which comprises up tributed to shedding excess farm labor (inherited to 60 percent of production costs. Russian farm en- from the Soviet era) as the agricultural enterprises terprises enjoy favorable internal market conditions underwent technological modernization (Uzun and characterized by protection from import competition Lerman 2017). and resulting higher prices. Productivity increases are fueled by major technological advances that certain Small enterprises are gradually exiting the pork (mostly large) enterprises in the agri-food sector have sector, a trend that will continue. Labor productivity undergone in the last decade. The sector adopted growth in the dairy sector has shown varied results. new technologies, improved genetics, and better ani- Medium and large dairy farms reported an average mal health conditions, and improved management. labor productivity growth of 3.3–3.6 times over the past 10 years, with the large companies reporting However, at the level of the farm enterprise, the labor productivity growth on the order of 10 times analyses show mixed results for productivity. For during this period (Tables 1 and 2). Small enterprises © 2017 Agriculture Global Practice. The World Bank Group 15 Russia: Policies for Agri-Food Sector Competitiveness and Investment reported a productivity decline, and considering the efficiency of input use through the adoption of new sizeable contribution of small and medium enterpris- technologies. es in the dairy production, their results reflected on the overall sector productivity. These findings from However, smaller dairy companies, which may even- the RUSLANA database are consistent with analy- tually emerge as the key drivers of dairy production, ses of other authors (Uzun and Lerman 2017), who demonstrate a fall in productivity and technical ef- mostly attribute improvements in labor productivity ficiency—indicating their lack of access to new tech- to the shedding of excess labor and to an increased nologies, challenges of management, and issues Table 1. Labor Productivity of Enterprises that Stated Dairy/Cattle Breeding as their Core Business (Thousand rubles of revenue/employee) Labor productivity, thousand rubles/employee Groups of enterprises by revenue 2008–10 2011–13 2014–16 ALL ENTERPRISES 822 796 791 > 1 billion rubles 2,340 2,872 3,255 500–1,000 million rubles 1,039 1,211 1,366 100–500 million rubles 881 955 993 50–100 million rubles 633 626 604 10–50 million rubles 701 543 477 1–10 million rubles 468 274 181 < 1 million rubles 419 199 67 Out of business 656 337 89 Source: RUSLANA database (courtesy of the Infrastructure Economics Centre, IEC_rus). Table 2. Labor Productivity of Enterprises that Stated Pig Farming as their Core Business (Thousand rubles of revenue/employee) Labor productivity, revenue/number of employee, thousand rubles per employee Groups of enterprises by revenue 2008–10 2011–13 2014–16 ALL ENTERPRISES 1,078 2,196 4,462 > 5 billion rubles 2,366 8,465 23,005 1– 5 billion rubles 1,360 2,505 4,667 500 – 1,000 million rubles 757 1,418 2,768 100– 500 million rubles 497 922 1660 10–100 million rubles 496 572 705 1– 10 million rubles 600 509 338 < 1 million rubles 293 163 92 Out of business 582 482 57 Source: RUSLANA database (courtesy of the Infrastructure Economics Centre, IEC_rus). 16 © 2017 Agriculture Global Practice. The World Bank Group Can the New Producer Type Be the Growth Engine? with animal health, as well as potential difficulties Figure 13. Assets Turnover for Enterprises that Stated Dairy/Cattle Breeding as their Core Busi- obtaining access to higher performing genetic ma- ness, by Enterprise Size, 2008–16 Average terial. Their asset turnover—a financial ratio repre- 160 Percent senting the efficiency of the use of a firm’s assets— declines over time, though the decline is slower than 120 that of labor productivity.5 Since there is a shortage 80 of milk in the country, even the most inefficient agri- enterprises running on obsolete technologies can 40 still sell their product at relatively high prices and en- joy temporary revenue growth. 0 S B B B UB B UB UB ion ISE RU RU RU RU nR nR nR nct PR n ln ln ln l ml ml ml t fu b m 0m 0m TER >1 00 00 10 <1 no 50 –5 EN 1,0 –1 1– es 0– 10 ALL As these analyses show, potentially “efficient” pro- 50 Do 0– 10 50 duction capacity probably lies within those enterpris- Labor productivity change (2014-16 average vs 2018-10 average) Assets return change (2014-16 average vs 2018-10 average) es with revenues of more than 100 million rubles (Fig- ure 13). This revenue threshold allows investments in Source: RUSLANA database (courtesy of the Infrastructure Eco- state-of-the-art technologies for the development of nomics Centre, IEC_rus). production facilities (standardized livestock breed- ing complexes, milk storage, transportation and pro- the future. Because most gains in milk production cessing facilities, and so on). Those companies with a will come from companies with less revenue and smaller turnover have been unable to efficiently uti- fewer cows, government policies should focus on lize relevant production capacities. Larger companies supporting the small and medium enterprises in the also have better access to credit and government dairy sector to improve their performance vis-à-vis subsidies, and therefore benefit from cheaper capital productivity and profitability. If the government ob- that they can use to modernize their technology. jective is to increase domestic milk production, it should direct a substantial part of its focus on de- However, large dairy sector enterprises are capital signing policies that help smaller, perhaps small and intensive and the prospects of repeating the suc- medium, dairy enterprises and individual farms im- cess of pork industry are limited. Although several prove their productivity through access to new mar- mega-size dairy farms do exist, their share in milk kets, better technologies, animal genetics, and sup- production is not increasing and will likely drop in port for animal health. 5 This observation about asset turnover is based on average financial results of 2007–16. © 2017 Agriculture Global Practice. The World Bank Group 17 Russia: Policies for Agri-Food Sector Competitiveness and Investment Productivity and ness industries found in other countries at compa- Competitiveness at the Farm rable levels of development. Agriculture’s share of Level: Catching Up in Key Russia’s overall GDP falls between 4 and 5 percent— comparable to the shares found in most Organisation Sectors for Economic Co-operation and Development (OECD) Total factor productivity (TFP) in Russian agriculture countries. However, Russia’s food manufacturing sec- has risen significantly since the early 1990s. Agri- tor is relatively small compared with those of OECD cultural TFP rose during the 1990s (roughly with an comparators, as it accounts for only 2 to 3 percent average growth rate of 2 percent) and has contin- of GDP—well below the 10 to 20 percent share that ued to grow, but at a declining pace in the 2000s would be found in other OECD countries. This dichot- 6 (Figure 14) (Rada, Liefert, and Liefert 2017). Despite omy points to the need to upgrade agricultural and the advances made in agricultural production and food industry development policies in order to fully trade balances described above, many partial agri- utilize existing potential. Understanding constraints cultural productivity measures in Russia continue to faced by the sector may help the government and lag behind those recorded in comparator countries. policy makers address the policy challenges. Crop yields remain below those found in Europe and North America; the same holds true for measures of This section examines several successful large agri- productivity in livestock enterprises. cultural enterprises in each of four priority agricultur- al sectors (dairy, pork, and corn and soybean grain Furthermore, the off-farm agribusiness sector remains crops). For these selected enterprises, farm records substantially underdeveloped relative to the agribusi- were analyzed to determine the level of competitive- ness that has been achieved relative to relevant in- Figure 14. Russia’s Agriculture TFP Growth Rate, ternational comparators. Although only a small num- 1991–2013 ber of farms were studied, they were chosen to be 4 3.79 representative of the experience of these important Percent 3.00 segments of Russian commercial agriculture. For the 3 2.49 2.12 selected farms, productivity growth has been im- 2 pressive since the 2000s, albeit from a relatively low base. Although this growth has slowed in the most 1 recent years, these farms are approaching (and may 0 soon achieve) true competitiveness with comparator 1991–00 2001–10 2001–13 2004–13 Years farms in Europe and beyond. The detailed findings are summarized below. Source: USDA Agricultural total factor productivity growth indices for individual countries, 1961–2013, dataset updated October 7, 2016. https://www.ers.usda.gov/data-products/international-agri- Agricultural enterprises (especially those in the live- cultural-productivity/ stock sector) are profitable in the short term mostly 6 TFP is a measure of the effectiveness of the usage of inputs (such as labor and capital). The higher the TFP, the more output is produced from the same amount of inputs. If the number of workers and the size of the capital is the same, but the output increases, this change is interpreted as an increase of the TFP. 18 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors because of two factors: low-cost feed production a farm is not representative of all farms, but gives a and high domestic prices for meat and milk. A closer fair picture of farm performance based on a single look at the cost structure of meat and milk produc- case study. The study employed focus group and in- tion suggests that around 50 to 60 percent of costs dividual interview techniques and farm data analysis comprise feed costs, where Russia has comparative to derive farm performance information. This meth- advantage; these costs reduce overall costs com- odology is developed by the IFCN Dairy Research pared with benchmarked farms in North America Centre and the agri benchmark network.7, 8 and Europe. Farms also benefit from market con- ditions that are favorable: market prices for most The following sections present and discuss findings agricultural products are high in Russia as a result for four priority sectors: dairy, pork, and the grain of border protection measures. On the other hand, crops – corn and soybeans. physical labor productivity in the sector appears to be rather low and the cost of infrastructure is high in terms of terms of its proportion of total costs. These The Performance of Dairy Farms factors pose medium- to long-term risks. Feed costs are highly weather dependent and wages can be ex- The dairy sector in Russia has yet to demonstrate pected to rise with economic development, result- sustainable trends in milk production and market ing in the need for increases in physical productiv- development despite consistent domestic demand. ity. Market protection measures are not beneficial to Although public policies and support are targeting the economy overall and may not last for very long. capital-intensive modernized dairy units, productiv- Thus policies should help farmers to stay profitable ity remains below the level of competitors, but it is by introducing risk management options and sup- catching up and—with supportive public policies— port programs. could soon be competitive. However, a closer look at the economic indicators at the farm and sectoral To explain the above findings, we employ bench- level point to several challenges—some linked to marking methodology, identifying and comparing public policies and infrastructure, others to farm typical production systems and farms in Russia with management. From the public policy perspective, their comparators in North and South America, Eu- the following issues are important. Russian dairy rope, and Asia. By using benchmarking methodol- production has not tapped into global dairy markets ogy, typical production systems and farms repre- yet, as demonstrated by the lack of domestic and senting the highest market share of milk, pork, and international competition that could have resulted crop production are identified in selected major pro- in more investment in the sector. Subsidized policy duction regions of each country used in the bench- support strategies seem to be forcing dairy farms marking exercise. A “typical farm” is a farm that has and enterprises to be dependent on support for characteristics that are common to farms of the se- profitability and for growth, perhaps even for survival lected major production region of the country. Such (this may be the case especially for smaller enter- 7 Information about the IFCN Dairy Research Centre can be found at www.ifcndairy.org. 8 Information about the agri benchmark network is available at www.agribenchmark.org. © 2017 Agriculture Global Practice. The World Bank Group 19 Russia: Policies for Agri-Food Sector Competitiveness and Investment prises). Although the maximum proportion of subsi- pean and U.S. farms. Both coupled and decoupled dies is going toward capital investment, significant subsidies comprise the revenues from milk sales. changes in terms of increased production—as is the The volume of milk produced makes the returns case in the pork industry—are not visible. from subsidies quite significant as a proportion of total farm income (Figures 15a, 15b, 15c). The case study on a typical modern farm in the St. Petersburg region shows that—despite subsidy levels The impact of subsidy removal on farm profitability that are two to three times higher than comparable was analyzed separately. The analyses show that farms in Europe—labor, land, and capital productivity subsidies are very important to ensuring milk pro- levels are quite low. Our analysis included two 850- duction; in the long run, however, the subsidies cow typical modern corporate dairy farms with high could be removed in a phased manner, provided the milk yield levels per animal, which are comparable farms could improve their management and produc- to the milk yields in farms in East Germany but low- tivity for sustained production. er than those in the United States and much higher than those grassland grazing farms in Ireland or New A typical advantage of Russian farms is their very Zealand. The typical Russian farms in the Northwest low land costs, but feed and labor costs are still region have free stall barns, as in other larger modern high, and so reducing these costs would provide an farm types. Such modern farms are not representa- opportunity to make the farms competitive globally tive of all dairy farms in Russia: significant numbers of (Figure 16). Typical Russian farms have quite high la- farms are still small and traditional, and, as was noted bor costs, even though farm wages are much lower earlier, such small farms produce the largest share of than wages in other comparator countries. There is milk. In terms of market organization, cooperatives potentially scope to improve labor productivity by are not common in Russia, and small and medium a factor of three to five through improved manage- farms do not have the benefit of typical market link- ment and improved mechanization. Wages for farm ages and organization the way their comparators in labor are much lower at US$3 per hour compared to the United States, Europe, and New Zealand have. US$12–18 in the other countries The seemingly high revenue and profit levels should be treated with some caution, because they are con- We did not analyze the reasons for low wages, but verted to U.S. dollar average for the year 2015 when based on the interviews with farm operators, we the Russian currency devaluated by 59 percent over identified several possibilities: (1) there are fewer the previous year against the U.S. dollar. Since most employment opportunities in rural regions; (2) there farm costs and revenues are in rubles, this does not is a lack of skilled workers who would require higher distort the profitability picture, but may point to an ar- wages, and therefore a reliance on a large number tificially high level of farm revenue. of unskilled workers; (3) there is a reliance on un- skilled low-wage migrant workers. More analysis is Our analyses of farm records indicate that Russian needed to understand levels of mechanization and farms receive comparable revenues from sales of technology substitution that could replace lower milk and meat, but they also benefit from subsidy wage levels. The capital input of Russian dairy farms levels two to three times higher than several Euro- is almost twice as high as it is in comparable farms 20 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors Figure 15. Dairy Farm Revenue: Russian Farms and Comparator Farms 15a. Milk Sales 15b. Cull Cow and Heifer Sales 15c. Subsidies 45 8 8 US$/1,000 kg milk (ECM) US$/1,000 kg milk (ECM) US$/1,000 kg milk (ECM) 40 7 7 35 6 6 30 5 5 25 4 4 20 3 3 15 10 2 2 5 1 1 0 0 0 Russian Farm 2 Russian Farm 2 Russian Farm 2 Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Decoupled subsidies Coupled subsidies + VAT surplus Source: IFCN International Farm Result Database 2016 Comparison Network (IFCN), http://ifcndairy.org/ Note: ECM = Energy-corrected milk. Figure 16. Cost Comparison of Typical Dairy Farms 50 Russian farms – US$/100 kg ECM free stall barns Typical farms – free stall barns 40 Free grazing systems 30 20 10 0 Russian farm 1 Russian farm 2 Denmark farm US farm Ireland farm New Zealand farm Total land costs Total labor costs Total capital costs Costs for purchased feed, seeds, fertilizer, & pesticides Machinery & buildings Vet & medicine, insemination Source: IFCN International Farm Result Database 2016 Comparison Network (IFCN), http://ifcndairy.org/ Note: ECM = Energy-corrected milk. © 2017 Agriculture Global Practice. The World Bank Group 21 Russia: Policies for Agri-Food Sector Competitiveness and Investment in Europe and the United States; clearly unnecessar- ures 17a, b, and c). Labor productivity levels in Rus- ily high capital investments are not needed for the sia are about 30–40 kilograms of energy-corrected optimal combination of labor intensity and capital milk (ECM) per hour. The labor productivity levels intensity. Capital input (excluding land) in the mod- in Germany are 210 kilograms of ECM per hour; in ern Russian farm is high relative to the level of its in- New Zealand it is 355 kilograms of ECM per hour. tensification and resource use. Ideal levels of capital The high levels of labor productivity in Germany and input are in the range of US$1,800 to US$2,500 per New Zealand are explained by good management cow to make returns from dairy enterprises profit- and the efficient use of mechanization by highly able at global levels. skilled farm labor. But even at such high levels of labor productivity in Germany, the analyzed German There is also an opportunity to improve labor pro- farm is unable to make returns to labor on par with ductivity at lower wages in the short and medium the regional wage level—an important benchmark term by improving farm management. Long-term for labor productivity—pointing to the continuous gains in labor productivity would be achieved by need for improvements in farm management and promoting farmer training and education programs technology if milk prices are low. and improving the skills of rural workers. Land costs in Russia are the lowest among the coun- Typical Russian farms lag behind their comparators tries compared, as a consequence of very low land on land, labor, and capital productivity indicators (Fig- rents. Most Russian agricultural land is owned and Figure 17. Dairy Farm Productivity 17a. Capital Productivity 17b. Land Productivity 17c. Labor Productivity (Excluding Land) 3.5 12,000 400 kg milk (ECM)/US$ kg milk (ECM/ha arable & pasture land for a day) kg milk (ECM)/hour 3.0 350 10,000 300 2.5 8,000 250 2.0 6,000 200 1.5 150 4,000 1.0 100 0.5 2,000 50 0 0 0 Russian Farm 2 Russian Farm 2 Russian Farm 2 Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Russian Farm 1 Denmark Farm USA Farm Ireland Farm New Zealand Farm Source: IFCN International Farm Result Database 2016 Comparison Network (IFCN), http://ifcndairy.org/ Note: ECM = Energy-corrected milk; ha = hectare. 22 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors not much land is rented out. Russia has very exten- more competitive, there is a good scope to re- sive land use practices reflected in a very low stock- duce feed costs by boosting the yield of fodder ing rate. This makes milk productivity per unit of land production and improving the feed manage- use very low, at around 1,000 kilograms of milk per ment. hectare (Figure 20). Land productivity levels in other countries are 5 to 12 times higher. There is great 9 Feed cost proportions: Purchased feed (con- scope to improve land use for dairy development, centrate and roughage) has the highest share but because land is not yet a constraining factor, of feed costs in Russia; the home-grown feed such potential may not be fully realized. In the long proportion is comparatively rather minor. term, there is an opportunity to improve the level of grain yields and pasture quality to make milk pro- 9 Feed costs: The typical Russian farm bears a duction more competitive. significant cost for feed, paying 60 percent of its total costs for feed, of which about 40 per- Thus, in the short to medium term, capital seems cent is purchased feed. to be the main constraining factor for productiv- ity growth in Russian dairy enterprises. As these 9 Replacement rates: The replacement rates analyses show, capital investments in Russian dairy of lactating cows are much higher in Russian enterprises are almost twice as high as they are in farm types, signifying higher replacement comparators. For this reason, the greatest scope for costs and lower lifetime production. With re- improvement is in achieving capital efficiency. placement rates as high as 35 to 47 percent per year, herd management through proper nutrition, breeding, and veterinary and health Main Factors Affecting Profitability care needs to be developed to make the farms competitive with other main dairy re- 9 Feed efficiency: Typical Russian 850-cow dairy gions in world. farms have similar feed conversion efficiency. However, the quality of feed is much lower than 9 Veterinary and health costs: Both these costs in it is in farms in New Zealand and Ireland, es- are quite low in Russia. This is reflected in rela- pecially in terms of energy and protein content. tively higher levels of somatic cell count levels Although Russian farms are not grassland- at 0.28 million cells per milliliter of milk in com- based dairy systems, it is still believed that the parison to 0.08 million in Ireland or 0.175 million quality of feed can be improved by managing cells per milliliter milk in New Zealand. pasture better. 9 Culling rate: The culling rates of lactating cows 9 Feed ration: Russian farms have a ration with are much higher in Russian farms than in com- 50 percent concentrates that are mostly pur- parator countries. The animals tend to reach chased, and with significant grass and grass lower milk yield levels in their 3rd to 4th lac- silage. Although the current low feed prices tation, making it economically not sustainable in Russia are making Russian dairy production to keep them for milk production. On the other © 2017 Agriculture Global Practice. The World Bank Group 23 Russia: Policies for Agri-Food Sector Competitiveness and Investment hand, higher beef prices make it feasible to farms, which switch from extensive to intensive cull cows for beef. However, the main reason milking technologies while the feed produc- for high rates of culling are the consequences tion remains extensive. The quality of Russian of high herd concentrations on typical Russian grass feed is low. Subsequently the share of concentrates in cow’s feed ration is too high. Figure 18. Pork Prices, 2000–15 These all lead to diseases and to a reduction of the productive period of cows, resulting in 5 US$/kg their culling. The situation is typical not only for 4 farms in the Leningrad region, where the farms were analyzed, but also in farms in other parts 3 of Russia. 2 1 The Performance of Pig Farms 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Despite the decline of pork prices in dollar terms Figure 19. Production and Consumption, 2000–15 since 2014 and the slight fall in consumption, Rus- sian pork producers benefit considerably from mar- 4,000 30 kg consumed per capita Thousand tonnes produced 3,500 25 ket protection and high market prices in ruble terms 3,000 20 (Figures 18, 19, and 20). Favorable market prices 2,500 2,000 15 and stable demand have provided profit increases 1,500 10 for pork producers because output prices and cor- 1,000 500 5 responding revenues enter very significantly into 0 0 the profit equation. In contrast, individual cost com- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Production total Consumption total ponents enter into the equation through their pro- Consumption per capita portional contribution to total costs. For example, an increase in pork prices of 10 percent increases Figure 20. Animal Inventories, 2000–15 the revenues by 10 percent; but an increase of feed prices by 10 percent increases total costs by only 5 25 1.8 All pigs, million heads Sows, million heads 1.6 percent if feed costs have a proportion of 50 per- 20 1.4 cent in total costs. 1.2 15 1.0 10 0.8 0.6 Apart from prices and subsidies, returns are also 5 0.4 determined by overall production volumes as well 0.2 0 0 as by outputs per animal. The latter is where animal 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 performance characteristics and farm management Total pigs Total sows factors contribute to the profitability. We analyzed Source: agri benchmark Pig Network, http://www.agribenchmark. a typical mega-farm enterprise in the Krasnodar org/pig.html region of Russia, comparing it with comparators in 24 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors Denmark, Germany, Canada, China, and Vietnam— Figure 21. Russian Pig Farms with Favorable Market Prices Exhibit Overall Positive Profits all typical farm enterprises for their specific geo- graphic regions selected for this analysis. For the 300 283 US$/100 kg carcass weight farms analyzed, animal performance in the Russian 270 250 sow enterprise is similar to performance in Western 200 188 competitors in terms of piglet weights, but lower in 155 168 182 151 terms of number of piglets raised. This can be an 150 131 indication of a lower health status and/or inferior 100 management. In contrast, animal performance in 50 the finishing farm enterprise—where piglets are fed 0 Russian farm German farm Danish farm Canadian farm and raised to market weights—appears to be lower Total cost Total returns than in the Western competitor farms, as the Rus- sian farm demonstrates worse performance of feed Source: agri benchmark Pig Network, http://www.agribenchmark. conversion (at least partially), daily weight gain, car- org/pig.html cass yields, and carcass weights. There seems to be room for improvement in all these productivity nity costs, as we calculate the closed-cycle pig pro- indicators. duction (Figures 22 and 23). When it comes to costs, the main factor appears to When looking at the long-term profitability of the be the advantage in feed prices for Russian farms. entire system from piglet to finished pig, the Rus- According to the data available, it seems that Rus- sian farm breaks even whereas all other farms in the sian farms have a price advantage in feed rations comparison make a loss (Figure 24). The main rea- that is between 30 and 45 percent less than it is for sons for such a positive performance are that the an- the Western competitors; this advantage is even alyzed Russian farm has relatively high performance, greater when comparted to the Asian farms ana- low feed costs, and high prices for piglets. lyzed. As a consequence, the Russian farm seems to have a feed cost advantage over its competitors, However, as in the case of the dairy industry, physi- especially in sow enterprises. cal labor productivity in Russian farm enterprises is very low (Figure 25a). This is not an issue as long For these reasons, overall the Russian farm demon- as wages are relatively low (Figure 25b). With im- strates positive profits because the market prices proving economic development and corresponding are favorable (Figures 18 and 21). increases of salaries, improvements in physical la- bor productivity are necessary if the farming sector Production costs of Russian farms are comparable wants to compete with other sectors. with those of Western farms. Asian farms normally demonstrate higher costs. Cost components such In addition to the need to improve labor productiv- as maintenance, depreciation, labor, veterinary and ity, there is a need to improve capital productivity medicine are rather high for the Russian farm. Ani- because capital remains the main limiting factor (Fig- mal purchases enter the cost equation as opportu- ures 25c and 26). Given that, in the short and me- © 2017 Agriculture Global Practice. The World Bank Group 25 Russia: Policies for Agri-Food Sector Competitiveness and Investment Figure 22. Total Costs of the Pig Enterprise (Factor and Nonfactor Costs) US$/100 kg sold 350 300 250 200 150 100 50 0 Russian farm German farm Danish farm Canadian farm Chinese farm Vietnamese farm Non-factor costs incl. depreciation Total labour cost Total land cost Total capital cost Figure 23. Breakdown of Nonfactor Cost Components of the Pig Enterprise 350 US$/100 kg sold 300 250 200 150 100 50 0 Russian farm German farm Danish farm Canadian farm Chinese farm Vietnamese farm Animal purchases Feed (purchase feed, fertiliser, seed, pesticides) Machinery (maintenance, depreciation, contractor) Fuel, energy, lubricants, water Buildings (maintenance, depreciation) Vet & medicine Insurance, taxes Other inputs pig enterprise Other inputs Figure 24. Short- and Medium-Term Profits of Finishing Enterprises 60 US$/100 kg carcass weight 50.172 50 42.167 40 33.128 30 20 11.433 9.333 7.187 10 3.590 1.476 0 -10 -20 -18.706 -18.091 -30 -40 -50 -45.953 -60 -54.930 Russian farm German farm Danish farm Canadian farm Chinese farm Vietnamese farm Short term: Total returns less cash cost Medium term: Total returns less cash cost+depreciation Source: agri benchmark Pig Network, http://www.agribenchmark.org/pig.html 26 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors Figure 25. Labor Productivity 25a. Physical 25b. Economic 25c. Capital 600 50 15 kg pork/hour US$ return/US$ cost kg pork/US$1,000 invested 554.6 554.0 43.25 12.71 40.41 41.05 500 40 12 400 383.9 30 9 26.14 300 20 6 200 11.31 10.05 10 3 1.88 100 57.1 11.2 0.45 0.71 0.58 1.06 3.1 0 0 0 German farm German farm German farm Russian farm Danish farm Canadian farm Chinese farm Vietnamese farm Russian farm Danish farm Canadian farm Chinese farm Vietnamese farm Russian farm Danish farm Canadian farm Chinese farm Vietnamese farm Source: agri benchmark Pig Network, http://www.agribenchmark.org/pig.html dium term, profitability is guaranteed through high Figure 26. Capital Costs market prices and relatively low production costs, 8 US$/100 kg sold improving capital productivity may not be urgent. 7 6.280 6 However, in the long term and with export orienta- 5 2.802 tion on the horizon, the industry and government 4 5.091 2.363 policy may consider improving resource allocation, 3 with a specific focus on limited resources such as 2 3.226 0.697 1 1.507 1.682 capital and labor (which will become limited in the 1.088 0.242 0.156 0 long term). m m arm arm m rm far far far Fa hf nf an an se se nis dia ine ssi rm me Da na Ru Ge Ch tna Ca Vie Liabilities Own capital The Performance of Corn-Producing Source: agri benchmark Pig Network, http://www.agribenchmark. Farms org/pig.html Russian corn producers underperform their com- parators in North and South America, but yields are to become a major supplier of corn both domes- improving at an average annual rate of 6 percent. tically and internationally, because an aversion to Russia follows the strategy of producing non-genet- GM crops is growing in Europe and Asia. Therefore, ically modified (GM) crops, and therefore may not in the long term corn may become a major crop if achieve the overall high yields seen in countries the domestic downstream sectors are ready to ab- such as the United States, Argentina, or Brazil (Fig- sorb the capacity and if the logistics infrastructure ure 27). However, this strategy may position Russia permits its export expansion. Despite restraint from © 2017 Agriculture Global Practice. The World Bank Group 27 Russia: Policies for Agri-Food Sector Competitiveness and Investment Figure 27. Corn Yield across Farms US$1.05 outside of Russia. This might be because in Comparator Countries, 2015 of low domestic energy prices in Russia and the fact 14 that there is no need to import nitrogen (contrary to t/ha 12 the United States at least). The costs of seeds and 10 plant protection chemicals are approximately the 8 same for Russian, Brazilian, and Argentinian farms 6 on both a per-hectare and per-tonne basis, and they 4 2 are significantly higher for U.S. farms—especially on 0 a per-hectare basis. Argentina Brazil Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 However, Russian farms lag their comparators in SH East NA operating costs (Figures 28b, c), which puts signifi- cant cost pressure on farms. The per unit of man- Source: agri benchmark Pig Network, http://www.agribenchmark. org/pig.html agement cost is high in Russia, primarily because of Note: East = Eastern Hemisphere; NA = North America; SH = low yields; on a per-hectare basis, however, machin- southern hemisphere. ery costs are comparable with those in the United States. Compared with an Iowa farm, they are even the use of GM seeds, the yield differential in Russia lower (average Russian farm machinery costs are is still below its potential: similar climatic and soil US$200 per hectare versus Iowa farm machinery conditions in other similar regions produce better costs, which are US$300 per hectare). yields. A considerable risk factor is wages, which are With an average annual increase of 10.2 percent seemingly low now but pose a significant risk of between 2000 and 2013, corn is tending to replace complacency. Russian farms can hire labor at much low-margin crops when this is agronomically pos- lower wages than major competitors such as the sible with regard to rotation. On the other hand, the United States. For instance, the average wage expansion of corn acreage is tempered by higher on Russian farms in 2015 was around US$2.90 risks associated with corn production than for tradi- per hour versus US$24.90 per hour in the United tional crops such as wheat as a result higher upfront States. Despite this fact, labor cost per unit is at a cash and liquidity requirements as well as limited similar level or even higher in Russia than in the know-how. United States. This is an indication of very low physical labor productivity. Contrary to the situa- Compared with U.S. farms, Russian farms are rather tion in the United States and Brazil, Russian farms competitive in direct costs (Figure 28). However, do not have access to family labor, which causes when compared with their peers in Latin America, only an opportunity cost and thereby acts as a buf- they are at the same level. One of the advantages of fer when economic margins become tighter. When corn production in Russia is the low cost of nitrogen. comparing costs on a per tonne basis, the low corn In 2015, the average price of 1 kilogram of nitrogen yields of Russian farms negate their advantage of was US$0.54 for Russian farms versus an average lower per-hectare costs. 28 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors Figure 28. Corn Production Costs, 2015 Figure 29. Corn Production: Total Costs and Gross Revenue, Including Decoupled Payments, 2015 28a. Direct Costs across Farms in Comparator Countries 60 180 US$/t t/ha 160 50 140 40 120 100 30 80 20 60 40 10 20 0 0 Argentina Brazil Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 Argentina Brazil Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 SH East NA SH East NA Seeds Nitrogen Phosphorus Potash Cash cost Depreciarion Opportnity cost Herbicides Fungicides Insecticides Revenue incl. dec. payment Gross revenue 28b. Operating Costs Source: agri benchmark Cash Crop Network, http://www. 70 agribenchmark.org/cash-crop.html t/ha 60 50 40 When it comes to profitability, Russian farms saw a 30 better financial result than their peers (Figure 29) 20 because of the following reasons. Land values in 10 Russia are among the lowest of the selected corn 0 producers. The cash costs of growing corn—com- Argentina Brazil Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 prising all actual cash expenses of a farmer during SH East NA crop production (direct costs, labor, contractor, land Hired labor Family labor Contractor rent, and so on)—is 41 percent lower in Russia than in Machinery Diesel the United States, and 28 percent higher than it is for 28c. Summary of Key Cost Elements Latin American producers. Opportunity costs (includ- 180 ing own land, family labor, and own capital) take the t/ha 160 bigger share in the United States and Latin Ameri- 140 120 can countries. Opportunity costs of Russian farms 100 include land and equity and are lower than the op- 80 60 portunity costs of their international peers. In return, 40 this implies that Russian farms are very cash driven 20 0 and thereby rather sensitive to changes in cash flow. Argentina Brazil Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 Russian farms receive farm-gate prices comparable SH East NA to U.S. cash prices for corn, unlike Brazilian and Ar- Direct cost Operating cost Land gentinian producers, whose sales prices were, on © 2017 Agriculture Global Practice. The World Bank Group 29 Russia: Policies for Agri-Food Sector Competitiveness and Investment average, US$57 per tonne lower. These lower sales bicide cost for GM seeds are more or less compen- prices reflect the transportation costs from locations sated by higher seed cost (Figure 30b). Only if insect remote from the harbors—in the case of some Bra- control becomes a major issue in Russia will the lack zilian farms, more than 2,000 kilometers—and, in of access to this technology come at a price in terms Argentina, export taxes. In addition, Russian produc- of competitiveness. ers received decoupled payments from the govern- ment—on average, an extra US$4.2 per tonne of Direct production costs for soybeans are relatively corn, which obviously in corn is not of any signifi- low on a per-hectare basis, but, given low yields, cance. Russian producers tend to be close to the rest of world on a per-tonne basis. Some Russian produc- ers use nitrogen in soybean fields, per the old-time The Performance of Soybean- production system, but this practice is gradually be- Producing Farms ing replaced by no or very low nitrogen input, as is seen in the other countries. The Russian soybean Soybeans are a relatively new crop for Russian pro- seed market lacks varieties that have been devel- 9 ducers in the European part of the country, and oped specifically for its domestic climatic and agro- acreage for this crop is growing at about the same nomic conditions. The relative position of Russian pace as it is for corn: Between 2000 and 2013 the producers as far as machinery and labor costs are acreage of soybeans in the Russian Federation in- concerned is the same as in corn (Figure 30c). Rus- creased an average of 10.2 percent yearly. During sian producers receive the highest market price for the same period, the average increase in yields was soybeans in the given sample because Russia is a 3.4 percent annually. Lack of locally developed va- net importer, hence local prices are partly driven by rieties, adopted inoculants, and inadequate know- imports (Figure 31). In addition, the domestic mar- how are the main constraints for higher yields and ket is artificially supported by the ban of imports of thereby for a faster expansion of soybeans in Russia. GM soymeal. Should Russia eventually become a net exporter of soy, the economics of the crop will Compared with their international peers, Russian change significantly. In addition to the high domes- farms achieve significantly lower yields (Figure tic prices, Russian farms benefit from government 30a). In 2015, drought reduced the average yield of payments—they receive an average of US$19.4 per Russian farms to 1.3 tonnes per hectare, while the tonne. normal yield for the same producers would be 2.0 tonnes per hectare or slightly more. Like corn, GM In Figure 31, the scenario of higher yields for Rus- soybeans are banned in Russia—but, contrary to sian farms is considered. Assuming that there were corn, this political situation is assumed to have no no changes for the other international peers (no major impact on costs because in the United States, changes in yields, costs of production, or the sell- GM soybeans are primarily Roundup Ready. Recent ing prices of beans), we adjusted yields of the Rus- analysis (Hakim 2016) indicated that savings in her- sian farms to their “normal” level under a normal 9 Soybean production has been more common in the Far East regions of Russia. 30 © 2017 Agriculture Global Practice. The World Bank Group Productivity and Competitiveness at the Farm Level: Catching Up in Key Sectors Figure 30. Soybean Production, Figure 31. Soybean Production: Total Cost and 2015 Gross Revenue, Including Decoupled Payments, 2015 30a. Yield across Selected Farms 4.0 500 US$/t t/ha 3.5 450 400 3.0 350 2.5 300 2.0 250 1.5 200 150 1.0 100 0.5 50 0 0 Argentina Brazil Canada Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 Argentina Brazil Canada Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 SH NA East NA SH NA East NA Cash cost Depreciarion Opportnity cost 30b. Direct Costs Revenue incl. dec. payment Gross revenue 120 US$/t 100 Source: agri benchmark Cash Crop Network, http://www. agribenchmark.org/cash-crop.html 80 60 40 weather scenario—that is, 2.0 tonnes per hectare 20 instead of the drought-reduced 1.3 tonnes per 0 hectare. Preserving the total cost of production per Argentina Brazil Canada Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 hectare at the same level (as in Figure 31) and as- suming that the prices were unchanged, the eco- SH NA East NA Seeds Nitrogen Phosphorus Potash nomics of soybean production for Russian farms Herbicides Fungicides Insecticides improves significantly. 30c. Operating Costs 300 The overall production cost of Russian soybeans US$/t 250 would compete with that of Latin American farm- 200 ers and would have a stronger competitive position 150 than North American producers. The per tonne cost 100 of production drops below US$260 for the first ana- 50 lyzed farm with the scenario yield, versus US$423 0 with the previous level. The second analyzed farm Argentina Brazil Canada Russia/Kursk Russia/ Black Sea Russia/ Krasnodar United States 1 United States 2 potentially displays a remarkable US$133 per tonne total cost—40 percent less than during the dry 2015 SH NA East NA year. The average farmer’s profit would go up from Hired labor Family labor Contractor US$103 to US$210 per tonne under the better- Machinery Diesel weather scenario. © 2017 Agriculture Global Practice. The World Bank Group 31 Russia: Policies for Agri-Food Sector Competitiveness and Investment Food Processing: advanced food manufacturers. Russia’s food, bever- A Potential New Driver age, and tobacco industry (farming and agribusiness of Agriculture Growth taken together) constitutes a smaller share of the economy than in other OECD countries. In 2015, a Russia’s food manufacturing industry has grown total 51,387 enterprises generated a contribution of steadily over the past decade at a higher rate than 5,383,265 million rubles (approximately 2 trillion in primary agricultural production. However, the share 2005 rubles) to the economy, which represents 6.7 of food manufacturing in the economy is still far be- percent of GDP; food processing and agribusiness low the share in countries at similar income levels, (not including farming) represent 16.2 percent of indicating that there are still opportunities for devel- Russia’s economy-wide manufacturing output. oping value-addition in the agri-food sector. Further- more, the so-called depth of the food manufactur- Table 3 provides key industry indicators from 1998 ing sector—an indicator that measures the extent to through 2015 together and divided into two time which agri-food processing is developed in a country periods, namely 1998–2006 and 2007–15, with the compared to primary agriculture—is also quite low in aim of gauging changes over a longer period. The Russia (Figure 32). Relative to comparators, Russia’s industry shows a high rate of growth in the number indicator is closer to that of commodity producer of enterprises, at 4.77 percent during 1998 to 2006 and exporter countries rather than to technologically followed by a decline at 2.05 percent.10 On average, Figure 32. Depth of Food Manufacturing Sector: Food Manufacturing Value-Added/Agriculture Value-Added, 2005–14 Average 4.0 Ratio 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Ethiopia Kyrgystan Iran (Islamic Republic of) Egypt Tunisia Turkey Senegal Philippines Georgia Slovakia Serbia (exc Kosovo) Bulgaria Republic of Korea Russian Federation Greece Uruguay Latvia Sweden Norway Poland Netherlands France Jordan Switzerland Ireland Sources: FAOSTAT data and authors’ calculations. 10 Bootstrapped standard errors are obtained using 5,000 replications. This method is employed since it gives better estimates when the size of the sample is small. The idea of the method is to use the empirical distribution of the data for making conclusions about the significance of the estimates. 32 © 2017 Agriculture Global Practice. The World Bank Group Food Processing: A Potential New Driver of Agriculture Growth the number of enterprises decreased from 57,869 In general, Russia’s food sector employment (em- to 53,164. Food enterprises provided employment ployment generated by the agriculture, food manu- to 1.346 million workers during 1998–2006, which facturing, and food service sectors) is skewed toward gradually reduced to 830,000. Employment in this agriculture (Figure 33). A more desirable structure in sector fell at an annual rate of 2.24 percent, slight- the food sector employment would be less domi- ly higher than the annual rate of decrease in the nated by agriculture and include more employment number of enterprises. A consistent decline in the from value-added sectors, namely food processing number of workers per enterprise, from 24 to 16, re- and food services. In high-income countries, within 11 flects declining labor intensity in the industry. Fewer the food system, agriculture accounts for a smaller workers per enterprise also indicates that Russia’s share of jobs while food services accounts for most food industry is relatively small in size. jobs. For example, in the United States, agriculture Table 3. Spatial Trends, Size, and Growth in Food Processing and Total Manufacturing in the Russian Federation, 2005 Prices Average performance Annual rate of growth Indicator 1998–2006 2007–15 1998–2015 1998–2006 2007–15 1998–2015 Food Manufacturing Enterprises (no.) 57,869 53,164 55,517 4.77*** −2.05*** -0.33 Workers (thousands) 1,346 839 1,093 −4.76* −2.24*** -4.71*** Workers per enterprise 24 16 20 −9.43*** −0.19 -4.38*** Wage rate (rubles) 5,765 10,747 8,256 9.84*** 2.36** 6.96 Output per enterprise (million rubles) 22.32 29.90 26.11 −1.43* 3.28*** 2.65*** Gross value-added per enterprise (million rubles) 8.69 11.80 10.24 −3.31* 4.64*** 2.73*** Fixed investment per enterprise (million rubles) 1.69 1.98 1.83 −0.42 −2.41 0.99 Labor intensity 14.40 8.08 11.24 −8.62 2.25 -5.23 Aggregate Manufacturing Enterprises (no.) 414,651 408,231 411,441 3.11*** −0.29 0.26 Workers (thousands) 11,506 7,968 9,737 −4.45*** −3.12*** −3.98*** Workers per enterprise 28 20 24 −7.56*** −2.83*** −4.24*** Wage rate (rubles) 6,267 12,312 9,289 11.7*** 3.01*** 7.82*** Output per enterprise (million rubles) 25.62 25.70 25.66 −1.91 1.04 -0.04 Gross Value Added per enterprise (million rubles) 6.82 9.36 8.09 3.60*** 1.81 3.34*** Fixed investment per enterprise (million rubles) 1.04 1.91 1.48 7.43*** 0.27 6.16*** Source: Authors’ calculations based on the ROSSTAT database. Note: Based on least squares growth rate with bootstrapped standard errors (5,000 replications): Log Y = a + b (time) + e. Significance level: * = 10 percent, ** = 5 percent; *** = 1 percent. 11 Labor intensity is the relative proportion of labor (compared to capital) used in a process. Its inverse is capital intensity. © 2017 Agriculture Global Practice. The World Bank Group 33 Russia: Policies for Agri-Food Sector Competitiveness and Investment accounts for about 20 percent of overall food sys- tate food systems transformations and investments, tem jobs and food manufacturing accounts for 14 including FDI, in response to changing consumer percent of jobs, while food services accounts for demand (Townsend et al. 2017). about two-thirds of the jobs in the food system. Such transformation is achieved by upgrading the skill- The earlier sections of this report observed that low- sets of rural labor both in primary agriculture and in skilled and low-paid labor is not yet a constraint to other food sectors. Modern agricultural production primary agriculture performance because they do demands highly skilled labor, with workers who have not yet impact profitability. However, in the long term knowledge of modern practices and tools, such as this may be a constraint. Furthermore, salaries in the information and communication technologies. In ad- food manufacturing sector (as well as in other food dition, skills beyond agricultural production—includ- sectors) have been declining in the last 15 years ing in food storage, grading, processing, and alter- compared with average salaries in the economy native energy—also need to be developed to facili- (Figure 34). This indicates that the food manufactur- ing industry may be losing its appeal. It also indicates that, as the industry is becoming more technologi- Figure 33. Composition of Food Sector Employment, 2010–15 Average cally advanced, it is failing to attract higher skilled (and therefore higher paid) workers. Agriculture and hunting Food Services Food processing The average scale of operations in food manufac- turing sector is also small, with an average of 1.83 million rubles in real fixed assets per enterprise. The investment per enterprise has hardly grown during the selected period except in 2007 and 2008, when it reached a peak of 23 million rubles at 2005 prices. On an average, each enterprise produced 26 million rubles of output, with an annual growth rate of 2.65 Figure 34. The Ratio of the Average Wage in the Industry to the Country’s Average Wage, 2000–15 percent during 1998–2015. The growth in the size of the industry (measured in output per enterprise) 1.0 Ratio was negative during 1998–2006, but subsequent- ly turned positive and grew at 3.28 percent annu- 0.8 ally. Compared to output per enterprise, the rate of 0.6 growth in gross value-added (output minus input) per enterprise is much higher, at 4.64 percent. This 0.4 may be attributable to an improvement in labor pro- ductivity and capital intensity. 0.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Agriculture and hunting Hotels and restaurants Food processing Production and output per factory in the food pro- cessing sector have grown quite rapidly in recent Source: ROSSTAT database. years, primarily because of an increase in the scale 34 © 2017 Agriculture Global Practice. The World Bank Group Food Processing: A Potential New Driver of Agriculture Growth of operations (output per factory) (Figure 35). How- Figure 35. Output and Gross Value-Added per Enterprise in Food Enterprises ever, the number of enterprises grew at a much slower pace and employment per factory has barely 40 Million rubles at 2005 prices increased. The sector has not demonstrated notable 35 employment generation, despite the relatively low 30 exit rate of enterprises in recent years. Although 25 the average number of workers is much higher in 20 15 food processing than in beverage and tobacco, 10 labor productivity per employee is significantly 5 lower in food processing, at 1,475,000 rubles com- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 pared to 1,946,000 and 7,875,000 rubles in bever- Output per enterprise GVA per enterprise age and tobacco respectively. This shows that the food processing sector has a diverse technological base: there are some very advanced manufactur- Figure 36. Changes in Employment and Labor ing enterprises with new technologies and some Productivity in Food Enterprises, 2005 and 2015 old, Soviet-era legacy enterprises. Contrary to this, 1,000 1,600 Employment Labor productivity the beverage and tobacco subsectors enjoy higher- 800 1,200 level technological advancement because FDI in 600 800 these sectors has been rapid and comprehensive— 400 the beverage and tobacco segments have aimed to 200 400 quickly establish themselves in the domestic market. 0 0 2005 2015 2005 2015 2005 2015 Food Beverage Tobacco From 2005 through 2015, employment in each of Employment, thousands these three subsectors fell at an annual rate of 2.27, Labor productivity, thousand rubles at 2005 prices 5.25, and 6.15 percent respectively (Figure 36). How- ever, labor productivity grew positively at 3.67 per- Figure 37. Trends in Labor Intensity in Total cent per annum only in the food sector, which has Manufacturing and Food Enterprises, 2005 Prices been able to upgrade technology. Labor productiv- 55 Labor Intensity ity increased more rapidly in food only after 2012. 50 The key subsectors within food include meat and 45 40 dairy processing, bakery, fish preserving, and the 35 vegetable oil industry. Both beverage and tobacco 30 25 segments have shown negative rates of growth, at 20 15 4.36 and 0.59 percent respectively. Figure 36 de- 10 picts changes in employment and labor productivity 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 in each sector at two points in time: 2005 and 2015. Labor intensity: Food Labor intensity: Manufacturing As shown in Figure 37, the fall in labor intensity Source: Authors’ calculations based on ROSSTAT database. in food enterprises was less steep than that in to- Note: GVA = gross value-added. © 2017 Agriculture Global Practice. The World Bank Group 35 Russia: Policies for Agri-Food Sector Competitiveness and Investment tal manufacturing until 2007, after which the two time periods. It is important to mention that labor moved at the same rate. Such fall in labor intensity productivity has risen faster in the food process- is consistent with the investments made in technol- ing, but wages have increased more rapidly in the ogy; after 2013, some signs of improvement are vis- overall manufacturing sector. Like labor productiv- ible in both. ity, capital intensity12 is much higher in food—1.5 to 2 times more than in total manufacturing. Capital pro- Consistent with this trend, labor productivity has ductivity and the wage rate have almost converged, risen, as have levels of wages—albeit at a declining but significant gaps remain in labor productivity and rate compared with the rest of the economy—while capital intensity in favor of food enterprises, thereby capital intensity has declined and capital productiv- suggesting its high growth potential in the country. ity increased. Table 4 shows the estimates of these In terms of growth, the annual rate of growth in labor three partial productivity measures along with a total productivity was high at 6.12 percent during 1998 to factor productivity (TFP) index for food enterprises 2006 and fell slightly to 4.82 percent in the subse- and aggregate manufacturing. It also provides esti- quent period. Significant growth is visible in capi- mates on the annual rate of growth in each of these tal productivity, at 7.05 percent between 2007 and productivity measures for overall period and for two 2015. Table 4. Partial Productivity and TFP in Food and Aggregate Manufacturing in the Russian Federation, 2005 Prices Average performance Annual rate of growth Indicator 1998–2006 2007–15 1998–2015 1998–2006 2007–15 1998–2015 Food manufacturing Labor productivity (rubles) (GVA/worker) 382,996 748,548 565,772 6.12** 4.82*** 7.11*** Capital intensity (rubles) (investment/worker) 75,922 125,185 100,553 9.01** -2.22 5.37*** Capital productivity (GVA/investment) 5.20 6.10 5.65 2.89* 7.05*** 1.74* TFP index 97.98 112.60 105.29 0.29 2.62*** 1.51*** Aggregate manufacturing Labor productivity (rubles) (GVA/worker) 255,318 483,503 369,411 11.2*** 4.63*** 7.58*** Capital intensity (rubles) (investment/worker) 39,889 98,246 69,068 15.0*** 3.10*** 10.4*** Capital productivity (GVA/investment) 6.69 4.92 5.81 3.83* 1.54* 2.82*** TFP index 93.34 103.13 98.23 2.43*** 1.08*** 1.28*** Source: Authors’ calculations based on ROSSTAT database. Note: Based on least squares growth rate with bootstrapped standard errors (5,000 replications): Log Y = a + b (time) + e. GVA = gross value-added; TFP = total factor productivity. Significance level: * = 10 percent, ** = 5 percent; *** = 1 percent 12 Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of a production pro- cess or the aggregate economy, it may be estimated by the capital to labor ratio. Labor intensity is the relative proportion of labor (compared to capital) used in a process. Its inverse is capital intensity. 36 © 2017 Agriculture Global Practice. The World Bank Group Food Processing: A Potential New Driver of Agriculture Growth Like partial productivity measures, TFP tends to be Figure 38. TFP Index in Food Enterprises and Total Manufacturing, 1998–2015, 2005 Prices much higher in food than in total manufacturing. The 140 TFP index TFP index in the food sector was 97.98 during 1998– 2006; this jumped to 112.6 during 2007–15, grow- 120 ing significantly at an average rate of 1.51 percent per annum. A higher rate of growth in TFP is identi- 100 fied only in the second period. This contrasts with total manufacturing, which witnessed a higher rate 80 of growth in the first period at 2.43 percent and a 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 decline at 1.08 in the period that follows (Figure 38). TFP index: Food TFP index: Manufacturing Source: Authors’ calculations based on ROSSTAT database. Factors Determining Employment, Estimation of Technical Progress, and Returns to Scale freedom index, has the expected negative sign but is found to be statistically insignificant. A statistical analysis was undertaken to estimate the factors that determine employment (labor demand), These results show that the food processing sec- output, and TFP in food enterprises. Details and meth- tor is undergoing technological modernization and odology of the analyses and a detailed description improving labor productivity. However, lower wages of the model are available in a separate technical pa- and stagnation in the movement of workers from 13 per . The analysis confirms that food manufacturing once sector to another may indicate that labor is not is an attractive sector of the economy. Increasing the moving from agriculture or other lower productivity scale of operation and capital intensity as discussed sectors to food manufacturing. There could be con- above are associated with positive but low growth in straints to the movement of labor as a result of infra- employment. The elasticity of employment per fac- structure and geography or major skill gaps, which tory with respect to scale (output per factory) is esti- are important factors. The lack of skilled labor could mated to be 0.59, indicating that employment grows be one of the main impediments to further labor pro- almost half as quickly as output per enterprise. As ductivity growth in food manufacturing. As firms im- expected, the wage rate has a strong negative im- prove their technologies they will drive out unskilled pact on labor demand (−0.65). An increasing wage labor and demand a more-skilled labor force. Train- rate induces the substitution of capital for labor, as ing and re-training would be costly for these firms, confirmed by a measurement of capital intensity, putting pressure on their profitability and therefore which shows a negative and significant impact on their competitiveness. Government policies should employment. The impact of trade (exports/imports), focus on promoting vocational education and work- captured through the trade openness index or trade er training and retraining, and on improving the 13 Appendix 1: Policies for Accelerating Productivity Growth in Food Processing Enterprises in the Russian Federation (by Seema Bathla and Alina Pugacheva) © 2017 Agriculture Global Practice. The World Bank Group 37 Russia: Policies for Agri-Food Sector Competitiveness and Investment availability of a skilled labor force in the food pro- we have examined the performance of the food cessing industry. enterprises using TFP. There has been a significant improvement in TFP—from 0.29 to 2.62 percent—al- For estimating technical progress and returns to though the growth performance of aggregate man- scale, two important factors responsible for consoli- ufacturing is much lower than that of food and de- dation and scaling up are considered—namely labor clined from 2.43 percent during 1998–2006 to 1.08 and capital (fixed investment). The analyses, outlined percent during 2007–15. An improvement in TFP in detail in the separate technical Appendix 1, show growth in food enterprises may be attributed to the that TFP is responsible for only 30 percent of food acquisition of better technology, driven by the grow- manufacturing growth because the industry has al- ing demand for processed food, better capacity uti- ready been utilizing the available technology. Pro- lization, and a policy change in its favor. A high cor- vided that the market demand for processed food relation between TFP and gross value-added (GVA) products increases, there is still potential for growth at 0.88 is again indicative of a growing efficiency in in the food manufacturing sector through the expan- the use of inputs. sion of production facilities. In terms of the contribu- tion of labor and capital to TFP growth, labor contri- What explains changes in productivity growth in bution is more statistically significant, indicating that Russia’s food enterprises? To explain this we looked the industry still has the potential to absorb labor. at the key factors specific to the industry as well as These results should be considered with the caveat some external to the industry. The industry-specific that there are federal level indicators and a regional factors are size and capacity utilization; the external decomposition of TFP may yield different results for factors include public policy, represented by the size different regions. of public spending and support services to agricul- ture; and infrastructural development, of which two particularly important public investments are roads Factors Explaining Productivity Growth (represented by road density) and power (measured in Food Enterprises as electricity consumption per capita). Other public policy variables taken to capture the business en- Trends in partial factor productivities estimated from vironment and investment climate are FDI, the ag- 1998 through 2015 show that although labor produc- riculture trade openness index, and per capita in- tivity and capital intensity have grown consistently, come. These macro variables are replaced by select capital productivity has increased much faster (Table indexes, such as the economic freedom index and 5). Despite these trends, labor productivity and capi- the economic globalization index.14 Agricultural link- tal intensity have slowed from the very high rates of age, which is captured by land productivity and the growth experienced during 1998–2006. Capital pro- size of agriculture in the economy, is considered to ductivity has increased with a significant growth that capture the role of backward linkages in influencing began in 2009. In view of these divergent trends, the productivity growth of food industry. Evidence 14 Information about the Index of Economic Freedom is available at http://www.heritage.org/index/ ; information about the KOF Globalization Index is avail- able at http://globalization.kof.ethz.ch/. 38 © 2017 Agriculture Global Practice. The World Bank Group Food Processing: A Potential New Driver of Agriculture Growth Table 5. Partial Productivity and TFP in Food Manufacturing in the Russian Federation, 2005 Prices Average performance Annual rate of growth Partial productivity Indicators 1998–2006 2007–15 1998–2015 1998–2006 2007–15 1998–2015 Labor productivity (rubles) (GVA/worker) 382,996 748,548 565,772 6.31** 4.94* 7.37* Capital intensity (rubles) (investment/worker) 75,922 125,185 100,553 9.43* −2.19 5.52* Capital productivity (rubles) (GVA/investment) 5.20 6.10 5.65 −2.85** 7.29* 1.76** TFP index 97.98 112.60 105.29 0.29 2.65* 1.52* Note: Based on least squares growth rate: Log Y = a + b (time). GVA = gross value-added; TFP = total factor productivity. Significance level: * = 10 percent, ** = 5 percent; *** = 1 percent shows that many food manufacturing enterprises Figure 39. Capacity Utilization (Investment/GVA) in Food Enterprises, 1998–2015 largely rely on imported raw materials (as high as Investment/GVA 0.25 70 percent is imported), thus these enterprises have weak domestic linkages with agricultural producers (USDA Foreign Agricultural Service 2016). 0.20 The size of industry and the capacity utilization (in- 0.15 vestment/GVA), both internal factors, tend to explain statistically significant variations in TFP although the 0.10 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 elasticity is higher for the latter at 0.36. A negative coefficient of capacity utilization may indicate unde- Source: Authors’ calculations based on ROSSTAT database. rutilization of capacity, which would have a negative Note: GVA = gross value-added. impact on productivity growth. As estimated by our model (Figure 39), the level of capacity utilization (represented by capital output ratio) was high in the tive and significant in inflecting TFP. The amount of industry and started dropping only in 2009, suggest- public spending and expenditure that goes toward ing better capacity utilization has been evident only agriculture support services, although positive, has in recent years, perhaps as a result of an increase in not impacted productivity significantly. Per capita in- demand following import bans. come, which captures the impact of growth and con- sumer demand, is found to be positive. This variable Among the public policy variables assumed to influ- is dropped in the analysis, however, because of its ence TFP, it is apparent that policy and institutional high correlation with other variables. environment matter considerably. As expected, trade openness and FDI are important, with agri- Improvement in infrastructure over time does have culture linkages having an insignificant impact on a positive impact on TFP. A 10 percent increase in productivity. These variables, when replaced by spending on infrastructure is associated with an select indexes (trade freedom, economic freedom, increase in the productivity of the food processing and economic globalization) turn out to be posi- sector of only 6.5 percent. These findings substan- © 2017 Agriculture Global Practice. The World Bank Group 39 Russia: Policies for Agri-Food Sector Competitiveness and Investment tiate the literature available for several countries in advantage of growing agricultural sector for raw Central and Eastern Europe on the key importance material instead of depending on imports. However, of physical and human capital, international trade, this finding should be interpreted with a caveat. It infrastructure, and more investments in research is based on data analyses of federal-level statistics, and development in the factors that influence TFP which may exclude strong agriculture–food manu- growth in the food industry (Alston, Babcock, and facturing linkages in regions where the sector is Pardey 2010). more developed than the national average. In addi- tion, as discussed earlier, the large agri-enterprises, One of the key findings of the above exercise is that or agro-holdings, are highly vertically integrated the agricultural linkage does not bear a high and sig- businesses and have a peculiar reporting structure nificant impact on productivity in Russia’s food en- that reduces the role of food manufacturing busi- terprise, implying that the relatively small size of the ness within the agro-holding. Nevertheless, more country’s agricultural economy may not be helping analyses may be required for in-depth understand- much in its growth. This has implications for improv- ing of the linkages between food manufacturing and ing land productivity so that the industry can take agriculture sectors. Policy Context: Can It Unleash the Potential? Policy Context: and G-20 comparators would do much to increase Can It Unleash the Potential? the competitive edge of the sector. Based on the analyses from the previous sections, Russia’s agricultural policies have been focused on this section establishes that investments in agricul- import substitution and on stimulating the produc- tural public goods underperform or demand quali- tion of commodities much more than on enhancing tatively new approaches. The previous sections public services and infrastructure. The reasons for showed that selected advanced Russian farms ben- this lie in the legacy of Soviet Union and post-Sovi- efit from low labor and land costs, and these farms et development challenges. The agriculture sector are catching up with their comparators in productiv- severely contracted after the collapse of the Sovi- ity and farm performance indicators. In addition, the et Union. The livestock sector, which was strongly food manufacturing sector is demonstrating good supported by producer and consumer subsidies prospects for growth, as evidenced by the fact that and price controls in the USSR, lost its competitive- its productivity growth is exceeding the productivity ness after the transition to a market economy. The growth of the aggregate manufacturing sector. De- sector collapsed, and Russia transformed from an spite these seemingly positive signs, important bot- importer of feed grains to sustain the livestock sec- tlenecks for agri-food sector competitiveness may tor to become the world’s largest importer of meat inhibit its long-term success. The first obstacle is that (Liefert and Liefert 2012). In the 2000s the govern- farm productivity performance is limited to selected ment pushed for the transformation of the grain and high-performing farms. The second is that the food livestock sectors by improving agriculture support manufacturing sector does not fully support agricul- policies (Box 4). In this context, the agricultural poli- ture sector growth because domestic value chains cies achieved their main objectives—increasing do- and backward linkages are weaker than expected. mestic production of key commodities to an almost Third is that most profitability gains on-farm level are self-sufficient level. Because the government’s pri- achieved as a result of high domestic prices and low ority is switching to export and domestic competi- land and labor costs, which tend to reverse and thus tiveness, the main question going forward remains to pose significant risks. These bottlenecks may re- whether the same policies can sustainably support duce the agri-food sector attractiveness to foreign agri-food sector’s global competitiveness and help investors, hold back the flow of investments and in- continuously attract investment that would improve novation in the sector, and constrain export competi- technology. tiveness. Total (federal, regional, and private) capital invest- Progressively raising the quality and targeting of ments in agriculture, hunting, and forestry com- public expenditure in agricultural services (exten- prised around US$8.41 billion in 2015—a 5 percent sion, research, education, and food safety and qual- increase from the previous year and an almost ity) and supporting infrastructure development to threefold increase over 2005.15 Investment through the levels like those of Russia’s closest EU, BRICS, federal programs amounted to US$3.87 billion in 15 These data are from the ROSSTAT Database. © 2017 Agriculture Global Practice. The World Bank Group 41 Russia: Policies for Agri-Food Sector Competitiveness and Investment Box 4. Types of Agriculture Support Measures in the Russian Federation Area payments. Area payments were introduced in 2012. They are provided by the federal government via regional administrations to all commercial agricultural producers as a decoupled subsidy. This procedure was triggered by Russia’s World Trade Organization (WTO) accession as an attempt to repackage direct WTO amber box production subsidies into the green box. However, it seems that many regional governments began to incor- porate various additional preconditions to eliminate “negligent” farmers. Direct subsidies to agricultural machinery manufacturers for selling domestically manufactured agricultural machinery to domestic farmers. Such subsidies were introduced in 2012. The subsidy includes a discount of 15 to 30 percent for farmers if they acquire domestically manufactured agricultural machinery. This is an indirect subsidy to domestic agricultural producers and is provided as a support measure to domestic manufacturers. If agricultural machinery is produced abroad but assembled in Russia, under this scheme it qualifies as “domesti- cally” manufactured. Interest rate subsidies. There are two types of interest rate subsidies: (1) working capital, and (2) investment loans. These subsidies comprise the largest share of funding of agricultural support measures. There are also some other less sizable, indirect farm support programs, such as the program of melioration and soil conservation, the program of rural development, subsidies for breeding activities, and so on. These pro- grams, however, make up only a small portion of government support. 2016.16 As stated in the State Program for Agricul- Livestock sectors (dairy, pork, and poultry) have tural Development 2013–2020 (State Program), the been the largest recipient of government subsidy government aims to achieve a 3.1 percent annual programs in recent years. Overall almost 75 percent increase in investment to the sector and a cumula- of direct capital grant investment projects were di- tive growth of 38 percent by 2020 from the 2012 rected to livestock production capacity building, no- 17 level. The program allocates only US$0.5 billion tably in the dairy, pork, and poultry sectors (OECD to facilitate the modernization of agricultural tech- 2016). Over the last 10 years, the average share of nologies, and possibly to finance some ongoing fixed asset investments in the livestock sector has R&D projects. However, the biggest chunk of the been 62 percent,18 which includes both government funding is allocated to support private goods—for (regional and federal) and private investments. It is example, around US$1.4 billion is earmarked to conceivable that government priorities supported enable farmers’ access to inputs, predominantly the turnaround in the sector and helped attract through concessional credit for equipment and considerable private investments. Pork producers machinery. are now advocating for a temporary suspension of 16 Ministry of Agriculture of the Russian Federation 2012. State Program on Agriculture Development, 2013 – 2020. July 2012 (Rev. December 2014). State Program on Agricultural Development 2013–2020. The source is www.mcx.ru 17 Ministry of Agriculture of the Russian Federation 2012 18 This is an average, calculated using ROSSTAT’s figures. 42 © 2017 Agriculture Global Practice. The World Bank Group Policy Context: Can It Unleash the Potential? federal support to capital investments in pork pro- (Figure  40b) reveals that Russia is consistently un- duction because the sector’s growth is posing risks derperforming OECD comparators in the types of overcapacity. The impact of subsidies at the farm of public investments in agriculture that normally level is explored in detail below. generate productivity gains throughout the indus- try. Investment levels in extension, education, re- The key distinguishing characteristic of government search and development, and other public goods support policies has been that public expenditure are persistently low. Another interesting character- has been heavily directed at private goods to the istic of public investments in agriculture is that they detriment of public goods (Table 6). Concessional are heavily skewed toward so-called miscellaneous credit has been the major support instrument in the categories—that is, those categories that do not fit form of subsidies on interest rate payments. Starting the general description of public investments. As in 2005, support measures also included direct capi- the breakdown of miscellaneous expenditures in tal grants (from 25 percent to 35 percent of invest- Figure 51 shows, the majority of such investments in ment depending on activity) for funding investments 2014 were for capitalization of state banks and leas- in priority sectors, to some extent supporting some ing companies. value-adding productions, such as slaughterhouses and milk processing. Public policies that support investments in public goods can establish important enabling environ- Overall, the level of investment in public goods ment elements for sector development. Our analy- has been consistently low compared to OECD ses found that the amount of public spending and and BRICS comparators. Although we did not con- expenditure on agriculture support services did not duct a quality assessment of public expenditures, seem to impact productivity in the agri-food sector a very quick comparison of general services sup- significantly. We did not investigate this matter fur- port estimates of Russia (Figure 40a) and the OECD ther, but background research and interviews with Table 6. Directions of Financial Support and Volumes from Federal Budget of the Russian Federation in 2016 (Rubles, millions) Total from the federal budget 155,356 Of which Subsidies for short-term loans 12,000 Subsidies for investment loans 55,500 Subsidies for compensation a part of the direct costs for construction and modernization of agricultural objects 11,600 Subsidies for a part of the costs of agricultural producers to pay insurance premium calculated under the con- tract of agricultural insurance in crop production 2,300 Subsidies for a part of the costs of agricultural producers to pay insurance premium calculated under the con- tract of agricultural insurance in animal production 240 Subsidies for price discount refund, given by manufacturers of agricultural machinery to farmers 11,200 Area payments to growers 23,045 Source: Government of the Russian Federation 2017. © 2017 Agriculture Global Practice. The World Bank Group 43 Russia: Policies for Agri-Food Sector Competitiveness and Investment Figure 40. General Services Support Estimates, 2009–14 40a. Russia Miscellaneous Cost of public stockholding Promotion of agricultural products Collective investments for marketing or processing Farm restructuring Institutional infrastructure Storage, marketing and other physical infrastructure Hydrological infrastructure Pest and disease inspection and control Agricultural product safety and inspection Extension Education Agricultural knowledge generation 0 100 200 300 400 500 600 700 800 900 1,000 1,100 US$, millions Average (2009–14) Average (2003–08) Average (1995–2002) 40b. OECD Miscellaneous Cost of public stockholding Promotion of agricultural products Collective investments for marketing or processing Farm restructuring Institutional infrastructure Storage, marketing and other physical infrastructure Hydrological infrastructure Input control Pest and disease inspection and control Agricultural product safety and inspection Extension Education Agricultural knowledge generation 0 2,000 4,000 6,000 8,000 10,000 US$, millions Average (2009–14) Average (2003–08) Average (1995–2002) Source: OECD Production Support Database, http://www.oecd.org/tad/agricultural-policies/producerandconsumersupportestimates- database.htm stakeholders indicate that a more in-depth analysis so on. The literature has many empirical examples of impact of public investments in agriculture and that demonstrate such success in China (Jin, Huang, food industry productivity may be required. Most and Rozelle 2010), Australia and New Zealand (Mul- countries that achieved significant results in agri- len 2010), Canada (Veeman and Gray 2009), as well culture and agri-food sector productivity succeeded as many other countries. in boosting their agriculture and food industries by investing considerably in public goods, such as agri- We identify three areas in which the public sector cultural advisory services and education, veterinary may be able to use policy and programmatic inter- and animal health, research and development, and ventions to spur productivity, competitiveness, and 44 © 2017 Agriculture Global Practice. The World Bank Group Policy Context: Can It Unleash the Potential? exports. In each of these areas, further analysis vestments. However, these investments have not yet would be merited to identify such policy and pro- resulted in broad-based productivity gains for the grammatic interventions in detail and to suggest op- whole industry, although selected individual enter- erational plans for implementing such interventions. prises have successfully outperformed their peers. These areas are: Going forward, more broad-based productivity gains could be achieved and growth maintained by intro- Investing in broadening productivity gains in priority ducing policies that support the spread of innovation sectors. As demonstrated earlier, Russian agricultur- and technology throughout the entire industry. See al subsectors are catching up with those of competi- Box 5 for an example of public policy intervention tors in terms of productivity and are close to achiev- that supports technology transfer and broadening ing competitiveness with international comparators. productivity gains. Considerable investments have been made in new modern technologies, which have replaced old and In addition, our analyses show that most profitability obsolete technologies as more financial resources in priority subsectors is a result of low labor costs, became available both from public and private in- while a closer look at the cost structure of key prior- Box 5. Public Investments Encourage Technology Transfer and Broaden Productivity Gains: Learning Organizations that Support Innovation for Small and Medium Farmers in Mexico Before the 1990s, Mexico’s public agricultural research and extension system was largely supply-driven and did not support the productivity growth and technology transfer required to boost competitiveness of the coun- try’s agriculture sector. As a result, large farm organizations and enterprises were relying either on imported technology and expertise, which was not available to small or medium farmers. The government responded by converting the inefficient supply-driven system into a program that aimed to provide technical advice to develop markets. One of the interventions the government supported was the establishment of Mexico’s Produce Foun- dations—a federal farmer organization that funds and implements research, innovation, and extension projects. The objectives of the organization were to mobilize funds for the national agricultural research organization and to transform supply-driven research into demand-driven systems. The Produce Foundations affected the Mexi- can agricultural innovations systems in several ways. Examples include: 9 they funded research projects that helped open new export markets, boosted the profitability of agricul- ture, solved serious production constraints (for example, improved pest control), and increased the sus- tainable use of natural resources; 9 they promoted farmer networks that helped disseminate new approaches and foster innovation; 9 they implemented development projects to expand production bases to small-scale farmers; and 9 they opened opportunities for researchers to interact with farmers directly, thereby fostering applied in- novation. Source: World Bank 2012. © 2017 Agriculture Global Practice. The World Bank Group 45 Russia: Policies for Agri-Food Sector Competitiveness and Investment ity commodities shows that physical labor produc- ample of a public funding mechanism that supports tivity is low compared with comparators in North better integration of primary agriculture producers America and Europe, because Russian wages con- with value chains. The key question is whether the tinue to be low. Farms also benefit from favorable food manufacturing sector has the potential to grow, market conditions because market prices for most or it is unique to Russia to have a relatively small agricultural products are high in Russia as a result of food manufacturing sector compared with other border protection measures. In this situation, capi- competitors. Both short-term and long-term factors tal seems to be the only constraining factor: capital may address this question. In the short term, market costs are high and investments depend on many ex- protection measures may deter investments in the ternalities. In the short term, incentives to improve agri-food processing industry because high domes- labor productivity might not exist, but labor produc- tic farm prices incentivize investing in primary agri- tivity would be required for long-term competitive- culture, making it more attractive than investing in ness. The favorable configuration of relative price food manufacturing (all other factors held constant). factors poses medium- to long-term risks. Wages are However, as experience in other countries shows, likely to rise over time, as they have elsewhere (for in the long term demand for processed food will in- example, in East Asian markets). Market protection crease, primarily because of dietary transition and measures do not benefit the economy overall, are the increasing incomes of the urban middle class harmful to the consumers, and may not be endur- (Minten, Reardon, and Chen 2017). Public policy may ing. Therefore policies should gradually shift toward consider gradual steps for promoting investments in spreading innovation and technology throughout food manufacturing industry with a view to improv- agriculture industry, and helping farms to stay profit- ing the competitiveness of both primary and pro- able in the long term. cessed food sectors (Box 6). Strengthening value chains and value-addition With this in mind, we recommend in-depth studies in food industry. Our analyses show that the food and analyses of the barriers for growth and expan- manufacturing industry is small compared to the sion of the food manufacturing sector with a focus agriculture sector as a whole and to the rest of the on strengthening linkages with the agriculture sec- economy. But it is productive. Productivity growth tor. Further growth in this sector would depend on in the food manufacturing shows some good pros- carefully designed public policies and support pro- pects for sector expansion. However, why the food grams. manufacturing sector is not expanding or supporting agriculture sector growth to a greater extent is un- Promoting human capital through capacity build- clear. Our analyses show that the backward linkages ing in agricultural sciences and farm management of the food manufacturing to the agriculture sector to improve labor productivity. As demonstrated by are not strong. Adequate infrastructure and effective empirical evidence, an important constraint for pro- modern public policies that support food manufac- ductivity gains in agri-food sector is the availability turing-agriculture linkages and stronger value chains of skilled labor. This study has not focused on the would strengthen the performance of the agriculture reasons why this is the case; additional studies may and rural economy in general. See Box 5 for an ex- be needed to understand why rural labor is a con- 46 © 2017 Agriculture Global Practice. The World Bank Group Policy Context: Can It Unleash the Potential? Box 6. A Funding Mechanism that Supports Linkages in Agri-Food Value Chains and Foster Innovation: The China Technology Transfer Project At the end of 1990s, China’s agri-food sector was in a time of urgent and challenging structural transformation. This urgency was dictated by lagging agricultural production that was unable to meet domestic demand, pres- sure from natural resources, changing consumer demand, pressure to advance domestic food processing and marketing, and the need to take advantage of opportunities to compete in global markets. A critical bottleneck in this transformation was the slow transfer and adoption of technology and the lack of knowledge-intensive agriculture. Because of its fragmentation, the farming sector was unable to effectively connect with higher-value markets, and the domestic food manufacturing sector was unable to effectively source raw materials to cater to changing consumers’ tastes and preferences. One way to respond to these challenges was to promote a viable model for implementing public investments that would promote the modernization of agricultural production, strengthen linkages with food manufacturing, and improve marketing. The World Bank–funded China Technology Transfer Project helped introduce a model of public-private partner- ship that assisted in facilitating public sector support to the agri-food sector and established a national frame- work for targeted implementation of public investments for the sector. Among others, the project helped in the following areas: 9 It combined public sector support for research, extension, and training with private investments. The gov- ernment funded the development and dissemination of public goods, but these activities were implement- ed by the private sector to foster the integration of public and private investments. 9 It established farmer associations that would benefit from learning and technology transfer, and at the same time these associations would collectively supply raw materials to food manufacturing enterprises. Funding support for food manufacturing enterprises was contingent on their agreement to directly support farmer associations that provide raw materials to these enterprises. Source: World Bank 2012. straint and what can be done to overcome it. Our by the growing skilled labor gap that is filled with interviews with farm operators and industry repre- unskilled workers either through abundant unskilled sentatives confirm that skilled labor is indeed a sig- rural labor available or through migration policies. nificant constraint for growth in the sector. Filling the Such labor market failure may not affect the pro- demand gap for skilled workers in the food manu- ductivity and profitability of agricultural enterprises facturing industry would require direct and indirect as long as unskilled labor is able to generate high employment generation, particularly at the regional productivity because wages are low. When wages level, with improved access to and quality of educa- increase, this will no longer be sustainable. There- tion and other services (see Box 7). fore a successful agri-food sector will demand highly skilled workers in the future, and public policy should There are reasons why workers are not moving to direct its attention toward ensuring an enabling en- rural areas fulfilling the demand. It may be that labor vironment and policies for promoting education and markets are not functioning efficiently, as evidenced training programs. © 2017 Agriculture Global Practice. The World Bank Group 47 Russia: Policies for Agri-Food Sector Competitiveness and Investment Box 7. Designing Education and Skills Policies for Agri-Food Sector Education policy affects innovation in at least three ways: (1) a high level of general and scientific education in a population facilitates acceptance of technological innovation by society at large; (2) innovation systems require well-educated researchers, teachers, extension officers, and producers to develop relevant innovations; (3) it is generally easier for farmers and business operators with higher education and skills to adopt some techno- logical innovations. Continuous skills development (training, re-training) is essential to improve the matching of skills demand in an evolving agri-food sector, which needs to adopt productivity and environmentally enhancing technologies and practices. To evaluate the effectiveness of skills development policies for the agri-food sector, the following questions can be asked: 9 What are the characteristics of the education and training system? What is the place of science in formal education? Are there programs to promote life-long skills development and re-training? Are they suc- cessful)? 9 Is agricultural education available? Is it adapted to labor market needs? Do graduates remain in the agri- cultural and related sectors? 9 Are there specific measures to address evolving labor market needs in the food and agriculture sector? 9 Are there specific education and training programs dedicated to natural resources, efficiency of resource use, environmental pressure (sustainable farm practices), and climate change (adaptation and mitigation)? Which community do they target (students, farmers, or agri-food managers and workers)? Source: OECD 2013. Conclusion Conclusion ness of agri-food value chains, result in higher prof- itability, and encourage more investment, including Despite advances in agricultural production, TFP, FDI, in Russian agriculture. In practical terms, this and trade balances, Russia continues to lag behind report has identified three areas in which the public many comparator countries in measures of crop and sector may be able to use policy and programmatic livestock productivity. This report has aimed to pro- interventions to spur productivity, competitiveness, vide a vehicle for dialogue with government on agri- investment, and exports: investing in broadening food sector collaboration to address this situation. productivity gains in priority sectors, strengthening It has identified policy recommendations to address value chains and value-addition in the food industry, selected challenges and to support the govern- and promoting human capital in rural areas through ment’s aim of attracting investments in the agri-food capacity building in agricultural sciences and farm sector, approached from the point of view that in- management to improve labor productivity. 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