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The Government's Role in Determinig Prices, Taxes and Credits for Individual Farms

Biruta Arnte report in Finnish-Baltic Joint Seminar, Vilnius, Lithuania, published in 'State Regulation of Agricultiral Production' (1992) Agricultural Economics Research Institute, Finnland, ISBN 952-9538-24-3, ISSN 0788-5393, pages 82-86 Oriģinālajā salikumā lasāms PDF fails pielikumā

THE GOVERNMENT'S ROLE IN DETERMINING 
PRICES, TAXES AND CREDITS FOR INDIVIDUAL 
FARMS 
BIRUTA ARNTE 
Scientific Research Institute of Agricultural Economics 
Riga, Latvia 
1 General characteristics of individual farms 
In Latvia land is being retumed to its users. Within the framework of land reform by May 
lst in 1992, there were already 41.3 thousand individual farms with total acreage 620 
thousand ha. This comprises 14% of agricultural lands. The average size of an individual 
farm is 15 ha. 
Individual farms gradually start to specialize in one type of farming. Two thirds of 
farms specialize in crop production, which requires less farm inputs and labour inputs. 
Only one third of farms want to specialize in cattlebreeding. In 1991 there were in average 
4 head of cattle, 3 milk cows, 5 hogs and 3 sheep per farm. 
The total yield from individual farms in 1991 was 7 thousand tons of milk, 1 thousand 
tons of meat (live weight) and 6 million eggs. It is respectively 4.2%, 3.3% and 0.6% of 
total farm products. 
The unsatisfactory situation as to the material and technical resources is an obstacle 
to a more rapid development of agriculture. There are only about 33% of tractors and 20% 
of other agricultural machinery needed in individual farms. Thus by May 1st in 1992 there 
was 1 tractor per 17 ha of agricultural land in individual farms. This figure does not 
describe the actual state of each individual farm, because the distribution of machinery 
is uneven. To reinforce the material and techinical basis is a prime agents for further 
development of individual farms. 
2 The role of prices in the development of individual farms 
By the end of 1991 the Counsil of Ministers of the Republic adopted a resolution on 
liberalization of prices on ali types of agricultural products. The objectives of the price 
liberalization were to establish the necessary prerequisites for further development of 
production with the regard to ali types of agricultural producers, including individual 
farmers, as well as to equalize the income brackets of agricultural producers with those 
of workers employed in other branches of national economy. As the fixed producer prices 
of agricultural products considerably lagged behind the rate of price increase for industrial 
goods, the gap between the incomes of people working in these two separate branches 
widened. 
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However, it should be noted that the liberalization of prices in ali branches of national 
economy still does not mean a transfer to market economy in the classical sense of the 
word, because the issues of privatization of land and real estate have not been solved yet, 
and the state monopoly on basic production means still exists. 
At present the farmer has the right to participate in the procedure of determining the 
producer price for his products. The prices of mille and meat are being set as a result of 
negotiations and also agreement between the producers of agricultural products, processing 
enterprises and traders. 
At the same time state guaranteed minimum purchase prices, which were set for the 
main agricultural products: crops 1000 roubles per ton , sugar-beet 250 roubles per ton; 
flax straw 2100 roubles per ton, milk 1050 roubles per ton, beef cattle 7300 roubles per 
ton (live weight), hogs 7600 roubles per ton (live weight). 
Yet, the government has set a margin for profit relation to charges for the processing 
enterprises - the same for dairy factories and meat processing plants - it should not exceed 
15%. The traders profit rate has also been restricted, so that it should not exceed 25% for 
bread, 20% for dairy products, and 15% for meat, meat products. 
The pricing system of this type enabled the agricultural producers to defend their 
interests. There was a steep fise of producer prices and on March lst in 1992 they exceeded 
average prices of 1991 7 times for milk, 4 times for beef and 6 times for pork. 
At the same time the results of indexation for the first quarter of 1991 indicated that 
production costs in agriculture have increased during this period averagely by 10.8 times, 
however, profits have increased only by 7 times. 
Agricultural producers suffer from lack of money for production development, and the 
volumes of production are confirming to decrease. If during the first quarter of 1991 the 
total product of cattlebreeding and poultry farming comprised 85% of that of the same 
period in 1990 and in dairy farming 82%, then the results for the first quarter in 1992 were 
78% and 80% respectively. 
In order to protect the producers of agricultural products under the circumstances of 
inflation, recommendations were handed in to revise the state - guaranteed purchase 
prices. From March 6th in 1992 the state - guaranteed purchase prices were revised, and 
they were set close to the actual prices which existed at that moment. 
During the first three months of price reform the prices for agricultural products were 
not restricted by anybody: it was the producer who set them, expecially in the areas where 
the Farmers' Centre had a strong influence. Now due to limited market both at home and 
abroad, the big processing plants try to stick to the state - guaranteed purchase prices. 
However, the prices for material and technical resources raise continuity. 
Thus, by May 1 st in 1992 the price increase for electricity was 25 fold, for diesel fuel 
46 fold, for fertilizers 24-93 fold, for agricultural machinery 10-20 fold if compared to 
1991. 
The forecast for this year as to the increase of production costs is 31 billion roubles or 
7.2 times more in comparison with the last year. This means that the state - guaranteed 
purchase prices for the main types of agricultural products ought to be increased by 1.5 
to 2 times. The result will be an inevitable rise of retail prices for foodstuffs. 
By May lst (compared with december of the last year), the retail prices had increased 
2.3 times for milk, 3 times for beef and pork. It should be noticed that after the revision 
of the state - guaranteed purchase prices, the producers' prices and the wholesale prices 
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set by the processing enterprises became stable. The retail prices continued to grow. For 
example, in May they had increased by 1.2 times for milk and dairy products and by 1.14 
times for beef and its products, if compared with March. 
A new price increase for agricultural products began with June lst in 1992, when the 
government lifted the restrictions on profits for processing enterprises and restrictions of 
tumover tax for traders. 
With the view of the present situation of wages compared to the consumer prices, the 
purchasing power of the population has dropped considerably. A decrease in sales volumes 
testifies to the fact. Thus, during the first quarter of 1992 (compared with the respective 
period in 1991) the consumption of foodstuffs has decreased by 53% for dairy products, 
by 44% for meat and meat products, by 31% for bread and bread products. 
During this period the retail prices have increased 2.5 times, but the wages have 
increased 2 times for industrial workers and only 1.6 times for agricultural workers. In 
order to bring closer the income level of agricultural workers to that of working in other 
branches of national economy, arrangements for price stabilization should be made, which 
would be impossible without state subsidies. 
3 The regulation of individual farmers' income 
If we compare agricultural production with other branches of production, its main features 
are a slow tumover of assets and seasonality. This means that producers' prices cannot be 
the sole source of income for agricultural producers. The income of agricultural producers 
should be regulated: 
- by state - guaranteed purchase prices 
by tax exemptions 
by subsidies. 
Especially the new individual farms who have just started farming need help, because 
they have money shortages for construction and they have to purchase material and 
technical resources. 
3.1 Credits 
Consequently a resolution was adopted in January of 1992 with regard to the condition for 
allotting credits to individual farmers from the state budget and to the terms of repayment. 
The annual interest rate for long-term credits envisaged for the purchase of agricultural 
machinery, buildings, for expansions or purchase of residential houses and production 
buildings as well as for buying cattle, has been set up to 7 per cent for individual farmers, 
and 12 per cent in average for ali the rest entrepreneurs. 
The resolution envisages also to draw money from the state budget in order to give a 
discount for the long-term credits for 50%, if the farmer has used them timely and 
purposefully. 
The critical situation which has set in as to granting long-term credits for individual 
farmers might seriously detain the process of privatization and the agrarian reform. The 
individual farmers' demand for long-term credits 12 billion roubles in 1992. 
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The government has found possibility to grant only 25% of the sum needed by farmers 
by now. This means that a special stabilization fund for farmers should be founded. It 
should be built of: 
- subsidies from state budget 
state and local government non-budget fund for privatization 
the money from commercial banks, companies and international finance institutions 
- contributions made by individuals 
3.2 Subsidies 
In order to achieve a balance between the income of agricultural producers and solvent 
demand of population, it would be useful to subsidize the price increase for material and 
technical resources. This would promote the reduction of production costs. Producer 
should be subsidized in the process of purchasing material resources. Subsidies should be 
based on standards for resource expenditure per 1 ha of agricultural lands and the amount 
of land used. Taking into consideration the vital importance of crop farming, the subsidies 
could also be differentiated according to the amount of crops sold. 
Subsidies for material resources will help to stabilize conditions for agricultural 
production and will restrict the steep rise of prices for agricultural products. 
The subsidy policy should be closely linked with tax policy. This will make it possible 
to evaluate correctly the production conditions for each region and to state the income level 
of agricultural producers. Simultaneously a mechanism for collecting different rent from 
the producers who work under better conditions can be introduced. It should also be 
mentioned that the present tax policy is not flexible enough as to the economic conditions 
of individual farms, including soil fertility and favourable geographical position. 
Taking in consideration the above said, it is almost sure, that many areas in Latgale 
and Vidzeme would not be able to compete with those in Zemgale and Riga district, where 
the cost of products is considerably lower. The farmers in the former areas will be forced 
to leave their farms because they will have gone bankruptcy. As a result of this there exists 
a danger to lose agricultural lands in great amounts. It has already happened in the recent 
past when due to an unsuccessful agricultural policy about 1 million ha of agricultural 
lands have been lost. It would be simply inadmissible in the present situation when our 
market is suffering from shortages. If developing individual farms is our objective, 
subsidies should be allotted to the individual farmers, who are under the worst farming 
conditions. 
Conclusion: 
- Government should support the establishing and developing individual farms by 
setting low interest rate on credits, determing small taxes, and by subsidizing the farms 
with bad farming conditions, 
- the agricultural workers are expecting the Supreme Counsil of the Republic to adopt 
the law on privatization of processing enterprises. The law will promote the establishing of branch societies (for dairy processors, for sugar producers, etc.), where the 
farmer becomes the owner of processing enterprises and is interested in the final 
product.