Inflation and measures to combat it contribute to rural backwardness

The article was published in the newspaper "Diena" on August 17, 2007.
Authors – Rita Sīle, Lāsma Zuzāne.
Farmers are threshing grain. There is a shortage of grain in Europe this year, so grain prices are also rising in Latvia. There is talk that bread will be almost twice as expensive this fall. There is no basis for such talk, but it is clear that food prices will rise. Many are already complaining about the insatiability of food producers, although without delving into the essence of the matter - producers receive less than a fifth of the store price for their products. Farmers and food processing companies have been complaining for years about trading companies whose policies make food more expensive for consumers, but do not allow producers to receive fair payment for their work and products.
Farmers themselves do not benefit from inflation, and the agricultural sector has not gained prosperity as food prices have risen. On the contrary, the agricultural economic summary for 2006 shows that, taking into account inflation, the real increase in income in agriculture in 2006 was 7.5%. Although the agricultural sector has grown in value, the growth has been smaller than in other sectors of the national economy. Gross income from agricultural activities in 2006 was 252.7 million lats. This is 14.6% more than in 2005, but a significant part of the income was made up of subsidies, the amount of which in 2006 was 168.2 million lats – 39% more than a year ago.
The calculations do not inspire optimism. A significant increase in subsidies in agriculture is no longer expected in the coming years. The increase in the purchase prices of manufactured products is also expected to be small in the future. However, the rise in resource costs continues - for two years now, costs have been growing faster than the value of production. In 2006, resource (intermediate consumption) costs were 17.1% higher than the year before.
Therefore, farmers are currently having to think about how to reduce expenses and increase production efficiency. One way would be to purchase powerful and modern agricultural machinery and switch to the use of more modern agricultural methods. Our country's agricultural sector has funds earmarked for this purpose in the European Union's structural funds. However, due to measures to combat inflation, their successful absorption is at risk this year.
To qualify for European Union funds, the farm owner must first make the purchases themselves and finance them in full, and only then can they receive partial compensation for the expenses from the Structural Funds. Farms use loans granted by banks for this purpose, because rarely does any agricultural company have enough free funds to set aside such large resources for investments. However, currently, as a result of both anti-inflation measures and the prudent policy of banks, it is difficult for farmers to obtain loans. Often, farmers do not expect a positive response from the bank, or the offered interest rate and the requirements set by the credit institution make obtaining a loan too expensive and complicated. An unhealthy, perverse situation has arisen – consumer loans in Latvia are still easily available, but it is too difficult to obtain a loan for business development.
If entrepreneurs cannot receive loans, Latvia risks missing out on the opportunity to use available European Union funds. It is worth adding here that stimulating production as opposed to promoting consumption would be one of the healthiest ways to mitigate the negative effects of inflation.
Other consequences of inflation and anti-inflation measures also have a particularly painful impact on the agricultural sector. Due to the rise in real estate prices, hectares purchased cannot be expected to be repaid with income from agricultural activities, not even until the end of their life. The increase in the cadastral value of land will also create new expenses for farms that use land as a fixed asset of production. In addition, our country lacks support measures for the purchase of agricultural land. In turn, there are countries where special support mechanisms are available for expansion in Eastern Europe, as a result of which entrepreneurs from other countries are purchasing increasingly larger areas of Latvia. In the long term, our country will be the loser from such processes.
Agriculture is particularly affected by the growth of production resources, electricity, gas, fuel, and fuel prices. There is reason to believe that by giving the green light to the growth of regulated resource prices, the state promotes inflation, while subsequently combating the consequences of inflation, with poor success. In this regard, Latvia is also currently putting its foot in its own way, and for the first time.
However, the most critical situation in the agricultural sector is currently in the labor market. Many farms pay excellent salaries to mechanizers, milkmaids, and other professionals, but there is a catastrophic shortage of workers with potential in the countryside. It is becoming increasingly difficult for farmers to find skilled and motivated workers. Currently, farms in Zemgale and Vidzeme are looking for labor in Latgale or even further afield. Of course, labor migration between Latvian regions is a mutually beneficial process for both rural residents who do not have properly paid work and farms that are looking for employees. Farmers also say that workers are almost blackmailing rural employers by going to Western Europe for profit. Then farm owners have no choice but to pay more and more, but it becomes impossible to demand adequate work results.
Rural areas have been chronically lagging behind the overall pace of development of the country for decades. Of course, as the analysis of various farm groups shows, in some areas farmers' incomes exceed the average by dozens of times. However, the relative success of the most successful farms cannot be used to judge the development trends in rural areas as a whole. Lack of satisfaction with the return on hard work invested, motivation problems and poverty manifest themselves as a lack of initiative in business, depopulation, a high proportion of social problems and the marginalization of rural society in general. Right now, as a result of inflation and measures to combat inflation, the gap between rural and urban development is deepening. In order not to place new ill-considered obstacles to the development of rural areas at the moment, implementing state measures to combat inflation should not unnecessarily complicate or hinder the taking of loans for the modernization of rural business.