National Audit Office: 70% of agricultural producers will need to diversify their sources of income in order to avoid difficulties in the coming years

Toomas Mattson | 6/28/2007 | 12:00 AM

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TALLINN, 28 June 2007 - An audit conducted by the National Audit Office has revealed that despite the current levels of support for agriculture and rural life, more than two-thirds of all agricultural companies operating today are likely to find themselves in serious difficulty in the coming years. In the event that support is decreased, only a fifth of professional agricultural producers are likely to be able to carry on.
The majority of producers will have no choice but to diversify their operations away from agriculture to generate additional income.

The state has invested and continues to invest heavily in the competitiveness of the agricultural sector and balanced rural development. Between 2007 and 2013, approximately 26 billion kroons (or roughly four billion kroons each year) will be paid out in support of agriculture and rural life as direct European Union grants and on the basis of the rural development plan.

Although more than 400,000 people live in rural areas in Estonia, the majority of rural and agricultural support is to be allocated to the 27,000 agricultural companies operating in the country. 6700 of these are professional farmers.

While the billions of kroons provided in support will be reflected in increased investment, land use and growth in added value, the audit carried out by the National Audit Office has shown that the grants to be issued during the 2007-2013 financial period will not improve productivity among agricultural producers to the extent that they will be able to compete with other EU farmers. Around 70% of agricultural companies are likely to find themselves in serious difficulty in the coming years, with only a fifth of farmers able to continue operating should the current level of support decrease.

Many smaller and medium-sized producers are likely to find themselves in difficulty with the next few years. Analysis of all of the groups of agricultural companies divided by size revealed that support will provide some relief for producers’ problems until 2010, but that more than half – mostly small and medium-sized companies – will no longer be able to compete thereafter. Some producers will have no choice but to diversify their operations away from agriculture to generate additional income. However, there are few in rural areas who would readily agree to take up new types of production in place of traditional farming. There has been a lack of market information for producers and the explanatory work undertaken by the ministry in this area has been limited.
Tarmo Olgo, a chief auditor with the National Audit Office, says that one of the most important goals of the audit was to stimulate debate on the future of agriculture and rural life among society, the parliament and government before the direct effects of problems begin to be felt in four or five years’ time. “We need to start acting today,” he said.
The competitiveness of the agricultural sector as a whole is poor. In terms of result indicators (yield, productivity and the creation of added value), Estonia lags significantly behind the old member states of the European Union (the EU-15). Only large-scale producers are able to operate efficiently.

Labour productivity in Estonian agriculture is also limited: 10 times smaller than in the Netherlands and 5 times smaller than the EU-15 average (based on 2004 data). Compared to other European Union member states, Estonia’s labour productivity is only exceeds that of Latvia and Lithuania.

The material basis of many producers is weak. The property and assets used for agriculture are obsolete. According to figures from the Rural Economy Research Centre, half of the structures in use in 2005 were more than 20 years old, and 70% of machinery and equipment had been purchased more than 10 years previously. This is why local farmers are unable to compete with producers from other countries. The small amount of arable land means that it is impractical to acquire agricultural machinery designed for high productivity, while the small number of animals leads to comparatively high costs per unit of output.

Large-scale producers have made significant investments in recent years, but small and medium-sized producers have invested very little. Primarily as a result of the investments made by large producers, the cost of property and assets per producer between 2001 and 2005 almost doubled on average, to 2.1 million kroons. However, the average value of fixed assets among small producers in 2005 was just 0.5 million kroons. Almost a quarter of producers made no investments between 2001 and 2005 at all.

When direct support for agriculture from the European Union diminishes, the state will face a choice – whether to invest billions of kroons of Estonian taxpayers’ money in inefficient agricultural production that is not sustainable, or to take a broader view of rural development, supporting retraining and growth in productivity, and contributing to the preservation of rural life generally. The need to view rural life as more than just farming is something that has also been stressed by the European Commission.

The National Audit Office does not consider it right that the Ministry of Agriculture treats the state’s rural life policy as an agricultural policy first and foremost. It is on this basis that the ministry coordinates the use of support from the European Agricultural Fund for Rural Development, without taking into account the areas of development that are implemented through support from other EU funds.

It is the view of the National Audit Office that rural development must be dealt with as a whole, from infrastructure through to education and health-related problems. The National Audit Office confirmed in the course of its audit that no institution is involved in thoroughly analysing the overall effect of the measures planned by the state on regional socio-economic development. Different ministries are guided at present by the priorities in their own fields, and the opportunity is not being taken to develop rural life as a whole through the combined influence of a range of measures. Neither has the Ministry of Agriculture – whose role it is to create the conditions for sustainable and diverse rural development – managed to systematically shape rural life.

Although there are dozens of individual development plans touching on rural development in Estonia, they are not sufficiently interconnected, and this means that the effect of the measures planned by the state on socio-economic development in rural areas cannot be comprehensively assessed.

Support for agricultural enterprise alone is not enough to achieve balanced rural development. A reliable network of roads that is always passable, a high-quality supply of electricity and communications and telecommunications services must be guaranteed, as must the availability of high-quality education, health care and cultural services.

The National Audit Office recommends the implementation of additional measures so that people leaving the agricultural production sector are able to find work that is as close to their place of residence as possible. In order to make working further from home more viable, the state of roads must be improved along with public transport connections. Attention must also be paid to retraining people leaving the agricultural production sector, and to solving the social problems resulting from the changes in their lives.

Specific proposals which would grant the Ministry of Agriculture greater authority to influence the work of other ministries in this area have not been submitted to the government by the ministry, and neither has the government required the ministry to do so.

Tarmo Olgo, the chief auditor who signed the audit, remarked that existing rural problems cannot be solved by simply focussing on agricultural production, and that the measures included in the rural development plan are not in themselves enough. “There are many sides to the objectives of the development policy for rural areas. Cooperation in this field can only be successful if it is done more and more with people’s well-being in mind, and viewing rural life as a whole made up of many parts.”

Additional information: Mr. Tarmo Olgo, Audit Director, +3726400776

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: [email protected]

  • Posted: 6/28/2007 12:00 AM
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