Economic & social impacts of recent agro-investment in Kazakhstan s grain region

Economic & social impacts of recent agro-investment in Kazakhstan s grain region Martin Petrick Leibniz Institute of Agricultural Development in Central and Eastern Europe Halle (Saale), Germany

Overview of the presentation Introduction Agricultural recovery in the North Kazakh Grain Region Main restructuring outcomes Social impacts Conclusions & recommendations Database: Official statistics, Case studies based on field visit in April/May 2011 Acknowledgements 2

Agriculture in the former Soviet Union Untapped land resources for food production Considerable yield gaps to be closed Second-wave farm restructuring in recent years: - largely uncharted effects - high variation in organisational models RUK as future players on global grain markets 3

The geographical setting Soil quality Low to medium (Podsol, Gley) Medium to excellent (brown, black soils) Low to medium (salty Solonchak, Solonetz) Very low (sand) Source: Haack Weltatlas 2007. Climate Unsuitable for agriculture Too much precipitation Too little precipitation 4

Cropland area (million ha) Cropland area expansion in N Kazakhstan 40 35 30 25 20 15 10 5 0 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 North-Kazakh Grain Region Kazakhstan 5

Investment in agricultural fixed assets (billion tenge) Rising investment levels 90 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 6

2001=100 Grain prices rise, wages rise faster 500 450 400 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Grain prices Wages in agriculture 7

Ag value added (bln 2000 KZT) Real ag value added almost doubled 500 450 400 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 8

Million tons Kazakh wheat exports 9 8 7 6 5 4 3 2 1 0 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012* Source: USDA. 9

A paradigm shift in land policy (early 2000s) From State ownership of land Long-term rentals to rural citizens (share privatisation) Subleasing of land To Private land ownership Limitations on state land rentals Slow evolution of a private land market 10

Main steps of farm restructuring 1990-1994: Early reform steps, little profound restructuring 1995-1997: Share privatisation, emergence of limited partnerships & individual ( peasant ) farms 1998-2002: Bankruptcy procedures accelerate restructuring After 2003: Implementation of new land code, recognition of private land ownership, prohibition of subleasing 11

Land use (million ha) Expanding land use by ag enterprises 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Agricultural enterprises Individual farms Household economies 12

Gross agricultural output (billion tenge in 2000 prices) Rising output from enterprises (not 2010) 350 300 250 200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 Agricultural enterprises Individual farms Household economies 13

What distinguishes enterprises from farms? Simpler registration & lower tax burden for farms Political preference in favour of enterprises ( merging small farms campaign after 2003) Capital intensity lower on farms Production portfolios, technologies & management challenges (labour) mostly similar 14

Agricultural labour Future access to workers a concern for many managers of all types of farms Substantial wage increases recently Deficient education & training Labour supervision - Persistent challenge on enterprises & farms - Advantages for individ farms due to smaller teams? - Performance pay widely in use - Introduction of satellite imaging technologies 15

The role of agroholdings Vertically & horizontally integrated business groups, often with outside capital Some with transnational operations (Russia) Main activity in grain production & trade Control up to 700 thousand ha per holding 15 largest cultivate 35% of cropland in NKGR Internal management structures largely unknown Oshakbaev 2010, Wandel 2011 16

The role of rural households 17

Persons employed in agriculture, forestry and fishery (in thousands) Stable employment in agriculture 3000 2500 2000 1500 1000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan Workers in ag enterprises 18

2003=100 Consumption spending outpaces cost of living 350 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 Rural consumption spending NKGR Cost of living NKGR 19

Share of households below the poverty line (%) Plummeting povety rate 45 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 North-Kazakh Grain Region 20

Income sources of rural households, Akmola 2003 Self-produced food items for own consumption 5% Goods received in kind 7% Other 3% Salaries from agricultural employment 25% Pensions 20% Income from nonfarm businesses 3% Sales of food items 10% Salaries from nonagricultural employment 27% World Bank survey 2003. 21

Main findings Cropland expansion, intensification, rising productivity Now three main groups of producers: ag enterprises, individual farms, rural households Productivity figures for enterprises & farms similar Centralised ag policy (production subsidies & finance) on the rise Clear & measurable benefits for rural population 22

Some conclusions No tradition of individual land use & ownership, smallholder farming not the default situation at the outset of investment boom Recent labour scarcity shifted balance of power towards workers, who value secure wage income Policy makers, investors & managers continue to embrace ideal of the industrialised farm Little involvement of foreign stakeholders / investors Competition among farm types (individual vs agroholdings) has not yet produced a clear winner 23

Lessons to be learned 1. Large-scale farming based on hired labour will likely form the backbone of future land cultivation in N Kazakhstan, entailing a mix of corporate & family businesses 2. Beneficial effects of agricultural investment materialise even in the absence of an ideal protection of property rights or fully transparent forms of citizens representation 24

Lessons to be learned 1. Large-scale farming based on hired labour will likely form the backbone of future land cultivation in N Kazakhstan, entailing a mix of corporate & family businesses 2. Beneficial effects of agricultural investment materialise even in the absence of an ideal protection of property rights or fully transparent forms of citizens representation Thank you! petrick@iamo.de 25

Min of Agriculture budget structure 2008 Credit support 27% Cross functional expenditures 4% Administration 7%Infrastructure 5% Crop & livestock services 17% Research & extension 3% Subsidies 24% Market intervention 13% World Bank PEIR 2010. 26

KazAgro sub-holdings 27

Policy recommendations Government control of land & capital access should be further relaxed Public investment in human capital much more warranted Centralised administration structures likely inefficient in targeting economically most promising activities Wide array of ag policy measures lack consistent strategy, hard to evaluate, not WTO conform More focused & less distortionary policy approach recommended 28

Future research needs Labour supervision: contracts, technologies, impacts Strategic policy implications of increasing labour scarcity Collect micro data to better compare outcomes of different farm types, scale economies Further commercialisation of rural households: pathways, policy implications Interdependencies among farm types: complementarity vs. specialisation Agricultural entrepreneurs, their origin & abilities 29

Area on which mineral fertiliser is applied (percent of total cropland) Expanding fertiliser use 9 8 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 30

An evaluation of land reform so far Gradual evolution of land policy Paradigm change from share distribution to private land market (around 2001) Most land still in government ownership today (low state rental rate) Prohibition of secondary land transactions limits shortterm adjustments & discriminates against individ farms Rising global interest keeps land on the political agenda (Chinese investors) 31

Average farm size (ha) Recent farm consolidation 16000 14000 12000 10000 8000 6000 4000 2000 0 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Agricultural enterprises Individual farms 32

Annual change of total land use (%) Ag enterprises grow more persistently 6 4 2 0-2 -4-6 -8-10 2003 2004 2005 2006 2007 2008 2009 Agricultural enterprises Individual farms 33

USD/ha Rising profitability of ag enterprises 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Production cost of grain in ag enterprises Grain revenue 34

Share of economically active population employed in agriculture, forestry and fishery (%) but falling employment share 45 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 35

Share of agriculture in regional GDP (%) Ag share in GDP lower than employment share 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 36

Real monthly consumption expenditures by rural households (2003 USD) Real consumption spending doubled in 5 years 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 North-Kazakh Grain Region Kazakhstan 37

Financial flows in the rural economy of NKGR 38

Source: Deininger et al. 2011, Rising Global Interest in Farmland, Washington DC. 39

Wheat yields (dt/ha) Three-year moving average Rising (but still volatile) yield levels 15 10 5 0 1989 2001 2002 2003 2004 2005 2006 2007 2008 2009 Kostanay North-Kazakhstan Akmola Kazakhstan 40

Disposition of formerly subleased land 2005 100% 80% Conditional land shares (ths ha) Land plots (ths ha) 1203 968 892 986 188 1773 40 266 60% 5573 6881 40% 2993 4665 20% 0% 5810 2563 673 619 NKGR Kaz NKGR Kaz turned into individual farms contributed to ag enterprise stock returned to government not decided yet / other Data by Land Resources Management Agency of Kazakhstan. 41

Land Code 2003 Private land ownership acknowledged Prohibition of secondary lease transactions Three options for subleased state land: - Continue lease for own cultivation as an individual farmer - Purchase from government, lease to 3rd parties possible - Contribution to capital stock of an ag enterprise However, ongoing primary lease of state land possible at low normative rate 42

Number of farms Farm numbers peak after new land code 14000 12000 10000 8000 6000 4000 2000 0 1990 2000 2001 2002 2003 Agricultural enterprises active 2004 2005 2006 2007 2008 Individual farms active 2009 43

GAO per ha (thousand tenge) GAO per ha is practically equal 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 Agricultural enterprises Individual farms 44

Wheat yields (dt/ha) Three-year moving average but wheat yields in farms are higher 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 Agricultural enterprises Individual farms 45

Population living in rural areas (million persons) Stable rural population numbers 8 7 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 North-Kazakh Grain Region Kazakhstan 46