Agricultural Subsidies of Azerbaijan

In the state budget of 2021, Azerbaijan plans to spend 506 million AZN for agricultural subsidies, equaling 1.8% of its total expenditures. Considering the importance of the agriculture for the rural population, as well as the hefty cost of the program, I decided to write a brief post about the subsidies.

Azerbaijan’s agricultural sector rapidly fell apart following the dissolution of the Soviet Union, as well as the war with the neighboring Armenia over Nagorno-Karabakh. Furthermore, during the oil boom period (between the years of 2005 and 2011) the development of the agriculture in the country was further hindered as it lost its relative value for the national economy. In the meantime, appreciation of the national currency (due to windfall oil revenues) has made Azerbaijani farmers/producers less competitive in relation to their foreign rivals. The oil sector, which was centered around the capital Baku, has drawn majority of the country’s most developed resources, including human capital. As a corollary of all these factors, the agricultural output diminished, and the sector became vastly underdeveloped.

However, underdevelopment of the agricultural sector brought various social and economic problems with it that the government could no longer ignore. For instance, in 2020, Azerbaijan’s largest import category was food items, totaling 15.29% of the whole. Wheat imports alone almost account for 300 million USD, which is 2.77% of the total. Farmers in the rural areas are the most impoverished group of the Azerbaijani society. To seek better opportunities, countless young people move to the capital, leaving their villages underpopulated, and Baku overcrowded.

To promote the agricultural sector and overcome the above-mentioned problems, the government announced a sizeable subsidy program in 2019 (which came into force on January 1st of 2020). The program envisions an annual amount to be paid to farmers and companies in the agricultural sector. Below is a short overview:

  • For plantation of crops, the subsidy is calculated as the base amount multiplied by the product coefficient. Base amount is pre-determined by the government, which is 200 AZN as of now. The product coefficient is also pre-determined. For instance, for 2021, wheat has the coefficient of 1.0, meaning that for each acre, the farmer/company receives 200 AZN. Some products are incentivized, thus have coefficients larger than 1.0, such as soybeans (1.3), tobacco (1.4), and rice (1.4). On the other hand, products such as corn (0.8), millet (0.8), rye (0.8), and peanuts (0.9) have coefficients less than 1.0. The farmers register their land before planting and declare which product they will farm to the relevant authorities. He/she is then given the full subsidy amount, which is deposited directly to the specially issued plastic cards (called farmer cards). Of the full amount, the farmer can only withdraw 25% as cash. The remaining amount must be spent cashless in designated areas where seeds, fertilizers, and other agricultural products are being sold. Between planting and harvesting, the authorities check whether everything (particularly if the declared product is being grown) is in order.
  • A one-time subsidy is given for newly found farms of 6 fruits – 11,000 AZN/acre for lemon, 9,000 AZN/acre for orange, 5,000 AZN/acre for pomegranate 4,900/acre for olive, and 4,400 AZN/acre for hazelnut farms.
  • For animal breeding, the government pays 100 AZN per each newborn calf, 10 AZN/year for each beehive, and 5 AZN/kilogram for cocoon.

THE CASE FOR AGRICULTURAL SUBSIDIES

Inasmuch as I am generally against government interference with the free markets, a couple arguments can be made in favor for this subsidy program. Firstly, we must consider national food security. Azerbaijan imports a substantial amount of food products each year, especially cereals such as wheat. Being dependent on foreign sources for the most fundamental products is an undesirable situation for any sovereign nation, hence these subsidies can help to curtail the food imports by boosting local production.

Secondly, we need to keep in mind the livelihood of the rural population, which makes 47% of the total in Azerbaijan. Although agriculture does not contribute that much to the overall national economy (in 2019, it made up only 5.7% of the GDP), it is the main source of employment for those who live outside of major cities. Given the consequential adverse effects of the Dutch Disease over non-resource sectors, it is only natural that a certain amount of the oil revenues is redirected towards the agriculture to help it grow. By incentivizing the farmers with subsidies, the government can achieve higher employment, rising income, and more production in the sector.

THE PROBLEMS AND SHORTCOMINGS OF THE SUBSIDIES

The foremost problem of the farm subsidies is about destabilizing the markets. Such artificial measures by the governments can lead to overproduction, distorted choice of crops and so on. Governments give subsidies to some products and not to the others, or such as the case of Azerbaijan, allocate more funds to specified products. Unless the subsidized products or its amount are determined very precisely (which is impossible to do so, especially given the lack of adequate data in Azerbaijan), it is guaranteed that certain products will be produced more, and some less, than their optimum level.

Another example of the destabilizing effect of the subsidies is that they can incentivize large-scale farming so much that it can lead to rapid deforestation, as areas that could have been forests or grasslands get locked into agricultural production. Those with cattle in different parts of Azerbaijan are currently having hard time with finding grazing land, as most of the open spaces have been sold to large landowners involved in farming following the subsidy program. On the other hand, mass-deforestation works are currently taking place in Azerbaijan and is uncovered thanks to the efforts of the environmental group called Ecofront. Throughout the last couple of months many cases of deforestation in places such as Lankaran (deforestation of 30 acres of Haftoni forest for plantation of lemons and additional 42 acres of land to BETA Tea company for tea plantation), Shaki (in Bideyiz village, 500 acres of land deforested for crop farming) and many more were reported. These cases of deforestation could have happened without the subsidy program too, but it further exacerbates the situation. Take the example of Haftoni forest – starting from 2021 the government announced a one-time subsidy of 11,000 AZN per acre for lemon farms. For the above-mentioned 30 acres, this makes 330,000 AZN! Unfortunately, a part of that subsidy goes to the pockets of officials, who in turn take a blind eye to the process of deforestation. One of such deals was uncovered by Ecofront, which confirmed the low and appealing price of these deals – 26 AZN/year per acre, 676 AZN for 30 acres annually. It is apparent that a serious amount of funding dedicated for subsidies end up in shady deals involving oligarchs and government bureaucrats.

Secondly, we must recognize that the subsidy program opens many doors for corruption and bribery. One example was already given above, but there are many more to it. For instance, those with ties to the government can bribe their way to deliberately misregister their product and get larger subsidies (tobacco instead of corn, for example). Not having strict evaluation process in place aggravates this situation. Long story short, the potential of using corruption to unjustly benefit from the subsidy program is a great threat to the whole sustainability of the program, especially in a country like Azerbaijan.

Furthermore, rather than helping the poorest farmers, these programs often benefit the large agricultural companies or the wealthiest of farmers. This is because of two factors. Firstly, the larger companies/farmers have much better access to information about the subsidy program than the low-income farmers. When I talked to farmers in my hometown of Qakh, many were unaware of the different product coefficients, as well as subsidies for fruit farms etc. Secondly, a big shortcoming in Azerbaijan’s subsidy program is that the amount of subsidy given per acre is constant, meaning it is given in full amount even to the largest landowners (there is only one exception here, which is wheat, where the subsidy amount is decreased by 20% for those with more than 20 acres of land). I consider this approach fundamentally wrong, because the number one goal of the subsidy program is not to turn a wealthy landowner into a multi-millionaire, but rather to help the poorest farmers so that they get out of poverty. Besides, the largest landowners enjoy the effects of economies of scale (such as owning the machinery rather than renting) hence their profit margins are already higher than the common farmers, which further jeopardizes the logic of the subsidies allocated for them.

Another argument against farm subsidies is about rent seeking. It is common to see the land is owned by one individual/company and is rented to another one for farming. In such cases, most of the time the “farmer card” either remains with the landowner, or the subsidy amount is added to the rent as a premium. Therefore, the subsidy itself does not end up going to the actual person farming the land. Moreover, it is possible to see the landowner demanding from the tenant to plant a particular product (for example wheat instead of rye, as the former pays a larger subsidy) irrespective of the tenant’s experience with the plant, so that he/she receives more subsidy.

FINAL REMARKS AND THE WAY FORWARD

The current subsidy program costs Azerbaijani taxpayers half a billion AZN each year. Although it surely has a positive effect, it is also too early to look at the statistics and judge whether the benefits outweigh the costs. Nonetheless, to further improve the program, I deem that the following steps can be taken.

First, to ensure that the allocated funds go to the actual farmers in need (and not to some oligarchs) the amount of subsidy given should be decreasing progressively (for all crops, not just wheat). The graph below shows the difference between the current subsidy mechanism, and the one that I am suggesting. For instance, the subsidy amount can be decreased to 90% for each acre above 10, to 70% for each acre above 20, to 40% for each acre above 30, to 10% for each acre above 40, and no subsidy given to each acre of land owned after 50 acres.  Same must be applied to fruit farms as well. By implementing this, we can also hope to stop the massive deforestation efforts, which are aimed at creating huge new farms/plantations. However, one word of caution, implementing this point would result in large landowners transferring/dividing their lands among many family members/relatives to avoid the diminishing subsidy amount. In this case, certain measures (such as significantly increasing the cost of dividing one plot of land into multiple pieces[1]) can be implemented to combat this practice.

Graph 1: Proposed subsidy mechanism

Graph 1

Second, subsidizing the capital-intensive field crops (wheat, rye, barley, millet and so on) asymmetrically benefits the large agricultural companies (mostly the “Agroparks” in Azerbaijan, who are known to be owned by government bureaucrats) as they are far more likely to own the required machinery than the common farmers. Because of their already better profit margins, the subsidy given to these legal entities should be reduced (for instance, 50% less than the normal amount per acre) to save a solid amount of funding, which can be redirected towards the actual farmers in need of subsidizing.

Thirdly, a problem that I have observed in Azerbaijan is that low-income farmers sell their products as soon as they harvest it, since they need money. However, this also means that they are selling their crops/fruits/vegetables when their prices are the lowest. Many trading businesses, who bring no added value to the table, take advantage of the farmers’ financial situation, and flip their goods in the wintertime for significant profits. To overcome this challenge, the subsidy program can have a new element where special no interest loans (the amount of loan equals the current value of the harvested products) are given to farmers (only those with less than 20 acres of land, for instance) in the harvesting period and are paid back in wintertime. Thus, the low-income farmers can hold on to their goods, sell them for a higher price in winter, repay the loans and gain extra profit. Such a practice would have zero effect over consumer markets (and inflation) since trading businesses are doing it anyways. On the other hand, farmers, who now experience higher profit margins, are more incentivized to farm more efficiently and yield more harvest. The cost of this scheme, which is the lost purchasing power of the loaned money, would be minuscule compared to its benefits.

Fourthly, one of the potential steps that we can take to combat corruption and bribery is to make the subsidy data publicly available. Hence, by having access to information such as which farmer/company receives how much subsidy for how much land and for which product, the relevant civil society organizations can monitor whether everything checks out.  For instance, implementing this idea would greatly reduce the risk of oligarchs misregistering their products for higher subsidies.

I hold that implementing these suggestions, in their more advanced and improved forms, can help to make the subsidy program more effective in Azerbaijan.

FOOTNOTES

[1] One can argue that such a policy can put an extra burden on low-income farmers wishing to sell a portion of their land, but I believe that since only larger land plots can be subject to dividing, this argument should not raise much concern.

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