Rasa Melnikienė: Consolidation of farms in Lithuania might continue

11 March 2019

Lithuania, an EU member since 2004, tends to follow the paths of a number of post-socialist countries with regard to the development of farm structure. Large enterprises become increasingly dominant in the agricultural production and land use of the country. What is the role of public policies in this process? What challenges do they face? The second part of the interview with Dr. Rasa Melnikienė, Director of the Lithuanian Institute of Agrarian Economics, aims to answer these questions.

Although it had long been believed in Lithuania that large scale farms are more competitive than small ones, the government started to constrain the expansion of large farms in 2014. In particular, a law was passed that restricted individuals, legal entities and related persons from acquiring / owning more than 500 hectares of land. What changes for the farm structure has this law brought about?

The law restricting agricultural land acquisition to a maximum of 500 ha has been in force since 2006. For some time, there was no monitoring mechanism for the implementation of the law, so the requirement was not met. Concentration of land ownership took place by acquiring agricultural land on behalf of family members or by establishing legal entities. There was no public information on the extent of the concentration when a legal person owns several agricultural companies. The changes started with the society and journalists taking an active interest not only in the concentration of land but also in the distribution of the EU support for agriculture. There were articles in the press that began to analyze the causes of this phenomenon and its consequences for the economic and social situation in the Lithuanian countryside. The politicians had to respond to the situation, and a monitoring mechanism was set up.

Are public policies in Lithuania designed in the way that they support large farming?

Until 2014, the amount of direct payments to farms was based on the area of land they managed. This way, 2% of farms of more than 100 ha in size received about 42% of total direct payments, while the rest 98% of farms accounted for about 52% of the payment envelope. In the implementation of the Rural Development Program, Lithuania prioritized the direction of increasing the competitiveness of farms, and the largest amount of support went to the measure to support investments in the modernization of farms. The beneficiary had to co-finance 50-60% of the investment at its own expense. Smaller farms lacked funds for co-financing, and banks did not give loans to them. One of the important indicators of the project selection criteria set out in this measure was linked to the profitability of farms following the principle ‘the strongest remain on the market’. It was possible to support the investment in the same farm several times. In addition, it has not been assessed whether farms are able to finance these investments without aid.

As a result, only a limited number of farms received investment support. To illustrate the shortcoming of this principle, in discussions I use the following example. Let us imagine that five farmers applied for farm modernization. Due to lack of funds, only three projects were financed. These farms have become more competitive than the farms without support. The farmers were unable to compete without having received support and decided to withdraw from agricultural activity. In the absence of other activities in rural areas, these farmers might emigrate or become unemployed. A separate investment support measure has been also provided for smaller or semi-subsistence farms, but by 2013 it was unpopular due to the high cost of the administrative burden (as compared to the amount of support) and due to the economically difficult-to-implement financing mechanism for small farms.

The support model focusing on strengthening the competitiveness of individual farms and ignoring employment problems has become an important cause of emigration from rural areas. The data of the Farm Structure Survey show that the number of farmers aged 35-45 dropped twice from 2010 to 2016. These are worrying signals. Since Lithuania's EU membership in 2004, 15% of the population has left rural areas. The shortage of workers has become a challenge for the competitiveness of large farms, because the employment in agriculture is less attractive than in the industry or service sector, and the quality of life in the city is better.

The declining population of rural communities and the worsening demographic situation has become the reasons which since 2014 have led to the search for ways of helping to stay on the market not only for medium-sized, but also for small and semi-employment farms. Increased dissemination of support is aimed not only at improving the situation of a large part of farms, but at attracting young educated people into small and medium-sized farms, who would take over the land and farms of their parents or grandparents. It also aims to encourage emigrants to return to rural areas.

How do you think will the farm structure in Lithuania change in the future? Will large scale farms continue to consolidate?

Since 2010, the number of farms in Lithuania has decreased by 25%, mainly in the group of smaller farms. The number of small farms will continue to decrease, as their owners are older people who will retire from farming due to their age. They will sell or lease the land to farmers in the neighbourhood; as a result, farms enlargement is unavoidable. In recent years, growth potential has been seen in the farms ranging from 50 to 300 ha. This shows that the sustainability of farm structure is increasing. In 2014, a new direct payment model has provided a major boost to the survival of smaller farms in Lithuania. It slowed down a change in farm structure by allowing some of the support to link to important objectives of the country.

Since 2015, 15% of Direct Payments envelope is used for the redistributive payments in Lithuania. Maximum number of hectares to be paid by redistributive payments is 30. The 30 hectare premium allows additional support for small farms and slows down the decrease of them in rural areas. As a result of this support, the average direct payment increased for 95% of all farms in Lithuania, i. e. for farms up to 65 ha.
Moreover, in order to maintain the production level of agricultural subsectors facing economic difficulties, since 2015 15% of Direct Payments envelope is used for voluntary coupled support. The support is granted for those livestock and plant growing subsectors, where main holders are small farmers.

Nearly 2% of Direct Payments envelope is used to support young farmers. Young farmers usually start their businesses as small and medium-sized farms. These policy changes are hopeful that changes in farm structure in Lithuania will not be so fast and will not threaten the viability of rural communities.
At the same time, the opposite processes are taking place. In Lithuania, change in the generations of farmers has begun. Farmers who have modernized their farms but have no plans to transfer them to the younger generation are trying to sell their farms on the market and face difficulties. Young farmers who want to buy such farms do not have enough financial resources. In Lithuania, the process of concentration of agricultural land among legal persons might continue after 2020. The investors' decisions will be based on a new support model that will determine what return on capital they can expect.

What is the future of small farms in your country?

At present, as a result of changing consumer attitudes toward nutrition, small farms in Lithuania develop actively in the segment of local food, grown in a nature-friendly way and processed on farms. Young farmers with higher education are more likely to be involved in this area. They have the knowledge to reach consumers through a short supply chain using sales platforms and building new business models based on collaborative networks. They find new niches, combine agriculture with rural tourism, educational programmes, culinary heritage, and other activities, thus reducing business risks. These farms, which use non-industrial technologies, often require very little investment support, but the state can strengthen local food movement by coordinating marketing actions, promoting cooperation and co-creation processes.

The role of small farms is also important in preserving the rural population in the labor market, as remote rural areas remote lack other economic activities in Lithuania. The analysis of the situation shows that farmers of working age, who have discontinued farming activity, emigrate. The vitality of rural areas is thus decreasing, the network of public sector institutions is declining and the quality of life in rural areas is deteriorating. These circumstances force politicians to revise agricultural policy. It has become obvious that policies aimed at strengthening the competitiveness of individual farms must be consistent with the principles of sustainable rural development.

Thank you for your time!

Logo