Directions and sources of investment financing in agriculture

Investment Directions and Government Support

A long-term shortage of working capital, the depletion of depreciation funds for current needs, and an accumulated price disparity have led to critical wear and tear on machinery, production facilities, and land reclamation systems. To restore production and develop farms, regular capital attraction is required. Today, the main sources of financing are the enterprises' own funds, allocations from federal and regional budgets, joint-stock and foreign capital, as well as borrowed resources.

Investment activity encompasses both the modernization of production and the development of the social sphere in rural areas. The main areas for investment remain:

• construction, installation works, and reconstruction of facilities;
• purchase of modern machinery and equipment;
• land reclamation;
• establishment of perennial plantings;
• formation and renewal of the primary livestock herd;
• development of social infrastructure;
• other works and capital expenditures.

State support for investments is implemented on a repayable and non-repayable basis through targeted programs. Federal budget funds are directed toward solving priority tasks of the agricultural sector:

• acquisition of new machinery, cultivar seed, and breeding livestock under federal targeted programs;
• improvement of soil fertility, land reclamation, maintenance of state reclamation systems, plant protection against pests and diseases, eradication of dangerous livestock diseases, scientific research, and environmental protection measures;
• lending and insurance in the agribusiness sector;
• compensation for a portion of costs for material resources and electricity, subsidies for livestock breeding and elite seed production (including the production of hybrid seeds);
• development and support of the market for agricultural products, raw materials, and food;
• organization of vocational training and professional development for personnel.

Substantial amounts of funds are allocated for long-term resource restoration programs. Within the framework of the Federal Targeted Program "Conservation and Restoration of soil fertility of Agricultural Lands and Agrolandscapes as a National Treasure of Russia for 2006–2010 and for the Period up to 2012," the following funding volumes were fixed:

• Total program budget — 407,019.3 million rubles.
• Federal budget — 95,767.8 million rubles.
• Budgets of Russian Federation subjects — 82,818.5 million rubles.
• Extra-budgetary sources — 228,433 million rubles.

Investment Market and Structure of Capital Goods

The ability to attract resources depends directly on the situation in specialized markets. In the agricultural sector, two key segments function simultaneously: the investment (capital) market and the investment goods market.

The investment market is a system of economic relations between investors, clients, contractors, banks, and intermediaries regarding the long-term investment of resources. Standard market laws of demand, supply, pricing, and competition operate within it, subject to the regulatory role of the state. An investor invests funds in agricultural production in the form of money, property, or property rights with the goal of obtaining a stable income.

Investment goods entering the economic turnover of agricultural enterprises are differentiated by their form:

• monetary form (cash, bank deposits, securities);
• natural-physical form (machinery, equipment, production facilities, biological assets);
• combined form (a combination of monetary and material resources);
• form of property rights (rights to use land plots, machinery, and other property).

Cost of Capital and Collateral Security Issues

The cost of a bank loan — the so-called cost of capital — is a key factor determining the scale of investment in agribusiness. When the bank interest rate rises, an enterprise inevitably reduces capital investment and lowers investment activity. Expensive borrowed money makes the purchase of new machinery, construction, and the modernization of facilities economically unfeasible.

• Share of loans secured by real estate in Western Europe — about 70%
• Main investment regulator — cost of capital (bank interest)
• Key loan approval condition — professional property valuation

The second major problem in attracting borrowed financing is collateral security. In Western European countries, about 70% of all types of loans are issued against real estate collateral. In domestic agriculture, this mechanism is poorly developed, which is why producers regularly face loan denials.

The attraction of loans against property collateral in the agricultural sector is held back by three main factors:

• underdevelopment of the land market;
• low liquidity of the majority of fixed assets, especially specialized real estate objects (e.g., livestock farms);
• weak development of a system for the professional valuation of assets offered to a bank as collateral.