Significant changes are expected in agriculture in the coming years, dictated by European Union strategies. The task for the Latvian state is to find the best possible solutions to achieve the set objectives - this is the development scenario outlined by Minister of Agriculture Kaspars Gerhards to members of the DB Entrepreneur Club.

The Minister of Agriculture recalled that currently more than 40% of Latvia's export revenue is generated by land-related sectors - land, forests and the sea, as the share of food exports is just over 20%, with the sale of forestry products in foreign markets accounting for an equal amount. "When Latvia joined the EU, the share of agricultural product exports was only 10% of total export revenue."

Food export revenue has doubled in terms of its share, and this happened because Latvia became an EU member state and was integrated into the common EU agricultural policy and its allocated support system," emphasised K. Gerhards. He acknowledges that there have been extensive changes in agriculture over the last 16 years, yet the sector is highly heterogeneous. Specifically, there are 58,000 rural support payment recipients, of which 34,000 are very small (1-3 ha), about 10,000-15,000 are managers of larger land areas (family farms), about 1,000 are recipients who could be considered medium-sized farmers (turnover of about 250,000 euros per year), and only 230 farms are considered large (with a turnover of one million euros and more). "Finding a formula - a solution to ensure rural habitation on one hand, and farm development by producing export-capable products that can compete abroad on the other - is a major challenge," admitted K. Gerhards.

A two-year transition period

In the new EU planning period (2021-2027), nearly 3.4 billion euros are being allocated to agriculture, including an additional 600 million euros for direct payments. According to the Minister, this significant increase in the volume of direct payments for Latvia will not, however, allow it to leave the last position in the entire EU. Currently, direct payments in Latvia reach 75% of the EU average, but in the new planning period, this share will rise to 82% and be on a par with Estonia, Lithuania, Romania and Portugal, but it will still be the lowest in the entire EU. "In the second pillar - the rural support fund - there will be a reduction," points out K. Gerhards. He acknowledges that, overall, the envelope allocated to Latvia has increased by 24%, which is the third-largest increase in the entire EU (behind Malta and Croatia). "The mentioned figures allow us to look at the future of agriculture with optimism, but the structure is highly heterogeneous, and it is difficult to find a common denominator on issues such as rural habitation, organic farming and export-oriented agriculture," says K. Gerhards.

There is currently a proposal focused on rural habitation, as it would increase funding for small farms (the current 500 euros per year would grow to more than 1,000 euros), large farms will have restrictions on receiving support for investments, and furthermore, they will be required to be green. For medium-sized farms, investment support has been proposed to strengthen them.

Whether this will be the final proposal, K. Gerhards does not predict, as discussions at the EU level are still ongoing. "A common vision across the whole EU is difficult to reach, so while a transition period of one year was initially planned, it is now clear that it will last for two years - 2021 and 2022, and during this time, funding for the new period will be allocated according to the 2014-2020 conditions," says K. Gerhards. In his opinion, the new conditions could only enter into force from 2023. It should be noted that farmers will face new challenges, as 40% of all policies and investments must be linked to the Green Deal. Several highly ambitious strategies have been approved by the EU - the Biodiversity Strategy and the 'Farm to Fork' strategy. "Currently, Latvia is viewing both of these targets for 2030 with great caution, as they require both a significant reduction in the use of pesticides and mineral fertilisers, and an increase in biodiversity. It is much more complicated for Latvia, with its lower direct payments, to carry out all the measures than in those countries where this support is a notch higher," explains K. Gerhards. He reminds us that the use of pesticides correlates with the level of direct payments; Latvia uses three times fewer pesticides than the EU average (they are used most in Malta and the Netherlands).

4 billion euro opportunities

Another support mechanism, according to the Minister of Agriculture, is the Recovery and Resilience Facility, for which up to two billion euros are earmarked for Latvia in the form of grants and up to two billion euros in loans. "The European Commission has already published guidelines on what kind of projects should be supported. The main focus is on bioeconomy, the Green Deal and climate neutrality, to which a total of 37% of funding will have to be allocated, and 20% to digitalisation," outlines K. Gerhards.

Member states (including Latvia) must submit plans for the use of funds from this instrument to the European Commission by April 2021; their implementation could be launched as early as the end of next year, but settlement for the work done must be completed by 2025. "Everything must be done to ensure this money goes into those projects that provide the greatest return for the entire economy. Proposals have been submitted regarding biomethane, which is aimed at reducing emissions in agriculture, there are projects for new bioeconomy production facilities, insulation, forest planting, digitalisation of state processes, retraining, etc.," says K. Gerhards.

Changing principles

The Minister acknowledges that not only in Latvia but throughout the EU, the central point of discussion is the question of how to reconcile rural habitation with the ability to produce competitive products at an adequate price.

"Different countries have different visions, but the direction is clear - support is aimed at rural habitation. For example, Germany proposes setting a differentiated level of direct payments," says K. Gerhards.

He acknowledges that the EU does not want to allow a situation to arise, as has happened across the bloc, where 20% of farmers receive 80% of subsidies. "The current objective is to find a mechanism so that small and medium-sized farms receive more than large ones. The Latvian proposal: small farms would receive guaranteed support, and setting a cap on the amount of payments is also possible," says K. Gerhards. He quickly adds: since Latvia is currently in last place in the entire EU in terms of direct payment amounts, if support for productive farmers is reduced, there is a risk that they will become uncompetitive compared to EU producers who receive much higher direct payments.

"The structure of Latvian farmers is very unbalanced, but in other countries, the situation is even more complex; for example, in Poland, farm size varies from 0.4 ha to 40,000 ha," replied K. Gerhards when asked to compare the problematics of this issue in other countries.

He also points to the farmers' question regarding competitiveness; for example, in Latgale, all farmers are subjected to EU requirements, but on the other side of the border, such requirements do not exist and equipment is also at least twice as cheap, so it is unclear how to maintain the competitiveness of Latvian farmers. This means that the EU should offer its own measures or solutions to ensure competitiveness.

The matter of emissions

K. Gerhards admits that, while fulfilling the duties of the Minister of Environmental Protection and Regional Development, a consensus was reached throughout the EU on reducing emissions by 40% compared to 1990.

"At the time, such a reduction seemed almost impossible, but today the European Commission wants an even greater reduction - by 55% - and EU member states are accepting it. The conclusion - a 40% reduction does not provide a sufficient signal for the restructuring of the economy," says K. Gerhards. He recalls that Latvia's emission reduction compared to 1990 is already 57%, which is more than the required 55%. Back in the day, Latvia was also assigned the lowest emission reduction plan, which was twice as high for Lithuania and Estonia.

At the same time, Latvia has a specific situation with emission producers because there are few large polluters, but very many small ones, whereas in Europe, the situation is mostly the opposite.

Reducing emissions will affect three areas - energy, transport and agriculture, and if in the first two areas technology will be replaced by more environmentally friendly ones by 2030 as a result of depreciation, in agriculture, there are no such options.

According to K. Gerhards, the increase in land used for agriculture will continue in Latvia, and its volume could grow by about another 10%. "Answers will be needed to several questions - do we maintain the current (140,000) dairy cow herd?

If we want to maintain the herd, then we must ensure an alternative - more extensive biogas production from manure, or we must go towards reducing the herd, or perhaps towards organic farming," the Minister of Agriculture outlines the options. He points out that there are EU member states that pay farmers to reduce the number of dairy cattle.

"There are places where a one-off subsidy of 7,000 euros is paid for giving up cow farming; in Latvia, dairy farmers would be ready to reduce the number of cows if a one-off subsidy of 2,500 euros were paid for each," says K. Gerhards.

He admits that any of the possible solutions will require funds and will have a significant impact on specific farmers. "There are farms with 300 or more cows, but there are very many farms with 20-30 dairy cows; in them, it is not possible to effectively mechanise work or ensure milk quality economically, yet the discussion between conventional and organic farming is and will continue to be relatively sharp," points out K. Gerhards.

New, expensive products

Both the previous and the current government, according to K. Gerhards, are striving to ensure the maximum possible value-added is attached to the agricultural and forestry products produced. "Significant resources have been directed, including EU structural fund money, towards the production of higher value-added products; for example, AS Dobeles Dzirnavnieks is a facility for high value-added organic agricultural products, there are also such facilities in milk processing, thus reducing the export of raw materials and instead increasing the sale of high value-added products abroad," says K. Gerhards.

He recalls that from the new - so-called Recovery and Resilience Facility - projects for facilities producing highly demanded and expensive products could be financed. "One such project is a protein plant (about 86 million euros), which would use peas grown in Latvia as raw material. In the forest sector, work is underway on the use of wood pulp, which would fall within the context of the bioeconomy and thus reduce the export of untreated or minimally treated wood (raw material)," K. Gerhards answers when asked to provide examples. He points out that the processing of marine products will also not be neglected.

Conflict may end up in the European Court of Justice

The Minister admits that in forestry, there are issues where interests collide, for example, regarding the volumes of dead wood and the emissions they cause, which the northern neighbouring country has solved by determining the cutting diameter. "In countries like Finland and Sweden, there are no restrictions on the landowner at all; they do as they wish. In Latvia, there are 135,000 forest owners, and I do not think that we should police these people like in Soviet times to prevent them from freely disposing of their property, but we do have non-governmental organisations and even political forces that believe the state has the right to intervene in forest management," pointed out K. Gerhards, while simultaneously admitting that Latvian forest owners are more strictly regulated than in Scandinavian countries. "We talk about Latvia moving in the direction of the Nordic countries, but regarding a certain part of society, the actions are contrary to what was promised in words," explains K. Gerhards. In his opinion, this issue might require not just discussions, but even the involvement of the Constitutional Court and the European Court of Human Rights.

"Back in the day, some landowners in Riga and the Pieriga region had their rights to dispose of these properties restricted, and the European Court of Human Rights ruled for the payment of very significant compensation from the state to specific individuals," says K. Gerhards. In his opinion, every decision of the European Court of Human Rights brings Latvia closer to being a civil society.

At the same time, the Minister reminds us that for the last 200 years in Latvia, forests have been cut and planted, and just like in Europe, there are very few naturally formed forests.

K. Gerhards also drew attention to the fact that in Latvia, the lesser spotted eagle has more than 500 nests, which is 40% of the entire EU population of these birds. "The lesser spotted eagle feels good in Latvia because there is a transition - from clearings to forest and field, but there is pressure from non-governmental organisations to restrict forest cutting in areas inhabited by this bird," admitted K. Gerhards.

In the shadow of a deficit

The Minister of Agriculture recalled the impact of Covid-19 on the national economy and the state budget. "The 2021 state budget was built based on a GDP growth forecast of 5% (a 7.5% drop was forecast this year), budget expenditures were planned at nearly 11 billion euros, while revenue - 9.8 billion euros, so a deficit of 1.2 billion euros or 3.9% of GDP was planned, but in 2022 this share must decrease to 2.9% and a year later - to 2.1%," says K. Gerhards.

He acknowledges that next year we will be living on borrowed money, which will need to be repaid on time.

"The positive news is that the rate of the Treasury's six-year bond issuance is negative, but if we do not observe the budget deficit limits, then not only will the state's rating fall, but also the possibilities for successfully paying back the borrowed money," says K. Gerhards.

Latvia will have to meet all Maastricht criteria by 2022, and discussions on achieving this goal will be difficult, K. Gerhards explains the situation. He points out that the draft budget provides for a reduction in the mandatory state social insurance contribution rate by one percentage point, as well as a reduction in the personal income tax rate (for salaries exceeding 62,800 euros per year). "However, that is not enough, because labour costs in both Estonia and Lithuania are lower than in Latvia, and therefore, unfortunately, Latvia will still be the last choice for investors to invest in the Baltics," concludes K. Gerhards. He does, however, admit that some interesting proposals will be submitted to the Saeima, about which there will be discussions.

58 000 Number of rural support payment recipients in Latvia

34 000 Number of rural support payment recipients who manage 1-3 ha of land

230 Number of farms considered large among payment recipients (with a turnover of one million euros and more)

Source: DB Club