The FINANCIAL — Policy and Management Consulting Group — Despite the current underdeveloped state, agriculture still remains one of the most promising sectors of Georgia’s economy in terms of GDP contribution, net foreign exchange earnings, employment generation, and importance for poverty reduction.
Although in the course of recent years sector output was characterized with contraction, during the last nine years its contribution to the national economy has averaged 16 percent.
Foreign exchange generated by the sector ranged between $US 84 million and $US 316.5 million, and on average, has been 28 percent of total foreign exchange earnings in the economy.
Agriculture continues to be mainly of subsistence nature; however, it is an important safety net for the most of rural population, and its performance is critical for poverty reduction. The sector has given employment around to 54 percent of the total labour force. The State’s real expenditures in agriculture from 1997 to 2007 have increased by about six times. In the course of recent years budgetary resources were directed at livestock breed improvement, upgrade of existing stock of agricultural machinery, and rehabilitation of amelioration systems, support to and anti- adulteration measures in viticulture and viniculture, and enhancement of food security and safety. In addition to the planned program measures, substantial funds were disbursed on ad-hoc basis to mitigate different emergency needs in rural areas.
Although, these interventions have provided needed relief in rural areas, they had only short-term impact on agriculture livelihoods, and did not result in sustainability. Increased spending without a consistent and comprehensive action plan for provision of financial support and public services to local operators to harness their production capacity and enhance competitiveness was not sufficient to trigger expected results in terms of improvement in agriculture sector performance. Moreover, during the last ten years, agriculture sector was hit by number of adverse factors – droughts, outbreaks of animal and plant disease, trade embargo, and a war. While overall real GDP growth from 1997 through 2007 accounted about 92 percent, and in the period of 2003-2007 its annual growth was about 9 percent, agriculture real GDP growth was negative, and through 1997-2007 accounted about (- 36) percent, and during 2003-2007 its annual growth was about (-9) percent
The growth that has occurred outside of agriculture, mainly driven by Foreign Direct Investments (FDI), has led to the embedment of poverty in rural areas. FDI in agriculture has been very low. In 2007, 2008, and 2009 it approximated 0.8, 0.5, and 1.2 percent of total FDI in Georgia’s economy, respectively.4 Through 2003-2008, rural population farming on maximum 0.5 ha area of land discerned vulnerability to poverty. The size of rural population falling under this category ranged between 35 and 55 percent of total rural population during the same period.
Financial institutions have a limited interest to lend in agriculture and food sector, and interest rates assessed on commercial loans are well above 16-20 percent. It can be said that no insurance is practiced in the sector, and use of leasing instrument to upgrade production processes is also very limited given practiced short term period of agreements. For financial sector main deterring reasons to become more active in agriculture are high risks, limited marketability of Georgian products, and low profitability.
Major risk factors associated with agriculture production are high vulnerability to weather conditions – drought, and to the outbreaks of different animal and plant disease and pests. Crop production – fruits, vegetables in open ground, cereals, grapes, citrus – are considered as the highest risk enterprises to lend; whereas, fish, livestock, poultry, and greenhouse subsectors, in descending order, are viewed to be less risky ventures for financing.
Also, financial institutions consider less risky to lend to the enterprises supplying products to local markets, rather than to export markets. Demand and prices in local markets are viewed to be more stable and predictable, than those in international markets.
 Area of agricultural lands (including pastures and meadows) is around 44 percent of total area. The remaining area is covered by forests, water bodies, and populated areas. Agriculture production is diverse including viticulture, cereal production, and a wide range of vegetables, fruits, nuts, livestock, dairy, citrus and tea. Farming systems vary according to climatic zones. Natural conditions require irrigation in the east of the country, and drainage in the west. Non-irrigated areas are used for livestock and rain-fed cereal crops, while the irrigated areas are devoted to fruits and vegetables. Subtropical climate in the west favors a wide variety of crops including citrus and tea, while viticulture and fruit production prevails in the east. Livestock production is present throughout the country.
Agriculture has a dualistic system and is represented by family holdings and commercial operators. Bulk of the production, more than 90 percent, is concentrated among highly fragmented small-scale family holdings. On average, the size of family holding is 1.22 ha, and normally consists of 2-3 land parcels each about 0.45 ha. Around 82 percent of family holdings produce mainly for self consumption, and the rest 18 percent is involved in cash cropping.8 Both crop production and animal husbandry are characterized with low productivity and are of extensive nature. Contributions of these sub-sectors to overall agriculture output have been changing, with the share of crop production declining, while that of livestock production increasing.
In the course of recent years trend in the output of main agriculture crops was characterized with a declining pattern. It was mainly brought by reduction in the area of land planted.
On average, per hectare yields of wheat, barley, maize, beans, sunflower, potatoes, and vegetables were around 1.7tons, 1.5tons, 2tons, 0.6tons, 0.6 tons, 10tons, and 9 tons, correspondingly. Moreover, with the exception of barley and maize, per hectare yields of the rest of crops have been characterized with a declining pattern.
Exclusive of hazelnuts, performance of horticulture sector has also been volatile and mixed. Those crops who received support from the Government have discerned relatively better performance, in terms of increased sales upstream of respective value chains. These crops comprise apples, grapes, and citrus.
In the course of recent years livestock productivity was characterized only by a modest growth. Annual milking rate of dairy cattle ranged between 935 kg to 1 193 kg per annum. In addition to low productivity, agriculture output levels are influenced and are highly vulnerable to unfavorable weather conditions, and different plant and animal disease and pests. Severe draught in 2000, 2004 and 2006 has resulted in significant contraction in cereal and horticulture crop output. Area of land irrigated in 2005 was around 30 percent of the area of land irrigated in late eighties. Similarly, about 10-20 percent of the area drained in mid-eighties was drained in 2005. Deteriorated irrigation infrastructure coupled with inefficient methods of irrigation is one of the main underlying reasons of fluctuation in crop output levels. Infestation of crop plantings during the growing season with different pests results in considerable divergences between annual figures on the areas of land planted and harvested.
In 2006 unfavorable weather conditions along with a crop output have resulted in shortage of livestock feed availability, and as a result many small-scale livestock owners to cope with feed shortages were forced to reduce the number of animals. Introduction and spread of avian influenza in 2005 and 2006, and that of swine fever in 2007 were mainly due to the practiced minimum level of veterinary and sanitary and phyto-sanitary (SPS) control at the borders and within the country. These developments have resulted in substantial reduction in the size of poultry and swine population, and consequently in the output of these sub-sectors. Poultry sub- sector has managed to recover, and although, it has not attained yet pre-disease outbreak levels, both size of population and meat and egg output levels have been rising on annual basis. In difference from poultry sub-sector, swine sub-sector was not able to recoup after a devastating effect in 2007.
Periods when outbreaks of the disease and drought were recorded correspond to the years when the most significant contraction in real agriculture GDP growth was observed.
Food industry with the exception of wine, mineral water, dairy, poultry/egg and some sorting/packaging is in dire condition. In the market there is an increasing demand on local foodstuffs and transparency in food chains. Although, Georgia has an excellent home-made fruit, vegetable, meat, etc. preserves, main retail outlets in Tbilisi mainly sell imported food products. The reason for this is simple – from the retailers point of view there is no reliable source of supply of such products locally, and varying product quality is also an issue. Prices on local produce normally are affected by weather and animal and plant disease and pest induced fluctuations in already low levels of production, volatile energy prices, inflation, limited access to adequate storage infrastructure, political situation in major importing countries, and developments in international commodity markets. Therefore, imported products and foodstuffs successfully compete with local equivalents on price and quality even during the normal marketing periods of latter. In addition, small operators without organization either in formal or informal groups find very difficult to concentrate simultaneously both on production and marketing, and exert sufficient bargaining power in input-output markets characterized with an unfair competition practices. Since mid nineties Georgia has been a net importer of agriculture products and foodstuffs.
Both exports and imports have been increasing on annual basis, growth rate of latter being higher. Major export market for primary and value added agriculture and food products have been members of CIS, and the second largest trade partner group – the EU
Among CIS members major export markets since 2006 have been Ukraine and Kazakhstan, partly substituting export shipments to Russia, which before export ban accounted for about 50 percent of total Georgia agriculture exports, mainly represented by wine and alcoholic drinks. In EU trade partner group the largest export market has been Germany. Main exported commodities are hazelnuts, mineral water, wine, and alcoholic and non-alcoholic beverages. Hazelnuts represent major export commodity to EU markets.
Like in case of exports, the main import suppliers of agriculture products and foodstuffs to Georgia market have been CIS and EU member states.
On average, during the last decade about 42 percent of total imports have originated from CIS, while around 16 percent – from EU. Overall, import supplies from CIS have been characterized with an increasing trend, while those from EU – with a declining pattern.
Major import suppliers have been Turkey, Ukraine, Kazakhstan, Russia, and Brazil, and main imported commodities were wheat grain and flour, different types of meat, sugar, sweets, and cigarettes.
Way Forward
The lack of adequate supply stimulating infrastructure, quality control at production sites and recognized standards of quality and safety have resulted in the supply of variable quality local produce, underproduction, imported food product dominance, and significant outflows of foreign exchange.
Agriculture sector has a potential to increase output and incomes, however, farming community either lacks resources, capacities or incentives, or the combination of these three, to do so. Commercial production requires increased participation in financial and input-output markets that remain weak due to poor institutional and physical infrastructure. Moreover, farm operators individually have a limited bargaining power and a capacity independently to participate successfully in these emerging markets.
It is clear that consolidation of land into larger and more economic holdings would occur, but as it seems this would be a slow process largely determined by the extent of growth in other sectors of the economy. Although the growth in other sectors during the recent years has been substantial, the growth trend has reversed as a consequence of the war and world financial crises. In the meantime rural dwellers strive to improve their incomes by other activities but there is relatively little formal employment available in rural areas forcing them to migrate.
During the last years, rural population although at a slow rate, but constantly on annual basis has been declining, and in 2009 the proportion of rural population in total population was 47.3 percent. Despite the structural problems there are ample of opportunities for local operators successfully to substitute imports in condition of effective support policies and enabling institutional and legal environment. In addition, with the increased engagement in local markets, operators will acquire skills and capacities that will allow in the long-run to consider expansion in export markets. Existing problems in agriculture and food sector should be tackled through implementation of comprehensive import substitution policy.
Main components of this policy are as follows:
a. Development of environment supportive to the formation of producer marketing groups
On average cultivated area and the size of agriculture operation per family holding is very small leading to inefficiencies, and difficulties for different actors in the chain to reach many scattered operators at the same time. Group building and organization of small holders can solve these problems as the collective action and social cohesion of the group can stimulate productivity, quality awareness, and improve farmer position in the chain. It is essential formed producer groups to operate on commercial basis similar to a private company.
Marketing cooperatives might serve this purpose well. Such a form of organization has multiple benefits – tangible as well as intangible. It provides benefits (i) to members in terms of ownership and democratic control, increased farm incomes, improved services, quality of supplies and products, assured sources of supplies, enhanced competition, expanded markets, improved farm management, legislative support, and local leadership development; (ii) to local rural communities through adding community income, strengthening rural communities and provision of goods and services to non-farmers; and (iii) to consumers via increased availability of quality products, varied services, new products, lower cost of farm produce, and improved general welfare.
Necessary pre-condition for development of enabling environment for producer group formation would be
- abolishment of all tax liabilities that will arise as the producer groups are formed and start operations
- promotion of the concept of joint efforts to achieve a common goal Offered assistance package to the established producer groups should consist of financial and technical support components. Along the other general requirements, main conditionalities for the established groups to be eligible for assistance package at an acceptable level of risk should be the following:
- Activities provide opportunities for import substitution
- Considerable representation of small scale operators
- Enhanced productivity
- Adoption of Global Good Agricultural Practices (Global GAP)
- Ownership and democratic control The extent and the type of provided support, financial and technical, should be based on the assessment findings of value chains in which established producer groups seek participation, and/or have been active independently before joining the group. The assessment of value chains should be outsourced to an independent reputable private service provider. However, it is very important Government to have the ownership of the assessment.
Assessment of value chains will allow identification and quantification of constraints faced by chain participants. Although, there is general knowledge about the problems, they are not well understood and documented. Value chain assessment will provide possibility to understand fully and document opportunities possessed by chain actors and constraints that limit their successful involvement in value chains. Identification and prioritization of possible solutions to the identified constraints is a key to elaborate specific producer group development strategy, in order to enhance competitiveness of the group and a chain as a whole, and address identified constraints in a sustainable way. Assessment of market based solutions should concentrate on three elements as follows: (i) identification of private sector solution providers, (ii) determination whether solutions can be provided in a commercially viable way, and (iii) identification of constraints on the demand and supply of the solutions.
Through prioritization and ranking of opportunities, the optimum market based solutions should be selected. This will require joint efforts from the Government, Donor institutions, and a private sector. These three actors jointly should decide on optimum market based measures, and divide responsibilities on provision of identified solutions.
Possible role of the Government might be provision of financial assistance to the producer groups, making amendments to existing legislation and/or elaborating new ones, and increase funding of public solution providers. Donor institutions might contribute to this joint effort through provision of technical assistance in terms of capacity building of identified and selected private and public solution providers and subsidization of solution provision to the established producer groups by a private sector.
Support to the capacity building of private sector solution providers will be instrumental in order they to continue provision of similar services to the established producer groups in the future.
b. Support to the creation of non-farm opportunities in rural areas
There is a very strong custom of traditional enterprises in Georgia based around the food sector. In the market there is an increasing demand on local foodstuffs and transparency in food chains. Although, Georgia has an excellent home-made fruit, vegetable, meat, etc. preserves, main retail outlets in Tbilisi mainly sell imported food products. The reason for this is simple – from the retailers point of view there is no reliable source of supply of such products locally, and varying product quality is also an issue.
Traditional enterprises also extend to the areas such as natural herbs used in medicines and arts and crafts. At present, these activities while important do not contribute significantly to rural incomes mainly due to the lack of any type of marketing expertise and producer inability to exploit opportunities that have arisen in Georgia as a significant consumer market develops. Not alone is there a lack of market expertise but there is also a lack of association among producers or in regions that would allow the promotion of a regional or product brand.
This approach will help to promote the concept of rural dwellers working together towards a common goal. It would help the process of overcoming the problem of producers only thinking in terms of marketing a single product but rather to think of marketing a region as a whole. Development of local brands would facilitate to the successful marketing of local produce by creating awareness of products, quality assurance system and developing suitable distribution channels.Â
Rural households involved or interested to become involved in similar activities should be supported in modernization/establishment of their premises and equipment, and improvement of production practices through implementation of local quality assurance schemes. Members along with other requirements will need to adhere to specific criteria to qualify for assistance package at an acceptable level of risk:
ï€Â   Implementation of a Quality Control Program
ï€Â   Implementation of a Code of Best Practice
ï€Â   Commitment to source local raw materials
ï€Â   Commitment to Best Practice in packaging and labeling Necessary pre-condition for development of enabling environment for entrepreneurs to organize around a brand would be abolishment of all tax liabilities that will arise as operators are organized around the brand promotion of the concepts of branding (regional) and joint efforts towards a common goals It is suggested to apply similar approach (methods, division of responsibilities) discussed above (producer marketing groups) for the determination of the extent and type of support to the established groups of entrepreneurs.
c.   Provision of investment incentives for development of consolidation centers and for international retailers to establish presence at local markets
Development of environmentally controlled consolidation centers and a receipt system in addition to basic warehousing function will serve wholesale market purpose, will allow extension of marketing season for local produce, and will advance linkages between farmers and consumers. These centers can be considered as a value adding enterprises, where grades and standards are implemented, and HACCP is introduced, and where the compliance with the standards is enforced. Consolidation centers will stimulate production and supply among operators and will serve the function of ready market for them. In addition of being a market outlet for farm produce, consolidation centers will also be a knowledge center for producers and will perform the function of extension service.
It will be in the interest of consolidation centers to provide farmers with technical assistance and faming inputs, so that they can apply good agriculture and integrated pest management practices. Also, consolidation centers will create perspective for small-scale operators to be part of growth process and attain sustainability Suggested investment incentive is a transfer of land property ownership free of charge in commercially viable locations for establishment of consolidation center premises and infrastructure. Retail sector is fragmented, and is characterized with a limited competition and failure to reimburse producers in due time for supplied goods. Although, the declared quality consciousness, often offered products are of questionable quality. To introduce competition and enhance general efficiency in retail sector, the Government should provide investment incentives to international retailers to establish presence at local market. The main conditionality of the Government should be that international retailer to invest in development of long term relations with local producers and source as much as possible local produce (both primary and foodstuffs) given local suppliers meet retailer requirements on quality, volume, and time of supplies. Suggested incentive measure is similar to that in case of consolidators – transfer under retailer ownership of land property free of charge in commercial viable location for establishment of premises and infrastructure.
d.Development of institutions and legislation governing food safety, veterinary, and plant protection consistent with EU acquis Above proposed introduction and adoption of different quality assurance schemes and good production practices at operator level will support operators to meet requirements of the Food Law upon its enforcement. Food Law will require much bigger standards at all levels in the food chain, and there is a high likelihood that operators without external assistance to face difficulties in meeting these requirements, ultimately forcing them out of business.
However, adoption of different quality and safety assurance schemes and standards at operator level is not sufficient to ensure overall veterinary, and SPS reliability in the country, and to deter increasing market supply with low priced and questionable quality imports. Operators still will be at a high risk of exposure and bearing consequences of introduction, spread and outbreak of different disease and pests, and will be facing greater competition from imports. Therefore, institutional development and legislative harmonization of food safety, veterinary, and plant health protection with EU acquis is instrumental for smooth operation and long-term sustainability of agriculture and food sector. e. Improvement in statistics collection and market information system.
The Government to improve policy making in agriculture and support informed decision making among operators with the technical support from the Donor institutions and in coordination with a private sector should take specific steps as follows:
Statistics – there is a need to improve available information on production (specific vegetable crops, foodstuffs, etc.), product prices including live animals (differentiated by quality, origin, markets, etc.), transportation costs (international and within-the-country differentiated by mode and type, etc.), trade (within the country supplies of local produce, differentiation between imports and re-exports), household welfare and food security, and update sample size of conducted surveys.
Market information system – system should be developed in order on regular basis to provide all interested with developments in the markets (product availability, prices, origin, point of sales, etc.) and the format of information dissemination should be accessible to all interested – for instance, special radio program should serve well this purpose.
This study is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents are the sole responsibility of GIPA, PMCG and the policy paper authors and do not necessarily reflect the views of USAID or the United States Government.
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