General Performance and Current Issues

Georgia possesses favourable conditions for the production of a wide range of annual and perennial crops, making agriculture one of the key sectors of the country’s economy. However, while the long-term development of the agro-food sector in Georgia remains a potentially attractive undertaking, agriculture is currently experiencing structural difficulties and sectoral growth has been a mixed picture thus far.

Agriculture is a key sector in Georgia, though its relative importance is declining. Real value added for the sector “Agriculture, Forestry, Fishing” from 1996 to 2006, based on figures from Statistics Georgia, as well as agricultural or food production from 1992 to 2006, based on figures from FAOSTAT, remained steady (Figure 10.1 and Figure 10.2). Meanwhile, the share of real value added in GDP fell from 34.1% in 1996 to 18.8% in 2006 (Figure 10.1).

10. Sectors of importance

At the same time, during the last fifteen years, the output structure of the agricultural sector changed significantly. For example, grapes were ranked first in Georgia’s food and agricultural production. By 2005, the production of grapes was nearly halved and is now ranked third (Figure 10.3, displaying the commodities ranking from 1 to 6 in 1992). Conversely, the production of cow milk more than doubled.

The main agriculture exports include shelled hazelnuts (21% of total agricultural exports), mineral water (10%), refined sugar (9%), distilled alcoholic beverages (9%), non-alcoholic beverages (6%), and citrus fruits (5%). Among the main imported items are: wheat and wheat flour, sugar, poultry, fish, meat, vegetable oil, milk, butter, and margarines.

The biggest growth potential for exports is in the citrus, tobacco, and wheat sectors. With substantial investment in technological and infrastructure capacity

Source: Statistics Georgia

Figure 10.1. Real Value Added Agriculture and Share of GDP, Georgia

1000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0,15 0,20

Figure 10.2. Agro-Food Production Indices, Georgia (Base period: 1999-2001)

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Agricultural Production

Food Production

building, Georgia’s agricultural sector also has significant potential to export soy, cooking oil, corn, nuts, tea, and herbs.

Georgia’s agro-food sector is facing the following problems.

1. Traditionally, Russia was Georgia’s primary export destination. In early 2006, Russia imposed a ban on Georgian wine and mineral water because, according to the Kremlin, the wine did not meet Russian quality standards⁶⁰. Georgia, however, insists that Russia is playing political power games. Additionally, Georgian wines have been imitated in Russia with mislabelling of cheap Russian wines, which has led to an increase in competitiveness in this sector. Mineral water, citruses, and fruits were also consequently subject to political interference in trade relations between the two countries.

Without Russia as an import market, much of Georgia’s wine production is in jeopardy. Prior to the Russian embargo, the industry was producing 63 million bottles of wine on average per year, 95% of which was exported. Current production levels may be down to 20 million bottles per year.

2. Georgia has lost the wine and fruit market in Russia and, has not been able to make major inroads into EU markets due to fierce competition in the EU and the ineffective marketing strategy of Georgian wine producers. After the embargo, Ukraine, Kazakhstan, the USA, and Poland became the main importers of Georgian wine. With regards to the EU, the main exported goods remain hazelnuts.

60 The recent statements by Russia indicate that these sanctions might be lifted soon.

Source: FAOSTAT

Figure 10.3. Production of food and agricultural commodities with rank 1 to 6 in 1992 (1000 US$ based on 1999-2001 international prices)

0 50000 100000 150000 200000 250000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Grapes Cow Milk, Whole, Fresh

Indigenous Ca ttle Me at A pples Indigenous Pig Meat Tea

To evaluate the impact of the Russian embargo imposed in 2006 on Georgia’s exports of wine, we look at nominal monthly foreign trade data from January 1995 until September 2007, which is only available for the product group

“Beverages, spirits and vinegar”. The slump of exports of the goods from this product group after March 2006 is nevertheless obvious. However, improvement has also been recently observed.

The challenges that the Georgian wine industry faces today and ways to overcome the consequences of the Russian embargo lie in successful marketing and branding, quality control, and protecting the market from counterfeits.

Since the imposition of the embargo, the wine industry has worked aggressively to identify and develop alternative markets, particularly in Eastern Europe.

Georgia was equipped with a modern control laboratory for testing wine quality.

A certificate issued by the Ministry of Agriculture of Georgia (“Samtresti”) guarantees the integrity of products exported to the EU.

3. Georgian agriculture is primarily subsistence agriculture with small market surpluses and low productivity. According to World Bank surveys, approximately 83% of Georgia’s rural population is entirely dependent upon their farms for subsistence and they consume approximately 73% of what they produce.⁶¹

61 During the Soviet era, agricultural production was hindered through misallocation of land and excessive specialization that did not allow for flexibility in exports. Large farms using plantation-style labor produced most basic crops. After the collapse of the Soviet Union, land was redistributed to individuals, with the stipulation that they farm it. By 1993, over half of cultivated land was in private hand. However, it partially resulted in ownership by those who neither live nor farm the land. It also resulted in the return of subsistence-oriented, small-scale production.

Source: FAOSTAT

Figure 10.4. Georgian beverage, spirits, and vinegar exports

0

Family holdings account for the majority of the output of plant growing. Only 25.9% of farms have access to agro-technical machinery and the means to use it. In eastern Georgia, the lack of equipment is accentuated by out-of-date irrigation systems unsuitable for the drier climate and poor technical conditions. Other issues stemming from the deterioration of the agriculture system include a lack of access to high-quality fuel and pesticides.

Lack of modern agricultural technology and equipment and infrastructure, outdated drainage systems, underdeveloped livestock feed and seed production, as well as lack of packaging and sorting technologies, are obstacles to production, especially export-oriented. Georgia imports a great deal of agricultural products, to the point where its self-sustainability rate has become dangerously low.⁶²At the same time, the share of the agro-food sector in total imports has been declining.

In 1995, this share was 42%. By 2006, it decreased to 16%.

4. Another large-scale problem is rural finance. The country’s existing financial system is limited, focused on short term trade financing and does not serve the agricultural sector. Thus, both, primary agriculture and the agro-processing sector have serious liquidity constraints due to the tight supply of medium term credit. However, a major coordinated effort is underway, supported by the World Bank, IMF, International Fund for Agricultural Development (IFAD), and bilateral donors to strengthen the banking system’s infrastructure. Rural credit unions and other non-bank financial institutions have been formed to address the problem of credit to small-scale farmers (Csaki and Kray, 2005).

5. Lack of strong industry associations inhibits the access of farmers to modern technology, financial resources, the dissemination of best practices, and the ability to influence government policy. This, in turn, hinders export opportunities.

6. At present, the process of land privatisation and liberalisation of land markets is not completed. Delays in land privatisation have stymied incentives for the growth of efficiency of land tenure and the manufacturing of high quality products.

7. The main exported agricultural products in Georgia are subtropical. Two primary regions for such products are near Georgia’s Black Sea shore. After the

62 According to the UN General Assembly adopted resolution in 1974, the minimum level of food security ranges from 80-85%. This means that a country's food security is at risk when more than 15-20% of food products consumed domestically are imported.

conflict in Abkhazia and the resulting separation of Abkhazia from Georgian jurisdiction, the main transportation route to Russian markets through Abkhazia broke down. Also, the eviction of the majority of the population greatly hampered citrus manufacturing in this territory.

8. Institutional reforms in 2004-2006 in Georgia aimed at reducing undue government interference and strengthening market competition were the most important components of a strategy to improve the business-enabling environment and hence economic growth. The World Bank’s Doing Business survey named Georgia among the leading reformers in the world in 2006 and 2007. The EBRD 2006 transition indicators show Georgia now roughly in line with the EBRD average.

This improvement in the business environment contributed to a dramatic increase in private capital inflows. Trade openness became relatively high.

Nevertheless, foreign investors avoid the agro-food industry, because the domestic market is small and the larger regional market is not fully accessible.

Foreign direct investment in Georgian agriculture is minimal. At present, foreigners have invested in the nut industry (the Italian confectionery company

“Ferrero” started operating in Georgia in 2007), wine making (Italy and Russia), and the water-bottling sector (Turkey).

Foreign investment is critical not only from the point of view of advanced know-how and access to foreign markets, but also as an alternative to medium term bank credit from local banks, which is often unavailable.

According to the USAID funded AgVantage program, the following investment opportunities are available in the agro-food sector of Georgia: milk processing;

individual quick freezing of fresh fruits and vegetables; mandarin orange consolidation, packing and export; commercial production of pedigreed poultry broiler hatching eggs; apple juice concentrate production; and, onion consolidation, storage, and marketing.

9. The Georgian government gives priority to reducing barriers to trade. This is partly a matter of reducing tariffs and non-tariff barriers imposed by the central government, stopping harassment and corruption by officials at the border and those controlling transit routes. At the same time, the elimination of trade restrictions creates problems for industries that were protected from international competitive processes. The agro-food sector is one of them.

10. Customs detection of the flows of pirated and counterfeit goods is weak. The elimination of the phyto-sanitary service in Georgia in 2005 decreased food

safety and gave Russia’s sanitary service ammunition to cast doubt over the quality of Georgian vegetables, wine, and mineral water, which led to banning these products. There is a critical need to modernize sanitary and phyto-sanitary services, institute industrial standards, and create international certification laboratories in order to ensure a compatibility with international norms and standards.