34 BFC Georgia Agriculture Finance Bulletin

06/2015

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34 Ge o r g i a Agriculture Finance Bulletin New Law on Wine to Improve Business The Ministry of Agriculture and ENPARD Host Armenian Delegation Georgian Meat and Dairy to Experience Difficulties in Exporting to the EU Georgian Blueberries to Hit UK Supermarket Shelves

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Georgian Agriculture Finance Bulletin Edition #34, June 2015

Contents State Initiatives ........................................................................................................... 2 1) 2) 3) 4) 5) 6)

Tomato Producer Receives USD 2 million in Co-Financing through “Produce in Georgia” Program 2 14 Beneficiaries Receive GEL 575,889 through “Seed the Future” Program.................................... 2 Georgia-China Free Trade Negotiations Underway – Wineries Positive .......................................... 2 Minimal Foreign Agricultural Land Acquisition since 2014............................................................... 3 Government Approves Hazelnut Production Development Program .............................................. 3 New Law on Wine to Improve Business............................................................................................ 3

Foreign Aid ................................................................................................................. 4 7) 8)

The Ministry of Agriculture and ENPARD Host Armenian Delegation .............................................. 4 RED Program to Demonstrate how Local Packaging Facilities can Increase Revenue by Linking Country to Cities ............................................................................................................................... 4 9) EU’s Clima East Program to Rehabilitate Degraded Land and Migratory Routes in the Vashlovani Protected Area .................................................................................................................................. 5 10) EBRD and FAO Address Dairy Product Quality Standards ................................................................ 5

Private Sector.............................................................................................................. 6 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23)

Georgia to Begin Exporting Herbs, Fish, Honey and Greens to Russia ............................................. 6 Georgian Vegetable Exporters Face Problems in Traditional Markets ............................................. 6 Nuts a Core Georgian Export, According to Forbes .......................................................................... 6 Citrus Industry Faces Similar Export Problems Suffered by Winemakers ........................................ 7 Georgian Meat and Dairy to Experience Difficulties in Exporting to the EU .................................... 7 Georgian Wine Exports to Decline by 50% in 2015 .......................................................................... 7 Sheep Exports Suffering due to High Costs....................................................................................... 8 Extreme Weather to Cause Increase in Hazelnut Price .................................................................... 8 Georgian Blueberries to Hit UK Supermarket Shelves ...................................................................... 8 Georgian Wine Awarded 20 Medals at International Competition .................................................. 9 Wheat Farmers Worried About Low Price of Domestic Wheat ........................................................ 9 Crystal CEO: Preferential Agro-Loans Largely Beneficial Despite Negative Side-Effects .................. 9 Marneuli Food Factory to Increase Production by 30% in 2015....................................................... 9

Note: The Georgian Agriculture Finance Bulletin presents a monthly roundup of headlines and news stories related to investments and financing flows to Georgia’s agricultural sector.

This bulletin is prepared by Business & Finance Consulting—a Swiss-based development finance consulting company with a long history of working in Georgia. Currently, BFC is implementing the Agricultural Lending Programme for KfW. Read more » BFC Max-Högger-Strasse 6 CH-8048 Zurich, Switzerland

Phone: +41 44 784 22 22 Fax: +41 44 784 23 23

info@bfconsulting.com www.bfconsulting.com

BFC. Georgian Agriculture Finance Bulletin. Edition #34, June 2015

State Initiatives 1)

Tomato Producer Receives USD 2 million in Co-Financing through “Produce in Georgia” Program

June 2nd, 2015, http://svobodnaya.info/index.php?option=com_content&view=article&id=9287:2015-06-03-08-3235&catid=43:economics&Itemid=87#.VYFlX_mqpBc

Prime Minister Irakli Garibashvili announced USD 2 million in co-financing through the “Produce in Georgia” program for tomato producer Stimor Associate.

The company will invest a total USD 8 million in high-tech, thermal water-heated greenhouses on 5.5 hectares of land in Sica, Samegrelo. The company has already produced 150 tons of tomatoes on 3 hectares, while the remaining area will be ready for production by the end of the year. The tomatoes will be sold on domestic and foreign markets. Construction work has created 120 local jobs whilst the existing greenhouses employ 45.

The tomatoes should help replace low-quality imports, added Garibashvili.

The Produce in Georgia program has 73 beneficiaries with investment expected to top USD 121.2 million.

2)

14 Beneficiaries Receive GEL 575,889 through “Seed the Future” Program

June 4th, 2015, http://sarke.com/cgi/search/news.asp?Code=10044761

Since February, 14 beneficiaries have received GEL 575,889 through the “Seed the Future” program, announced the Agency for Agricultural Projects Management.

Orchards were planted on an area totaling 89.63 hectares – including 84.3 ha of apple, 3.1 ha of plum, 1.2 ha of sweet cherry and 1 ha of peach.

Beneficiaries receive 70% of sapling costs and 50% of drip irrigation costs for orchard cultivation and 50% of total investment in nursery farms.

Interested parties may apply for autumn orchard cultivation assistance beginning July 15.

3)

Georgia-China Free Trade Negotiations Underway – Wineries Positive

June 4th, 2015, http://commersant.ge/index.php?m=5&news_id=23080&cat_id=6

A free trade agreement is currently being negotiated between Georgia and China, which would result in the removal of import duties on Georgian wine.

This would be great for Georgian wineries, said Nutsa Abramishvili, director of Schuchmann Wines. Due to its size and an increase in wealth and wine consumption, China has become the top priority for the company, she added. While Georgian products are competitive and exotic to the Chinese consumer, tastes vary significantly to those of European consumers.

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According to Zurab Ramazahvili, director of Telavi Wine Cellar, while the removal of import duties is clearly favorable, it is not essential to the success of a wine in a foreign market – as long as it is of high quality and correctly marketed.

Meanwhile, Zurab Chkheidze, director of Kakhetian Traditional Winemaking, announced a 35-40% increase in wine exports to China in 2015 compared to the same period in 2014.

4)

Minimal Foreign Agricultural Land Acquisition since 2014

June 9th, 2015, http://sarke.com/cgi/search/news.asp?Code=10044793

Foreign nationals have purchased only 18 agricultural sites totaling 70 hectares since 2014, according to Rezonansi newspaper.

In 2012, parliament imposed a moratorium on the acquisition of agricultural land by foreign citizens.

While the moratorium ended on December 31, 2014, the Ministry of Economy has suspended land privatization until a new law comes into force. The lack of foreign land acquisition is compounded by relative lack of interest in small privately owned plots, according to the newspaper.

Consideration of the current bill on foreign agricultural land ownership has been suspended due to strong opposition in parliament and a recent confidence-vote on the new government, said member of the parliamentary Agrarian Committee Tamaz Kacheishvili. The Committee recommends foreigners to be restricted to leasing agricultural land.

Economist Levan Kalandadze believes the delay is sapping investor confidence, citing the risks posed by ongoing uncertainty.

5)

Government Approves Hazelnut Production Development Program

June 22nd, 2015, http://sarke.com/cgi/search/news.asp?Code=10044914

The government has approved a program on the “Development of Hazelnut Production through Support for Agricultural Cooperatives�.

Funding will come from the budget allocated to cooperative development.

Through the introduction of international standards, state-of-the-art production infrastructure, and the allocation of land for cultivation, the program aims to increase hazelnut quality, production volumes, and export potential while decreasing prices.

Initially, a warehouse and drying facility will be built in Zugdidi, and participants in the program will be limited to cooperatives registered in the municipality.

6)

New Law on Wine to Improve Business

June 24th, 2015, http://commersant.ge/index.php?m=5&news_id=23972&cat_id=6

Deputy Minister of Agriculture Levan Davitashvili, announced that Georgia will replace the 1998 law on viticulture.

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BFC. Georgian Agriculture Finance Bulletin. Edition #34, June 2015

While the Association Agreement with the EU has led to new requirements – particularly the transfer of certificates of origin to customs authorities – many of the new features are not spurred by the agreement, said Davitashvili. For example, Georgia has 500 original grape varieties – the new legislation obliges the state to protect them, added the Minister.

Many of the changes were requested by the businesses involved – for instance, not all product categories are covered by the old law, making it impossible to issue export certificates to the producers of such products. The new law will take product categories directly from the International Organization of Vine and Wine (OIV).

In addition, since wine is a low risk product, it will not be necessary to label all ingredients. Finally, certain new penalties will come into force – for example, if there is a lack of indication of origin, said Davitashvili. Read More »

Foreign Aid 7)

The Ministry of Agriculture and ENPARD Host Armenian Delegation

June 1st, 2015, http://moa.gov.ge/index.php?menuid=17&lang=2&id=494#.VYurXhuqpBc

In Batumi, an Armenian delegation met with representatives of Georgia’s Ministry of Agriculture and the EU’s European Neighborhood Program for Agriculture and Rural Development (ENPARD) and its partner organizations, the UN Development Program and FAO, to discuss avenues of cooperation and best practice. Whilst in its 4th year in Georgia, the ENPARD program was launched in Armenia at the beginning of 2015.

In Georgia, through the assistance of ENPARD:      

900 cooperatives with 6,100 members were established 300 cooperatives received business development training 54 regional consultation centers were established Capacity-building programs were conducted at the Ministry of Agriculture An agricultural census was held 50 cooperatives received financial aid

This year, EUR 3 million will be allocated to diversification of the rural economy and EUR 700,000 to the development of academic programs pertaining to the agriculture sector.

8)

RED Program to Demonstrate how Local Packaging Facilities can Increase Revenue by Linking Country to Cities

June 4th, 2015, http://georgiatoday.ge/news/207/Expanding-the-Market-to-the-Farmer-%E2%80%93-RED-Launches-NewActivities-in-Georgia

Potato farmers in Kvemo Kartli and Samtske-Javakheti toured a modern packaging and sorting center in Bolnisi, Kvemo Kartli. The demonstration, organized through the Rural Economic Development (RED) program – jointly administered by the Ministry of Foreign Affairs Denmark and the Swiss Agency for Development and Cooperation – aims to show farmers and entrepreneurs the benefits of such centers.

These include increased efficiency, quality control and traceability, firm production contracts, and yearround fixed local markets, leading to increased sales and revenue.

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Further demonstrations in other localities are planned to show how “linking” the country and urban markets in this way is beneficial for both producers and consumers.

This is just one element of the RED value-chain development program: seven model commercial farmers operate throughout Samtske Javakheti and Kvemo Kartli allowing farmers to learn first-hand production techniques increasing volume and quality.

9)

EU’s Clima East Program to Rehabilitate Degraded Land and Migratory Routes in the Vashlovani Protected Area

June 10th, 2015, http://finchannel.com/index.php/world/georgian-news/item/45086-clima-east-pilot-project-focuses-onclimate-change-and-its-impact-on-georgian-pastures

The EU-funded Clima East program, in cooperation with UNDP in Georgia, is helping to preserve both the natural heritage and the livelihood of 500 families in the Vashlovani Protected Area, who have suffered as result of climate change and human interventions, according to the EU Neighbourhood Info Centre.

The main aims of the pilot project, implemented since 2013, are rehabilitating pastures, introducing sustainable land management practices and improving the living conditions of the local population.

Roughly 4000 hectares of degraded land and a 300 hectare animal migration route are being rehabilitated to help stabilize or reverse the effects of climate change.

The Clima East project provides support to European Neighbourhood Policy countries and Russia to mitigate and adapt to climate change.

10) EBRD and FAO Address Dairy Product Quality Standards June 23rd, 2015, http://finchannel.com/index.php/world/georgian-news/item/45708-the-ebrd-and-fao-invest-in-the-future-ofgeorgian-dairy

Georgian milk and dairy producers are struggling with production and quality issues, relying increasingly on dairy powder imports to satisfy demand.

Whilst these problems have existed for years, they take on a new significance with the signing of the Deep and Comprehensive Free Trade Agreement (DCFTA), according to the European Bank for Reconstruction and Development (EBRD). Dairy farmers will be required to meet new safety legislation or close down.

The EBRD and the Food and Agriculture Organization (FAO) are working together to increase dairy product safety and quality in Georgia. The FAO has provided recommendations – in particular, increasing education on modern production technologies, optimal animal feed and health care, and training additional veterinarians.

In addition, funds for the construction of new dairy farms and the modernization of old ones need to be secured. The EBRD loaned USD 1.3 million to Kvareli Baga in 2013. Since then, the farm has seen production levels far above the country’s average. The FAO adds that existing medium to large farms could almost double their profits by making simple changes and adopting modern technologies. With a successful modernization program, Georgia could be self-sufficient in 5 years.

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Private Sector 11) Georgia to Begin Exporting Herbs, Fish, Honey and Greens to Russia June 2nd, 2015, http://sarke.com/cgi/search/news.asp?Code=10044724

Georgia will begin exporting herbs, fish, honey and greens to Russia, said the Ministry of Agriculture, adding that, while no contracts have been signed, Russia has also expressed interest in importing sheep.

Georgia currently exports alcoholic beverages, mineral water, soft drinks, fruit and vegetables to Russia.

In 2014, total exports to Russia amounted to USD 274.9 million, a 44% increase year-on-year. However, exports over the last 4 months were 2.2 times lower than the same period last year, at USD 39.8 million.

12) Georgian Vegetable Exporters Face Problems in Traditional Markets June 5th, 2015, http://www.georgianjournal.ge/business/30626-hard-times-for-greengrocery-in-georgia.html

Vegetable exporters are facing difficulties with traditional export markets. While the Russian market recently reopened to the import of Georgian vegetables, it is difficult to supplant alternative suppliers – including Azerbaijan and Iran – which filled the gap since 2008. The continuing conflict in Ukraine – another traditional market – has led the hryvnia to devalue by a factor of 4 compared to the US dollar.

Georgian producers that continue to export to Ukraine struggle to make a profit.

There are about 1000 greenhouses in Imereti alone, with 5500 SMEs yielding 25,000 tons of vegetables annually – 40% of the total is exported to the Ukraine. The rest is exported to Belarus, Azerbaijan, Latvia, Bulgaria, Moldova, Estonia, Romania and Lithuania. In 2014, export volume totaled 1,900 tons – a 300 ton decrease year-on-year.

The Ministry of Economy and the Georgian Industrial Development Group (IDG) are cooperating on promoting exports by bringing vegetable products to European food safety and quality standards.

Producers were encouraged to build annexes which would allow EU standards to be met; the IDG, in turn, will seek the necessary investment.

According to Paata Charakashvili, head of the IDG, mergers will be required to reach the necessary production volumes to crack the big markets – whether Europe or China. Read More »

13) Nuts a Core Georgian Export, According to Forbes June 11th, 2015, http://forbes.ge/news/741/qarTuli-agroeqsportis-kaklis-guli

Nuts are one of Georgia’s unheralded export products, according to Forbes. EU countries account for 74% of Georgia’s nut exports, while only 16% is exported to the former Soviet Union, demonstrating that the European market is, indeed, breakable.

Lack of state-of-the-art technologies and know-how are a greater obstacle than barriers erected by the EU, according to the magazine. However, with agriculture and surrounding infrastructure remaining relatively undeveloped, it will be difficult for Georgian nuts to gain market leadership, it added. Read More »

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14) Citrus Industry Faces Similar Export Problems Suffered by Winemakers June 11th, 2015, http://commersant.ge/index.php?m=5&news_id=23339&cat_id=6

Despite expecting a good harvest, Georgian citrus producers will face similar export problems as wine producers. The two main traditional exports markets are Russia and Ukraine, both of which have experienced heavy currency devaluations and other economic problems.

Otar Putkaradze, head of citrus company Shalta 21, said 80% of exports are destined for the Ukraine, adding the company saw a large decrease in exports to the country in 2014 and expects an even sharper decrease in 2015. Georgia also exports citrus fruits to Armenia, Azerbaijan, Uzbekistan and Belarus.

15) Georgian Meat and Dairy to Experience Difficulties in Exporting to the EU June 12th, 2015, http://www.georgianjournal.ge/business/30764-does-georgian-meat-have-a-future-at-the-europeanmarket.html

Georgian products deemed “high-risk” – such as meat and dairy – face difficulties in meeting the EU’s stringent food safety standards.

According to Lia Todua, manager of the Consumer.ge, program developed by the Center for Strategic Research and Development of Georgia, as standards apply not just to the final product but the entire production process, it will take years for all to be met.

Nino Zambakhidze, Chair of the Georgian Farmers’ Association, does not expect high risk Georgian products to reach the EU before 2020. Most slaughterhouses fall far behind international standards, while Georgian livestock is not yet free from disease. Another problem is the relative lack of education, with farmers assuming registration and vaccination are merely means for the government to collect more taxes, she added. Producers should focus on satisfying local demand first, said Zambakhidze.

Juan Echanove, the EU’s Food Safety and Rural Development Attaché, agrees with Zambakhidze, stressing Georgia would be better off using its produce to reduce import dependency.

16) Georgian Wine Exports to Decline by 50% in 2015 June 14th, 2015, http://finchannel.com/index.php/world/georgian-news/item/45213-georgian-wine-export-to-decline-by-50-in2015

In 2015, due to the crisis in Ukraine and the devaluation of the ruble in Russia, wine exports are expected to decrease by 50% year-on-year. Ukraine and Russia are traditionally the largest export markets. In 2015, Georgia exported 10.5 million bottles worth USD 30.15 million to 31 countries.

However, Giorgi Samanshvili, head of the National Wine Agency, believes the effect will be minimal, citing that only 6 companies out of 120 rely almost solely on the Russian market. Moreover, the Russian embargo of 2006 taught producers that the Russian market is unstable, leading to market diversification.

Tbilvino, Georgia’s leading winemaker, expects a decrease of only 5-10%, with growth in all 28 of its other export markets. Another leading exporter, Teliani Valley, saw an increase in exports year-on-year despite Russia and Ukraine comprising a significant portion of their portfolio.

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BFC. Georgian Agriculture Finance Bulletin. Edition #34, June 2015

Schuchmann Wines saw a decrease of 20% in the first 5 months of 2015, yet director Nutsa Abramishvili still expects the company to reach export targets by the end of the year, due to a diversification program that began in 2013 - reducing Russia’s export share from 60% to 20%.

The increase in the price of grapes also contributed to a reduction in exports, with Georgian wine becoming more expensive, leading a decrease in demand. Winemakers were forced to reduce prices with demand low, leading to lower profit margins, according to Giorgi Margvelashvili, director of Tbilvino.

17) Sheep Exports Suffering due to High Costs June 15th, 2015, http://commersant.ge/index.php?m=5&news_id=23489&cat_id=6

Georgia produces 300,000 tons of wool per year, most of which is destroyed on the spot. Exports of sheep are also decreasing significantly, according to the head of the Sheep Breeders’ Association Beka Gonashvili. Azerbaijan remains the biggest export market, yet high pasture taxation and the import of lower quality Armenian sheep to Georgia, which are then sold on in the guise of Georgian sheep, has reduced demand.

According to GeoStat, strong growth in exports began in 2009, with target markets including Azerbaijan, Iran, Turkey, Lebanon, Qatar and the UAE. However with prices increasing, export markets are now limited to Azerbaijan and Iran. Yet the latter has large sheep reserves, and demand has reduced, according to Gonashvili.

Farmers pay GEL 150-180 for one sheep, adding GEL 30-40 to the price when exported. According to GeoStat, sheep exports decreased by 10% in 2013. In 2014, sheep exports totaled USD 15.5 million, and USD 18.1 million in 2012.

18) Extreme Weather to Cause Increase in Hazelnut Price June 20th, 2015, http://www.georgianjournal.ge/business/30776-hazelnut-price-will-increase-due-to-extreme-weather.html

Hazelnut prices are expected to increase due to the devastation caused by hailstorms on this year’s crop, with many experts predicting prices exceeding GEL 15 per kilo. Prices briefly hit GEL 13 per kilo in June. A kilo of raw hazelnuts currently costs GEL 5.

19) Georgian Blueberries to Hit UK Supermarket Shelves June 22nd, 2015, http://agenda.ge/news/37710/eng

Georgian blueberries are to be sold in ASDA supermarkets (owned by Walmart) across the UK. It will be the 2nd Georgian product to feature on the European market after kiwis, according to the government.

In the future, Georgian blueberries will also be sold on the Dutch, Armenian, Russian and Balkan markets.

A USD 6.7 million, 70 hectare blueberry plantation and processing plant – a joint venture between the state-owned Partnership Fund and blueberry producer Vanrik Agro – were completed several months ago in Ozurgeti. The project received support from the German International Cooperation Agency GiZ and Khalik Bank. The berries will be washed, assorted, snap frozen and exported.

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20) Georgian Wine Awarded 20 Medals at International Competition June 24th, 2015, http://agenda.ge/news/37871/eng

Georgian wines received 4 silver and 16 bronze medals at the Decanter World Wine Awards (DWWA), with Schuchmann Wines and Teliani Wine receiving the bulk of the awards. In comparison, Russia received 2 silver and 5 bronze and Armenia received 1 sliver and 3 bronze medals.

France was the most successful country, winning 58 gold and 398 silver medals, followed by Italy with 36 gold and 340 silver and Spain with 31 gold and 179 silver medals.

In total, 240 experts sampled 10,000 wines, awarding 305 gold, 1,944 silver and 4,810 bronze medals.

21) Wheat Farmers Worried About Low Price of Domestic Wheat June 26th, 2015, http://sarke.com/cgi/search/news.asp?Code=10044973

Wheat farmers are worried about the current low price of domestic wheat, at USD 150 per ton compared to USD 250-300 per ton for imported wheat.

Levan Silagava, head of the Georgian Wheat and Bread Producers Association, said that domestic flour mills will purchase the local crop.

22) Crystal CEO: Preferential Agro-Loans Largely Beneficial Despite Negative Side-Effects June 28th, 2015, http://finchannel.com/index.php/world/georgian-news/item/45975-mfo-crystal-financial-institutions-shouldfocus-on-business-loans-rather-than-consumer-ones

Crystal, a micro-finance institution (MFI), sees the largest share of its loans disbursed to the agro-sector (32%), said CEO Malkhaz Dzadzua, followed by the service industry (23%), trade (18%) and housing (15%). The average loan is GEL 2,000 and the average term 18 months.

While the state subsidizes agricultural loans, these do not enter into direct competition with the MFI, said Dzadzua, with the focus mainly on larger businesses. Moreover, Crystal cooperates with the government on programs such as agro-insurance and the provision of interest-free loans over GEL 5,000.

While the subsidization programs have largely positive effects, there are some negative aspects too, notes Dzadzua – possibly leading to excessive expectations, passivity of beneficiaries, market restrictions, an increase in bureaucracy, disproportionate expenditure of state funds, and the risk of corruption and nepotism. Read More 

23) Marneuli Food Factory to Increase Production by 30% in 2015 th

June 29th, 2015, http://finchannel.com/index.php/epaper, Edition of June 29 , 2015, page 11

Marneuli Food Factory (MFF) predicts 30% growth in 2015, compared to 25% last year, according to Director Irina Gaprindashvili. The company has invested in new products (now totaling 60) and

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BFC. Georgian Agriculture Finance Bulletin. Edition #34, June 2015

production equipment. The company offers 100% Georgian products to local consumers and is now the country’s largest food processor.

Having participated in several international trade fairs in 2014, MFF is currently in negotiations to commence exports, said Gaprindashvili.

Agriculture is a very difficult sector, according to Garpindashvili, with considerable human resources needed during harvest and mistakes punishing farmers severely. Moreover, a lack of knowhow and technology has hampered growth. This prevents prospective businesses from entering the field.

Since MFF produces 100% Georgian products, however, MFF has not been severely affected by the recent devaluation of the lari, she notes, adding that it did not boost the company’s business as much either, as material imported to process and package the products increased in price. Read More 

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