38 BFC Georgia Agriculture Finance Bulletin

10/2015

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38 Ge o r g i a Agriculture Finance Bulletin Georgian Government to Create More Favorable Conditions for Investors After Meeting Targets, EUR 8 Million Tranche of ENPARD Funding Released Dutch Consultancy Makes Recommendations Regarding Fruit and Vegetable Export to EU Wine Exports Drop 44% to 24 Million Bottles Worth USD 66.8 Million

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Georgian Agriculture Finance Bulletin Edition #38, October 2015

Contents State Initiatives ........................................................................................................... 2 1) 2) 3) 4) 5) 6) 7)

Georgian Government to Create More Favorable Conditions for Investors ................................... 2 Disaster Compensation Guarantees May Hamper Agro-Insurance Scheme................................... 2 Wine Export Risk Mitigation Strategies Lacking, says ISET Report .................................................. 2 Preferential Loan Package for High-Yield Dairy Cows in Pipeline ................................................... 3 Government Purchases 33% of Kakheti Grape Harvest .................................................................. 3 Otar Danelia Awarded FAO Commemorative Medal ...................................................................... 3 Agricultural and Business Loans Cheaper than in Europe, says Prime Minister ............................. 4

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

After Meeting Targets, EUR 8 Million Tranche of ENPARD Funding Released ................................ 4

Private Sector.............................................................................................................. 4 9) 10) 11) 12) 13) 14) 15) 16) 17) 18)

Regional Agricultural Production Distribution Revealed ................................................................. 4 Dutch Consultancy Makes Recommendations Regarding Fruit and Vegetable Export to EU ......... 5 Wine Exports Drop 44% to 24 Million Bottles Worth USD 66.8 Million .......................................... 5 First Caucasian Cheese Festival Held in Tbilisi ................................................................................. 6 Georgian Hazelnut Processor Competitive on Global Markets ....................................................... 6 Georgian Wine Gaining Foothold in Japan ...................................................................................... 6 Georgian Agricultural Products Covers 16 Percent of Foreign Trade Turnover .............................. 7 Citrus Harvest Estimated at 135,000 tons ....................................................................................... 7 Hazelnut Exports Increase by 160% ................................................................................................ 8 Investment Potential in Georgian Hazelnut Production ................................................................. 8

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 »

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

State Initiatives 1)

Georgian Government to Create More Favorable Conditions for Investors

October 1st, 2015, http://finchannel.com/index.php/world/georgian-news/item/49793-georgian-government-to-create-mostfavorable-conditions-for-investors-in-the-agricultural-sector

Georgian Deputy Minister of Agriculture, Gocha Tsopurashvili, recently announced the government’s plan to create more favorable conditions for investors in Georgia’s agricultural sector. Georgia has a special co-financing fund to assist investors in realizing even large-scale projects in Georgian agricultural.

Within Georgia’s agricultural enhancement program, an investor can provide only half of the required sum, with Georgia’s co-financing fund providing the other half (allowing for investors to buy-out the fund’s shares at a later date). The program also provides for land grants for the production of processing complexes in certain projects that are deemed to meet the public interest.

2)

Disaster Compensation Guarantees May Hamper Agro-Insurance Scheme

October 1st, 2015, http://www.georgianjournal.ge/business/31532-georgian-farmers-playing-russian-roulette.html

In August, a hailstorm devastated crops in Kakheti, including 1,300 hectares of Saperavi and 1,000 hectares of Rkatsiteli in Kvareli alone. In 2012, storms caused even greater damage across the region.

In response, the government introduced a pilot agro-insurance scheme, subsidizing 94% of the cost in the first year, resulting in the issuance of 21,000 policies. In the second year, the government reduced the subsidy to 55%, and issuance decreased to 3,500 policies. Even though GEL 10 million was spent subsidizing the pilot agro-insurance program, it failed to take off.

A possible explanation is offered by MIT professors Ester Duflo and Abhijit Banerjee: when a natural disaster occurs, or an election is nigh, politicians offer compensation guarantees, leaving farmers with no incentive to buy insurance. During the 2012 disaster, Kakhetian farmers received GEL 150 million in compensation, perhaps leading to belief in future bailouts.

Several counter-strategies are available. It has been shown that taking health surveys leads to an increase in insurance purchases. Agricultural risk surveys may produce similar results. A second strategy is tying cooperative grants with an obligation to buy agro-insurance.

3)

Wine Export Risk Mitigation Strategies Lacking, says ISET Report

October 7th, 2015, http://cbw.ge/economy/georgian-wine-plan-for-the-worst-hope-for-the-best-iset/

The government failed to enact risk mitigation strategies during the bumper wine export years of 20132014, leading to greater sensitivity to the Russian crisis, according to an ISET Economist Blog report.

When the embargo was lifted, exports to the Russia skyrocketed in 2013 and 2014, accounting for up to 68% of total exports. Wine and grape prices soared. Investors expanded vineyards and processing capacity, with grape production increasing from 144,000 tons in 2012 to 290,000 tons this year, according to the report. Due to the Russian crisis, exports fell dramatically in 2015, with Saperavi grapes down to GEL 0.82 per kg – less than half the average GEL 1.94 per kg seen in 2014.

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

Considering the relative small size of Georgian wineries, even during 2013 and 2014, the companies lacked sufficient capital to undertake effective global diversification strategies – leaving them dependent on the Russian market. Only the government had such means. Instead, the government spent over GEL 60 million subsiding grapes that were already at record prices, according to the ISET report.

The wine industry provides the livelihood of a large portion of farmers, and governments are keen to avoid social crises, providing a logic behind the continued subsidies. However, diversification strategies would have similar effects: as well as opening new markets using the diplomatic channels of Georgia’s 58 embassies, new products such as organic and kosher wines, Chacha, brandies and Churchkhelas should be promoted, as well as well as Japanese-style “one village, one product” agro-tourism, recommends the report.

4)

Preferential Loan Package for High-Yield Dairy Cows in Pipeline

October 12th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10045690

Georgian banks and the Ministry of Agriculture have ceased providing preferential loans for the purchase of Georgian dairy cows, according the Deputy Director of the Agriculture Projects Management Agency Mamuka Kvaratskhelia.

Georgian breeds – costing between GEL 1,000-1,300 – yield 1,000-1,300 liters of milk annually, while imported breeds yield up to 4,000 liters and cost between GEL 2,200-3000 per head.

A new state funding package is currently being discussed with the banks and the government, said Deputy Agriculture Minister Levan Davitashvili. Preferential loans will only be disbursed for the purchase of high-yielding breeds, he added.

Kvaratskhelia added that many Georgian breeds are now extinct but, if reinstated in the right conditions, could provide high milk yields.

5)

Government Purchases 33% of Kakheti Grape Harvest

October 13th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10045702

Chairman of National Wine Agency Giorgi Samanishvili announced 132,000 tons of grapes were processed in Kakheti. The government has purchased 33% of the harvest, which will be turned into industrial alcohol, reducing the necessary storage space by a factor of 10, added Samanishvili.

However, in Signagi and Dedoplistskaro the excess could not be purchased, while in Guria, Samegrelo and Imereti there was unmet demand for grapes, said the Chairman, adding that excess grapes from Kakheti should be sent to these regions.

6)

Otar Danelia Awarded FAO Commemorative Medal

October 13th, 2015, http://moa.gov.ge/index.php?menuid=17&lang=2&id=594#.VijvKJeVG4o

Minister of Agriculture Otar Danelia has been awarded the Food and Agriculture Organization (FAO) Commemorative Medal for outstanding contribution to agriculture in Georgia. The medal was presented

by Mamuka Meskhi, Deputy Head of FAO Georgia.

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

Juan Echanove, the EU Agricultural Attaché in Georgia and Gunther Zimmer, Director of the Austrian Development Agency’s South Caucasus Office, also received the medals.

The awards were presented as part of the FAO’s World Food Day – observed by United Nations member states to highlight the related issues of world poverty, food security and agricultural development. The celebrations also coincided with the FAO’s 70th anniversary.

7)

Agricultural and Business Loans Cheaper than in Europe, says Prime Minister

October 26th, 2015, http://cbw.ge/economy/business-and-agro-loans-in-georgia-are-cheaper-than-in-europe-says-primeminister/

Business and agricultural loans are cheaper in Georgia than in Europe, according to Prime Minister Irakli Gharibashvili, citing rates of 1-2% in Georgia versus 3-4% in Europe.

The Prime Minister highlighted several subsidy programs, including the Produce in Georgia program.

Foreign Aid 8)

After Meeting Targets, EUR 8 Million Tranche of ENPARD Funding Released

October 17th, 2015, http://cbw.ge/economy/eu-releases-georgia/

After meeting European Neighbourhood Programme for Agriculture and Rural Development (ENPARD) targets, a further EUR 8 million has been delivered to the Ministry of Agriculture.

To secure the release, 888 cooperatives and 54 Regional Information and Consultation Centres were established. This has increased agricultural output by an estimated 10%, according to EU Ambassador to Georgia Janos Herman.

The EU funded ENPARD will run from March 2013 to March 2018 and has a total budget of EUR 52 million.

Private Sector 9)

Regional Agricultural Production Distribution Revealed

October 1st, 2015, http://www.georgianjournal.ge/business/31533-georgias-actual-agricultural-output.html

The Ministry of Agriculture has released a list of Georgia’s top 21 agricultural products and corresponding regional production distribution.

Kvemo Kartli produces 70% of the country’s onions, followed by tomatoes (65%); cucumbers (40%); potatoes (31%) carrots (20%); beef (19%); dairy products (17%); wheat (13%); cherries (7%); and apples (4%).

Shida Kartli produces 64% of the country’s apples, followed by cherries (57%); tomatoes (25%); peaches (21%); onions (15%); wheat (6%); and fresh water fish (4%).

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

Kakheti produces 70% of Georgia’s peaches, followed by cucumbers (40%); pork (21%); beef (15%); honey (15%); poultry (13%); onions (10%); cherries (7%); freshwater fish (5%); and tomatoes (4%).

Imereti produces 21% of the country’s dairy products and freshwater fish, followed by pork (20%); poultry (19%); beef and green vegetables (18%); plums (15%); hazelnuts (14%); cucumbers (10%); cherries (9%); apples (6%); tomatoes (4%); peaches (2%); and tangerines (1%).

Samegrelo produces 55% of Georgia’s tea, followed by hazelnuts (52%); honey (33%); pork (23%); poultry (21%); plums, green vegetables, dairy and beef (15%); apples (9%); tangerines (5%); and peaches (2%).

Guria produces 23% of the country’s hazelnuts, followed by tangerines (17%); and plums and tea (12%).

Adjara produces 77% of Georgia’s tangerines, followed by tea (33%); freshwater fish and honey (15%); and plums and potatoes (4%).

Samtskhe and Javaketi produce 70% of the country’s carrots followed by potatoes (55%); and freshwater fish (30%).

10) Dutch Consultancy Makes Recommendations Regarding Fruit and Vegetable Export to EU October 7th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10045649

In Imereti, 25,000 tons of fruits and vegetables are produced by 550 small and 10 large businesses across 1,000 greenhouses, according to the Ministry of Economy’s Industrial Development Group (IDG).

The produce is exported mainly to Ukraine, Belarus, Azerbaijan, Latvia, Bulgaria and Moldova. In order to export to the EU, Georgian fruit and vegetables must reach Global GAP standards. To date, the only Georgian company with GAP certification is Herbia LLC. The IDG requested Dutch consultancy Bilancia assess the necessary requirements for EU export. The consultancy recommended that the cost of introducing GAP standards could be reduced to EUR 50,000 through the creation of cooperatives. Organic fertilizers must be introduced and the produce transported to the EU in an air-conditioned environment, concluded the consultancy.

According to IDG estimates, Georgian products could hold 0.2% of the EU market.

11) Wine Exports Drop 44% to 24 Million Bottles Worth USD 66.8 Million October 8th, 2015, http://agenda.ge/news/44031/eng

According to the National Wine Agency, 24,071,200 bottles of wine worth USD 66.8 million were exported to 41 countries in the first 9 months of the year – a decrease of 44% year-on-year. The drop is primarily due to the crises in Russia and Ukraine, with exports to the countries decreasing 55% and 62% respectively. Some new markets saw huge increases, however. Exports to China increased 90%, for example.

The top five markets are Russia with 12,508,086 bottles, Kazakhstan with 3,442,296 bottles, Ukraine with 2,149,471 bottles, China with 1,517,843 bottles and Poland, with 1,112,118 bottles.

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

During the same period Georgia exported 4,483,702 bottles of brandy to 17 countries and 97,000 bottles of Chacha to 20 countries. To date in 2015, Georgia exported alcoholic beverages worth USD 100 million.

12) First Caucasian Cheese Festival Held in Tbilisi October 8th, 2015, http://agenda.ge/news/44045/eng

The first Caucasian Cheese Festival will be held in Tbilisi this October. The festival invites major players as well as local producers to exhibit dairy products from different regions of Georgia, Armenia and Azerbaijan. Industry representatives from Israel and Turkey have also been invited. The festival will also feature a cheese competition, with the winner revealed on the closing day.

The Georgian Guild of Cheese Producers have organized the event in the hope of transforming Georgia into a regional cheese production and trade hub.

13) Georgian Hazelnut Processor Competitive on Global Markets October 12th, 2015, http://georgiatoday.ge/news/1532/Georgian-Hazelnut-Hits-American-Market

Hazelnut processor Georgian Product Renaissance (GPR) now exports to the Netherlands, Canada, China and the United States.

The company uses only local hazelnuts, which are USD 0.70-0.80 cheaper than in Turkey, while being of similar quality, according to company director Baia Salukvadze. This renders the company’s products highly competitive.

GPR was founded in 2013, with investment totaling USD 1.5 million, co-financed through the Ministry of Agriculture’s preferential agro-lending scheme. The company is currently planning further expansion.

14) Georgian Wine Gaining Foothold in Japan October 13th, 2015, http://agenda.ge/news/44311/eng

Japan has become one of Georgia’s top 10 wine export markets, with 90,194 thousand bottles exported in the first 7 months of this year, amounting to a 10% increase year-on-year, according to the National Wine Agency.

In part, this is due to Georgia’s regular participation in Japanese wine seminars, degustation events and large-scale exhibitions such as Foodex Japan and Wine and Gourmet, said Georgia’s Ambassador to Japan Levan Tsintsadze. Georgian wines have also won several medals at Japanese competitions, such as the Sakura Japan Women Wine Awards and the Japan Wine Challenge.

Meanwhile, Georgia and Japan jointly promoted their cuisine at eh Expo Milano 2015, with Georgia presenting its Qvevri wines.

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

15) Georgian Agricultural Products Covers 16 Percent of Foreign Trade Turnover October 23rd, 2015, http://finchannel.com/index.php/world/georgian-news/item/50917-georgia-share-of-agriculturalproducts-covers-16-of-the-foreign-trade-turnover

Products in the agro-industrial complex form a relatively high share of 16.4% in the foreign trade turnover of Georgia. According to the National Statistics Office, the general trade turnover in Georgia reached USD 6.4 billion between January 2015 and August 2015 (USD 1.46 billion in exports and USD 4.94 billion in imports).

During the first 8 months of 2015, agro-industrial exports totaled 24% of Georgian exports (USD 354.9 million) with beverages (47%) and nuts (33%) representing the largest agro-industrial exports. Russia, Ukraine, Azerbaijan, Kazakhstan, Germany, Armenia and Italy are the largest exporters of Georgian agricultural products.

During the same 8-month period, agro-industrial imports to Georgia totaled 14% of Georgian imports (USD 693.7 million) with grain and pulse supplies (12%) representing the largest share of agro-industrial imports into Georgia. Russia, Ukraine, Turkey, Brazil, Germany, the USA and Armenia are the largest importers of agricultural products into Georgia.

The prospects for development within the general agricultural sector of Georgia—as well as that of its fruit, vegetable and grain segments—will be one of the major topics at Georgia Agro Forum 2015 in November.

16) Citrus Harvest Estimated at 135,000 tons October 27th, 2015, http://agenda.ge/news/45201/eng http://interfax.az/view/652312

A bumper citrus harvest of 135,000 tons is expected this year, of which 105,000 tons will be collected in Adjara. An industry expert estimats the total will be 40% higher than in 2014.

Only 80,000 tons were collected in Adjara in 2014, according to the region’s Minister of Agriculture Zaur Putkaradze. The harvest in Guria is estimated at 25,000 tons – including 16,500 tons of mandarins, 880 tons of oranges and 900 tons of lemon.

Four international standard processing plants are now operational in Georgia. Favorable climatic conditions will also result in higher quality fruit, according to the Ministry of Agriculture. The fruits will be exported mainly to Ukraine, Russia, Belarus, Kazakhstan, Kyrgyzstan, Armenia and Azerbaijan.

The Ministry of Agriculture announced that for every GEL 0.20 paid for a kilogram low quality mandarins, processors would receive a subsidy of GEL 0.10. Additionally, GEL 2 million of state funds have been used to modernize the mandarin transportation fleet and storage facilities. Citrus industry enterprises may also benefit from the preferential agro-lending program.

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BFC. Georgian Agriculture Finance Bulletin. Edition #38, October 2015

17) Hazelnut Exports Increase by 160% October 29th, 2015, http://www.finchannel.com/index.php/world/georgian-news/item/51167-in-the-first-half-of-2015-georgiaincreased-hazelnut-exports-by-160

From January to June, Georgia hazelnut exports totaled USD 73.6 million, up from 28 million (+163%) during the same period in 2014, according to GeoStat.

Hazelnuts are a major export product, with markets including Ukraine, Russia, the Czech Republic, Italy, France, Spain, and Iraq, amongst others. Six varieties are produced in Georgia: Common, Bear, Pontic, Imereti, Kakheti and Colchis, according to APK-Inform.

Irma Khvedeliani, Executive Director of the Georgian Hazelnut Processors and Exporters Association, will present a report on the industry at the Georgia Agro Forum, to be held this November in Tbilisi.

18) Investment Potential in Georgian Hazelnut Production October 29th, 2015, http://finchannel.com/index.php/world/georgian-news/item/51166-investment-attractiveness-ofhazelnuts-production-in-georgia

Nut cultivation in Georgia, in particular hazelnut cultivation, is quite an attractive market sector for investors. The Italian group Ferrero—with the support of USAID and in partnership with AgriGeorgia— plans to realize a program for the training of specialists in hazelnut cultivation. To date, Georgia faces a deficit in available storing and processing capacities for hazelnuts which is a good signal for investors.

Large-scale Georgian nut producers will take part in Georgia Agro Forum 2015 next month in Tbilisi.

Scheduled presentations at the international conference will cover topics ranging from the investment potential in Georgian nuts to technologies, topical issues and cooperation within the Georgian hazelnut sector.

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Prepared by Business & Finance Consulting (BFC) www.bfconsulting.com In this bulletin, BFC provides extracts from articles that have been published by others and as a result cannot be held responsible for such content.

The articles do not necessarily reflect the opinions of BFC, its staff, its associates or its partners.

Copyright of articles is retained by their authors.

Prepared by Business & Finance Consulting (BFC) www.bfconsulting.com In this bulletin, BFC provides extracts from articles that have been published by others and as a result cannot be held responsible for such content.

The articles do not necessarily reflect the opinions of BFC, its staff, its associates or its partners.

Copyright of articles is retained by their authors.