SPECIAL REPORT
FAO/WFP CROP AND FOOD SUPPLY ASSESSMENT MISSION TO AZERBAIJAN

• 1. INTRODUCTION
• 2. OVERVIEW
• 3 DEVELOPMENTS IN FOOD PRODUCTION
• 3.1 The Macro-Economic and Policy Framework
• 3.2 Constraints
• 4. Foodcrop Production in 1999
• 5. The Food Supply Situation, Cereal Imports in 1999/2000 AND OUTLOOK FOR 2000

1. INTRODUCTION

This report presents the findings of a Joint FAO/WFP Crop and Food Supply Assessment Mission. An FAO staff member visited the country in the period 8-12 November and was joined by in-country WFP staff. The aim of the mission was to obtain up-to-date and reliable estimates of food production in 1999, to determine the major constraints to increasing food production and to assess the outlook for crops and the food supply situation in the year 2000. Throughout its work, the Mission received generous assistance from the government, the World Bank and many NGOs. It is particularly indebted to OXFAM which organized a field visit to Barda, a key wheat producing area, and enabled the Mission to witness first hand some of the frustrations and problems currently faced by wheat farmers.

2. OVERVIEW

Despite financial stability and steady recovery in GDP since 1997 and fundamental market oriented reforms, output of the agricultural sector is growing slowly. The cropped area has declined steadily and yields remain low. However, there are signs of a shift to more profitable crops and livestock production in the wake of land privatization, and crop yields in 1999 have improved following better growing conditions in 1998/99. Livestock numbers of ruminants have recovered but productivity remains low.

After reaching a peak in 1997, the area sown to wheat has declined due to import competition following the liberalization of the grain trade. The lack of access to credit for good seed and fertilizer, and the unreliable availability of irrigation water, prevent farmers from increasing both the yield and the quality of domestic wheat, to levels where it would be competitive with imports in urban areas, and increasingly also in rural areas.

Other constraints to increasing domestic food production include the inadequate infrastructure for marketing and the poor state of the agro-processing industry and lack of significant investment in new processing capacity. Above all, the lack of an enabling institutional environment for producers, processors and traders has severely limited investment in agro-processing and growth in the sector. Rural households are increasingly producing food for auto-consumption, selling surplus production on rural markets but with little access to the growing urban market.

Grain production in 1999 is forecast at 1 090 000 tonnes, 14 percent more than in the preceding year but still nearly 20 percent below output in 1991. Improved yields resulting from better weather and management by private farmers have offset the sharp reduction in the area sown. Production of potatoes and vegetables has increased but that of cotton, tea, tobacco and grapes has continued to fall. Production of meat, milk and eggs expanded.

Lacking funds and infrastructure, the agriculture sector is stuck in a low-input/low-output situation. Little significant recovery can be expected until the financial capacity of the sector improves, rural credit institutions are developed and irrigation and drainage systems are rehabilitated. However, the 1999 Anti-Corruption law and the lighter and more transparent tax regime for farmers are positive signs. Donor funded projects are also expected to have positive effects in localized areas.

There is no shortage of food in rural or urban markets as the shortfall in domestic production is offset by imports, while rural markets are oversupplied. In urban areas, imported wheat and flour have displaced local production and the incremental demand associated with more rapidly growing incomes is almost entirely supplied by imports, particularly of processed products and poultry. Imports of processed foods and flour have penetrated most rural markets, even in major wheat producing areas.

3 DEVELOPMENTS IN FOOD PRODUCTION

3.1 The Macro-Economic and Policy Framework

Macro-economic reforms in 1996 have halted the sharp economic decline since 1990 and the country has experienced a steady growth in GDP since 1997. Growth has been fueled mainly by investment in the oil and related industries. Expenditure on oil-related activities has increased output in the construction and service sectors and stimulated imports, but has failed to stimulate growth in domestic manufacturing and agriculture. The sharp drop in output characteristic of the period 1992-94 has been halted but output in the agriculture and manufacturing sectors has stabilized at levels about 50 percent and 30 percent respectively of that in 1990. The manat has been stable, and has appreciated in real terms and against the rouble. As the neighbouring Russian Federation remains the major trading partner, the market for agricultural produce is directly affected by developments in that country. The agriculture sector employs about one third of the population and provides livelihood and food security for 45 percent of Azeri households. Agriculture's share in GDP has fallen from 30 percent in the early nineties to 20 percent by 1998, but its share in employment has remained fairly stable at about one third.

Food production remains depressed despite financial stability and fundamental reforms introduced in 1997. The abolition of the state order system, export and import quotas and licensing requirements has liberalized producer prices, trade and marketing. State trading organizations operating in the wheat and cotton sectors have been privatized or liquidated, and the market for wheat is highly competitive, if not transparent. Moreover, the privatization and distribution of 1.3 million hectares of cropped land to 790 000 households is nearing completion. (By October 1999, some 1.17 million hectares had been privatized to 90 percent of the eligible households). Farmers are now free to determine which crops to sow and where to sell them. However their options remain severely limited by a combination of financial, infrastructural and institutional constraints. As the 1999 harvest outcome and the outlook for food production in the coming year are largely determined by these constraints, they will be examined first.

3.2 Constraints

Although the country has significant agricultural potential, there appears to be only limited scope for enhanced crop production in the short term. This is due to the nature of the constraints faced by farmers -and the economy at large - which will require significant investment in infrastructure as well as time to change habits and build skills and institutions providing an enabling, rather than a punishing, environment for enterprise.

Although land privatization has resulted in better crop yields in 1999, the size of the average private farming enterprise is small, averaging less than 5 hectares, and ranging from 3-10 hectares. In some cases, the privatized land has been stripped of improvements, e.g. irrigation pump and electricity supply, limiting water supply to rainfall, while most crops require irrigation, particularly in the spring and summer. The fertility of the land has been mined by many years of inadequate use of fertilizers, inadequate crop rotation, salinization due to the poor state of the drainage system, erosion (many trees have been felled for fuel to cope with energy shortages) and pollution. Some 1.4 million hectares of the arable land (31 percent) is affected by soil fertility depletion. Use of fertilizer and agro-chemicals has fallen sharply, from 87 kg active ingredient per cropped hectare in1990 to 5 kg in 1997 (latest data available).

There is little working capital to purchase yield-enhancing inputs after several years (1992-1995) of rampant inflation and adverse terms of trade for agriculture, three years arrears in the payment of salaries by state farms and very little access to credit to finance operations. The Land Market Law approved in 1999 provides for the sale/purchase of land and allows the sale of land mortgaged as collateral in cases of failure to repay credit. At present, however, there is no operational bank in rural areas and commercial banks prefer lending to traders. Currently, the availability of credit with which to finance working or investment costs on farm is limited to the small amounts made available under donor funded schemes, mainly by the World Bank and the EC's Technical Assistance for the CIS Countries (TACIS). Even if farmers could afford the inputs, their availability is problematic because domestic production has either ceased (fertilizer) or is inadequate (seed), and there is no guarantee of their quality.

Agriculture is largely dependent on irrigation, but the availability of irrigation water is inadequate or uncertain. Some 1.6 million hectares have irrigation but the system is operative on only 1.1 million hectares (or two thirds of the cropped land). Where it is operational, the availability of water is uncertain, reflecting the poor state of maintenance and repair, (also of pumps); difficulty in agreeing modalities of use by groups of private farmers, frequent power cuts and lack of transparency in the control of water flow.

Timely access to farm machinery is difficult. The operational machinery is reduced and much of it is obsolete, and unsuitable for small plots. While land and livestock have been privatized fairly rapidly, privatization of farm machinery is bedeviled by lack of clear guidelines and issues related to the debts incurred by the former state farms. This has made timely planting and harvesting more difficult for many small farmers or groups of farmers. As a result, the September/October winter wheat planting season may extend to December, with the harvest also prolonged, with deleterious effects on yields. Losses at harvesting remain unnecessarily large due to the type of machinery and harvesting delays.

Marketing of surplus produce over household consumption is both difficult and expensive. While rural markets are oversupplied with perishable commodities, access to urban and external markets is limited by inadequate infrastructure, the poor state of the marketing and processing sector and the numerous unofficial taxes levied at regular intervals in the marketing chain and at the borders. Most large processing plants are either closed or operating at very low levels. Prior to 1991, agricultural processing contributed up to 45 percent of industrial production and a large proportion of processed foods was exported. Currently, very little domestic produce is processed and exported. Demand is also directly affected by developments in the neighbouring Russian Federation. The rouble devaluation in 1998/99 led to large-scale imports of wheat and other goods at very low prices, while exports were depressed due to the sharp drop in the purchasing power of the rouble.

The lack of an operational agricultural bank and a functioning irrigation system are exacerbated by the pervasive effect of corruption, which significantly increases the cost of all operations, at all levels in the production and marketing chain and at the borders. It effectively reduces the competitive advantage of domestic produce on the urban markets, undermines export competitiveness and is a major deterrent to investment in agriculture and agro-processing industries. As a result, there has been a rapid increase in the import of processed foods, which have penetrated throughout the country.

4. Foodcrop Production in 1999

As can be seen in the table below, the aggregate area sown to crops has fallen steadily from 1.2 million hectares in the mid-nineties, i.e. after the occupation of the land in and around Nagorno Karabakh, when the country lost about one-fifth of its land area. The bulk of the decline has been in fodder and cash crops requiring processing, (cotton and fruit/grapes). The aggregate area sown to cereals has remained fairly stable until 1998, with wheat displacing other cereals, notably coarse grains. Since 1998, and following privatization of the state monopolies in trade in wheat and cotton and the rapid privatization of state farms, both the area sown to all cereals and wheat began to fall due to import competition and disruption caused by land privatization. Moreover in 1999 there is a marked shift to more profitable crops, notably potatoes, vegetables and fodder crops as well as livestock and maize production.

Table 1: Azerbaijan - Trends in agricultural production

1/ Forecast

Source: State Committee of Statistics of Azerbaijan¹

The average yield of crops (other than potatoes, produced on household plots) in 1999 is higher than in the period 1995-1998 but below those of 1991. Following land privatization and markedly better weather than in 1998, indications are that the yield of most crops has recovered somewhat in 1999 but the estimates for crops other than cereals remain tentative as the harvest is still in progress.

Cereal production in 1999 recovered to 1 090 000 tonnes, 14 percent more than in 1998 but remaining almost 20 percent below output in 1991. The area sown - 515 000 hectares - fell sharply (-15 percent) compared to the previous year due to a sharp decline in the area sown to winter wheat, and is the lowest area sown to grains since 1991 (652 000 ha). Better weather than last year, and, likely, better care for crops now that households' livelihood depends on output from their plots, have produced the highest average yield for grains since independence and a sharp recovery from last year. Better yields for wheat offset the lower area sown and wheat production is officially estimated at 850 000 tonnes, compared to 820 000 tonnes in 1998. Production of maize increased sharply in response to an upturn in livestock numbers and demand for livestock products.

In view of the early privatization of the bulk of the animals and the availability of grazing, livestock numbers of non grain-intensive animals and livestock production have recovered steadily since 1995. By 1 January 1999 the numbers of cattle and cows exceeded those of 1991 while those of sheep or goats were close. Production of milk is now higher than in 1991 in response to a 20 percent increase in the number of cows.

5. The Food Supply Situation, Cereal Imports in 1999/2000 AND OUTLOOK FOR 2000

There is no shortage of food in rural or urban markets. Any shortfall in domestic production is offset by imports. Urban areas are almost entirely supplied by imported wheat and flour, as well as poultry and processed products. However, imported foods need to be purchased and purchasing power of the bulk of the 8 million inhabitants remains low. Although GDP has grown steadily since 1997, it is still less than 50 percent of the level in 1990. The cost of the minimum food basket has stabilized at US$68 per month for a family of five. Food continues to account for a large proportion of household expenditures, 70 percent of total expenditures of the most economically vulnerable.

Annual imports of cereals are estimated at about 500 000-650 000 tonnes on average and probably peaked in 1998/99. The precise volume is difficult to estimate in view of under-invoicing at the borders and the substantial unregistered inflow of all foodstuffs (and notably livestock products) arriving via neighbouring Dagestan. In general, imports of food are undertaken commercially; food aid deliveries in recent years have been very limited, around 20 000 tonnes of cereals and small quantities of pulses, vegetable oil and sugar for targeted distribution to vulnerable populations.

In 1999/2000 imports of cereals are again likely to fully cover effective demand, and are tentatively estimated at 600 000 tonnes, about 10 percent less than last year, when wheat was particularly cheap. Given the margins of error in the production and import data, demand estimates are tentative. The most important element is grain use for human consumption. Given a population of 8 million (based on a recent census) and an estimated per caput cereal consumption of nearly 160 kg per annum, the aggregate cereal food use is estimated at almost 1.3 million tonnes. Other uses are estimated at 200 000 tonnes including seed use of about 125 000 tonnes (seeding rates are high 220-300 kg per hectare) and waste/losses of about 5 percent as well as some processing for alcohol, etc. Livestock production is based on pasture, fodder crops, straw and bran; feed use of grain is tentatively forecast to rise to 176 000 tonnes, given the larger maize harvest and increased animal numbers. All of these estimates are very tentative. However, given that the minimum food basket of the vulnerable populations (which includes no meat, fish or milk) includes 12 kg of flour per person per month, equivalent to per caput consumption of 200 kg/pa grain, an estimate of 160 kg per caput for the population at large could be reasonable.

In recent years, the number of vulnerable people has declined but nevertheless there are still some 860 000 Internally Displaced Persons (IDPs) and refugees largely as a result of the still unresolved issue of Nagorno Karabakh. In all, nearly 500 000 vulnerable people (of whom half are from the displaced community) still need humanitarian assistance. The World Food Programme has been providing humanitarian assistance to Azerbaijan since 1993 through emergency operations. Presently, WFP is providing humanitarian assistance to 485 000 IDPs and vulnerable groups from 1 July 1999 for a period of three years through the Protracted Relief and Recovery Operation (PRRO), Project No. 6121.00. Total food commodities committed under PRRO throughout the Project period is 47 880 tonnes with a total cost of about US$23,000,000.

The majority of those who remain vulnerable have, over the past years, sold whatever valuable or sellable items they possessed and have little margin of security left. A sample survey by WFP's implementation partner World Vision International in 1998, with regular follow-ups thereafter, of the nutritional status of 660 IDP families indicated that 30 percent exhibited some signs of malnutrition, including 2 percent serious, 7 percent moderate and the balance mild and that the nutritional state of children deteriorated over the winter of 1998/99. As many IDP and refugee families have relative(s) working abroad, the recent restrictions imposed by the Russian Government on the movement of people from the Caucasian countries could have a negative impact on the economy at large and on the vulnerable households in particular.

The outlook for agricultural production in general and cereal production in particular in 2000 remains uncertain. The area sown to wheat in the fall of 1998 for harvest in 1999 fell sharply, due to the disruption caused by the land privatization process and very depressed market prices in response to substantial inflows of cheap Russian wheat and flour following the devaluation of the rouble in August 1998. However, despite higher domestic wheat prices, the latest (incomplete) data at the time of the Mission's visit indicated that the area sown to wheat for harvest in 2000 was about 26 percent less than at the corresponding time last year. In view of the difficulty in obtaining timely information from 700 000 small farmers, official expectations remain that the area sown to wheat will increase. Nevertheless, the early onset of cold weather, coupled with working capital and machinery shortages, could keep the area sown below expectations and yields low. The final area sown to cereals could, perhaps, recover somewhat from last year's very low level, while still maintaining its overall downward trend. Farmers are in a vicious circle, where lack of (access to) adequate inputs keep yields low, while import competition, the decay of much of the agro-processing industry and the lack of an enabling environment for private enterprise all combine to keep crop income low. Although production is becoming more market oriented, most farmers lack access to market information and continue to plant wheat to cover household needs and to avoid cash outlays. Many farmers have worked on the state farms but few have the technical and managerial skills necessary to maximize the earnings from their small plots of land. Most are risk-adverse. At the same time, income from wheat production under the current low-input/low-output system is inadequate to cover minimum household needs. Yields are likely to remain low, as farmers are strapped for cash.

There are some positive developments. The tax law has recently been modified to provide more incentives to domestic producers and to reduce the opportunities for harassment by the tax authorities. The Value Added Tax of 20 percent on marketed primary produce has been removed and farm enterprises, be they private household or juridical entities, are now liable for only one tax, the Land Tax, which has been fixed at four levels in keeping with the quality of the land. In localized areas, the impact of credit and other assistance made available by donor-funded projects is expected to increase productivity.