SPECIAL REPORT

CROP AND FOOD SUPPLY SITUATION IN GEORGIA

10 December 1999

1. OVERVIEW



2. DEVELOPMENTS IN FOOD PRODUCTION



• 2.1 The Macro-Economic and Policy Framework
• 2.2 Land Privatization
• 2.3 Other Constraints
  

3. Foodcrop Production in 1999



4. The Food Supply Situation, CEREAL Imports in 1999/2000 and the OUTLOOK for 2000

1. OVERVIEW

This report presents the findings of an FAO Crop and Food Supply Assessment Mission to Georgia in the period 12-21 November 1999, which was fielded with logistical support of WFP. The aim of the mission was to obtain up-to-date estimates of food production in 1999, determine the major constraints to increasing food production and assess the outlook for crops and the food supply situation in the year 2000. Throughout its work, the Mission received assistance from the government, the UN organizations in the country, TACIS (EC Programme of Technical Assistance to CIS Countries), the World Bank and many NGOs.

Agricultural production in Georgia recovered sharply in 1999, mainly the result of markedly better growing conditions for crops, some improvement in the availability of inputs (fertilizer, seed and credit), the impact of technical assistance projects and localized rehabilitation of the irrigation system. Nevertheless, far from being the motor for Georgia's economic recovery, agriculture has performed poorly with output growning more slowly than in other sectors since 1993. Rural incomes have remained stagnant during a period of strong GDP growth.

Chief among the many constraints to increasing agricultural output is the partial - and stalled- transition to a market economy. Incomplete land privatization, lack of transparency in procedures and transactions in privatization, trade and marketing, the absence of a clear separation of the roles of the private sector and the government, and institutional shortcomings have led to slow recovery and investment. Continued direct or indirect involvement of the government in input provision and trade has prevented the formulation and implementation of transparent policies aimed at the development of the agricultural sector as a whole. Farmers remain poorly linked to the growing urban as well as export markets, to the detriment of the agricultural sector's ability to generate funds for operations and development. Scarce power supply in rural areas is another major constraint.

The aggregate area being cropped is recovering but, after reaching a peak in 1997, the area sown to wheat has declined steadily, in favour of more profitable crops (sunflower, potatoes, vegetables, and maize) and due to import competition. Incentives to produce wheat are also undermined by the lack of a consistent policy towards wheat production, trade and marketing, and large scale inflow of smuggled wheat via South Ossetia, Abkhazia and Adjaria.

Grain production in 1999 is forecast by FAO at 880 000 tonnes, some 17 percent above last year's poor harvest, despite a 9 percent reduction in the area sown. Timely rains, some improvement in farmers' access to inputs and increased care for their crops by private farmers, have resulted in better yields. However average yields are well below their potential due to inadequate access to credit for good seed, fertilizer, herbicides, machinery and the decayed state of irrigation and drainage systems. Production of potatoes, vegetables, sunflower and tea has also increased in 1999 but that of fruit/citrus has continued to fall in the absence of an efficient marketing system and agricultural processing. Production of milk and eggs expanded but that of meat has stagnated due to animal health problems.

The sector remains depressed and stuck in a low-input low-output scenario as access to markets and resources are limited. The taxation regime is not conducive to stimulating market production and gives scope for incentives to underestimate output. However, there is a growing nucleus of farms, which are being operated more efficiently. Growth in the number of rural credit cooperatives is also a positive sign. Rehabilitation of the beverage industry (mineral water, wines, tea, etc.) has started and guaranteed high quality wheat seed is now available. Donor funded projects are also having positive effects in localized areas. Nevertheless, weather is likely to remain the main determinant of output until drainage and irrigation systems are rehabilitated. Significant, sustained recovery can be expected only if, in addition, land ownership issues are resolved, the agro-processing industry is revitalized and the financial capacity of the sector improves.

There is no shortage of food in rural or urban markets and although the population, on average, is poor, there is no acute malnutrition in the country, even among children. Liberalization of trade and prices of wheat has improved the grain/bread supply situation, but largely as a result of increased imports. Incremental demand for higher value foods associated with more rapidly growing incomes in urban areas is almost entirely supplied by imports, particularly of processed products and poultry, but even potatoes and other fresh produce. Registered food, beverage and tobacco imports account for 15-20 percent of the total registered imports.

2. DEVELOPMENTS IN FOOD PRODUCTION

2.1 The Macro-Economic and Policy Framework

Macro-economic reforms and greater political stability since 1994 have halted the sharp economic decline since 1990 and the country has experienced sustained growth in GDP between 1995 and 1997. However, growth slowed significantly in 1998 (to about 3 percent in 1998 from 11 percent in 1997), as the Russian financial crisis exacerbated persistent internal problems, chiefly poor fiscal management. Growth has been fueled mainly by growth in the services, road/ pipeline construction and telecommunication sectors. Between 1995 and 1998, the ratio of exports to imports fell steadily from under 40 percent to just under 20 percent. In 1997 and 1998, 20 and 15 percent respectively of the total value of (registered) imports were food and beverages/tobacco. In addition, illegal imports were substantial. Output in industry (including agro-processing) continues to decline, and by 1998 it accounted for only 10 percent of total GDP compared to 30 percent in 1990. Agriculture's share in GDP has varied hugely, rising from 29 percent in 1990 to 70 percent in 1993, falling back to about 35 percent on average in the last 5 years and only 25 percent in 1998, reportedly due to adverse weather conditions. Although output in the agricultural sector is only about 70 percent of its level in 1990, employment in the sector has about doubled and it now accounts for over 50 percent of total employment. Rural incomes have remained practically stagnant during the recent high growth period, mainly due to unequal access to inputs complementary to labour, barriers to land consolidation, lack of market access, scarcity of rural credit and limited off-farm earnings. The availability of power (electricity and gas) remains erratic and ranges from about 10 hours per day in the major cities to only 2 hours at night in rural areas.

The local currency "Lari", devalued in December 1998, lost over one third of its value, but nevertheless appreciated against the rouble and the Turkish lira. As the neighbouring Russian Federation remains a major trading partner, the economy is directly affected by developments in that country. The 1998 financial crisis contributed to the widening balance of payments gap, as it led to reduced exports to/and remittances from the Russian Federation while imports increased sharply.

Significant progress has been made in the privatization of small-scale enterprises and the liberalization of prices and trade, but in many cases ownership of medium and larger enterprises is unclear and the scope for government influence remains large. Lack of transparency in procedures and transactions, unfair competition and poor law enforcement remain deterrents to the development of a market economy and much needed investment in all sectors, including agro-processing. Domestic production in both agriculture and industry is also adversely affected by shortcomings in the enforcement of the customs regulations, licensing procedures and the taxation system. High tax rates induce widespread tax evasion and much economic activity remains in the shadow economy to the detriment of public finances as well as the reliability of the statistical information. Inputs imported commercially are subject to 34.7 percent duties and the Value Added Tax (VAT) rebate system is not operational. Incentives to increase marketed output are also diminished by the VAT of 20 percent on marketed production with annual turnover exceeding Lari 35 000 (or about US$17 000).

Food production remains depressed despite laws and regulations eliminating most price subsidies, dismantling of the state order system, liberalizing prices, trade and the exchange rate and privatization of land. Despite these reforms, however, the government remains involved in economic activities, including trade and the provision of inputs (notably machinery, fertilizers, seeds and credit) to farmers. According to the UNDP Human Development Report-Georgia 1999, "In a country where the distinction between the interests of the private businesses and those of the government offices is often vague at best, where the rule of law is less than optimally enforced, where oligopolies control what should have otherwise been competitive markets, and where contraband is widespread, the abolishment of government price controls is not synonymous with achieving the principal objectives of price liberalization, namely to provide economic agents with information about the true opportunity costs" .¹

2.2 Land Privatization

Land privatization has focused only on the small-scale (household/subsistence) sector with little real progress in restructuring the former large state farms. Land reform took two forms: the allotment of small parcels of land of up to 1.25 ha to each rural family, and the lease, through district authorities, of state-owned land to persons or legal entities. The aim was to create a subsistence sector for small farmers and a market sector controlled by large leaseholders. By April 1999, 918 000 hectares had been transferred to 1 026 000 families while 825 000 hectares are leased by the state to 46 000 entities. Of the cropped land, 631 500 hectares (i.e. 58 percent) have been privatized, 294 000 ha are leased and 155 000 are neither leased nor privatized. All farmers have to pay the Land Tax, but the leasehold fee is equated with the Land Tax and is paid to the same authority, so that the leasehold is basically granted free of charge. Excluding agricultural land in disputed areas (notably Abkhazia), nearly 1.2 million hectares of agricultural land (including 1 061 million/hectares pastures) are not distributed or leased.

Farm structure remains a mix of very small fragmented plots in private ownership and larger farms (often restructured ex-state farms) held on 10-year leases. While many household plots are too small for technical or economic efficiency, they tend to be fully cultivated. By contrast, the larger farms require access to working capital and machinery to be functional, and tend to remain under-utilized due to lack of credit. Only about half of the leased land is actually planted. There is, at present, little indication that small private farmers, who market a portion of their crop directly on rural markets, are less productive than many large farmers, who, in some cases, have preferential access to inputs and credit made available by the Government. This dual system of land ownership and the nascent land registration system remain impediments to the development of a land market, the efficient use of the scarce land resource, and investment. The rehabilitation of irrigation and drainage systems and the development of operational water users associations are also hampered.

2.3 Other Constraints

Farmers are free to determine which crops to sow and where to sell them, but, most, be they big or small, have serious financial and infrastructural constraints which limit their options. The effects of the institutional constraints vary with the degree of influence. Most farmers have land but little machinery and lack cash to purchase the necessary inputs. The availability of inputs (with the exception of nitrogenous fertilizers) is also inadequate.

Access to agricultural credit remains limited, partly because most commercial banks do not lend to farmers, and partly because the cost of credit is high. Land may be sold, leased or mortgaged but the small size of the privately owned holdings disqualifies them as collateral. The availability of credit tends to be limited to farmers benefiting from donor funded schemes. For the rest, even if they could afford inputs, the availability is problematic because domestic production is inadequate and there is often no guarantee of their quality.² Timely access to farm machinery is also difficult because of a shortage of operational machinery and spare parts.

Marketing of surplus produce over household consumption is both difficult and expensive. The country has a good potential for high value crops such as fruits and vegetables, for export and for processing. However, the competitiveness of domestic produce on urban and external markets is reduced 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.

Most large processing plants are either closed or are operating at very low levels. Prior to 1991, agro-processing accounted for 40 percent of industrial output, much of which was exported, and the food industry employed 42 percent of the labour force. At present only 5-10 percent of the food industry is operational. Most of the processing plants are old, oversized and often stripped of their parts in the privatization process, which started late and has not led to adequate restructuring and investment. This is true also for the large (privatized) wheat mills which have a milling capacity in excess of 1.1 million tonnes per annum, while flour production was officially estimated at 180 000 tonnes in 1997 and 139 000 tonnes in 1998. To date only foreign investment in wine, tea, water and milk products has materialized. The economic and legal climate has discouraged investment in other industries.

Demand for domestic produce is also undermined by lack of transparency in trade and marketing as well as by the impact of large-scale tax evasion at the borders. Illegal trade is facilitated by the complexity and arbitrariness of the border procedures (reportedly it is easier to smuggle than to import flour legally) and the ethnic and political tensions in the country. Demand for domestic wheat is particularly affected. The imperfect privatization of some of the largest bakeries and flour mills has resulted in a wheat market which is difficult to enter, and where bread prices are not responsive to market forces. The large, non-restructured mills have high milling margins but offer low prices to farmers and charge high uniform wholesale prices for flour. In 1997 and 1998 the competitiveness of domestic flour was already undermined by the appreciation of the Lari relative to the Turkish lira and the Russian rouble, which made imports from these origins cheaper. After the collapse of the rouble in the autumn of 1998, flour entered the country at prices as low as US$40 per ton. Moreover, high import duties and taxes (amounting to 34.7 percent) have led to a steady increase in illegal imports of flour. Steps have recently been taken to improve customs and excise revenue collection by hiring a foreign company responsible for supervising the inspection of goods and services at the points of entry. Revenue collection has improved in 1999 but the company has no access to some important areas through which wheat and flour is smuggled, notably Adjaria, Abkhazia and South Ossetia. The country is not self sufficient in wheat and imports are necessary but regulation of imports in the existing environment is extremely difficult. Illegal imports have increased steadily and estimates place the volume of flour smuggled in from neighbouring countries at 300 000 - 600 000 tonnes in 1998/99, depending on the level of domestic wheat and bread consumption.

3. Foodcrop Production in 1999

As can be seen from table 1, the aggregate area sown to crops is slowly increasing as the economy stabilizes and the disruption due to land privatization is overcome. Nevertheless it is still less than in 1991 as the area sown to fodder and crops for processing/export, (fruits and tea) has fallen sharply. By contrast persistent bread supply problems, particularly in rural areas, and the decline in markets for traditional exports (citrus, wine, vegetables and tea) made wheat and maize attractive and the area sown to grains increased steadily until 1997. In addition, the liberalization of trade and pricing of wheat, and the removal of subsidies on bread coupled with high world cereal prices in 1996/97 led to a sharp increase in sowings, particularly of winter wheat. After 1997, however, the area sown to wheat has declined steadily as it is less profitable than maize, and, at low yields of 1-2 tonnes/ha, it is not competitive with imports, the more so with import duties and taxes evaded. The area sown to maize has a steady upward trend, as it is used for food and feed, requires much less seed than wheat, and can be harvested on small plots without machinery. The area of more profitable crops (potatoes, vegetables, and sunflower) is increasing steadily as farmers diversify production.

The average yield of cereal crops in 1999 is higher than in 1991 as both land and other resources have been moved from the traditional crops (citrus, grapes, tea) to cereals to improve household food security and in view of the collapse of the export oriented agro-processing industry. However, average cereal yields are still low, due to soil erosion, the poor state of the irrigation and drainage systems and a shortage of cash and credit for most farms.

Agricultural output remains very difficult to estimate. Although data is collected mainly by sampling, the techniques are inadequate and the samples small as a result of lack of funds. The margin of error in foodcrop production and yield estimates is high (roughly 20 percent but ranges from 10-50 percent depending on the crops). Nevertheless, grain production in 1999 recovered to an estimated 880 000 tonnes, 17 percent more than estimated output in 1998 and 53 percent more than in 1991. The area sown - 378 000 hectares - fell sharply (-9 percent) compared to the previous year due to a sharp decline in winter wheat sowings in response to import competition and seed shortages. Better yields for wheat offset the lower area sown and wheat production is officially estimated by the Ministry of Agriculture at 280 000 tonnes, compared to 200 000 tonnes in 1998. Production of maize recovered from last year's drought but inadequate drainage and increased salinization of the soil have kept yields relatively low. Markedly better weather than in 1997/98, in particular timely rains and the absence of drought and high winds which damaged wheat in the preceding year, helped to produce the highest average yield for grains since independence. Other contributing factors include some improvement in the availability of inputs (which nevertheless remains inadequate), including credit, (over 100 rural credit unions are in operation), as well as fertilizer and machinery, reflecting donor grants distributed by the Ministry of Agriculture and the reactivation of domestic production of nitrogenous fertilizer. Better care for crops also plays a role although heavy weed infestation and poor land preparation continue to limit yields overall. Production estimates for crops other than cereals remain very tentative, as the harvest is still in progress and the bulk of these crops are sown on small private plots for which data collection remains weak.

Table 1: Georgia - Trends in agricultural production

1/ Forecast

Source: Ministry of Agriculture, State Department of Statistics of Georgia and FAO estimates.

In view of the early privatization of the bulk of the animals and availability of maize, numbers of cattle and poultry as at 1.1.99 have recovered from the low levels reported in 1993, but, with the exception of cows, remain well below pre-transition levels (cattle: 80 percent and poultry 43 percent). Sheep and goat numbers have stabilized at about one third of their level in 1991, in response to the loss of access to pastures in the neighbouring Russian Federation and overgrazing of limited domestic pastures. Pig numbers increased for the first time in 1999 (by 11 percent) to 40 percent that of the 1991 level, reflecting better availability of feed in 1998/99 but continued limited effective demand. Domestic production of milk is now higher than in 1991. Output of meat and eggs has stabilized at levels nearly 80 and 60 percent of that in 1991.

4. The Food Supply Situation, CEREAL Imports in 1999/2000 and the OUTLOOK for 2000

There is no shortage of food in rural or urban markets. The availability of milk in urban areas has improved and a wide variety of bread is available at any time. Any shortfall in domestic production of food is offset by imports. Chief amongst these is wheat and flour. Urban areas are almost entirely supplied by imported wheat and flour, as well as poultry and processed food products. In urban areas, where incomes are markedly higher than in rural areas, supermarkets selling a range of imported processed foods have proliferated. However, imported foods need to be purchased and purchasing power of the bulk of the resident population remains low. Although GDP has grown steadily since 1996, it is still only one third of that in 1990 and in addition, income disparity has greatly increased. The cost of the minimum food basket (2 500 calories per working man) was about US$100 per month for a family of four in the first quarter of 1999. Food continues to claim a large proportion of household expenditures, between 60-70 percent according to the World Bank Poverty Report ³. Despite reforms aimed at improving the social safety net, the system remains ineffective, with very low pensions and benefits and long arrears in payment, also for salaries paid from the national budget.

In recent years, the number of vulnerable people has declined and several surveys are underway or planned to determine the extent and nature of vulnerability. A proportion of the 280 000 internally displaced and refugees have been integrated into the economy and are better off than some non-IDP vulnerable groups such as those who are unable to work (the elderly or disabled), the unemployed, and populations in small mountain villages. Currently, the best available estimates indicate that between 16 and 50 percent of the population remains poor, depending on whether the new poverty line (L 52 adult/per month) derived from the 1998 Household Budget Survey or the official poverty line (L.102) is used. However, there is no acute malnutrition, not even among children. This is due also to the distribution of targeted food aid. In all, several hundred thousand people still need humanitarian assistance, including the 182 000 receiving assistance from the World Food Programme under the current Protracted Relief and Recovery Operation (PRRO), (Project number 6122.00). The PRRO, which replaced the Emergency Operation in July 1999, is for a period of one year and has a total food commitment of 18,190 tonnes and a total cost of about US$ 10,000,000. The WFP assistance under PRRO is comprised of two components - (i) protracted relief with free food distribution to the most vulnerable people and (ii) recovery through food for work. 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. As many Georgian families have relatives 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 poor/vulnerable households in particular.

In grain equivalent, annual wheat and flour imports for domestic use are estimated to be of the order of 600 000 tonnes in recent years. The precise volume is difficult to estimate in view of the volume of smuggled flour, transit trade to Armenia and Azerbaijan and uncertainties about the levels of consumption by humans and animals. With the exception of wheat, most food is imported commercially. Food aid deliveries since 1996/97 have decreased to about 110 000 tonnes of cereals on average per annum (from an average of 500 000 tonnes in the preceding three years), as well as small quantities of pulses, poultry, vegetable oil and sugar for targeted distribution to vulnerable populations.

In 1999/2000, imports of cereals are estimated at 550 000 tonnes, about 8 percent less than last year, when wheat was more easily available and cheaper in the neighbouring countries. Estimation of the demand for cereals for human consumption has been based on the findings of the Household Budget Survey, carried out by the State Department of Statistics and the World Bank in 1997 and updated regularly, given the uncertainty of the production and import data. The survey indicated that the average consumption per person per day in the country was: wheat bread 244 grams (equivalent to 244 grams of wheat grain); wheat flour 98 grams (131 grams of wheat); flour from maize and other cereals 82 grams. Multiplying these quantities by 365 and adding a small amount of rice (18 g/p/pd), buckwheat and other whole cereal (4 g/p/pd) results in an average consumption of cereals, in grain equivalent, of 173 kg per person per year. The official population estimate (extrapolated since the mid-80's) is 5.4 million people but of these about 0.5-0.8 million are not resident in the country. There is general agreement in the country that the resident population is in the range of 4.6-4.8 million. Taking a resident population of 4.7 million and an average per caput consumption of 173 kg, the aggregate use of cereals for food is estimated at 815 000 tonnes, including 650 000 tonnes of wheat and 155 000 tonnes of maize. Consumption of pasta (18 g/p/pd) has been excluded from the domestic use of cereals, as it is generally imported. Other uses are estimated at 100 000 tonnes including seed use of about 52 000 tonnes, waste/losses of about 5 percent and some processing for beer etc. Livestock production is based on grain (particularly maize), pasture, fodder crops, straw and bran. Despite the better maize harvest, feed use of grain is tentatively forecast to contract about 10 percent to 476 000 tonnes, in view of higher domestic prices for wheat compared to last year and health problems in the industry. Small quantities of grain are exchanged for fuel at the border with Azerbaijan and aggregate cereal exports are estimate at 30 000 tonnes. All of these estimates are very tentative. Thus, total domestic utilization of cereals, plus exports, is estimated at 1.43 million tonnes. Import requirements are estimated at 550 000 tonnes. Against this requirement, food aid pledges (mostly for budget support but 10 000 tonnes for targeted distribution) reported to date amount to 78 000 tonnes. The balance is expected to be imported commercially.

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 very depressed market prices in response to substantial inflows of cheap wheat and flour following the devaluation of the rouble in August 1998. However, despite higher domestic wheat prices at present, the latest (incomplete) data indicated that 117 000 hectares (out of a targeted area of 180 000 hectares) had been ploughed and 76 000 hectares sown to winter crops (mainly wheat). In view of the difficulty in obtaining timely information, official expectations remain that the area sown to wheat will increase compared to last year to reach 120 000 hectares. Nevertheless, the sharp increase in the price of diesel (which doubled in November), the onset of cold weather, coupled with working capital and machinery shortages, could keep the area sown below expectations. At this early stage, with illegal imports of cheaper flour likely to continue albeit in smaller volumes, and in the absence of an increase in the bread price, indications are that the final area sown to cereals could maintain its downward trend. Many farmers are in a vicious circle, where lack of adequate inputs keeps yields low, while import competition, high milling margins and the lack of an enabling environment combine to keep crop income low. Farm production is becoming more market oriented (e.g. the increase in sunflower production) and maize production is more profitable than wheat production. However, many farmers in eastern Georgia lack access to markets and 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 the land. Many are risk-adverse, lacking a secure market for their output. Yields are likely to remain low, as farmers are strapped for cash.

On the positive side, land registration is now well underway, paving the way for land consolidation and the ability to use land as collateral. Credit is an area of considerable donor activity. Various credit lines for individual farmers and credit unions are available and there are now more than 100 credit unions operational and more are being established. In localized areas, credit and other assistance made available by donor-funded projects is expected to increase productivity. The tea, wine and beverage industry is recovering.